Tuesday, 22 May 2012

The Nature of Greed

Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I've been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.
Gordon Gekko, Wall Street (1987 Film)

Individual action is a wonderful thing. It has propelled humankind to living standards our ancestors could once only dream of. In countries that have generally allowed freedom for its citizens, we no longer know the meaning of hunger. We all own a plethora of entertainment devices, films, music, information all at the touch of a button. Travel once the pastime of the rich has now filtered to all sections of society, with foreign culture and holidays never being so accessible. A supposed common flaw of allowing individuals free reign of their lives is the character flaw of greed. Greed is mistakenly interchanged with con men, or criminal behaviour. Greed in its true definition is nothing to be ashamed of, nor something we should seek to avoid. We are all motivated by greed in some form or the other.

There is a popular phrase "Its always the next guy that is Greedy". Greed is always directed at other factions of society. The Bankers are Greedy, but not the Unions. Entrepreneurs are greedy, but not the workers. The traffic is bi-directional where Bankers may believe Unions to be greedy by raising their wages above market prices. Entrepreneurs probably think some workers are greedy as they pick up their pay-check giving sub-standard work. Greed exists in all of us. We all want better living conditions. We all want better for our children. I'm sure many in povery stricken nations could conclude that all of us who live in calorie surplus nations are greedy "They throw millions of tons of food away every year while we starve".

To believe otherwise, is to exclude yourself as a biological entity. Capitalism is falsely credited with creating greed, yet greed has existed throughout time long before humans existed. All biological life works on greed, the need to feed oneself, the need to prosper and to ensure your children prosper. Greed is a natural character trait that enables survival.

Greed is commonly misrepresented under the banner of fraud. For example landlords are usually commonly associated as greedly people ready to exploit tenants. I was a tenant for around eight years and had numerous landlords so I can speak from personal experience of the common misconceptions of greed. I had landlords who owned property empires, vast estates worth millions. Many people commonly associate this with a bad kind of greed "How much money does one person need?" (I'm sure poverty stricken nations look at pictures of our supermarkets and conclude "How much food do people need?"). However on the face of it all they were doing was offering a service, I would pay for use of a dwelling on a temporary basis. In exchange I had no maintenance responsibility of the property, could move quickly if I wished and needed little money to put down to live there.

The confusion comes over a landlord offering a service, in a mutual agreement between two parties and when issues arise. On two occasions I have had the classical sense of greedy landlords, ie landlords who step outside of the law to obtain more than what they are entitled too. Both disputes were on deposits and in both cases I obtained the full amount as the legal system amended this attempt at fraud.

You will always have individuals who try and go against the law and break contracts of agreement, but this is why the law exists, to uphold against such criminal activities. Gordon Gekko, the fictional character in the eighties film Wall Street, was quoted regarding greed however the character he portrays is not one of greed but he is ultimately a criminal. He broke these mutual laws and thus faced jail. It wouldn't matter which social economic system you lived in, Socialism, Fascism, free markets, such characters always exist as humans are imperfect. Limited powers and liberty limit such abuses.

A segment of society who are associated as greedy are bankers. With incomes many multiples above the majority its easy to play the 'greed' card and instigate envy within society. Unions are held up as the antithesis of greed, when in reality they are more self absorbed then the bankers they attack. Arthur Scargill is a classic example of a Union leader, militant, hard left but known most of all for getting workers what they wanted - higher pay. Scargill didn't care how this may impact other members of society so long as he got as much as he could for his members "If you don't ask, you don't get", in what could easily be passed as yuppie language. Negotiating inflation pay busting deals paid for by the taxpayer, while the public periodically went into darkness. Those were the costs.

A free market solves such disagreements. If there wasn't a state monopoly  various Coal mines would have been owned by different companies. If an employee was genuinely getting paid too low, then they could up sticks and work for the competitor. If they could get no higher wage then they would know they had a market rate for their labour. If they desired higher pay then they would need to retrain and enter a new employment field. This is how the process should work, not how the Union and Scargill acted.

