Leading the Revival of Individualism & Self Reliance

The Government Shutdown Will Not Shrink Economic Growth Despite What The New York Times Thinks.

/in /by

While some readers of this column are perhaps already familiar with this historical anecdote, it’s worth repeating every now and then that as recently as the year 2000, the state of Ohio had more paved roads than all of Russia combined. Please think about that for a minute. Ohio, a seemingly middle-of-the-economic-pack U.S. state, not too long ago had more paved roads than a country that is eleven time zoneslarge.

So how can the Buckeye State claim so much in the way of drivable terrain? Why is there so much throughout the U.S.? The answer is that Americans – for good and bad – produce so much taxable wealth. Government doesn’t build roads as much as it’s able to pay private actors to build roads thanks to the endless amounts of money that flows into government coffers. Road construction doesn’t drive (excuse the pun) economic growth in the United States; rather it’s an effect of it. Haiti, Peru and Democratic Republic of Congo don’t have fewer roads because their politicians are thrifty; they do because there’s insufficient growth in the private economy of each country such that their politicians have very little to spend.

Which brings us to a recent New York Times’ piece which speculated on the economic impact of the federal government’s partial shutdown. Alan Rappeport and Binyamin Appelbaum observed that the shutdown is “unlikely to make much of an immediate dent in the growth of the United States economy.” Later on they tried to tie a number to their assertion with their mention of a Standard & Poor’s estimate that the partial shutdown “could shave $1.2 billion off gross domestic product each week,” only for them to ‘reassure’ readers the latter only represents “a very small fraction of the nation’s economic output.” Rappeport and Appelbaum state the obvious, but unsurprisingly miss the point.

They forget that the federal government has trillions to spend every year precisely because the American people produce many more trillions worth of wealth. The federal government is big in the United States solely because the U.S. economy is massive. Rappeport and Appelbaum comically confuse causation here.

To believe their reporting, the U.S. economy is made bigger by government spending! That’s impossible. The federal government once again only has trillions to spend as a consequence of all the wealth already produced in the private sector. That’s why governments around the world spend much less than wasteful American politicians do. Applied to Russia and its substantial lack of roads relative to the U.S., it’s not that the pols there are stingy with the money of their people. In truth, the Russian people produce wealth at a small fraction of the rate at which the American people do.

Rappeport and Appelbaum also forget that economic growth, despite what they’ve been led to believe, is not an effect of consumption. Goodness, we all have endless consumptive desires. That’s just evidence that we’re human. What the Times’scribes can’t seem to wrap their heads around is why Americans are able to consume to much more than other people. Rest assured they’re not able to because politicians at all levels of government are so eager to reach into their pockets. Taxation logically limits our consumption.

Back to some semblance of reality, Americans are able to consume abundantly because they produce wealth in abundant fashion. Consumption is an effect of production, and the more investment there is, the more production there is. If anyone doubts this, just stop and consider the relative productivity of a farmer who only has a shovel versus one with a tractor. Or a factory worker aided by robots versus one manually handling all aspects of production. Or a technologist working with dial-up internet speed versus 4 or 5G. The simple truth is that the more wealth invested in us, the quicker our productivity rises, and with the rising productivity, the greater our ability to produce in order to consume.

It’s all a reminder of how much bigger (and we’re talking exponentially bigger) the U.S. economy would be if government at all levels taxed and spent quite a bit less. Oh my, would we be prosperous. And for those who say we wouldn’t be because there would be no roads, let’s be serious. Capitalism is all about expanding ways for the productive to meet the needs of other productive people. For individuals to suggest we’d still be riding in horse-drawn carriages from Los Angeles to San Francisco absent government is for certain people to reveal a level of unseriousness that is awe inspiring.

For now, though, it should be said that Rappeport and Appelbaum are engaging in double counting of the most dishonest kind when they claim even small economic growth decreases as a result of the partial shutdown. They’re being silly. Economic growth is once again what enables government. And if it were smaller, the private investment without which there is no growth would be quite a bit more sizable.

So while it’s a reach to suggest President Trump understands what Rappeport and Appelbaum plainly do not, how dreamy if he did only to ride out the shutdown at least through 2020. This way there’s thankfully no wall, and no growth in government. Congress and the White House lose, but those of us not in government win. As for the estimated 500,000 federal employees who will have less thanks to a partial shutdown, welcome to the world of the private sector American worker 365 days/year thanks to government that grows and grows on the backs of those not in its employ.

John Tamny is a speechwriter and writer of opinion pieces for clients, he’s editor of RealClearMarkets

Let’s Welcome The Deflation That Is Coming – It Helps Everyone Except Government And Its Cronies.

/in /by

The greatest hoax perpetrated by the governing class on the rest of us is the Federal Reserve’s 2% inflation target. They are telling us that the dollar in our pocket will buy 2% less every year, or about 20% less in 10 years and 33% less in 20 years. And they are telling us this is a good thing. In fact, since the first year of the Federal Reserve in 2013, the average annual rate of decline of the spending power of the US dollar has been over 3%, so the Fed is beating its target. Your dollar has lost more than 95% of the purchasing power it represented in 1913.

We tolerate this because we have been taught (in the government’s own schools) since kindergarten that inflation is a good thing, and its opposite, deflation, is a bad thing. If there were to be deflation, then the purchasing power of the dollar in your pocket would be increasing not decreasing. So why would that be a bad thing?

Well, the Fed has a lot of myths they’s like you to buy into to support the idea of deflation as a bad thing. They include:

  • The economy can’t grow when prices are falling. Wrong. Empirically, economic growth is not negatively correlated with falling prices. As one example, the US economy in the last third of the 19th Century grew strongly while overall prices were declining, so that real per capita income growth accelerated. And that’s the point: it is real income growth that people seek, not inflation-boosted nominal incomes measured in dollars that buy less and less every year.
  • Companies can’t make a profit when prices are declining. Wrong. Profits are the difference between selling prices and costs. When both are declining, there is no reason why profit margins can not be maintained. Companies have become very smart at anticipating future prices and future costs during the unstable inflationary conditions induced by the Federal Reserve and other central banks, and they will be able to utilize the same forecasting skills when prices are falling.
  • Deflation creates unemployment. Wrong. The economy can grow and therefore employment can grow amidst declining prices. Real wages can also grow in deflation. The only possible cause of unemployment in deflationary times would be the maintenance by government regulators of a mandatory minimum wage that was higher than the free market price that labor could command. The government would quickly find that such regulation would be unsustainable.

