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Global Risk/Innovation Blog

Day Dreams without Day Doing = Unhappiness

By Shlomo Maital

   A report in Science  last year shows the following:

People spend 46.9 percent of their waking hours thinking about something other than what they’re doing, and this mind-wandering typically makes them unhappy. So says a study that used an iPhone web app to gather 250,000 data points on subjects’ thoughts, feelings, and actions as they went about their lives.  The research, by psychologists Matthew A. Killingsworth and Daniel T. Gilbert of Harvard University, is described in the journal Science.

 In other words:  we spend nearly half our time day dreaming, thinking about things other than what we are doing – clearly because what we are doing is uninteresting or boring – and then become unhappy, because the virtual world we dream about is far more wonderful than the real world we live in.

“A human mind is a wandering mind, and a wandering mind is an unhappy mind,” Killingsworth and Gilbert write. “The ability to think about what is not happening is a cognitive achievement that comes at an emotional cost.”  

Human brains are different from animal brains, because humans can imagine what does not exist.  This, however, as novelists and philosophers have noted endlessly, can make us both visionary and very unhappy.  

  I believe there is a fairly simple solution.  Continue to dream.  But do more to implement your dreams and to create the virtual world that your dreams envision. 

Global Crisis/Innovation Blog

History DOES Repeat Itself, Only Losers & Winners Change Sides

By Shlomo Maital


  British PM Lloyd George, after Versailles


It is not only those who forget history who are doomed to repeat it, as Santayana warned. It is also those who remember history who repeat it. 

  On June 28 1919, the Treaty of Versailles was signed, imposing on Germany the responsibility for World War I and with it, the demand to pay (in 2011 dollars) the staggering sum of $442 billion in war reparations.   Germany could not possibly pay this enormous sum, with its post-war economy depressed.  So it simply printed marks, paid the reparations with worthless paper, created hyperinflation that destroyed Germany’s economy, and set the stage for the rise of Hitler in 1933.  Hitler’s war machine created jobs, income and employment, and ultimately destroyed Europe in WWII.  

    After Versailles, the British economist J.M. Keynes, who attended it as British PM Lloyd George’s advisor, went home to Cambridge and wrote a book,  The Economic Consequences of the Peace, protesting  the war reparations and predicting accurately that the result would be to destroy Germany and set the stage for a second world war.  

   Fast forward.  Nov. 29, 2011.  It is now GERMANY that is imposing ‘reparations’ on Greece, only they are not war reparations, but penance for overspending.  Germany’s psyche has a deep scratch from the 1920’s hyperinflation and hence Germany utterly refuses to allow the European Central Bank to print money and bail out Greece, Ireland, Portugal, Spain and Italy, nations that overspent and overleveraged.  Germany remembers history – all too well. 

   The problem is, just as Germany could not possibly pay $442 b. in 1919, in war reparations, so Greece cannot possibly pay all the debt it has accumulated, especially when bond traders are betting against Greece and raising the interest rates on new Greek borrowing to astronomical heights – a doom loop that is inexorable and fatal.  

   So history is repeating itself.  A rich nation is imposing a huge tax on a poor nation, in the name of justice.  And the result?  It will be ruinous for Europe, just as WWI and WWII were.  As Joseph Nocera points out in today’s Global New York Times, Germany too will suffer, because when Greece and perhaps other nations leave the euro block, the resulting turmoil will greatly hurt German exports.  Nobody benefits from chaos. 

    Treated unfairly in 1919, Germany now does the same to the profligate nations of “Club Med”, as the Germans call them.  History does repeat itself.  Everyone will lose as a result. 

       Global Crisis/Innovation Blog

 How Strong Minds Raced So Weak Legs Could Walk

By Shlomo Maital




A U.S. National Football League charity campaign once used the slogan, “strong legs run so weak ones can walk”.  I recalled this during a visit yesterday to an Israeli startup named Argo, launched by Dr. Amit Goffer.  Argo’s product is called ReWalk, and it is an exo-skeleton (outside-the-body skeleton) which, with electronics, enables those who cannot walk to stand on their own two feet and walk at 2 km. per hour, a good clip.  ReWalk can also enable people to climb stairs.  You might call it, “strong minds race so that weak legs may walk”.  

