Kiyosaki's promise: Quit your job, let your money work for you

Don't work for money, let your money work for you. That is the essence of an interesting book by Robert T. Kiyosaki called "Rich Dad, Poor Dad". Employment in a company with a fixed work contract, Kiyosaki says, will lead most people into a hamster's wheel. Looking to earn money to support their growing expenses (children, house, car etc.), most people tend to work harder to receive more pay. They promptly hand over a larger share of their income to the State as they enter a higher tax category. In 2010 for example, an average German citizen employed in a private firm was working for the government until July 4th, after which he started producing value for himself. If he decided to work harder, it might push Tax Freedom Day even farther away.

Let your money work for you/adapted from
Flickr CC BY esbjorn2

Kiyosaki therefore proposes to a) cut spending and b) invest the money thus saved. His book can be criticized for many reasons, but the idea of "making money work for you" sounded appealing. I'm all in favor of investment with a moral backbone, so I scrapped speculation on oil, currencies, pension funds and food commodities in favor of stock options. I invested a fictional 7740 EUR into a portfolio of big stable European companies on May 7th (if I wanted to do that annually, it would require me 645 EUR per month in real life). Commission fees etc. of approx. 2% would put it down to 7585 EUR.

Now, the DAX which reunites 30 of the strongest enterprises in Europe's economic locomotive, Germany, grew by roughly 26% in 2009 and 17% in 2010 (my calculations). If I was lucky and my European company portfolio outdid the DAX by a third, I'd be between 23% and 35%. After a year of foregoing spending, I'd have gained 1745-2654 EUR (again subject to taxes).

Let your money work for you? I couldn't quit my job and live on 2654 EUR per year. Nor could I do so after ten or 20 years. Investment, I guess, cannot replace a work contract. It can give you a bit of spending money, but it won't make you rich unless you put your money into high-risk endeavors like startups or low-priced stocks.

Besides, for the last month all of my big European company stocks have only seen one direction: down.

What does the financial crisis have to do with Three Mile Island?

A lot, if one believes the Financial Times columnist and book author Tim Harford. For his book Adapt, he researched the parallels between security in engineering and security in financial markets. Harford singles out three main issues which put the stability of the financial markets in danger: complex structures of financial institutions, interconnectedness of financial institutions and a lack of control through regulators.

The more complex a financial institution, the more likely it is that risks will not be recognized until it is to late. Harford compares the meltdown of Lehman Brothers with the failing reactor at Three Mile Island in the United States. The reactor, he says, started overheating at 4 a.m. when knowledgeable personnel was absent, the control room was difficult to understand due to its impractical design and security systems reinforced the catastrophe rather than attenuating it.

Controlled explosion of a bank/CC BY-NC
total_incompletion

In the financial meltdown of Lehman Brothers, Harford sees the same process. Pricewaterhouse & Coopers was asked to organize Lehman Brothers Europe's orderly insolvency but when its consultants arrived, they had no idea how to understand the complexity of the institution with its numbers of divisions, assets and real estate. They ended up following Lehman Brother employees around to understand what there job actually was.

Likewise, politicians were not given adequate information permitting them to handle the financial crisis responsibly. Harford cites an example of Tim Geither, the head of New York FED at the time of the Lehman Brother collapse, who received the information about AIG's imminent breakdown at 4 a.m. after a transatlantic flight on a handwritten DIN A4 paper with a lot of numbers.

Finally, security systems reinforced the financial meltdown. According to Harford, even small banks that didn't engage in risky speculation often took out an insurance with a re-insurer like AIG. The goal: if for whatever reason customers should withdraw more money than the bank had in cash, the remainder would be covered by the re-insurer. Given that most re-insurers were rated AAA, this also gave the small bank an AAA rating (as it was now absolutely certain that the bank could service its debt). However, in practice re-insurer A also had a re-insurance contract with re-insurer B, who had a contract with re-insurer C, who had a contract with re-insurer - A! At the moment where A's panicking clients withdrew money, it not only pulled B and C into the abyss, but also the small commercial bank. Its portfolio was suddenly no longer insured and became rated C; it did not obtain any more loans from other financial actors except for skyrocketing interest rates.