There are several more “deflation is bad” myths, but none are persuasive. So why are our governing class masters so adamant that inflation must be maintained? Because it is good (indeed vital) for government, and for its cronies in banking and the financial industry. Inflation is the fuel for never-ending government growth. When the Federal Reserve prints money (“expands the money supply”), which is the action that creates inflation, it goes straight to government spending. Government can issue unlimited amounts of debt for the Federal Reserve to buy (or “monetize”), in the confidence that (a) government can pay it off in future years with lower-value dollars, and (b) government will always have access to new Federal Reserve-created dollars in the future so it never needs tp stop or reduce spending. This inflation machine is the main engine of continued welfare state and warfare state expansion. Government just keeps getting bigger and bigger under conditions of inflation.

Similarly, the government’s closest cronies, the banks, are the next recipients of Federal Reserve-created money, which they can lend out at high interest rates to businesses and individuals, making profits on the spread. Banks lend every dollar they receive from the Fed nine times, multiplying the inflationary effect of newly printed money. In inflationary conditions, firms are happy to incur debt that they can repay in the future with lower value dollars. Business becomes more speculative as a result. In deflation, businesses are more likely to finance themselves with equity than debt, so that business becomes more soberly managed, more reliable and more likely to generate high quality growth. Both businesses and households become more likely to save now for investment later, taking economic and social power away from the Federal Reserve and the banks and putting it back in the hands of private citizens.

If government has such a vested interest in continued inflation, what are the signs that they might not be able to maintain their 100+ year record? There are three.

  • Central Banks are beginning to realize that never-ending inflation is beginning to turn destructive to society. We reported here that the research arm of the Bank For International Settlements, the nation state central bankers’ own global central banker, has declared that the financial crashes and crises knowingly caused by unrestricted money printing should be brought to an end. At the same time, nation-state Central Banks like that of Japan are beginning to recognize that, in the anemic economic conditions they have brought about with their unrestrained money-printing, there comes a point where the citizens give up and cease to be economically productive.
  • Technology-induced price deflation is becoming more and more pervasive. In the case of the declining prices / growing economy story of the US in the last third of the 19th Century, technology – in the form of railways, manufacturing machinery, electric lighting and telephones – played a large role. Today, we are undergoing a technology shift of comparable influence, with global trading platforms, declining transaction costs, and galloping automation, both software-based and hardware-based. Technology’s typical effect on prices is to reduce them not increase them.
  • Today’s demographics are deflationary. As the baby boomer generation is retiring, they are starting to withdraw money from their retirement accounts to live on. Whatever they spend, they do so very carefully. Many countries, including Japan and China, are aging faster than they are adding to their affluence.  Insofar as consumer spending influences price inflation, these conditions are anti-inflationary.

The signs are promising that we might be entering a period of price deflation, or at least price stability. If the rate of money printing by Central Banks continues to slow, and the downward influence of technology and demography on prices strengthens, then it could happen. Citizens will rejoice, and governments and banks will cringe, which is as it should be.

The Dominican Friar Who Introduced the Western World to Western Civilization.

/in /by

Perhaps the most challenging and controversial question of human existence is, well, human existence. How did we acquire consciousness, and when?  Was it an emergent phenomenon as suggested by Darwin’s theory of natural selection, or was it a supernaturally induced spark that created our inner voice, our sense of the future, and formed language? This is an enduring historical, scientific, religious, and philosophical conundrum, and a contentious one at that.

A similar, and existentially important question is: when and how did human beings make the giant leap from the mind-numbing stagnation of the Dark Ages to the humanism and achievements of The Enlightenment? Was it an emergent phenomenon, divine inspiration, or was it a spark induced by a few mere mortals? This question is also one of history, science, religion, and philosophy. While the histiography is complex, there is one individual who resolved the religious and philosophical differences that paved the way for Romanticism and the Scientific Method. This Poetic Justice Warrior bridged the gap between Catholic hegemony and The Renaissance. He is the Italian Dominican Friar Saint Thomas Aquinas.

The Teacher, Philosopher and Theologian

The bridge that Aquinas built was constructed with the ancient girders of Aristotle’s reason, and this was no small feat. It required extraordinary insight and courage as he risked possible excommunication from the Church. To be accused of blasphemy was a very serious matter. For example, three years after Aquinas’ death in 1274, the Bishop of Paris issued a condemnation to declare that God’s absolute power superseded any principles that are derived from reason.

The condemnation listed over 200 such heretical propositions; many were Aristotle’s, and twenty were from Thomas Aquinas’ own philosophy known as Thomism. One example of Thomism is self-determination and inductive reasoning:

The will does not precede the intellect but follows upon it. It freely chooses among the many goods that are presented to it as desirable according to a changeable judgment or evaluation. Consequently, the choice follows the final practical judgment. But the will is the cause of it being the final one.

Another example of Thomism is Aquinas connecting the divine and the Law of Identity (everything behaves according to its nature):

Consequently, the one God, unique and simple, alone subsists in absolute being. All other things that participate in being have a nature whereby their being is restricted; they are constituted of essence and being, as really distinct principles.

As is frequently the case with poetic justice, it takes time and patience, and is an inevitable force of nature. Fifty years after his death, Aquinas was canonized as a saint, in 1567 he was awarded the title of Doctor of the Church for his research and writing, and in 1879 Pope Leo XIII declared Aquinas’s theology a definitive exposition of Catholic doctrine.

Enter The Modern Era

Thomas Aquinas utilized a method of thinking and learning known as Scholasticism, which is a system of critical thought that was a departure from traditional Christian theology. Scholasticism is closely associated with the rise of modern universities in Europe, and it relies heavily on dialectical reasoning, which is a form of debate that excludes subjective or emotional elements. The goal is to arrive at objective truth. Rational arguments are broken down into inferences that move premises toward logical conclusions. This is essential for resolving contradictions because contradictions cannot exist. The significance of this, especially in the late Middle Ages, cannot be underestimated. Scholasticism was the crucial method needed to reconcile Christian theology with Classical philosophy, and pave the way for the Modern era.

Aquinas’ signature achievement is his masterwork Summa Theologica, and it is considered to be the pinnacle of scholastic, medieval, and Christian philosophy. Within Summa there are several main characters, and two of these people could have been considered heresy. One is the Islamic, Aristotelian philosopher and polymath Ibn Sina (Avicenna), and the other is Aristotle himself, referred to as The Philosopher. But how did Classical Greek philosophy resurrect itself after a 1000 year absence in the Christian world? According to philosopher Stephen Hicks:

1085 is a significant year. Spain becomes fully Christian again. And at Toledo and various other points, the Christians rediscover all sorts of Greek and Roman texts that had been lost to Western Europe. And curious minds start to read some of these texts and discover these magnificent civilizations that had existed long before and shockingly were not Christian. How was it possible?

