Tuesday, 14 December 2010

Where is the deflation?

"The Chinese government is expecting its economy to expand around 8% of gross domestic product in 2011, same as in recent years, but it has raised its inflation target to around 4%, indicating Beijing isn't willing to sacrifice growth even though fighting inflation is a top priority.

State television reported the new numbers Tuesday, citing Zhang Ping, the head of the National Development and Reform Commission. Next year's inflation target is a full percentage point higher than this year's target of 3%."
News that China will raise its Inflation target

If you were to believe the experts it is deflation we have to fear. Its just round the corner. Its a battle we must win. A depression must be avoided which apparently is caused by deflation. In the real world people are seeing costs rising all the time. Not just in the West but in emerging economies also. The Chinese authorities have raised their inflation targeting metrics in order to keep their bubble, sorry growth, moving up. A rule of life is governments always bend the rules. Its sets them. Free markets allow people as individuals to set the rules. Participants mutually trade with one another under an amicable agreement. The state takes at will and by force. Inflation is one such example, it benefits no one in society in the long run, only the government over the short term.

The fact that the target has been moved upwards should not be a surprise. This is what's going to happen everywhere, across the globe. Here in the UK our Inflation has risen yet again. Its now been above the target for over a year now and what are the "inflation fighters" (that is Mervyn King and his MPC comrades) doing about it, Nada. Zilch. They have already raised their inflation targets, they just haven't told the unsuspecting public. There's more price increases in the pipeline:

The increase in VAT from 17.5% to 20% that will come into effect next month will be used to "mask" more extensive price rises according to accountants at KPMG.

They claim almost two thirds of retailers and consumer product manufacturers plan to increase their prices by more than the planned VAT hike in January.

Martin Scott from KPMG told the BBC why he believed retailers would raise prices by more than just the VAT hike next month.

All this inflation is causing Government bond prices to stay high. Well I say high, but we haven't seen anything yet. They will go double digit over the course of this state induced disaster. Double Digit may seem high in today's environment buts that's what you would have thought when Interest Rates were single digit back in the seventies. In the US they eventually went above 20%. Ouch!

Well at least the banks are ok now. They were small fry. We have moved on to more impressive bailouts like, err, countries? Ireland, Portugal - what about when Italy and Spain need assistance? They in turn get bailed out by Germany or France or even the UK. Hang on, aren't we bust also? Yep. Fractional reserve banking, fiat state monopoly money, you have to admire it. The Governments legalised ponzi scheme. No one has the money for any of these bailouts. Deflation will never happen because Governments know this would be the end and a collapse of the system. Therefore they will print money. They will raise inflation targets. They won't even tell people they are doing this. Oil is at record high once more. Just like with any unwarranted inflation, peoples living standards are falling. Prices rise and real wages don't keep pace. 

Through all the bailouts and enlightened interventions, nothing has been solved. Its worse than before the crunch. Its the quiet before the storm, just like prior to the market collapse of 2008. Everything was fine until it happened. That's the problem with economic collapse caused by government mismanagement. You can't predict it, you just know it will come. And when it comes its always too late to act. We won't hit bottom until the market is allowed to cleanse itself, but that isn't going to occur. Until then, just know that inflation will always be there, always rising, even when it may seem its not. Deflation is just the Governments smoke screen.

Friday, 5 November 2010

IP and the Next Wave of Computers

"Microsoft is launching legal action against Motorola over its line of Android-based smartphones, claiming the manufacturer infringes a number of its patents. The lawsuit is the latest in a series of patent infringement cases being fought in the increasingly-competitive mobile market."
"The increasingly-popular Android software is also at the heart of a legal battle between Oracle and Google, while Nokia is embroiled in a long-running legal battle against Apple, and Apple is separately suing manufacturer HTC. Manufacturers have become quick off the mark in launching legal action against rivals, owing to a dynamic smartphone market across continents."

"Google and a reseller of its products have filed a lawsuit against the U.S. Department of the Interior after the agency solicited bids for cloud-based e-mail and messaging services specifying that bidders must use Microsoft products."

"Apple sues Motorola for infringing on patents related to multitouch and other access technologies in its Android smartphone lineup. Motorola had sued Apple earlier this month."

Everyday the tech news always seems to have at least one new case of some computer company suing another. With so much at stake, companies want to gain any advantage they can over their competitors. Intellectual Property is an issue that is rarely discussed. Convention states that we require IP in order for innovation to occur otherwise there would be no incentive to create new products and ideas. However its a similar fallacy to the one where governments state we need to create inflation otherwise the economy would tailspin into depression and stagnation - the opposite is in fact true. The abandonment of IP and patent laws would be a great benefit to society and on the contary would create huge amounts of innovation. 

Xerox Modern Desktop

Back in the late seventies and early eighties Xerox invented the first modern computer that we have all come familiar with. That is a computer with a mouse, keyboard and a graphical user interface. The team that came up with the concept couldn't convince the Xerox execs that it was a good idea, with them dismissing it stating devices such as the mouse would never catch on. Where Xerox couldn't see potential Apple could. Steve Jobs went over there with his lead engineers and they copied everything they saw. He realised that this was the future of computers. Bill Gates did a similar thing with Microsoft after seeing the technology, he also copied the concept. Desktop history was written.