The example shows two things. Not only was there a latent error lurking in the equation: The security system would fail exactly at the moment when everybody sold stocks and rushed to the banks to withdraw their money. But the security system also put players in danger that it was supposed to protect. Besides, it gave an incentive to insured banks to take a greater risk, certain that they would be covered if their speculation backfired.

Harford draws four conclusions from his findings: it is crucial to

• understand the structure of a financial institution to reduce risks and latent errors, 
• not only understand but reduce complexity of this institution, 
• decouple regular bank activities from risky activities so that they cannot be endangered by the collapse of the speculative sector and 
• encourage whistleblowers within the institution to uncover risks and to communicate them. 

I encourage you to listen to the entire talk Tim Harford recently gave at the LSE. You can find it here. 

Poland awaits a tough Council Presidency

Another month and Poland will replace Hungary at the helm of the EU Council of Ministers. The new Presidency is yet to clarify its priorities, but the general lines are clear. Poland wants to focus on “European integration as the source of growth”, a “Secure Europe” and a “Europe benefiting from openness”.

It will be a tough time. As Euroskeptics are gaining ground in Finland, Denmark, France and the UK, the European Parliament insists on an increase of the EU's funds for the period of 2014-2020. Further European integration will be difficult to bring about. In an analysis for the Polish foreign ministry, the authors expect financial negotiations "on all fronts", given that the reform packages of Common Agricultural Policy (between 44% and 40% of total budget in 2007-13), Cohesion Policy and other policies will be on the table by the second half of 2011.

With regard to the European internal market, Poland has set high stakes for itself. It wants to "introduce a new model of economic growth, one that would allow the Union to secure appropriate level of economic development for the coming decades and guarantee the well-being of EU citizens". Focusing on the electronic services market and on the establishment of a European patent are two aspects that the Presidency wants to pursue in this regard.

It will be particularly interesting to see the Polish contribution in energy policy. While most European countries are looking to expand renewable energy, Poland still derives around 54% of its energy from coal and wants to start a nuclear energy program. And yet, the government wants to make renewable energy and the development of a European energy infrastructure an important part of its Presidency.

During the second half of 2011, many eyes in Europe will turn to Poland. Can it use the Presidency to be an honest broker and at the same time become one of the five big players in the EU?

The government is somewhat condemned to success: a failure of European solidarity right now could be taken as a go-ahead for other countries to let European integration unravel. To top it, the Council Presidency is expected to be overshadowed by legislative elections in Poland which are set to take place in October 2011.

Not an easy Presidency. But if it is successful, Poland will take a more central place in EU policy-making in future.

I throw away, you don't eat

Between yesterday and today, 219,000 people joined the dinner tables all around the world. Tomorrow, another 219,000 new world citizens will join us on this planet and another 219,000 the day after. They are born into a world that cannot feed them any more and that asks for higher and higher entry fees.

Until 2050, demand for food is expected to rise by 70%, says Oxfam in a new report published today. And within 20 years, global food prices could double as a result of climate change. The consequences look like this:



The EU has realized that it needs to act. At a food security conference organized by the European Economic and Social Committee (EESC) last week, Agriculture Commissioner Ciolos and Development Commissioner Piebalgs highlighted the responsibility that the EU has for food security in developing countries. The message is clear: agriculture in the global South has to become more efficient, more productive, more rewarding for the individual farmer and better governed through international, national, regional and local institutions. Sounds like an affair to be left to paper-producing bureaucrats.

But the help that the global North can give is not only about "capacity-building", it's not only about "technical support" from government to government. It starts with things as easy as reducing food waste. According to a recent study by the Food and Agriculture Organization (FAO) of the UN, a third of all products we buy are thrown away. But of course, demand for them drives prices up in the first place. Unless you are a trader of agricultural commodities, that should worry you.

