Healthcare has to be Earned

"Always have a healthy disregard for the status quo"

Myself

Healthcare. Should it be a right or should it be earned? Ask 99% of people and they will probably state it is a right for everyone within a developed nation. I'm the one percent. I believe healthcare needs to be earned. The crisis in healthcare within developed countries has not come about from the free market or a defunct laissez faire capitalist system. It has come about from years of Big Government. There is no crisis in the software and computer industry where costs are spiralling out of control with service quality in decline. The freedom of the human spirit and mind is the most powerful weapon to combat poverty. Abundant healthcare needs to be earned.

Altruism is the status quo with Big Government as the institution that forcefully implements such principles. I used to be a believer in the "mixed economy", the current system that we are taught at school, the "right" moral system that we should abide by. Then I started asking questions and the more questions I asked the more contradictions I would unravel whereby altruism is supposedly the only way a civilised society can be run. Healthcare was one such mystery. Why do markets improve services and bring down costs over time, yet I saw the so called "free market" healthcare system in the United States do the complete opposite. Many accept such a view; that the Healthcare system in the United States is free from Government control and that Healthcare needs to provided by Government. I didn't and kept asking questions; questions that need answering are hard; accepting conventional wisdom is easy. Healthcare, just like food, needs to be earned.

Food is a similar commodity to Healthcare in that it is vital for human existence.  In the present time-frame we find ourselves in we have an abundance of food. We can all comfortably eat ourselves to an early grave should we wish. It wasn't always like this. Back in the 19th century food bills consumed a large proportion of a workers pay. In the infamous 1848 food shortages that ran throughout Europe, many including Karl Marx, concluded that Capitalist systems had run its course. Food was a right. Many Western countries thankfully did not implement collectivisation, the policy to trick people into believing abundant food can be provided by a coercive state. Instead food was to be earned. People set to work improving agricultural methods, respecting private property and allowing entrepreneurs the freedom with their minds and resources to enable abundance. Thanks to such policies and people I now enjoy a nutritional diet that a King would once have dreamed of. However in countries that believed food to be a right the complete opposite happened. Under Tsarist Russia, a backward political system, the country exported grain to Europe. Under Collectivisation, food, rather than to earned, was deemed to be a right for all of society. In Lenins famous "bread, land and peace" speech the stage was set for the inevitable food shortages that would occur. Russia could put a man in space but they couldn't provide basic staples for the majority of the population. During the 1960's Khrushchev sold of a third of Russia's Gold reserves in order to avoid mass starvation. Zimbabwe, once the bread basked or Africa, under collectivisation became a barren land of pestilence and starvation for its people. Food, it was claimed in such countries, to be right.

Do we give a people a right to a car? To a phone? To a computer? To a 40" flat screen TV? When Henry Ford set out to make a car that was affordable for the common man many in the industry said it couldn't be done and he was mad for even trying. Well we should all be thankful for the people who have a healthy disregard for the status quo. Once an object of the elite Henry Ford revolutionised the way cars were made making them affordable. Re-known for his obsession to detail he had no interest in being a CEO in the office with elaborate job titles, instead he was constantly on the assembly line looking to make things more efficient. Innovation such as the moving assembly line and asking questions of why does that man have to turn for that component it should just be there, were the hallmarks of an wealth maker. He became rich but he made us all far richer in the process and we didn't have to lift a finger. Three Quarters of Americans who are classed as living in poverty now own a car thanks to people like Henry Ford. If the Government had mandated a car is a right that would not be the case - it would still be an object for the wealthy elite. Instead a car had to be earned with hours of dedication and freedom for individuals to pursue their own selfish interests.

If the Government had introduced a policy that mobile phones during the late 1980's should be a right for everyone what would have happened? One can be sure that the innovation that occurred over the next 25 years would not have happened. Back in the 1980's mobile phones were expensive. It would have required a subsidy program, regulation and government enforcement in the industry in order to provide a phone to everyone. Freedom for the wealth creators to pursue their own interests would have been blocked as the government would have artificially supplied everyone with a phone. Thankfully we had to earn that right. Now anyone can have a phone; the old ones go free. Phones are now so sophisticated its incredible. Car navigation, language translation, bar-code scanners, sound systems, all round entertainment wherever we go.