With all the lawsuits going on regarding patenting touch gestures or even trivial operations such as email synchronisation on mobile devices can we imagine if Xerox had done the same? The desktop revolution would never have exploded as quickly as it did. Royalties would have been paid to the monopoly holder of the Patent keeping prices higher than what they should be and preventing other communities and individuals adding bells and whistles to the initial concept. Can you imagine if the person who invented electricity, cars or the jet engine had patent monopoly rights?

The idea that we need patents or IP to ensure innovation is scaremongering. Its big corporations trying to monopolise markets at the expense of society. A true free market is one where ideas are open and free to all. Choice is given to consumers. Prices are continually brought down. Quality is continually raised. Companies still have plenty of need to innovate without IP laws.


A common misconception is that the iPhone is the most superior phone you can currently get. Of course many realise this is not the case. There are many alternatives on the rapidly rising Android platform that have better technical specifications. The reason why people perceive the iPhone to be so good (apart from the glamorous advertising) is that it was the first slick smartphone on the market. It gained early market share, a critical concept for any company. Innovation is just as likely to occur under this premise as everyone wants initial market share. Companies and individuals would innovate under their own free will. Its in humans DNA. You don't need to patent ideas that make one person rich at the expense of everyone else. 

Open platforms have always been the most innovative. Telecommunications was heavily regulated up until the 1980's. The industry was a stagnant state monopoly. Then we gave it over to free enterprise and a plethora of gadgets and tools became available to us all. Companies all copied one another, putting out extras here and there as they would attempt to gain a competitive advantage over their rivals.

Libertarians agree with private property laws. For example I own a car and if someone was to take it from me then they would deprive me of the pleasure and utility of its use. Therefore the legal system should enforce physical property laws. However for an idea, why should we monopolise that? I write ideas on this blog, commentating on current events using economics and history to gain understanding of what is happening. I could charge a fee but I give it all away for free as I believe ideas should be available to all regardless of income or social status. If people read this and gain a greater understanding of events then how does that deprive me? I still have all my ideas. It's similar if hypothetically I came up with a great new way of producing electricity. Rather than sharing the idea I patent it and monopolise the idea so others can't benefit from it. If others were to use the idea how would this deprive me? I still have my original idea and can benefit from it. Others should also be able to benefit from it. In open systems someone may build upon my original idea and make it better. Now I can use their innovation for my own benefit. Innovation builds upon one another enhancing our capital structure.

Innovation is a human instinct. We all are naturally lazy, trying to think of ways to do things more efficiently. Sharing our discoveries greatly improves all our well being.

Computers next Big Cycle

I used the recent news of the various large computer firms suing each other as we are currently embarking on the next wave of innovation in computers. Like economics, the computer industry also works in cycles. 

  • Humans to Mainframes 
    • 1956 - 1966 (Innovation and Growth), 1966 - 1976 (Refinement)
  • Mainframes to Desktops  
    • 1976 - 1984 (Innovation and Growth), 1984 - 1992 (Refinement)
  • Isolated computers to networked computers 
    • 1992 - 2000 (Innovation and Growth), 2000 - 2008 (Refinement)
  • Computers everywhere 
    • 2008 - 2016 (Innovation and Growth), 2016 - 2024 (Refinement)

We are all familiar with the first three waves of computers. Mainframes used to rule the world then along came some individuals with vision such as Steve Jobs and Bill Gates (along with others) and said people are going to want their own computer. All the big mainframe players at the time dismissed the personal computer, IBM dismissed it as a toy and with that error they nearly went bust in the early 90's.

Then came the Internet. For years it had been the sole use of the military and been stagnant for years. Along came private initiative and enterprise and revolutionised the way we consume information and live. Again many dismissed the Internet. I remember first being connected during the growth phase and I thought it was brilliant, a revolutionary concept. A lot of other people I knew dismissed it and couldn't see the value, again saying it was a toy, that is until we hit the refinement stage.

We have only just entered the next new exciting phase of computers. Ubiquitous, pervasive computers, seamless to the user. Not only are they all connected but they are everywhere. In our cars, TV's, appliances, phones, all interconnected able to communicate with one another. Concepts like cloud computing are yet to really take off, but this is where we are heading. Our music, videos, news - our lives - accessible at the press of a button on any device, anywhere in the world.

Devices such as smartphones, Internet TV, iPads or Tablets are being wrongly dismissed as toys but these are the pioneering devices that will become common everywhere (they will evolve further, but the concept is there). Not only touch screens but swipe screens like the movie minority report. Phones that can read a computer in your fridge that reads RFID chips on its contents to tell you what to buy while at the supermarket. A new round of investment in computers has only just begun and with it a new way of using computers. 

Remove IP

In order to excel in this new era of innovation we need to reform the IP laws and allow everyone, individuals, small organisations and the large established corporations all to innovate sharing knowledge with one another as this growth phase takes off.

Microsoft vs Google vs Apple

The big three have very different approaches to the new wave of technology. Two were spawned during the personal computer revolution while Google was established during the network phase and there are signs that Microsoft is struggling to embrace the latest wave (I think Bill Gates could see what was coming). Google are embracing open standards and open source software, they know they can't fight free markets. They have created the popular mobile platform Android and gave it away for free. Microsoft's cash cows are its OS and the Office suite. Without these incomes, Microsoft would be a great deal smaller. 

