If you haven't heard of Matt Ridley aka the Rational Optimist then you've missed out on a different point of view to that promoting the fashionable doomsday du jour.
Ridley articulates very well, I think, why we should all be optimistic. His views on this topic align very well with my own. Even though there are rocky days ahead and almost certain financial doom and gloom, when you take a thirty thousand foot view of things for the long term one must conclude that humans will yet again defy the doomsdayers' predictions and work things out.
Imagine how miserable it must be to live life thinking that CO2 is going to make the planet uninhabitable and is already responsible for fire, flood, earthquakes and whatever other natural disasters that used to carry exactly that name until a generation grew up largely uneducated about how the world works - and uncaring, to boot. And uncaring that it's important that they know.
Who seriously thinks that when the oil eventually becomes uneconomical to produce - which is many hundreds of years away - mankind won't have transitioned to something like nuclear to fuel society?
Who seriously thinks the world is going to get to the point that it can't feed itself?
As I said, it would be a miserable life indeed.
Matt Ridley's presentations should be played to all 14-15 year olds in school. It would inspire them and get them to focus on the big picture.
If you like the video then send it to your 'miserable' friends so that they can find a reason to turn their thinking around.
Here's the current results of the poll at The Australian. It won't please those who think they'll be able to make a quid suing the rest of us for being racist:
It's a pity that conservative values, especially that of race-blindness, are not more widely held in the community. Perhaps they are but you wouldn't know it from listening to the media. Ironically, those that think these laws are necessary to rein in the racism of (mainly) white men don't understand that those white men inhabit the same political orbit as the race baiters.
The DPRK and its people are now greeting the 50th anniversary of the Taean Work System created by President Kim Il Sung.
The President created the Taean System, model of the socialist economic management, in the early 1960s when the socialist system was established and the overall technical modernization of the national economy was progressing in the DPRK.
This system is the advantageous Korean-style socialist economic management that embodies the Juche idea and the revolutionary mass line based on it.
It helps conduct all the business activities under the collective guidance of party committees and rouse the popular masses to the implementation of economic tasks by giving priority to political affairs. The system also makes it possible for the superior to help the lower in a responsible manner and to closely combine the science and technology with production and turn the economic lever into good account in order to ensure the production in a rational way.
It is the people-centered economic management system, whereby the popular masses manage and run the economy in a scientific and rational way as the true masters of its management, and the socialist economic management system that embodies the collective principle of "One for all and all for one!" This is essential character of the Taean Work System and herein lies the source of its inexhaustible might.
The past five decades after establishment of the system are a glorious and immortal history in which the socialist economy of the DPRK hewed out the original path of its development under the leadership of the great leader and the great party and the Korean people have wrought epoch-making miracles in the economic construction while overcoming all sorts of trials and challenges.
It is important to solve any problem arising in the economic activities in a Korean way suited to intrinsic nature of socialist society, with clear awareness that the victory of socialism is just victory of the revolutionary principle.
All the people should give full play to the advantage of the Juche-oriented socialist economic management system under the leadership of Kim Jong Il.
If anyone can tell me what that means then feel free to provide feedback!
My favourite bit is that "One for all and all for one!" is now a collective principle in North Korea. I'm sure that The Three Musketeers is banned there, as it might give people funny ideas about rising up against the oppressors, so the ruling party is probably pretty safe from being discovered.
I tell you something that constantly surprises me - the lack of knowledge of history of those on the left with whom I discuss political matters.
Take Martin Luther King Day as an example.
The left write articles and make speeches and send tweets containing one or other of MLK's profundities in an attempt to cloak themselves in moral rectitude. MLK was the leading figure in the Civil Rights movement and is quite rightly regarded as the man who brought to an end the last vestiges of racial discrimination in the United States.
What these people don't seem to be aware of is that the entire reason there had to be a civil rights movement in the first place was due to the racist policies of the Democrats! From Jim Crow to miscegenation laws to lack of voting rights these were all policies introduced and supported by the Democrats.
Since the time of Lincoln the Republican party has been at the forefront of the equality argument. It's ironic that to now argue that white and black are equal and that there should be no racial preferences for work or university placement is guaranteed to attract a charge of racism. MLK would certainly be shocked at the blatant racism of these policies.
But it's not just the civil rights movement that those who claim to be the defenders of equality are ignorant about.
The eugenics movement of the early twentieth century had as one of its primary objectives the restriction of having children of those who were less educated. It was an almost entirely race based policy.
The union movement is one of the worst racial offenders going. The minimum wage was introduced entirely to deal with the 'problem' of cheap, black labour which would threaten the jobs of a unionised, white workforce. As Thomas Hazlett points out in this terrific article, this policy led to apartheid in South Africa. The great Tom Sowell calls the minimum wage the most racist legislation ever to be introduced.
A lefty will learn more in the three minute discussion between Williams and Sowell than they will in a lifetime of watching the ABC or SBS or reading The Age or Canberra Times or in the USA the New York Times etc.
In fact, while I'm linking to Tom Sowell here's another short lesson for the world's ignorant left.
But it doesn't stop there. The original purpose of Planned Parenthood was to create an environment in which young, pregnant, black women would have abortions on the grounds that they were not able to look after the children.
And there's more! Gun control in the United States south was introduced (by Democrats) entirely because they didn't want newly freed slaves having firearms. They feared, probably correctly, that a number of them might want to exact some vengeance before settling down.
Somehow or other history has been turned completely upside down and it's the historically race-blind party - the Republicans - who are tarred with the racist slur while the historically racist party - the Democrats - have been given a free pass.
I guess that's what happens when the mainstream media and universities and others in the chattering class overwhelmingly inhabit the left side of the political spectrum.
John Mauldin is a well known economics commentator and forecaster. I recommend subscribing to his email newsletter "Thoughts from the Frontline", which you can do here.