Not only was Aquinas born into a prominent Catholic family during a time of enormous transition for Europe, he was a strong-willed and highly educated renegade. As a young man, his parents held Aquinas under house arrest for a year because of his plans to join the Dominican Order, by whom he had been introduced to Aristotelian philosophy while enrolled at university in Naples.

Postmodern Progressives vs. The Enlightenment

The fall of Rome in the 5th century A. D. led to the fall of literacy, and the rise of St. Augustine’s influence over Christian doctrine. According to Hicks, “the dominant Augustinian Christian theology is very anti-empirical, it emphasizes revelation, mysticism, authority, and faith. Reason, to the extent that is allowed, is severely subordinated.” Its doctrine teaches that the divine controls all that will ever happen, force is permitted against heretics, people are inherently evil, and that reason, purpose and pride are bound to fail.

Incidentally, the rise of so-called progressivism in 20th century western culture has similar characteristics. While literacy is very high, its doctrine is government control, intolerance of debate, people are inherently victims, and individualism has failed. This can only lead us down the Road to Serfdom, and ultimately to the slavery which had been eradicated by western capitalists.

Not only did Aquinas usher the Catholic church into the Age of Reason, whereby it became a major force for higher education throughout the western world, he helped pave the way for the level of human consciousness that nature intended. And this unleashed a spontaneous force of nature that brought human flourishing to the entire world. While the pagans of classical Greece and Rome were slave owners (it was common and accepted nearly everywhere on earth) and placed no particular value on individuals, Christians began to regard slavery as inhuman. After all, central to Christian theology is the idea that all human beings are equal in the eyes of God, an idea also enshrined in the US Declaration of Independence. As President John Adams wrote, “The Revolution was in the minds of the people.”

And this is the spark, combining the Classical ideal of reason to the Christian ideal of equality, that freed the human mind and led to Western Civilization’s hallmarks of personal liberty, self-reliance, invention, religious and ethnic tolerance, limited government, the arts and unimaginable prosperity. All of which describes individualism, a Classical and ancient Hebrew idea best championed by Poetic Justice Warrior Ayn Rand, “The world you desire can be won, it exists, it is real, it is possible, it is yours.”

 

Entrepreneurs Bring Economic Progress – Which Is Far More Important To People Than GDP Growth.

/in /by

Economists tend to represent economic growth as growth in the level of income and of GDP. But economic progress is far broader than that, and to focus on GDP growth is to ignore the most important elements of economic progress – the elements that improve people’s lives.

Why do economists miss this point? Because they don’t understand entrepreneurship, and the role of entrepreneurs in economic progress. In economists’ models, firms are run by managers who choose low cost resources and manage processes in order to achieve greater efficiency. In a competitive economy, this would drive companies out of business. Continuous improvement and innovation are the drivers of economic progress, and they come from entrepreneurs not managers.

We invented economic progress only recently. It began in the late eighteenth century with the industrial revolution. Before that, the standard of living and the quality of life was much the same in 1750 as it was in 1650, and it was much the same in 1650 as it was in 1550 and, indeed, as it was in 550.

Since then, economic progress has been greater in the nineteenth century than the eighteenth, greater in the twentieth century than the nineteenth, and every indication is that the progress will continue to accelerate in the twenty-first century.

In the United States, per capita GDP was nearly seven times greater at the end of the twentieth century than it was at the beginning. But looking at only growth numbers seriously misrepresents the nature of the economic progress that took place in that century.

At the beginning of the twentieth century only about 1 percent of American households had cars; by the end of the century 91 percent of households had them. Largely because of advances in medical technology, life expectancy rose from 47 years at the beginning of the century to 77 years by the century’s end. Telephones were rare at the beginning of the century, but commonplace by the end of the century. Information acquisition and entertainment were completely transformed in the twentieth century. At the beginning of the century there were no movie theaters, no radio broadcasts, and no television. By 1900 electricity was available to some, and was used mainly for lighting, but by 1950, electricity powered radios, electric washing machines, and refrigerators.

By 2000, most people classified as poor in the United States had indoor plumbing, air conditioning, telephones, and automobiles. The Internet revolutionized communication and allowed business ventures to span the globe. While only a few computers existed in the world in 1950, many people had more than one computer in their homes by 2000. Computers did not become common until the 1980s, and the World Wide Web did not exist until the 1990s. The first airplane had not yet flown at the beginning of the twentieth century, but by the end of the century travel throughout the world in jet aircraft was commonplace. Despite the tremendous GDP growth over the twentieth century, when one reflects on economic progress over the century, it is apparent that the primary component of economic progress is not the amount of income growth, as impressive as it was, but rather the substantial change in the qualitative nature of the economy’s output, and the extent to which people enjoyed consuming it.

They were also able to enjoy producing progress. At the beginning of the twentieth century the average work week in the United States was about 50 hours, and by the end of the century it had fallen to about 35 hours. Again, this quantitative change in hours worked, while impressive, does not reflect the changing nature of work, which became less dangerous and less physically demanding. People worked more with their minds and less with their bodies by the end of the century, and this is reflected in the fact that at the beginning of the century only 22 percent of adults had completed high school, while by the end of the century 88 percent had at least a high school degree. Accidental deaths, including those on the job, fell from 88 per 100,000 to 34 per 100,000 over the course of the century.

While people work fewer hours for more income, the more significant element of progress in the work people do is not the quantitative reduction in work hours or increase in output, but rather the qualitative changes in the nature of work. At the beginning of the century the reward for work was money, and most jobs were mainly manual labor. While money was still a primary motivation at the end of the century, people considered the pleasantness of a job, including intellectual stimulation, challenges, and workplace amenities as significant rewards for employment. Many people enjoy the work they do: something that would have been much rarer in 1900, when work was often physically demanding, dangerous, and tedious. One can look at growth in terms of increased output per hour of work, but the progress in terms of qualitative changes at the workplace is at least as significant as the quantitative growth.

Henry Ford was the entrepreneurial innovator who brought assembly line production to the automobile industry, which enabled a substantial increase in the output of automobiles per worker. But focusing on growth in output per worker misses the much more important truths about the transformation of lifestyles that resulted. People’s transportation options were greatly enhanced, making automobile travel available to a large segment of the population. This changed many other things – such as shopping for example. Supermarkets, shopping malls and large discount stores would not be feasible if people could not drive their own cars to transport substantial quantities of goods. Because shoppers can buy more each time they shop – because they can transport more in their automobile – stores can offer a greater variety of goods at a lower cost. Entrepreneurs who supply the retailers are encouraged to think up a larger variety of new goods for sale.

