Saturday, May 29, 2010

Debt - "A Productivity Arbitrage"

So it's been a little over an year and the same question comes to haunt us all over again only this time it is much more bigger and treacherous. The issue is the same - "The World is just too leveraged"
The first question to ask is what really is debt? In my opinion it is basically a mechanism to exploit productivity arbitrage or a way by which a lazy buffoon with lots of capital can gather even more capital. Let me explain.........

If I find a person who has an ability to do good business and I have the capital but short on ability then I would lend him the money; sit home and watch Fashion TV while that man toil to reap rewards for my capital - This is what I call "Productivity Arbitrage". The reason that the Western World was able to gather so much Debt was because it had much higher levels of productivity and so the people were to willing to lend them.

Post the IT revolution of 90s this productivity has come to a plateau, infact because of their ageing demographics, especially for Europe means that productivity is actually declining.
But true to the Human Nature of extrapolating the past to the future meant that the trend of Western World getting more and more debt didn't stop. What was worse was that this money instead going into asset creation went to fund the current consumption. Any growth achieved in this way today directly means slow growth later. A question that comes to mind is why did this start to happen, why this world started spending rather than investing?

If I give you some money today you can either start your own business and may make a future or end up with nothing or else consume it on the usual human vices. With the productivity levels declining, the Western world would rather spend that money as with falling productivity the chances to achieve success in investing also starts to decline. However the lazy buffoon conglomerate of some countries and banks were lost in their Cinderella world. What is worse is that the government is actually protecting them as was apparent in the Greece crisis. This has set a wrong precedent of Moral Hazard. What it tells the world is to LEND! LEND! LEND!!!. Take the hard earned money of a small man and lend it to countries & businesses who fliters it away, make pennies on the deposit/lending spread and sip your martini. When these countries and businesses would not be able to pay you back these banks would be protected again by money of the poor citizens who would end up paying for the continuation of their lavish lifestyles and for their stupid fallacies.
This game is now coming to an end. All it would take is a failed auction of any of the Western country or Japan and then all hell would break loose. The world would see a catastrophe never seen before.
Debt which started as a genuine productivity arbitrage instrument with the onset of this century has become the wildest instrument to speculate in the hands of well attired but ill advised banks who are protected by even more ill advised governments but their capacity to save them is reducing ever moment. The best thing would have been to take a few years of recession, however to save a few Capitalist Cronies the world is heading towards a disaster. I am afraid I can't be bullish anymore though one thing is for sure that when we come out of this the Wheels of Fortune would have changed and the countries who are in good shape would benefit from it.
I would continue to explore this issue much more in my later articles and how one can make money in this environment. Next article would probably be on the 4 pins of this square garden - The US, Europe, China and Japan. I always say "Let there be chaos before the pattern emerges", However today all I would say is that "Don't find pattern in this chaos". Till Next time...........