Ironically many believed Scargill to be propelling miners living conditions upward when in fact he put them all out of a job in the long run. As it transpired coal could be mined elsewhere for less, as state mismanagement along with unproductive unions destroyed UK coal mining. It wasn't Thatcher but Scargill and others who destroyed the industry. Strikes had forced the Government to look elsewhere for a reliable supply so the majority of society would not have the lights turned out while the workforce had become uncompetitive. Scargill illustrates no difference to a banker, "Everyone is out for as much as they can".

The irony behind the quotation given at the start is the very fact that it was meant to illustrate the wrong doing's of Capitalism when in reality it shows how people, under their own free will, can increase their well being by always wanting more, by wanting to go that extra mile, to enhance and improve the way we live. Whether it is material possessions, knowledge or fame greed exists within all of us. To think otherwise is to deny oneself from being human.

Monday, 21 May 2012

Growth vs Austerity

The battle between Growth and Austerity continues as economies have become stagnant with no end in sight for the current crisis. In one camp the solution is to grow our way out of trouble by increasing public spending, therefore trying to shrink the debt as the economies size increases. The other school states, we need to reduce spending and remodel the economy away from the old borrow and spend mentality. It's hard to know who to believe. On the one hand economies got into this mess because they spent beyond their means, increasing their GDPs to artificial levels therefore one could conclude that the logical outcome is to reduce spending, to set right these imbalances. However many nations have adopted Austerity, growth has flatlinned, even gone into reverse, and created higher unemployment with incomes being continually squeezed. 

Do our main political parties really offer options? In the UK the pro growth Labour Party claims we need to increase spending, while the Conservatives, the pro austerity party, claim we need to cut spending. Despite all the rhetoric the difference between cuts actually implemented by the Government and the cuts that would have been proposed by the opposition under Alistair Darling results in only a £9B difference, small in comparison with an economy estimated to be in that value of £1.5T.

The problem with both camps is that neither really offer solutions to the problems at hand. Greece has attempted to implement austerity but has not really addressed the core issue. That core issue is the fact that the country is bankrupt, and when something is bankrupt it needs to default and restructure. Without a default and restructure the debate on growth or austerity is irrelevant, Greece will never be able to get out of its current mess. The same goes for many nations facing similar issues, primarily spiralling Government spending with income from taxation not keeping pace.

The schools of thought can be summarised as follows.


In order to solve deficits austerity proponents state that spending has got out of control, therefore Government spending must be cut. A lot of the cuts are half measures, cuts made on the fringes of the welfare system that don't amount to much and don't affect the majority of the people. 

Interest rates are still held exceptionally low, printing money is still deemed as austere and emergency loans from the ECB/IMF are considered to be tackling the spending crisis.

With the above, austerity is not really being implemented instead many countries are just postponing spending into the future.


The followers of pro-growth believe the false Socialist Keynesian fallacy that we need to increase Government spending in order to haul our economies out of this mess. They believe that Growth can come from the Government and this will alleviate the debt crisis. Its a simple solution, although fatally flawed and over the long term would have the complete opposite effect. The level of bankruptcy within the country would intensify over time, with peoples living standards eroded further.

As spending increases, so do deficits. Governments over the long term can never create growth by arbitrary spending. Over time, taxes are raised to try and cover the gap caused by increased spending, undermining potential future growth further. Genuine capital for investment begins fleeing along with income from taxation as individuals stop paying taxes. The Government is put under further pressure and prints money to cover the shortfall. Inflation rises, living standards decrease, Entrepreneurship dwindles. In other words it becomes a vicious cycle where the Government finds themselves back at square one, however now in a more dire state of affairs. The Growth camp can only intensify the crisis further.

Default and Roll back of state

The other camp that remains out of the debate is one of default along with a roll back of what functions the state should perform. As Governments can not pay on the majority of their spending commitments they need to default on bond holders. If Greek debt stands at over 100% of GDP then the best way to reduce this is to default on much of it and liquidate capital, similar to private entities and companies. Billions of Dollars are liquidated all the time, either through share price falls or outright bankruptcy, yet the system is incredibly efficient and re-mobilises economic resources producing genuine long term future economic growth. 

