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POLITICAL INTRODUCTION

The Euro is now 10 years old and has seemingly ridden out the waves of displeasure over its introduction. Its creation was for political reasons, not because market forces led to its necessity, and this point was responsible for most of the anguish. Operating against sound economic theory, the politicians recklessly introduced the currency against the widespread opinion that it was doomed to fail.

Political meddling into the European zones currency markets has been a persistent problem throughout the last century. First they tried the Bretton Woods system of fixed exchange rates in the 40′s, but when that didn’t work they switched to the European currency snake in the 70′s.

The currency snake was a horribly unstable system and was quickly abandoned as it could not withstand speculative market activities. It was replaced by the Exchange Rate Mechanism of the European Monetary System, which was essentially a precursor to the Euro and European Union.

FIXING RATES DOESN’T WORK

When a country adopts the Euro, it essentially fixes its exchange rate of the local currency. Although the obvious difference is that the actual currency changes names, the mechanisms involved do not differ too much from pegging the currency to the Euro value.

In fact, countries may simply be better off fixing the exchange rate to the Euro’s movements, rather than bringing in a new currency, which is precisely the action taken by Estonia, Latvia and Lithuania. Denmark is also effectively pegged to the Euro, as it still follows the old Exchange Rate Mechanism of the European Monetary System, albeit it is now in its second version.

Scouring through historical examples, we find that fixed exchange rate systems fail with tremendous regularity. It has been proven that they make little or no economic sense, yet governments always pursue them based on personal interests instead of letting the market reach its own level of normality.

Fixed exchange rate systems and currencies such as the Euro are fatally flawed. They are guaranteed to be unsustainable in the long-term, since economies will always have difference performances. Combine this with the vast range of histories, governments and internal structures; the Euro is faced with further pressure from a multitude of angles.

DIFFERENT ECONOMIES, DIFFERENT NEEDS

Economies expand and contract – it’s a natural cycle. We have seen the rise and fall of many economies and even nations over the last 100 years, with a high concentration over the last 10 years. Discoveries of natural wealth have propped up the economies of many nations, but the labour markets can also be a major factor.

India came out of nowhere and obtained a large portion of the world’s telemarketing and IT contracts. China experienced a resurgence with cheap labour and manufacturing, followed by a setback caused by poor quality, poisoned and unsafe goods. The lazy attitude of the US population came back to bite them as they found their jobs being shifted overseas.  

Political factors have also led to many economies disintegrating. Imagine if Iraq had the Euro – there would have been major problems with sustainability. Demark has suffered greatly from Islamophobia and their treatment of Muslims. With Muslims worldwide launching a campaign to boycott Danish products, their economy has suffered the consequences.

When a country and its economy no longer remain competitive in the global marketplace, the country accumulates large amounts of foreign debt and these deficits eventually become unsustainable. Even small reductions in economic performance can build up over time and lead to the situation that faces many of the Euro’s adoptive countries today, such as France, Greece, Ireland, Italy, Portugal and Spain.  

INFLATION CAN’T BE BEATEN

Having one currency and one interest rate for a number of different countries and economies simply does not work in the long term. While it can survive in the short term quite easily, as soon as there are inflationary discrepancies, it all starts to fall apart. Presently, the inflation rate has been similar across all countries using the Euro. But the global financial crisis has the potential to cause massive inflationary discrepancies, which would lead to tremendous problems in the Euros sustainability.

We can see the problem clearly using an example. If a neighbouring country sells an item for 2.000 Euros while in the home country it is selling for 4,000, the public are obviously going to jump over the border to make the purchase. It could also lead to the unusual situation of a retailer being able to purchase the exact same item cheaper over the border instead of from the local manufacturer.

This price discrepancy would not just be limited to one item, but encompass all items available for purchase. Normally the exchange rate fluctuations would act as cover for the differences in inflation between nations, but when they are all locked into the Euro, the only outcome is absolute disaster.

In stark contrast to the doom of the Euro, history has shown that exiting such an elaborate currency concoction can be extremely beneficial. The UK and its Pound Sterling suffered under the previous Exchange Rate Mechanism system, with sharp rises in bankruptcies, home repossessions, and unemployment all stemming from the fact that the currency was overvalued.

The problem became so bad that the currency was expelled from the Exchange Rate Mechanism in what would be termed ‘Black Wednesday’. But to the amazement of economists, the economy not only recovered, but flourished.

A similar return to economic prosperity lies in wait for the struggling Euro countries, if only they would abandon the Euro. Clearly, the sooner they do this, the better; as the economics behind the Euro’s future do not exist and it is doomed to fail miserably.

WHAT IS E-GOLD?

