The Recent Economy up to Covid-19

In the previous post I noted that Keynesian economics tended to fail because governments overlooked the second half of the prescription: when the going got strong, it was necessary to “pay back” the debt, or at least reduce the money supply. That results in politicians being party poopers, restraining the good times and what politician wants that with an election coming? The net result was with too much money floating around, we had the rather unexpected result of inflation coupled with stagnation/recession. More money would not solve that. Friedman had the answer, perhaps: stop government priming the economy and correct structural deficiencies. That was not followed either – Friedman had no more success than Keynes in getting politicians to behave. What resulted was the likes of Reagan reducing government expenditure, lowering taxes, and maintaining and expanding the government deficit. Then the US Federal Reserve set the tone by reducing the money supply, even though it knew that would send unemployment soaring. They simply did not care. Anything went in the name of “economic efficiency”. 

What was undefined was “efficiency.” To answer that we have to ask what is the purpose of the economy? To the bankers it seems to be to make nice profits for banks, but surely it is more than the keeping of tidy books. For some, it is to maximize wealth, especially for themselves. For some it is to generate the means of enabling people to live in a pleasant place and live alongside nature. For others it is to enable all people to get the best out of life. Under the new economics of Reagan and others, the emphasis was on the “basics”: get the government out of the economy because they don’t know what they are doing, focus on low and stable inflation, let the rich get richer, following which the wealth would trickle down. Except the evidence is, it didn’t.  Then when it became clear that squeezing the money supply, while it might have helped make the books tidier, was generating unemployment that was too great, so central banks switched to using interest rates as their primary tool. Which gets us to where the bankers are now. Interest rates have got to the point where depositing in banks is only good for security, as long as the bank does not go belly up.

What actually happened was that when the corporations noted that the government did not care about employment it fired its workers, thereby saving money on benefits, etc. and moved manufacturing to low wage countries. Basic manufacturing, like clothes, were exported to places like Indonesia or Bangla Desh, and more difficult manufacturing to China. That undoubtedly increased the wealth of the rich, but it sent the workers into low-paying jobs in the service industries. Meanwhile, there was a somewhat unrecognized crisis in the academic community, and in particular the physics community. Funding had dropped and we had a large number of highly educated unemployed. The physicists, in particular, were good at computer modeling, and they got jobs in banks to create new “financial products”. The banks made huge profits until about 2008. The problem with these “products”. which were sliced and diced debt, were based on the assumption that nothing significant could go wrong, but in the US, for political reasons, a huge number of houses were sold to people who had no hope of repaying the mortgages. Oops. 

We have sort of recovered from that, but the legacy is that thanks to COVID 19 the debt levels of so many countries is extraordinarily high, interest rates are ridiculously low they cannot go lower, so there is no incentive to save. Money goes into assets, which merely inflates the price of the assets. Stock at $100 is worth that if you can sell it for that, but at the end of a period of time, you have to look at the overall returns on investment. In a bubble, everyone makes money until the music stops, then the losses are concentrated on the then holders. COVID has forced the nervous investors to cash out and the stock market fell, but it is coming back because of the quantitative easing. So what happens when the quantitative easing stops and the bonds are cashed out?What is clear is that we cannot look to the past for ways to get out of this. We have to try something new, but what? If you look at our leaders, do any of them have a solution to what happens after quantitative easing? Or do they have their heads in the sand and assume that will be for another electoral cycle?

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Brexit Strikes Again

Last week, I reblogged a post that I found to be quite interesting. It appears that currently there is chaos in Britain regarding Brexit, and it is worth looking at how we got here. As Philip Henley pointed out, the vote to leave the EU in accord with the results of a referendum was passed by Parliament by 498 votes to 114 votes. That became law and is the default position should a deal not be made. The May government then set about negotiating a deal with the EU, and the EU became very hard-nosed: its attitude was that it would make the situation as tough for the UK as it could reasonably do to discourage others from leaving, but also leave an easy route to remain. One of the provisions of this deal was the so-called Irish Backstop, nominally a transition period to ensure the Irish border could be kept open, but with the proviso that it would remain in force until the EU decided that it was no longer needed. The net result of this is the possibility that it could refuse indefinitely, in which case Northern Ireland would effectively become part of Eire. This deal was rejected by Parliament three times.

