Days of Reckoning

When times are good, people think they're being clever.

When times are bad, they wondered why.

If they had known, they would not have gone that far.

But it's their cleverness that had brought them to where they are.

It is very sad to realise how people have brought trouble to themselves

We only wish they hadn't. But who are we to tell them so.

The writings on the wall.

1. They had decided on a global liberal economy where labour and capital can move freely.

2. Europe with its fear of stagnation opened up to the free movement of labour.

All that they got is the free movement of Islamic extremists.

3. Capital is free to flow. The US Fed print money and the money went to China to make use of the cheap labour, They lost the capital and the intellectual property.

4. China, feeling rich and capable, use their surplus reserves to buy minerals in Africa.

5. It is inevitable that China will rise and the US will fall. China has newer infrastructure and the US infrastructure is decades old.

6. While the global transition is going to be a gradual process from the US to China, the usual impatience of Marxists to allow historical transition to take its course is ignored and a forced transition is tried. China says it should be the dominant economies and the US economy is in descend.

7. The US while in descent is not without economic and political power and China in ascent is with no economic nor political power. Impatience kills.

8. The US in decline will not decline without a fight. The US still has enough power to kill China.

9. The US dollar is still the reserve currency. Whoever think they can device a good alternative is utterly lack of education on the history of money.

10 While China may strive to live without the US and may possibly succeed, this does not mean that the US is without dominance in the world economy.

11. With the tariff war, the world economy is doomed to recession and high unemployment.

12. China currently suffers from delusion of grandeur, while the US is struggling to stay above water.

13. China for the moment cannot live without the US.

14. The US economy will dominate for the next 5-10 years.

15. The China economy is still in the infant. It has not treated its workers well.

16. It is easy to print money - in the US and China. After printing money, how do you retrieve money from the system?

17. The only way money dies is for banks to go bankrupt.

18. When banks do not lend, the economy goes into recession.

19. Economic growth is borne out of confidence.

20 When there is no confidence in politics and economics, recession looms. 

Tariff War

A tariff is imposed because the deficit economy is caught in a downward spiral because the surplus economy fails to adjust properly.

The theory is that the surplus economy, as a result of the increase in foreign exchange, will have a strengthening currency which leads to a loss of export competitiveness which then gives the deficit economy a chance to compete and recover its external trade position. 

This does not usually happen in the now of China and in the past of Japan where their respective currencies are being held down deliberately either by maintaining low domestic interest rates or by managed foreign exchange policy.

It is a long-held belief that an external trade surplus is indicative of good economic health. 

Of course, it is better to have a trade surplus than a trade deficit. 

But it is not good to always maintain a trade surplus which means than other economy or the rest of the world has to run a trade deficit forever which it clearly cannot. 

(If the trade surplus economy is small, then the problem is not that serious, as in the case of Singapore.) 

By maintaining a sustained trade surplus, it means that the domestic industries are deliberately keeping down the cost of production especially wages and the benefits to workers while profits are ploughed into machinery to keep increasing productivity.

A social and political policy question arises: What is the benefit of a sustainable trade surplus when the working population does the enjoy much of the fruit of the surplus? Are people meant to work the machinery and hence work like machines as well?

Of course, the trade surplus has also the effect of flooding the domestic economy with liquidity. The local banks choose to direct their new loans at real estate which seems to the practice all round the world in the last few decades. The problem with real estate is that it is also a good collateral for banks for their loans, so as real estate prices increase, asset inflation escalates new loans to real estate again, thus accelerating asset inflation.

The banks think they have good collateral so when the asset price bubble bursts, as it is happening now, the banks will end up owning the real estate themselves. In asset deflation, the banks will be loaded with bad loans enough to send them into insolvency due to lack of reserve provisions as the directors have pocketed the profits (which had encouraged them to be reckless in their lending).

Now, what should the surplus economy do when faced with tariff imposition by the deficit economy? A non-economist will think that it is war, call it economic war, and retaliate. Even at war, one probably does retaliate but possible try to defend. 

To retaliate means that: since you are hurting my industries, I too will do the same to hurt your industries. 

To defend means that: since you are hurting my industries, I will do my best to ensure that my industries are not hurt too much. How can you do that?

One is to provide subsidies to the hurt industries. This may not be a good move because you will be accused of further distorting fairness of trade.