Because of the introduction of low-cost long distance telephone calling – and now the internet – these entrepreneurs can contact sellers thousands of miles away to order new products immediately. Sharp declines in transportation costs make it feasible to ship individual purchases thousands of miles to buyers. The variety of goods and services offered for sale continues to expand. Progress in one area leads to progress in others. Life gets better. Progress brings economic growth with it, but growth is a minor component of economic progress.

Progress is not brought to us by managers striving for efficiency, but by entrepreneurs developing specialist knowledge about their area of expertise and thereby discovering new opportunities to serve customers better and to make a profit doing so. The profit-and-loss system amplifies progress. Profits reinforce the pursuit of ideas that are wealth-enhancing for entrepreneurs, and losses terminate the ideas that are not. As a result, the positive impact of successful entrepreneurship is much larger in magnitude than the negative impact of unsuccessful attempts. That’s how progress occurs. Specialization is an important element – something Adam Smith knew at the beginning of the Industrial Revolution.

Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things. . . . It is naturally to be expected, therefore, that some one or another of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, whenever the nature of it admits of such improvement. (Adam Smith, Wealth Of Nations, 1776)

Entrepreneurs invest in producing the specialized knowledge that will enable them to make future entrepreneurial discoveries. Their pursuit of knowledge makes innovation and progress more likely.

To read more, see Progress And Entrepreneurship; Randall G. Holcombe; QJAE Fall 2003.

Post-Bureaucratic Capitalism Is Here: 12 Characteristics Of Innovative Organizational Forms Emerging In The New Management World.

/in /by

A large-scale movement to transform bureaucratic management is under way. Models of “the organization of the future” have emerged in a number of very large organizations. “Sleeper cells” of the new way of managing have sprung up in many more organizations. Alarmingly for some, firms operating in the new way are often so successful that they are putting traditionally managed firms out of business.

In 2018, the Drucker Forum hosted several presentations that illustrated a future of post-bureaucratic firms, each with a unique “feel.” They each have a somewhat different story. Yet the stories have some important common threads.

Living a narrative.

Post-bureaucratic firms sees themselves as living a narrative of where they have come from and they are being run the way they are. The story both expresses and inspires the passion of those living and implementing the story. In each story, making money is the result, not the goal.

Uniqueness.

The management models of these firms all have different names and labels. Each firm uses its own terminology to describe what it is doing. Some of the firms like Vinci have been operating this way for many decades. Others have been at it for a shorter time.

Home-grown.

The management models of these firms all have a home-grown feel to them. They have emerged organically over time. None of them has occurred as a result of imposing a system or model from without. This is one reason for the differing nomenclatures.

Bottom-up.

The journeys of each firm tend to be bottom-up in spirit and orientation, not top-down. They are based on pull, rather than push. In each case, the top has been supporting and inspiring change driven largely from below.

Human-oriented.

While outsiders might characterize the stories of these firms as reflecting “human-centered organization” or “human beings creating value for other human beings,” by and large, the executives of the firms themselves use humbler and less abstract home-grown labels.

Common features of the business models of these firms include:

Customer-obsessed: These firms are obsessed with adding more value for customers and end-users. They are aligned with Peter Drucker’s dictum that there is only valid purpose of a firm, to create a customer (taking “customer” to include “end-user”). They all stress getting close to customers, understanding customers, interacting with customers, drawing on customers, changing their structures and doing whatever is necessary to add value to customers. In some cases, customers become almost part of the firm.

Small is beautiful: They all emphasize getting big things done in small units, small teams, small everything. Big complex problems are descaled into tiny pieces that can be handled by these small units or teams, which are often self-organizing. Processes and procedures are less important than inspiring energy and innovation. The primary focus is on passion and commitment, not rules and structures. The emphasis is on enablement, rather than control.

Networks: These firms are run as networks or ecosystems, rather than top-down command-and-control models. They tolerate and even encourage significant “organizational messiness.” Values and culture are key features that help maintain consistency and coherence.

Some characteristics of the performance of these firms include:

Holistic: The post-bureaucratic approach applies to the whole organization, not just the R&D department. It includes talent (formerly HR), accounting, procurement, finance and so on.

Operating at scale: These firms have shown that they are capable of operating at very large scale. Those presenting at the Forum included organizations with more than 100,000 employees. Some of the largest and fastest growing firms on the planet espouse similar narratives.

Profitable: These are organizations in the private sector (although similar developments are beginning to emerge in the public sector.). They make a lot of money, although making money is the result, not the goal. Post-bureaucratic management is thus not about tradeoffs. In fact, the new way of managing has helped public corporations overcome adverse pressures from the stock market and hedge funds to give priority to maximizing shareholder value.

Imperfect: Yet none of these firms is, or claims to be. perfect. They are all on journeys and the journeys continue. Their very success has turned some of them into quasi-monopolies, giving rise to the risks that monopoly always brings. Issues of privacy and exploitation of personal data, creation of sweatshops are also present in some cases. In other cases, there are steps backward after steps forward.

Adapted from a 12-9-18 post by Steve Denning at forbes.com.

Entrepreneurial Initiative Beats Corporate Innovation Process Yet Again. When Will They Ever Learn?

/in /by

According to the Wall Street Journal, Altria, maker of Marlboro and other cigarettes, is planning to invest in Juul, maker of a cigarette alternative which vaporizes nicotine-containing liquids. These devices are often called “vapes” and the practice of using them, “vaping”. A company dedicated to addicting people to smoking burning tobacco is now adding to its portfolio a company dedicated to terminating that addiction. At the same time, Altria has made a $1.3 billion investment in Canadian cannabis company Cronos Group, Inc. It will all make for interesting portfolio management.

However, for entrepreneurs, the most important aspect of the investment combination of Juul and Marlboro is what it tells us about innovation and who is capable of delivering it. Altria has been aware for a long time of the evidence that the long term future of the cigarette market is threatened by external trends, including the subjective lifestyle preferences of consumers (and the non-consumers who dislike the “second hand smoke” problem), but also including regulation, taxation and the resultant deterioration in the price-value proposition.

Faced with such negative long term trend signals, the good and wise corporation, prompted by the business school community that has populated the executive ranks in addition to marketing its tools through consulting, seminars and books, initiated an internal innovation process. This produced the idea of so called e-cigarette products, like MarkTen and Green Smoke, devices in which tobacco is heated but not burned, which purportedly makes smoking less risky. The process also produced a device called iQOS, developed in partnership with Philip Morris International, which is a sister company spun out of Altria to sell cigarettes in international countries outside of the glare of the US legal profession and its alliance with state and federal regulators.

Philip Morris International took the lead in marketing iQOS and claimed some early success in Japan, so much so that the company diverted significant resources from conventional cigarettes to the heat-not-burn “breakthrough”. After initial growth, Motley Fool in October 2018 reported “disappointing earnings” at Philip Morris International attributable to a “significant slowdown in the e-cig’s primary market, Japan”. Motley Fool reported some early trial among a younger demographic, but “a wall of resistance among older cigarette smokers”.

