March Towards Freedom

With the recent elections in the UK I thought it was time to delve into the present political structure, how history has shaped where we are and what is to come during the 21st Century. I believe history will look back at the 21st Century as a golden era in humanities progress. Not only from a technological view, but politically also. 

We have to start with a conventional view of the current system. At school you are taught about the political spectrum, a view that places all political views on a sliding scale from left to right with current positions of the political establishment rooted in the center. The picture below illustrates this concept for anyone who is not familiar with the spectrum.

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I have plotted various political ideologies along with popular UK political parties. In school you are taught that both the left and right sides of the spectrum are political extremes and should be avoided, leaving the centre ground as the only option by default. Incidentally this ground is occupied by all major western political parties. For example in the UK I have drawn from left to right, Labour, the Liberal Democrats and the Conservatives as this represents their historic political views but in recent years they have blurred to the point of being nearly indistinguishable.

I started having a real problem with this picture as I began to branch out my thinking during my twenties and saw alternatives. Such alternatives could not be mapped onto this conventional model. Even before I formed such views I still had issues with the old model as it places both Communism and Fascism at opposite ends yet both ideologies share common views. They both despised Capitalism, favoured central planning, implemented price controls along and deficit spending. The right wing is supposed to be the side of Capitalism, yet as Joseph Gobbels said;

"It would be better for us to go down with Bolshevism than live in eternal slavery under capitalism"

Nazism was called National Socialism as its members aligned more with Socialist principles than Capitalists and free marketeers.

Therefore a new political model is required not only to make this anomaly correct but the very nature of it assumes society with be stuck in stasis with a state.

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I have labelled it "Real Political Spectrum" as I believe all political views can be mapped onto such a model with consistency. The real spectrum has at one end Totalitarianism and slavery. Such regimes have little or no rights for the individual. In the past all of the western world used to fall under such a description. Our ancestors lived under serfdom which closely resembled slavery and the landowners could do as they pleased with the people who worked there. Slowly people gained more rights removing the shackles of serfdom. Democracy would take a long time to establish itself. In the past the King had complete autonomy over the people but this belief would be challenged. The Age of Enlightenment espoused radical ideas such that an individual had the right to pursue happiness and a freedom. These concepts were non-intuitive to many at the time who had always been directly governed by strict central authorities. Such ideas began in Scotland, England and Holland with the emphasis on tolerance to one another. Thinkers such as John Locke would inspire a whole generation to emigrate to the Americas and spread the concept of liberty. Schools were appearing as early as the 15th Century, such as the scholastics of Salamanca in formulating a theory which declared the rights to life and liberty; at the time a novel thought. Later schools would come along, such as the Austrian School, repeating and supplementing arguments for subjective value, price theory, business cycles, inflation, interest rates and so forth. These ideas enlightened many who found them.

During the age of reason another group of thinkers began distorting the word freedom. Jean-Jacques Rousseau argued that true freedom was the individuals submission to the wills of others in power. Freedom of the individual was not real freedom. Real freedom was the collective view of the elite few over the many. These ideas were explored in further detail by a later generation of thinkers. Hegelianism explained that the state had supreme rights over an individual. Such views would influence next generation thinkers such as Karl Marx. The left would go on to pollute the very essence of freedom, liberalism and human rights. Freedom became associated with a submission to the state for a collective good. Liberalism was associated with state grand plans to organise and plan for societies needs. Rather than individuals choices, human rights became one that was ever more influenced by the states needs.

During the 19th century regions such as Britain, the Low Countries, North America and Scandinavia became incredibly rich as liberty and the individuals rights to pursue happiness were embraced. America experienced deflation and a rapidly growing economy, Sweden had moved from a relatively poor country in Europe to one of the richest by the end of the century. Germany unified and became a world beater in the Chemical Industry due to its liberal patent system compared to Britain and France where the State still granted monopoly patents. Freedom was creating wealth and materialism for the first time in human history. 

During the next century these countries would all succumb to the collective will of the state. Loss of freedoms and the expanse of Government was a slow process. During the Great Depression in America people still believed they were better off dead then accepting handouts from the state. How societies morals changed over the course of a couple of generations. The social ratchet kept tightening as the size of Government expanded. Some countries decided to nationalise the farm, notably Russia, Eastern Europe, many parts of Asia, South America, Africa and sporadic islands most famously Cuba came in for good measure. Britain, the Low Countries, North America and Scandinavian, the very nations who cradled liberty, expanded their states but never going the full distance. Swedens state expanded vastly during the 1950's, 60's and 70's, slowly destroying the gains that free market capitalism had bestowed on them during prior years. Americas slow abandonment of their founding fathers constitution and growing Government influence which got worse during the 1960's guns and butter programs left them with a social system that made a mockery of their slogan "land of the free". Reaganomics had shown how muddled the term liberty and free markets had become. Regan spent more than any previous president with large deficit spending policies and expanded the size of Government, yet ironically was labelled a free marketeer. Britain descended into the abyss on a couple of occasions; blackouts, never ending strikes, decline of industry and mass socialist programs. The biggest shock came in the form of Germany the only country to fall into a totalitarian state. The atrocities were no different than those committed in China, Russia or Cambodia. Mao once commented that a nuclear war would be good; it would clear out half the worlds population to start again. The fascination that Nazisim brings to people is the fact it happened in Germany, an industrial power. 