Recently Microsoft has begun trying to get patent loyalties from the hardware manufactures that use Android, claiming that it infringes on Microsoft patent rights. Manufacturers pay the fee as its cheaper than a legal dispute, however it is merely delaying the inevitable. If Android was really infringing on Patent rights then why aren't Microsoft suing Google? Its because they know they don't have a case and Google would fight back, resulting in the them having no position to claim royalty fees from the manufacturers.

All of this is taking valuable business away from Microsoft in the next big market. On the desktop side, most people still believe they have a rock solid market share, but I beg to disagree. The numbers may still stack up on Microsoft's side, but not for long. The market will get them eventually.

Notebooks were once the in thing before the iPad. As they are designed to be a lightweight device many manufacturers thought rather than paying Microsoft a $50 licensing fee for each unit, why not use another OS, Linux, a free and open OS. When this happened Steve Ballmer quite literally bricked it and starting practically giving away XP licences trying again to regain the Microsoft monopoly. But all it does, like with Android, is delay the inevitable. Microsoft needs to continually sell new Operating Systems and Office products to keep the revenue coming in. As we progress through the current phase of computers the operating system will just be the container. People will use multiple OS's, interchanging seamlessly. The majority of the content will come through the web, the cloud, using standard formats read on any device. Our files. Our music. Photos. Documents. Games. People will not need to have Windows moving forward. Linux will provide more than an adequate alternative.

Google Chrome OS

The concept above is behind the soon to be released Google Operating system. It will merely be a container to control the local hardware but all the content will be online. Again like Android it is based on Linux and like Android has its source open to the public (relative of course, like their browser Chrome, Google control their official release). The price? Free. And so long as it doesn't deviate too much from the core of Linux it will be reliable, fast and secure. I believe this will open the way for other Linux distributions. If the manufacturers break from Windows once more to Linux then Windows will have problems going forward. Why pay for an OS when there is a free one that performs all the tasks and is superior? Video game lock in will only last so long, eventually that will become more open (and more orientated towards the web).

Steve Ballmer has dismissed Linux in the past as "Communist" - he really is as much of an idiot as he looks! Linux is a perfect example of free market economics. It was created by individuals all collaborating together, all sharing ideas with one another, open to everyone, controlled by no Government, Corporation or Cartel. Microsoft on the other hand used patents, and abused it power by enforcing closed standards and locking people onto its platform. Well the market always catches up with everything, its a universal law. Communist Russia, State monopolies, Government overspending - the free market always wins out. Microsoft's tight grip is slowly eroding. How can they compete with free?

Russia and China Adopting Linux

Emerging markets are going to be bigger consumers of computers going forward. Russia has recently announced it wants to create its own Linux OS to move away from Microsoft. China tells Microsoft that it likes its software, just like it tells the US government it will keep buying it bonds but on the other hand they are pushing Linux to its citizens to adopt its own version, Red Flag. Russia and China don't want to hand over income to the US as there's only so long they will be able to pirate Windows without political action. China wants to keep their trade surplus with the US and to make it as large as possible.

I think Linux will be the next big platform. It has the ultimate price point - free. It hasn't been adopted due to historic Microsoft lock in, but as uses of technology change so will peoples needs. Then the manufacturers will bundle Linux as the OS instead of Windows. Android is taking off, on mobile devices. Chrome OS I believe will be a winner eventually (although it may be slow - its ahead of its time) not just on netbooks but desktops eventually where the old magnetic hard disk will have the same fate as its 1.44" floppy cousin. People will have more choice and will not really care about the operating system they use so long as it can operate the hardware and connect to the web.

Apple, has it peaked?

The ultimate fashion accessory, iPad, iPhone, iPod, iTouch - they could bring out a brick and call it the iBrick and Steve Jobs would be able to fool people that it was special. Apple products are no more superior than Windows or Google products (I could list a lot of Apple defects, there seem to be new defects every day of late), its just they charge twice as much, have half the specification but make it look pretty. Apple are repeating the same mistakes as they did in the eighties. By not appealing on price their market share will slowly erode. I think they missed something with iOS. They should have made it open for any device. Instead they have one phone fits all, £600, the Apple ecosystem. Too expensive for many people when there are alternatives at a fraction of the cost. Apple has bugs just like Microsoft or Google. Its just Steve Jobs is a great liar. 

I think Apple will have its niche. But it won't get majority market share like many think it will.

We need to radically reform the Patent laws in order to breed innovation for the good of society not to enrich individuals at the expense of the majority. This goes for many industries, Music, Pharmaceuticals, Film, TV. You can close as many Napsters as you like, but another one will take its place. Its the free market telling us that the law needs to be reformed and allow IP content to be free to all.

Saturday, 25 September 2010

Labour is always Scarce

The fundamental premise with economics is scarcity. Society has endless desires but only scarce resources to meet those needs. Despite the industrial, telecommunications and off-shoring revolutions we have undergone, we all still would like that extra bit more. Free Markets always create more jobs then there are people to carry them out, new ones that didn't exist 20 years ago. When politicians say we need to protect jobs what they really do is take jobs and create unemployment. The left warned of this during the Thatcherite years. However we all found new jobs. My job didn't exist back then. It was created by the free market (in fact you could say an American created my job by inventing the majority of the leading technologies we use today).