   Dr. Goffer told us that following a terrible accident, which left him paralyzed and confined to a wheel chair, he asked an audacious question:  How can I create a device that enables people who cannot walk, to walk by themselves?  Dr. Goffer has three degrees in electrical engineering, and worked for years at Odin Medical Technologies, which he started (real-time MRI images for brain surgery) and at Elscint (medical imaging).  In 1998/9 he conceived of ReWalk and built a prototype himself.  He described his approach to entrepreneurship:  “not succeeding is not in my vocabulary.  You create a corridor…you see a light at the end of it, and there are no exits, once you start you have to go all the way to the end, until you succeed.”  

   Goffer estimates there are 2 million persons in the U.S. alone who are in wheel chairs, and of them, some 500,000 could use ReWalk.  He is marketing the device to U.S. Rehabilitation Hospitals, including the Veterans’ Administration.  There are two models: one for institutions, like hospitals, and the other, for purchase by individuals.  Argo has venture funding and employs 15 people in Israel, one in Europe and four in the U.S.  It has several patents.  


    We saw a demonstration of ReWalk. Attached to a disabled person’s legs, it uses an electronic sensor device on the person’s wrist to move each leg forward, when the person (on crutches) leans forward.  The battery power is carried in a small backpack.  The device makes a whirring noice, that is not unpleasant or loud.  The price is currently $90,000 per device, in the U.S., and 90,000 euros in Europe.  This price will decline as large-scale manufacturing occurs.  It finds use both as a ‘walker’ and as a rehabilitation device to help those who have been injured.  By putting those confined to wheelchairs on their feet, erect, it essentially moves them from ‘disabled’ to ‘enabled’.   Goffer himself cannot use his device, as he is quadriplegic.  But he nonetheless wants to get his device to market quickly.  I told him I thought a great many people are waiting for it.  “I know,” he said.  This is why he and his team are working very hard.  Production currently takes place at the company’s offices in Yokneam, a northern suburb of Haifa.

   Check out; this device is quite amazing.   

    Global Crisis/Innovation Blog

 Understanding How the 1% Duped the 99%:

Why Russian Roulette Does Not Enhance Wellbeing

by Shlomo Maital


   Thick fog covers the current reportage on the global crisis.  Here is my brief attempt to slash through it, in 197 words.

   Commercial banks, investment banks, hedge funds and other financial firms deceived themselves and duped the world. They believed they were making high financial returns, justifying bloated compensation for themselves and their shareholders.  But it was a fake.  There was no real value. Financial returns must be adjusted for risk.  When you subtract risk from return, their investments were massively in the red. Why? They failed to take into account systemic risk – collapse of asset prices when the bubble they created bursts.  None of the risk assessment models sufficiently accounted for systemic risk.  If there were real economic value in this deception, then everyone in the world could grow wealthy by playing Russian Roulette, as one wag observed.   There is inherent built-in deception in financial services.  Investment firms trumpet their historical rates of return. But they never advertise or quantify their risks.  No investment can be evaluated, without knowing those two key numbers: return and risk.  Never invest  when you are told only the historical return.  The entire world did.  And look where it got us.  And guess what – we are doing it again.   This is how some (not all) of the 1% in finance duped the 99% who do real work.   

   It now looks like the intransigent European Central Bank, which insists on fighting phantom inflation during a terrible deflation, will utterly fail (or not even try) in rescuing the euro.  Look for a ‘haircut’ in the Euro nations, down from 17 to about 8, mainly the northern high-saving countries, and a prolonged period of recession as Europe reorganizes its Single Market into North and South segments.  Belgium’s sovereign debt has now been down-graded and it looks like Spain, too, needs a bail-out.   America, too, continues to drown in debt, and personal saving, which rose to 5 per cent, is now down to only 4.  Black Friday (the day after Thanksgiving, when mobs storm the shopping malls to waste money on useless trinkets) is indeed Black, for America and the world.   

