When the “Vital Few” Go Mobile?
As we saw in my previous columns, the recent financial crises rhymes strongly with the one John Law and the Japanese government managed to engineer. Though in different ways, they were all “land-based”, drawing on the misperception that there is necessarily something “real” about increases in prices of immobile assets.
Just as Law and the Japanese government forgot, so did the Federal Reserve and the US Treasury, when letting financial institutions accommodate large expansions of credit – based on “real estates”.
It’s here that the distinction lies between this past “bubble” and what was labeled as the Internet-related one, and why the recent one will take much longer to correct. Whereas Internet shares could not be leveraged through bank loans and government guarantees, “real-estate” was – and banks and governments fueled the folly. This is why the paper loss with Internet shares, though amounting to trillions, had no significant effect, whereas the present one will be taking long years to overcome.
By looking at the crisis of sovereign debts through the “immobile” versus “mobile” prism, we get a better insight too. After all, such debt is “land-based” too, backed by national governments’ ability to tax people living in its territory (mother- and father-“lands”, take your pick). But what happens if the talent from these lands – what I often call “the vital fews” – move, be it abroad or through evasions?
The “land” stayed the same, but the ability and incentives to create wealth, and the part of such wealth that would be taxable – has diminished, as Italy, Greece, Spain – and now France – show.
How does one verse in the famous Lorenz Hart Bewitched, Bothered and Bewildered lyric go?
Burned a lot, but learned a lot,
And now you are broke, so you earned a lot
Bewitched, bothered and bewildered – no more.
Indeed, it appears that the “immobility” prism and its language bewitched the world for far too long. Perhaps by shifting to the “mobility” prism, the choices we face today could come in far sharper focus. A land-based credit system means that a real estate crash as opposed to, for example, a dotcom crash wreaks havoc with the entire financial system and not just with the portfolios of some investors; it’s effects are longer lasting. This leaves government, which are also in some sense a land-based revenue model grasping for higher tax revenues. The immobile stay, but the mobile who are among the vital few leave, and take with their tremendous wealth generating powers elsewhere, to the detriment of the country which they leave behind.