After the war Germany was split, one side more free than the other. Other countries had a similar setup. China and Hong Kongs relationship, North and South Korea. These real life examples would show us all the benefits of individual autonomy over submission of our free will to central authorities. West Germany would become one of the economic powerhouses in Europe once more, South Korea gave its people some of the best living conditions on the continent, despite the fact that the North started out richer and Hong Kong; well in the end China under Deng Xiaoping just copied its neighbour with similar polices. Taiwan, Singapore and notably Japan all blazed a trail in showing the power of unleashing individual autonomy. Japan's 1950's, 60's and 70's bee-like workers transformed one of the poorest nations (just after it had lost everything during WW2) to one of the wealthiest; a first world nation.  

Meanwhile cracks were beginning to show under countries that had opted for the submission to the state. The Soviet bloc would begin to unravel and its leaders gave its people more autonomy over their lives. China and India would move out of their shadows and during the later part of the 20th Century would begin to show their potential. Chile has now become one of the most prosperous nations in South America due to its belief in free markets. Pinochet was a nasty piece of work but this had nothing to do with the economic policies put in place. America, Canada, Britain and many others who had traditional left leaning parties would become pro-market. New Labour was created in the UK; their direction was copied from the Clinton administration who realised that people had spoken and they wanted the Government off their backs.

The trend will continue throughout the 21st Century. At the other end of the spectrum is the endgame for society, freedom for all individuals on the planet and I believe over the course of the 21st Century we will make tremendous progress towards such a goal. The 20th Century will be viewed as a tragic experiment with the state and the submission of our rights in the false belief that this was true freedom. Holocausts, wars; regressions in many nations of basic human freedoms. More people were killed through State inflicted conflicts than in any previous century in human history. Many countries regressed into insular Totalitarian states. Countries that had so much potential; Russia, India, China, Spain, Italy; even Germany. Whole continents such as South America, Africa and Asia all embraced centralised dictatorships. 

Many of developing countries have gained ground and will continue gaining ground on the West but it will be the West that continues to spearhead the charge towards freedom and an abolishion of the state. Its Citizens are still the freest. They are critical thinkers with little respect for their elders conventional views. Many of its brightest and dynamic don't follow; they lead. 

I can not explain exactly how we will transition or when the state will go in its entirety or geographically where this will occur; that's for the future to decide. My excitement lies with the fact that I know it will happen and its only a matter of time. The state will fall from a combination of factors. One they will over-stretch themselves. In doing this they will wittingly and unwittingly hand over more of societies functions to the free market. Second, people will create new de-centralised systems that can not be shut down through acts of third party aggression and will directly bypass Government controls. These systems will run in parallel to the established industries, covertly changing the public's perception that certain services must be provided by a Government. The Internet has proven itself to be a remarkable source of free-willed information. Dictators, notably in Egypt tried to shut it down only to find their economies have now become too dependant on the platform and had to turn it back on. China tries to ban information but projects such as Tor are allowing these people to exchange and read ideas that the state has tried to blackout. Bitcoin will revolutionise money and finance. It or its successor, will prove hard to contain. Many other decentralised systems are coming into play subverting the central authorities. The third reason; new Blood. Young people are great. They have no baggage, no pre-conceived ideas or ideologies that they have espoused for a lifetime. Instead they are open minded and receptive to new concepts with an inquisitive nature unlike older people who are comfortable with the reality they have always known. I was once new blood and during my twenties rejected all beliefs I held dear. My parents held conventional views, all my relatives had no background in social and political issues. I was the first on my mums side to go to University and many people I came across had no interests in such topics. I formed my views completely on my own and through inquisitiveness and sheer graft. When there is no one to show you the door, finding the right one can be hard and time consuming taking a lot of effort. My point is, if I can do it with my background anyone can. All the time its getting easier as more and more convert to realising that individuals have the right to their own destiny.

The mental shift I believe is already starting. Voter apathy, with cynical views towards politics as it seems to fail no matter who obtains power. People bad mouth all the mainstream political parties and are no longer dogmatically tied to a single party, instead select on the day which "handouts" they like best (one of the reasons the parties have all merged to a very common centre ground chasing the ever increasing floating voters). More people are embracing liberty and its principles of limited Government. People who are non-politicised are getting more sceptical of broken promises made by successive parties. 

History will view the 21st Century as a Golden Age in human prosperity and progress. There will be steps back, volatility, ups and downs; its all part of the ongoing struggle to distribute complete autonomy to the individual, to have complete control over their own life. I like many others look forward with excitement to what the future will bring. You should too.

Socialist Utopia

Another generation, another group of people who believe they can take us all to the promised land. A recent article written by Owen Jones, a left wing activist and author, titled "If socialists really did run the show, working people would benefit" displays the usual naivety and/or arrogance that has persisted with each successive generation of state planners who believe they can change the world for the good. Excepts taken from the article, accompanied with my commentary can be read below.

The taxpayer splashes out three times more subsidies on private train companies than they did on publicly owned British Rail.

History reads different. Steam power and Railways were not created by the state but by private initiative and capital. The whole railway network during the 19th Century was funded completely by private money, during which time steam power costs continually came down, allowing people to go on holiday to coastal resorts for the first time and enabling goods and services to be transported to traditionally remote locations at reduced costs. Britain then exported this knowledge to the world. The reason railways got in a mess was from state interference. During the two World Wars the network began to be progressively nationalised, initially for wartime needs, then for the 'Socialist Good'. Private railways began struggling during this period because the state began to subsidise the road network, meanwhile unfairly railways had to upkeep not only the trains but also the rail tracks. Auto-mobiles, in the form of buses and lorries had their infrastructure paid for by the state (a classic case of how destructive state subsidies/interference becomes) so had an unfair advantage. They only had to pay for the auto-mobiles, not the infrastructure. After the Second World War the UKs railway network, as part of mass nationalisation, was put in State hands for around 40 years during which time they became a mess and woefully mismanaged. If as Owen says they just need to be renationalised to fix their ills, then what did the state do for 40 years with the network? The state subsidises the railways because it feels its helping everyone, when in reality all it does is waste resources. Railways only exist due to Capitalism and free markets, so give it all back to its creator rather than the current hybrid state/market system and let prices correct years of Government mess.

