The Profit Motive Wins a Battle in the Fiat Currency War

A few months ago, Dan Denning told his Australian Wealth Gameplan subscribers about the Rossi family. The three of them were speeding along the A9 from Milan to Switzerland, above the Australian speed limit. In the back of their blue Fiat Panda was their life savings. Unfortunately, the northern Italian border guards are rather thorough. Website reports:

‘Last year, €11 billion (SFr13.25 billion) that was about to leave the country was seized by the financial police at Italy’s borders. Seizures of cash increased by around 50 per cent in 2011, while the figure for gold grew by at least 30 per cent.

‘There have been reports that old smugglers’ routes between Italy and Switzerland have been re-activated while rumours have been circulating that Swiss banks have been forced to rent safes in hotels to meet the unexpected demand from Italian clients.

‘Claims that Italians are smuggling massive amounts of assets out of the country are not new. In December for example, La Repubblica reported that some smugglers were resorting to primitive methods such as hiding money in suitcases or under their clothes, as in the 1970s and 1980s.’

11 billion euros of wealth was confiscated on the border between Italy and Switzerland last year. That’s almost one percent of Australia’s entire GDP! And that’s what didn’t make it through.

How did the Rossis go? Back to that in a moment.

It’s quite sad to see a political and currency union come to this. We were around when the euro was introduced. Back then it was all smiles and optimism. (And that was in Germany!) These days it’s all about escaping from one country to another. Speaking of which, your editor was once smuggled across the Italian-Swiss border under a blanket in the boot of a car. Our thoughtful parents had forgotten our passport but not theirs. Or our younger sister’s. Apparently it was all an unfortunate…coincidence. Anyway, it’s not a great experience crossing a border illegally. Unless you are about 11 years old. Then it’s awesome.

The eurozone crisis isn’t so awesome for the 11 year olds of today. They’re having to leave their home countries for a better economic future, like Alessandra Rossi, who’s in the back of the blue Fiat Panda hurtling toward the Swiss border. They are also losing the basic services their elders enjoyed. ‘Children Lose to Bailed-Out Bankers as Crisis Forces Cuts’ is Bloomberg’s headline on how things have changed for Europe’s youth. The article covers healthcare cuts to some of Europe’s most needy. The other side of the coin is no better. Some of our old school friends in Europe are struggling to find jobs.

The point this Markets and Money is trying to make is that these crises have a very personal side to them. The kind that makes your stomach churn and your eyes go bleary. Money does that pretty regularly to people, but not in the sense that the euro is doing it now. The euro’s potential to disappear on any given weekend in some countries must be absolutely terrifying. Especially to those with savings — the savings needed to drive investment and productivity. It’s causing people to do unusual things, like trying to flee with their cash.

Not only is the euro the problem, it’s also what created the problem. The common currency and the shared monetary policy that came with it created the bubble that has now burst. Europe is rife with the kind of instability that only needs a spark to ignite a firestorm. More than half the Greek police force voted for a (more or less) neo-Nazi party recently. Golden Dawn’s party faithful were featured on SBS’s Dateline this week chanting useful slogans like ‘Albanians, Albanians, you’ll never be Greeks’ and other cruel things about the Turks which we can’t quote here.

Remember that it’s not just the euro which is unstable. All fiat currencies are. After all, they are just paper that the government declares to be valuable. If the government is called into question because it can’t pay its bills, is that paper still valuable? And if the paper is printed willy nilly, is the government still credible?

No matter what happens to the fiat currencies of the world, this environment doesn’t bode well for Australia’s economy. Throw in a housing bubble and a Chinese resource demand bubble and you’ve got a serious problem. But it’s unlikely that economic hardship would split Australian society like it has split the Europeans. Or is it? And would Australians become extreme nationalists in the face of a shrinking pie around the world? ‘New Zealanders, New Zealanders, you’ll never be Aussies!’ Not quite as catchy.

