Review – The Party (#China, #communism, #politics, #books, #review)

The Party: The Secret World of China’s Communist Rulers

by Richard McGregor, published 2010

Thus it is obvious that the only visible, tangible government we have is made up of these professed agents or representatives of a secret band of robbers and murderers, who, to cover up, or gloss over, their robberies and murders, have taken to themselves the title of “the people of the United States”; and who, on the pretense of being “the people of the United States,” assert their right to subject to their dominion, and to control and dispose of at their pleasure, all property and persons found in the United States.

~Lysander Spooner, “No Treason, no. 6, The Constitution of No Authority“, 1867

The “secret” at the heart of this book is that the nation of China has been ruled, since 1949, by an unelected confederacy of gangsters calling themselves “The Communist Party of China”, who wield extra-judicial power over Chinese society up to and including superiority over the so-called sovereign government of China. In other words, the Chinese government does not discipline members of the Party, but rather members of the Party discipline members of the Party, and everyone else.

I see three interesting questions raised by this fact, none of which appear to be addressed by the text:

  1. How is it that a private “political” organization (ie, mafia) came to control an entire country like China, including its government?
  2. If members of the Party are not answerable to the Chinese government or the Chinese people, who are they answerable to (what restraints, if any, are there on their power and why)?
  3. If the Party controls everything and is the real source of opportunity in Chinese society, why wouldn’t a rational, ambitious person make it their goal to enter the Party and thus enjoy their rewards?

The first question is not addressed because this is not a work of history as much as it is an exploration of the mechanical functioning of Chinese politics. But the question should interest us nonetheless, because if it has happened in China, it’s possible it could happen somewhere else, or more cynically, that it has happened somewhere else (I’m not talking about the USSR, or Cuba, or North Korea here…) and may be it is happening somewhere else right this moment. If murderous gangs can get control of extremely populous, ancient and fairly homogenous societies as a kind of accident of history, there is nothing to be done about it. But if there is some kind of predictable pattern to this kind of exploitation, there may be a similarly predictable pattern for defending civilization against it or unwinding such a menace once installed.

The second question is not addressed because the book’s focus is really about China narrowly, not China in the context of international political structures. Within the domestic domain, the author suggests that the Party’s control is essentially ironclad. If you can murder tens of millions of people by starvation or as collateral in a kind of cultural war, and continue on in power, you don’t seem to have many internal threats to your power. What is it that seems to get the Party’s panties in a bunch? The risk of failing to impress the outside world with a spectacular 2008 Beijing Olympic Games when revelations about a mass infant poisoning via tainted baby formula come to light. Why doesn’t a market for political control exist within China, but it does seem to exist outside of China? Who is a realistic potential hegemonic external ruler of China in the post-colonial era?

The third question is not addressed because it is taken as given by the author that the Party is an immoral institution and thus no reasonable person would want to participate in it. The people who stand outside the Party, or who are demonstrated as being victims of it, are painted as the good guys, just trying to get by, while the Party members highlighted are discussed in menacing terms, from afar, almost like a kind of wild animal whose motivations do not merit spending time trying to understand. But if your society has been co-opted by a secret band of murderers and thieves, isn’t joining forces with them your best and most rational chance for survival, at least while a domestic market for political control seems non-existent?

And what of our own society, in the West generally and in the United States specifically? It seems like choosing not to be political, to not only avoid participating in politics but to avoid membership in political parties and ambition within their institutional frameworks, seems to be a choice to cede social and even a measure of individual control to those who choose otherwise. Why play the victim? What good is morality when it is a tool of your own undoing?

Of course, a party that everyone is invited to join has no advantage in exploitation, so it must have some meaningful criteria for excluding people and thus ensuring a supply of victims from which it can extract its privileges.

3/5

Review – From Third World To First: The Singapore Story (#Singapore, #history, #economics, #politics, #books)

From Third World to First: The Singapore Story, 1965-2000

by Lee Kuan Yew, published 2000

Extended Introduction

This book has two parts (well, really, three, but the third part is about 20 pages and isn’t as significant as the other two parts), the first of which is about how Lee Kuan Yew describes the building of political institutions and the development of the economy of Singapore under the leadership of himself and his People’s Action Party over almost four decades, the second of which is a country-by-country exploration of Singapore’s foreign relations or what might best be called the exercise of Lee Kuan Yew’s political power abroad. I have an essay planned which will cover the first part of the book separately, focusing on the economic development of Singapore “from Third World to First” and the related political issues with specific emphasis on the myth of Singapore as an example of free market economics at work. Confusingly for some readers, I will argue both that according to Lee Kuan Yew himself Singapore was not a free market and was not intended to be one, and that despite this most of the credit for Singapore’s amazing economic development over the forty year period observed still belongs to the workings of the free market and not to intelligent central planning and wise stewardship of the economy by protectionist politicians.

Therefore, this review will only cover part of the book, but a still substantial one (pg. 225-660) and one which touches upon enough issues that will be raised in the upcoming essay that the reader should be able to get most of the story. I also plan in this review to meander quite a bit and talk about the things I found most interesting or meaningful, rather than summarizing the themes. I took extensive notes on the used copy I bought, annotating almost every other page. There’s a lot to chew on here and I probably won’t cover it all even between this review and the later essay, but might come back to it and comment on individual issues as my thoughts or interest allow. For those who are so inclined, you may wish to read some personal observations and experiences I had during a recent trip to Singapore, as well as some of the comments I made about Singapore’s history and political story, by reading the earlier posts tagged about Singapore. They may add meaningful context.

The Role of International Affairs in Little Singapore

Imagine I described to you a tiny, natural resourceless island nation situated strategically along a major shipping lane, whose historical role was one of trade entrepot and for whom fluid commercial volumes with every people and country possible were key to its economic survival. What kind of foreign policy would you imagine such a country would conduct? Do you imagine it’d have a standing army, or rely on the goodwill of other nations for its existence? What do you think it’s chief executive would spend most of his time doing and where would he most frequently be found?