As her tenure as PM came to an end, Parliament came together and the ordinary MPs rebelled and took over the House, claiming they were trying to reach an agreement. At first they came up with eight possible options, but when put to the vote, all eight were rejected. Obviously, they were a negative bunch. After a panicking weekend, they reduced the number of options, but again nothing got a positive vote. Missing from the choice was “no deal”; the reason being that the Speaker stated that was the default option. That meant that everybody who wanted the “no deal” exit voted no to everything and those who wanted various deals cancelled each other out. Of course, there was no alternative deal that was realistic; both sides have to agree for there to be a deal and the EU stated there were no alternatives. Accordingly, the “no” vote won. What we learn from that is that in such a situation, the order you do things is important.

Part of the problem appears to be there are a number of hidden agendas. Nicola Sturgeon wants another referendum, as do the “Remainers”. Sturgeon simply wants a precedent for another referendum for Scotland leaving the UK, and presumably taking the North Sea Oil revenues with it. The “Remainers” simply won’t accept they lost the Parliamentary vote. Corbyn merely wants to be Prime Minister. I have heard no clue what he really wants to do about Brexit, other than annoy the government.

How could this have been different? First, decisions should be final, and the first decision was whether to leave or not leave. An overwhelming majority took the leave option. MPs then had the obligation to make that decision work. That vote was the time to argue whether the first referendum was fair, binding, or what. They declined because they did not want to come out and tell their own constituents they don’t care what they think.

The next step is to negotiate a deal. The mathematics of decision-making is called Game Theory. In terms of mathematics, there are clear requirements to get the best from a negotiation, one of which is that if the bottom line is not met, you will walk. For that to mean anything, it has to be credible. If the UK politicians want anything better than the May deal, then “No Deal” must be on the table, and it must be credible that will apply. Johnson is as near to credible as possible. If he is undermined, the UK is highly likely to lose.

At this point, the behaviour of some MPs is unconscionable. They have no proposal of their own, they have heard Johnson say he will try for a deal, and Johnson has laid down just one condition – the Irish backstop must be replaced. He should be supported in his efforts unless they have a better idea. There is talk of Johnson being undemocratic for suspending Parliament for 23 days. As Philip Henley has pointed out in the previous post, 23 days is far from being unprecedented. Johnson has the job of negotiating some sort of deal with the EU with a pack of yapping dysfunctional MPs offering a major distraction. The fact is, none of them have come up with something workable.

Now Parliament has voted to block a “no-deal” exit. Does that mean there must be a deal? No, of course not. First, the bill must be passed by the Lords. Since they are largely “Remainers”, they probably will pass it, although when is another matter. However, for that to be effective, there actually has t be a deal on offer. The only one that is the one they have voted out three times. The EU says they will not offer another one, although what would happen if Johnson offered a workable option to the Irish border is uncertain. The Commons also voted that the UK request another extension. Whether the EU would be interested in that is less certain; they must be on the verge of saying they want rid of this ridiculous situation. Note if only one EU member votes against it, it fails. Then after demanding an election for the last few months, Corbyn has vetoed one before Brexit date, deciding instead he wants another referendum. (His problem is that many of the Labour seats come from regions that voted strongly for leaving.) Just what that would solve with this dysfunctional lot of MPs eludes me. However, the so-called blocking vote has arisen because a number of Conservative MPs have defected. They were always “Remainers”, but their defection means Johnson at best runs a minority government that will not accept anything, or everybody else votes in Corbyn as Prime Minister. That is unlikely, so it will be Johnson who goes to Brussels to ask for a deal or an extension. The question then is, how intense will his asking be?

