Repairs to China and the West (750)

One of the more fascinating stories that I came across in the last few days concerned a students’ magazine in China. This was produced in one of those joint American-Chinese universities (I’ve forgotten which one) that have been set up in the last 30 years. The magazine had a story about Chinese dissidents — campaigners for more human rights in China and so forth. But before the magazine could actually go on sale in the wider Chinese world, some mysterious ‘authority’ intervened and the magazines are now piled up in the student editor’s bedroom! The point made, however, was that discussion about these matters was all very well within the university, so long as it didn’t go outside it.

This fits in with the relatively few insights we have about what goes on within high politics in China. The two that have impressed me more than most are two books. One is China’s New Confucianism by Daniel A. Bell, who is a long-time American lecturer in political philosophy at Tsinghua University (one of the two ‘Oxbridge’ or ‘Harvard-Yale’ universities in China). The other is China’s New Rulers by Andrew J. Nathan and Bruce Gilley based on secret files smuggled out of China concerning the detailed administrative reforms of Deng Xiaoping in the early ’80s. The substance of both is that beneath the formal administrative committees of China, and right up to the nine-person Poliburo, veritable cauldrons of ideas, even the most heretical, are tolerated and are allowed to be ventilated upwards and sideways, but not downwards and outwards — and certainly not published to the wider public.

This, of course, is in complete contrast to politics in Western advanced countries. Here, by means of sheer economic force in a series of epic battles over a period of about 200 years, and fought successively by one class after another, we have now arrived at what we call democracy where every single adult, educated in current problems or not, has the vote. What this means is that, in order to be re-elected, political parties have to offer suitable bribes to different classes of the electorate and, when in power, carry them out, even though it means that governments have to go deeply into debt. To be realistic, the debts of most advanced country governments from America through to Greece are now already so great that they’ll never be repayable. Unless a string of highly desirable, uniquely new, consumer goods comes along and re-launches economic growth in a magical way then, sooner or later, the debts will have to written off (even though many individuals and businesses will suffer) and new currencies brought into being.

But leaving that fascinating topic on one side, which of the two — Chinese ‘totalitarianism’ or Western ‘democracy’ — will bear up better as the looming economic depression spreads around the world? Which side will be able to keep social unrest down to containable levels? Thank goodness, the usual orthodox outlet for such stress, warfare, is now ruled out because even governments and politicians can now be obliterated by nuclear bombs, or cybernetics or drones. (Even in Medieval warfare, when kings ‘led’ their troops into battle, they were usually well protected by a well-armed retinue and rarely killed. They were too valuable as hostages for high ransom payments.)

Well, I’ve little doubt in my own mind which of the two sorts of governments will fare better in the immediate years ahead (repeat immediate). The Chinese have had at least 2,200 years of experience at their form of governance already whereas our full-blown democratic experiments are barely a century old. But in 20 or 30 years’ time when China has caught up with the Western way of life, it will be highly likely that its totalitarianism will have to give way to some form of democracy because our increasingly complex society will require responsibilities to be shared by all specializations (that is, adults with a job).

But in both cases, the West and China, are going to have to vastly improve their education systems. China’s authoritarian rote-learning is not conducive to creativity. The West’s polarization between elite schools and state schools means that most potential talent is blunted long before adulthood. Governments on both sides are well aware of their respective deficiencies. Beyond the immediate years ahead, future society and governance will depend on which side actually succeeds in repairing their school systems. I wouldn’t put a bet on this.

Today will be an interesting day (400)

Concerning the row that went on yesterday between Angela Merkel and Nicolas Sarkozy (which Merkel won), one economist, Christian Schulz of the Berenberg Bank, put his finger on it: “Unfortunately, we are in the paradoxical situation where we are pinning all our hopes on a new catastrophe for Berlin finally to move.”

Sarkozy wants the European Central Bank to have the same power to issue bonds (to save most of the Eurozone banks and governments) as the US Federal Reserve. But the French (desperate that Moody’s, Fitch or S&P might downgrade their government any day now) overlook one thing. The US Fed is married to the American government and its tax-raising powers. The ECB, however, is married to nothing. There is no Eurozone government. The ECB is merely a theological product of a posse of politicians and bureaucrats that managed 12 years ago to convince the world that the Euro is a real currency. Or as real as the Dollar anyway.