Why is all this important for healthcare? Because I believe healthcare is no more a right than any of the above. It needs to be earned and if it is earned then healthcare becomes abundant for all including the poorest in society. So the first thing to tackle is Americas so called "Free market" healthcare system. 

Around 50% of Healthcare payments in America is spent by government due to regulations, Medicare and Medicaid; I should just stop there as even an ardent socialist will realise that this is far from a free market. Then there is licencing. This is a process to ensure a limited supply of labour is supplied to a particular field in order to drive labour rates up for doctors. That's what creates artificial supply in doctors or a specialist. In the 19th Century Doctors didn't like the fact that anyone could enter medicine so lobbied government to restrict entry - under the guise of "helping" people. In reality all it did was to skew market forces and monopolise a profession. A monopoly that also controls how medicine should be practised stifling creative thinking. In Software this doesn't happen. Anyone can code you don't even need a degree despite the fact many computer systems are critical to all our lives and complex. Its based on reputation and merit; not monopoly organisations that can control entry. People quit university and never even qualify with formal education. Bill Gates didn't even do his degree in computers yet is one of the most renown names in the field and we all trust him with the software his company creates (and by all accounts he is a very good programmer).

Regulations in Americas healthcare system is a maze. Insurance policies in America include no direct correlation on lifestyle habits, age or previous history - the government bans it. Catastrophic healthcare is not an option, instead people claim insurance for routine inspections. Its like getting insurance for your car and the government mandating that it must include an oil change, wax and clean every month and minor wear and tear on parts such as tyres. There's a reason we just insure for major car damage and pay cash for tyres and optional extras. Its a more efficient way of people looking after property. If tyres were included then there would be no incentive for people to ensure they did not "burn rubber" or to maintain their tracking which rip through tyres. Insurance would rise as a consequence quite considerably. By regulating the government stifles start-ups that cease to even exist. Just getting a new drug approved means only large companies can create such innovations with all the paperwork involved no young start-up can do this. If there are huge costs and regulations as to what can be done then such start-ups will never exist. Free markets encourage trial and error. American healthcare persecutes such behaviour. 

Insurance in some cases has to cover for example massage therapy which many individuals would see as a non essential item. There's a whole host of treatments that "must" be included in a healthcare policy. Insurance companies can not offer insurance between states due to Government regulations. Patent laws enforced by Governments drive the price of drugs up. The West in my opinion are unwittingly pursuing genocide in continents like Africa due to such restrictions (patents are another issue for discussion, immoral and against free trade). As the Government is the largest single payer in America for healthcare they have no price conscious. There are flat fees for patient treatment resulting in no innovation to drive down costs. Why do hospitals need to drive down costs when the price paid will always be the same. Employers get tax breaks for offering employers insurance as part of their employment. Its like getting your car insurance paid by your company, the price concious consumer is removed. There should be no tax break and consumers should choose as required.

As the Government pays in many medical cases people have no incentive to look after their health. When healthcare is a right and someone else is paying, why bother. New technology should be making healthcare more inexpensive and plentiful instead the complete opposite is seen. If we have a MRI scanner shouldn't such equipment diagnose people quicker and require little human intervention. Yet costs continue to go up, despite the fact that the electronics field for example where equipment becomes more sophisticated and yet the costs to the end consumer continue to plummet.

With all the Regulation this stifles entrepreneurial doctors. If the Government has fixed prices and fixed rules on what they can do then how can your doctor challenge the status quo? How can they as experts use their judgement to make things more efficient? Many entrepreneurs in software were derided as nuts and went against what was convention in their selective field. Steve Jobs, Bill Gates, Larry Page and Sergy Brin. As IBM once said to Bill Gates "All the money will be in the computers; not the software", or when Steve Jobs and Wozniak created Apple, computer executives used to quip "What would an ordinary person want with a computer?". When the google co-founders decided that they would index the Internet that was growing at an exponential rate and offer the service for free many said, "How will this be sustainable and possible?". Healthcare in its current inception does not have the conditions in place for a Steve Jobs doctor. Entrepreneurs when allowed full freedom drag humanity towards prosperity and always start as a minority having a healthy disregard for the status quo.

