We are beginning to see a complete break-down of certain economies
within the euro-zone. I gave a very comprehensive account of my views
on things in the three part scenario I painted for 2013.
-- Part 2
-- Part 3
However, I was pointing out general principles, and how they would
likely play out. It's perhaps time I put real things that are happening
right now into that framework.
I live in the Algarve which means I have first hand experience of what
is happening here in Portugal, which is, according to the so-called
banking triumvirate that oversees the way the economy is run, a great
success. Naturally, it is anything but.
Let me first try and give a picture of life in Portugal. This is almost
impossible in a few lines, but let's try.
The country does not have a very good record of achievement over the
years. It managed to stay afloat despite various outside threats, and
eventually entered the twentieth century still as a largely medieval
place. When I first visited Lisbon in the mid sixties it was a small,
very dirty, collapsing place that was largely closed. There were just
over 60 escudos to the £. Forty years later when Portugal
converted to the euro there were 315 escudos to the £. That gives
you some idea of the disaster that was the Portuguese economy
throughout that time.
When I returned in 2001 I found a largely messy country which was part
medieval, part modern, with a somewhat confused populace. Many of the
main roads were still dirt tracks; the electricity failed on average
twice a day, sometimes more often; large parts of the country still had
no piped water, and the stuff we did get out of the tap often came out
as a thick brown gunge. The bank tills only operated half the week
(tuesdays wednesdays and thursdays), and if you wanted to take out
money on other days you had to go to Spain. Timber, tiles, and a whole
host of things simply weren't available. They all came from Spain.
That's where we bought our microwave ovens, and many other things. Even
now if I want a bottle of sherry I have to drive over the frontier. You
just dont see many basics we take for granted in Northern Europe on
sale here. The Portuguese are an insular lot.
They are also an uncomplaining lot. They also accept, and seem to like,
the widespread abuse of power and invasive corruption. They expect
politicians and bigwigs to bully them, and extort money. They
repeatedly vote into office known crooks.
A very recent example of corruption is the way a government minister
gave a tourist project the go ahead as crucial to Portugal's economy,
thus taking it out of the normal planning process. As everybody knows,
the last thing Portugal needs is more tourist housing as there are
already tens of thousands of abandoned building projects marring the
countryside. The over-riding issue here was simply a payment to the
politician to gain his support. Nothing will be done about that blatant
corruption. It's a way of life here, and is apparently seen as
An architect friend of mine came to Lisbon last year with a Brazilian
friend. The Brazilians find the Portuguese a bit of a joke, but let's
leave that to one side. He rang me up and said: "John, I dont get it,
how does Portugal function?"
I laughed. It doesn't. Let me explain. He was referring to the fact
that people get paid on average €900 a month. Housing costs about half
that. A family therefore has the equivalent of about €100 a week to
live on. That supposedly provides for a family's food, clothes, gas,
electricity, mobile phones, car, and so on.
Let's go back a bit. In 1985 most of the population were peasants in
the fields getting about by donkey, or low-paid workers in towns who
walked to work. There were hardly any cars, there were no electrical
appliances as most folks either had no electricity or had a single
circuit on a 6 amp fuse. That explains why you couldn't buy an electric
kettle. There was nowhere to plug it in.
Fast forward twenty-five years and you have families with all sorts of
gadgets, probably two new cars, mobile phones, and a wallet full of
Problem number one: whoever heard of a middle class that exists on
credit cards? Folks who cant afford a car go out and buy a new one,
apparently paying extortionate amounts of purchase tax, and locking
into an introductory payment scheme, which after two years reverts to a
higher payment scheme. All is well for that two year period, then the
rate goes up, so the family stops paying and the car is repossessed.
They then go out and buy another new one on another reduced payment
Excuse me but you cant run a middle class on that basis. You still have
a peasant class, on peasant wages, but you now also have a totally
skewed economy which is ultimately running at a loss.
The money to buy the car was lent at below market rates: a loss. The
car is returned after two years and is now worth half what it
originally sold for: big loss. The economy is not based on credit so
much as on defaulted credit. The country cant grow on a base of
The way round this has in the past been repeated devaluation of the
currency. That, of course, does not solve the above problem, but means
that there is no way for a local economy to thrive, and it makes
imports more and more expensive. The modern method of coping is to
cadge money from the EU, which has now turned into bailout loans. These
can never be paid back because everyone is running on negative. The way
out of that scenario is to kick the can down the road (borrow more
money to pay back the money you previously couldn't pay back).