If you’re a frequent internet user and haven’t heard of e-gold, then you must have been hiding under an e-rock. Since the start of the internet age, nothing has had more of an impact on internet payments than e-gold. Simply put; e-gold stands for electronic gold. E-gold users were the owners of an online gold account and used gold to make their internet transactions, including product purchases.

E-gold has a large amount of gold reserves stored in vaults, of which users purchase this gold and receive an online balance. The balance is kept as a weight of gold and account owners simply transfer a portion of the gold in their account to make a purchase. It is basically a combination of the traditional purchasing with gold coins and internet banking.

One of the main benefits to users is that cross border payments become much simpler, as all users are trading amounts of gold and there are no currency exchanges necessary. If a customer wishes to purchase a product that retails for $70 US, it is simply a matter of sending the equivalent in gold, which the e-gold system calculates automatically.

HISTORY

E-gold was founded by Dr. Douglas Jackson back in 1996. He spawned the idea a year earlier while still working as a doctor and treating patients for cancer. As he was a long-time student of economic history, Jackson knew the benefits of a gold backed currency and its advantages over our paper versions backed by nothing.

After many long nights coding the system, and with the help of a software engineer, the e-gold system was launched online. Pointing to the numerous downfalls of paper currency and the improbable failure of a gold backed currency system, Jackson was sure e-gold would take off and was even quoted as saying e-gold was “probably the greatest benefit to humanity that’s ever been thought of”

E-gold’s growth was slow at the beginning and it wasn’t until the year 2000 that Jackson finally saw some reward for his perseverance. The amount of transactions exploded in January that year, and by November e-gold had processed over 1 million transactions and had 20 employees.

E-gold also introduced e-silver, e-platinum and e-palladium to give users a variety of metals to own. Initially, these metals were stored in banks safety deposit boxes, then at an office safe, before the rapid growth of e-gold led Jackson to store it in bank vaults in London and Dubai.

SUPREME SUCCESS

At the height of e-gold’s success, the vaults stored a total of 3.8 metric tons of gold, which was valued at more than US $85 million. In late 2005, there were 3.5 million account holders spread over 165 countries, meaning that e-gold was the second largest online payment system in the world, trailing only Paypal.

As successful as e-gold was, it was not all smooth sailing along the way. The user growth was so rapid that the servers were often unable to withstand the traffic load. Phishing attacks from cyber scammers were another problem, with users often having their accounts drained. Jackson was forced to upgrade his servers and develop an anti-phishing solution to combat these problems.

Whenever a venture proves to be successful, copycat providers always enter the scene. This was no different in the case of e-gold, with a huge number of competitors such as e-Bullion entering the market. While they were able to take a few customers from e-gold, by then it was a trusted name in the e-currency arena and they were unable to match e-gold’s success. 1,000 new customer accounts were being opened each day and e-gold was quickly becoming the world’s most popular online payment system.

THE DOWNFALL

As the popularity of e-gold grew, so did the hatred towards it from the international banking cartel. The financial system that dominates the world was under threat from the new player in the market and they used their clout to influence the US authorities to shut down e-gold at any cost.

In the last weeks of 2005, the FBI and Secret Service arrived at Jackson’s house, e-gold’s office and e-gold’s server in three simultaneous raids. It seems that e-gold was becoming a favourite of underworld criminals and they wanted to find data that would lead to their arrest. Over the next 2 years, Jackson voluntarily devoted time to locating more online criminals and supplied the information to the law enforcement agencies.

But even though e-gold was proving to be a remarkable ally in the fight against online crime, there were still players in the banking cartels who wanted to preserve their monopoly on money. In April 2007, Jackson was indicted on false charges in an attempt to put him out of business. In the course of proceedings, Jackson’s prosecutors surprisingly admitted that they used e-gold with great success to catch some of the worlds most wanted hackers and credit card thieves.

Knowing that the US courts had a history of ignoring the facts and incarcerating innocent people, the prospect of facing a lengthy prison term was too much for Jackson to bear. He came to an agreement with the US authorities to plead guilty to money laundering and operating an unlicensed money transmitting service, in return for minor penalties such as serving six months under house arrest with an electronic bracelet.

SLOW DEATH

Jackson’s real penalty was the government’s confiscation of around US $1.2 million in assets, as well as a US $300,000 fine. He was also forced into an agreement to work alongside the authorities. Law enforcement agencies are now working with him to once again use e-gold as a system to catch internet criminals.

New account openings have been suspended for the meantime, while radical changes are made to the system such as ID requirements similar to bank account openings. Nigeria, Ukraine and Russia have been blocked from the system and all users have had their accounts frozen.

One of e-gold’s main attractions to customers was its anonymity and privacy aspects. Users could operate their accounts and conduct transactions without the government hawk over their shoulder. With e-gold receiving a fee of 1% of each transaction, users were prepared to pay for this anonymity. It is unlikely they will be so willing to part with their money if the scrutiny is the same as the banks who charge lesser fees.