Healthcare has been heavily Government regulated throughout he 20th Century so it is impossible to say what healthcare would look like under a free market. However one interesting area is Laser Eye surgery which has had very little regulation and government involvement. Once the preserve of the rich it has now become affordable for the common person. Prices have fallen and the quality has improved. This is despite the ever increasing sophistication in tooling. They can even do it with robotics and computing with no human intervention. So when economists such as Paul Krugman claim rising Healthcare costs are the result of every increasing technology think again. When a free market is at work; this brings down the costs. They don't go up.

Since the "Peoples Revolution" in Cuba, Castro and his followers declared healthcare was a right for all. Healthcare would be provided by the state for "free". Cubans now have this so called utopian system of free healthcare whereby people can no longer even obtain paracetamol that cost pennies here in the West. Many cases are reported of patients being neglected with woeful practices. Ambulances are in the form of people using wheel barrows to take their loved ones to hospital due to shortages of transportation. Some of the photos can be accessed online as many Cubans have had enough of Western tourists telling them of their utopian healthcare systems. The locals know the reality. The services they get aren't the special tourist built facilities Michael Moore viewed. His video actually worried Cuban officials so much they believed there would be uproar with people demanding such facilities for themselves. Cuba is so poor they export their Doctors to other nations, not from some altruist principle but to line the pockets of Castro and his cronies, another way the administration tries to gain hard currency. Contracting their principles like all good Socialists; they make a profit.

In the UK we have the National Health Service where healthcare is a right. Instead of insurance companies refusing treatments its the Government. Private Insurance will see you in days; with the NHS its months or years. As we have all the same market limitations as the United States we again have the problems of rising costs and declining customer service. There's many defences made for the NHS. Some say it was deprived from funding during Thatcherism, despite the fact Thatcher spent more on Health in real terms than Labour leaders such as Harold Wilson (rising 32% in real terms during the 1980's). More money is always pushed as a solution but it never works and never will (healthcare continues to rise as a percentage of GDP). Economic freedom is required. Scaremongering keeps everyone in line with current mainstream wisdom; fear tactics tell people they would be far worse under a free market, citing the so called free market healthcare system in the United States. The NHS is propped up by the free market due to the productive wealth of other freer areas of the economy that pay taxes and create long term prosperity which helps pay for the ever rising costs. 

When I was a teenager during the 1990's if someone had said to me one day that I will have access to unlimited email, have endless Video and Music content for free, be able to upload an unlimited number of photos and have a 42" screen Television I would have said what planet are you on. Humanity earned these services we didn't have someone say we needed them they just came about through hard work and the freedom given to free market capitalism. People pursing their own interests is the most powerful tool to solve poverty. It used to be when you couldn't have three square meals a day you were poor. Then when that became implausible they said if you didn't have a Television you were poor. Then a computer. Then a phone. Healthcare needs to take a look at history. If you want to solve the current lack of quality healthcare for all then don't state it as a human right or need. Healthcare needs to be earned and with it will come abundance. The unfettered free market can only solve such such a difficult issue.

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 Social Question

"We need some more Lehmans so we can get out of this. Over the past 20 years Messrs Greenspan and Bernanke introduced crony capitalism to the West which is leading to a lost decade[s]. Market fundamentals are that failures should collapse and be replaced by creative new forces rather than being propped up as zombies... Marx is singing in his grave there in London as the US government now controls the auto, mortgage, insurance, banking, et al industries and he has not fired a shot. Letting Lehman fail was perhaps the only thing governments have done right during this whole drama."
Jim Rogers, Chairman Rogers Holdings (recent comments)

