It’s Child’s Play at the G20 Summit

Just in case you weren’t watching, the international playground got a little bit more petulant this week.  It seems not everybody wanted to play nice at the G20 Conference in Los Cabos, Mexico.  For those of you who are unaware (and the rest of the world who doesn’t care) the G20 is kind of a super-bloated G7 (G8, actually.)  Still in the dark?  It’s an economic summit of the boys (and a few girls) who run the world.  Originally, this was a summit of financial people – economists, bankers and such – but lately the politicians have been taking centre stage.  This is unfortunate because most politicians really don’t understand economics; few, if any, have ever even paid their own bills.  Which is why any good accountant will tell you our planet’s financial wellbeing would be better off in the hands of SpongeBob SquarePants and Patrick.  All that aside, the leaders of the top twenty economies do get together every so often (at fun destinations the rest of us save all summer to visit) to take pictures of each other and talk a lot of nonsense.  Invariably, they all pose for a group photo that looks like Mrs. Cranston’s 4th graders all grown up, then they pick up pencils and go home.  It’s kinda like a birthday party with speeches – or it has been, until now.

It’s been a long time since I played “I did not/You did so” seriously, but I can still recognize a schoolyard squabble when I see one, and Jose Manuel Barroso’s nasty comments the other day were nothing more than that.  Barroso is the head of the European Commission, and he’s all bent out of shape because the politicos in North America have been spouting off about what’s wrong with the Euro.  In a snit, he got his mittens on a microphone, and in less than diplomatic-speak, told the boys north of the Rio Grande to mind their own business.  Actually, it sounded a lot more like “You’re not the boss of me,” complete with fist-on-hip defiance.  Then, before our guys could say “Shut up!” to him, he went on to point an accusing finger across the Atlantic and say, “You started it.”

The maturity level of the powers that be in our world has always been in question, but this really is a new low — especially from this guy.  He’s got some cojones yapping off, considering he’s been President of the European Commission since 2004, long before Greece quit paying its bills.  Not only that, but during the neverending story of the monetary emergency we call Europe, I never saw him in any of the Merkel/Sarkozy photo-ops.  Plainly speaking, it doesn’t look to me like Jose Manuel Barroso spent any time draining the swamp before the Euro crisis started — or killing alligators after things got rolling.  But he wasn’t finished yipping!  The next thing you know, he’s poor-mouthing the IMF (International Monetary Fund) saying North America should throw in an extra ten billion or so, just in case somebody else south of the Alps decides to go belly-up.  I don’t know how they play the game in Europe, but on this side of the Allegheny Mountains, you don’t call somebody down and then ask him to pay for the privilege – especially when he’s been footing the bill for most of sixty years!

Luckily, all this happened at the G20 Summit because, as anyone who’s followed them closely will tell you, the major accomplishments of these conferences is, in a word, nothing.  Everybody talks a good fight and throws billions of Dollars, Euros and Yuan at each other — in the hope that some of it will stick — but in the end, nobody is willing to tackle the real problem: the bills are coming due and nobody’s willing to pay them.  Actually, that’s why Barroso got in a pout.  Canadian Prime Minister Stephen Harper (who has two degrees in Economics, BTW) had the audacity to point out that Europeans were still spending more money than they were worth, and if they didn’t stop the red ink soon, they were going to drown in it.  Maybe I’m just backing the hometown boy, but I’ve got to agree with Harper.  Europeans have been ignoring their credit limit since before I was born.  In the old days, they could depend on Uncle Sam to cover the shortfall, but ever since Obama discovered there are more numbers after a trillion, they can’t really rely on America’s sweaty twenties any more.

Guys like Barroso should take some time away from the microphone, wander down to the local McDonald’s and ask the kid behind the counter how she handles her money.  I can almost guarantee that she’s not spending ten times more than whatever minimum wage she earns.  Actually, that little trip might do him (and a few of his G20 buddies) a lot of good.  From my point of view, if the powers that be are going to act like adolescents, I’d like them to at least be smart ones.