Private landlords get away with charging extortionate rents, knowing that the state will pay billions subsidising them through housing benefit.

I'm not sure where to begin with this oxymoron. On the one hand private landlords charge too much rent, but on the other Owen admits that these artificial high prices have been created by the state? Simple, stop subsidising rents a flaw of Socialist policies, not free markets.

Wealthy individuals enjoy tax relief on their pensions worth billions.

So does every tax paying person in the country, which is why we are all told to save into pensions as its very tax effective. Not only do we get tax relief on our salary contributions but also on any earnings/dividends from the savings that are invested. Its not an 'elitist' perk.

Socialism for the rich is thriving while, for everybody else, it is capitalism red in tooth and claw.

I agree, Socialism always benefits the rich and ensures the poor suffer. Cuba, Soviet Russia or China, the party elites enjoyed beneficial health treatment, exotic foods and lavish lifestyles while the majority endured rationing and hardship. Its no different with our political system, just to less extremes. Factional reserve banking, Central Banking, patents, regulation, Government money production and so forth, all enrich the wealthy at the expense of the poor. All instigated by the state. Abolish the state, empower individuals, then the poorest in society will benefit the greatest.

If socialists really were running the show in Britain, they would be building a society run by, and in the interests of, working people. Our banks – propped by the British people – would be taken under genuine democratic control, forcing them to operate in the interests of society as a whole.

How many Statist leaders have said this line before? All of them end up impoverishing the people, taking away individual liberties and freedom, extinguishing any prosperity. A true free market HAS to operate in the interests of society. Organisations that don't become extinct.

Our booming wealthy elite would be forced to pay a fair share of tax (or, in some cases, any tax whatsoever).

How would this exactly happen. Is Owen and his 'apparatchiks' going to hold a gun to this so called 'wealthy elite' and force them to pay? Such people would simply flee along with their capital and talent to places where they wouldn't be persecuted in a wealth witch hunt. Meanwhile this would leave people who stayed in such a country in a poorer state as they would be deprived of such expertise and capital.

Owen, like many on the left, are misguided by the belief that they can generate wealth by simply taxing (taking the means of production, with no form of merit) people more. Owen attempts to make the higher tax argument here (go to 7 minutes, 20 seconds in), however as Andrew Neil points out, when top rate tax rates during the sixties were 98% the top 1% only contributed 5% of total taxation, while now with a top rate of 40%, 30% of income is generated by the top 1% of earners. As Andrew Neil correctly points out - this is Socialism, one of the reasons behind sluggish growth as compared with the sixties. We already tax the rich far too much (for the record I do not qualify for high tax rates, incase you belief I have a vested interest). Michael Moore and others conclude the same misinterpretations, when America had similar high tax rates but conveniently ignores that no one paid their taxes at this rate, or the brackets were so high that only small numbers qualified. People stop paying tax at a certain point and it just pushes wealth away.

After the disastrous failures of market economics, real socialists would be taking our utilities – such as the railways and rip-off energy companies – into social ownership: not old-style, statist nationalisation, but democratically run by workers and consumers.

Market Failures? The technology sector is run with no regulations, no state intervention, no subsidies. Yet it continues to drive down costs and improve quality. The biggest beneficiary's? The poorest among society. The Internet along with many of its high quality services are free for anyone to use. Computers can now be picked up for a couple of hundred pounds once the preserve of large Corporations and Governments, with people now even carrying computers in their pockets. People in third world countries even have access to such sophisticated capital goods. Large flatscreen TVs have become the norm, DVD players cost the same as a single DVD. People can connect with anyone in the globe, at their fingertips is billions of terabytes of information. All thanks to free markets, not elitist state planners.

Railways have been covered above, meanwhile our utility network was driven into the ground by Nationalisation and has only recently started to correct the previous state run ills. However contrary to how it looks utility companies are not run by the free market but state granted regional monopolies, one company for one geographic area. Prices are determined not by supply or demand but at the whim of regulators who determine 'fair' prices, preventing price rises in order to mobilise private capital investment which over the long term would bring down costs and increase supply (again benefiting the poorest in society). Even the Institute of Civil Engineers understand basic economics, supply and demand controlled by prices, reporting that the price of water should rise in order to ensure correct use of the resource for the long term and to increase infrastructure spending. Not rationing (hose pipe bans).

Nationalisation, sorry 'Social Ownership' (obviously Owen realises Nationalisation is a discredited phrase with the public so conjures up another alias), a dogma to arbitrarily align resources to workers and consumers under a 'democratic' system is fairy tale economics. A Socialist never understands we live under constant scarcity. In order to meet our infinite needs with limited productivity we need a system that channels these resources effectively. Free markets do this. Now Social Ownership is the same as any other centralised solution, it sows its seeds to its own demise. Presumably people could vote on if the price was right? So consumers would constantly say "I think the price should be lower". Meanwhile the workers would constantly say "I think I should be paid more". Under a free market increased purchasing power occurs spontaneously, but under Owens system, rationing and hardship would endure, resulting in lower living standards. We all want more for less, but we need a rational system that can deliver such desires.

They would bring down welfare spending, not by kicking people at the bottom, but by building social housing, introducing a living wage, and creating jobs.