"I take advantage of one of the beautiful flaws of capitalism which is that the capitalist will sell you the rope to hang himself if he can make a buck. So they only think about money - they do not really care what I believe, which is upsetting on some levels."
Michael Moore, when asked about how he gained the funding for his new film

"They [financial crises] are all different, but they have one fundamental source. That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue...The bankers knew that they were involved in an under-pricing of risk and that at some point a correction would be made"
Alan Greenspan, recent comments regarding the financial crisis

Questions of equality have been asked for hundreds, even thousands of years, however it was not until the Industrial Revolution that the topic became a major talking issue for many intellectuals. The emergence of competitive markets did not create equality, the opposite was observed as income gaps grew and have continued to grow as time passed. Two forms of egalitarian views emerged, the Jacobin violent revolution in which people would be educated to accept the new system imposed on them, or a gradual evolutionary process where the people would demand Socialism. In short centralised totalitarianism or through democracy. The twentieth century will be seen as a great experiment with statism, country after country have attempted to plan economies through central authorities all of which have failed. The fundamental question is not how can we make societies more equal which is mistaken as the ultimate goal, but how can we raise everyone's living standards.

The quotes given above are from a range of individuals, each with a different viewpoint on the recent events and social system we live in. One fundamental premise of an economic system is how to best use societies resources. Despite what is told from romantic socialists we live in a world of scarcity. We only have a certain amount of natural resources, a limit on the hours we work and a finite labor force. These factors mean that society needs a mechanism in which to direct all of the above in the most effective way to meet peoples needs. There are generally two sides of this coin - a free market directed by prices or a centrally planned system whereby Government can direct the above. We currently live in a combination of the two.

Another key concept of economics is the idea of wealth. What is wealth? Is it money? Material items? Spiritual enlightenment? I am not a material person however such possessions is a good measure. It may be as simple as the food that we eat. We all take this for granted where we have the option to eat ourselves to death but our ancestors as near as 150-200 years ago experienced famine on a regular basis. Karl Marx's famous Communist Manifesto was written during the 1848 European uprisings against a backdrop of crop failure and mass starvation throughout the Continent (the most infamous was the Irish Potato famine). Therefore a good economic model is to supply an adequate amount of goods and services that people wish to consume. We all have wants and desires in life. We would all like to own fancy cars, extravagant homes with endless means to consume but we can't. To obtain these goods and services we have to produce and we are all only so productive therefore have a limit to how much we can consume. So how do we get the most bangs for our bucks? This is where the two opposing systems come into play. One promotes free markets where people will be driven to do things they want on their own accord. The other, is where the government has to plan to ensure we all can enjoy equal spoils of our labor.

A free market can only deliver more material goods for us all to enjoy. Central planning, as history has shown and economic theory proves creates stagnation and falling living standards. The principle behind free markets is to lower the price of goods and services thereby increasing societies purchasing power - the true driver of wealth, which is what free markets are so good at. I can buy infinitely more than my father could when he was my age, and likewise his father. A market ensures this process will occur by enabling entrepreneurs and capital in competition to innovate thereby increasing general productivity. The incompetent fail, leaving the competent to take over, as Joseph Schumpeter put it, creative destruction. The other viewpoint is that the government can handle this process. They can centrally plan and co-ordinate resources and supply goods and services for the good of people. The problem with this system is how do you determine the competent people? How can you ensure competition and that governments will not abuse their monopoly power.

Ludwig Von Mises, one of the greatest economic thinkers in history, proclaimed that Socialism was doomed to fail before it had even begun. When various states succumbed to Communist regimes everyone agreed that you may have issues with incentivising people. How would you get people to do the less desirable jobs, say work in a dark mine in dangerous conditions - even the Socialists recognised this issue, and tried to solve the problem with honour parades and so on. However Ludwig Von Mises ignored this concept. He assumed that you could create a society in which everyone worked for the cause, the collective. He said it would fail not because people wouldn't do the work but for another more rational reason. He argued how will the government know what to tell the people to do? Without prices how would the resources be channeled? Coining the phrase 'planned chaos' he said any socialist system for a complex modern society would inevitably collapse, it was only a matter of time. This wasn't at a time we find ourselves in now, where all these systems have collapsed, this was back in the 1920's when Socialism was the in thing.