In this week's newsletter he provides a concise description of what ails Europe and that the banking system's debt is a creation of government policy (allowing banks to buy sovereign debt at a 30:1 leverage ratio) and the inexorable effects of having to borrow more to pay back previous debt.
The root cause, of course, is paying for the increasingly large promises of the social welfare state. Not that today's left can understand that basic fact.
When the Labor government won power in Australia in 2007 it inherited probably the strongest economy on the planet, which included near zero government debt. In only a few years it has managed to grow that debt to $230 billion. The tragedy is not only that the country has nothing to show for all that spending but also that we are not able to learn from the disaster in Europe.
One of the interesting things about being in Hong Kong is that I get to see the weekend edition of the Financial Times 12 hours early. And the headlines were not all that pleasant. As I promised last week, we will cast our eyes to Europe and ponder what is in store for Europe for the year and the next five years. And what do we read on page 2? The "ECB raps revisions to draft a fiscal pact." Seems they feel there are too many loopholes, which will make the document meaningless … somewhat like the treaty they have now. And we further learn that "Greek default threat grows as talks falter." Seems there is a lack of agreement on how much of a haircut the investors ought to take, and the Greeks don't want to guarantee any future debt, just in case they need to default some more in the future. But they do want the €15 billion they need to keep the debt machine running for a few more months.
And on page 1, in big type, we are surprised (but not very) by the headline, "France and Austria face debt blow." Seems those sharp-eyed accountants over at S&P have decided to downgrade French debt from AAA. Which of course leads to another headline on page 2, suggesting "Firepower of bail-out fund cast into doubt." The currency markets were shocked – shocked I tell you – that S&P would do such a thing and promptly took back the euro rally and cast the euro down to recent cycle lows. Who knew, other than the entire free world not watching reality TV, that S&P was planning to do such a thing? And we read elsewhere that the European Commission is dismayed that S&P would do something so clearly not right, at least according to the way they keep their own books. Even here in amazing Hong Kong, with the growth of China driving a wave of prosperity, eyes are fixed on Europe. How will they deal with the crisis? We read that US exports to Europe were down 7% last quarter, and Europe has not yet really entered into recession, which is almost guaranteed this year. And if US exports are down, then so are Asian and Latin American exports. Global growth appears to be threatened.
Solving the Mayan Code
There are so many pieces of data to go through in order to augur Europe's future – I want readers to know I have left no stone unturned! In fact, I went to some very old stones to get help with this week's letter. I began to scrutinize the Mayan Code from ancient Central America, which so many feel predicts the end of the world on December 21 of this year, bringing my fresh eyes to an old mystery. After much deliberation, I have come to this astounding insight: The Mayan academics who created the code were not in fact astronomers or even astrologers. No, it is clear they were another breed of even more dubious forecasters, called economists. Once you approach the glyphs with that understanding, it becomes clear they are not predicting the end of the world, merely the end of Europe. One symbol clearly shows the Greek flag dipping to the ground. Another depicts the Italian flag with its wheels coming off. Oh, and you don't even want to know what they have prognosticated for the French. This is a family e-letter and I can't squeeze such language past the censors. But now that I have provided the basic insight, I leave it to you, fellow scholars, to decipher the rest of code.
And we will spend our time together here this week trying to discern what it means, in fact, for Europe to come to the place in its journey where it must make extremely difficult and often painful choices. As I wrote last week, as I started this voyage of discovery with you, the choices the various countries in the developed world are now making will put us on a path that does not allow us to turn back without severe consequences. (If you missed last week's letter, here it is.) We are left with debt that must be dealt with, with imbalances that must be balanced, and with deficits that must be brought under control. No matter what we choose, there will be pain for all of us. You cannot make debt go away without paying it back or defaulting, one way or the other, which means someone loses. And as we will see, paying it back can be very difficult, indeed, once it has grown this large.
To Solve the Crisis You Must Solve Three Problems
There are three main problems in Europe. The first is that most of the banks are massively insolvent, because they have 30 times their capital invested in the second problem, which is the sovereign debt of countries that are going to have trouble paying that debt. If the banks have to mark down the debt to what its real value is – or to what it will soon be – they will be bankrupt on a scale that makes 2008 look like a waltz in the park.
Countries simply cannot function in a manner that can be called normal without viable banking systems, which is why the authorities spend so much time worrying about them. If banks can't make loans, then businesses must cut back, which means fewer jobs, products, and services, which quickly becomes an ugly spiral. Losses in the private sector mount up. This obliges the treasury secretary to get on one knee and beg some elected official who has no understanding of how business and economics work to save the world as he knows it.
But if countries must step in and save their banks, then they have to assume some of the losses. (I am assuming that this time shareholders get completely wiped out, as do most bondholders. Taxpayers – read voters –are actually paying attention this time. They are in no mood to bail out bankers.) But most of the countries in Europe with the worst banks simply do not have the money to invest. They already have too much debt. Where do they get the capital? (More on that later.)
For most of the past two years, European leaders have tried to deal with the problems as though they were short-term liquidity problems: "If we just find the money to buy some more Greek bonds, then Greece can figure out how to solve its problems and then pay us back. Given enough time, the problem can get solved." They have now arrived at the understanding that it this not a short-term problem. Rather, it's a solvency problem of the various governments, which of course creates a solvency problem for their banks. They are now addressing the problem of solvency and providing capital until such time as certain countries can get their budgets under control and the bond market sees fit to provide the capital they need.
But they are completely ignoring the third and largest problem, and that is massive trade imbalances. Germany exports products to the peripheral European countries, which run trade deficits. As I have shown in several letters, a country cannot reduce private-sector leverage, reduce public-sector leverage and deficits (balance its budget), and run a trade deficit all at the same time. That is simple, unavoidable math, based on 400 years of accounting understanding. Ultimately, there must be a trade surplus if leverage and debt are to be reduced.