It looks as though Altria has seen the warning signs as an indication of failed corporate internal innovation, and has swerved to the alternate lane of acquisition of the innovative ideas of external independent entrepreneurs.

Its investment of $12.8 billion for a 35% stake in Juul Labs Inc suggests a roughly $38 billion valuation, making Juul one of the most valuable private companies. The Juul team has created this much value in about three years, while Altria and Philip Morris international were destroying value in their failed attempts at internal innovation.

The Failure Of Centrally Planned Innovation Processes.

They should have known. Corporate innovation processes are doomed to failure. That’s because innovation is not a process. It can’t be centrally planned by executive wing geniuses, no matter how much they spend on consulting and business school seminars. Innovations like Juul are emergent results of marketplace experimentation by entrepreneurs and consumers. The consumers become dissatisfied with the current set of offerings available to them – that particular phenomenon is strikingly apparent in the cigarette market. They begin to experiment with alternatives – they might try nicotine chewing gum, or patches, or snus (tobacco pouches placed in the mouth) or even iQOS. They are not yet declaring their loyalty to a new solution, but simply looking round at alternatives.

Entrepreneurs are dissatisfied with the supply side of the market. They sense the consumer dissatisfaction and match it with their producer dissatisfaction. They, too, experiment. There have been many such producer experiments in the cigarette market, and Juul is the one that has, for the moment, risen to the top. Why? It’s usually random luck combined with a co-creation collaboration with the consumer – continuously adding and changing features and attributes and measuring consumer response until the best combination emerges. There are so many experiments among so many producers and so many consumers that one combination eventually emerges as the most preferred. The outcome can not be predicted, it can’t be modeled, and it can’t be managed. The genius of the market is that all of the failed experiments result in very small losses and a lot of learning. The one successful experiment eventually incorporates all the learning, attracts a large number of customers, creates a lot of value in a short period of time, and generates a huge amount of economic progress far in excess of the losses from the failures.

The scale and reach of this experimentation, the rapid exchange of knowledge and learning in the network of entrepreneurs and consumers, the flexible adaptiveness that allows for the rapid abandonment of the resources committed to failed paths and the agile transfer of resources to the path of success, can not be matched by a centrally planned corporate innovation process. Decision-making in hierarchical structures can’t reproduce the emergent properties of interconnected knowledge-sharing networks. Processes with their stages and gates can not compete with the spontaneous order of free experimentation. Corporate investment guidelines can not compete with entrepreneurial risk-taking.

The Future Of Innovation Lies With Interconnected Individuals.

The future of innovation lies squarely in the initiatives of the independent, interconnected entrepreneur. As new technologies like A.I. and global idea exchange platforms augment individual capacity, the trend towards individually ideated innovation will accelerate.

This does not mean that corporations will not try to suppress it rather than adopt it. Glaringly, in a follow-up report in the Wall Street Journal, we learned that one of the results of the Altria investment in Juul will be collaboration between the two companies’ regulatory teams. Speaking of cronying up to government regulators, the Altria CEO was quoted as saying, “We have years of experience” in such regulatory negotiating and another spokesperson spoke proudly of Altria’s possession of  “a level of sophistication they (Juul) need”.

This reveals a downside of capitalism. Altria has enough money to invest in Juul Labs, and enough left over to smother it in corporate process and bind it with regulatory collaboration. While there is no inherent objection to scale, it usually brings with it the insidious integration with government that is anathema to further economic progress. Not to worry; the independent entrepreneurial network will nurture new innovations through its experimentation and co-creation activities faster than incumbent corporations can capture the emergent value through M&A.

The Nation’s Youth Are Leaning Towards Socialism. Financial Professionals Are Forecasting Its Devastating Economic Damage.

/in /by

If there was one idea that you could say dominates today’s Democratic Party, it could be summed up in one word: Socialism. Many Democrats, from Vermont Sen. Bernie Sanders to Massachusetts Sen. Elizabeth Warren, embrace some form of socialism, soft or hard.
But what, you might ask, would America look like under socialism? Now there’s an answer, and it isn’t pretty.

Democrats’ New Fixation

Taking the Democrats’ new fixation with socialist ideas seriously and coinciding with the 200th anniversary of Karl Marx’s birth, the president’s Council of Economic Advisers (CEA) decided to apply conventional economic analysis to the U.S. economy under socialism. It won’t be the happiest place on Earth.

The report, “The Opportunity Costs of Socialism,” warns that “socialism is making  a comeback in American political discourse. Detailed policy proposals from self-declared socialists are gaining support in Congress and among much of the electorate.”

The numbers are pretty scary. According to the analysis, if the U.S. were to deploy Venezuelan-style socialist policies it would be a disaster.

Those policies, by the way, have been hailed by Sanders, Democratic candidate Alexandria Ocasio-Cortez, and dozens of other Democratic candidates this year who were endorsed by the socialist wing of the party. Much of the Democratic Party today has become enamored with socialism.

Indeed, a poll earlier this year by the American Action Forum found that 40% of Democrats say socialism is the best form of government. Another 10% say both socialism and capitalism are best. Meanwhile, 57% of Democrats said that socialism has a “positive impact” on society.

Venezuela’s Model

So it’s not at all unfair to ask what would happen here if we imposed Venezuela’s brand of socialism in the U.S.? After all, Venezuela is the most recent economy to go whole-hog socialist in this hemisphere since Nicaragua in the late 1970s. And as recently as the 1960s, its citizens were richer on a per capita basis than people in Great Britain.

How would their socialism work here?

Let’s start with reality. The Venezuela model would lead to nationalization of key industries, price and currency controls, rationing, poor health, political instability and widespread politicization of the rest of the economy.

Such policies would lead to a collapse of 40% in real GDP, or about $24,000 per person, according to the CEA report. And no, the CEA estimates are not based on some pie-in-the-sky model. They’re based on data from a wide body of research and studies that clearly and convincingly show less-free economies perform far worse than free economies.

No ‘Third Way’

Unfair, say socialist Democrats. Venezuela’s a failure. What about the “Third Way” socialism of Nordic countries like Sweden, Norway, Denmark and Finland? They’re all highly successful. They’re almost paradise.

Never mind that none of those countries today qualifies in any meaningful sense as “socialist.” Or that all of the Scandinavian countries have pulled back from their quasi-socialist experiments during the 1970s, and are instead now cutting government spending growth, privatizing social security, reducing their once-generous welfare programs, lowering taxes, and pursuing free-market policies in general.