Of course this idea was challenged. Many said "Well we have equations, we will just use these" or "We will just find the entrepreneurs and place them in government positions". Von Mises rebutted the above on quite logical grounds. If you give someone a cushy government job on a regular wage you take away the entrepreneur, his capital and his capitalist instinct. When an entrepreneur sets up a company he tries to meet a consumer demand. He risks his capital and his time and for these reasons he will work day and night, always on edge to ensure he delivers quality service or products better, than his competitors as cost effective as possible. Would Bill Gates have created Microsoft if he had been in a government job. Would Microsoft have turned out the way it did if he didn't quit university, did not work late nights and did not have to risk his own capital? I doubt it. Its all this that ensures effective use of economic resources, placing the competent who prove themselves in charge of economic resources. A bureaucrat on £60,000 a year will never do as good a job as someone with no such security.

When we come to equations this is always a distraction in economics. Back when Britain was the leader of the world, the nations leading classical economists such as David Ricardo, Adam Smith and John Stuart Mill were in an age when everything was being mathematised. Science and technology was conquering the planet. With this backdrop they began trying to use mathematics to explain economics, however their models never really worked. This tradition carried on, right up until the present where economists still try and use it for the macro sphere. Economics is not a science and it never was. In micro you have concepts such as prices, supply and demand but no specifics. Then we jump into macro and all the economists tell you we can 'predict' this or 'solve' this because we have equations. If it was like science then why couldn't they predict the credit crunch? Science can predict all types of natural events to pin point precision but economists can't seem to predict the future any better than the average person on the street. The problem is you can't mathematise human actions. You can't mathematise future trends and technologies. The future is uncertain and impossible to model.

Of course many could not see this, so again Ludwig Von Mises in his typical genius fashion, just accepted the formulas for the sake of argument. He said even if you could create formulas to model the economic picture, then how would you obtain the inputs for them? Collecting data is prone to error and a time consuming activity so as soon as you get the data it is already out of date. In a constantly changing world it would be impossible to create accurate models to direct the means of production. Central Bankers acknowledge this concept today by using the famous saying for constructing monetary policy 'its like trying to drive using the rear view mirror'.

In a market with prices, the most competent who anticipate consumer demand survive, while the ones who forecast less successfully go out of business, thus releasing societies scarce resources for the competent to use. Despite what the left proclaim about 'excessive profits', profits and loss are the markets pricing mechanism. The future is uncertain, therefore profit just means you forecasted in the correct direction, losses mean you made a wrong forecast.

In history too, we can see ample examples of Capitalism pitted against Socialism. Korea, a country that was split by war is a fine example. One nation followed state planning, the other free markets. Back in the fifties the South was actually poorer however it soon caught up and then some. Now we see how South Korea has elevated its people to some of the most prosperous living standards on the Continent while North Korea continues to decline. For years the economy has been contracting. As Ludwig Von Mises states, under Communism you are in a constant depression. Recessions and depressions can only occur under government involvement.

Russians for years had product shortages as the state set prices of goods too low. Newspapers were so cheap that people bought them not to read the news but for alternative uses such as wrapping paper. Prices had been fixed by the state for decades with no relation to the actual costs of production. Russia only lasted as long as it did due to its resources. It sold anything it could to the West in an attempt to hold the country together, Oil, Gas, Iron Ore, Gold. As the commodities boom ended in the early 1980's so did Russia's income of hard currency, leading to a gradual collapse from within.