There have also been reports of many frozen accounts across the globe, with requests for ID to prove account ownership. Even when government issued ID has been produced, it has been rejected with e-gold saying ‘ID can not be verified’. One user has had his ID rejected three times and now faces the prospect of never seeing his money again.

The ‘new’ e-gold is already developing a bad name in internet circles. Unfortunately, to save himself from a lengthy prison sentence, Jackson has turned e-gold into a Big Brother extravaganza. But with internet and e-currency users, it’s a case of once bitten, twice shy. The death of e-gold appears to have arrived. The sad fact remains that it Jackson had shifted e-gold operations to another country; it would still be alive and thriving today.

Continued from Australia Post: The Stamp Nazi’s – Part 1

FALLING COSTS

What is interesting to note is that the stamp price differential between actual cost and the inflation adjusted expected price has remained constant during a period when Australia Post has undergone massive cost reductions in its business. New technology has greatly improved efficiency and replaced many of the previous mail sorting staff. Even though the mail network has grown, the technology has resulted in falling employee numbers in recent times.

Australian Post’s annual reports detail the drastic fall in full-time staff numbers. In 1996, there were around 32,000 full-time employees, while 12 years later the number had fallen to around 25,000. These figures are even more astounding when you consider the population boom Australia experienced over that same period.

Staff reductions are just one part of the cost reduction picture. The service quality is no longer at the same standard due to a number of internal policy changes. Mail was previously delivered twice each weekday, plus once on a Saturday, but that has now been reduced to just once per weekday, if we are lucky. A reduction in deliveries mean less staff and lower costs, but the price of stamps has still risen even with these cutbacks.

When you factor in that fuel costs and interest rates are also well down on last years figures, it is very hard to substantiate another rise in the cost of basic stamps so soon after last years increase. Quite simply, costs have fallen and there is no financial basis for another price increase.

UNHAPPY CUSTOMERS

This may not have been the most appropriate time for Australia Post to announce their price increase intentions. Still reeling from the all too familiar incident of a postman failing to deliver their mail, it may have been wiser to wait for that storm cloud to clear before demanding the public to part with even more money from their pockets.

Just days ago, a postman from Wahroonga was arrested after he was found with more than 5,000 undelivered letters stored in his house; some of them even having been opened. But more bad news awaits the mails intended recipients as police are now intending to hold them as evidence for 6-12 months.

Undelivered mail is just one of the service quality complaints commonly heard regarding Australia Post, with another major issue centring around the recent delays in mail delivery times. The problem stems from a new policy designed to ‘improve efficiency’, which is effectively just another term for cutting staff numbers. 

Local mail is now likely to be sent to large sorting centres, sometimes hundreds of km’s away. After sorting, the mail is sent to the destinations in order to be delivered. Local mail that was previously delivered the same day now has to be transported away, sorted, and sent back to the exact same place before it can be delivered. How this can be considered efficient is anyone’s guess.

WHY THE PRICE RISE?

If costs are falling and service levels are declining, then what can be the real reasons for Australia Post wanting to increase the price of stamps so soon? It seems to be a case of corporate greed when you look at the profits Australia Post is generating. We can only hope that it isn’t another case of a giant CEO pay package being granted.

Australia Post staff are scheduled to receive a 4% pay rise in September, which is well above the current national inflation rate. This is an extremely surprising move considering they are seeking additional revenue in the form of a stamp price increase. Surely it would have been smarter to increase the staff pay inline with inflation to prevent the ‘need’ for increased stamp prices.

In addition to the employee pay rise, Australia Post is also inline to fork out $500 bonuses for the staff if they achieve mail delivery targets. If all 25,000 employees were to receive the bonus, it would come at a cost of $12.5 million. Senior management will undoubtedly receive a far more generous bonus, stretching the total bonus payments further into the multitude of millions.

Australia Post has been generating large profits in recent years, with approximately 90% of its profit coming from selling products and services in competitive markets. This indicates that it would be prudent not to alienate their customer base and push them towards free technologies such as email. Similar to the petrol stations business model, where the bulk of the profits are made from selling junk inside the stores, Australia Post needs to keep the stamp price low to continue to attract customer to their stores.

RECORD PROFITS

It’s not like Australia Post are struggling financially. In fact, last year was actually a boom year for them, with the 2008 financial report detailing record profit levels. Their pre-tax profits increased 5.4% over the year to record their highest ever yearly profit of $592.2 million. Their managing director even admitted in the company’s annual report that the letter delivering business was doing very well, when he stated “Our improved financial returns are the result of strong revenue performances in each of the three core business areas”.