Two is to negotiate to see which aspects of the trade is deemed to be unfair. It has usually got to be concerned with the (allegedly) suppressed exchange rate, the too low cost of production such as excessively low wages, poor worker welfare and all those things dealing with labour which the deficit economy has been doing to improve human welfare in society. To undertake a negotiated worker welfare programme for the labour force may be a good first step.

Of course, what has happened with the surplus economy is that it has tried to spend its surplus in third world countries to try to secure raw materials for future growth. This diversion of the trade surplus could probably have also weakened the force of adjustment for the benefit the deficit economy. This is like a three-body problem which means that there is no possible stable working equilibrium to be established between the surplus economy and deficit economy (which the conventional theory espouses) because there is a third party economy involved to which the equilibrating energy is diverted. With no equilibrium in sight, it is natural that the deficit economy wants to put a stop to its deficit run and start rebuilding its economy with a new paradigm. The same goes for the surplus economy which will now have to find its new working model without the prevailing deficit economy.

If the now surplus economy now wants to circulate around its own orbit, it will have to find another economy with a big deficit to fund its desired surplus. This is unlikely to happen firstly because of the deficit size to be replaced but because it will then have to accept a new currency for its foreign currency reserves. At the moment, there is no such single currency that could be deemed acceptable.

There has been an apparent drive to sell the US dollar for gold which can be kept as reserves. When you keep gold in your vaults, gold does nothing as it sits there collecting dust. In the end, you may try to issue your currency as a receipt to an actual amount of physical gold. It would be much better than bitcoin which is an artificial digital construct on an arbitrary basis.

The problem with a currency on the gold standard is that if you allow the gold to be redeemed, you may end up with no physical gold and lots of paper money.

There is no way in a money-using economy that you can do away with money as a unit of final settlement. It is the ability of the fractional banking system that allows money to be created through the expansion of loans, and when the new loans are properly vetted and used, that money creation helps to expand the real economy. It is a fact that the expansion of the US money supply helps to raise the China economy as new US loans were spent on investing and building factories in China and in the process built up the foreign reserves of China.

For China now to discard the US dollar as its foreign reserves by divesting into monopsony and gold, is an attempt now to play the economic game with the US. It is therefore logical that the US should stop this bilateral economic understanding and enforce a structural break even just for the sake of trying to reduce the deficit problem. Like everybody when we try to reduce our debt, we consume less output thereby causing a recession.

A tariff war ends up in recession. This is a fact. 

Tariffs

 A country imposes a tariff to increase the cost of imports of similar goods which are being produced at home due to higher local costs such as higher wages, higher rentals, and higher quality such as tighter QC. Tariff gives the local industry a chance to survive or grow.

The country on whose exports tariffs have been imposed may want to retaliate by imposing tariffs on imports from the first tariff-imposing country. It is not likely that it will be on the same products but probably products which are competing locally or even not.

The end result is that prices of goods and services will rise in both countries on all things with tariffs imposed. There are other consequences. Tariffs are usually imposed with times are tough for local industries. This means higher prices with probably slowly growing demand. These tariffs suck up purchasing power from the local economy into government coffers and this comes in handy as governments are suffering huge deficits around the world. The net impact is smaller quantities consumed and hence production cut. 

Economic recession is inevitable, even if tariffs were originally imposed to restructure global economic balance. 

Economic restructuring usually means some industries will die and new ones come up.

The current global economic problem is something that is waiting to happen and we were not so sure how that was going to happen. This round of tariff imposition among trading countries is surprising but anything could have happened to trigger a global adjustment. For sure, this also means that the US is unlikely to print more money and so we should see a sharp drop in global liquidity and a massive contraction around the world, hitting real estates and banks.

What is happening is something we have been expecting - a massive adjustment in the global economy. A slowdown and recession will take place in the next few years, and it will be sad to see the economic adjustment and deterioration descending into military warfare.

The Value of Living

There is nothing like to feel alive, being able to enjoy life and be happy. This money cannot buy.

Money can of course prevent poverty but poverty is not starvation and not suffering in the strictly absolute sense.

All of us live in relative poverty when compared to all the rich people, in terms of money. Rich people live in relative poverty when compared to ordinary people who can love and trust and be honest in equal measure without fear of the person closest to you stabbing you even when you are guarded.

Of course, all assets are relative in value, relative to money and relative to each other.

Now, the values of all types of assets are going to be measured by which way the economy is going to adjust. 