Greece runs a trade deficit of about 10% of GDP. Until they can stop that bleeding, they cannot get their government and private budgets under control. It is not simply a matter of cutting budgets or raising taxes. Indeed, their economy will continue to shrink, making it more difficult buy foreign goods without increasing their own production of goods and services. It is a vicious spiral. And that same spiral will spin up to take in all of Europe. Again, more on that later, as we consider what their choices are.
But for now, let's start with my contention that if you do not solve all three problems you do not solve the real problem. Greece cannot "stand on its own" without a change in its cost of production relative to Northern Europe. Neither can Portugal, et al., unless Germany either changes how it exports and consumes more, or Germany is willing to fund Greek (and Portuguese and Italian and…) debt, so those countries can continue to run large deficits. Let's resort to something I have done in the past, and that is to create a simple model to help us understand the issues involved. As always, when we make simple assumptions we are ignoring the real complexities. I know things are vastly more complicated than the following simple analogies, but the underlying truths are basically the same.
Getting Simple About Europe
Let's assume a country that has a gross domestic product (GDP) of $1,000. In the beginning it taxes its citizens about 25% of GDP and spends the money for the public's benefit. But alas, it spends about 30% of GDP, so it must borrow the overage (about $50) from its citizens or from the citizens of other countries. Because the country starts out with relatively little debt, interest rates on this loan are low, because those who buy the debt can easily see that the the country can pay them back. If the debt of the country is only 5% of GDP ($50) and the interest rate is 4%, then the amount that must be paid as interest is only about $2 per year. Not a whole lot, about 0.2% of GDP.
But this goes on year after year. Sometimes the deficits get smaller and sometimes they get larger, depending on the economy; but government expenditures grow at the same rate as the country grows, and the debt keeps growing at an average of 5% of GDP per year. Now, if the country is growing at 3% a year, after 24 years the economy will have doubled to $2,000 GDP.
That means the debt has grown (roughly) to a total of $1,800, which is now a debt-to-GDP ratio of 90%. Debt has grown faster than the country's economy. Note that if the country had held its budget down to where it grew slower than GDP, thus reducing its need for debt, that ratio would be lower, even if the debt had grown. You can indeed grow your way out of a debt problem if the growth of government spending is less than the growth of the economy.
But what if the size of government grows to about 50% of GDP, rather than 25% or 30%, over the 24 years, as politicians decide to spend more money and voters decide they want more benefits? (Think France.) Then the private sector must pay about 50% of its production to the state – plus, the debt is now growing unwieldly. The private sector has less to invest in new businesses and tools, and the growth of the economy slows. And then along comes a very nasty recession. The revenues of the government fall as the economy shrinks. If the economy shrinks by 3% and total taxes are 50%, then tax revenue falls to $970. But the government does not cut back; and indeed, because it must pay unemployment benefits and welfare (because unemployment rises in a recession), its expenses actually rise by 5%! So it now needs $1,050 to pay all its budgeted expenses. And it must now borrow $80 to pay everyone it has promised to pay, in addition to the $100 it was already borrowing every year to cover its deficit, or a total of $180 a year, which is 9% of GDP. (Yes, I know that debt must change as a percentage over time and nothing is stagnant, but work with me here.)
Now debt-to-GDP is rising by about 5% a year. Not a large number in the grand scheme of things, and everyone knows that the recession will soon be over and the deficits will come down. Sovereign governments never default on their debts – our government leaders assure us of that. They can always raise taxes or cut spending, can't they?
And things rock along just fine, and the bond market continues to buy the debt, until one day you look up and the debt is 120% of GDP. Then the bond market gets nervous and says that instead of 4% it wants 7%. Now the interest payments are over 8% of GDP and 16% of government spending, which means the government must either cut back on services or salaries or benefits, or raise taxes, or borrow more money. But cutting spending and raising taxes have consequences. They reduce GDP growth over the following 4-5 quarters as the economy adjusts.
What if that interest rate cost rose to 10%? Then the interest cost to the government would become 20% of its expenses and be rising faster than the country could grow, even in the best of times. And if they continued to borrow at 7% and the country did not grow, those interest expenses would rise at least 7% a year – as long as interest rates didn't go up.
And what if the other countries who had been buying the government's debt looked at the basic math and realized that, another step or two down the current path of government spending, there was no way they would be able to get their money back?
How Much Risk Do You Want in a Government Bond?
Now, government bond investors are a curious breed. They invest in government bonds because they actually think there is not supposed to be any risk. They want their money to be safe. If they wanted risk, there are lots of opportunities to invest with the potential for more reward.
The moment that government bond investors begin to think they might be at risk, they leave. And history suggests they tend to leave seemingly all at once. It is the Bang! moment. Someone fires the starting gun, and they all head for the exits. They start selling their bonds to speculators at discounts, which makes the effective interest rates in the market rise, sometimes by a lot. That means that if a country wants to borrow more money, it will have to pay the effective price in the market, or maybe as much as 15-20% IF – a big IF – it can even get someone to buy the bonds, which of course makes it even more difficult to pay their debt as interest costs rise.
Now, let's add a twist. The other countries that have bought those bonds are not actually countries, but banks in other countries. And because the regulators of those banks knew it was impossible – inconceivable – that a sovereign country might default, they allowed their banks to buy 30 times as much sovereign debt as they had capital in their banks. They did not have to reserve against any losses, so these were "free" profits for the banks. You pay 2% on deposits or short term commercial paper and buy bonds paying at 4%. You make a 2% spread, which you then do 30 times. Now you are making 60% profits on your capital and deposits. It is a very nice business – as long as everyone pays the interest. And because it is such a good business, you just roll over the debt every time the bond comes due, because you want more easy profits.
Let's say that banks bought up to 10% of their total government sovereign-debt holdings in our problem country. If the country gets into trouble and says, we will only pay 50% of our debt (we will discuss why below), then that means the banks lose 5% of their total assets. But they only have about 3% capital, because they were allowed to leverage. That means they are functionally bankrupt.
