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  11th December 2008. MONEY AND VALUE.

This is a continuation of last month's discourse on the recession & economic turmoil in the world, which was an expansion of my predictions in 2000AD and 2005AD.

It is my contention that some things are inherently incomprehensible.  Our brains are just not hardwired to image the "space" which is required to visualize those things.  Sure, some of us can create math models that describe those things, but even those people do not claim intuitive comprehension.

Let me try to explain.  On the Macro level, Hubble described the four dimensional universe.  He did not claim to be able to intuitively  comprehend the 4D universe.  His suggestion was "visualize an expanding sphere.  Now imagine that the 2D skin of that sphere contains three space directions."  Like a ship on our planet, continue on in a straight line (continents permitting) and you would return to your starting place.  Except in our universe, that ship could go straight upwards, and return to it's origin point.

Or let's look to another example.  On the Micro level, consider quantum theory.  If a photon bounces off a surface, it applies pressure, so it must be a particle.  But if you put two holes close together on a surface, that same photon will go through both, so it must be a wave.  There are lots of other examples.

I believe that human nature and money are also only describable in 4D space.   So money can be correctly described as having values that appear to our 3D minds to be mutually contradictory.

Lets try a few properties.
  1. The value of money is the labour that it could buy.
  2. The value of money is the interest it could earn.
  3. The value of money is the real property that it could buy.
  4. The value of money is the goods for which it could be exchanged.
  5. Gold is money.  The value of money is the quantity of gold for which it could be exchanged.
However, during the Feudal era, money could not buy land. Land was the root of Value.  Peasants had no choice but to rent from the Lord of the Manor, and give a tithe.  Then industrialists realized that labour had a value independent of land.  In fabled "el Dorado" gold would have been nearly valueless.

The current financial problems derive from a convergence of factors, but the major factor is that Industrial Capitalism has been supplanted by the "Dynamic Data" era.  This was introduced in November's post.  I will now expand on the concept.

From Feudal times until the first decade of the second millennium, the chief store of value was money.  There was very little that was valued that money could not buy, and if you had a lot of it, then it would reproduce, with very little effort on the part of the owner.  (Just like a Feudal Lord needed expand little effort to maintain his lifestyle).

With the invention of dynamic data, money came to an end.

The Feudal Lords attempted to maintain their niche, which is why land taxes are still inordinately low, and why land has such a high capital value.  It is also why the proverb exists: My grandfather told my father, 'If I had bought land as a young man, I would be wealthy today'.  My father told me 'If I had bought land as a young man, I would be wealthy today'. "   So what will you tell your son?

 The Industrial Capitalists of the world (which includes the labour unions) are in their turn attempting to maintain their niche in the new order.  That is why governments are vainly attempting to maintain patents and copyrights, and are providing financial support to Banks and Industrial corporations (e.g. GM, FORD).

Will they succeed?  That is the wrong question, but I will answer it anyhow.  Governments will stop the recession, but only if/because they seem determined enough to continue printing money until the price of real estate inflates to the price that owners paid.  However average real (i.e. after inflation) sustained return on capital will not again get above 4%pa, and will probably not average more than about 1%.

I will tell the right question in a later post.

OZ BILL OF RIGHTS.

On looking back, I really said it all when I wrote my Libertarian society post.  The French "Declaration of the Rights of Man" (1789) got it mostly right, since then the UN Bill of Rights (1948) expanded and attenuated the rights, and no doubt the Europeans (ECM) have attenuated and expanded it further.  I expect that the Australian Government will expand and attenuate it even further.   My own suggestion would be that we adopt the 1789 French "Declaration", but getting that is less likely than getting a Grey-Schwartzenegger amendment# to our constitution.

# A "Grey-Schwartzenegger" amendment to our constitution would allow the Australian People to dismiss a Government at a time of the people's choice, in a way similar to how Governor Grey was removed and eventually replaced by Arnold Schwartzenegger.

23rd December.  MONEY & VALUE (2)

I promised that I would reveal the "right" question in the post of 11th December above.  The right question was, where should money be invested for the best return?

Allow me a background discussion.  One of the great things about "Liberty" is that there is no censorship, meaning that the public can read a range of views on any subject.  At the extreme end of credible economic doomsayers is Andrew Evans-Pritchard.  who writes for London's Telegraph.  Among others, (including the UN, the US & our own government) he is quoting that the one year future outlook for business is contracting.  I find it rather puzzling that financial advisers keep suggesting that stocks be retained so as to not "realize losses".  At the very least, the worst performing non CGT stocks should be sold so that income tax liability is eliminated.  However with the existing negative outlook, (not just mine) it would seem that everything except recession proof stocks should be dumped.

The current market is a fire sale by the big institutions, usually selling up in the mornings and early afternoon, and then doing a buyback on thin trading the half hour before close.  Hoping thereby to mislead and take advantage of smaller investors.  Concurrently, disinformation in the media is rife.

I said in my last post that I did not believe that real interest rates would again exceed 4%, and would average around 1%.  Let me attempt to explain why.

I have previously defined "Monopoly" as "Natural Monopolies" and "Legal Monopolies".  Natural monopolies rely on ownership of a planetary resource.  Examples would be a coal mine or bandwidth.  Legal monopolies depend on patents and copyright.