The Euro Crisis and the Golden Rule

I’m amazed at how long it has taken our European friends to realize what reality looks like.  It’s as if they got into the Christmas cheer back in 1989 and never got out.  If you recall, that was the year the two different Germanys danced on the wall and all was well with the world.  At that time, the idea was that without a bothersome Iron Curtain messing things up, Europeans could finally learn to live with each other and become the superpower they were always meant to be.  This has been Europe’s elusive dream ever since Hadrian ruled all the good bits of the continent at the high-water mark of the Roman Empire.  The cunning plan was to slowly integrate everything from the North Sea to the Mediterranean and create an economic powerhouse that would fear nothing in its path.  What a difference a generation makes!  These days, the Germans aren’t dancing anymore — and neither is anybody else.  The grandiose schemes of 1989 got waylaid — for good and sufficient reason.  Europe is now on the brink of a catastrophe that would make the fall of the Roman Empire look like a minor inconvenience.  So, after only twenty years to think about it Europeans are suddenly looking around for — as Monty Python once said to an astounded television audience — “Something completely different!”

Even as you read this, Merkel and Sarkozy are discussing (plotting is such a hard word) ways to take over Europe.  In the 3,000 years of recorded European history, there has never been such a reluctant power grab.  Neither one of them wants this (although Sarkozy has that suspect Napoleon thing going on) but at the end of the day, they have no choice.  They have to do it.  It’s either that or there isn’t going to be a Europe to take over.  Time is running out, so whatever they do had better be big and bold and work right out of the box.

You need to understand something about the European situation before you can understand what Merkel and Sarkozy are up against, however.  There’s a difference between the European Union and the Euro zone.  Not all countries in the European Union use the Euro.  Great Britain, Denmark and Sweden among others, still use their own pounds, krone or what have you.  Therefore, their stake in the game is quite different.  Even though their national currency is not going to be at the epicentre of the financial earthquake, the non-euro EU members are obviously going to take a serious kicking if the Greeks, Italians and Spanish hit the fan.  Plus, they’re probably going to be on the hook for any attempted bailout.  You don’t have to be a Euro sceptic to see more liabilities than benefits.  If things in Europe aren’t fixed pretty quickly, there’s a real danger that a lot of people will be wondering just how much this Euro experiment is actually worth and they might even start looking around for the exits.   Merkel and Sarkozy already know that it’s not just the Euro that’s at stake here but the future of the European Union itself.

Merkel and Sarkozy need to forget about integrated economies, long term solutions, ECB realignment, blah, blah, blah, and restore some confidence in the Euro – today.  The Euro is an unusual currency.  Like the magician’s assistant in the levitation trick, there’s nothing holding it up.  Whole books have been written on what the Euro is and isn’t, but they all boil down to the same thing – faith.  The Euro is based on the simple idea that 400 million Europeans are willing and able to pay.  That’s it.  The Euro is in such dire straits right now because nobody believes that anymore.  The big money boys are looking at the balance sheets and thinking they’re about to get left holding the bag — and it’s going to be full of useless paper.  Therefore, like Sunday morning evangelists, Merkel and Sarkozy need to convince them that as long as they keep the faith, they’re not going to go to hell.

The only way they can do that is quit applying billion dollar band-aids and lay down a heavy duty set of rules.  As of this morning, the nations of the Euro zone need to start taking their fiscal marching orders from the bureaucrats in Berlin.  It’s the only way the banks are ever going to refinance the ridiculous mortgage the Europeans have saddled themselves with.  If Germany and her little sister, France, are willing to co-sign an unlimited line of credit to the southern half of the continent — and put up their taxpayers as collateral — they need to have a serious repayment plan.  Otherwise, they are just going to be sucked into the bottomless financial pit the Europeans have been digging down south.  This isn’t about national sovereignty or petty politics; it’s cold, hard economics.  Anything less and the crisis just deepens and threatens the European Union itself.