Without a functioning banking system, other countries now have to step in and take the losses (and perhaps wipe out the shareholders and owners of their banks). That would be bad for the other countries, as that much spare cash is not just lying around in government coffers. They are ALL borrowing money already and have their own deficits to worry about.
So everyone gets together and they tell the bankrupt country (because that is what it really is), we will lend you more money to keep you alive, but you must agree to balance your budget. And since that is the only way the problem country can get more money, they initially say, "Sure. We can do that. Just give us some money now so we can get it figured out and get everything under control." In the world of government, living within your means is called austerity. And it's an uphill slog. Let's say your deficit started out at 15% of GDP (somewhat like Greece's). If you agree to cut that deficit by 4% a year for four years running, if everything stays the same, you could be back in balance. But the other counties would have to agree to lend you the difference between what you budgeted to spend and what you took in as tax revenues. Just to keep things going. Otherwise you'd have to default on your debt. If the countries simply have to guarantee the loans and not actually spend the money, it is a lot easier than having to find real money to save their banks, so they agree.
But the cuts you have to make are not as easy as everyone hoped. It seems that employees don't like having their pay cut, and unions don't want pensions cut, and retirees certainly expect the government to fulfill its promises; and don't even get started on cutting healthcare, which is a God-given right.
So you raise taxes and cut spending by about 4% the first year. But a funny thing happens. That reduces the private economy by about 4%, so the base on which taxes are collected is reduced, which means less revenue is raised, which means that the deficit is much worse than projected. And then the following year you have to make another 4% in cuts, plus the last shortfall, just to make your plan and get to the agreed-upon deficit, in order to get more loan money. It becomes a very vicious circle.
And let's look at the endgame. That debt-to-GDP ratio will rise to at least 150%, while the economy is actually shrinking. If interest rates settle to a mere 7% (hardly likely), it means the people of the country are going to have to pay over 10% of their total production to foreign banks each and every year for decades, never mind paying down the principle.
Let's throw in one more twist. The country has been buying about 10% of GDP more from other countries than it sells to them. That is because the relative wages in the problem country are about 30% higher than in the "good" countries. The good countries get the money from what they sell and have a nice surplus. The problem country soon runs through its savings, trying to buy the goods and service it wants; and the private sector, as well as the government, must cut back.
What happens is that you are locking in what feels like a depression initially, and then you have a slow- or no-growth economy for many years, as so much of your work goes just to pay back that debt to the banks of other countries.
Understand, your government has freely obligated itself to pay that debt. But it means that its citizens in effect become debt slaves for a generation or two to foreign banks. Not a very popular platform for a politician to run on for re-election.
Long-time readers know I think the neo-Keynesians do not have a proper view of the world. They live in a theoretical world divorced from what really happens. But in this respect they are deadly right. Austerity on the scale needed by many countries will only reduce potential GDP. The Keynesian prescription is to therefore run deficits and borrow money until you get growth again; but when you have already exhausted your ability to borrow money, it just doesn't work.
More debt makes if far more difficult to grow your way out of the problem. If you are already drunk, you can't get sober by drinking more whiskey. If Greece cuts its deficit by 15% of GDP, the reality is that GDP over time will be reduced by about 20%, and the debt will grow, both in real terms and as a percentage of GDP. A 20% decline in GDP is by any standard a depression and makes it even harder to grow, as so much of what you do make has to go to basic expenses and not productive capital. And if you have the burden of massive debt it becomes damn near impossible.
That is why individuals can file for personal bankruptcy. We no longer force people into slavery or debtor's prison to pay their debts, at least in most places.
So our problem country goes to its lenders and says, "We think you should share our pain. We are only going to pay you back 50% of what we owe you, and you must let us pay a 4% interest rate and pay you over a longer period. We think we can do that. Oh, and give us some more money in the meantime. And if you refuse, we won't pay you anything and you will all have a banking crisis. Thanks for everything."
The difficult is that if our problem country A gets to cut its debt by 50%, what about problem countries B, C, and D? Do they get the same deal? Why would voters in one country expect any less, if you agree to such terms for the first country? So now let's return to the real world of Europe. Greece cannot pay its debt without a major depression. So its wants to pay only 50%, but it doesn't even want to guarantee that in any meaningful way; so bondholders scream, "We get nothing in return for agreeing to take a 50% haircut?!" Which is today's headline.
Greece cannot print its own money, so unless it leaves the Eurozone, it's stuck. They can default on their debt, but that means they are shut out of the bond market for some period of time. That would force them to make the spending cuts they are now resisting, as they would simply not have enough money to pay their bills. Even with a 100% haircut they're looking at a shorter but very real depression. And because no one will sell them products they need, like energy and food and medicine, unless they can sell or trade something in return (that trade-deficit problem), they will be forced to change their lifestyles. Wages must drop or productivity rise to be competitive with northern Europe. And that differential is about 30%. I am not certain, as I have not been to Greece in a long time, but my bet is, you won't find many Greeks who think they are overpaid by 30%. But that is what the market is going to say. And that is the third problem, which Europe is not addressing. Germany and the northern tier are simply more productive than the Southern periphery. (With the possible exception of Northern Italy, but Italy all gets lumped together, which is why many Northern Italians want to be their own country and not have to pay taxes that go to Southern Italy. I am not taking sides, just observing what we read in the papers.) Until Germany consumes more from the peripheral countries or the peripheral countries become more productive, the imbalance will not allow a positive solution.
Prior to the euro, the imbalances would be handled by currency exchange rates. The value of the drachma would go down relative to the value of the deutschmark. Things would balance over time. Now, all of the eurozone countries are effectively on a gold standard, with the euro standing in for gold this time. Britain, the US, and Japan print their own currencies. Their currencies can rise or fall over long periods of time, based on national accounts and the desires of foreigners to buy goods or invest in their countries. Greece and the other peripheral countries face a difficult choice. Do we stay in the euro and pay as much as we can, and watch our economy drop; pay nothing and watch our economy drop (as we get shut out of the bond market); or leave the euro and go back to our own currency and watch our economy drop?