If I was a statist I could create jobs. Get half the unemployed to dig some holes, then get the other half to fill them back in. Job done. We could alternatively just regress our capital structure. Why use tractors when we can plow fields by hand, consuming vast amounts of human labour. Creating jobs is easy, creating wealth producing jobs is hard and can only be done by entrepreneurship.

So why the current mess with unemployment? As with anything there are many contributing factors, however they all have their root in the state. Unemployment will always exist within a society as people opt to take breaks, or find themselves between jobs. However the persistent high levels of unemployment we see is a direct product of State arbitration. Governments have created a class of people, due to failed state education and a benefits culture, who are unemployable. Minimum wage laws makes it increasing hard for such people to find jobs as their productivity level is priced out of the market place (read here for a detailed discussion). Rigid labour laws prevent prospective employers from easily hiring people. Its no coincidence that Spain has some of the highest unemployment levels caused by some of the most backward labour laws in the Western world. The credit crunch, created by Government economic mismanagement has created a serious mis-allocation of economic resources, preventing employment lines from recovering. And social housing has been a disaster, effectively creating ghettos on both sides of the Atlantic. 

And they would be reversing the scandalous lack of rights that workers have in the workplace, which is what ensured that wages were declining for many before the crash had even happened.

We have too much workers rights in the workplace not too little! We want to make it easy for companies to fire people because it makes it easier for them to hire the unemployed. Its not in the interests for companies to fire people at will. Getting new labour is expensive, time consuming and you can end up with people who are not as effective as the original person you fired. If employees want to goof around and then wonder why they got fired well maybe they should have been fulfilling their employment contract. If the working conditions were too harsh then walk and get a job elsewhere. If you felt you were unfairly dismissed then the company that let you go won't stay in business long, and you would find it easy to get work elsewhere, as the competitors can take on these people with ease due to easy hiring laws.


Wages have risen in real terms as when I was a child a VCR and a computer was a luxury item. Now we watch TV on demand and all have access to multiple computers. All consumer goods supplied by free markets have become more accessible to the poorest in society.

There are more fallacies in the article, I have only highlighted a select few. The comments section also distorts facts just as bad. One of the comments claims that because China is run under a Communist party that somehow their growth can be attributed to Socialism. So I guess the millions who died under Mao were not victims of Socialism? The impoverishment only ended when Deng Xiaoping took over after Mao's death and as history quite clearly showed Deng embraced capitalism. He allowed foreign capital, expertise and entrepreneurship room to create prosperity. The Communist party is nothing but a legacy, the real engine of growth for the country now is capitalism. Millionaires  and Entrepreneurs are now celebrated in China, whilst in the past under Mao they were persecuted.

The whole article is history regurgitated, another generation of Socialists who believe they have the means and knowledge to deliver a fair, just and equal society for all. I share those ideals but I'm not naive or arrogant enough to believe that I and a few select people can deliver on such promises. Instead I believe that people should be given freedom to achieve these goals under their own free will. We don't need a third party to interfere with our lives, such as the state. Let people run their own affairs. The world will work under its own accord.

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.

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.

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.

China Hedge Part II

Earlier last year I wrote a post about the China Hedge and there's further activity as the video shows.

Click here to view Video.

Is Gold in a mania? Is this the end of the bubble? Or are the Chinese ahead of the game yet again? The clip mentioned that China has now become the largest Gold producer in the world, surpassing South Africa (which incidentally has been in decline for a while now). The Chinese are digging like crazy for the stuff, they have been for years as the Government knows the yellow stuff is the key to their economic well being during the next 10-20 years. We don't have a bubble, but the Central Banks and Governments will create one here. George Soros aptly called it the 'ultimate bubble' and I agree. When he said this many looked at his comments and concluded that this meant gold was already in a bubble, but I never drew that conclusion, he's a smart guy. As it transpired later Soros actually added gold to his fund. Funds all around the world are increasing their holdings. But we are way off the bubble top, years away. 

The fundamentals for the bull market just keep getting better and the authorities apostles, such as Paul Krugman, keep telling us Gold bugs what we want to hear. Apparently we aren't doing enough. Right? We've been here before Mr Krugman. You've been telling that gruff to Japan for 20 years now and what have they got? Huge debts and a basket case economy. Get those interest rates lower, increase spending and get more money into the pockets of people. I forgot that prosperity was that easy.

China has also become the largest Gold consumer, which is another huge shift in the world. Ten years ago their citizens couldn't buy it, now the Government actively encourages purchases. You can't eat gold? You can't use gold? But you can't use or eat worthless paper tickets, promises of payment, that we call money. Bonds are a disaster. Housing is going to be a terrible way to hedge going forward and stocks, dear me, companies have that much state intervention Karl Marx would be proud. Only Cash is going to do worse than the list above. However Gold is outside the system. It's no ones liability. However stupid, despotic or mad our leaders become, it won't affect gold. 

We all await the China crash. Marc Faber seems to suggest sometime in the next 9-12 months. More market commentators have noticed. Hugh Hendry, Jim Chanos, Mish Shedlock with many of the underground economics forums also beginning to discuss the events that are happening. Evey Credit boom ends, and there is never the 'soft landing' that is always told, it always gets messy. However when China does run into difficulties don't think this is it. It will just be a setback, many of the above also agree with that concept. Unlike the West, China is starting from a very low industrial base, meaning there is still huge potential to grow. She will just grow her way out of problems eventually. Remember the US had huge issues as it rose to become the superpower. The Great Depression, the panic of 1907 and many financial storms throughout the nineteenth century. She overcame them all as it was from a lower industrial base and she borrowed money to produce not consume, similar to China. Of course when China stumbles what will happen to Australia in the short term? Many Asian nations - Japan, Malaysia, Vietnam? African nations such as oil rich Angola or Nigeria? South America, with Chile and Venezuela? Not only are the Chinese buying gold but they are forming huge trade links around the world and also practice a form of check book diplomacy. They use their monetary reserves and labour to build infrastructure for such countries to access the natural resources they need and buy some friends while they are at it. 

