Wednesday, March 13, 2013

"Worry more about the real world instead of the paper world!"

This is a good interview on Charlie Rose. His guest is Jeremy Grantham, co-founder and Chief Investment Strategist of GMO, a fund managing over 100 BUSD. At about minute 51 in the interview, Grantham says the following:

"What debt does is that it distracts us from the real world. Debt is an accounting rule. It's paper. The real world is the quantity and the quality of your people. And the quantity and the quality of your capital spending. Are you building new machines? Are you being inventive? Are you training your people? Is your High School system delivering the same education as it used to relative to the South Koreans; relative to the Norwegians? No, it's not. We should worry more about the real world and less about the paper world."



  1. (1) Yes, we should worry more. But the problem with debt was that it didn't feature in standard models so that the risk of a credit crunch was overlooked. Money and debt still aren't modelled right.

    (2) For the real economy and investments, recommended reading is the Entrepreneurial State by Mazzucato:

    (3) A problem with Greece and Italy is that foreign investors hesitate about bureaucracy and corruption. My proposal is that these countries create investment zones under international law, like Hong Kong was, say with a lease of 40 years. See this Economic Plan for Europe:

    (4) A response to this by say professor Varoufakis is long overdue. See also the summary in eKathimerini:

    1. Have you ever read this piece which I first wrote a couple of years ago?

    2. Yes, in particular the example of tooth paste rings a bell that I saw it, in 2012 or perhaps even in 2011. But apparently it had dropped from my mind, as less memorable. For this reason: you propose a Free Trade Zone while my impression is that a Lease is required, i.e. with a local authority. International investors will not trust a FTZ that essentially remains under Greek authority. The zone wouldn't be quite free since it still would pay taxes, but stable ones. I now agree that your piece is more memorable, since few consider this, and it is very important. Do you agree on that distinction between FTZ and Lease ?

    3. I am not quite sure what you mean by a Lease. Where can I read up on it?

      In principle, I can't fathom anything happening in Greece which is not under Greek authority. Greeks already have enough aversion against foreign investment. To also give foreigner authority over domestic territory --- well, everything is possible but that does stretch my imagination!

    4. Brazil & Argentina have FTZs in Manaus and Tierra del Fuego - under Mercosur rules they will lose their special status this year. Its hard to believe that the EU would not have similar rules. As far as I can tell the EU only allows Free Ports - Greece has three - Piraeus, Thessaloniki and Heraklion. If the EU allowed FTZ's then surely there would be some somewhere - Ireland, France and UK come to mind [sorry UK has one - The City - Rafferty's (no) Rules Zone).

      That said, Argentina did attract foreign investments in the TdF FTZ - notably Samsung - by slapping large tariffs on Samsung competitors products - see Bianca Fernet's posts at Wolf Richters blog.

      Better to make the whole country 'investor friendly' and let business decide if, when & where its worth operating a toothpaste factory in Greece.

      Re Leasing, would that be such as - NYC property developer buys 99 year Right of Surface concession to Corfu Beach & Forest for 23MEUR, perhaps?

      Capital from the near east rushes into Greece

      What really took my eye in the above item is the possibility of BUILDING SUBMARINES IN GREECE - one of the things preventing that happening is:-

      "...the ban of the European Commission, which stipulates that the shipyard [Skaramanga] has no right to complete orders for the construction of commercial and military vessels for third countries."

      The 1100 workers at Skaramanga are working short weeks - one day a week, weeks!!!!!!

      I've often wondered what happened to the Greek shipbuilding/repair industry. Looks like the Lebanese bought it, was that before or after the EU imposed its 4 day a week lock-out at Skaramanga?

      Why not get them to build a REAL oil/gas survey vessel NOW, rather than leasing non-existent French frigates some time in the future, to do something for which they were never designed. Greece, the only country with Exocet missile armed geo-survey ships - something else to stretch ones imagination.

      That (geo-survey vessel) sounds like a good project for EIB funds, Greece could get Norway involved to do some skills transfer and provide some of the money. Makes more sense to me than building straight line train tracks and importing TGV trains. The workers are already on site - if that ain't 'shovel ready' I give up.

      Oh dear I just saw that Troika talks broke down «sigh»


    5. @Klaus: I do not have more details than "Lease like Hong Kong", and refer to "common knowledge". You do get the point when you say: "To also give foreigner authority over domestic territory --- well, everything is possible but that does stretch my imagination!" My impression is that something like this is indeed required. You propose to give the FTZ constitutional value, say a 2/3 vote, yet, you are too optimistic, I would suggest, about the execution of the law under Greek authority. My suggestion would be not to do dramatic about this proposal, words like "surrendering national sovereignty" and such. It is just a Lease and a very practical thing to do. I propose to end this short discussion here. It was just intended as feedback and not more. Still: many compliments.

  2. Verily - Hallelujah!

    Very interesting fellow - not often I can listen those type of interviews from end to end without losing interest - or falling asleep.

    Something to worry about IMO at least

    Something not to care about - But nevertheless worth looking at

    Something to go Hmmmm about - Messing about in Boats is much more fun than messing about in Banks.


  3. Regarding FTZs: I have written so much about that but since my search function isn't working, I can't find anything ad hoc.