Under a year ago I visited Cuba, a country still run under Communist principles. People were under rationing, I saw queues outside closed shops, the shopkeeper coming to the door occasionally before opening with people asking him if he had any particular products (there were not many shops though, you were also lucky to get your allocated rations). University graduates were working as luggage boys or laundry maids, wasting their education as there were no other options. Rather than tipping currency for the cleaning maids, we tipped shampoo and toiletries as these are far more valuable than the governments worthless currency that can't buy any goods. After recently being hit by a hurricane they are rebuilding their homes with asbestos. Despite the health hazards society is too poor to afford the alternatives. For decades Cuba was propped up by Russia, buying their sugar for four times the market price, and practically giving them oil. After Russia collapsed Cuba could no longer get hard currency and technology, Castro's solution was to open the gates to tourism. This is what saved the regime in recent times, again a free market propping it up. They still have major issues and you could sense the bitterness the local people have towards the economic system. As one of our tour guides remarked, "This is supposed to be our Leninist-Marxist workers paradise".

The solutions many social commentators propose are just the above. Government systems and they never work, its always the free market that has to prop them up. They denounce that the rich are getting richer while the poor are getting poorer, but the poor get richer too as long as they are in a free market. As society accumulates increased capital and productivity these gaps widen as other nations fall behind under kleptocratic regimes with dictators, for example continents such as Africa. Many areas in Asia were poorer than Sub-saharan Africa 50 years ago. Asia then decided to open up their economies, respect property rights thus encouraging capital and expertise to invest there. Japan is already treated as a first world nation despite 60 years ago been seen as a basket case by the West.

When commentators such as Naomi Klein or George Monbiot argue that Globalisation exploits the poor, it does the complete opposite by alleviating poverty, in fact it enriches us all. Costs are lowered thus increasing purchasing power of developed nations, and developing nations are given access to capital, not only for machines but enhancing their human capital to raise their living standards.

"It's human nature, unless somebody can find a way to change human nature, we will have more crises and none of them will look like this because no two crises have anything in common, except human nature."

A quote again from Alan Greenspan. Despite what he says in public he knows the real cause of financial bubbles and crisis. He may blame markets or peoples irrational behaviour, but history again has shown it to be expansive monetary policy. When he wrote with Ayn Rand he lambasted central banks for their interference in markets. As time passed he became more involved in government affairs. Reveling in the role, labeled by the press as the 'Maestro', how he lies in public I do not know. Like with most bubbles throughout history you will find a central banker or a government authority behind it, creating inflationary booms and busts which we now label as the 'business cycle'. In the past it was fraudulent Gold deposit banking which governments encouraged. It was a less transparent way to debase currencies through intermediaries such as banks, there was also the added bonus of a scapegoat too. Banks also benefited as profits could be privatised in the boom, losses socialised during the bust. This trick fools many Socialists into believing capitalism is unstable, or as Marx liked to think it overproduced thus creating inevitable booms and busts. But this isn't true free market economics. Governments are the cause of recessions and bubbles through economic mismanagement. Private banks didn't under price risk, they had too much money from the central banks therefore as the inflationary boom kept going they lent it out recklessly as they don't make money by sitting on it. They had already lent to all the creditworthy borrowers but were still being thrown money by the central banks, therefore lent it to individuals that could never repay the debts.

A free market is the answer to the social question, we just haven't lived in one. Disparities in wealth should not concern individuals, as it is just a measure of how productive an individual is compared with another. Many may look enviable at rich successful entrepreneurs but they create the wealth and jobs for us all to enjoy. They increase all of our purchasing power and drive up living standards by creating new processes and markets. We help them with our labor, but at any point we are all free to become an entrepreneur. Companies are there to serve consumers and have little power, its only Governments that can give them more power then they should such as the past two decades with the banks. If people no longer wished to drink Coca Cola then the company would cease to be. Markets give people choices and treats humans as individuals, respecting ones rights. They drive living standards up across society this is the end goal, not equality. Individuals will always be 'unequal', each one of us has different talents and a free market allows individuals to make the best use of those talents. This is the answer to the Social Question. Socialism can never solve the social question it creates "equality" by impoverishing us all. It is nothing more than slavery to the state.