The Eurozone, Chinas biggest importer won't be doing the country any good with what's happening there. Previously I contemplated that Euro members could leave as they can't adapt to the Germans mentality. However I now think its the Germans, the strong rather than the weak, who will leave! I mean the recent bailout is a complete disaster - no one has the funds to pay for it. This will just further undermine the Euro in the long run. I think it may now be more likely that Germany will leave as there are more mutterings from their public that they've already had enough and want a return to the sound Mark. If that happens you can kiss the Euro goodbye. The Germans are the only ones disciplined enough to run a relatively sound currency (perhaps Finland, Holland and France also). The Euro needs the Germans. Again all this just puts further gloss to the gold bull run. You can't even turn to the Germans for sound money any more.

We are witnessing the breakdown of the welfare experiment since Nazi and Japanese expansion created the Western promises 'a society fit for their war hero's'. The social ratchet kept tightening, with no politician loosening the grip. Just like the collapse of communism it will be the free market that defeats statist policies. It always does. While we transition there's going to be some pain along the way. Chinas Hedge continues....

It's not a Greek Crisis

"There is no money. There is no one else’s pocket left to pick. You can’t borrow anymore, you can’t print anymore, and you can’t steal anymore from anyone else....You object to the bond market, but the bond market is just the voice of reality calling. It’s telling you that 2 plus 2 is still 4, no matter what your union bosses would have you believe. Your bosses tell you that ‘the people’ didn’t spend the money, but it’s not true. That’s exactly who has wasted the money, and now the bill is coming due....You’ve thrown your bottles, burned your flags, waved your signs and had your fun. Now it’s time for you to learn the lessons of history and abandon this idiocy before we finally lose our patience with you. Grow up – and get back to work."
Daily rant directed towards the recent Greek Protesters

It may be all Greek to you, but the effects of the bond bubble is here for all to view (already a wiki page has formed). As soon as the so called economic professors proclaimed the financial crisis to be over (the very same individuals who said 'What housing bubble?') another one has begun to erupt and its only just begun. The location or nation doesn't matter, the important point is no politician, government official or prominent academic has a clue what to do next. A 'bailout' is required to avoid financial contagion, horror stories of Lehman are retold. It doesn't matter that no one in the West can cope with their own domestic liabilities never mind take on others, instead a short term fix is proposed as the solution. In reality it can only exacerbate the problems down the line.

Euro bashing has taken center stage. All the Euro sceptics have suddenly come out of the closet. They never knew in the first place why the UK shouldn't join the Euro but recent events have given them the confidence to speak out once more. Is the Euro doomed? Wrong question. All fiat money is doomed. Despite what has been said regarding the Euro, the Germans hold the key to it. Their Deutschtum regarding sound monetary policy does not bode well for future bailouts towards the more irresponsible European nations. Germany should have got rid of Greece and let them fail. But politicians prefer short term fixes rather than the tough long term ones - they won't be around when they break again. Our old PM Tony Blair can attest to that.

Many falsely believe that Greece is the Canary down the coal mine. Put it this way, did we expect better of the Southern Mediterranean nations? We could list the historical facts, the Inquisition, Catholicism focus on the collective rather than the individual, corruption, even the hot weather but that's what history teaches you - what to expect. Greece isn't the canary down the coal mine, the drachma when it existed was very weak, and the Greeks vigilance at the printing press had a terrible history. Britain, as I have mentioned, is the canary down the coal mine from what I can gather. It is a member of the monetary core - nations such as Germany, Switzerland, the Scandinavian countries, the US - these countries have historically had relative sound money (a few periods of exception can be noted) and have respected individual liberties as early leaders of free markets. When the crisis spreads to the core then we will see real problems. Who will bailout the last resort? There is only one tool. A printing press, others such as China wait to see what destruction we can inflict on ourselves. They gave us cheep goods, gave us their savings to buy more of their goods and saturated us with consumption based debt as we have already struggled to grow our economies over the past decade. If you can't beat them militarily then use economics as a weapon, as Sun Tzu said, '...one hundred victories in one hundred battles is not the most skillful. Seizing the enemy without fighting is the most skillful'.

Portugal and Spain are showing signs of stress also, how long it takes to spread northwards remains to be seen. Eastwards Dr Faber says bubbles are forming in China, nothing I haven't observed but good to hear from the doom prophet whose practically called every bearish situation before it happened for the past 25 years. Where can an investor turn in times like these? The answer should now become obvious to anyone who is following such events closely.

Tonight we have the election here in the UK. Will we have a hung parliament? I hope it lives up to its promises as the most exciting election in a generation. The last two were very boring for a neutral like me, I was too young for the elections previous to these. On that note its time to go watch what Government will 'solve' our domestic crisis. Unfortunately as the quote hints at the start, no politician or bailout offers a cure. Only ourselves as individuals can put things right. Politicians will just keep putting our problems back for the next guy to solve.