Don’t take our word for it. Their own leaders admit as much. In 2015, after Sanders foolishly waxed rhapsodic about the Nordic socialist model, Danish Prime Minister Lars Lokke Rasumssen, speaking at Harvard, harshly corrected him: “I would like to make one thing clear,” he said, in remarks clearly aimed at Sanders. “Denmark is far from a socialist planned economy. Denmark is a market economy.”

‘Nordic’ Model Isn’t Socialist

The truth is, today Scandinavian nations are in many ways more free than the U.S. As we wrote in August: “They don’t have government ‘guaranteed jobs,’ there’s no mandated minimum wage, and they require citizens to pay more out-of-pocket for health care than the U.S. does today.

“What’s more, Sweden and Denmark under Obama  ranked as more economically free than the U.S., according to the Heritage Foundation. Norway was just a few steps behind.”

And by the way, the average standard of living in Scandinavia is below that of the U.S.

Even so, let’s measure ourselves against Scandinavian policies at the peak of their Third Way experiment in the 1970s, their most “socialist” phase. The CEA says if those ’70s-era policies were enacted here, they would result in a 9% reduction in real GDP, and a whopping 19% cut in household income after taxes and health-care spending.

Welcome to Scandinavia!

Meanwhile, on a more immediate level, Bernie Sanders has made quite a stir with his falsely named “Medicare-for-All” program, which is really just socialized medicine. By the way, it has nothing to do with our current fiscally unsound Medicare program at all, so don’t be fooled by the title.

Socialism: A Health Care Nightmare

What if we imposed socialized health care on Americans?

It would result in a 9% reduction in real GDP. It would also slash household income by 19%, after taxes and health-care spending. And it would lead to far worse care and rationing.

In sum, it is a fact, not an opinion, that socialist economies perform far worse than free-market or capitalist economies.

As the CEA said in its timely report, “The historical evidence suggests that the socialist program for the U.S. would make shortages, or otherwise degrade quality, of whatever product or service is put under a public monopoly. The pace of innovation would slow, and living standards generally would be lower. These are the opportunity costs of socialism from a modern American perspective.”

Hey, at least under socialism we would be equal in our misery. But is that what Americans, including rank-and-file Democrats, really want?

The Diminuitive Russian Emigre Who is America’s Greatest Defender

/in /by

The 10th Venice International Film Festival began August 30, 1942. One of the films entered was from famed Italian director, Goffredo Alessandrini; and he hired Italy’s top studio, Scalera Films, to produce it. Alessandrini’s goal was to film a drama of epic proportions. For his ambitious project, Alessandrini chose the perfect vehicle to adapt to the screen, wartime Italy’s best selling novel, We The Living by Ayn Rand. To guarantee its success, three of Italy’s top box office stars were hired, and it subsequently became a smash hit among Italian audiences, the Italian Gone With The Wind if you will.

The Irrepressible Human Spirit

This romantic drama was the story of a strong, independent woman facing the challenges of life in a spiritless and ruthless Bolshevik Russia. According to Rand, the novel is not about Soviet Russia in particular, but about the sanctity of human life, and a woman’s spirit that could not be crushed by the State. Mussolini’s fascist government eventually banned the film after two months, and ordered all copies to be delivered to government authorities for destruction. The success of the novel in fascist Italy, and its film version (which Rand did not know about, let alone authorize) were the first of many monumental achievements for Ayn Rand. Her body of work, briefly described below, make Rand an obvious choice for Poetic Justice Warrior.

We The Living, published in 1936, was Rand’s opening salvo for her sense of life in the world of fiction. As an émigré from Soviet Russia in 1926, she could speak with authority about the life-sapping totalitarianism that held her country hostage. So it makes sense that she was shocked to find acceptance of Soviet style oppression among American intellectuals and politicians. In fact, finding a publisher for We The Living was a struggle, they were worried that no one would believe the violence and despair that Rand described in her novel.

The Individualist Ideal

Rand’s next project, The Fountainhead, was published in 1943, and it was about the struggle between individualism and collectivism in Man’s soul. Like the heroine Kira in We The Living, Rand created a new heroic character to illustrate a life of purpose and pride. In this case, it was the architect Howard Roark, and his character became Rand’s prototype of how life could and should be lived.

For contrast, Rand created antagonists that are all too common in everyday life. One is the conformist Peter Keating who asked “Can’t you ever do things without reason, like everyone else?” But worst of all was the spirit-crushing Ellsworth Toohey whose mission was “If you kill a man’s sense of personal value, he’ll submit.” Roark refused to submit. A non-fictional version of Toohey is the American progressive democrat John Dewey, who believed “There is no obvious social motive for the acquirement of mere learning, there is no clear social gain in success thereat.”

Another important philosophical theme from The Fountainhead is the Law of Identity, meaning everything has its own unique properties, they behave only according to their nature. Existence exists, or as Roark explains, “No two materials are alike. No two buildings have the same purpose. Every form has its own meaning. Every man creates his meaning and form and goal.”

The Fountainhead became a best-selling novel, and 1949 it was also produced as a film with A list actors, this time by a Hollywood studio. The intellectuals remained unimpressed, and Rand was frustrated that none of them understood her achievement. When a friend suggested that she explain her philosophy in non-fiction, she replied no, everything is in the novel, I will go on strike.

The Motor of the World

Rand’s next novel was Atlas Shrugged. Published in 1957, it was originally titled The Strike. It is loaded with heroic characters and true to life antagonists. Critics complain that the characters are one dimensional, and the heroes millionaire industrialists, but this reveals a lack of understanding. Ostensibly, many of the strikers were also managers and skilled tradesmen. Atlas is their story too. They were hired because of their integrity and skill, and were well compensated and appreciated. They went on strike because they refused to lend sanction to the heavy handed authoritarians who exploit their value, loot their employers, and produce nothing,

Like the previous two novels, it’s a love story, and it’s about the struggle between the individual and the collective. But its also a thriller – the desperate search for society’s destroyer, the strike organizer who demonstrated what happens when people of the mind retire to happy valley. The scope is so rich and deep that we’ll focus on one element, the economics of Atlas Shrugged.

Rand’s economics are almost identical to those of Jean-Baptiste Say, our first Poetic Justice Warrior. Say discovered that in a market economy, capital is the mind of its owner. As Rand explains, “Wealth is the product of man’s capacity to think.” Both Say and Rand taught us that it’s the producers that matter; they create markets, they create consumers, they create wealth. And not just wealth, they explained the root of money itself. Say poured the foundation of all other economic theory, Rand uncovered the fountainhead of human flourishing.

