Joel Bowman

Joel Bowman, reporting from Buenos Aires, Argentina…

It’s all happening today, Fellow Reckoner. Gold, stocks, oil…all have rallied to important highs. That’s what the papers say anyway, so it must be true.

Gold has “reclaimed the rally,” reported one outfit. The Midas Metal was trading for around $1,634 an ounce last we checked, up $24 in as many hours.

The S&P 500 is likewise north of where it began the session. The index rose 1% to a 5-month high on what Wall Street determined were solid earnings. We didn’t bother looking at the actual reports. Stocks go up because more people buy them than sell them. Those people may be right, or they may be wrong. The future will reveal this information in its own sweet time, of course…but news reports are necessarily wedded to the past and, as such, don’t tell us anything about the future. We’ll have to wait and see how things shake out. Today, they’re up.

Oil near $103 per barrel is important too. We would expect escalating tensions between the U.S. and Iran to express themselves in similarly escalating prices. But it isn’t only geopolitical fissures driving the price of the world’s preferred energy. Basic supply and demand fundamentals led Steve Belmont, Senior Market Strategist for the RMB Group, to declare that, “Crude oil may not only be the best commodity play for 2012, it could prove to be the best commodity play of the next three to four years.” Mr. Belmont offered some pretty compelling reasons for his call in yesterday’s issue of your Daily Reckoning (which you can read here).

So there you have it. Everything up…up…and away! That’s what’s going on in the known world. It’s right there in the papers. But what about the unknown world…perhaps better described as the under-known world? We eluded to this mysterious marketplace yesterday.

Actually, it’s not really so mysterious. Not for half of the world’s working population who today find themselves in its employ, anyway. We’re referring to that delicious bastion of creativity and unbridled innovation sometimes known as “System D.” Robert Neuwirth, author of the book Stealth of Nations: The Global Rise of the Informal Economy, coined the term to describe the world’s collection of off-book street markets. It’s a kind of “global street market,” or, if you prefer, one of the only truly free markets left on the planet.

“System D is a slang phrase pirated from French-speaking Africa and the Caribbean,” explained Mr. Neuwirth in an article for Foreign Policy magazine. “The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of ‘l’economie de la débrouillardise.’”

Mr. Neuwirth, who wisely abbreviated the phrase to “System D,” estimates the size of the off-book global economy to be roughly $10 trillion anually, although he stresses that this calculation is “very rough and almost certainly on the low side.”

It is important to note here that Mr. Neuwirth does not include activities such as gun running, drug or human trafficking or “things like that” in this calculation. Bascially, System D refers to the “ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy.”

All in, this admittedly conservative estimate figures the total System D economy at about two-thirds the size of the world’s largest economy, the U.S., with an output roughly 40% higher than that of China. Now accounting for roughly half of all jobs in the world, System D’s share of the global workforce is expected to increase to two in every three jobs by 2020. It’s growing. Fast.

Is this really surprising, Fellow Reckoner? The various nation states of the world, in the final throes of a deadly debt spiral and facing imminent paper currency crises as a result, are erecting all manner of regulatory hurdles in order to protect certain, mollycoddled industries from the evolutionary forces of market capitalism. This, we wager, will not end well for them.

We touched on this in yesterday’s issue. In all likelihood, the U.S., Europe and Japan will never make good on their debt obligations. These three economies count for roughly half the world’s “official” GDP (spurious measure that it is). The U.S., we mentioned, just past the 100% debt-to-GDP threshold. Peripheral states lining Europe are there already. Japan’s debt-to-GDP levels sit at more than double that of the U.S. Good luck with that.

The decay of the nation state has been a while in the making, like a slow, gangrenous rot attacking the vital organs of a once productive economic model. Fellow Reckoners are well-versed in our “march of the zombies” theme. Bill Bonner writes frequently in these pages about their relentless infestation…in health care, insurance, education, financial services and, the mother of all zombies, the murderous military industrial complex.

Thankfully, these are pillars of a dying economic model. They are the life-sucking parasites, the favored class and the politically connected, yes. But they have cause to be fearful, too. They are part of a dying experiment. We doubt the malevolved cupcake Nazis in the TSA security line know it…but we have a hunch the higher ups are starting to get a little nervous. Surely they can smell the blood on the guillotine by now, just as their ancestors once did. Their days of looting with impunity are coming to a close.

The growth of System D is something entirely consistent with a global trend this editor expects to accelerate in the coming years – that of increased geopolitical and economic decentralization prompted by a continued weakening of the overly-indebted, outmoded nation state model. In other words, as the edifice of the nation state continues to crumble under massive debt loads and the political impotence to do anything meaningful about it, more and more people will look to the unregulated System D markets of the world for both employment and, increasingly, investment opportunities.

We’re interested in stories of freedom, Fellow Reckoner, and System D is full of them. Untaxed, unregulated, unlicensed individuals trading freely with one and other and with little or no regard for those that would tell them, “No!” Stay tuned

Joel Bowman

Joel Bowman is a contributor to The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

  • gman

    “It is important to note here that Mr. Neuwirth does not include activities such as gun running, drug or human trafficking or “things like that” in this calculation.”

    can’t handle the truth, eh?