Now, do I really need a luxury buffet for my XXth birthday that allows my guests a choice between 50 different kinds of food? Or could I cut it down to 15? And if there are leftovers, couldn't I put them in doggy bags and give them to a shelter?
And do I really need to throw away that two-day old cauliflower because I am leaving on a two-week vacation? Or could I put it in the freezer? There are a range of websites that offer advice on nutrition and consumer behavior, for example this one, this one, this one and a lot of others.

We all make choices every day - since we live in a global market, our consumer choices impact directly on others. Ask Spain if you don't believe me.

Shouldn't we be more responsible consumers?

As a courtesy, please don't +1 my blogposts.

Happily walking into the bubble

It’s Saturday and you’re walking through your favorite supermarket. You’ve invited friends for tonight and you’re planning to have a barbecue.

The first thing you look for is meat. As you’re stepping into the meat section, a freezer pushes itself in your way. It bears a note saying “Your colleague chose spiral sausages and chicken filets last week”. You take a peak inside the freezer, your hand finds the spiral sausages and they disappear in your cart. Never did you notice the beefsteaks across the aisle that were on a 20% discount.

Your hands push the cart further. You also need a proper barbecue grill to feed your guests. Just the other day, you remember reading about one in a leaflet and it that seemed quite nice. But as your getting to the section where barbecue grills are sold, only two of the available models are actually on display. All other are stocked on the shelves, hidden away in massive cardboard boxes. “Your mom bought me just yesterday” it says on one of the grills on display, while the other bears a sign “Three members from your football team bought me last summer”. Unnerved, under time pressure and unwilling to start unpacking the other models, you opt for the football team grill – it is less practical than the one you had read about, but it will work for tonight.

You remember that you also need to get a shampoo. Once arrived in the toiletry section, you look for the shampoo you’ve seen in a commercial the other day. It was produced with 100% organic materials, and obviously more expensive than most of the bottles you’ve got in front of you on the shelf. But your brand is nowhere to be found and all shampoos are screaming in your face “Gregory bought me!”, “Cedric bought me!”, “Dean bought me!” Exasperated, you brandish your arm and send bottles flying. In the last corner of the shelf, you find the brand that you were looking for. You cautiously put the trophy in your cart and your glimpse goes back to the other bottles, still scattered on the floor. You believe you can faintly hear them shriek “but your friends also bought us, why wouldn’t you do the same?”

Google +1 works with the same system as your shopping adventure. As you are searching information on the internet, Google puts you into a bubble of friends’ recommendations that obscure your view upon other options. The next time you search something, your friends' recommendations appear on top. This might not seem so much of a problem at first sight – isn’t it practical to have your social network prepare your decisions?

But what happens if you’re a Parliamentarian with a day to work out your position on prenatal diagnostics? Would you trust your social network enough to blend out contrasting opinions? What happens if you’re a journalist, looking for speedy information on the revolution in Yemen? Can you trust your social network to have closed all the information gaps?

The European Commission is currently investigating if Google illegally downgraded external services in its search results. By accepting +1, we would allow Google to upgrade information that we are prone to like and downgrade information that we’d likely oppose. Democracy doesn’t work like this.


Update: For more about the importance of global information and knowledge management, you may listen to this podcast. Google is certainly the fundamental player in this business.
Update II: Facebook has not paid me for writing this post.  
Update III: I've just seen that Blogger now added the +1 button to my posts...do me a favor, don't use it.   
Update IV: To see my love for Google as a research tool, see this more recent blogpost.