If you’ve got faith in Australia’s mellow nature, just take a look at the hysteria over China’s purchase of Australian agricultural property. And the hullabaloo about the American marines set to move to Darwin. On that note, what was the government thinking? Hosting American troops up there is like kicking a dragon in a toe-scale.

Back to our key point. It’s not just your wealth that needs shoring up in the face of poor investment prospects. It’s your perception of life in a dodgy economy. Will your friends, children and grandchildren struggle in an Australia without a mining boom and rising prices? How will you feel about investing when nothing is ‘safe as houses’ any longer and the old ‘buy and hold’ strategy is dead and buried? Are you willing to look overseas to invest or even escape with your capital?

If you are, consider this from Dan’s Australian Wealth Gameplan (AWG) issue:

‘Families and investors who wait until the last minute to try and protect their wealth will find it difficult. Not only will it be incredibly stressful, it will probably be too late. Some families will probably find a way. But most will not and will be forced to accept whatever the government [declares]’

And governments get away with murder during financial crises.

‘I like to think the Rossi family makes it’, Dan wrote at the end of his AWG issue. Apparently, 11 billion euros a year didn’t make it last year. But there is reason to hope for the Rossis and their life savings. It’s called the profit motive, and it beats the government every time. Huzzah!

But how does the profit motive help the Rossis protect their wealth from the Italian government and European monetary megalomaniacs?

Here’s part of the transcript of a phone conversation between blogger Bruce Krasting and his Swiss banking friend, who goes by the surreptitious name of ‘Geneva’.

Bruce KrastingWhat is going on at the [Swiss] borders? Is money still coming in by car?

Geneva – Yes. The border guards can’t search every car. The latest development is that the border guards are now searching some of the cars that are leaving Switzerland.

BK – Why would border guards stop cars that are leaving Switzerland? What are they looking for?

Geneva – Mules. Professionals who smuggle money. It is very easy for a Swiss to go to a bank and withdraw a large amount of paper money. The mules bring the cash over the border to French and Italians who want Swiss francs. The mules also bring euros into Germany for those who have private accounts in Switzerland who want cash to spend.

So hopefully the Rossis swapped their euros for Swiss francs in time. Or found someone to transfer their savings anonymously.

Either way, long live the currency speculators and their profit motive. Together, they’re saving Italians from their financial tyrants!

Until next week,

Nickolai Hubble.
Markets and Money Weekend Edition

ALSO THIS WEEK in Markets and Money…

China’s Economy… Where All is Not As It Seems
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We’re heading into a global recession. That’s what the bond market is saying. It’s why some government bond yields are at all-time lows. It’s why the Swiss and German government can borrow at a negative interest rate. And it looks like equity market’s finally got the picture on Friday. They now realise, for the first time, that this is serious.

Government Intervention and the Hidey-Hole of the Productive
By Nick Hubble

By paying a little more per cup, fair trade coffee sellers claim you are ensuring that coffee farmers are getting their fair share of the wealth…What happens is that the people with banana farms see their coffee-farming neighbours buying Rolexes down at the village market. They quickly figure out that it’s a lot more profitable to switch their banana crop to coffee beans… They’ve fallen for the rent seeking trap.

Economic Trends: The Little Book of the Shrinking Dollar
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Government cannot and will not control spending so long as the money grows on trees courtesy of the Fed. The Fed will not stop printing so long as its sponsoring government needs more money… With this comes cycle of booms and busts, with each bust being “cured” by more of the thing that made the boom happen in the first place. It is sheer madness, since debt on this level amounts to a serious interference with freedom itself.

Floating Towards Japan’s Economy on a Sea of Bad Debt
By Bill Bonner

We’ve got nothing against Japan. But what puzzles us is why anybody would want to be like Japan. The Japanese economy has gone essentially nowhere in the last 22 years. Now, it has the largest pile of debt in the entire world – rivalled only by Britain. How did it get all that debt? Following Paul Krugman’s advice! So let’s see…you run up debt equal to 4.5 times your GDP…you don’t increase the number of jobs. Your assets get cut in half…and then cut in half again.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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