The solution also involves rolling back the state and allowing free enterprise further reign in society to improve productivity and reduce costs. Healthcare, Schools, Government Pensions - the costs continue to rise while productivity falls. Private capital would solve many of these issues.

Default is politically unpopular and a banishment of the state is a banishment of politics. Many people still believe that state systems are "free" and that they benefit from them i.e. they take more from them then what they put into such systems, convincing many members of public that we need welfare. To default on loans is a political parties nightmare as this tarnishes the incumbent Government, despite helping to solve the spending problems by freeing up wasted lines of production. It is important to distinguish that a default will not solve the issue on its own, the Government has to take the correct action after the event, that's why a roll back of the state needs to occur with moves towards greater individual freedom and a smaller state.

In our current system only until market forces deem the situation so dire does bankruptcy come about. Currently the market is lenient as it realises debt can be monetised by Governments and inflation is historically low. It also realises that Governments control the rules and consequently can lend to itself or other Governments (as its been doing). Without the recent QE and low interest rates the market would have already started forcing bankruptcy upon many nations, fixing the ills we see. When Governments have such extraordinary control economic problems get out of hand, in comparison private companies go bust very quickly if they can't control expenditure versus income. Governments merely take or adjust the rules in play to avoid this scenario, thus continuing to put economic resources to bad use.

Default comes about when inflation gets out of control or Governments struggle to monetise the debts, then the markets deliver the killer blow  instigating a default. Britain went Bankrupt in 1976 because inflation was out of control meaning printing money would have been unacceptable to the public and markets refused to lend to a Government who couldn't control spending. The IMF bailed the UK out but it didn't fix anything, it just pushed the problems into the future. We should have just defaulted and rolled back the state. Of course the Government can still ignore these signals under a dictatorship and just print more money et al Robert Mugabe, leading to a world of misery. 

From a global point of view, the current fractional reserve system can deal with the odd small country defaulting, say Iceland, but when it comes to larger entities such as Italy, Spain, France, UK and so forth, then the true naked state of the system is shown. The interconnectedness of the current fractional reserve banking system comes down like a house of cards, calling into the question its very existence. People would then ask questions such as why do Governments have free reign on interest rates, money and permit fractional reserve banking? Why do we need Central Banks? Why do we need Governments? The ultimate solution is to remove all central powers, instead  empowering individuals with the freedom to run their own lives, free from third party interference.

Current state of affairs

So we find ourselves in the current predicament, no one really wants to do the right thing therefore the crisis is prolonged. Governments have great power through the monopoly they have in money so rather than accepting the situation they opt instead to push problems into the future. Bankruptcy and failure is nothing to fear or to avoid, it happens all the time in the free market and is an outcome of discovering prosperity. Until people are educated and aware in such matters then we will always have Government debt crisis throughout history on a regular basis. Austerity or Growth, both solutions do not fundamental solve the problems baked into the system. 

Sunday, 13 May 2012


First it was Club Med that experienced a relapse of sluggish economic growth with Spain and Greece slipping back into negative growth. The reasons outlined by the 'experts' who caused the original depression were, "The currency wasn't flexible", "There was no devaluation", "Governments couldn't deploy monetary measures", all because such powers had been centralised to the ECB.

Then the UK recently slipped back into recession. Yet it has consistantly devalued, it has consistantly printed more money relative to other Western nations and it's Government has deployed uber loose monetary policies to try and "solve" the growth issue. However the UK has still come a cropper too. 

UK pay in real terms has fallen more then anywhere, inflation is higher relative to other countries, the country is still running a large budget defecit (just as  Keynsians claim this is whats needed), it has printed hundreds of billions, nationalised industry, had historically low interest rates that are very negative when taking into account the current inflation rate and the currency has been  devalued considerably. All of the above are always touted by Keynsians as the solution however it has done the UK no good what so ever. None of this suprises me, nor should it suprise the reader of this blog.