The Parliament clings to Strasbourg

MEP Ville Itälä is a brave man. In his report on "discharge in respect of the implementation of the European Union general budget for the financial year 2009" regarding the European Parliament, he proposed that the European Parliament

• Takes note of the budgetary constraints many Member States face as a result of the financial and economic crisis and the need to critically review potential savings at all levels including at Union level; in light of this situation, stresses that real savings could be achieved if Parliament only had one workplace in the same location as the other Union institutions; indeed, in the report of the Secretary-General on Parliament's preliminary draft estimates for 2011, the estimated annual cost arising from the geographical dispersion of Parliament has been estimated at around EUR 160 000 000, accounting for about 9% of Parliament's total budget; draws the attention to the fact that currently the decision to change this situation - and to make some EUR 160 000 000 of savings annually as well as to considerably lessen Parliament's carbon footprint - lies exclusively with the European Council (Member States); calls on the President of the European Parliament and on the Members who are negotiating the Union budget on behalf of the Parliament, to suggest to the European Council that they make it possible for the Union to make these savings. 
• Also points to the reply given by the Secretary-General to the discharge questionnaire, according to which the two sessions held in Brussels instead of Strasbourg in September 2008, due to the repair of the ceiling in the Strasbourg hemicycle, resulted in savings estimated at some EUR 2 500 000 ;

To suggest to the Member States the idea of scrapping Strasbourg was too much to ask from the European Parliament. In the version that MEPs adopted on Monday 9 May 2011, it only says that the European Parliament

• Takes note of the budgetary constraints many Member States face as a result of the financial and economic crisis and the need to critically review potential savings at all levels including at Union level; in light of this situation, stresses that real savings could be achieved if Parliament only had one workplace in a single location.

Thanks to Eva for making me aware of the vote.  

Update (13/07/2011): Now it seems as though a majority of MEPs wanted to axe trips to Strasbourg.

One year, little change. Happy Birthday Europe

Happy Birthday Europe. It's a sour birthday. There isn't really much to celebrate on Europe Day. The EU hasn't moved an inch closer to becoming a force to be reckoned with in the world, despite the establishment of the EEAS and the continuous decline of the US as a superpower.

The democratic uprisings in the MENA region left Europe, including Turkey, divided, driven, uninspired, even uninterested. While France pushed for a swift European response in Libya, Germany successfully embarrassed itself in front of the UN Security Council. They later subduedly committed more Awacs to Afghanistan to make up for it. In the end, the US took the baton from the squabbling Europeans and did the lion share of the job themselves. Even as the MENA uprisings touch home in form of North African migrants, the EU finds itself unable to pursue a common migration strategy. It prefers compromising the Schengen system and letting member states have it their own way.

Talking about the US, did anybody say the US would drop in European esteem after the release of thousands of diplomatic cables last year? It appears the EU doesn't even know how many European bank account details the US accesses on a daily basis, a right the European institutions willingly granted them. And European politicians were fastest to congratulate Barack Obama for the killing of Osama bin Laden, but when people started criticizing their attitude, they quickly highlighted that they lacked reliable information about how Osama really died.

No, the EU has definitely not become a stronger voice in the world. Even in the area where we have been most progressive so far, green energy, the EU allows itself to be surpassed. Despite all studies calling for a 30% emission reduction target by 2020, the EU prefers business-as-usual. China and Indonesia are showing the way to clean energy in an impressive manner. Yet, on a more positive note it seems that Spain and Germany have understood the importance of renewable energy and are committing more investment to the sector. 

While many things in external policy are far from perfect, there are also successes. The bright light in the obscure forest is Humanitarian Aid Commissioner Kristalina Georgieva, who has established the EU as a powerful donor of humanitarian aid in Haiti, Ivory Coast and Libya.

With regard to internal EU affairs, the picture looks a little brighter as well. The Belgian and Hungarian presidencies have been running ambitious agendas with a focus on sustainable development, Trans-European Networks and a stable European economy. It is to be hoped that the Polish presidency will follow in this line.

Yet, as we are heading into the new year, Euroscepticism is on the rise in Finland and France among others, European democracy hasn't improved much (where is the ECI?) and we are no step closer to a single-seat parliament than a year ago. Europe is entering into a year with a lot of things on the agenda. I hope it will be less disappointing than the last year has been.

Happy Birthday Europe, and a good start into the new year. You will need it