                   Global Crisis/Innovation Blog

 How to Spread a Small Idea Into a Big Deal

By Shlomo Maital

  I love public transportation, and ride Israel’s excellent trains and buses all the time.  Lately, at several bus stops, I noticed something rather strange.  There were improvised book shelves, and books on them.  Why? Who?  When? 

   I discovered the answer the other day. Here is the story.   Dr. Danny Shoshan, and Amit Matalon, of Technion’s Architecture Faculty, devised an experiment to see how the city and its residents interact.  They placed two sets of bookshelves at bus stops in a Haifa neighborhood.  They stocked them with books and monitored what happened over a 3-week period.  “A miracle took place,” Shoshan says. “People took over the role of stocking and returning the books”.  They then expanded the project to six more locations.  The same thing happened.  Technion students began to put their theses and textbooks on the shelves for sharing.  In religious Orthodox neighborhoods, residents put religious books and CD’s on the shelves.  

  “Our motivation for the project was art,” Shoshan says. “Public space is the place to bring Art!”  Similar “libraries” have been built in other Israeli cities – Tirat HaCarmel, Kfar Saba and even Tel Aviv.  Others will soon be added.  There have even been orders from abroad.  The Mayor of Kfar Saba notes, “with minimal investment and very very creative thinking, we can make municipal libraries available to the general public.”  

    Innovator – why not try this in your city?  Just put a few books on the bench at a bus stop.  See what happens.  Or in general:  Put something in a public place, that arouses curiosity, interaction and conversations.  This is what ‘art’ is truly meant to be.  

  • Source: Technion FOCUS magazine, Oct. 2011.

Global Crisis/Innovation Blog

Steve Keen on HardTalk: Write off the Debt!

By Shlomo Maital


   Steve Keen, “the merchant of gloom”, an Australian economist who predicted the global financial crisis, was interviewed on the BBC program HardTalk, on Nov. 25.  Here is what he said.  In short:  The banks have created enormous unsustainable amounts of debt, and we have no choice – either endure two decades of Japanese-like stagnation, while the debt slowly winds down to sustainable levels,  or write it off, start fresh, and avoid the ‘lost generation’ of youth who find no jobs. 

     “We’re already in a Great Depression, in the last one people did not call it that until it was over, always hoping change, improvement is just around the corner.. Great Depression wasn’t called that until the late 1930’s.  The situation now economists call transient may be like Japan, which had a lost two decades, this is the best we can hope for under the current situation, slow grinding process to wind the debt down. 

     “When you have a growing population and economy used to growth, people expect jobs when they leave school but find none, even if you grow a bit less than population change, that means we create a lost generation – which has one outlet, frustration and violence. This is not how to manage an effective society, to be caught in such a trap.  Hitler rose, because he reversed the conventional economic behavior of his time and turned Germany away from 25% unemployment (by building a war machine), leading to the catastrophe of WWII.  He would never have risen were it not for the Depression. You can get very bad social outcomes from the current situation.   The Tea Party was a visceral reaction, right wing. Occupy Wall Street is progressive, it’s been broadly-based, youth-based, people who are laid off, people you would not expect to sit in a tent on Wall St. …a major part of their attitude is that they’ve had their trust in society betrayed. They want a harmonious society. They are not socialists.  They believe society should be something we can trust in, destroyed by the financial sector. They want to rebuild that trust. They don’t know quite how.  I’m opposed to capitalism “parasiting” itself and living off other sectors. 

     “ I think Occupy Wall St. should occupy economic departments of don’t get into this fix without extraordinarily bad thinking among economists.  I think economic departments in universities should be closed. 