They have no choices that allow them to grow and prosper without first suffering (for perhaps a long time) some very real economic pain. As I have written in previous letters, leaving the eurozone has severe consequences; but the economic pain of leaving would go away sooner and allow for quicker adjustments, than if they stayed. However, the initial pain would be worse than the slow pain they'd suffer by staying in the euro. Their choice is, simply, which pain do they want – or maybe, which pain do they think they want? Because whatever they choose, they are not going to like it.
And just as I was finishing this section, this note came from Naked Capitalism:
"The three Troika inspectors—Poul Thomsen from the IMF, Mathias Morse from the EU, and Klaus Mazouch from the ECB—are supposed to head to Greece next week to inspect its books; the budget deficit is once again higher than the revised limit that Greece had vowed to abide by. And they're supposed to negotiate additional 'structural reforms.' But there probably won't be three inspectors, according to senior IMF sources. Missing: Poul Thomsen. The IMF has had enough.
"Already, according to more leaks, IMF Managing Director Christine Lagarde had warned German Chancellor Angela Merkel and French President Nicolas Sarkozy that the fiscal and economic situation in Greece had deteriorated. Hence, the 'voluntary' haircut on Greek bonds held by private sector investors should be increased to more than 50% to maintain the goal of bringing Greece's debt load down to 120% of GDP. And the second €130 billion bailout package, agreed upon on October 26, should be enlarged by 'tens of billions of euros.'
"The German reaction was immediate. 'There has to be a line somewhere,' said Michael Fuchs, deputy leader of Merkel's party, the CDU. 'This cannot be a bottomless barrel.' Even if Merkel were amenable to committing more taxpayer money to bail out Greece, she'd face a wall of opposition in her own party. And he wasn't brimming with optimism: 'I don't think that Greece, in its current condition, can be saved,' he said."
The article goes on with a description of the chaos in Greece. It is worse than I have described. Really. And so terribly sad.
As I was munching through a delicious butter chicken the other day marveling at the different flavours, the wonderful aroma and the eye pleasing richness of its colour it occurred to me that if you were born and lived your life in a Marxist state then you would never know what this wonderful dish tasted like.
It's ironic that someone born in Cuba - and by 'someone' I mean your average Joe and not a high party official that travels the world - could live their whole life and never know of the existence, let alone the taste, of butter chicken but a cigar aficianado in Mumbai will most likely know the flavour of a Cuban cigar.
In any state in which the government tells the citizenry what they can and cannot do, and the Marxist kind is the purest example, there is simply no driver that could ever lead to such exotic additions to the culinary landscape. The 'need' in 'to each according to their need' does not include butter chicken. How could it?
During both World Wars, as well as the Depression, rationing and food shortages led to long lines outside the local butcher or grocer. In free economies these events are rare and the fact they happened has led to much historical analysis and commentary in order to be able to avoid them again.
But in countries in which the state controls all aspects of people's lives these queues are normative. During my time in the Soviet Union I used to marvel at the length of the lines for such basics as bread, milk and meat, even in well below zero temperatures. It left an indelible impression on me and is one of the reasons that I was anti the left early in my life. In free societies queues are normally the result of the release of a new Apple product or of tickets to see the world's hottest bands.
This insular thinking leads to a xenophobic result, whether planned or otherwise, in which anything from the outside - including people, their ideas and their culture - are shut out. If you're drawing up 5 or 10 year plans then one of those things that never seems to make the list is:
 b) iii) Allow immigration of 500,000 Indians so that we can not only take advantage of their ideas but also go to Indian restaurants to eat yummy butter chicken.
That's assuming that you could find any Indians who wanted to emigrate, as well as anyone who could afford to pay for a restaurant meal.
Thus, the net result of planned, Marxist states is a decaying and calcifying of life due to the inhibition of new ideas from outside, free thought and individual liberty.
Free trade, underpinned by Adam Smith's 'invisible hand', has made available to consumers all around the world a vast array of quality of life improving products and services that they could otherwise never have had access to, assuming they knew they existed.
Yanis Varoufakis has been in the media a fair bit recently given his academic status, clarity of thought and expression, and Greece's prominence in discussions of the financial crisis that has beset Europe.
In this interesting interview they cover the Greek situation, Euro politics and his three pronged solution to it all.
He discusses a topic that I've been meaning to cover in greater depth, which I'll do so in a future post, and that is the concept of national dignity - a different thing to terms you often hear such as national pride or nationalism.
Update: By the way, Yanis is a self described Marxist so it's a funny, old world when the crisis is so bad that Marxists and capitalists are lying in the same bed! I guess that in WW2 many partisan groups fighting with the Allies were also Communists and the need to fight against the common enemy brought them together.
Critics of the West tend to point to China's ability to build roads, airports, buildings, fast trains and whatnot at a much faster rate than can Australia, the USA, Canada and Europe etc. They're even planning to send a manned mission to the moon.
Watch this terrific video showing what is possible these days.
How are they able to achieve such a great outcome? Here are a few reasons:
They have no shortage of funds to not only build the building but also create the company in the first place;
They have the will of the government to support such expansion;
They have the manpower available to build what they need; and
Critically, they do not have environmental regulations and anti-development green groups to tie up their plans for years.
So what does that tell you about China?
Consider these facts:
Using 1920s/30s technology the 102 floor Empire State Building took just 410 days to build;
In 1933 construction started on the Golden Gate Bridge and was completed just 4 years later;
In 1859 the British started work on the 450 miles of main sewers connecting over 13,000 miles of smaller sewers that would become the London sewerage system, completed in 1865; and
In 1969 the United States landed a man on the moon.
Again, what does that tell you about China?