What Merkel is saying is that until the ECB is well and truly married to a Eurozone government able to supervise the taxation powers of its constituent nation-states then the ECB can’t offer bonds for sale to the general public. (It couldn’t offer bonds anyway. Central banks don’t do that sort of thing. Only governments do that. Central banks merely act as convenient pawnbrokers which receive the legal paper documents of a government bond as a pledge and issue the specified ‘value’ of the money in return.)

Christian Schulz is wrong. Angela Merkel is not wishing for a catastrophe. Nor is it for Berlin to move. It’s for all the other Eurozone governments to yield their individual taxation powers and form a super-government. They won’t do that. Their tribal nature (mankind’s instinctive tribal nature) won’t let them. So will there be a catastrophe? Very possibly. Will there be a domino effect on America? Very possibly, even though it’s been trying to ring-fence itself in the last few days. Will there be a domino effect on China? Very possibly.

For the past two weeks, Wall Street share prices have been hypnotized by the political antics going on in Europe. Yesterday, even Germany couldn’t sell all its bonds. Yesterday, America celebrated Thanksgiving day. Today will be an interesting day.

Why a United Europe can never be (450)

It’s ominous indeed for the Eurozone (and the European Union behind it) that German-originated bonds failed to be fully taken up yesterday. Slightly more than a third of a modest auction ($8 billion) of the economically strongest nation in the Eurozone failed to find buyers. On Tuesday, this would have been so unimaginable that a bookie could have offered 100:1 against this happening and, probably, no-one would have taken the bet. This surely is the most significant event yet in the history of this grand Napoleonic reprise (because, initiated by the French, this is what the European Union and the Eurozone was meant to be). It is nothing to do with lack of confidence in Germany per se; it is a realistic assessment by objective investors that even Germany can’t keep on sustaining the Eurozone as it has been doing.

The attempt at a United Europe was, in truth, a French-led attempt at a new nation-state which, with a consumer base of 400 million, could serve as a powerful economic counterweight to America. This, however, can never be because it would contradict one of the plainest facts of human history. This is that any successful nation-state needs to have a predominant, and widely similar, culture within it. At the very least, it has to impose a common language as soon as possible. It’s a sine qua non.

As to language, examples abound. Two obvious ones are the United Kingdom where Scottish, Welsh and Irish Gaelic were ruthlessly persecuted, and the United States of America, where many Native Indian languages and French and Spanish were expunged. The apparent anomaly of China, in which 20 or 30 different languages are still spoken, has, nevertheless, been held together for 2,200 years with one written language imposed by Emperor Qin.

Hilariously (if it weren’t so tragic), the very bureaucratic centre of a putative United Europe, Brussels, lies in a country which has two cultures so different (each with its own language), that it hasn’t had a government in over a year, and there’s precious little chance of one anytime soon from what one reads. (Curiously, Belgium shares this distinction with Iraq. Now that the Kurds have removed themselves from the country, the Sunni and Shia Muslims are even more at each other’s throats than they were before America invaded.)

Well, I’ve written all that I intended to say this morning. However, there’s another curiosity which might be added as a postscript. Business-wise, scientifically, artistically — culturally, if you like — the world is becoming a vast spider’s web of many different specializations where territorial boundaries are gradually becoming increasingly exiguous. And all these lateral networks are increasingly speaking one common language — the accidental cause being the birthplace of the industrial revolution.

A voice from the past (300)

Here’s a little something I came across today. It was written by a stockbroker on the London Stock Exchange and, with modern terms replacing the old, is as relevant today as when it was written. And all this applied some 20 years before European and American governments got into their own special form of additional skullduggery by persistently shaving the real value of the incomes and savings of the poor and middling by over-printing their currencies.

“The enormous extension of the joint-stock system, the scientific development of the haute finance, and the perfection of the modern methods of market manipulation, have placed a most dangerous power in the hands of skilful wire-pullers, and they are not slow to use it. Somehow or other, sooner or later, a check must be put on the depredations of those men who may be termed the vampires or blood-suckers of the commercial world.

“For the trust or company-monger pure and simple, who is neither producer or distributor, but is content to make his own dirty profit out of the ruin or impoverishment of other people, is nothing but a blood-sucker in that he benefits nobody but himself.