Despite Chinas one billion plus population that 40-50 years ago was enduring starvation they have now moved, in many cases, to a calories surplus state. The progress its people have seen by embracing a little bit of free market economics is phenomenal. As countries become more wealthy their capital structures evolve also. Years ago China had masses of impoverished rural peasants that would work for practically nothing. Now their economy has a service sector, a younger generation of consumers who don't just subsist but buy electronic goods or designer labels. 

As developing countries become more prosperous, the low cost labour that continually brought down the costs of goods and services to the West begins to run dry. As I've warned before we have taken the China deflationary juggernaut to be the defacto standard when in fact it was a mere blip in history. Labour will get scarce once again. There won't be the numbers to do the low cost manufacturing jobs as people in such countries will become more educated and move into the new jobs in law, finance or computers. Cost pressures will increase. Currency debasement throughout the globe will push prices ever higher. Chinas population will increasing move into jobs that didn't exist 20 or 30 years ago, into service jobs to meet an ever prospering nation.

Where will our next low cost destination come form? Africa? There are a lot of problems with the continent, in many cases poor infrastructure and a history of expropriation of property from foreigners. Most of Asia is now going through a similar process to China. South America doesn't have the numbers or the poverty China once has. India has great levels of poverty and could be a potential candidate but is also developing into higher level jobs, so oddly is similar to China. There could be a revolution in robotics that automate most of the once manual jobs but these tools generally progress over a long period of time and there is already a fair amount of mechanisation in manufacturing around the world. 

The expansive monetary policies that many governments are pursuing will be a disaster. Here in the UK our inflation has been above the Central Banks target for around 9 months now (CPI has been higher than 3%), and they have recently been talking about more QE, ie printing money. You want to know what the future brings? Inflation and lots of it. That's something I can agree on with Peter Schiff.

Saturday, 11 September 2010

Why we don't need Manufacturing

A common assumption among many commentators is that Western countries need a manufacturing base. We have these trade and budget deficits because we don't 'produce' anything tangible. I suppose 200 years ago the same people would have said we need an agricultural base and not this 'phoney' manufacturing industrialisation many nations embarked towards. I disagree with Peter Schiff, Americans don't need manufacturing any more than a country used to employ huge numbers of the population in the agricultural sector. They just need to do things that other nations can't. The service sector is not a drag on the economy, its a path to further prosperity and represents an increase to a nations living standards. 

The purpose of conducting trade on a global scale is take advantage of one another's skills. Argentina and New Zealand are rich in agricultural, so we import their produce as it is more efficient than producing our own. Japan has virtually no natural resources so they turned to electronics and car production and export such goods for the exchange of oil or steel for example. China has an army of low cost workers, impoverished by Mao's Communism, they now look to improve their living standards by using Western expertise in tooling, to produce goods we buy here in the West. America has been a nation of great entrepreneurship, producing some of the leading technologies we use throughout the world. Apple, Microsoft, Google - even Facebook - they all came from an American and throughout the world we all enjoy using their services in some instances for free.

The point is a country does not require manufacturing in order to prosper. American Manufacturing lost out to the first wave of Asian tigers such as Japan, South Korea, Taiwan - not because of 'Government Regulation' as Peter Schiff wrongly associates in the video, but because they could do the work better and cheaper than the Americans. They do it so well, that the US exports their Iron Ore for the South Koreas to use, then South Korea sells it back to America in its end form, and it is still cheaper than doing the work domestically. 

The decline of manufacturing in America is not an isolated case. Throughout the West - Germany, France and Britain, the sector has continually shrunk. That's nothing compared with Hong Kong. It's manufacturing base is 10% of the total economy. Yet Hong Kong is an impressive place. I was impressed by how efficient things worked when I visited. The service was excellent where ever I went and cheap. Hong Kong used to be predominately a manufacturing economy along with the other first wave of Asian Tiger economies - Singapore, Taiwan, Japan, South Korea. Now they have all to some degree expanded into a post industrial economy, into services, yet all these countries generally run trade and budget surpluses. 

The fact that the second wave of Asian tigers have picked up the manufacturing tasks - India, China, Vietnam, Indonesia, Malaysia and so forth shouldn't be something to fear, we should embrace it. We all benefit.

Its easy to use emotive arguments to state that paying Asian workers a dollar a day is immoral, but every society needs to begin somewhere, and history illustrates this. 200-150 years ago our Western ancestors lived in conditions we can't begin to imagine. They lived in fear of constant starvation, literally if the weather was bad that year people would starve, it was that bleak. We moved out of these conditions into the relative utopia today by our ancestors working, innovating and building the capital structure we inherit today. They built the infrastructure, knowledge and tools we use today. And as generations move on, a free market improves this process and each generation should be better off than the previous one (excluding Government stupidity).