Well, that they're a number of decades behind the West, for starters, and are racing to catch up, which they're able to do (as are other fast-developing nations such as Brazil and India) by leveraging existing technologies created over the last 100 years in the West.
Combined with the number of empty cities they've built it also tells you that they're going to have a terrific contraction at some point, which will really hurt us out here in Australia given that our government has pissed away the strength of our economy and undermined, through poor industrial relations law, any chance we'll have for a quick recovery.
But the video is impressive nonetheless and really serves as a reminder of what was possible before government regulations and green groups got in the way.
In a massive surprise to absolutely nobody, President Obama has announced that he intends to cut the size of the US military by around half a million troops.
Obama is clearly pandering to his loopy left supporter base, as well as that group of people who have forgotten where their freedom came from and simply take it for granted ("it's a human right, don't you know?"). These people think that the defence money can be better used on social programs.
The mighty American military machine that has for so long secured the country's status as the world's only superpower will have to be drastically reduced, Barack Obama warned yesterday as he set out a radical but more modest new set of priorities for the Pentagon over the next decade. After the wars in Iraq and Afghanistan that defined the first decade of the 21st century, Mr Obama's blueprint for the military's future acknowledged that America will no longer have the resources to conduct two such major operations simultaneously.
Instead, the US military will lose up to half a million troops and will focus on countering terrorism and meeting the new challenges of an emergent Asia dominated by China. America, the President said, was "turning the page on a decade of war" and now faced "a moment of transition". The country's armed forces would in future be leaner but, Mr Obama pointedly warned both friends and foes, sufficient to preserve US military superiority over any rival – "agile, flexible and ready for the full range of contingencies and threats".
No doubt that conservatives will be having conniptions about such a plan.
I have commented before that the European social welfare states are a Potemkin village, as they rely on the United States to defend them, as well as cheap medical solutions invented in the US, which has allowed money to be spent on welfare programs instead. It's amazing that even given those two huge head starts the Europeans could spend themselves into penury in such a massive way.
It was only a matter of time before Americans got sick of paying for Europe's security while also getting it in the neck. It is somewhat galling for Americans to foot the bill for Europeans' security and standard of living and then be voted the most dangerous nation in the world by the European citizenry.
The Europeans must have known such a reduction was possible and the US has struck right when everyone is holding their breath about Europe's economic future. The UK, at least, understands what it means:
The wider significance of America's landmark strategic change was underlined by British Defence Secretary Philip Hammond, who used a visit to Washington to warn that America must not delay the production of US warplanes bound for British aircraft carriers. The US strategy is expected to make a drawdown of some of the 80,000 troops based in Europe.
"We have to look at the relationship with Americans in a slightly different light," Mr Hammond told Channel 4 News. "Europeans have to respond to this change in American focus, not with a fit of pique but by pragmatic engagement, recognising that we have to work with Americans to get better value for money."
Here's my take. It will be another promise like the one to close Gitmo and bring troops home early etc that the left will fall for hook, line and sinker but will never be implemented even if he wins a second term (which I think is more likely than not).
But it should give Europeans something to think about in the future.
With the result of the Iowa caucus to be decided narrowly in favour of either Rick Santorum or Mitt Romney it's clear that the biggest loser in the field was the one whose hopes were pinned most firmly on victory - Ron Paul.
Make no mistake about it, this is a devastating loss. Paul was all-in in Iowa having a massive ground game, coupled with lax rules for participation and the most fervent activists on the right side of the political spectrum, and got his butt handed to him with his not even close third place finish.
This should come as no surprise. At the end of the day Ron Paul is a loser and is a prime example of the notion that when you're a one trick pony you can't attract anything approaching a majority of the vote.
The problems with Paul as a presidential candidate are many.
While he attracts most of his support for his position on the economy and government spending, quite rightly pointing out that the spending is unsustainable, he has failed miserably over a long period to garner support within Congress even from his Republican colleagues. And it's that last point that really highlights his failure. How could he possibly be a president that gets things done?
His isolationism is problematic. The position that America should withdraw its forces from the world and close most of its bases is no different to that held by such notable lunatics as Noam Chomsky. This is not the position of a serious person. I have written before that the United States has a moral obligation to use its unique power to make the world a safer place and Paul's insensitivity to the suffering of a large part of humanity does not speak well about the orientation of his moral compass.
Over the years Ron Paul's responses to the rank racism and homophobia published in his name have the same ring of authenticity about them as did Bill Clinton's original statements regarding Monica Lewinsky. I don't believe him and neither do the majority of the American public.
It is also odd that someone that takes themselves remotely seriously could make such wishy washy statements when responding to the 9/11 Truther nutjobs. I wonder whether he's read the 9/11 Commission Report (which I commend to all, as it's a great read) or checked out the Popular Mechanics destruction of 9/11 conspiracy theories? Obviously not.
Unfortunately, I doubt his setback in Iowa will lead to a withdrawal from the race any time soon, though there is some suggestion that he doesn't want to get the mainstream Republican base too far offside, as that will hurt his son Rand's chances in the future.
I encourage everybody to watch the following video, which provides an easy to understand overview of Europe's debt woes, how they got there and what their options are.
It really does show that the social democratic state eventually falls to bits under the increasing financial burden of the promises that the left has to make to various constituencies in order to gain power, which leads to the gigantic Ponzi scheme they've got going at present.
With 2011 now behind us what were the highlights and lowlights that historians will write about?
It's a big field to choose from but I'll take a bit of a crack...
The deaths of Kim Jong Il, Colonel Gaddafi-Quddafi-Kaddafi and, of course, Osama-Usama bin Laden. It's a shame that we couldn't see off the Brothers Castro and Robert Mugabe, as well, but at least we have that to look forward to in the next year or so.
Kim Jong Il has been replaced by his son, surely the fattest North Korean in fifty years, who will no doubt continue to build the socialist utopian dream. I wonder whether inner city, latte drinking, Chardonnay sipping, Gaia-loving greenies recognize that the implementation of all of their policies would pretty much lead to a North Korean state?