According to LKY’s memoirs, though a small country dependent upon trade and commerce, Singapore nonetheless had a big role to play in international politics and was not above taking hostile stances even toward other southeast Asian nations (and even looked on approvingly at various wars in the Middle East!). Establishing a robust Singapore Armed Forces was one of the first priorities of LKY when independence was gained in 1965, reportedly to ward off threats from Malaysia and even Indonesia. And during my reading, I lost count of the number of times various chapters and paragraphs began with LKY meeting with other political and academic elites outside of Singapore.

Rather than adopting a strict foreign policy of peace and goodwill towards all nations, LKY comes across as almost bloodthirsty in his description of Singapore’s role in the Vietnam War, describing American intervention as good and necessary, claiming the Vietnamese regime deserved to be “punished”, first in a cross-border skirmish with China and then by continuing sanctions and non-normalized trade and diplomatic relations between Vietnam and Singapore even a decade after the conflict ended and even going so far as to throw his lot in with the Khmer Rouge to counterbalance the Vietnamese puppet government in Cambodia, describing the decision as one arrived at after having “no choice”! If choice doesn’t play a role in designing policy, what need have we of great leaders like LKY?

And then there is Singapore’s role as arms merchant at various times in various conflicts…

And why was it so important to LKY to get agreements with other countries to host SAF detachments for training in unusual environments? Though we are told that the SAF was created to defend tiny Singapore, the desire to train in environments alien to the tiny tropical island seem to lead logically to one place– interventionism. I doubt LKY planned to militarily dominate the globe, but surely he hoped to have his forces participate in struggles that had nothing to do with the direct defense of the island.

While many of the political tours were related to commitments imposed by being part of the British Commonwealth and its former colonial possessions, there seem to be just too many instances of LKY as a global jetsetter to excuse. Why was this man hobnobbing seemingly everywhere but Singapore?

I don’t know what the meaningful difference is between a currency board and a central bank, but assuming there is one, LKY said that Singapore did not have a central bank because,

a central bank is an easy way out for a finance minister who likes to juggle [his figures] when he has a deficit in his budget. I do not think we should put such a temptation before the finance minister in Singapore.

And yet, we witness numerous examples throughout the book, including episodes in Indonesia, Malaysia, Thailand and the Asian Financial Crisis during which Singapore attempts to “defend” the value of other countries’ exchange rates through currency intervention in Singapore. Why? What excuse could their possibly be for this behavior other than trying to be a “player” in world affairs?

But it’s not all baffling. The book has its charming moments, too, including many glimpses into how world political figures really think and what they say about their regimes and records of governance behind the scenes. Take, for instance, this phallic competition between Indonesia’s Sukarno and Lee Kuan Yew:

[Sukarno] asked, “How big is your population?” “One and a half million,” I replied. He had 100 million. “How many cars do you have?” “About 10,000,” I said. Jakarta had 50,000. I was puzzled but readily conceded that he occupied first place in Southeast Asia in terms of size.

Or, the behavior of Indian officials in the face of new golf balls:

It was a gradual slide in quality of a once elite service [Indian Civil Service], now caught up in the throes of a social and economic revolution which had reduced living standards… they could not buy good (i.e., imported) golf balls because their import was forbidden… Our high commission had advised me to bring several boxes of golf balls to distribute to the committee members of the club. It was depressing to see top brass and civil servants breaking up the packages and taking fistfuls of golf balls to stuff into their golf bags.

Indeed, golf balls were so precious that caddies would dash into any house or rough to find them. Once, at the former Bombay Royal Golf Course in 1965, I sliced my ball into a squatter area [what is a squatter area doing within driving distance of a Royal Golf Course?] and heard the loud clatter as it fell on a zinc roof. My caddie dashed off, I thought to find out who was hurt. But no– a little boy emerged with the golf ball, not to complain of injury but to bargain over the price of the ball.

We also learn of the need to be street-wise when dealing with foreign communist dictatorships looking to play a little development scam on a credulous leader:

In February 1994, I signed the Suzhou Agreement with Vice Premier Li Lanqing in Beijing, witnessed by Premier Li Peng and Prime Minister Goh… the essence of the project was to transfer our knowledge of how to plan, build and administer a comprehensive industrial, commercial and residential park that could attract high-quality foreign investors… Instead of giving SIP their full attention and cooperation as was promised, they used their association with Singapore to promote their own industrial estate, Suzhou New District (SND), undercutting SIP in land and infrastructure costs, which they controlled… It was a chastening experience… For the Suzhou authorities, a signed agreement is an expression of serious and sincere intent, but one that is not necessarily comprehensive and can be altered or reinterpreted with changing circumstances… China has an immensely complex government.

But LKY was something of a shakedown scam artist himself as Singapore was seen as a “developing” but not “developed” economy for some time. After catching some American personnel spying in Singapore,

I told the British commissioner, Lord Selkirk, that we would release these men and their stupidity would not be made public if the Americans gave a hundred million U.S. dollars to the Singapore government for economic development. They offered US$1 million, not to the Singapore government, but to the PAP [LKY’s political party]– an unbelievable insult.

He engineered something similar with Japan,

The only important business I raised with Prime Minister Hayato Ikeda was the “blood debt”, a request for compensation for their wartime atrocities… We eventually settled this “blood debt” after independence, in October 1966, for $50 million [serious money for small Singapore when the dollar was worth something!], half in grants and half in loans. I wanted to establish good relations to encourage their industrialists to invest in Singapore.