“True commerce is, like charity, twice blest; it advantages both buyer and seller and, through them, the entire community; but wherein does the world at large benefit by our dog-eat-dog fashion of financial cannibalism, the stock combinations and share-splittings and re-shufflings, the rigs, corners, creations of sub-trusts and baby companies, and all the other devices of up-to-date market jugglery? Are they not simply ‘the law of the beast’ working in the mercantile world, the modern counterpart of primitive ‘tooth-and-claw’ rivalries that existed before company-mongering was invented.” (Hugh E. M. Stutfield, National Review, March 1898)

One can only laugh (500)

There are several powerful currents which are now conjoining and carrying all of us along helplessly in advanced countries into a brand-new era. How powerful they are and will become relative to one another we can’t possibly say. We can only juggle them around in our heads individually and try to imagine what the new era might be like in vague outline. But the currents themselves are easy to identify (in my opinion). They are:

1. Automation continuing apace, already producing in the last 20 or 30 years a surplus in the working population of advanced countries, mainly so far at the top and the bottom of the adult age range but will gradually spread upwards from the school-leaver as life-time unemployment;

2. The rising power of the scientific class mainly within transnational corporations, and a correlated diminution of credibility of the nation-state political class which is still overwhelmingly non-scientific despite the 300 years of industrial revolution;

3. A rising demarcation of wealth and income between what can be called a new meta-class (at present about 20-30% of existing advanced country populations) and the remainder for whom there’s no hope given our present dysfunctional state education systems;

4. A reduction in family size, and thus indigenous populations, of advanced countries and, by way of the protection of jobs, a consequent rise in anti-mass immigration protest (which the political class is only just waking up to);

5. Increasing urbanization of the masses and a corresponding diminution in the daily time, space or energy able to be devoted to new consumer goods (if indeed any uniquely new ones exist any longer);

6. Innovation will increasingly switch from consumer goods to production and delivery systems. The present composition of GDP inputs (70% and 30% respectively) is likely to reverse within the next 50 years; the increase in the standard of living of countries, regions, cities, localities in the longer-term future will be better described in terms of the increasing energy efficiency of the necessary work to sustain them in their varied leisure pursuits rather than in monetary terms as now measured.

7. Many policies and functions are decreasingly carried out by nation-states and increasingly by specialized lateral transnational agencies; the remaining basic functions (e.g. civil protection) will be increasingly carried out by re-shaped and re-sized governances.

Some sort of picture emerges in my mind and, maybe, one might have arisen in yours (or you may well dispute some of my projections!). Meanwhile, and quite separately from the above trends, we’ll all have to experience what is likely to be a catastrophic breakdown in our present world currency system when governments finally realize that they can’t get out of trouble any longer by printing more banknotes or inventing more varieties of pseudo currencies (e.g. special drawing rights [SDRs], troubled asset relief programs (TARPs), quantitative easing [QE] — and the most risible one of them all so far, the European financial stability facility [EFSF] which, it seems, has died a death before it was able to be born!).

Keith

Where are the rich London merchants? (1,250)

The likelihood is that the economies of Western Europe and America, now facing disaster, will be ultimately saved in a similar way to how the English economy was saved in 1694. Well . . . to be correct, it wasn’t so much that England’s economy was saved in 1694, but England’s very existence as an independent nation. At that time, the French government, fancying the wealth of England that was just beginning to industrialize, was massing troops on its side of the Channel and was imminently threatening to invade. Taxation being too slow to collect, King William’s government suddenly found itself needing money to raise an army and build more ships as quickly as possible.

However, there was a problem. Although there were two or three hundred extremely rich international merchant traders and goldsmiths in London with more than enough money to equip several armies they were unsure of the stability and probity of King William’s Government. In living memory (1672) they’d been bitten once before when King Charles II had reneged on his debts to some of them. However, they themselves faced being ruined if the dreaded French invaded so they had to devise a plan.

It was already the case that, for mutual everyday help, the London merchants were already grouped together in what can be called proto-banks (also known as bill brokers or discount houses). So long as they could trust one another, individuals within and between these groups could create and exchange credit by means of writing promissory notes to one another, balancing up with actual cash on clearing days. On this occasion, some of the groups coalesced (over 40 individuals altogether) and decided to form a ‘super-group’ which they called the Bank of England. They offered to lend £1,200,000 at 8% interest (quite a modest rate at that time) to William.