Colonel Gaddafi-Quddafi-Kaddafi was caught hiding in a drain and executed on the spot by some overenthusiastic supporter of freedom and democracy. Note the use of sarcasm at the end of that last sentence. The mad Colonel's last thoughts must have been how he could have been so stupid as to voluntarily reveal his WMD program and give up its development in return for a lifting of international sanctions. I was talking to someone a few weeks ago and they asked who Gaddafi was, which you have to admit is a bit surprising, especially when the someone is in their thirties. I replied that he was the dictator of Libya for 42 years but that they took him out and shot him. The question then came, what for? For taking people out for 42 years and shooting them, I replied. Good riddance to bad rubbish. I hope the family and friends of those he murdered aboard Pan Am 103 can be somewhat more at peace now.
I wrote about the death of bin Laden when it happened, describing him as a truly evil bastard and that the wind would be knocked out of the violent extremists' sails. That has pretty much happened and while it will still take a generation for the true believers to get too old/die out, as it has with ETA, for example, the Islamist terrorist threat is now pretty well contained. That it means we have to take off our shoes when going through airport security or have our genitals groped when visiting the US is bin Laden's real legacy.
It's too early to say whether the Arab Spring will turn out to be an Arab Winter. It's more likely that in a few years' time things will pretty much be the same as they were before the uprisings but with different faces adorning placards in the town square so I'm not calling that as a highlight.
In cool things that happened, the world's first artificial organ transplant was done, using an artificial windpipe coated with stem cells.
Corporal Ben Roberts-Smith was awarded the Victoria Cross for various acts of conspicuously lunatic bravery in Afghanistan.
The Qantas dispute was an undoubted highlight. In what must be the left wing cage fight of the century, unions representing a large number of Qantas workers were left red faced and blustering when the company's gay, progressive left wing CEO, Alan Joyce, called their bluff and grounded the airline stranding hundreds of passengers getting ready to board their aircraft and inconveniencing thousands more who had to put off holiday trips. Hopefully, Qantas can maintain its independence from union control when the case is arbitrated before Fair Work Australia.
The loss of Christopher Hitchens. No death of a public figure has hit me as hard as did that of this man whose greatness came from his ability to defend Western civilization from its enemies, both within and without, and call out evildoers regardless of their political affiliation. He was a Marxist from an early age and we never knew, as he somewhat wisely avoided discussing the matter, whether he had given up on that odious ideology or was one of these people who would defend Marxism because it 'has never been done properly'. He was also a famous atheist who wrote God is Not Great: How Religion Poisons Everything, the title of which somewhat gave away the contents hidden therein. I reckon that in a contest between Religion and Leftism the latter would be by far and away the more potent and destructive poison. He had a way with words that will forever elude the 99.9% of us who hack things out on a daily basis. But it wasn't just his choice of words or defence of free speech and free thought and free living that was the attraction - he was a self described bon vivant, after all - it was that he was, simply put, fascinating. I reckon he could talk about second century Mongolian yurts for hours and keep his audience enthralled and amused as he sat at the front of the theatre unashamedly smoking and sipping from a tumbler of ubiquitous Johnny Walker Black Label. Vale, Christopher Hitchens.
There are other people whose loss we can mourn. Vaclev Havel was a great man at an important time of world affairs as Communism finally fell apart under its own ideological momentum, but he made 75 and his time was past so we remember and thank him for his deeds. Dick Winters, the great wartime officer whose heroic deeds and quiet manner were so brilliantly portrayed in the terrific mini series, Band Of Brothers, passed away at the ripe, old age of 92. In the same category of quiet bravery we also put Nancy Wake whose ability to elude German capture led to her being called the White Mouse. On the shoulders of such great people better societies are built. Steve Jobs also succumbed to illness. His legacy will be getting designers to better understand the human-machine interface providing access to computing and the Internet to many people who were previously unable to cope with it all - and I'm talking about the elderly, mainly, as well as the very young who can do with an iPad at age 3 or 4 what they would normally have to wait another 5-6 years to do on a standard PC.
The Japanese Tsunami. That 20,000 deaths and many more maimed and inured could be so quickly forgotten in the media's rush to scare the world about the non-existent nuclear threat at Fukushima or to blame it all on man made global warming highlights both the intellectual ineptitude of today's media as well as its abrogation of anything remotely resembling moral thinking.
Anders Breivik's massacre of 76 people in Norway. It wasn't just that he calmly boarded a train after setting off the bomb in his first attack and then travelled to where he would continue his killing spree but that he seemed so happy about it all and completely unrepentant. In many ways he was very similar to our own psycho, mass killer Martin Bryant. Naturally, the media pounced on a few paragraphs in his 1000 page 'manifesto' to decry him as a right wing, Christian extremist. That he also included many left wing statements in his manifesto and was never a churchgoer seemed to be missed in the media's race to apportion blame to its ideological opponents.
The Australian government probably had its worst year ever. Bowing to its extremist green coalition partner the Labor Party introduced a super profits tax on mining (the only sector of the economy holding the country up), a carbon tax (to attack the rest of the economy) in spite of a solemn promise not to do so, and new workplace legislation (in case it missed any big business with the previous two). These three things are already severely weakening business confidence and their impact will be felt for a generation, as that's how long it will take to pay back the financial mess we've been put in. What happens if China goes through a downturn is anybody's guess but it won't be pretty. I don't mind having an ideological fight over what the government should spend people's taxes on but I do get cranky that our current crop of political leaders have learned nothing from the social democratic spendathon that has wrecked Europe.
There are other things that could make the list - the Queensland floods and Western Australian fires, the ongoing nitwittery of spending somewhere between $40 and $100 billion on a broadband network, the political to and fro over illegal boat arrivals while hundreds of people continue to perish as a result of Labor's weakening of our immigration laws, and the replacement of a good and decent Speaker of the House, Harry Jenkins, with an immoral, drunken boob in Peter Slipper.