American race-baiters like Jesse Jackson and Al Sharpton couldn’t have worked a better deal with calls for reparation that would just end up in their own pockets! He even tried the same scam on different terms with the Japanese at a later date, this time playing “Godfather” over a shipping lane:

To get the Japanese to help us, for example, in investing in a petrochemical plant, we had to remind them that their ships passing through the Straits of Malacca would have problems with toll collectors if Singapore were to join the other littoral states, Indonesia and Malaysia.

“Nice open sea lane you got there, it would be a shame if something happened to it,” said in a thick, Germanic Robber Baron accent. The shakedown later continued with “soft loan” subsidies available only to developing nations:

I protested to Fukuda that his officials had spoken of Singapore not as a developing country but as an industrialized one not entitled to soft loans from Japan… We would lose our General Scheme of Preferences (GSP) [like affirmative action for international trading partners who are non-developed countries] and other advantages before we could compete on equal terms.

“Soft loans” are a form of fraud where one entity makes loans to another entity that they never intend to be repaid and usually forgive entirely. It is an outstanding source of graft, especially in corrupt political regimes where outright bribery is outlawed by the lender nation’s laws.

When he isn’t reflecting on his own actions, LKY proves to be a biting and incisive critic and a truthful observer of laws and conditions in other people’s countries. Here he is on the European Economic Community, the predecessor to the EU:

With the other commissioners, I discussed how to avoid manufacturing those products that EEC countries would find sensitive because of persistent high unemployment. I discovered to my dismay that the list was unlimited. Any member country with any influence on Brussels, feeling the slightest pain, could appeal to Brussels for protection and would invariably get it.

This brief anecdote proves three things simultaneously– (1) contrary to propaganda, the EU is a protectionist trading bloc, not a free trading society, (2) there appears to be no nation on Earth that is led by politicians who understand the benefits of free trade, even unilateral free trade and (3) not even trade-dependent Singapore is able to gain a competitive advantage by being a true free trader because it was led by a Keynesian planner-mindset politician-in-chief, LKY, who had his own worries about managing unemployment in his country to risk upsetting bureaucrats in Brussels! Now that is global political power projection for you!!

Here’s another honest and insightful observation from LKY, this time about a faux pas made by an inept American president:

When I was leaving, he gave me a green leather-bound copy of his campaign autobiography [aw gee, what a nice gift, a hastily produced, ghost-written volume of propaganda], Why Not the Best? He had already inscribed it, “To my good friend Lee Kuan Yew. Jimmy Carter.” I was flattered but surprised by my elevation to “good friend” even before he had met me. This must have been a standard practice during his election campaign.

It makes you wonder if Jimmy Cahtah even bothered to sign it himself. If you’re going to piss off a foreign leader on a cheap gesture, spare no expense!

The book is rife with such charming episodes, I could fill the blog up with them. Instead, it’s worth saying something about Lee Kuan Yew’s somewhat confusing and arbitrary arguments for polylogist legal theorizing and the explanations he gave for the success of Singapore’s economic and national development since 1965.

As a polylogist, LKY is a skeptic of the idea of simply importing “progressive” legal principles from one population to another:

the are fundamental differences between East Asian Confucian and Western liberal societies. Confucian societies believe that the individual exists in the context of the family, extended family, friends and wider society, and that the government cannot and should not take over the role of the family. Many in the West believe that the government is capable of fulfilling the obligations of the family when it fails, as with single mothers… freedom could only exist in an orderly state, not when there was contention or anarchy. In Eastern societies, the main objective is to have a well-ordered society so that everyone can enjoy freedom to the maximum [even better if they’re ruled by people like LKY!]… Democracy works where the people have that culture of accommodation and tolerance which makes a minority accept the majority’s right to have its way until the next election, and wait patiently and peacefully for its turn to become the government by persuading more voters to support its views.

And yet, he encouraged China to join as a member of the law-abiding community of nations! How can China, whose authoritarian legal system is ostensibly appropriate for the culture and values of the Chinese, join the law-abiding international community whose laws and customs are foreign and antagonistic to the culture and values of the Chinese? One potential solution is that there exist in every society a set of elite individuals who are not beholden to local political bigotry and historical traditions but can instead transcend them and tap into a more universal logic. But if they can do this for their countries at an international level, why can’t they do this at the “local” level of their domestic politics?

This seems to present some problems for the polylogist approach of LKY, although I think there’s a perfectly simple, but embarrassingly revealing, answer that has something to do with the reality of power and how and why it is exercised in any society which the thoughtful reader can probably surmise with a bit of their own consideration.

I am not a polylogist. I believe there is one, universal human logic that all mature, physically functioning adult minds can understand and employ in their own thinking and communications. That being said, I think LKY is absolutely correct that it is absurd to believe one can foist political principles that were developed over hundreds or thousands of years of combined cultural history onto a population that has never utilized them before, such as using military Keynesianism to deploy democracy in Afghanistan and Iraq, particularly when in so doing the existing political arrangements and power structures are rapidly collapsed or, worse, ignored as if they’re unimpactful.

But more importantly, I think it is naive to expect any political principle, foreign or domestic, to work miracles. For example, believing the process of revealing voter preferences through democratic elections can somehow obviate the need for working within the confines of economic scarcity. Or, to use another example, instituting a vicious socialist dictatorship which doesn’t give a damn about anyone’s preferences, and expecting it to spit out the highest standard of living in the world for its people. So, there is some truth to what LKY is saying on this subject, just not much how he said it.

And how did LKY explain Singapore’s success?

the basic principles that have helped us progress: social cohesion through sharing the benefits of progress, equal opportunities for all, and meritocracy, with the best man or woman for the job, especially as leaders in government

I’d call this a bit of self-aggrandizing delusion. When LKY says “sharing the benefits of progress”, he means that he doesn’t believe the outcomes in a market society are anything but random (he makes this claim in an early section of the book), and that the wealth should be spread around by politicians through things like government housing projects and forced savings accounts. Of course, getting to hand out welfare goodies after an election is a good strategy for winning future elections– some might call this building “social cohesion” to a particular party’s cause, such as LKY’s People’s Action Party.