Ayn Rand’s achievement is an original and integrated system of philosophy called Objectivism. Its precepts include the laws of identity and causality, reason and free will. Its basis is rational egoism, or the moral pursuit of one’s self-interest. Each person’s life is its own standard of morality. As Rand explains, nothing can prevent an individual from acting on their judgement except other people, and only this makes the case for morally defensible government.

I Choose To Live

As poetic justice would have it, Atlas set records for book sales in 2008 and 2009 because of the government induced banking crisis that was prophesized in its pages – what had been a fictional novel 50 years earlier. And in another sublime example of poetic justice, the original movie negative of We The Living was saved. The Scalera studio chief put another film into its container to be destroyed by Italian authorities in 1942. The original was subsequently discovered in 1968, and it was in marvelous condition.

The film survived because one person chose life for We The Living, as its heroine Kira chose to live. Instead of submitting to an existence of despair in Russia, she chose to risk murder for the hope of flourishing in Finland. Kira was shot in the back and killed by a Russian soldier. Her alternative was to never know freedom; a choice no different than what a loving parent would do to save her child.

Rand, through her fictional character Kira, had solved an enduring philosophical problem. Kira’s highest value was her life, and she chose to live as humans are meant to live. With her capacity for reason, Kira perceived reality and what she ought to do. Here Rand bridged the philosophical gap between what is, and what people ought to do – the gap between facts and values. Perhaps Rand’s greatest philosophical achievement was to prove that reason can be applied to values. She proved that values are not purely subjective, much like she proved that the human mind cannot be separated from the body. They are an integrated system.

For Ayn Rand, facts, logic and values guide principles, and principles guide action for human flourishing. This includes healthy emotional responses such as goodwill and benevolence. These are the same emotions that Rand credits for Western civilization’s celebration of life we know as the Christmas season, and that define Poetic Justice Warriors. Please click to learn more.

To Invest With Confidence In Turbulent Markets, Ignore The Experts With No Skin In Your Game.

/in /by

Since October 1st of this year, the S & P 500 stock market index has fallen about 16%. So its fair to ask, why is this is happening with strong corporate earnings, employment, and US Gross Output data. But it’s not smart. Stock prices do not move in tandem with economic data, and are even less correlated with stock market forecasts.

Naysayers have been predicting this for a long time, so they eventually had to be right. For the same reason that the market’s cheerleaders eventually had to be proven wrong. The fact is that the US stock market is the largest, most liquid, most active, and most efficient stock market in the world. Discussing and listening to market forecasts can be interesting, but only research analysts, bank economists, and newsletter publishers make money from their rubbish. Individual investors have more reliable ways to make investment decisions.

The Fallacy of Wall Street Analysts

For evidence of forecasting hubris, look no further than the December 20th edition of the Wall Street Journal‘s “Streetwise” section. The article by James McIntosh begins by saying that market forecasters were having a good year this year, until they weren’t. Wow, who knew? He then stirs up the requisite fearmongering after the market decline by asking “is this the start of something much worse?” Later, he continues with another obligatory pronouncement: “My favored interpretation of the recent selloff is that investors were wildly overexuberant.” To generalize about “investors” and “overexuberance” like this is loaded with fallacies and dismisses the price mechanism inherent in free markets.

The statement implies that all investors are comparable, and to prove it, they were all simultaneously overexuberant. This is cheap analysis and defies reality. So were the aforementioned forecasters also overexuberant, but not the writer? But the real implication of the article is that markets fail, and they fail because of asymmetric information – everyone has incomplete information, and its not the same. And the implication of that is that all market participants must have perfect information to avoid market failure. This is the common wisdom, and dead wrong. As Brian P. Simpson tells us in his book Markets Don’t Fail:

However, one cannot change the nature of reality. One cannot wish asymmetric information out of existence, and one cannot wish perfect information into existence. One must accept reality as it is and use the nature of reality to his benefit. This is exactly what a division of labor society in the context of a free market allows people to do.

The point is that free markets are complex systems, and when left alone they behave in wonderfully efficient and life fulfilling ways. They are a force of nature and must be understood to be appreciated. The price mechanism of free markets is fundamental to capitalism, and individual investors who buy stocks in their many forms are buying capitalism.

The Nature of Markets

The information contained in prices provide the most reliable guidance for balancing our unique and competing long-term goals. Prices are an emergent phenomenon, they are the result of millions of people making choices in pursuit of their own unique values. They are like blockchain technology – a decentralized, self-perfecting, and horizontal structure. When market forces are understood, capitalism is appreciated in a profound way.

So if market forecasters have little regard for the price mechanism, what kind of information should individuals use to make personal investment decisions? It starts by minimizing potential errors, and one obvious potential source of error is market forecasts themselves, no matter whose they are. Another potential source of error is risk tolerance questionnaires. As clinical psychologist and investment advisor Phil Demuth advises about risk tolerance:

As a psychologist, I am unaware that such a trait exists – I believe that research would show this construct to be situation-specific. However, even if this trait did exist, it would be a terrible guide to investment decisions. Investors should invest in whatever way has the greatest likelihood of meeting their financial objectives.

One of the things investors can control is their exposure to risk, and as Demuth advises, risk exposure should be calibrated according to the probability of meeting and exceeding future financial goals. Trying to beat the market only adds more potential errors. According to Nobel prize winning research, the primary dimension of investment return is the market itself, owning stocks always outperforms owning bonds and cash over the long-run.

The Uncertainty of the Future

For an individual investor, stocks are a risk asset, much like America is a risk asset, and investment decisions such as exposure to risk should be based on future cash flow needs and other variables that are known and can be controlled. Yet the contradictions in the Wall Street Journal article continue to flow freely, for example “Investors who have no strong views on how these events will unfold should expect volatility.” The implication of this is absurd – you should have strong views about the future, and if you do, you can avoid volatility. How about avoid reality? But it gets better, “Those who had the foresight to sell heavily into the irrational strength of the U.S. stock market in the summer should begin buying back.” Even if this is “the start of something much worse?”

To accept reality is to respect America, capitalism, markets, and the uncertainty of the future. The biggest risk investors face is not markets, but government interference such as interest rate price fixing and global supply chain disruptions caused by economic protectionism. The most reliable way to manage risk exposure is probability analysis using a Monte Carlo simulator with objective capital market assumptions, the kind that anticipated the recent sell-off, and gave its informed users a Plan B. Instead of betting against the house, be the house. Market forecasters who think they can outguess America have no Plan B for you. The key is to change your performance benchmark away from some meaningless index like the S&P 500, and replace it with living the one life you have with confidence.

 

 

Where Will The Next Crash Begin? Smart Europeans Suggest Italy Is A Good (Or Bad?) Bet.