The biggest fear is that interest rates will rise to curb inflation. It is a bit too late to curb inflation. The world economy is already highly inflated. Prices are already very high, so say too high. Prices must adjust ie to fall in order for the economy to adjust back to equilibrium. Why adjust back? Because the global economy has stopped growing, China has stopped growing. So prices must adjust downwards in the coming future.

Interest rates are not going up because all policy makers and politicians are interested. Their wealth will evaporated as whenever there is an economic depression. We do not need a cut in the money supply for proper adjustment to take place. We just need the growth of the money supply namely the growth of debt creation to slow down. Then deceleration forces will bring about the needed economic correction. Those with their hands full of assets will be devastated.

The cryptocurrency investor has a major reckoning to make. Even cryptocurrency unit is now worth more than an ordinary person's lifetime income. More many of these units are out there waiting to cash out? If all the cryptocurrency units where to be sold, there don't think there is enough volume of the money supply to support that value under the supply curve of cryptocurrency. Even if that happens, the cryptocurrency investor will now hold all the money supply in the world and surely the interest rate on money will rise. They would want interest rates to be high then they can gain from holding cash. There is a convoluted thinking in cryptocurrency. We will let the cryptocurrency investors figure that one out. Similarly, the case with gold investors. The only real gold investors are those accumulating gold to support a new international reserve money. They will not ever sell their gold holdings, as would be the case for cryptocurrency investors who want to be wealthy in that digital unit.

The food for thought here is the nature of value of assets as we await how policymakers decide to solve their debt repayment problem. Unless, they all print money till all hell breaks loose, which it seems to be. Then, we should be gladness just to be alive. Enjoyment of life is an added bonus. How cool the night is tonight. Nice!

The Nature of Risk

Nobody invest with a view to risk. Everybody invest in the belief that they will make money for sure. If they are not sure, they would not have invested.

But there are risks in investments. And people do lose money in investments.

So what happens?

People believe that prices rise and fall for all assets over time. Even those who are absolutely convinced that property values will keep rising in city centres because the population keeps rising and there is limited space in city centres.

But city centres do shift. There are many inner city decays and inner city slums and poverty.

People keep building new assets, designs keep improving as well as the way of life.

Nothing is static. Things in life keeps changing.

It is not true that if you just sit on your assets and do nothing, the prices of your assets will keep rising.

There is this fantasy that one can just accumulate more and more assets and become richer and richer.

All that happens in the end is that there will be companies that grow and grow with assets, and there are people running the companies and they are not owners of the companies. There are these non-human legal entities that just keep accumulating, apparently under the same name, but inside the companies, the corporate ownerships have changed many times, and the founders and their descendants have long sold off their grandfathers' assets and blown off their wealth.

It is true that as the world gets older and more and more people are building more and more assets, more and more assets will come into existence and they will all crowd around certain areas for critical mass. These assets will be owned by people and companies of all shapes and sizes. Or they could all be left in ruins, like all ancient cities and civilisations.

The real question is where do we as individuals come into the picture?

Do we want to become like individuals who spend all their lives accumulating gold and carrying sacks of gold on their backs?

Or are we masters of ourselves and living this world and, at the same, making sure that we have just sufficient means to be able to enjoy this short life that we have. No more, no less. If not, only slightly more but no less.

In which case, we should be spending our younger days working hard and saving, so that we have the means to enjoy our lives when we are not physically or mentally capable of exerting ourselves in the struggles of living.

The risk of accumulating assets is that we have forgotten the primary purpose of accumulating them and have forgotten to live and enjoy our lives.

Some would ask with vastly accumulated assets, we can have all the riches to live our lives the way we want. It is very hard to be rich and humble. It is also very hard to be rich and know the value of living. When very rich, we also know our cleverness and become arrogant and try to reshape the world around us to our own whims and fancies.

It is very easy to fall into the trap and think that what we believe is reality.

The truth is that we are all nothing and we will all die and there is nothing about us to be arrogant about.

We should be spending our remaining days enjoying the quietness and solitude of time spent with ourselves and loved ones, saying all the things we want to be able to say to each other face to face one simple word at a time.

All the assets are like the roof over our heads and rooms to keep us safe and warm. We can use money to buy things and comfort, but we can only discover for ourselves the true happiness of quiet contentment, that we alone are quite sufficient for us alone.

Asset values rise and fall with the madness of people as they react in fear to the uncertainty of the future which is always uncertain and hence always at risk.