Similarly, it is pure fudge to claim that you provided equal opportunities for all while running a meritocracy. A meritocracy implies an inequality of opportunity– opportunity goes to those who show merit, having performed well with other opportunities. To give everyone equality of opportunity is not just wasteful, it’s impossible. Does everyone in Singapore have an equal opportunity to be Prime Minister like LKY, or just those who control a well-oiled electoral wealth redistribution machine like the PAP? The double fudge is insisting that government leaders themselves are examples of this meritocracy. Nobody wants to lose their subsidized housing for questioning the merits of their political leaders!

That being said, I don’t think LKY played NO part in the Singapore success story. There is something to be said for a stable political regime with predictable laws and regulations over a 40+ year period, especially one which tended more toward laissez-faire than most. And clearly, looking around the neighborhood (Malaysia, Indonesia, Vietnam, Cambodia… China) Singapore could’ve had worse political management than it experienced. I just think that the credit due is negative– it’s what LKY and his team didn’t do, that made Singapore great, not what they did do. That, and what they didn’t do relative to what the more eager regimes in neighboring jurisdictions did do over the time period observed. With racial tension in Malaysia, military government in Indonesia, socialist science experiments in India, a devastating civil war in Vietnam and the Great Leap Forward and Cultural Revolution in China, you didn’t have to be all that fast to win this footrace.

By just not getting out of bed and ordering an atrocity each day, LKY virtually guaranteed the investment, development and progress would come to his tiny island nation unimpeded for decades, just like it did. But since there’s no way to run a truly controlled experiment here, there’s no way to know for sure what might’ve happened under a different set of policies, so ultimately it’s Lee Kuan Yew’s word against mine.

3/5

Review – The Panic Of 1819 (#history, #economics, #banking)

The Panic of 1819: Reactions and Policies

by Murray Rothbard, published 1962, 2007

Please note, this book is also available as a free PDF on the Mises.org website, which is how I read it [PDF]

Introduction

Rothbard’s “The Panic of 1819” is a lot of things, but the thing it is most is yet another reminder of the old dictum “Plus ca change, plus c’est la meme chose”. Contained in this approximately 250-page reporting of the causes, consequences and social responses to the Panic of 1819 are the same behaviors and political programs that could be found in today’s headlines about corrupt Chinese banking practices, Chicago-school monetarism and Keynesian pump priming, including early recognition that attempts to kickstart “idle resources” logically implies a totalitarian command economy where the government manages all resources (and all people) at all times.

It’s all here, and more. There is nothing new under the sun.

How the business cycle gets started

Early on page 16 the reader is entreated to an excerpt from private correspondence between Pennsylvania politician Condy Raguet and European economist Richard Cantillon in which Raguet tries to clear Cantillon’s confusion as to how fractional reserve banking manages to operate to the point of a catastrophic bubble instead of wobbling and crashing under its own confusing weight:

You state in your letter that you find it difficult to comprehend, why person who had a right to demand coin from the Banks in payment of their notes, so long forebore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not the interest of the first to press the banks and the rest are afraid. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society.

Today’s full reserve Austrian economists, caught between clueless and complacent bank executives, a massively indebted “ownership society” public, Keynesian and monetarist adherents and “free banking” friends who are anything but, simply has no place to turn for safety. He defaults to “enemy of society” status in the ensuing confusion though he seeks only to point out the folly of these fractional reserve systems which inevitably injure all in tying their fates by one string.

The Panic of 1819 followed the War of 1812. During the war, imports and exports came to a halt due to the sea being a battleground and many products which would’ve been imported were kept in their home (overseas) markets to furnish the war effort. As a result, the young States United of America saw the development and growth of domestic manufactures and exportable industries. However, when the war ended and international trade resumed, many domestic manufacturers found they weren’t actually competitive facing world markets (this makes sense because if they had been they probably would’ve developed before the war, not during it in a period of “isolationism”). This created a nascent strain of “protectionist” thinking and monied interests who saw a benefit to adding tariffs on imported products.

The end of the war and the resumption of trade saw a banking boom (fractional reserve) which finally ended in 1819 with the panic. From about 1819-1823 the country was in and out of what could be termed depressed economic conditions. In many ways the early country’s experience mirrored the present day experience from 2008-2009 onward, especially the contentious economic and political debates about how to respond.

Something I found fascinating was what happened to various “macro” economic metrics during the Panic (what we’d call a crash):

The credit contraction also caused public land sales to drop sharply, falling from $13.6 million in 1818 to $1.7 million in 1820, and to $1.3 million in 1821. Added to a quickened general desire for a cash position, it also led to high interest rates and common complaint about the scarcity of loanable funds.

That last bit is especially fascinating to me. I don’t know what the state of federal funded debt was in this time period as Rothbard doesn’t really go into the concept or existence of a “risk free rate” but it is interesting to see “deflation” leading to HIGHER rather than LOWER interest rates. In today’s topsy turvy world, low rates are supposed to be the result of the flight to safety during a depression while high rates are supposed to herald an economic recovery. However, it seems it was just the opposite in 1819.

I found myself charmed by the ability of so many in 1819 to see what was the cause of the bubble and the collapse, even politicians. For example, in an address supporting a “relief bill”, Illinois Senator Ninian Edwards observed:

The debtors, like the rest of the country, had been infatuated by the short-lived, “artificial and fictitious prosperity.” They thought that the prosperity would be permanent. Lured by the cheap money of the banks, people were tempted to engage in a “multitude of the wildest projects and most visionary speculations,” as in the case of the Mississippi and South Sea bubbles of previous centuries.