Misleading Accusations

Fake news is becoming more common, and most of it is either political in nature or it is an attempt to be humorous. Last week I posted on the attempted murder of the two Skripals. Since then there have been a raft of accusations, some of which border on the pathetic, and some of which are definitely misleading.

The first example comes from the Russians. A Russian ambassador stated that for the British to be able to identify this agent as a Novichok, they must have a sample, therefore they are making it. There was then the implication that this could have been the source, although he never actually said he believed it. This last implication is just plain stupid. I am quite convinced the British would not do this. If they wanted to get rid of the Skripals, which I do not believe they would, at the very least they would do it in a way that would not harm anyone else. It is almost as if the Russian government sees itself as some sort of gangster organization and thinks everyone else is too. That is why I think it was a stupid comment; it is the sort of thing that immediately backfires.

But what about the point that Porton Down must have samples? That is just plain wrong. They must have some sort of expertise, but since it is the UK national defence laboratory, that expertise should be taken for granted. If so, it is a rather straightforward task to identify something like that. We know what the structures involve, and such structures do not occur in nature. You have to have some idea what it could be before you start if your sample is really small, but given the circumstances, that would be a given. One approach would be to run a mass spectrum of the sample (having done some sort of chromatographic purification), and do it under a few different conditions. One such determination would be low energy ionization to determine the overall molecular weight, which tells you how many atoms are there, and if the instrument is good enough, the molecular formula. That is because although all elements comprise protons and neutrons, which have a constant mass, the binding energy varies from atom to atom, and from relativity there are clear but very small mass differences between the various possibilities from the general molecular weight. The next attempt would be hit it with higher energy, which would break it into fragments, and again the molecular weights of the fragments will tell you how the various groups are assembled. Finally, some small groups will give you more information, and the exercise then is to interpret how to put this back together again. Of course had they ever had access to a sample, they would have records of the fragmentation patterns of all the Novichoks they knew about. So there is little doubt the British authorities would have been able to find out what this was without having to go around making or having samples.

However, then the British politicians made a further statement: we can tell where it came from through the structure. Sorry, but you can’t. That statement violates the first law of thermodynamics, from which you can show the nature of a chemical is independent of how it was made, or from where. Had there been tonnes of the stuff, yes, then you might, not directly from the structure but rather once you knew what it was, you would know who made it because chemical plant, by and large, gets dedicated to making one substance and there would probably be only one making some of these components. But at the gram level, there is no way of knowing from its structure where it came from.

The problem with these sort of comments is they sound convincing to those who do not know much about the general subject However, eventually someone points out the errors and conspiracy theories start up. When it becomes known that the authorities made politically desirable statements, all sorts of rubbish comes out of the woodwork. Another problem with such announcements is that they may look to be politically desirable at the time, but what about the downstream consequences? In this case, the desire to blame Russia has set off some tit for tat diplomatic expulsions, and some sanctions. Now what? Why could that not have waited until the evidence came in? If it can be shown that Russian agents did it, then surely the various actions would be stronger and even the Russians might seem embarrassed. But suppose some individual or small rogue organization did it? Now Russia has been made angry for no good purpose. Nothing has been done that could not have waited, so why not wait and make sure the conclusions are right?

Predicting the Outcome of Trade Wars

I have written a series of novels that form a sort of “future history”, all of which, of course, were imaginary and in most cases I hope those futures won’t come to pass. I never intended to try to predict any future, because predicting the future is tricky and it seldom complies with our wishes. There are two basic approaches. The first is to be sufficiently general that with any sort of luck, you can say, “Yes, that complies with the prediction.” A classic example was when a king asked the Delphic oracle what would happen if he went to war with a neighbouring king and he got the answer, “A great kingdom will fall.” Overjoyed, the king went to war, overlooking the fact that it could be his kingdom that fell. Oops.