    “The various nation states of the world, in the final throes of a deadly debt spiral and facing imminent paper currency crises as a result, are erecting all manner of regulatory hurdles in order to protect certain, mollycoddled industries from the evolutionary forces of market capitalism.”

    oh so verily true. you get a gold star! but if you want to see a REAL death spiral just wait until “System D” has free reign.

  • ragnar danneskjold

    Italy has always had a significant portion of its economy in System D. Thirty years ago, Italy had virtually no mortgage loan system. You either inherited or paid cash for a house, or you rented. They never had foreclosure crises in economic downturns.

    America is headed in the same direction. Subcontractors work for cash. This lessens taxes, workmen’s comp, insurance, and withholding costs. Many shops run cash sales without sales taxes, like camera shops at the wharves in San Francisco. Farmers’ markets sell food without overhead or taxes. This will all be increasing geometrically. In most markets it costs 30-60% more to build a custom home than to buy a foreclosure or short sale. Any cost advantage makes it more feasible to get a job. More and more people will be tempted to take the risk of government action against them, because it is better than starving, and the more people who work outside the system, the harder it will be for the government to force compliance with the myriad regulations and taxes which are a barrier to entry.

  • gman

    “the more people who work outside the system, the harder it will be for the government to force compliance with the myriad regulations and taxes which are a barrier to entry.”

    yep, all true, have to agree. and once those barriers are down people will once again learn the hard way why those barriers ever existed in the first place.

  • Dave

    The army of zombie parasites that have taken control of municipal, state and federal government had better start looking for a skill set people are willing to pay money for.

    As small towns and municipalities started cutting jobs recently many were surprised just how redundant many of the self proclaimed “essential” service employees were.

  • Eric

    Brilliant and courageous Mr. Bowman. In a world ran by force, and not by virtue, pointing out the benefits of peaceful, voluntary interactions in a virtuous way, like you did, is an act of valor and integrity. I salute you for that.

    @gman,
    if by “once those barriers are down people will once again learn the hard way why those barriers ever existed in the first place” you meant that people will find problems once they stop being subject to force (since that is what the artificial barriers to entry represent). Then I`d tell you that of course there`s gonna be problems, which are also known as “DEMAND”, and infinite solutions for them, also known as “SUPPLY”. These two are simply a representation of human action and life. And they can only logically coexist in a win-win fashin. And yes, there´s always gonna be violent people out there, people that will advocate (as you are doing it right here) and pursue violence. But a few free neurons competing with each other would swiftly find a peaceful, efficient, beautiful solution to the problem of protecting free, peaceful, productive, life-loving, happy individuals from people like you.

    Don´t worry, they might even find a solution to your sociopathy in the meantime. See, violence is expensive, we might as well cure it, and we`ll all benefit. Again, demand and supply can only exist if both parties win.

  • gman

    “Don´t worry, they might even find a solution to your sociopathy in the meantime.”

    some people learn harder than others.

    good luck. seriously.

  • Stephan F.

    Mr. Bowman has this uncanny knack of hitting the bulls-eye dead-center. As such, I would certainly advise one to take heed of the points he so well puts forth. The growing underground (black) market is alive & well and I’m afraid it’s going to be with us for quite some time. Hmmm…seems to me we should be turning to those poor/hapless Russian souls who had to endure it for so long, and get their advice.

  • Parr

    Gman,
    They have to learn the hard way. It is all pie in the sky, we can all hold hands and work it out together until someone takes your money, wife, lunch whatever by force. Or they sell you something that is not what you paid for.

    Then these walking victims run to the stronger folks who they before called uneducated, sociopaths, racists, fools whatever and beg for help.

    Eric if the rules disappear then you had better be prepared to stand up when what you bought on the black market is crap. The “real” bad guys can read the weak guy or gal very easily and will walk all over them.

    Young Joel is right this is probably coming and I think I will buy the book he mentioned. DR has fascinating articles. But crooks, cons and scary folks will flock to this “off books” area. That is where you will find your true sociopaths Eric. You won’t be able to report them to police and they will know it.

  • gman

    “The “real” bad guys can read the weak guy or gal very easily and will walk all over them.”

    yep. when it’s survival of the fittest then you find out what the word “fit” really means.

  • Mark Rogers

    Well, Hernando de Soto and his Institute for Liberty and Democracy in Peru identified these informal economies more than a decade ago – and explained how and why they came into existence and what is wrong with them. Without in any way disagreeing with the analysis of the over-mighty, bloated welfare state, which is the real zombie economy, the existence of markets outside a coherent legal system is a PROBLEM, not a solution. Try investing in an economy where records and titles are not kept, for instance. Mr de Soto’s work is the key to the western crisis as well. http://www.ild.org.pe for a lot of fascinating research and action, and also read “The Destruction of Economic Facts” and “Who Owns This Mess” for an alarming analysis of our crises in the US and the EU.

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