I enjoyed learning that even medical analogies to describe the cause and effect of monetary expansion and collapse were popular in 1819. One government committee, the Hopkinson Committee, arguing against “debt relief” legislation, noted:

palliatives which may suspend the pain for a season, but do not remove the disease, are not restoratives of health; it is worse than useless to lessen the present pressure by means which will finally plunge us deeper into distress.

I thought that pain pill and hangover analogies were something recent and peculiar to adherents of the Austrian school but critics knew of these rhetorical flourishes even two hundred years ago, at least!

On the topic of “flight to safety”, I did make note of one paragraph which seemed to suggest that while interest rates on bank debt and other commercial lending may have risen, interest rates fell dramatically on tax-backed (ie, “guaranteed”) government issues, for example:

“A Pennsylvanian” pointed to United States and City of Philadelphia 6 percent bonds being currently at 3 percent about par– indicating a great deal of idle capital waiting for return of public confidence before being applied to the relief of commerce and manufacturing. Thus, in the process of criticizing debtors’ relief legislation, the “Pennsylvanian” was led beyond a general reference to the importance “confidence” to an unusually extensive analysis of the problems of investment, idle capital, and the rate of interest.

This theme of “idle capital” was remarked on more than once in the text and by various parties with differing viewpoints. This is a particular fetish of Keynesians and monetarists who cite the existence of “idle capital” as an excuse for government to raise public spending to “put it to work.” It is fascinating to see these early Americans predicted Keynesianism by almost 150 years!

Another thing I found remarkable was the prevalence of either state-owned banks (federal, with the Bank of the United States, or individual states) or strong political pushes to establish these banks in response to the ensuing depression and the stress this created on the banking system. In other words, nationalization of the banking industry as a political prop to collapsing FRB institutions is nothing new:

The Alabama experience highlights the two basic measures for monetary expansion advocated or effected in the states: (1) measures to bolster the acceptance of private bank notes, where the banks had suspended specie payment and where the notes were tending to depreciate; and (2) creation of state-owned banks to issue inconvertible paper notes on a large scale. Of course, the very fact of permitting non-specie paying banks to continue in operation, was a tremendous aid to the banks.

People refer to the United States economy and monetary system at various points in time being “free market”, and while it’s true that tax rates and business regulations were generally less cumbersome near the nation’s founding than today, it is also true that there has been a virulent strain(s) of interventionist thinking and policy-making from very early on. It wasn’t until 1971 with Richard Nixon’s closing of the gold window that the US currency finally went fully inconvertible, and yet already in 1820 (if not earlier), people were calling for inconvertible paper currencies issued by state-owned banks. Some free market!

The whole episode seems to beg a question that, sadly, Rothbard did not explicitly address or explore, namely, Why did banks need to be chartered by the government in the first place? Although there were calls during the response to the economic crisis for various forms of occupational licensing and business regulation (aimed at stemming the flood of superior imports damaging local industries), the reality is that any other business but banking, such as butchering, baking, sawmilling, leather tanning, import/export, etc., did not require special permission granted by a session of the local legislature, state or federal. Why was banking different, requiring an act of congress to get the enterprise going?

Besides the fact that many such banks seemed to be public-private partnerships which included state “capital” injected into them, the only answer I have managed to come up with so far that makes any sense is that the banks were all set up on a fractional reserve basis, and a blessing by the government served to either 1.) grant legitimacy to an illegitimate institution or 2.) create the pretense and wishful thinking of providing some kind of “legal oversight” to what everyone at the outset understood to be an essentially criminal organization operating with a special legal privilege or 3.) both.

Because every bank had to be chartered, when the FRB system inevitably hit a bump in the road as it did in 1819 and many banks wished to suspend redeemability of their bank notes to stem outflows of specie, their status as creatures of the public legal mechanism meant they could run to the legislature for permission to violate their own contracts– and they almost always got the permission granted. Now, for example, if angry pitchfork-wielding townsfolk show up to break into the vault, take their gold and lynch the bankers, the Sheriff might step in with his posse to make sure everyone remembered their role.

Keynesians and monetarists and Chinese bankers

Continuing the theme of “everything new is old”, I was struck by commentary from a Pennsylvanian congressman named Henry Jarrett suggesting that government relief money might serve to prime the pump of the economy:

An inconsiderable sum of money, for which the most ample security could be given, being loaned to a single individual in a neighborhood, by passing in quick succession, would pay perhaps a hundred debts.

Kind of sounds like George W. Bush urging Americans to go shopping after 9/11, in order to get confidence in the economy back. It’s a crass Keynesian tactic inspired by a confused understanding of the relationship between production, consumption and the role of money in the economy.

It was also interesting to see how many people back then could sense there was a problem with the way the banking system operated, but were confused into thinking banking in and of itself was illegitimate, rather than simply the practice of issuing a greater supply of banknotes than the amount of specie held in reserve. Consider a campaign circular for a candidate for Congress from mid-Tennessee, who said:

banking in all its forms, in every disguise is a rank fraud upon the laboring and industrious part of society; it is in truth a scheme, whereby in a silent and secret manner, to make idleness productive and filch from industry, the hard produce of its earnings

If you substitute “banking in all its forms” with “fractional reserve banking”, you’ve got a pretty accurate description of the nature of the problem.

It’s also worth quoting at length the argument of “An Anti-Bullionist”, who thought that the economic crisis of 1819 was caused by specie money specifically, rather than abuse of specie money via fractional reserves. In its place he sought to create a fully inconvertible paper currency issued by the government which would of course be “well regulated” and serve to protect the economy from the inevitable deflationary death spiral of the specie system he believed he was witnessing. Shades of later monetarist thinking abound:

His goal was stability in the value of money; he pointed out that specie currency was subject to fluctuation, just as was paper. Moreover, fluctuations in the value of specie could not be regulated; they were dependent on export, real wages, product of mines, and world demand. An inconvertible paper, however, could be efficiently regulated by the government to maintain its uniformity. “Anti-Bullionist” proceeded to argue that the value of money should be constant and provide a stable standard for contracts. It is questionable, however, how much he wished to avoid excessive issue, since he also specifically called a depreciating currency a stimulus to industry, while identifying an appreciating currency with scarcity of money and stagnation of industry. One of the particularly desired effects of an increased money supply was to lower the rate of interest, estimated by the writer as currently 10 percent. A lowering would greatly increase wealth and prosperity. If his plan were not adopted, the writer could only see a future of ever-greater contractions by the banking system and ever-deeper distress.