     “We have to change the political power balance.  The financial sector, the creditors of the world, are dominant politically for 30 years. The debtors are at the bottom.  We need to resverse that, turn the power back to the debtors.  Politicians won’t listen until they have to. Politicians are reactive, not leaders.  They go along with the general trend that a larger financial sector without regulation is a good thing. And they get their campaign contributions from it.      Banks created more loans than they should have, then bundled them and sold them to pension funds and institutions. So we can’t have a ‘jubilee’ (50-year debt forgiveness).  The debt is too widely owned.  We have to see where debt is good and where it is bad. Good debt finances investment in technology. Bad debt finances gambles on rising asset prices. THAT is what did the damage.  In America’s economy, good debt is sustainable at 50-70% of one year’s GDP.  Current level of debt?  300% of GDP.  Not sustainable.  The debt caused a house price bubble.   Write off debts of people like you and me.  We have to look at the situation, what do we face if we honor debts that should never have happened?  Best example is Japan, a cohesive society, and their GDP growth is lower than population growth, even with a falling population. We face two decades of that. 

      “We must admit something – the credit system has failed.   Historically,  in Australia, 10% of GDP went to pay for housing.  Today it is 100%.  That 90% financed the bubble.   But if we forgive debt on an individual basis it will take forever.  We need a systemic approach.  Households did not make the bad decisions. The banks did.  So we have to write off the debt.  As someone has said,  debt that CANNOT be repaid, WILL NOT be repaid. Let’s face it.   There are two sources of money: banks through lending and government through deficits.  Banks over-lent.  Let’s stop this and reduce private debt, while letting government create credit exclusively.  In the past 3-4 years, the rescues have been to create money and give it to the banks, believing the banks will lend. That is bizarre, because they’ve lent too much already. So all this money has been ineffective.  What we have to do, not easy, the working model is – give the money to the public,  to pay off their debt level, not spend it.  Per capita.  Pay the debt down.   It is not a tax cut.  If you give the money to everybody, and require debt reduction —  we reward those who over-borrowed, but, we must do this, because there is a system failure, and there has to be a system solution.  EVERYBODY gets a boost, and the scale of my solution is extreme, but normal policy allowed a 40-year buildup of unsustainable debt.  We need a sophisticated approach to eliminating an unsustainable systemic level of debt.   If we keep the parasitic banks alive, the economy dies.  If we did my solution, banks would get money in loan repayment.  Their cash flow would decline.  So the bank would struggle, and the financial services would decline – but most already are insolvent, we just haven’t recognized this. 

     “Banking behavior is positive when it provides working capital for business. It is negative when they finance Ponzi schemes to gamble on asset prices, where the money itself is causing that asset price bubble. This is parasitic.   Instability in capitalism is created.  It gets to technological breakthroughs.  This is creative.  That also includes financial instability. So I am trying to promote creative instability, and control financial instability.  We have to control the Frankenstein.  Banks make money by creating debt.  Most of us decline that debt, because it is dangerous.  In Latin the word ‘mortgage’ means ‘death contract’  (mort =  morte, death).  In the past 40 years, we were encouraged by economic theory to take on more debt than we should.  We have to prevent the possibility of asset bubbles financed by leverage from happening again, and it might.    Countries have rising sovereign (govt.) debt because much of the private debt has been made public by governments.   My Eureka moment: in 2005 I looked at the data for Australia, and saw debt growth in Australia rising exponentially, relative to income.    I plotted the data – perfect exponential curve, 1964-2005.  I thought, this has to change!  When debt starts to fall, we will have a financial crisis. I had to raise the alarm.     

      “People were not worried about private debt.  Because economists have a mythical view of debt – money goes from the patient people who have money, to those who are impatient and need and want to borrow money.  This is a myth.   Max Planck failed to convince his Maxwellian colleagues about quantum mechanics, and said, the old physicists have to die off before the young physicists will lead to the triumph of quantum physics.  The same applies to economics. The old Keynesians will have to die off.  Unconventional economics has been derided, but it knows the current version of capitalism doesn’t work.  And after the global crisis, this is being recognized.  I see no politician bold enough to do what I recommend. “   

        Global Crisis/Innovation Blog

 How to Innovate by Asking Audacious  Questions

By Shlomo Maital



 Renault Fluence: no gasoline!