Merkel and Sarkozy have got to get tough and invoke the Golden Rule: We make the gold; We make the rules.

India’s Economic Revolution

Last week, everyone was focused in on America’s Black Friday retail shenanigans – as well they should be.  There’s no doubt the world economy desperately needs some conspicuous consumption right now, and those half-crazed American shoppers didn’t disappoint us – although the pepper spray was a bit much.  However, on the other side of the world, getting largely ignored outside of India, there was some even better economic news.  This news was largely ignored outside of India because, beyond the outsourcing debate, India itself is largely ignored by the Western World.  While all economic eyes are hypnotized by the Great Chinese Dragon, the Indian Juggernaut (a Hindi word, by the way) is steadily gaining momentum.  Nobody is ever going to say that the Indian economy will save the world from international recession. (Dare I use the d-word?)  However, it’s certainly going to be a game changer.

Here’s what happened last week.  It’s all very complicated and you can read a slightly slanted version here, but in essence the Indian government opened up the country to foreign, hypermarket chain, investment.  What does this really mean?  In a word — Walmart.  The international retail bogeyman is coming to the sub-continent!  Just as an aside: in North America, we are blinded by Walmart.  However, around the world there are several other hypermarkets — including France’s Carrefour and the UK’s Tesco plc, ranked two and three by revenue — and they are major retail players internationally.  For example, Walmart has 189 outlets in China, but Carrefour has 184.  Walmart might be the biggest kid on the block, but — to mix a metaphor — it’s not the only game in town.  I’m not going to debate the various merits and demerits of Walmart here — that’s for another time – but Walmartophobia aside, this is excellent economic news.  Let me explain.

To most North Americans, India is a combination of Russell Peters, Slumdog Millionaire and Apu from The Simpsons.  In general, most of us don’t ever get past Bollywood or the local tandoori restaurant.  We are walking encyclopaedias of ignorance when it comes to what’s south of the Himalayas.  This isn’t because we’re stupid; it’s because, for the last decade, we’ve been looking at the Yangtze, not the Ganges.  However, times are changing.

I’m not going to bore you with statistics, but here are just a few incredible numbers.  There are over one billion people in India.  Although nearly half of them live below the poverty line, the Indian middle class is huge, and it’s expanding faster than any other place on the planet.  In real numbers that translates into 350 million people with disposable income.  In 199,1 the average per capita GDP in India was (U.S. dollars) $329.00. This year, it’s $1,265.00, and by 2016 it will almost double to $2,110.00.  Do the math!  The standard of living in India is growing at a phenomenal rate.   Those are all pretty spectacular numbers, but the one that tops them all is the median age in India is 25.  That means half a billion people between the Indian Ocean and the Bay of Bengal are under 25 years old.  This is primo, prime time purchasing power.  The market for Levis alone is breathtaking.

This brings us full circle back to India’s new government policy to allow what they call “multi-brand retail” outlets — superstores.  Last Thursday, the Indian government opened up a vast retail market.  It doesn’t take a genius to figure out that we’re not just talking about a couple of big box stores out in the suburbs.  The ripple effect of adding 350 million potential customers to the world economy is going to be huge – and it’s not only because of end-user retail goods, either.  For example, there are going to have to be warehouses, fleets of trucks, forklifts.  How many shopping carts do they need?  How many computers and cash registers?  How much cash register tape?  Coat hangers?  Staplers?  The little tags that show the price?  The list goes on and on, and this is just the beginning.  All this stuff has to be manufactured and purchased before the first family in Mumbai lays down a single rupee in retail sales.

The folks in Cincinnati are still part of the largest retail market in the world, but while they’re fighting over a big screen TV at Target, there’s been a seismic shift in Asia.  The potential is huge, and we’d better pay attention to it.