I want to tell you a story. This is a true story; it’s about me, my family and my country, and it's not pretty. This story starts in the fifties. In the 1950s Portugal was a poor country, on par with Romania, the Philippines, and Ghana to give you some examples. We were ruled by a dictator and my family remembers stories of hunger and very difficult times to live a decent life.

Two decades later, in 1974, Portugal lived a revolution, became a democracy, and all of the sudden we thought we were a modern Western nation. My family recalls 25% annual salary increases, free everything (apparently I was fed on a lot of free baby food), and an overall feeling that “we have the right to be as rich as Germany”. Nonetheless, we were still a poor nation, so for some time we kept playing the role that China played in the last decade (and still does) - cheap labor. That kept us going.

Then came the European Union. Portugal joined the European Union (then ECC) in 1986 and we had our “drug dealer” moment. If you’re not familiar with the drug dealer life story (don’t ask) here’s a long but realistic portrait. From 1986 through the early 2000s we spent all we were given and more. Money was endless so, as good drug dealers, we bought Ferraris, big houses and luscious vacations. Unfortunately I’m not exaggerating a bit. Our politicians did the same, and we built freeways to nowhere, world expos, football (or futbol) stadiums, and even tried to host the Olympics and the America’s Cup. 

Because we were a fucking Western nation!

Now I’m not playing the saint here. My family wasn’t left behind. In 1977 my parents had an old Citroen and a 2-bedroom apartment in a poor suburban neighborhood in Lisbon. That’s how my sister and I were raised. In 2000 we had 3 houses, a vineyard, 5 cars (no Ferrari), and I was eating foie gras and drinking fancy wine. We weren’t selling drugs, we were just riding the wave. It was the Euro wave and we made the cut.

In 1998 I left Portugal, first to study, then to start my own company. I left my country thinking we were a fucking Western nation (no shit!). That sentiment was reinforced after living in Paris and Madrid. Our living standards were definitely not inferior to those of my friends in France and Spain. 

Then all of the sudden I started feeling something was changing. I was living in Madrid and my salary kept increasing while my friends talked about trouble in Portugal. I thought that was the typical Portuguese whine. But then the economy tanked and everyone started talking about recession. At that point I thought that was serious but thankfully our government came to the rescue and we kept buying fancy cars and spending vacations in Brazil and Bora Bora (that was popular in Portugal 10 years ago).

Then came 2008 and the mother of all recessions (at least for my generation). I was in the US already and I thought that was really bad but thankfully our government came to the rescue (again!) and kept things going. Ok, maybe we weren’t buying Ferraris and going to Bora Bora but BMWs and Zanzibar weren’t that bad after all.

Then came 2011 and you can read my last post to understand where we are right now. Let’s say we are a step away from being under the bridge begging for a piece of bread. That’s the unfortunate life story of another drug dealer (again, I highly recommend this link). Not only we spent all we were given, we spent thinking the inflow was never ending.

If you’re American, it’s up to you to discern whether or not the US are headed in the same direction. I was too young in the nineties to understand the implications of what our decision makers were doing. When I see the US economy I can’t help but thinking about the drug dealer story. China can bail you out now but no one will bail you out indefinitely. Either you quit early on or you’ll end up under the bridge. 

Your choice...

Image: David Castillo Dominici / FreeDigitalPhotos.net

This week the Portuguese government presented the budget for 2012 and I was surprised (not to say shocked) with some of the measures approved. Granted that Portugal is under siege, with the IMF and the European Union demanding hefty budget cuts to reduce public debt, but it’s hard to believe that this budget can solve the country’s short term problems and it will definitely hurt long term growth. 

When I first read the budget proposal, there was one question I couldn’t stop asking - do our politicians know math? I’m not talking about complex derivatives or even  quadratic equations, I’m talking about ratios. 

Here is a quick Math 101 for Politicians. While public debt is an absolute number, budget deficit is a ratio. And it’s not just any ratio, it’s one where the numerator (tax revenue) and the denominator (government spending) are tightly related. If you change the denominator, you need to understand the implications of that in the numerator and vice-versa. If you reduce certain types of spending and, as a result, you get less tax revenue, the final ratio will hardly change. The 2012 budget proposal ignores this basic premise. It’s an amateurish exercise, where the government tweaked numbers to achieve whatever deficit goal they were looking for, without considering potential consequences of those changes on both sides of the ratio.

I’ll elaborate. This budget hammers three classes - public workers, retirees and small business owners. How? Slashing government salaries and pensions by 14% across the board, and almost doubling sales tax on restaurants and bars from 13% to 23%.  This is not just a sign of weakness from the government by going after those who are easiest to track, but it’s also an exercise of poor math. The government expects private consumption to decline by 5%. Now you do the math. At least 15% of all consumers will be affected by the 14% salary cut and 25% of restaurants and bars are expected to file for bankruptcy. Now compute additional factors like lower consumer confidence and lower salaries in the private sector as a result of the government’s example and you see how I don’t get this math. You can't mess up with the denominator and expect the numerator to remain the same.

The saddest thing about this budget is its lack of long term perspective. None of these measures help growth, business owners or entrepreneurs (those who were challenged to be the engines of the recovery). It doesn't even send a message of optimism since further cuts are expected in 2013 and now everyone knows who’s going to pay for that. It’s bad math coupled with bad politics. And it’s too sad that it’s my country.

Image: digitalart / FreeDigitalPhotos.net

This post is not about smoking exactly but it is about addiction. I’ve been wanting to write a post on constitutional limits to government debt for a long time and you’d think that by now the subject would be cold. You’d be wrong – a bunch of European countries, Portugal included, are still trying to enforce the rule. What were all these people watching when the US put up a degrading political show during the debt ceiling negotiation? Plus, let me tell you one thing about the Portuguese culture (I’d extend the analysis to most countries) – people, including and especially politics, will always find the back door to a law limiting their rights. Just like smoking, if you don’t fix the addiction and simply throw your last pack in the lion’s cage, you’ll find a way to get that pack back once you’re desperate. In Portugal specifically, where laws are hard to enforce, you can imagine how effective constitutional limits would. Portugal is the land of fait accompli policy – go over the debt ceiling and then we’ll see what happens.

But let’s ignore geographic specificities and focus on why a debt ceiling is ridiculous. I’ll use another metaphor to illustrate my point – a debt ceiling is like telling someone they can drink as much as they want and later preventing them from using the restroom. Maybe it wasn’t that good of a metaphor but my point is, politics all over the world have a mechanism to stop governments from spending more – it’s called budget. During the budget negotiation is when you tell a government to stop drinking. If you allow it to go to the water fountain there’s no way back – either it’s going to pee on its pants or it’s going to implode.

Sure, sometimes the political calendar doesn’t make this process linear but that’s part of the democratic process. Plus, political hypocrisy never prevented those who approved the budget to come later claim they can’t raise the debt ceiling. So I question, why are we rushing into this kind of process? Do we really want to put up this kind of show every year or so? I guess politics can be that cynic and it’s sad.

Image: scottchan / FreeDigitalPhotos.net