Central Banks are changing their Tune

This week the IMF began sales of their Gold reserves. I have mentioned previously that the IMF have been looking to do this, however how wrong was I regarding what may happen to Golds price! Two hundred tons came onto the market and rather than the price possibly dropping, the price instead soared. The Central Bank of India gobbled it all up in a single transaction. Many articles have already been published in relation to the event, and with good reason. The shiny stuff has risen in price for the past decade, despite european central banks selling huge quantities, the most infamous being my countries sale of half our reserves known appropriately as 'Browns Bottom'. The worlds central banks are suddenly looking at Gold from a different viewpoint. The move by India shocked everyone. The next sale could see multiple buyers apply, China, Russia, Brazil and other emerging nations will be feeling anxious - "How do we get out of our paper reserves"? One day there will be a rush for the exits, a dash for the ultimate form of cash. Meanwhile Geithner and Obama parade around the globe, reassuring foreigners of their strong dollar policy, their words contradicting their actions. A sound currency does not exist with zero percent interest rates, deficits as far as the eye can see along with printing more of the stuff. You don't need to be an 'A' grade economist to see the anomaly.

It's important to remember that you can't grow gold. Gold can't be produced in a factory, or planted as a tree. There has always been a finite supply throughout history and when there's no where for investors to turn, they head to safety, historically that has been precious metals. The limited supply can be seen with the recent "Sell your Gold" adverts, dealers buying the public's jewelry, melting it down, and selling it to institutional investors. While the recession continues to force the public to liquidate their hard assets for paper cash, the paper cash investors are diversifying into such assets. One only has to look at the events last autumn, bullion dealers ran out of stock which caused the adverts you now see. Hoarding along with limited ground supply has led the dealers to impell the public to sell.

One thing you have to understand is that China is sitting on 2 Trillion Dollars of paper promises. They currently have around 1,000 tonnes of gold. $2 Trillion could buy them an awful lot more, if they can find willing sellers. The recent IMF sale was $6.7 Billion for two hundred tonnes, I'm sure you can do the maths to see China's buying potential. Compared with nations in the West, many other emerging economies still have woefully imbalanced Gold reserves as the table details (original table taken from following article).



There are many countries who have plenty more cash to convert into Gold, histories ultimate form of payment. Germany, Italy and France hold approximately 70% of their nations reserves in Gold. Compared to China, India and Russia with 1.9%, 6.2% and 4.3% respectively, if I was a betting man I would say the latters percentages will inevitably increase.

For too long the West had a monopoly of talent and capital, corrupt regimes around the world ensured this. Battles between the far left and right in South America, Asia's experiment with Communism, Eastern Europe held back by the Iron Curtain, Middle Eastern states squandering the oil bonanza of the seventies and of course Africa's various despotic rulers. For too long during the 20th Century statism looked like the solution to peoples problems, when in fact it was the cause. Many talented individuals migrated to the West in search of a better life for their families. The collapse of Communism along with the revolution in telecommunications saw to it that many emerging nations began to realise their potential. Why emigrate to the West when they now have the same intellectually challenging jobs at home? Many Western countries still have one trump card - longevity in respect to human rights. No matter how bad my government messes up I always know I will be able to say what I want. I always know that the right path will eventually be trodden. I always know that Britain was the first nation to overthrow a monarchy on the continent during its Civil war, thus beginning the process towards the present inherently stable democratic system that has endured for centuries. The above may not seem much, but its amazing how we can all take this for granted. It won't stop the shift of power from West to East. Gold, it seems, is also moving in the same direction.

The 'China Hedge' and Western Zombies

Earlier this week the Chinese Government did something that Governments don't usually do. State television began promoting Gold and Silver as a good investment.



So why is the Chinese Government telling its people to buy Precious Metals? Of course I have previously mentioned the Chinese Government increasing their own holding of gold but now it is telling its citizens to follow the same strategy. To me it would seem their leaders must realise that the economy is in a bubble and whatever they try and do, China is heading for a hard landing. The trick with governing people is to try and provide the illusion of prosperity. Its what the West did during the housing bubble. Despite average workers incomes stagnating, people were content as their home was rising in value, giving them a false sense of wealth. People didn't mind that NHS waiting lists got worse, Governments role in the economy expanded along with deficits so long as their homes kept appreciating. When that disappeared, then people became restless. Recently with the 'green shoots' (read another dose of inflation from the government) people again believe how good it is that their houses will hopefully hold or increase in value and we can return to the old days of easy living. The problem comes when people realise the green shoots were in fact weeds, and that the asset prices will fall back - then we go back to unrest.

The Chinese Government aware of this dilemma, seem to be trying to hedge their citizens from the global depression. Their exports continue collapsing, millions of jobs are being lost, the Baltic shipping index is once more on the slide similar to 2008 before the financial carnage occurred. To cover their citizens against this and falling stocks and real estate they are encouraging people to buy precious metals. As recent as 7 years ago citizens were banned from owning such assets. This illustrates how radical the policy is. What does this mean for the price of such assets? I do not know. All I know is that the Chinese Government, again, seem to have studied their history and see where we in the West are now leading the whole world. China has grown phenomenally in the past 30 years, but its still America, Europe and Japan who have the most influential economies. It seems that we wish to create a new set of zombie institutions just like Japan did to try and maintain our illusion of past 'prosperity'.

Western Zombie Banks

"At the moment the investment slump is being compensated by public spending. As long as global growth is supported by public help, we cannot talk of sustainable growth"
Yves Mersch, ECB Council Member

Whenever I mention to people that what we are doing is creating Zombie Banks that will stagnate the economy for years just like Japan I am greeted with exactly the same comments before the housing bubble burst. "It's different this time", "We are not like Japan", "It won't happen here". Well it will happen and as the years go on it will become more evident to everyone.