The alternative is to look at what has happened in the past and extrapolate. If you want to know what the weather will be like in two hours time, look out the window. In general, the chances of a dramatic change are not that great. If you look further to the future, the problems get more difficult. I recall in my youth, there was something of a drought in Westland, New Zealand, and since that is rather wet generally, the weather forecast consistently seemed to think that this could not last, so they predicted rain. The drought persisted for 48 days, when finally the weather forecast decided to yield and predict continued fine weather; a front arrived and it rained! The problem for New Zealand then was there were very few data coming from the Tasman sea. Now, with satellites, they can see what is coming, and follow its rate of arrival.

Anyone who has tried to predict sports game results will know how difficult that is. With some sportsmen (and women) form is transient to say the least. Only the bookmakers do well, and of course they don’t care who wins; they lay the odds so that they always make more from the losers than they pay to the winners, or at least they try to. That is why they like to offer “multiple choice” bets in big team games. So why are sports so difficult to predict? The problem involves random variables. Someone is not feeling very well, a key player gets injured, players have mental aberrations, the list goes on.

Anyway, the cause of this particular post is President Trump’s latest proposal to put tariffs on foreign steel and aluminium. This was totally unpredictable, but the question now is, how do you predict the consequences? It is no good extrapolating because there is nothing recent to extrapolate from. It is no good being Delphic, because that does not get anyone anywhere. The problem then is, how will other countries respond? They have two considerations. If they retaliate, you get a trade war and everyone loses. If they do not retaliate, then Trump will be encouraged and keep at it, and again most lose. They could try to persuade him not to, but so far he has not been particularly amenable to receiving advice and changing his mind.

The EU has stated it will impose tariffs on US products, but Trump has threatened to counter those with tariffs on European cars, which are more of a big-ticket item for Germany. I was unaware that the EU was a significant exporter of steel or aluminium to the US. A check on the EU statistics showed that “metals and others” came in at about 4% of trade, and the EU imported a little more from the US than it exported. In my opinion, a better strategy for the EU would be to shut up and see what happened. There are a lot of other countries far more deeply involved, so let them do the fighting. Unfortunately, politicians, when interviewed, feel they have to say something and cannot resist the chance to look important. Much better to “make a stand” and never mind the consequences, which in this case would be severe.

This raises the question, why has the US got such a big trade deficit? The answer from a US professor of economics at first sight seems of low relevance, but on thinking about it I suspect he is in part correct. According to him, a very important cause is the US government deficit. If you think about it, suppose the trade should be at equilibrium if there were no deficits. Now, when you borrow money, if that goes more or less in the same ratio to domestic and imports as before, the imports rise, but the government deficit is not going into exports, or, at present, into infrastructure, which would enhance economic growth. So the balance swings to more imports. There is a second problem. No industrialist likes to expand production or invest more to do it when there are frequent random changes to the rules. Good growth is encouraged by clear government rules that stay the same. Right now there is the threat of chaotic rule changes. All of which raises the question, what next? I don’t think anyone knows, but the worrying thought is that suddenly the world could fall back into trade wars and nobody wins.

The Latest Indictments by Robert Mueller

Probably the most interesting thing to happen this week on the world stage, as opposed to locally, was the issuing of indictments by Robert Mueller. These came as quite a surprise to me because they were only peripherally related to the election. The few things that were, like dressing up as Hillary Clinton in prison garb was, in my opinion, more juvenile than anything else, and the charge of posting tweets that might have influenced voters seems to me to be a bit over the top. It almost made me wonder if anything I had written in various posts could be considered as “influencing American voters”. If it were, then I find that strange because I have no preference for American politics, but because of the importance of the US, of course I am interested in what goes on there.