"Liberalism and capitalism address themselves to the cool, well-balanced mind. They proceed by strict logic, eliminating any appeal to the emotions. Socialism, on the contrary, works on the emotions, tries to violate logical considerations by rousing a sense of personal interest and to stifle the voice of reason by awakening primitive instincts."
Ludwig Von Mises

"Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individuals life and the unrestricted supremacy of the government in its capacity as central board of production management."
Ludwig Von Mises

The Global Race to the Bottom

Since the financial carnage during late 2008, the real effects of the credit crunch have now started to be fully felt with members of the public now under no illusion of the severity of the situation the world finds itself in. No country has been isolated. The question is, how much worse can it get? Is the world heading towards a path of destruction?

Consumption based economies, resource rich nations, export driven countries - all have been hit hard by the turbulent events we find ourselves in. Since the collapse in commodity prices, after the huge de-leveraging that began in September last year, resource rich nations have come under intense pressure. The Rubble is in dire shape as Russia's Oil and Gas revenues have dried up. Run under a corrupt political system that is trying to keep together its fragmented collection of states by use of oppressive force which now seems unsustainable in the long run. Mexico, whose low cost manufacturing operations have been hollowed out in recent years by the lower Chinese labor costs, has been heavily reliant on it's Oil revenues, however production has been in decline for a good number of years. Along with the collapse in Oil's price, the nations stability has become questionable. The Peso has slid to record lows recently, with the Central Bank trying to stop the slide. Markets always have more money then Central Banks, however authorities always like to waste money to try and prop up their currency as though that changes fundamentals. It's remains to be seen if Venezuela can remain solvent with Oils new low price. Iran faces increasing fiscal pressures, along with other Middle Eastern states in an already unstable region of the world.

The Euro continues to mask the various problematic states that hide behind it. The Mediterranean nations and the Iberian Peninsula, Portugal, Spain, Greece and Italy all with a traditional weak work ethics and a short association with democracy, seem like they could once again fall under a Totalitarian dictatorship once more. Salazar, Franco, Mussolini or the "Junta" - we could well see a new generation of radical political movements. Germany's output has collapsed, as its export market has dried up. Eastern Europe's economic miracle after the break up of the Soviet empire is beginning to unravel. Latvia posted a 10.5% fall in GDP in the last quarter in 2008. After the IMF bailed out Hungary, the government are looking to cut government spending and balance the books further. Meanwhile in Ireland they have begun looking at cutting public pay, in order to keep the illusion of solvency for the time being.

After the surge in the Yen last year, as the unwinding of the Yen carry trade took its course, the BOJ will no doubt try and stem the rise by looking at measures to devalue, as its exports have fallen off a cliff. Many of the other Asian nations have not fared any better. China's exports have also collapsed, but so has their imports by a larger amount putting pressure on resource rich nations in the region such as Australia. China's creditor position, now as cash is king, is finally beginning to buy into the markets it will so desperately need when its rise as world superpower resumes. Layoffs in the urban cities continue to displace people back to the countryside, and its not just China where layoffs are occurring in Asia. Taiwan, South Korea, Vietnam all of these export based nations are suffering.

Back in the UK, Ed Balls, Gordon Browns trusted advisor and friend who recommended granting the BOE independence back when Labour came to power, stated recently that this was the worst financial crisis in 100 years. He also mentioned we could see a rise in extreme right wing politics as unemployment increases. Just like the 1930's another crisis in "Capitalism" has arrived, with worldwide contraction occurring once more. Once more the same mistakes are being committed. The Krona collapsed last year, however this won't be the last currency collapse of the crisis, or for years to come. There will be more that come under pressure. The Forint, Rubble, Dollar, Pound or Euro - no paper currency will be immune to what is happening. Continual debasement will occur and further currency crisis seem inevitable as a race to the bottom takes place.

The US are leading the world with further bailout packages. Obama's recent stimulus plan will soon be in the system. Who will pay for it? Who will pay for the $1Trillion and growing budget deficit? Domestic citizens? Foreigners? In the climate we find ourselves in? Recent losses have been announced at the recently formed giant UK banking group Lloyd's. More pain is yet to come, along with further nationalisation of the UK banking sector. In a post I wrote just before the globe came close to financial collapse, I said there will be a limit to how much Governments will prop up institutions and infuse money into the system. Well it looks like I was wrong on that point as most governments are more incompetent than I gave them credit for.