Even chartalists will be happy to see that early proponents of the “American System” of nationalist public-private industry were representing their views in the debates of the early 1820s, for example:

Law pointed to the great amount of internal improvements that could be effected with the new money. He decried the slow process of accumulating money for investment out of profits. After all, the benefit was derived simply from the money, so what difference would the origin of the money make? And it would be easy for the government to provide the money, because the government “gives internal exchangeable value to anything it prefers.”

Why even have a private industry? Or money, for that matter?

Luckily, advocates of laissez-faire existed in this time period, too, and they were not silent. Commenting on one proposal to deal with “idle capital” by Matthew Carey, the “Friends of Natural Rights” wrote:

The people of the United States being in a very unenlightened condition, very indolent and much disposed to waste their labor and their capital… the welfare of the community requires that all goods, wares, mechandise and estates… should be granted to the government in fee simple, forever… and should be placed under the management of the Board of Trustees, to be styled the Patrons of Industry. The said Board should thereupon guarantee to the people of the United States that thenceforth neither the capital nor labor of this nation should remain for a moment idle.

[…]

It is a vulgar notion that the property which a citizen possesses, actually belongs to him; for he is a mere tenant, laborer or agent of the government, to whom all the property in the nation legitimately belongs. The government may therefore manage this property according to its own fancy, and shift capitalists and laborers from one employment to another.

Finally, I don’t seem to have made a good note of the specific passage that caught my attention in this regard but I chuckled when reading the description of the operations of the average bank before collapse. These bankers would set up a new bank and pay only a fraction of capital with specie, the rest would be constituted by additional promissory notes from other banking institutions (which were themselves fractional). The bankers would pay themselves dividends, in specie, while the bank operated, and issue themselves and their friends enormous loans with which they’d purchase real goods and services, all while the real specie capital of their bank depleted. When crisis hit and they could not redeem their depositors’ money, they’d get legal permission to suspend redemption, ask for infusions of new capital from state authorities and/or set up a brand new bank whose purpose was to steady the previous institution. Ultimately, the bank would collapse and this too would work in their interest because they’d already hauled off the specie via dividends to themselves, and many of them were debtors of the bank who now had loans due in a worthless currency that was easy to obtain.

It reminded me a lot of the present Chinese state capitalist model.

Conclusion

“The Panic of 1819” is not light reading and for some readers it may not even be interesting reading. It depends a lot on how fascinating you find in depth examinations of “minor” historical economic events.

But that doesn’t mean it isn’t surprising, well-written (for all the facts and data, Rothbard still manages to weave together a narrative that helps the reader appreciate the nuances of the various factions and viewpoints of the time) and at times, depressingly relevant. People who care about economic and financial history and unique, formative episodes in the early history of this country, will find a lot of insights and curiosities in this work. I strongly recommend it.

4/5

Passing through Taipei (#travel, #Taiwan, #Asia)

We’re on the second leg of our trip home, connecting from Singapore in Taipei. I remembered that I forgot to share about our visit to the Taipei Municipal Water Museum when we were here last week.

img_20160412_110735

This building and pump system was constructed by the Japanese administrators after Taiwan was transfered to Japan by the Qing Dynasty. It was constructed around the 1920s, maybe earlier, I don’t remember. We have to assume the city didn’t have anything like this prior to the Japanese building it as I saw no mention of it replacing any previous water sanitation system.

The system is fed by gravity from a canal that diverts water from a nearby river. The dirty water is pumped up an incline to create pressure where it is gravity fed into a filtration system below. The water passes through various sand compartments and is filtered of particulate. The clean water then enters the second half of the installation and is pumped back uphill to create pressure and is then gravity fed into the distribution network of mains around the city.

The project is fascinating for its technological complexity. It required knowledge of hydraulic engineering, metallurgy, electricity, biology, physics, masonry, and mechanical engineering to construct. It undoubtedly took the labor of hundreds of people to construct and operate. While the pumping station has been replaced by modern equivalents, the filtration system is still in use and has been expanded and the general principle of operation remains the same.

The Japanese left many legacies like this behind them. Setting aside the brutality of their occupation, they left many cultural, edible, and practical social improvements behind them that the Taiwanese admire to this day.

Why did the Japanese feel they must expand their influence through militarism and conquest? Why couldn’t a Japanese engineering firm have been hired to construct this project on the basis of market principles and freely entered contracts?

How much different could history be, and how much further ahead socially would southeast Asia be, if the Japanese had been captured by a more peaceful ideology?

The Best Interview On Gold, The Gold Market And Investment Implications I’ve Ever Read (#gold, #economics)

In “What is the key for the price formation of gold?” at GoldSwitzerland.com, SF-based software developer Robert Blumen covers a lot of fascinating and, to my eyes, original ground in an interview with the site’s host.

This has got to be the best interview on the subject of gold in general, the functioning of the gold market and the implications for investors that I’ve ever come across. Blumen not only covers these specific subjects related to gold, but also discusses the Chinese economy, the US economy and the state of monetary and fiscal affairs and even the attitudes of value investors, demonstrating thoughtful familiarity with all he touches. Blumen is well-versed in Austrian economic philosophy and applies this theory to the various practical considerations resulting in surprising new perspectives on common themes.