Apparently, we're all doomed anyway. According to Mayan prophesy the world is due to end in December 2012. Does anyone else see the irony of the Mayan's supposed ability to forecast the end of the world this year but inability to forecast their own demise a thousand years earlier?
With Europe on the brink of financial collapse, the USA spending itself into perdition, China's manufacturing contracting and the rest of the emerging economies in various stages of expansion and contracting what can we look forward to in 2012?
Here are my predictions for 2012. Some are big, bold and brave and some are a bit obvious. We'll see how I go in a year's time.
The pressure on the banking system is now so great that it's hard to see how they can get through 2012 without some sort of financial ruction. The ECB has recently introduced a scheme in which it will lend money at around 2% to banks that are having trouble raising capital. At the same time as it has made 200 billion Euro available European banks have actually deposited 250 billion Euro with the ECB at a 0.5% rate. What does that tell you? That interbank lending is completely broken and they'd rather get near zero interest rates from the ECB than much higher rates by lending to other banks, which they don't trust. Part of the problem is that banks are not forced to mark assets to market so their balance sheets are completely false. If forced to mark to market a large number of banks would be insolvent.
Prediction 1: A number of large, well known European banks will go belly up in 2012. Their governments will engineer mergers with other banks in the same way that Lehman Bros was.
The infamous PIIGS are in even worse shape now than they were a year ago so the outlook for them is somewhat grim. Whether the technocrats that have been installed in Italy and Greece by the Euro elites can undo the rot remains to be seen. What is clear, though, is that there is a major attempt by European politicians to avoid the situation in which any country leaves, or can leave, the EU. Greece's problems are simply a matter of social and political corruption. People have come to expect an easy ride paid for by the government lavishing wages and entitlements on them that they have not earned. For its part the government has simply borrowed and borrowed - especially once it joined the EU and could borrow at the same rate as Germany - and paid off its constituents and cronies. There are no innocent parties in Greece in that regard. Spain is simply suffering from the excesses of democratic socialism taken to their logical conclusion. Government borrowing in order to pay for a plethora of social programs has really killed their economy. Youth unemployment is something like 50% and their housing market crash makes what happened in the US look like a walk in the park. Italy, on the other hand, can get its house back in order with some reasonably simple financial discipline. I was listening to John Mauldin a few weeks back and he highlighted that in France there are around 35,000 drivers (chauffeurs) for public officials in a population of 65 million. With a few million less people that number in Italy is 160,000 and that if they simply got rid of 75% of them then it would take care of 25% of their deficit. Which is pretty amazing when you think about it.
Prediction 2: No country will leave the EU in 2012.
Given that it's an election year Mr Obama will pull out all stops to get re-elected including doing things that will boost his standing in the short term but hurt the United States subsequently. The Republican field of presidential contenders is probably up to the normal standard of years gone by but because we live in such difficult times people are looking for a strong Reagan-like figure and there simply isn't one there. It's odds on that Mitt Romney will take the nomination and enter what will be one of the most contentious, negative election races in US history.
The US Fed will respond to any quantitative easing by rolling out another round themselves in order to maintain an exchange rate of around 1.3 to the Euro. QE3 could happen in 2012 but it's not a prediction.
Prediction 3: In one of the closest races in US history Mr Obama will be elected to a second term.
The validity of the election result will be questionable given the Democrats' penchant for voter fraud and there may be grounds for appeal in certain electorates.
Prediction 4: Republicans won't have learned to correct the type of fraud that saw Al Franken steal his seat in Minnesota and we'll see repeats in 2012.
Prediction 5: The stock market will end 2012 up 20% so the Dow at around 14,500.
Chinese manufacturing is in a contraction at present due to demand for their products from Europe and the USA falling. Inflation, which has been a problem (and was exported to China from the US), is now coming under control so the government will need to look at ways of keeping their export machine going.
Prediction 6: The Chinese will re-peg the Yuan to the US dollar. This will increase their export competitiveness but will force the US to consider countermeasures in the form of quantitative easing and that will lead to an inflation problem again down the track.
Australia will continue to look like it's doing well while at the same time the foundational strength of our economy is stripped away by the most incompetent government in our history. Fair Work legislation will really bite in 2012, industrial disputes will hit a 10 year high, business investment will slow in the 2nd half due to the dual impacts of the insane Carbon Tax and Mining Tax, and the government debt will top $250B (a staggering number when you consider it was zero in 2007 and is due nearly 100% to ill-disciplined spending). The Reserve Bank will be forced to reduce interest rates in order to keep our dollar from appreciating too much against those other countries that are in the process of money printing. In an environment of rising inflation that could spell trouble for the Australian economy in 2013. All of which makes the next prediction pretty simple.
Prediction 7: The next election will be called early, probably in the last quarter of the year.
With many governments increasingly unable to fund themselves they will turn to the only source of funds left that they can access - pension funds. This will be a disaster, of course, but I expect that governments will force pension funds to invest a percentage of their assets - say 25% - in government bonds. If this happens then make sure you have many, many assets to fund your retirement, as you won't be able to rely on your pension maintaining its purchasing power.
Precious metals will continue their volatility in 2012. Gold is heading up and now is a good time to be buying. The current drop in prices is a result of raising cash to meet margin calls and, while there might be some slight downside still to go, I expect gold to top $2000 by year's end. Silver is a bit more problematic but I think that there's at least 10% in it and maybe more so I'll call $35 and see how I go.
Hope everyone has a terrific 2012. Remember to focus on your health and happiness first, as without that you're nothing!
Update: Prediction 8: Nothing will change in Syria. Assad will not be forced out now or anytime soon.
Update 2: Prediction 9: There's a fair chance that if any other regime is going to fall in the Middle East this year then it'll be Iran.