There is another side to this. Because the government and hangers-on
are filching funds from the system, and have been for years, and
because the government consists of people who dont give a damn for the
country, only for their own welfare, and because they are utterly
incompetent, they cant manage the economy and it is going from bad to
This means the government cant pay the bills despite the fact that they
are borrowing heavily from the EU and the IMF, so they are wrecking the
businesses of Portugal. They have increased the tax rates across the
board which will do three things.
First, it will mean the revenue from taxes will go down. There is a
simple mathematical model for tax collection. It consists of a bell
curve. The government finds the sweet band within that curve and sets
the tax rate within that band; at the top of the band in good times,
and at the bottom of the band in hard times. If you move lower than
that band you take in less tax. If you move higher you also take in
less tax. It's obvious. At high rates people dont work, it doesn't pay.
They go on the dole instead. At lower rates, more people work but there
is less tax collected.
The corollary to this is that to get people back to work, and to get
businesses to grow, you lower taxes. The Portuguese government is
raising taxes. That is what you do to cool down an over-heating
economy, not one that is already on its knees.
Second, as mentioned above, it discourages people from working and so
more people join the dole queues, and there are less jobs because
employers are also discouraged by the high tax rates, and taking on
more workers becomes uneconomic, thus the economy will nose-dive.
Third, money is removed from the work place, both by government, and by
the withdrawal of investment in the market place, which in turn leads
to a smaller economy.
In short, the Portuguese government is quite deliberately destroying
the Portuguese economy with the connivance of the international banking
Let me quote you from a recent letter from yet another businessmen who
has thrown in the towel. This will show you how some of this works.
"On January 1 new laws are being implemented for all small businesses."
First, please note that small businesses are the lifeblood of an
economy and usually a government will do all in its power to encourage
them. The Portuguese government wants them all out of business. The
letter explains: "The first thing we have to do is purchase a cash
register at the staggering cost of €2,000 which will have a USB port
fitted so that it can be checked monthly by the tax authorities. We are
already being taxed 80% on our income."
"The next ludicrous rule is that we have to purchase a [receipt book]
at a cost of €50 with only 50 receipts in it."
Just think about that. You run a shop, and someone comes in to buy a
mars bar. It sells for 90 cents. You had to buy the mars bar in the
first place, probably for about 70 cents. You have to pay for the
running of the shop, and earn a living, yet it costs you a further one
euro just to give a receipt. How long before you stop selling pretty
well anything? Even if you are mathematically challenged, by day two
you are probably in shock and need therapy.
How about this one. "It was declared that all farmers would have to
count how many potatoes they would plant in the field so that the
government could assess how many kilos of potatoes they could charge
Portugal is run by a bunch of complete lunatics who are hell bent on
destruction. This is economic suicide.
Let's continue with the letter. "Tens of thousands of small shops,
cafes, music shops, etc, are closing down because of this madness."
Let me ask you two things. First, do you want to live in a country like
that? The rate of emigration is naturally rather high, and includes a
steady flow of Portuguese, together with a good proportion of
foreigners who came here for the good life. Second, how long do you
think this madness can last? And that leaves one wondering what the
end-game will be. Is Portugal headed back to the dark ages?
If you decide to invest here you really do need to see a psychiatrist.
By all means come to retire here, but make sure you have plenty of
money, and plenty to insulate you from the economy here, and maybe it
would be best to move to somewhere close to the border. And dont buy a
place, it is easier and cheaper to rent, and if you decide you cant
take any more, then you can easily up sticks and move somewhere else,
without waiting for years and years to sell your home.
I have to face facts; I made a very big mistake buying a home here. I'd
love to tell you all is sweetness and light, and that buying my home
would be the best move you ever made, but unfortunately I was brought
up to tell the truth. What a bummer!
Is that it? Not really. It's the same in Greece. And how long before
somewhere else goes the same way? Almost every country in the eurozone
is running on negative. Europe, economically speaking, is currently not
a pretty sight.