But they couldn’t necessarily trust King William’s Government (beyond being able to fight the French), and their offer depended on a few quid pro quos. The most important of these was that the new Bank wanted to monopolize all of the Government’s financial business. Because government taxation tended to come in as pulses on four ‘quarter days’ during the year, ownership of the accounts would mean that the directors of the Bank could get first-cut from the taxation moneys received in order to repay themselves with interest and also the opportunity to make short-term loans to others and receive additional interest. It was a wonderful way of saving the nation and making themselves even richer.

The second big concession they demanded, and received, was that their own promissory notes should become the official banknotes of England. Although there were many other varieties of promissory notes in use by private groups both then and in the following decades, this privilege ensured that the Bank of England’s banknotes could start to be used to pay taxation as alternatives to gold and silver. Thus everybody was encouraged to use the Bank’s banknotes.

Of course, the initial Bank loan to William’s Government was in gold and silver, the universal currency that was common throughout the world, from Ireland through to Japan, but after then the Bank of England’s banknotes could thus be used widely for domestic use (not for international trade, of course). In theory, the Bank’s proprietors could, at trivial cost, print as many of these as they liked and become as rich as Croesus. In fact, they didn’t. Being sensible people with a thorough knowledge of industry, trading and finance they only issued new banknotes by selling them for gold and silver. They knew that, like some sensible economists today (that is, those who consider ‘Quantitative Easing’ to be foolhardy), there is no such thing as a free lunch and they had make sure that they didn’t cheapen the value of their banknotes. If money is inflated by excessive printing then, sooner or later, the country that issues it is either defrauding its people (particularly those who save money) or ultimately faces disaster. Besides, the Bank’s proprietors wanted to make sure that they, and their descendants, besides being able to remain rich would also retain their high social status as being trustworthy.

In due course, the idea of a central bank with unique powers was copied by other countries which needed to raise large amounts of money to equip armies which, due to artillery innovations, had become very expensive. In modern times, however, governments have snatched back most of the powers that they were obliged to give to the central banks. All central banks, whether as powerful as the US Federal Reserve or the People’s Bank of China, are today not independent, as they are often claimed to be. That’s merely propaganda. In truth they are little more than departments of governments with most of their senior personnel appointed by their governments. They may seem to be independent sometimes when the cliques that run them are at variance with the cliques that run government treasury departments — as they often are — but, essentially, central banks print money and set interest rates for the political convenience of their governments.

Which now brings us to where we are today. The US Federal Reserve and almost all the central banks of Western Europe are now themselves effectively bankrupt. Strictly speaking, they and their governments are illiquid rather than classically bankrupt. In principle, they’ve no need to be bankrupt because the countries in which they reside are still wealthy with more than enough assets and human skills to keep their economies going. The problem is that those who have money — rich investors and, more importantly, pensions and investment funds — are becoming increasingly reluctant to lend it. Government bonds are not as secure as they used to be. The reason for this is that the methods that governments use — tinkering with interest rates or printing banknotes — are no longer having any effect at all on their economies.

Where, oh where, are the rich London merchants of yesteryear? Superficially they appear to be their modern equivalents — the high-street banks and the investment banks. But most of those are bankrupt or illiquid also. The reserves they have are either property collateral which they can’t sell at the price it used to be or government bonds which are now becoming increasingly difficult to sell with every passing day. Of the two principal government bonds in the world, the Eurobonds are fast becoming impossible to buy or sell, and the credibility of US Bonds now depend on what the US Congressional ‘Super-committee’ can conjure up in the next two weeks by way of rescuing the dollar from oblivion. The signs are — heavily — that it will fail and only come up with trivialities.

But we still have thousands of rich entities in the world. Not only are they rich, with swollen bank accounts at the present time, but they also know, unlike governments and central banks, exactly how to create wealth in detail — just as the London merchants used to (they had to know the details of industry as well as finance). I write, of course, of transnational corporations and hundreds of thousands of smaller businesses which depend on them. When the equivalent of the 1694 French troops are massed in sufficiently high numbers on the other side of the Bankruptcy Channel, then I think we can be reasonably sure that the transnationals (of the West and of China) will come forward with their plan. Of course, they will want their quid pro quos also. They’ll need to establish their own new brand of world currency and effectively monopolize, at least for a while, its supply in order to keep the world economic system going. Suitably re-sized governments and politicians who’ve learned some basic economics can emerge later.