A lot of claims have been made that the UK has fallen back into recession due to the austerity measures. However all of the above does not indicate austerity but reckless government spending, as bad as under the previous Labour government. Cameron and the Conservatives are performing exactly as I thought they would, no spine and all sound-bites. Indeed it is worth repeating:

The Tories may be historically comfortable in this setting but how many grass root Lib Dem supporters are going to swallow the medicine? Defection of many to Labour is inevitable. And remember - "things were going 'well' under Brown". This could cast the Tories in the wilderness for a decade if they practice what they preach. There's only so long you came blame the previous government for the mess. Give it a year and people won't be seeing Labour mess but will instead switch their view to Tory mess. Just like Thatcher. People forgot the Labour mess in the 70's, they just remember the early eighties.

It seems the recent local elections have also reflected this mood (I realise some of the votes will be on local issues, but more commonly its used if people support current policies). Labour regained a number of councils and increased its share of the vote. Cameron is the latest scapegoat, the problem being unlike Thatcher he's not fixing anything and has to contend with stronger opposition with his Government having no ruling majority like Thatcher had. He's reliant on money printing, negative interest rates and a huge Government deficit. There's nothing austere about his politics. Ed Milliband keeps moving towards the center ground, refusing to trip up on left wing questions, such as questions on Union strikes, and maintains a consistent view with Ed Balls re-iterating the need for growth, ie more money printing and fiscal deficits. 

Public opinion in the UK is changing towards running deficits to support growth, a dangerous combination. Individual freedom, free markets and liberty create growth. When a Government tries to create growth it does the complete opposite over the long term. Running deficits, spending money on public works, creating inefficient and wasteful entities, removing entrepreneurship - all this does is stifle societies economic fabric. Socialism will always collapse for that reason. If I was a politician I could campaign for growth. I could promise that I would create employment, create public works projects, hand out subsidies, tax the rich. It's incredibly easy to do but this will never create the prosperity we all desire. 

Unfortunately the UK is slipping into this mindset where Government needs to increase spending once more. So far we have only endured mild stagflation but it will intensify going forward as people once more seem to be seeking for state intervention. Growth is peddled as a solution, but sustainable growth can only ever come from the free market, not Government Spending.

Its not only the UK that has lurched towards the left and away from 'Austerity'. The recent French elections have opted for a Socialist leader, Hollande, who like all Socialists has promised the earth but like any politician has no means to deliver. France already spends beyond its means yet has opted to spend, well, more. Policies will be watered down as market reality hits. 

Greece continues to be rudderless with the elections bringing no clear decision. Extreme parties such as the far left and right have gained at the expense of the  usual popular moderate parties.

I detailed the problems with PR in a previous post and Greece is a classic example of the problems caused. As a student of history it reminds me of many European Countries during the 1930's, similar to Germany, when Hitler rose to power. When crisis hits, people seek radical alternatives. The Greek people went for the extreme right and left, just like what happened in Germany 80 years ago. No one could form a Government, so Coalitions were formed, in Germany's case the moderate right aligned with Hitler's Fascist party believing they could moderate his views and was seen as the only option against the communists to uphold the status quo and form some sort of Government. Well what a mistake that turned out to be.

Times have changed, so I think the Greeks will see sense on the second election (although I may be wrong), but PR gives extremes platforms to perform on. Under first past the post systems that we have in the UK, it means people stick with moderate conventional politicians as extremes struggle to field candidates in all seats. People therefore vote for a party that will likely get the local seat. With PR, there is no such check and people can vote for extremes knowing full well there is not a number of seats to win, its a percentage of votes which gain seats, this in turn makes extremes more appealing. Extremes always offer people simple solutions. Problem is that whether its the far right or left, they always endorse catastrophic policies resulting in a complete erosion in individual liberties. Both ends of the spectrum believe its my way or the highway, and persecute anyone who gets in their way.

Greece now has the problem of no effective Government. Just like 1930's Germany, the moderates have to seek help from extreme parties in order to try and form a Government. The anti-austerity parties seem like they will get their way.

Recession. More Government Chaos and no real solutions. Some things never change.