Money is borrowed to purchase items from which the borrower expects to make a profit.  Let me catalogue those borrowers:
  1. Large (non-monopoly) businesses will find increasing difficulty competing with smaller businesses.  Examples are steelworks, manufacturing (including whitegoods, autos, chemicals etc).  Even "Wal-Mart" and similar retailers will eventually lose market share as the internet permits smaller stores to source supplies direct from manufacturers.  Paying high interest rates would make these businesses even less competitive.
  2. Small non monopoly businesses do not need large amounts of cash.
  3. Legal monopolies are even today finding it increasingly difficult to enforce their patent and copyright fees.   Advances in Technology mean that just about anything can be copied if the license price is "high".  (Check out the list of available titles at mininova.org.  Ask patent owners.  This problem will not go away.  Bob Hawke said it, "It's no good enacting laws that cannot be enforced".  The problem is, the cost in money and political capital of enforcing legal monopolies is prohibitive.)
  4. Hedge and investment funds and financial institutions are already in trouble, employment is falling, sales tax receipts will drop, income tax receipts will diminish.  The natural monopolies are all that is left that could become the government's new cash cow.  Natural monopolies include real estate.
  5. Private homebuyers are increasingly absent from the market.   A solution is that land taxes (and mineral taxes etc) should rise.  I am aware that land tax would seem counterintuitive to produce a fall in real estate prices, and so is unlikely to be followed by the liberal regimes currently govering the US and Australia.  (I suggest that those who scoff should examine the correlation between land tax and real estate prices in the different cities of the USA.)  Hopefully, this land tax rise will be seen as the logical solution (see Henry George) to the real estate bubbles that preceded the current (2008) and the 1929 recessions.  Low real estate prices will coincidentally reduce the demand for large loans.
Of course there would be a political backlash if land taxe on housing blocks were raised without compensation.  Perhaps some cash compensation should be given "up front" to homeowners for the loss of land value when the land tax is raised to (say) 2%-3% of value.

So that is why I expect interest rate will fall and stay down.  Very few people will need to borrow large amounts of money.  So the market for cash will become very competitive.  So interest rates will remain very low, at least for the foreseeable (5 year) future.

By similar logic, equity returns will also fall and stay down. 

So for now, sell everything and put the money into those government insured cash deposits (which nice Mr. Kevin, husband of a multi-zillionaire, has guaranteed to unlimited amounts out of hardworking Australia's generosity).  Everything else has, at the moment, an unacceptably high downside risk.  When the unemployment figures stop rising, or the inflation numbers stop falling, then it will be time to reconsider.  (If unemployment stops rising, buy into labour monopoly industries like car companies etc.  If inflation stops falling, look for gold and selected industrials or natural monopoly corporations.)

29th December  Kevin Rudd.

In the last few days Kevin has saved the jobs of about 50 union bosses, and about 1,200 union jobs in the Auto industry for only $50 million per year for 3 years. That is ~ $42,000 p/a ($50,000,000/1,200) that he is paying to keep each union job, or about $1,000,000 to keep each union boss employed.  That $50,000,000 per year cost does not include the much criticised (by WTO's) tariff on vehicle imports, which alone increases the cost of motor vehicles to the public by about 10%.

The $50,000,000 p/a contribution is reportedly for a fuel efficient car.  However asian countries could provide equal or better (i.e. greener) cars for less (i.e. no tariff), leaving us with cheaper cars and a greater variety to select from.

I would prefer our taxes be spent providing social security and retraining for those subsidized workers, although I would not be surprised if a majority of the 10% of our workforce that is unionized did not agree with my preference.

31st December REPRESENTATIVE DEMOCRACY & INSTABILITY.

Democracy only seems to work in the so called "first world" nations.  Other places (Gaza, Zimbabwe, Fiji, Thailand, Venezeula etc) it seems not to function properly.  Why?

My thesis is that "Representation" is the problem.  When we elect a "representative" we usually have a choice between two organizationa, neither of which has a policy on all issues as we would like.  So in the USA a voter might be pro abortion (D) and anti union (R).  Voting for a representative will always be a compromise.  Some nations have a multiplicity of political parties, (e.g. Greens etc) but although this gives the appearance of greater democracy, it is phony.

The failure of democratic representation leads to unrepresentative influence.  Large parties do "side deals" with small groups, promising to deliver legislation or assistance in return for political assistance (either financial, voluntary help, or by delivery of a small "voting clique".)  Examples in Anglophone nations are rife, copyright law, E10 legislation, hospitals.

Hamas is an example of such organization.

Just as the Greens promote the popular cause of conservation, but nonetheless do very bad things (e.g. promote introducion of E10 despite the fact that it is known to produce an increase in the starvation of babies in poorer countries), so Hamas promotes the popular cause of "Land for Palestinians" but attracts publicity to it's cause by firing rockets at Israel, an action that most Gazans would probably censure.

The solution to the problem is some sort of direct democracy. Now that we have computers, it is possible   (I have described a possible implementation here.) .  However I very much fear that the organizations that provide our representatives have no interest whatsoever in allowing their power to diminish.  Even though such a solution would also probably solve most of the terrorist problems of the world.

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