/in /by

Over the last couple of years, the main challenge to EU cohesion has been Brexit, with the media sharply focused on the negotiations and all relevant developments. Since the release of the draft withdrawal agreement, largely perceived as a victory for the EU, those who support the European project and believe in a strong leadership from Brussels have projected confidence and optimism for the future. According to these voices, the divisions caused by the rise of nationalism and populism in the past years are healing, the relationship between member states is normalizing, while a future of stability and harmony awaits.

However, such a vision might prove naive, as it discounts a much greater risk to the EU than Brexit ever was: the political and economic powder keg that is Italy.

The budget fight

For over three months, Italy’s 2019 budget plans and the resulting friction with Brussels have made been making headlines and bringing to the surface numerous concerns over the country’s economic stability and relationship with the EU. The Italian government, aiming to honor its heavily populist pre-election promises, has presented a budget that is sharply at odds with the plans and goals of EU officials. Hailed by the Italian coalition government as a budget that will “end poverty”, the plan includes (among various other spending programs and tax cuts), a lower retirement age and a state-guaranteed basic income of €780. In order to finance its ambitious spending spree, the new Italian government plans to increase the budget deficit to 2.4% of GDP, a number that EU officials found very difficult to reconcile with, especially since the previous government’s plans only required a 0.8% deficit. Given Italy’s extreme national debt levels, Eurozone officials saw a clear threat of future instability in the new government’s plan that could easily spread throughout the bloc.

In October, the tensions culminated in an unprecedented move by the EU Commission: Italy’s draft budget was rejected and revisions were mandated. Italy defiantly announced it would stick to its plans, and in response, the Commission said that significant fines and sanctions against the country were “warranted”. The fines that the Commission threatened could amount to 0.5% of Italy’s GDP, while additional disciplinary measures could include a freeze on development funds. At this stage, a last-minute compromise solution could be hammered out in order to avoid the sanctions, however, the entire incident has heavily bruised the already strained relationship between Italy and the EU.

A history of friction

While the rejection of the Italian budget by the Commission was seen by many as an unusually aggressive step, it is useful to remember that this was not the first time that the new coalition government has been strong armed by Brussels into towing the line. In June, when the new government was still in negotiations to fill its key posts, Paolo Savona emerged as the first choice for finance minister. A professor of economics with experience at the Bank of Italy, Savona was summarily railroaded by pressure from the EU, as his positions were hardly in line with the European project and even less so with the common currency, which he described as “a German cage”. The nascent government quickly conceded and instead made him minister of European Affairs, placing a much less controversial candidate as finance minister.

However, it is important to note that the two parties that the Italian government consists of together won over 50% of the vote in this year’s election. The most outspoken member of the government, Matteo Salvini, leader of the nationalist Lega party, Deputy Prime Minister and Minister of the Interior, has repeatedly expressed his opposition to the Euro which he called “a crime against humanity” and to EU overreach, as he said only last month that “people like Juncker and Moscovici have ruined Europe and our country”. Going a step further and moving from mere discontent with the status quo to actionable plans, the coalition also made clear that, should the EU push them too far and attempt to micromanage their policies, they will not follow the surrender paradigm of Greece, even if that means turmoil in the markets. Instead, they will drop the Euro and adopt a parallel currency; a move also known as ‘Plan B’.

A ticking time bomb

Italy is the third-largest economy in the Eurozone, but it carries the second largest debt-to-GDP, only surpassed by Greece. At 131% of its entire economic output, Italy’s debt stands at over €2.3 trillion. The country last year spent 3.7% of its GDP just on interest payments, a figure that is projected to rise to 3.9% by 2020.

To make matters worse, economic growth has also essentially flat lined. The government’s projections foresee a 1.5% growth for 2019, a sharp contrast with Morgan Stanley’s latest forecast of just 0.5%. These figures might sound dismal, but they are consistent with Italy’s growth record in recent years. Since 2008, the country has gone through a triple-dip recession, from which it has yet to recover. Today’s GDP per capita, inflation- adjusted, is lower than in 2000.

Furthermore, the country is facing a severe demographic problem, that is bound to exacerbate its debt crisis. A report by Italy’s national institute of statistics revealed that the country’s birth rate once again declined in 2017. This persistent downward trend of recent years raises significant concerns, as, after Japan, Italy is the world’s second-oldest country in terms of elderly people as a ratio of the total population.

Also, Italian banks are still a major weak link. Overall, European banks have amassed about €944 billion in bad and non-performing loans that clog up their balance sheets. Italian banks are at the top of the list, holding the lion’s share of this bad debt, with €224.2 billion ($255.9B) weighing down the country’s banking sector.

It is thus clear that, apart from the political friction and the rift with the EU, Italy’s problems are multifaceted, compounded over decades and run very deep, posing a real systemic risk not just to the country itself but also to the entire bloc. Anemic growth, an ailing banking sector, skyrocketing national debt, unfavorable demographic trends and increasing financing costs form a toxic combination that can seriously destabilize the Eurozone.

“Too big to save”

Last time Italy found itself near bankruptcy, it was saved by the ECB’s decision to launch into a decade of money-printing, heavy intervention and massive government bond purchases.

However, the ECB is now set to stop and reverse the measures that facilitated this favorable environment that supported the entire European economy after the last recession. This might prove catastrophic for Italy. Rising interest rates will make the debt near-impossible to service without impacting major spending programs and government services. Without external, systemic and extensive support, the country is bound to struggle heavily over the next years. Unlike Greece, Italy will be a far greater challenge to bail out and the failure to do so will have far grimmer implications.

While the economic problems have a slow-burning fuse and will inevitably lead to a serious crisis eventually, it’s the political troubles that might actually speed up that process. The recent tensions have drawn attention to the capacity that Brussels actually has in interfering with national policies and member state affairs. It has also served, to many, as evidence of how far it is willing to go and to exercise these powers, should a member state refuse to tow the line.

On top of this, issues such as the increasingly wide divide with the EU over migration have also heightened the public’s discontent. The real, on-the-ground implications of the multifaceted challenges that burden Italy have taken a toll on the average citizen’s life and this is strongly reflected in their views and outlook on the future. According to a study released in August by Ipsos and the More in Common initiative, only 16% of Italians believe that globalization has had a positive impact on the economy, while 73% say that traditional parties and politicians do not care about people like them. As more and more voters are attracted to the extremes of the political spectrum, the rift between Left and Right keeps growing.

It might not be yet clear exactly what kind of move by the EU the Italian government would interpret as “a step too far” and cause them to make good on their warning to launch their Plan B. However, what we can tell for sure, is that the European project, the common currency and the Brussels bureaucracy will definitely not be able to sustain the blow of another exit, especially if it’s Italy that decides to leave.

Claudio Grass, via pro aurum. All rights remain with the author and pro aurum.

Write for CFI