Take for example a Chinese person. They are beginning this process our ancestors went through, however they can access a wealth of Western knowledge that will greatly speed up this process. For example the Chinese worker on a Dollar a day now, can feed himself and his family while in comparison under Mao millions starved. As China exports more to pay for technical imports they can build roads, lightening fast railways and improve their capital structure like we did. His Children then have access to more education, tools, computers - objects their father never had. Instead of working at the factory for a Dollar a day, they set up a company that competes with the Western firm. This is what happened in many places like South Korea and Taiwan. Now they have their own companies, HTC (I highly recommend their phones), LG, Samsung, which the Children of the similar hard working parents indirectly helped to create. 

The so called humanitarians are currently protesting against such wage rates, but wait another generation to see how it transforms the ancestors of the people who walked before them. It will be a different picture.

The common mistake is that when a manufacturing job is lost, this will deteriorate our living standards. When we joke that everything is made in China, we also talk about the decline of our living standards to come. The opposite is in fact true. Both sets of nations benefit. 

Think about it. Since China has become the manufacturing hub of the world every good conceivable has come down in price. This increases our purchasing power and living standards. It helps China move out of poverty. We move into work that pays better and exchange this other service based products for such goods.

That's not to say its all a bed of roses. People who previously had these types of jobs in the West are displaced. They need to find alternative work. With the advent of minimum wage rates and generous benefit options it has become increasing hard for such people to find alternative work. They are the forgotten minority, the underclass who become stuck in a vicious cycle, created by the plethora of Government experiments. A free market society would find jobs for such people. The Government hampers this process. 

Peter Schiff has also made comments in the past stating that China should send their push bikes to America (indicating a reverse in living standards for Americans as opposed to China). Peter is also wrong on this front and history again has the answer. The UK used to be like America, the most prosperous country in the world, ahead of the game. As we went into decline others became more prosperous. Now if we take like for like, Britain was once America and America was once the China of the world, do I now have lower living conditions than my great grandfather? Relative to Americans conditions may have declined, but over time both sets of peoples living conditions have risen. Its the same with the rise of Developing countries today. Just as America made huge innovations in technology and exported it to the world to use, Chinas rise will also benefit us all.

With 3 Billion people awakening from the shackles of Socialist or right wing Statist Military dictatorships, all that extra human labour will be a great boon for the global economy, just as it has been already. Historically the native Han Chinese are a very entrepreneurial people. When Mao took control, many such individuals fled - Singapore, Taiwan, Hong Kong, the West - and they all prospered. With Chinas embracement towards freer trade I'm willing to bet there are some smart people there that will have some great ideas, products that people will want, innovations that will make our lives better. Jobs we don't even know exist will be created from such ideas. Just as Americas innovators have made our lives better with their products, it will be the same with developing nations as they rise in prosperity. 

As more of the world becomes educated, more service jobs will be created. More wealth will be created at an ever increasing rate. There's only been hundreds of millions in the West over the past Century who have had free speech and markets. Imagine what another 3 Billion people can bring to the equation as they become increasingly educated and freer. 

To contrast markets to Governments look at the technology sector, the industry I work in. It is probably the most dynamic and fast paced industry continually making our lives easier and more productive. Its also one of the few sectors that has no Government interference at all. No regulation. No government agencies monitoring it. Yet it continually increases the quality of goods with more features. We are told that we need regulation and Governmental agencies to 'protect the consumer' condescending people that they are too stupid to manage their own interests. Yet the technology sector flies in the face of such logic. Bad products and companies go bust quickly, and quality always wins out at as consumers are rational and don't need an agency to co-ordinate such an activity. Contrast that with the financial sector - fractional reserve banking instigated by the Government, Regulation after Regulation, Agencies (Moody, S&P, FSA etc), price fixing of interest rates, currency monopolies - its no coincidence that its in a mess. It will always be in a terrible condition and a drag on society with the Governments involvement, meanwhile the technology counterpart continues to efficiently mobilise societies resources effectively using the free market. If you ever need to argue the merits of a free market then this is the example to choose and will stump anyone opposed to the concept of Capitalism. I don't even think the Socialists would dare contemplating nationalising this sector. On the other hand many financial service jobs we could do without. Just like propping up our Steel, Coal and Car industries of the seventies its with finance this time and its counter-productive.

I'm bullish for the Century to come. Sure we all know many Governments are walking head on towards the next crisis of their own doing - stagflation, trying to erode our capital structure and removing individual liberties. Its going to be rough for at least the next decade, probably slightly longer. Going forward however we have a lot to look forward too. Markets will be embraced further, people will see our Governments misdoings. The Socialist and Communist experiment is dead. Thatcher or Regan didn't kill the left, it was the free market. I don't agree with Peter Schiff, I personally align more with Warren Buffets recent statement where he said our children will have better lives than we did. So long as we allow markets not Governments to enhance our lives this will always be the case. Relative decline, sure, but as with the example of the UK's decline each generation has had a better standard of living because we never truly abandoned the free market despite a few wobbles along the way. Look forward to the future, the innovation revolution is only just beginning.

Monday, 30 August 2010

Viva La Revolution!

As the majority of the Western world went into a synchronised recession, Cuba was consequently hit hard by the relative hardships inflicted on our countries. Cuba's main source of hard currency to pay for imports is tourism. A country that has been stuck in permanent depression ever since the Communists took power from Batista with a philosophy of the state mobilising economic resources has meant Cubans productivity has fallen woefully behind other nations around the world. 