We haven't learnt anything from the events last year. Bankers are getting their bonuses once more. Banks have merged creating even larger "too big to fail" institutions with the Government guaranteeing all of them. They will use Lehman from now on to scare people, to legitimise further government involvement. Politicians don't dare bring up any previous discussions regarding reforms as they all try to maintain this illusion of prosperity but it won't work. Earlier posts back before Lehman collapsed that I wrote had some hopeful comments, on what needed to be done - saving, the abandonment of wasteful consumption, independent thinking. However I thought we would try and prop up everything, repeating the same mistakes of history with everyone tricked into believing the governments 'solution'. We should have made sure there were more Lehman's. Its just finance. People would have rebuilt their lives. We would still would have all our tools, skills and infrastructure.

So how long will China pursue Gold?

As I have previously mentioned China are acquiring gold to try and build a reserve currency contender against the US Dollar. I have read many articles on how the USD is going to collapse or be replaced by the Euro or some other currency. But as I've said before where is the alternative? The Euro has too many soft nations such as Spain, Italy and Greece. If it was just the sounder economies such as Switzerland, Germany, France, Norway then maybe there would be a sounder alternative. The Chinese RMB is pegged and that's before we come onto the smaller size of the economy compared to the US. I can not see the government letting the RMB float freely while the current crisis is present, they will keep it under control not risking further dislocation that could ensue by allowing it trade in the markets. The Japanese economy has gone nowhere for two decades and despite what people may say that they are due a boom I can't see it happening. The Government has to walk the right path first and I'm yet to see it.

If China did wish to challenge the USD as an alternative world reserve currency then the only way I can see other nations taking up the offer would be to peg it to Gold. The Chinese could then say "sure you can have your paper dollars backed up by American Governments lies as they continue to devalue them, or you can use our currency, fully convertible into Gold". Whoever holds the reserve currency status has a huge advantage in that they can export their inflation to others just like the US has been doing for decades. China and Russia may discuss alternative world currencies but they would both secretly prefer their own nations currency as the reserve standard. In order for China to do this they still have to accumulate a lot of gold. The 1,000 tonnes they already have would not be enough. China still has a lot more to accumulate, just as the gold bull market still has a lot further to go.

What the Autumn may Bring ...

History has a habit of repeating itself. Markets also, follow a similar pattern as history can show. As Summer draws to close, as we enter Autumn, I feel we are in for another action packed time, similar to the close of 2008. Optimism is in the air all around with a complete turnaround of sentiment. When the majority are optimistic, its best to go against the tide and September and October are historically torrid times for the markets. There is evidence all around the globe that imbalances still exist - many worsening as time passes. China is in a rampant bubble driven by the Communist party. Many Eastern European nations are close to currency crisis, exposing many Western European countries who have lent them money. Sterling continues to worsen, as the UK leads the developed world in printing money and debauching the currency. Liquidation is put on hold, as governments believe they can avoid the inevitable. There have already been ominous signs for this month, with the classic August stock market volatility. Central Banks are planning their next moves, in the US there have been rumors regarding a second stimulus package as the first one runs out.

If we take a look at the VIX (the volatility index) it has been moving downwards since the events last October. Notice how quick it can move upwards as last year shows.


There was always going to be a market rally. Nothing ever moves straight up, or straight down. There are always periods of consolidation. If we look at Sterling, it has rallied quite substantially since its dramatic decline last year. Does this mean it has reached a low? I'm afraid not, all the fundamentals point for it to resume its bear market run, and if I was a trader I'd be looking to put shorts on Sterling as the next few months should see a deterioration once more. Sterling looks once again a basket case currency as it did during the sixties and seventies with a new generation that is fooled with the same rhetoric past politicians used to say to justify the devaluations.

30-40 years ago the politicians always justified the devaluations. We need to buy time, it will make our exports more competitive, we need to 'invest' to keep jobs and so forth. Roll forward 30 years and the same fallacies are being told. The idea that a devalued currency can bring prosperity is sheer madness, if it was that easy then no one would have to innovate or increase productivity. Over the long term this policy never works. You need a strong currency and a strong government to put the breaks on and say 'Ok, we tried to inflate, it didn't work, therefore we will stop the printing'. As painful as this would be it works. People adjust, they become more competitive, make better products, start investing. This is how you become wealthy and give your exports the edge. This is what Japan and West Germany did.

After the Second World War both these nations had worthless currencies. War torn, people had resorted to bartering rather then use government money, they had no currency reserves and their people were living in poverty. Nations usually have to get in this state before politicians get a spine and change their ways and that's what happened. Germany abandoned the flawed Reichmark and introduced the Deutsche Mark with a new emphasis on maintaining a sound currency, and so began Wirtschaftswunder, the great Germany economic miracle. Britain meanwhile became the sick man of Europe and was synonymous with the term 'Brain Drain', despite getting more American Aid than the Germans from the Marshall Plan. Germans on the other hand enjoyed a booming economy, one that had low inflation during the stagflationary seventies.

Japan also took a similar route. Their goal was to get Western Currency, and the only way they knew how to do that was to sell quality products that Westerners wanted to buy, and in return they got their pieces on paper. Did they debase the Yen to achieve this? They did the exact opposite and they created quality products. Westerners used to joke about Japanese products (similar to what they say about Chinese ones now as China tries to emulate Japan) but what do people think of when they see Sony, Toyota or Seiko now? They did this while the Yen appreciated, innovating, increasing productivity and smashing the Americans once dominance of export markets during the 1950's and 1960's. The only reason Nissan or other such companies placed their factories here in the UK is for shipping costs and the 'enlightened' tariffs governments have imposed to 'save' jobs. Even if the Chinese or whoever could do it cheaper.