The 'Fear' Index

Since the Credit Crunch began around 18 months ago, we have seen great volatility in the stock markets and the currency markets. One measure that is used to measure volatility in the S&P 500 stock index is the VIX index, the volatility index, which the below chart illustrates.


The parabolic move, that can be seen in September/October of last year shows how distressed the financial markets became during this period. If we look at the blue line in the middle graph (the 50 day moving average of the index) we can see it has steadily been rising from a low of 0 in October 2007 (Just after the Credit Crunch began), to around 35 currently. Its been on a downtrend for the past couple of months, so does that mean the worst is behind us? Far from it. We are just starting the Bull market in market volatility as the graph illustrates, with further, and in my opinion greater shocks to come. A recent downtrend has emerged but for how long? The Western stock market will not be a place to be for at least the next decade in my opinion. The bailouts, money printing, increased government intervention, currency instability and record low interest rates will ruin the free markets price mechanism and further flatten the production structure. These destructive effects are yet to be felt.

So who will suffer the Worst and who will lead the upturn when it comes?

We are not going to see an upturn in 2009. That's for sure. The exporting giants, such as China, Germany and Japan will suffer a great deal, indeed China should fall into a serve depression if it allows markets to work their magic (I mentioned back in May that this should be expected). Germany and Japan should follow similar fates. In fact nations similar to this will experience as bad downturns if not worse than consumption based nations such as the UK and the US. But some of these nations should lead the world economy out of the downturn when the markets have cleared, along with resource rich nations such as Canada as people will always need materials. They already have the productive capacity or resources when the recovery arrives. The key thing is that they let their domestic markets clear. As Japan illustrated this is not always the case. China will no doubt experience shocks and inevitable set backs (just as the US did back at the turn of the Twentieth Century with the panic of 1907, or the UK did at the turn of the Nineteenth Century with the wars with France), but their leaders are about as Communist as Adam Smith, and have a long term outlook to supplant America as the economic superpower. They are not concerned with short termism, polls, or quarterly GDP figures. They are concerned about building a productive capacity, and becoming the economic engine of the globe. 600 years ago China was the largest economy in the world under the Ming Dynasty. There's no reason why it can't be again. The other Asian giant, India, may well suffer from their larger public sector debt than other countries in the region. For all India's progress, there are still great issues there, whether it is their poor infrastructure (bad roads, frequent power cuts) or the caste system, I still see great potential but it will be limited by these factors.

Nations similar to the UK and US, who have used up most of their natural resources, are running huge deficits, have lost all thrift and have lived on a mirage of debt and cheap goods will be the slowest to recover. Many Western Countries belong in this category. Countries like Italy and Greece, with greater life expectancy, will suffer even worse fates as their vast public sector debt will no doubt drown out any possible recovery. Nations such as Germany may well be hampered by nations such as these as they try to hold the Euro together.

After the fall of the Roman empire, European culture went backwards not forwards. It slipped into what is now known as the dark ages, as the Islamic nations along with the Orient, became the cultural centers of the world, producing goods that fascinated the outmoded Europeans. It wasn't until the fourteenth century that the Renaissance began in Europe, with cities such as Florence and Venice importing goods and ideas from the Orient and the Middle East. The conquests of the Islamic Moors on the Southern Iberian Peninsula further dispensed wisdom and knowledge that spread slowly throughout Europe. The Occident, or what we now refer to as the West, began a long transformation, increasing their material wealth and ideas. Once again, Eurasia finds itself in what seems like a similar junction. Ideas, knowledge and culture are flowing in the reverse, from West to East. In the past it took centuries. This process may well take decades, as technology has increased the ease and speed at which ideas can be spread. The race to the bottom has begun, but who will be the first to resume the race to the top when the recovery arrives?

To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting.
Sun Tzu, The Art of War

By nature, men are nearly alike; by practice, they get to be wide apart.
Confucius, The Confucian Analects