One of the things that surprised me about this indictment was its length. It is 37 pages long, and some of the allegations seem to me to be ridiculously trivial. One allegation I found interesting was that some of these Russians “communicated with unwitting individuals associated with the Trump campaign”. This would seem to indicate that Trump’s protestations that there was no collusion is valid. Collusion implies knowledge of what you are doing; being fooled by someone is hardly collusion. Another interesting thing about this allegation is that it gives no examples of what actually happened with these “unwitting individuals”. It could be a straw man allegation for all we know, and no evidence is likely to be required because I can’t see these Russian coming to the US to defend themselves.

One of the defendants is a collection of entities termed “the organization”, and it had an annual budget of millions of dollars. That is a fairly trivial budget compared with what the American parties spent. It “obviously” had Russian government involvement because one of the officers had been in a company that provided food for the Kremlin. Now that is a deep association. It divided itself into sections and posted on social media, with the goal of spreading distrust towards candidates and the political system in general. If so, we have to admire its success, because if you look at the social media there are a lot of people who do not trust their politicians. Apparently the organization received money though a number of Russian banks, but given that it is a registered Russian company and its headquarters are in St Petersburg, that is hardly surprising, nor is it a crime. A cited example of their efforts at subverting the US elections was to have somebody stand outside the White House with a sign saying “Happy 55th Birthday Dear Boss”. What an earth-shattering criminal he was! One man, R. Bovda, attempted to travel to the US under false pretenses but could not get a visa. Obviously a master criminal! Most of the other defendants are charged with holding office in the Russian company. Charged? Why is that a crime?

A number of the defendants were charged either with attempting to enter the US or of doing so and not disclosing their full intentions. The indictment even mentions that two who succeeded wrote a report summarizing their itineraries and listing their expenses. Maybe they were complying with tax law. They talked to Americans, and even made a list of US public holidays. And someone paid them to do this? Others posted on social media, under misleading identities, with the intention of irritating Americans. Now that is sterner stuff.

Apparently these Russians were real spoil sports, as they periodically destroyed or deleted data, emails, and other evidence of their activities. However, the FBI seems to have taken the trouble to look up Facebook and check their history. Again, hardly master criminals. They purchased Facebook ads for “March for Trump” rallies, but also advertised “Support Hillary. Save American Muslims”, although later they tried “Down with Hillary”. For people being paid to do this, they lacked focus.

Some were also charged with obtaining money by fraud, including defrauding a federally insured institution. They are also charged with misrepresenting and lying on their visa application, and in carrying out identity theft, and used false credit cards thus defrauding the financial institutions. They also perpetrated wire fraud and bank fraud. At this point I should add that it is highly appropriate that such people be charged for such crimes, and dealt with in the usual way. However, what I find surprising is that these sort of crimes are not usually given this sort of publicity. The usual procedure is to apprehend the perpetrator, charge them, and let the law run its course. It is hardly of the stature of international crime. Another oddity is that no American is charged, and presumably the Russians are in Russia, so why release this now? Why not say nothing, hope they try to enter the US again, and if they do, arrest them? Is the release to show evidence that Mueller has been doing something? Hopefully, not to divert attention from other problems.

At the same time, an ex-Director of the CIA has apparently publicly stated that the CIA has regularly interfered with foreign elections, “but only for the greater good”. The greater good of whom? Why was Pinochet of greater good than Salvador Allende? Admittedly, the American mining companies in Chile would agree, but would the Chileans at the time? If it is for the greater good of America, why can’t some other country do the same for the greater good of their country? Then we might ask, what was the budget of the CIA for these ventures? My guess is it would be far greater than “millions”. The Russians should be accused of being cheapskates, or maybe the CIA of wasting tax-payer’s money?

In one of my futuristic novels, I had a different form of governance, and there was a fringe movement calling for “the return of democracy” (not that we actually have it now – our western governments are of the Republic form). Three very senior people sit around a table discussing this, laughing at the bizarreness of those long-gone times. However, I never foresaw anything quite like the present political mess.