It’s a long interview and it will only fully reward those determined to dive all the way in. Here’s an excerpt:

There are two different kinds of commodities and we need to understand the price formation process differently for each one. The first one I’m going to call, a consumption commodity and the other type I’m going to call an asset.

A consumption commodity is something that in order to derive the economic value from it, it must be destroyed. This is a case not only for industrial commodities, but also for consumer products. Wheat and cattle, you eat; coal, you burn; and so on. Metals are not destroyed but they’re buried or chemically bonded with other elements making it more difficult to bring them back to the market. Once you turn copper into a pipe and you incorporate it hull of a ship, it’s very costly to bring it back to the market.

People produce these things in order to consume them. For consumption goods, stockpiles are not large. There are, I know, some stockpiles copper and oil, but measured in terms of consumption rates, they consist of days, weeks or a few months.

Now for one moment I ask you to forget about the stockpiles. Then, the only supply that could come to the market would be recent production. And that would be sold to buyers who want to destroy it. Without stockpiles, supply is exactly production and demand is exactly consumption. Under those conditions, the market price regulates the flow of production into consumption.

Now, let’s add the stockpiles back to the picture. With stockpiles, it is possible for consumption to exceed production, for a short time, by drawing down stock piles. Due to the small size of the stocks, this situation is necessarily temporary because stocks will be depleted, or, before that happens, people will see that the stocks are being drawn down and would start to bid the price back up to bring consumption back in line with production.

Now let’s look at assets. An asset is a good that people buy it in order to hold on to it. The value from an asset comes from holding it, not from destroying it. The simplest asset market is one in which there is a fixed quantity that never changes. But it can still be an asset even when there is some production and some consumption. They key to differentiating between consumption and asset is to look at the stock to production ratio. If stocks are quite large in relation to production, then that shows that most of the supply is held. If stocks are small, then supply is consumed.

Let me give you some examples: corporate shares, land, real property. Gold is primarily an asset. It is true that a small amount of gold is produced and a very small amount of gold is destroyed in industrial uses. But the stock to annual production ratio is in the 50 to 100:1 range. Nearly all the gold in the world that has ever been produced since the beginning of time is held in some form.

Even in the case of jewelry, which people purchase for ornamental reasons, gold is still held. It could come back to the market. Every year people sell jewelry off and it gets melted and turned into a different piece of jewelry or coins or bars, depending on where the demand is. James Turk has also pointed out that a lot of what is called jewelry is an investment because in some parts of the world there’s a cultural preference for people to hold savings in coins or bars but in other areas by custom people prefer to hold their portable wealth as bracelets or necklaces. Investment grade jewelry differs from ornamental jewelry in that it has a very small artistic value-added on top of the bullion value of the item.

So, now that I’ve laid out this background, the price of a good in a consumption market goes where it needs to go in order to bring consumption in line with production. In an asset market, consumption and production do not constrain the price. The bidding process is about who has the greatest economic motivation to hold each unit of the good. The pricing process is primarily an auction over the existing stocks of the asset. Whoever values the asset the most will end up owning it, and those who value it less will own something else instead. And that, in in my view, is the way to understand gold price formation.

Many of the people who follow and write about this market look at it as if it were a consumption market and they look at mine supply and industrial fabrication as the drivers of the price as if it were tin, or coal, or wheat. People who look at gold as if it were a consumption market are looking at it the wrong way. But now you can see where the error comes from. In many financial firms gold is in the commodities department, so a commodities analyst gets assigned to write the gold report. If the same guy wrote the report about tin and copper, he might think that gold is just the same as tin and copper. And he starts by looking at mine supply and industrial off-take.

I wonder if more equity analysts or bond analysts were active in the gold area, if they would be more likely to look at it the same way they look at those assets.

Video – Hugh Hendry Interviewed By Steven Drobny At LSE (#macro)

Hugh Hendry interviewed by Steven Drobny at the London School of Economics, 2010

Major take-aways from the interview:

  • How he got his start: began at an eclectic asset management firm in Edinburgh, which rotated its young associates; began at age 21 in the Japanese stock market the year after it peaked in 1990; the next year rotated to UK large companies; the next year US equities; moved to London in 1998/9 and no one would employ him because he was a jack-of-all-trades, master of none
  • 1929/1930 marked a “revulsion with debt” period, which changed very slowly, ultimately eradicated from society in 1973/74; then the opposite cycle occurred, with society massively leveraging; during this upswing, it has paid to be optimistic and the financial economy has become the economy; we appear to be on the verge of a generational shift again, where farmers will reign over hedge fund managers
  • Macro opportunities are created by the interactions of economics and the abilities of politicians to try to fudge them
  • “The best trade is the one where you don’t fear the consequences of being wrong”
  • China
    • China’s economic development strategy is not unique, it’s just large-scale; economy is being directed toward sovereign-profit, not corporate-profit
    • Pursuing sovereign power over economic power results in building your economy on foundations of sand; Japan tried the same thing and it appeared to work until it was revealed to have not worked; Confucius saying, “Wise-man not invest in over-capacity”
    • China is like the sun, you can’t get too close or you’ll melt (can’t short equities in China, HK, or commodity futures or equity derivatives in the West); used the “satellite”, bought CDS on a basket of Japanese industries, as Japan is very reliant on trade with China– steel, for example
  • If we’re going to have hyperinflation and the dollar loses its value, you need something profoundly negative to shake the course of economic growth globally, because only if that happens will the central bankers respond with this dramatic decision of hyperinflation
  • Slowdown in China, economic restructuring in Europe would be the economic equivalent of a meteor hitting Earth
  • Market call: the Yen and the USD could appreciate greatly, because there is so much borrowing in those currencies, if asset values take a hit, you have a shortage of dollars or Yen to pay against the collateral values of that lending; combined with calls on the Nikkei at 40,000, 50,000 (want to be very long equities at that point)
  • Good hedge fund managers give great weight to the consequence of their actions and are fearful of them, so they won’t be hurt too much if they’re wrong
  • Being plasticine: we spend so much time trying to see the future, we’re deluding ourselves because we have no chance to see the future; better to be careful and flexible, avoid dramatic injury and maintain optionality to respond to whatever the future holds
  • Be a centipede, not a mountain climber; have a hundred legs so you can let one or two go if you have to do so
  • Strategically, it’s not rational to try to outsmart bright people; bright people are encouraged to be logical in their constructions; my business franchise is trying to get opportunities from the arcane world of paradox, disciplined curiosity, the toolset of the maverick