Yesterday I and two colleagues visited Better Place, a company founded by Israeli entrepreneur Shai Agassi.  Better Place wants to wean the world from its addiction to oil and gasoline.  It believes consuming 85 million barrels of crude oil daily, half of it for powering automobiles, is not sustainable.  Its solution:  Create an ecosystem with electric cars (Renault-Nissan “Fluence”),  lithium-ion replaceable batteries, charging stations, and battery-replacement stations. The first such nation-wide system is now almost in place in Israel (we interviewed Agassi by phone as he made the rounds of his robotic battery-replacement stations, aiming at having 50 of them in place very soon, all over the country).  Hybrids are not the solution, because they still consume gasoline, albeit somewhat less of it.  Better Place thinks the added electricity used by electric cars can be generated by non-fossil-fuel sources, and Denmark, the next site of a nation-wide system, already makes 20 per cent of its power through wind and sun, and has so much of it Denmark pays Germany (!) to take the power off its hands.   Drivers of Better Place cars drive in to charging stations, where a robot replaces the spent battery with a charged one, in less time than it takes to fill a tank with gasoline.  You pay by subscription, based on kilometrage driven yearly (20,000 km., 30,000 km., etc.).  The car’s computer tells you if you havee enough charge to get to your destination without a new battery, and if not, where you can replace the spent one.

     The origin of Better Place was an audacious question.  After completing an amazing career (B.Sc. from Technion-Israel Institute of Technology at age 17 ½,  work at Apple,  startup named TopTier, sold to SAP, work at SAP leading up to a top management position, resigned to launch Better Place, and Agassi is only 36),  Agassi asked this question:

    How can we run a country’s cars without gasoline?

The technological answer is simple.  Electric cars. The business answer is really tough – how to sustain a company that does this.  Better Place is essentially a “media” company. It doesn’t sell cars, Renault does that. It sells the recharging/battery replacement system.  Fluence owners drive in to a batter replacement center, and a robot replaces the lithium-ion battery under the car with a charged one.  The margin between what Better Place pays for electricity and what it charges the drivers for electricity provides profit that drives and sustains the business. 

    It all began with an audacious question. But Agassi’s answer was NOT technological, solely, but cleverly business and economic.  This has enabled him to raise several hundred million dollars, from top investors, including GE. 

   So – innovator:  Ask, what is the question? Not, what is the answer!  And, seek highly audacious questions.  Questions that comprise unsolved, perhaps unsolvable, social problems. Then tackle them with energy vision and creativity.     


    Global Crisis/Innovation Blog

 How to Build a $15 b. Global Company

By Shlomo Maital 



  Eli Hurvitz

The legendary founder, long-time CEO and Chair of Teva Pharmaceuticals Ltd. Eli Horwitz, recently passed away, at age 79.  He died of cancer.  

  Teva is a $15 global pharmaceutical giant, the world’s leading generic drug firm, and is on its way to “31 for everyone” ($31 b. in annual revenues).  It was driven by the vision and skill of Hurvitz, and his long-time CEO Israel Makov.   To create a global market leader is tough. To do so from an Israeli home base is nearly impossible.   How did Hurvitz and Makov do it?  Through sweeping vision and smallest-detail execution, qualities that rarely collaborate or even co-exist.

   Hurvitz spotted a press report, in 1985, describing the U.S. Hatch-Waxman Act, named after American political leaders Orrin Hatch (Senate) and Henry Waxman (House).  This act was designed to encourage generic drugs (ethical drugs whose patent has expired, and can be produced and sold by anyone), as a way of reducing health care costs, even then troubling America’s leadership.  Few pharmaceutical firms showed any interest.  Generic drugs are commodities, with low margins (compared to the enormous margins enjoyed on ethical drugs).  Why bother?  Hurvitz spotted a business opportunity. He realized that to excel in generics, Teva, his company, would have to be super-efficient at managing costs, and super-speedy in developing ways to produce generic drugs the instant patents expired (recall that pharmaceutical companies patent not only the molecule but also the way they produce it).  He also realized that Teva would have to scale up, and to do so would require many acquisitions – so he built world-class competency at acquiring and integrating companies.  His CEO Israel Makov was a great partner.  Makov offers this prescription for building a global firm:  first to imagine, first to move, first to scale.  Hurvitz and Makov imagined (a global giant, in generics),  moved (to build global capability) and scaled up.  Together they disproved the assumption that cost-effective production cannot take place in high-wage high-cost Israel (Teva’s Kfar Saba plant is its most efficient worldwide). 