The company report also contains further incriminating evidence, showing that the proposed stamp price increases are definitely not necessary. Managing Director Graham John once again shoots Australia Post in the foot with statements such as “Our letters business continues to perform solidly in the face of widespread changes in communications technology and behaviour” and “We expect that the letters business will earn higher profits in 2008/09″.

Even a primary school child can work out that if they are expecting to make $136 million each year from the stamp price increases, they could instead reduce their profit by that same amount and still be making in excess of $466 million each year. The postage service is supposed to be provided to the Australian public by the government and should be operated at either no profit or a loss. Why should Australians have to pay to support the lifestyles of the corporate big-wigs?

Putting aside the corporate greed shown by Australia Post’s executives, the government should also take some of the blame. Australia Post should be a 100% government owned and operated institution, and should not be paying tax on their profits. Coincidentally, if the government were to waive around half of their tax liability, it would more than cover the expected revenue from the stamp price increases.

The reasoning given for the stamp price increases is not valid, the business sense behind the request is missing, and the need for the price rise is non-existent. Greed is the only clear and logical conclusion, and whilst Australia Post remains a monopoly we may just have to bite the bullet and pay the extra money. At least they have given us another excuse not to send Birthday and Christmas cards.

STAMPFLATION

Australia Post’s recent decision to apply to the ACCC for permission to raise the price of basic stamps has ruffled a few feathers throughout Australia. They are seeking a 5c increase mid next year, which will bring the stamp price to 60c. With the last price rise occurring less than a year ago, the public has been left wondering if another increase so soon is warranted.

The basic postage stamp isn’t the only postage charge inline for a price hike. Bulk mail is also on the hitlist, with Australia Post seeking a 2.6c rise for small letters and 5c for bulk letters. The postage cost rises also follow years of hefty price increases for owning a PO Box. The PO Box costs have risen well above inflation levels, which is surprising considering they represent a significant cost reduction for Australia Post in terms of delivery expenses.

The direct marketing sector will be one of the hardest hit by the price rises. Increases in postage costs will naturally be passed on to the customers, making alternative forms of marketing and advertising more attractive. Conversely, from a consumer point of view, postage hikes would be welcomed with open arms if it meant a reduction in the amount of junk mail they receive.

While a small price rise can easily be overlooked as it is considered an insignificant amount, it is important to view the cost from a long-term perspective. The price rise is expected to cost consumers and businesses an estimated $136 million each year, which all adds up in the long run, since the businesses costs are always passed back on to the consumers over time.

REASONING REFUTED

In an effort to calm the public storm, Australia Post’s group manager of letters, Allan Robinson, has spurted out a number of junk statements which on the surface, appear to give good reason for the stamp price increases. But careful examination of his arguments reveals that they have no relevance whatsoever.

Robinson’s first comment was to state that it is only the third price rise in 18 years. If the price is increased next year, Robinson’s statement will indeed be correct. But it is simply a matter of skewing the figures to suit his objective. He has conveniently started counting immediately after 1992 price rise and avoided mentioned the extreme stamp increases throughout the 80′s, where the price rose in 9 out of the 10 years in the decade.

The main factor that discounts Robinson’s horrible reasoning is that, at the end of the day, it is totally irrelevant how many prices rises there have been in previous years. Plus, if only three were needed in 18 years, then why are they asking for another rise just one year after the last one. By bringing up previous price rises, he is blatantly trying to divert attention away from the only real indicator, which is if it is required financially.

The urban sprawl and population growth copped some of the blame as well, with large population growth experienced in areas such as western Sydney, southeast Melbourne, southeast Queensland and parts of Western Australia. 2.5 million new delivery points are expected to be added over the next ten years.

While raising these points may succeed in pulling the wool over the eyes of many Australians, already there are quite a few people questioning his logic. Population rises and housing volume growth will require new employees and delivery centres to manage the increase in mail volume, but these costs will surely be balanced and potentially even outweighed by increased revenue.

By focussing the public’s attention on expense increases, Robinson has hoped that the revenue increases will be ignored. The habitants of the new delivery addresses are new customers who will be receiving new letters and no doubt posting letters as well. More letters posted means more income. Plus it flies in the face of simple economies of scale – the greater number of users, the lower the cost.

RISING FASTER THAN INFLATION

Using the All Groups quarterly figures of Analytical measure of Consumer Price Inflation from the Australian Bureau of Statistics, we can calculate the cost of basic stamps over time if they were to have increased directly inline with inflation.

After the introduction of the decimal currency system, the stamp prices increased dramatically, at one stage increasing to more than twice the price that would have been expected if it increased inline with inflation. Back in 1992, there was a 17c price differential on the charts and the proposed price increase next year will probably bring the gap back up to 16c, meaning that the inflation rate over the last 20 or so years has been minimal.

Continued at Australia Post: The Stamp Nazi’s – Part 2