History has always shown that the best way to innovate is to let individuals who understand their respective market mobilise resources. The Google empire used to be two guys working in a garage. Mighty Microsoft was once a small two bit outfit doing small time work in Alberquerqe. Sony, the Multinational Japanese electronics giant was two men who had a passion for technology. They set up their company after the Second World War, during Hyperinflation and resource shortages where many of the materials they required to make electronic components were not available. Its a testament that all the above ventures have improved all our lives immeasurably, driving up product quality and innovation and driving down costs. 

Cuba however followed the romantic ideal where the "people" would run industry for the "people" (despite the fact that companies are always created by ordinary people). Widespread nationalisation took place, giving economic resources to people who had no interest in such ventures. The popular Che Guevara for example took control as the minister of industries while serving as the national bank president. This was despite the fact that he had no interest what so ever in either ventures or had proven competence. Through the years the decline in living standards has been taking its toll on the country. Cuban people are getting restless. 

Since the collapse of the Soviet Union, Cuba could no longer leach from its big brother, Castro had no option but to open up to tourism, abandoning the autarky he had previously tried to maintain. The problem with this solution is the Cuban people began to see how the West were really living, contrary to the state propaganda they had heard. Fancy gadgets, multiple overseas holidays, all you can eat hotels (while the population has rationing) and the freedom to say what they want and do. Not ideal for a dictatorship.

From 1993 Cuba has also begun slowly abandoning its rigid dogma, now trying more market orientated solutions such as allowing individuals to make profits to increase production. Periodically these have been revoked as uprisings occurred. The resourcefulness of Cubans during the regime is quite remarkable. During my stay we were told they use sugared water as an alternative to brake fluid in cars as they can't afford to import the real stuff. All the old American cars are quite a sight, with people packed into them. Despite the resource shortages people are still able to keep such cars running. Due to the lack of motorised transport and fuel it is law that you have to give people lifts if you own a car and they wish to go the same way as yourself. Such is the desperate state of the country.

Within the news recently it is becoming apparent that more market alternatives are being considered. Its not only the West which are announcing cuts. Cuba has cut the subsidies paid to its pensioners on cigarettes. With monthly pensions of $10 and a pack costing around $0.33, its any wonder how they live on such a low amount (a serious smoker would need all their income to buy a pack a day. Now compare that with your own countries pension and cost of cigarettes). They have been removed from rationing along with other products - the government are now acknowledging you need real prices to direct supply and demand. Announcements have been made that more workers will be self employed and set up businesses, taking people out of the unproductive public sector and into the private sector. 

All of this is inevitable, that is Communist and Socialist systems break down. North Korea, China, North Vietnam, India, Russia, Zimbabwe and Eastern Europe. They all fall apart as peoples living standards decline. Cuba is no different. Often viewed under the academic romantic ideal it is no fun for its people. The free market will win out eventually.

The only reason any such country last as long as they do is usually natural resources. Venezuela is held up by the left as a great example of the good work socialism can do but in reality Chavez is becoming a tyrant and is propped up by all the Oil he sits on. He continually tries to blame 'speculators' and tries to control prices in a vain attempt to give something for nothing to his people. In reality he impoverishes them with product shortages in the long run. For nations such as North Korea who are resource poor they just rely on aid from others such as China and South Korea who are scared of the implications if such nations collapsed leading to a plague of people  rushing for the borders. 

Through this Century the free market will expand and with it Socialism will go into further decline.  We may have some turbulence to come but this will enforce the long term trend. In the West which are already viewed as free market entities they will go even more market orientated. Central Banks will loose the faith of the people as they mismanage the national currencies and people wish to find out why such events are happening. Alternatives will be put forth. Market alternatives, with money and interest rates moving away from political interference. 


A small mention that I will start using my twitter account to post snippets of my view on what's happening (as an alternative to the detailed posts I put here). You can view/follow what I have to say here if you use twitter.

I think we have some interesting news to come, especially when the budget cuts become reality and the Governments finances further spiral out of control. Inflation is already embedded here in the UK. Despite the recent GDP growth its all government driven and its all making things a whole lot worse. QE2 will recommence at some point despite the high levels of inflation. Interest rates will rise which is why they will try and hold these down over the short term using monetary policy. But like the Statist nations above that try to fix prices, the same disastrous consequences will occur. Shortages and further long term problems.

Thursday, 19 August 2010


Free markets work in wonderful ways, especially when it comes to technology. Prices come down, quality goes up, its a win-win situation for consumers. History has a habit of repeating itself and it seems to be repeating once more in regards to Apple. Once more Apple are ahead of the herd releasing new products to the market such as the iPad and iPhone but once more the market is chasing them down once more.

Apple has always been an innovative company ever since they created the first personal computer as the big players such as IBM ignored such innovations labelling them as too insignificant and 'toys'. During the 80's they create machines such as the Macintosh, which were unparalleled  innovation during its time. There was nothing on the market like it. This is where Apple always slips up. If they had a similar business model to Microsoft we would in all probability be using Apples operating systems which were always far superior, however Apples solution was to keep the hardware locked down in their own control. Microsoft in the meantime just concentrated on the software and allowed the hardware manufactures to compete in selling the computers, thus lowering the costs greatly and also allowing consumers greater flexibility and choice of product (treating people as individuals with different requirements and needs).