     Innovator:  Keep your eyes peeled for news accounts of trends that embody business opportunities, like Hatch-Waxman.  Envision the possibilities.  Organize to implement.  Move and scale quickly.  And you too, like the late Eli Hurvitz, will create a market-leading global firm.  

 Global Crisis/Innovation Blog

Finding Golden Eggs Among Basic Science Geese

By Shlomo Maital










In a fascinating address given yesterday by Prof. Haim Harari, long-time (1988-2001) President of Israel’s Weizman Institute,  the sometimes-weird link between great basic research and ‘golden eggs’ (commercial wealth, jobs, and income) was explained.  Harari gave as an example RSA (the Rivest-Shamir-Adleman) algorithm, used widely for encryption, the foundation of security on the Internet.   (Adi Shamir did the basic research while at MIT but then joined the Weizman Institute).  

      Here is how it works (from Wikipedia): 

   The algorithm involves multiplying two large prime numbers (a prime number is a number divisible only by that number and one) and through additional operations deriving a set of two numbers that constitutes the public key and another set that is the private key. Once the keys have been developed, the original prime numbers are no longer important and can be discarded. Both the public and the private keys are needed for encryption /decryption but only the owner of a private key ever needs to know it. Using the RSA system, the private key never needs to be sent across the Internet.  The private key is used to decrypt text that has been encrypted with the public key. Thus, if I send you a message, I can find out your public key (but not your private key).   It is an almost unbreakable encryption code.

 The point Harari makes is that if you asked someone three decades ago, what is the most utterly useless, impractical field of basic research in the world, hands down ‘number theory’ would have won.  Number theory is the study of numbers – integers and primarily, prime numbers.  Who would have thought that number theory would become the foundation of Internet encryption and security, in term the foundation of the use of Internet for e-commerce and anything involving payment and sensitive information?  

   Harari’s message is clear.  Allow curiosity to drive basic research.  Strive for excellence.  Do not try to calculate which basic research is potentially useful, and which part is not.  You simply cannot predict.  Who knew that the abstract research in physics on “microwave amplification by stimulated emission of radiation” (maser) and “light amplification by stimulated emission of radiation” would become the ubiquitous laser, the heart of the huge consumer electronics industry?   

     The “valley of death” (the huge gap between a basic science breakthrough and its successful commercialization) is  very real.  It needs to be overcome. But the point is, there is no valley at all to cross, if there is no strong basic research.  Japan, for instance, discovered long ago that it cannot continue to borrow the basic research of other nations forever; every nation has to do its own.   

  Global Crisis/Innovation Blog

Kyle Bass Sees What is Plainly Visible But Unseen

By Shlomo Maital 






US house prices/median family income, 1978-2008

In a previous blog, I quoted Peter Drucker, who “saw what is visible but unseen”, just by looking out the window.  Kyle Bass did the same. He worked at Bear, Stearns, becoming at age 28 the youngest senior managing director in the firm’s history.  He is now the managing partner of Hayman Advisors LP, an investment firm which he founded in 2005-6.  Bass is famous (notorious?) for foreseeing the subprime mortgage crisis and profiting from it immensely, when most of us just didn’t see it. He realized before anyone that private bank debt would become sovereign debt, and that Greece’s debt was too big for Greece to be able to pay back.  He bet on that — when Greece’s interest rates were nearly equal to Germany’s.  He won big time.   He was recently interviewed on the BBC program “Hardtalk”.  Here is what he said:

   “ in 2001 [Fed Chair Alan]  Greenspan traded the dot com bust for the housing boom, lowered interest rates to 1%, because he thought that was how to come out of the bust aggressively.  Then he quit…handed the  reins to Bernanke.  We [at Hayman]  looked at:    median home prices, median income that had moved in parallel for 50 years…and at affordability. When Greenspan created the housing boom, there was massive divergence between median income and median home price [see figure above]…home prices took off, median incomes stayed stable…     How did we profit? When you are a fiduciary, like Hayman, people invest their capital with us, in order to not lose and to make good risk adjusted returns…  in 2006 we had a portfolio of investments all over the world… the hedge we did, we bet against the bottom 3% of subprime securitization, it cost me 1% a year.. it was the best asymmetric hedge I’d ever seen in my life…   we were long in the fund, so this was our hedge, just in case something went wrong. We knew something would go wrong.  We had a good hedge against it.  We lost on other investments, profited on the subprime hedge, and made profit overall.  