Kleptocracy Via Inflation Is The Global Model, Not Just Chinese (@John_Hempton, #china)

Australian hedge fund manager John Hempton is out with a new piece on his blog about “The Macroeconomics of Chinese kleptocracy“, the main takeaway of which is:

But ultimately the Chinese establishment like inflation – it is what enables their thievery to be financed.

The more serious threat is deflation – or even inflation at rates of 1-3 percent. If inflation is too low then the SOEs – the center of the Chinese kleptocratic establishment will not generate enough real profit to sustain the level of looting. These businesses can be looted at a negative real funding rate of 5 percent. A positive real funding rate – well that is a completely different story.

[…]

The Chinese establishment has a vested interest in getting the inflation rate up in China. Because if they don’t all hell will break loose.

Unless the Chinese can get the inflation rate up expect a revolution.

I know John (who appears to be a well-intentioned but generally naive political conservative) would likely strongly disagree with the following characterization but…

This is the kleptocratic model prevalent in all major developed and developing world economies– inflation is the keystone piece of these systems and it is why CB presidents from Bernanke to Draghi to Shirakawa are all intent on creating and maintaining it.

If the inflationary engine fails to turn over, the loot-truck stops making its rounds. If the loot-truck stops making its rounds, the elite and their scumbag offspring don’t get paid and all the world’s peasants (you don’t have to work a farm to be an economic peasant) suddenly wake up to just how desperately poor they are after being continually ripped off for decade upon decade.

But, I’m a cynic, so of course I’d see the world that way. More reasonable men, like Mr. Hempton, are more prevalent in the world than I, so everyone is spared my dark view of things and can instead bask in the glory of knowing that, while our systems may not be perfect, at least they’re not as bad and out in the open as China’s.

Value Idea: Japanese Net-Nets

Japan seems awfully cheap these days:

A study made under the authors’ direction (covering some 3,700 stocks traded on the Japanese exchanges), found 512 stocks selling for less than net current asset value (includes long-term investments) and 212 selling below ⅔ of net current asset value (Graham’s famous “66% net-net” threshold). Equally interesting, 763 of the businesses were selling for less than cash plus short and long term marketable securities. Suffice it to say, there are large parts of the Japanese market selling for extremely cheap.

Based on the studies previously referenced, we would anticipate this basket of cheap Japanese stocks to similarly outperform the market indices. If the 30 businesses were afforded a modest multiple (8-times earnings before interest and taxes) + net cash, similar to what businesses typically sell for in private-party transactions, the average valuation for the 30 businesses would be $191 million vs. a market-cap-inferred-price of $86 million. You’re theoretically getting $191 million worth of private-party businesses for the public market price of $86 million. This represents a tremendous upside potential when the market’s sentiments toward Japan become normal again– offering a handsome potential reward for those brave enough to test their resolve in the face of threatening headlines.

Individual securities can be attained through most brokerage houses without too much fuss. Although the trading costs can be steep (we’ve paid $100 per trade through one of the bigger name houses), we feel the potential upside justifies the transaction costs, depending on the size of your portfolio. For smaller amounts of money and certainly increased liquidity, WisdomTree’s Japan SmallCap Div Fd ETF (NYSE:DFJ) may be a good way to participate in Mr. Market’s mispricing of Japan. Although the DFJ is not as cheap as a readily-attainable basket of individual stocks (Price-to-Book of ~.77 vs. much less), the liquidity and diversification is quite attractive.

I like the idea of investing in Japan. It’s strongly within the econo-legal orbit of Western countries and Western attitudes toward law and commerce. There is definitely fraud and corruption, as there is anywhere in the world, but it’s probably less worrisome in Japan than it is in a place like neighboring China.

The challenges to investing in Japan are:

  1. Cost of trading
  2. Language barriers in studying company publications
  3. Convenient access to reliable market data
I am not sure how affected Japan will be by a China slowdown. I am not sure how much a person should worry about the fact that many of these Net-Nets appear to be in the engineering and construction consultancy business– this was an area that was a focus of corruption and overspending during the boom years in Japan and it’s questionable how many of these businesses are kept alive now or in the future by political connections.

Finally, at some point Japan is going to have a day of reckoning related to their massive government debts. For the average Japanese business with earning power and some growth prospects the implied inflationary solution to that problem seems like a tailwind. But for a Net-Net with no real exciting business prospects and a lot of cash on the balance sheet, that seems like it could destroy a lot of value, if anything.

Austrian economist Gary North insists that won’t happen, but I’m not sure what will take place instead.

The best strategy, were someone to attempt to take advantage of this scenario and these low prices relative to net current assets, would probably be to build some kind of a basket of the best of the best, as the author suggests.

I read a good article by Geoff Gannon on How to Pick Net-Nets, and he argues the main idea is to protect yourself from the downside, not to worry about the upside, when it comes to Net-Nets. He says the main risks to look out for are:

  1. Fraud
  2. Solvency
  3. Ownership dilution
I’m going to keep my eye on the Japanese NCAV situation, but for now it might be cheapest and easiest for me to find a few issues in the US, first. Meanwhile, I wonder what’s going on in Europe as far as Net-Nets go?