“The world can’t wait!” (500)

“The world can’t wait!” says our Prime Minister, David Cameron. But the world most certainly can — and will — wait until a sufficient balance of investors in this or that government decide that they will cash in their investments and take gardening leave while this or that government sorts itself out. Never mind that this or that government, say that of Greece, might produce a chain reaction of other governmental failures, say of the Eurozone, and then America and then China, it will still be a case of “Pull the ladder up, Jack. I’m all right” on the part of a minority of individuals who are more concentrated on their own affairs than the universal scene.

However, the assets of a country are always vastly greater than its national debts and once the governments of failed countries learn, or are forced, to reduce their size, cost, bureaucratic corruption, and currency inflation, then prosperity will inevitably resume, and outside investors (if they are needed) will start to pay attention again. The biggest deficiency of governments is, of course, currency inflation. In crude terms, this is the printing of money whenever a government gets into a bad fix. Without this, the other deficiencies of government — overlarge size, cost and bureaucratic corruption — can’t get out of hand.

One of our instinctive predispositions is an asymmetric assumption of risk. Most of the time we assume that things will always get better. After all, we’re top species in the animal kingdom, aren’t we? We’ve survived so far after gaining an adequate brain about 150,000 years ago. Unfortunately, things have only got better in the past after finely balanced bottlenecks and catastrophes have occurred. The advanced countries haven’t had a major catastrophe for a considerable time, however, apart from two mini-ones — the Great Depression of the 1930s and the Credit-Crunch of 2008/9. In both cases it’s been a case of more of the bite of the dog that’s caused it to provide a solution — inflation. The inflation was inadvertent in the case of the 1930s Great Depression. It came about only as a byproduct of World War 2.

This time, however, the recently accelerated currency inflation of the world’s predominant trading currencies, the dollar and the euro, have so far not produced a solution to the Credit-Crunch. We are heading towards an economic catastrophe, according to the leading politicians of the major governments. But don’t they realize that in saying this they are destroying what little remains of their credibility? If they’re so clever at producing a prognosis, are they not able to supply a diagnosis also? Yet, after sixteen G20-type Summits trying to solve the problem of Greece in the last 18 months, they haven’t produced a glimmer of insight.

So it looks as though we’ll have to have a world-wide economic catastrophe after all — or, hopefully, only a few days of it — before the only solution dawns. This is to stop the money printing habits of the last century altogether and to revert to a world trading currency that is stable (based on gold or suchlike) and can thus supply a basic discipline to the gross inflation of currency by governments and the gross credit-making of their captured associates, the banks.

Grecian wonder (400)

I can see no hope for Greece now. Even if Mr Papandreou manages to form a Coalition government later today and get a vote of confidence, I cannot see how the majority of Greek people are going to accept many more years of even more austerity than they have already suffered.

It’s no use saying that the Eurozone has been pampering them for many years and they must now buckle down and get used to reality. When it comes to human emotions, there are no absolutes. It’s all relativity. As Krushchev once said when he’d retired from being the President of Russia: “It’s easy to govern starving peasants. But once they have food in their bellies then it’s another matter.” Two years ago, most Greeks had already gained as high a standard of life as most Germans, French, Italians, etc. It’s already declined, and even this part-way step has produced a country that’s barely governable.

Any more attempts at austerity, then daily riots and national strikes every few weeks will produce a revolutionary situation. Or, rather, not so much revolutionary (because there is no conceivable alternative in sight) but total breakdown. At an intuitive level that ordinary Greeks probably understand, even though they can’t articulate, they know they face a choice of more austerity for at least 10 years in the Eurozone or yet even more austerity for a only a couple of years or so if it, like Argentina in 2000, decides to default. In the latter case, it could leave the Eurozone, restore the drachma, and regain the self-respect and cultural independence which the bureaucrats of Brussels took away from them years ago.

I can see no other immediate future for Greece, even if it has to have a draconian government — maybe even with military backing — for a few years. China will help. It is already building massive port facilities at Piraeus and won’t want to see these held up. Furthermore, Greece could immediately start offering wonderful holidays to tens of millions of the Chinese middle-class whom the Chinese government is already encouraging to spend more. In four or five years’ time, if not before then, the average Greek will be scratching his head in wonder that his country ever entered the Eurozone in the first place.