    “We have a large portfolio of global investments. And enormous hedges in Europe and in Japan.   We  realized the crisis would move from housing, to banks, to govt. We did math which other people did not do.  As the housing problem metastasized, it started to move globally, what we saw was,  beginning of 2008 to Q2 2009, every time a highly levered institution got into trouble,  in US and EU, the Central Banks took those bad private risks/assets and moved it onto the public balance sheet.  [It was called a ‘bailout’, ‘too big to fail’.]   We decided in mid-2008, there would be either massive delevering (deleveraging, write-off of bank debt, including bankruptcy), or would the move onto the govt. balance sheet.  The latter happened – in the US and partly in the EU they moved bad private assets onto the govt. balance sheet.    No one did this calculation…looked at how big debts were, how big revenues were, for govts.  What solidified our search was:  for Iceland, 300,000 people, $20 b. GDP,  3 Iceland banks had over $200 b. worth of assets!.  When the Icelandic banks went bad, it sank the country.  No regulator existed, deciding to put limits on the size of banking system relative to GDP…because it generated revenues, jobs.     

     “The global debt scenario?  Yes, we took bets against Greece…  for a $1,000 bet, you could make $700,000 profit, in the initial stages, 2008.  Greece’s sovereign debt traded as if it were German sovereign debt… it was within 11-17 basis points of German debt.  That’s 11/100 of one per cent.  There were great asymmetric hedges then.  Today,  all the asymmetry hedges in the world lie in Japan.  

   “The only way to resolve EU problems is to have massive debt restructuring, write-downs.  You know Europe is in trouble when it has a German Pope, and an Italian Central Banker.  World sovereign debt has grown in the  last 9 years from $80 trillion to $210 trillion. That’s  12% / yr., while GDP grew at 4%.   It is not sustainable.  The “PIIGS” (Portugal, Iceland, Ireland, Greece, Spain) are heading into insolvency.  There is noo solution but – either pay the bills, or  debts have to be written down.    Germany itself has defaulted twice in the last 100 years.  Germany hasn’t recapitalized its banks.. UK,  US HAS!  EU banks have three times the leverage of US banks.  EU hasn’t recapitalized its banks.    Issue Eurobonds (with no country on the face)? So profligate Southern European countries continue to spend wildly and Germany foots the bill.    Profligate countries blackmail Germany every time.  It’s not to Germany’s benefit.   How many of your relatives would you go joint and severally liable with?   EU won’t work unless it has centralized taxing authority, until every one of the 17 Euro nations cedes sovereignty.  This is a tall order.   The [bond] market is telling us, it won’t work.   Japan? It  will fall big time.  Japan has the single worst balance sheet problem with sovereign debt in the world…    in Japan: a xenophobic society, population decline, they will lose 27 m. people in next 40 years to demography…private assets of the public in Japan are close to $13.2 trillion…but govt. debt is $15 trillion – the first time in history a country’s sovereign debt exceeds private assets…. In Italy, the 10 yr rate went from 5% to 6%:  and Italy went to full crisis, in one percent!  Japan spends 50% of central govt. tax revenue on debt service, and  half is interest… if Japanese interest  rates rises 2%, debt service will alone exceed govt. revenue!”

   Kyle Bass went to college (Texas Christian University) on a combined academic/sport scholarship (he was a champion diver).  As a talented high diver, he knew how to take leaps others did not.  His leap into betting against subprime mortgages was a huge success. Perhaps then, we should listen to what he says about the euro and Japan.  

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
November 2011