Friday, April 11, 2008

The Swiss and American Growth Story

The last week was extremely busy so writing after a big pause. I would be leaving for New York on Sunday so before I do that let me elaborate the points on the reasons of growth in Switzerland (some points of the analysis holds for many European countries) and briefly discuss growth of US. I know I am unable to discuss about options trading and China story, probably my next article would be about them if something more interesting doesn't strike me. So here we go.........

Two countries that gained tremendously in the watershed event of WWII were US and Switzerland

America gained tremendously as result of influx of great minds from Europe, no amount of physical capital can match the influx of high influx of human capital, its simply invaluable (almost like a call option with limited downside and unlimited upside) , no one can tell the value of the idea or business venture started by some crazy nerd today whereas in case of pysical capital we know the number printed on the note!! So these great minds from Europe (particularly Jews) entered the US shores and made America , powerful and also changed the face of the planet. Einstein discovered general relativity, Goldman started an organisation that later came to be known as Goldman Sachs.

Back during the period of WWII, Switzerland chose to remain neutral in the global conflict. Unlike US it mainly gained from the influx of physical capital. Wealthy Jews and others kept their money in Swiss banks. Large part of money was never claimed as their owners lost their lives during the war. Now once you have large sums of money it has to go somewhere (to business and assets) and this leads to wealth multiplication over time. This is what has given rise to UBS, Credit Suisse. Don't fool yourself in believing that they are big because there are a lot of smart people in these organisations (smartness has no correlation with money making and oh! yes UBS just recently devalred losses worth USD 12 billion... smart people). Anyways a few such organisation can change the face the nation that has a population of not more than a millionWith almost 50% of them in active workforce these two organisations employ a very large chunk of population. Also with banks with such lare capital around it propels other internal businesses as well e.g. ABB. So with just a handful of entrepreneurs and large amount of wealth created this nation is a rich nation even though people don't work!!!, shops open at 9 a.m and close at 6 p.m, some restaurants open for not more than 3 hrs!!! well let them carry on this way other nations would surely catch up.

One more important point in development of Switzerland and many other European countries is culture. Well before jumping up and down just read..... I walk out of the airport and call for a taxi, two drivers come up one is an Indian driver and another one is an american, whom would I hire.... well the Indian driver....why? because I feel comfortable thats all, nothing against any country or race...its just a human fallacy. In a similar fashion these European countries have benefited from the influx of investment from global giants (mainly from US and UK) over other economies in aisa, simply because of this reason. All countries in south asia is still poor and so there is no surplus capital to invest. Atleast the countries in Asia Pacific, Taiwan and China have benefited from a rich Japan. So the next time you pick a taxi think about this point.........

Wednesday, April 2, 2008

The European View

Been very busy the day I stepped in Zurich and so ofcourse have been unable to write any new articles. I will continue the articles specifically on options trading and China once I return back to India. Anyways this article is a bit of digression but one important insight that I have gained from my visit.

I expected Zurich (financial capital of Switzerland) to be a very modern city, however it turned out to be just another town, totally shocking. The buildings are old, well maybe because Switzerland was a neutral country during WWII and so unlike most of Europe the city survived with its legacy. Anyways two important things that I observed here are:

- People are not very rich in the west, ofcourse Indians would find the place expensive but thats purely due to purchasing power parity ( which anyways would vanish in the next 30 years) though the people are not very poor unlike in India. So the GINI index (level of disparity) is smaller here compared to India. What is the reason behind this I am yet not sure. The government taxation and social security system might be one answer but certainly there must be some more important reason to ponder over.

- Also one thing to think over is how such a small country with negligible natural resources became developed. Well the answer to this question is relatively easier. One reason is that the surrounding countries were richer so it automatically boosts the economy of your country as labour and trade arbitrage processes are quicker and this transfers and creates wealth in that country (switzerland in this case). The second reason is that during the WWII many of rich jews and other people kept their money in the swiss banks ( this is what made UBS and Credit Suisse) and most of that money was never claimed as their owners lost their lives during the war. This money in turn got channeled into the Swiss economy and created the growth momentum..............