The Value Of Gold

The value of gold can hold only when everybody wants to buy gold and keep and does not want to sell.

The only people in the world who keep gold forever are those from ancient civilisations which must have known, from history, that gold is something that has lasting value.

The only institutions in the world which keep gold forever are the central banks when gold is the only money and money is gold. This was true in the past when first it was the silver standard (Spain and the Incas) and then evolved into the gold standard. During the silver standard, silver was dug out in Peru and after trading was buried in the soil in China by corrupt officials. The gold standard was used by the British and abandoned by the Americans. 

The reason was that the standard restricts trade as there was a shortage of the money supply. When money becomes fiat, there is no shortage of the money supply and the only problem becomes an oversupply. The answer to the problem of the money supply is a rule on the restriction of the money supply which no government today seems to be willing to adhere to. The alternative answer is a return to the gold standard whereby the supply of money is constrained by the output in digging gold out of the ground.

Bitcoin ostensibly comes in to replace gold as a standard for the money supply where the supply of bitcoin is dependent on some computer algorithm and the amount of precious electricity required to run the program. But this is no different from a money standard based on the number of kangaroos in the world, or any other exotic or esoteric output. Furthermore, who gives the authority to bitcoin for bitcoin to be the world standard for money - nobody. But this does not detract people from buying paintings of dead people as the supply would certainly be restricted to the existing available.

Same as for bitcoin, there is nothing to prevent gold being accumulated and used in some cases for the payment of bilateral transactions, if both parties so do agree, just as in any other barter trading arrangement.

The point to make is that the price of gold is very high now because first there are people want to buy and keep gold and are buying and keeping gold. Second, there is an enormous of fiat money that has been printed and because of the oversupply of the money supply, people are selling the fiat money for real and tangible assets like gold, silver, minerals, oil, etc. Not sure how real and tangible bitcoin is.

A more interesting question is: Will the price of gold ever reverse? If the people who are keeping gold do not need money and are keeping the gold forever, then no.

Under what conditions will the price of gold reverse? When the opportunity cost of holding money is too high. I.e., when the interest rate is high, say, 5% or 8% p.a., on fiat money. When the return of investment is high, such as in stocks and shares. This may be in certain stocks, as the global economy is adjusting the current technology which seems to be threatening every human job. This last point is interesting.

If computers and machines are doing all the work producing output, who will be consuming that output. If humans are out of a job and have no money, then humans cannot consume that output. The machine produced output will go bankrupt and have to stop.

What do humans do then? Humans go back to the farm and live a simple life eating durian.

There seems to be a way out for policymakers today. Forget about the super-rich investors in technology which are producing output that no humans can afford. Focus on the agriculture sector whereby owner-farmers can grow enough simple food to feed their families. There is plenty for farm-based industries to grow, using the use of super-machines.

Accumulate gold by all means. Most likely this is your savings, your surplus capital. You have more money than you will ever need. Trading in gold and other assets is just a game you play to while away your time alone.

For those who want to live, it may be more useful to engage in more physical and down-to-earth activities which have direct benefit to your physical and mental health, making you tired and hungry, so that rest and eating are joys in your life. The value of gold is just a theoretical consideration done at leisure in quiet solitude.

The Illusionary Nature of Value

When markets collapse, we hear of the loss of billions in value. 

Just like during good times when markets rise, people feel good because they feel they are extremely rich.

The funny thing is this - that the value of any class of assets is measured by the last market traded price of probably one unit of that asset class.

It is by simple extrapolation of that last market price to the entire asset class that has not been sold that value is measured - what they call market capitalisation.

Market capitalisation is a theoretical concept that has no representation in real life. You cannot eat market capitalisation. You can only eat the last assets that you have sold for cash that you can use the cash to consume. The assets that you hold of which you imagine to be worth so very much because of the price that is currently going on in the market is a fool's paradise. 

Of course, it is better to have assets in your hands than no assets at all - because at least at the end of the day, when need be, you have something to sell for cash.

My point is to discourage people from imagining how wild rich they are when in fact they are holding onto to something durable or tangible which carries some value in the future (before of their durability), of which we have no clue what it will be when we need to sell the asset.

It is for this reason that people with extra money need to work hard and pay attention to markets so that they can ensure that the assets that they are holding hold the value that they desire.

There is no guarantee to the value of their assets - because the value is dependent on market conditions.

This is the great disaster story about saving for retirement by entire populations. But that is another story.