Are we ready for the New World? (part 1)

Friday, October 24th, 2008

“I work as an escort in London’s Canary Wharf. Do you have any sound business advice on how workers in my industry should tackle the sudden drop in demand following the recent collapse of Lehman Brothers?”. This was a question I read in Financial Times newspaper, on Sunday 5th of October, in the weekend’s edition. The column is called “Solving readers’ dilemmas with the tools of Adam Smith” and the answer was quite funny but the third proposal by the journalist Tim Harford was the most interesting of all: “You may find that escort services are a little like estate agency, in that even severe demand shocks don’t tend to reduce fees. You’d find yourself well paid when in work but frequently idle. That spare time could be used to study or find a part-time sideline”.
So, the World is changing… even the oldest profession suffers in this period and the English journalist compares it with Real Estate agency. No comment… (by the way, if you have more questions like this, you can send them directly to Financial Times, at economist@ft.com)

How i see the situation around the World today

Today, Friday, 24th of October 2008, let us crosscheck the situation in Romania and the world, in the economic field:

The World economy started trembling (and it will not stop soon). Many people make the mistake to think that it trembles because the Stock Markets are up or down. But this is not very relevant. The Stock Markets are just the indicators, the thermometers which show to us what is coming up in the near future. The Real economy has a very big problem, which still is in the very beginning; we will feel it in our skin much more in the upcoming months.
The banks have stopped granting loans. Or if they do grant, they ask for interest which can not be accepted by a healthy investor. This means that the real economy is close to paralysis, if the situation will continue like this (and I don’t think it will change until the end of the year).
No one knows the depth of the problem and the end of it. Even after the two trillion euro budget coming from European Union and the seven hundred billion budget coming from USA, no one knows what will happen tomorrow and which other bubbles will explode.
My personal opinion is that the upcoming two months until the end of the year are an excellent period for all traders and directors to bring up to surface all possible losses they have, all possible debts and other problems. Like this, 2008 will be even worse than it is so far, but as their stocks and profits (or losses) will dive to bottom, this bottom will be an excellent basis for 2009. With this bottom as a start, they will be able to present as success even the smallest improvement.
We have one guaranteed situation. The World has entered into recession, either people admit it or not. No one knows how long this recession will be, but for sure it is a difficult period and a recession does not end in couple of weeks or months.
When USA, the strongest consumer of the planet, enters in recession; the problem is spread all around the world. When Germany and so many other major European countries will follow, it is more than sure that consuming and exports will decrease, drastically. With the loans to be for a period a quiz without solution, many companies will fire people and all the serious players will try to cut costs, by all means.
Last but not least. I hear around me many people happy because the governments invest hundreds of billions of euro or dollars to save the banks. I agree, without the banks the world will probably collapse. But why don’t we realize that this huge bulk of money directed to the banks means: The countries will have to cut off other expenses, so as to finance this “bail out”. By cutting off expenses, the middle and low class of the society will be affected. This affection will cause a decrease of consumption, which brings unemployment and less income for the State. The State, having less income, needs to cut off more, plus it will have to pay higher amounts to cover the loans it took for saving the banks. As the money does not go to Real economy, to investments, mainly public, all the countries which are about to invest money to save their banks, will be automatically deeper into problems, at least for two years..

While in Romania…

Romania does not have a serious problem with its banks, as the savings of the people are really low (which is bad in other circumstances, but right now it is really a relief to find out that it is quite easy to guarantee the total of the savings, without a national budget to be bankrupted, like in other countries).
Romanians did not invest in the Romanian Stock Market. A very small minority did this, which can not become a problem for the masses. The main Romanian idea (“why to give my money to someone else to deal with?”) which was the reason for Romanians staying away from the local Stock Market, is now the one which lets them untouched by the Stock Market crisis.
My prediction is that the Romanian economy will also feel the recession, starting with the first and especially the second quarter of 2009. Some people start to realize now that there is a problem, especially because the banks halted almost all the loans.
This will be visible to the lower growth of GDP in 2009, but still this growth will be one of the top in Europe (and all the World). From 9% in 2008 I expect it to be less than 6%, maybe even less, while Euro-zone will be around 0 – 0.5%.
The Real Estate transactions will continue, but only when the numbers will be closer to reality, far away from the artificial ones of the period: second half of 2007 – first half of 2008.

The majority of the people still did not realize the size of the problem…

What really amazes me is the fact that from one hand the Romanian media do not really explain to the people how black are the upcoming days (maybe because the main idea is that “we face the problem only at the last moment when it appears in front of us”). In other countries, all people talk about the crisis and the recession, all media do the same, everyone is sceptical (at least) and behaves in the same way. Here the majority of the population “heard of something” but they did not care to find out more details. People continue consuming like there is no tomorrow, buying very expensive cars with ridiculously high interests (euribor of 3 months plus 7 – 8%) and changing well paid jobs for reasons that are so funny, that automatically become jokes.
In my opinion this is the biggest risk that Romanians undertake now. They do not want to admit that the golden age has ended; most of the them still want money without hard work, still search for clients who will pay artificial prices. You should listen to several people we collaborate with, when we talk over the phone. “But, mr Ilias, this is the owner’s price. How can you offer so less, not even half of what he wants?” “Because this would be a fair price today” “But for this price, he will not sell” “Ok, let him. In 6 months he may be ready to accept a price even lower than this one today”.
The World is changing, the fundamentals of Capitalism will be replaced in the near future, in the upcoming months. We live in historical moments. Are we ready for the new period that is already here?

(to be continued)

Are we ready for the New World? (part 1)

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