Of course Japan and Germany are different entities now. Their first and second generations built their wealth and generally as the generations move on it gets wasted. They aren't the countries they used to be. Nations such as China are where Japan were back in the 1960's, a generation who still remember Communist hardship, whose parents still remember the mass poverty and killings. Following a similar model they had no currency reserves and now have amassed $2 Trillion Dollars, and are still amassing them. They have high savings rates like Japan once had and are becoming a huge creditor nation. All of this takes huge personal sacrifice. Sacrifice many current western generations are not willing to make.

So will anyone take similar action as the above for the UK? I don't believe so. Things haven't got that desperate yet. They will keep debasing telling the public the reasons above, a noose will slowly tighten around the government. Spending out of control, exports unable to pay for imports, international investors dumping the currency, tax increases on businesses driving out talent, with the process going full circle. Of course the markets will force their hand eventually. We are a way off yet, but I feel this is what it will take. A real crisis. We should see currency controls at some point in the future as the government attempts to bolster Sterling. They may even start with limiting the amount of foreign money you can take abroad.

People in the UK, I feel, are putting too much trust in David Cameron and the Conservatives, that they will win the election next year and all will be fine, however I personally think the trust is misplaced. Tory Party members have recently attacked the NHS and David Cameron has shown what he feels. He wants the NHS and is willing to spend more money on it. I don't think he has the conviction to scale back government significantly and even if he did the damage is already too bad. Mr Cameron seems to want to mimic Labour as close as he can and won't want to upset the public too much. Even if he was like Thatcher, back then the deficit wasn't as bad, we had oil and gas, and we weren't monetising our debt on the scale we are now. Thatcher would recoil in what needs to be done under our current circumstances.

In a nutshell the world still has plenty more deleveraging, which means Governments will be looking to carry on with printing more money. The UK has continued with QE and for some reason this shocked the markets recently, but it shouldn't have shocked any regular readers to this blog. It will keep on going, £200B, £300B and so on. I don't know how much but I do know there is no way they will sell it all back to the market like many believe. Not when the nation is running deficits for the next decade at least. Now the path has been embarked upon it becomes very hard to stop, and as our politicians were all too weak to take the pain from the credit crunch there is no way they will stop the monetising of government debt. You see people still don't understand and tell themselves "Well we will just wait a bit until the credit crunch passes then we will sort out this or that". It doesn't work like that. The easiest path would have been to take the pain fully as soon as the credit crunch hit. Once you postpone it, you make it worse and then politicians keep saying we will wait until this next crisis passes etc. Then the markets force their hand, and then a nation faces real hardship with no alternatives left.

In times like this there is only one asset for amateur investors - Gold. It reveals all the lies the government and media tell us. Its price tells you what is really happening. Recently the asset has been mentioned in the press, with commentators talking about it, however they still don't understand its value. They ask the wrong questions such as "Why would you place value in Gold?", rather than "Why do you place value in Sterling?". Ignorance and historic naivety, its amazing how well we have been conditioned away from Gold and Silver, free market money. Over a hundred years ago our ancestors would have gasped in horror at the financial system we live in. Four Pounds used to buy an ounce of Gold back then, now its more like 570. Gold may have made the news but what do commentators say when they mention it? Should people sell at these high prices. People are interviewed selling the stuff. When did you ever hear these people call a bubble, and now they seem to think Gold is in one. It will be in a bubble when they are all telling people to buy the stuff, its a safe investment, supply and demand and all that jazz. There's a long way to go until that moment happens.

Gold also tells you the truth of real prices. While people were hysterical regarding house prices, did they realise what was actually happening to the true price? Of course in Sterling prices shot up 200-300% but what about another currency, for example Gold, true historic value. In Gold house prices were stagnant as Gold climbed a similar amount during the same period against Sterling. You could have saved yourself all the hassle of estate agents, mortgage brokers, Tenants, property maintenance and so on, and bought gold in a few minutes online and sat back. Sterling lost its value which gave the illusion that houses were worth more. In other words we never had a housing boom. We had good old currency debasement, mass inflation. Its the same with Oil and so forth. Oil jumped ahead last summer due to demand being larger than supply, but its now still up around 300% since its low 10 years ago in say dollars, but in Gold it hasn't moved.

The governments in recent months have allowed the banks to use false accounting laws. If the market did this the company executives would be sent to jail, but when the Government changes the rules its fine, just like before the S&L crisis blew up. Central Banks have all sorts of worthless paper on their balance sheets. They are monetising the deficits. The banks they have nationalised are trying to lend further money to the economy. Easy money, ruins society. It always has throughout time. The decline of the Roman Empire as they debased their Gold Coins. The Spanish Empire as the Conquistadors drove out the Islamic Moors from what is now Andalucia and continued their conquests by discovering the Gold laden lands of South America, again easy money same effects. Latin American nations throughout the 20th Century had government after government who pursued similar mistakes, despite places like Argentina being richer than the US 100 years ago. Italy and Britain during the sixties and seventies played with easy money and look where it got them during the seventies devaluation sagas. What remained of British Industry collapsed, as companies thought they could keep selling on price, rather than quality and innovation, but eventually costs go up also as companies become sloppy relying on further devaluations to bail them out.

Politicians are too tempted to play the easy money card as the great deflationary juggernaut, China, exports low cost products, recycling their money back to the West to encourage further easy money policies here. China have studied their history well and know full well how destructive easy money is to society, and realise what they are doing to the West.

Unfortunately when Fiat currency exists it is a lot harder for the Government to face the pain and do what is right for the long term. Easy money means easy living for the short term, but it just impoverishes society in the long run and puts a greater burden on future generations. We should have another scramble for cash over the coming months, but I suspect this will be the last scramble for the fiat currencies. After that only true money that has a historic track record such as Gold will be desired. What will the Autumn bring ... we will all have to wait and see.