    The basic premise of my FTZ is the following: to make entire Greece a good place to do business is a generational project. To make a small 'pocket' within Greece (i. e. FTZ) an outstanding place to do business can be done literally within weeks or months (or overnight...).

    It is much easier to start something the right way from scratch than to repair the wrong way forever.

    And once you have 'pockets' where things are the right way, that right way may very well rub on the the rest of the economy. People assume new habits when they see that they work well elsewhere and provide benefits (not by command).

    I am not for undue perks in FTZ nor anything else of that nature. I am only for oustanding business conditions. Since we won't live to see that in the entire country, I suggest to start doing it in 'pockets'.

    1. sorry hit the publish too soon

      I found one of your 'unfindable' posts -
      A plea for Special Economic Zones (again...)

      In that post you refer to Special Economic Zones - as you well realise SEZ's include sectors such as manufacturing, power generation, R&D etc. FTZ's are different things - but they are often confused in the media. Within the Port of Piraeus there is an FTZ. Lets stick with SEZ's.

      You know some of my objections - but lets say the EU would allow them - I would hope (insist) it be for all distressed countries. IMO Italy is NOT distressed, nor is Spain or Ireland.

      The Lithuania minimum wage has been stuck at 271/month since 2007 - take a look

      My Lithuanian friend says the reason its unemployment rate is only 12% is because the government lies and because of emigration - including to Russia, Belarus & Ukraine Many older people speak Russian - not surprising given they were under almost continuous occupation by the Tsarist Empire and Soviets between 1795 and 1991. Apart from 22 years of freedom that Lenin gave them after 1918, before the Stalin's reoccupation, and then the Nazi occupation between 1941-44, after which Stalin's lot came back until 1991. I don't buy into the "Greece is Special" school of thought. All countries are special one way or another.

      I found a commercial company in India that specialises in setting up and administering SEZ's. Inspira Projects Ltd, its a unit of an Indian Pharma company - Ajanta Pharma. Maybe Greek could borrow the idea of private sector SEZ's. They have an appeal even to me - provided the parent company is engaged in the real economy doing real things - i.e. no property developers or banks.

      But I'm sure you know in your heart as well as I do, that the EU wont allow Greece or anyone else to try anything as creative as private sector SEZ's. It wont even let Greece build merchant ships in its own damn shipyards - and who would be behind that I wonder - Germany, France & Spain come to mind.

      Why Spain - well Australia is talking to Spain as a possible supplier of some new subs, it couldn't talk to Greece about them even if it wanted to - because the EU says so. Another constraint on Free Trade!!!

      I'm back at the place where I think it would be better for the Greece to be outside the EU, for the reasons previously stated, and for the reasons previously stated it need not be as bad as most people think.

      Did you see this - Russell Indexes downgrades Greece to emerging market status


    2. CK

      Now that you have alerted me to the difference between FTZs and SEZs, indeed I mean SEZs.

  4. I despair when I read superficial analysis like that. My debt is your investment, so I have the right to disregard your investments? In other words Greece is right to keep borrowing as long as the education system produces students that win S. Korean students in World math competitions? This guy is probably a secret agent of ΑΝΤΑΡΣΥΑ. What he should have said is that debt is the focus, the end result of bad policies and we must change these policies to tackle debt in the long term, something that is entirely different and far less palatable.
    He is also ignorant of his (US) history. I think it was Madison that said :I study war and politics so that my son can study engineering so that my grandson can study fine china and violin. The esteemed gentleman has forgotten about the first stage:if the political situation is shot nothing can save you. The Central Powers had the best education system in the early 20th century.And remember, even S. Freud danced in the streets of Vienna the day the Emperor signed the declaration of war against Serbia that fateful August. Forget political stability and Lenin will be prophetic: the only thing that history teaches us is that it teaches us nothing.I only hope that B. Obama and his successors are wiser than he is.
    Between writing this last night and posting this morning I reread Keynes in an article about the gold standard. From the Economical Consequences of Peace: the best way to destroy a country is to debauch the currency because it unleashes forces not even one man in a thousand can comprehend. Proof: the above interview. You think these guys with their imprecise thinking will understand or will they spout received wisdom and try to game the market in the background to profit from the mess?

    1. I think you misunderstood him (or I misunderstood him).

      I didn't hear him talk about debt the way you comment. Instead, I heard that he was saying that the discussion should move away from abstract debt issues and move towards the real economy.

      I have always phrased that the following way: the debt is the derivative, the real economy is the underlying. You have to fix the underlying. Playing around with the derivate won't solve much.

    2. @ theAthensdog

      He is MI6, lol lol Australia division lol lol


  5. I now found these two posts which I had written about SEZs.

    And one of the post includes back-links to other articles.

  6. One of the major Greek newspapers today run the story that permission was denied to a Greek company to mine zeolites.

    In the story it was also mentioned how currently zeolites are imported from Bulgaria by a company of Greek interests, whose administrative council is comprised of relatives of a certain Greek politician.

    This comes in stark contrast to how the Greek state sold a goldmine for peanuts to a well known public-sector contractor, who then resold it at a much higher price to a company of Canadian interests.

    Since we all discuss from a theoretical angle, I thought that this reminder about how the Greek society operates would be useful.