Apple relies on its image, its marketing. Sure the Apple OS may be better than early Microsoft versions (such as the dreadful Windows 9x OS) but for consumers there are two concerns, quality and price. Why don't I drive a BMW or Audi? The cars would be superior in quality to the cars I have had, but price is also a big factor for consumers. 99.9% of the time people want a car that gets you from A to B. Its the same with Microsoft OS compared with Apples - it gets you from A to B at half the price. You put up with no fancy cup holder or an extra gadget here because the engine turns over and its cheep to maintain. 

Since Apple have released their iPhone and iPad, Google and to some extent Microsoft are again packaging the software for the manufactures to use. Just like the Mac in the 80's, Apples early products have market share which is sure to be eroded in the future once more. Android is already gaining popularity with its open format and with Chrome OS due to be released later in the year this will surely take away market share from Apple (and Microsoft) as they are open, free and do the job. People can openly contribute and build apps for such systems and its only a matter of time before more applications appear for such devices. Over £400 for an iPad? Please, it sounds like daylight robbery to me. The competition is already offering much reduced priced products at half the price. It's not long before the quality catches up too and surpasses Apples offerings.

Of course you could claim that Apple do this on purpose, ie appeal to a niche markets and work from high margins. However unlike the German car companies who compete with the Koreans and the Japanese on quality and charge the premium, I can't see Apple being able to do the same against Google. Google have opened up the code and are offering it for free, allowing all sorts of customisation, thus will appeal to the masses once more. They won't need to copy Microsoft's model of vendor lock in. Times have moved on. It seems Apple have not learnt anything from 25 years ago and are repeating the same mistakes. Give it another 10 years and we will in all probability see a repeat of Apple in the wilderness once more, similar to the 90's.

Sunday, 18 July 2010

UK Housing Market Crash, Its a Marathon not a sprint

"PricewaterhouseCoopers said there was a 70pc chance that British house prices would be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in prices in cash terms – in other words any rise in property prices won't keep pace with inflation. ... Even in 2020, after five years of predicted relatively steady growth, the accountants warned there is a 50pc chance that "real" house prices would be below 2007 levels."
A recent PwC report on UK House Prices

The beloved British property bubble has recently looked shaky once more. QE has come to a short term end, political talk of fiscal austerity, interest rates with only one way to go and a Government who are fast running out of money. There are no fundamentals supporting the recent dead cat bounce in the UK's property market. Many still believe that you can't go wrong with property, that its business as usual with never ending positive returns from the value of their land, but the coming decade will smash all those myths with a bear market that will endure for a whole generation. If market forces were allowed to play out we would have had the housing market crash, we would have had the 50-60% falls but with modern Government its never a quick sprint, it always becomes a drawn out marathon.

Over the long term as I have mentioned the value of the land (or houses as people commonly mistake) goes nowhere (Of course the free markets lowering of many consumer goods means assets can indeed buy more consumable goods in the future. It's one of the reasons the rich always get richer with our current monetary system). Its the depreciation of the value of our currency that provides this illusion. Don't believe me? Take a look at the chart of gold to house price ratio in the UK. 

The target area is not my illustration but obviously someone who predicts rising gold prices relative to houses. The chart is probably not quite up to date, but it displays the important historical ratio of how many ounces of gold it takes to buy a house. The chart illustrate some important historical changes notably 1971 when Bretton Woods - the fixing of many Western currencies to the dollar which in turn was pegged to gold - collapsed. Through the 50's and 60's house prices seemed to rise relative to gold, but this is because the fixed price masked the real price a free market would have determined for Gold. After 1971 when the price was liberated the value of houses to gold indeed fell greatly. This is during a time of great inflation, generally rising house prices in Sterling - but the key thing is they may have been rising but not in real terms. Then came the 80's, 90's and 00's - a historical unprecedented credit boom based on pure fiat money with no restraint. Free markets did their job and lowered prices of consumer goods, the authorities reaction - expand the money supply to counteract this based on their flawed central planning metrics. It reached a peak of over 500 ounces of gold to buy the average house, but this is where the illusion stopped and gravity would take hold once more.

Record low interest rates, huge private debt levels, trade and budget deficits, a Government fast running out of money and bullets there is only one way for this asset and thats down. 

The bigger problem I see is - we haven't liquidated any this debt - we haven't de-leveraged! Politicians like to proclaim that our public sector debt is low (however its now exceeding and growing at a faster rate than our peer nations) but forget to mention our private debt levels. They are astronomical compared with other Western Nations. We borrow huge amounts of money from the Russians, the Saudis, the Chinese, or owe it to ourselves and we dig further into debt to buy overpriced assets such as houses in order to fund short term consumption. We kid ourselves into thinking we can do this by becoming a financial centre but in reality it's just a ponzi scheme under the hood. We borrow huge amounts of money, spend this money through the economy, which in turn drives the City of London which packages all this money up and in turn we kid ourselves into thinking we have a sound economy. Of course it will all come crashing down with disastrous consequences. The world will not look kindly on us when we can't pay our way without turning to the printing press. 

These private debts are weighing down on the economy and will stagnate growth for many years to come. Unlike other nations who are in the Euro we have our own currency. Worryingly 99.9% of economists seem to think devaluation and money printing are the way out, but this will only compound the troubles. This will in turn drive interest rates ever higher over the long term, ultimately making it harder to service our debts, that the Government are obsessed with not liquidating just like Japan's politicians 20 years ago. 

People naively think inflation is great for high debts, but again they forget that goods and services rise under such conditions. Serving debt may become more expensive but what happens when the price of energy or food rises beyond pay inflation like what is happening now here in the UK? People struggle further opting for present consumption or living costs over future investments. Inflation erodes our existing capital and savings or drives it out of the country, just like what is happening now with negative saving rates. Society doesn't invest in capital goods (tools, for example computers, machines, roads) as it needs ever more resources in the present time to stand still. Societies prosperity relies on the capital structure, put simply the access each generation has to tools. I have higher living standard than my grandfather as I have more tools at my disposal. University, the Internet, a computer and so forth. When Governments inflate they give people pay cuts instead of allowing the capital structure to adjust. Companies accept this as a solution but in reality we get less productive as tools or innovation are deemed surplus to requirements over the short term. To an Austrian economist all of this makes perfect sense, but to the many it will only become clear once the process occurs. Then it will make perfect sense to all.

The Spanish are another country with similar issues to the UK. They also have a lower public debt compared to others, but their private debts are relatively large. They also try and prop up their zombie banks and prevent liquidation. The US on the other hand leads the western world in this aspect. Who was the nation writing off all these bed debts? People viewed the sub-prime fiasco that the US was becoming the basket case of the world but in fact they are ahead of the curve, indeed ahead of Europe that's for sure. The value of their houses have already fallen around 25-30% but their bubble was no where near as bad as others such as the UK. They don't have as much private debt as the UK. And despite talk of manufacturing decline, who produces some of the most innovative and high tech products in the World? The US. I'm bullish on the US relative to other nations. I'm wouldn't invest there, which tells you the trouble the world is in.

For example Apple is a marketing machine, with a whole fanatical legion of followers. They make their hardware in China buts its in their product design, software, marketing - the creative economy - that provides the real income. The UK would be lucky to have the same clout, but we don't. Sure we have small to mid size innovative companies which I take my hat off to who do a great job, but we have no Googles or Microsofts. All US based with their profits going back to their home country. 

My employment record is great illustration of the UK's problem. I currently work for a large Japanese based firm, prior to that a large American Services Company. I've worked for 3 UK based organisations. A UK government backed learning centre called the Open University, a car sales company called Reg Vardy who sell cars made by companies based in France, Germany, Japan the US - basically anywhere but the UK and a telecommunications company who sold German telephone equipment made by Siemens and photocopying products made by Cannon a Japanese imaging specialist.

Where are the large British companies? This is the problem - I agree with letting foreign companies and expertise come in - this increases all of our living standards. But it can only do so much. We will never be able to maintain the illusion we have made for ourselves under the current framework of more debt, more sales, more jobs based on this debt, rising assets based on this 'prosperity' with the cycle going full loop. It doesn't matter if its tangible or intangible - we only seem to be able to sell others products to ourselves by increasing our short term consumption debts. We make an excellent nation of salesman and people who get into huge debts but at some point in the future others will demand payment and stop lending at which point we will come short. 

The values of these such debts are tied in many places to assets such as houses. The government can not dampen or assist in this rebalancing process, all they can do is make the imbalances worse like they are doing now. By enforcing the cycle listed above. People like to think this is different to the seventies.

Back in the seventies we propped up manufacturing, car makers, our steal works etc. This was despite the fact that others around the globe were doing it cheaper and better. Then Thatcher came in and changed all this. She stopped propping up these type of jobs. Of course unemployment went through the roof as it takes time for the private sector to create sustainable jobs that were competitive in the global marketplace. In our present time replace factory worker or coalminers with estate agents or beauty therapists. Same problems just different unsustainable lines of work.  Sure we may have a need for such people but not on the sheer scale we have them now. That's the simple fact why for example estate agents haven't been hit as hard as they should have been. Low interest rates and printed money have supported the assets that they sell. The government has in fact given many of these lines of work a bailout, by ensuring the debt economy and imbalances can continue. 

People don't understand when you try and put all this into context - the unsustainablity of the debt we amass. Business as usual, I don't know how you will afford to buy if you don't buy now and so forth - as though this exponential debt boom can continue. "Surely the Government will turn to negative interest rates or the Government won't allow the prices to fall". Everyone misses the real crisis to come when the Government has no more bullets, they will no longer have control of circumstances and events will dictate policy. Greece may have been removed from red alert but the solution was just more of the same - more debt for all to bail the Greeks out. Economic gravity will take hold - you can't escape it. 

The illusion still seems real to people. Like a magician Derren Brown or David Blaine who kid people into believe that they are performing an art form or something that is indeed beyond the realms of magic but they are just the same as Paul Daniels - it's a trick that has been handed down through the generations only with their modern twists on such acts. The Gold ratio of house prices illustrates that house prices are just an illusion over history. Its the decline of the purchasing power of our governments monopoly over our money that provides the magic trick. The magic act has many more years to run.