The Trump Enigma

That would make a great book title, in the “truth is stranger than fiction” genre. Right from the get-go, Trump’s Presidential campaign was totally puzzling: he never seemed to miss insulting just about every minority you could think of; he ran around making grandiose statements that were either hideously ridiculous, such as Mexico was going to build his wall, or he was saying things that everyone seemed to recognize readily as being very unlikely to be correct. It was not as if he were trying to fool everybody; he looked the exact opposite of a con man. He was ramming statements in people’s faces in a way that almost challenged them not to believe. How could anybody win like that?

He did have some statements that almost certainly struck home. “Drain the swamp!” was one such statement. All around the world there are a lot of people who have little faith in politicians, and many people are convinced that politicians specially favour big business, etc. We also see politicians closing down the government for no good reason other than petty politics, or pushing extraneous agendas. So that sort of statement should have struck oil.

However, recently I came across a news extract that summarized parts of Michael Wolff’s Fire and Fury, and here was a surprising explanation: Trump did not want to be President. He wanted to lose. As the campaign was coming to an end, he was about 10 points behind. That did not bother him. Trump intended to run a TV network, and his aim was to be one of the most famous men in the world. He was happy. He did not want to be President, and just about everyone close to him thought he should not be. Trump apparently said something like he was not thinking about losing because he wasn’t going to lose. He would not be President, but he would be a huge winner.

Why did he not release his tax returns? Because it never occurred to him he would win, and if he lost, there would be no point. He had a built-in whinge against Preibus, the Chairman of the Republican National Committee, hence an excuse for losing. He would be a martyr to “Crooked Hillary”. His family would be extremely famous. Kellyanne Conway could be a cable news star. Then a wheel fell off. Comey made his famous public statement and Hillary’s ratings started to fall. Apparently, on the night the results came in, Melanie burst into tears at the news. Trump did not believe it, then he became horrified, then suddenly he decided, yes, he could do this.

I have no idea how accurate this is, but this is what Michael Wolff apparently wrote. My initial thought after reading this was, Dang! Why couldn’t I have thought of something like this sooner? This would make a great plot for a novel, and it’s wasted, thanks to Trump.

But this puts a new perspective on Robert Mueller’s investigation into Russian collusion. There cannot be collusion between two parties unless they have a common objective. If the Russian interventions, if there were such interventions, were aimed at promoting Trump, as is usually asserted, and Trump was trying to lose, there can be no collusion. On the other hand, suppose the Russian interventions were aimed at getting Trump to lose, can you collude and plot to lose? Or will the proposed collusion now make Hillary guilty, because she was the only possible beneficiary? Or was such Russian activity a clever punishment on Trump? Or, as I feel is more likely, if some Russians did something, it was totally independent and not coordinated with Trump or his campaign. Who knows?

Yet, in a way, this forks Trump. Now he is President, can he really afford to announce that he tried to lose? Can he make that his defence against Mueller’s probe? To add to the mix, right now there is a memo that Congress wants to release that some people claim relates to the Christopher Steele report, which is the basis of the allegations of collusion. Now Steele runs a consulting company and was an MI6 agent, and the funding for this report apparently came from the Clinton/Democrat party. Is that not collusion with a foreign agent to undermine the US political process? Is there any way out of this mess for anyone?

All the same, I wish I had thought of that plot. Not, of course, that anyone would have believed it to be plausible. It would be laughed out of court as to ridiculous for words.

Exit Mugabe

I confess to having an interest in “important” people. What is it that makes them get to where they do? I have explored this in a number of my novels, and I have met and talked with a number of important people here, not that New Zealand is very important on the world stage, nevertheless I think I have seen enough to know that I don’t really know the answer. In Mugabe’s case, though, I think there were two major causes that brought him to the top. The first was self-belief and determination, and the second was stubbornness. Once he made up his mind on something, nothing would turn him away. And yet he has finally decided to quit.

He probably had little choice. The army did not want to have to shoot him, but eventually it must have occurred to him that the senior army officers could not back down and live. That is the sort of reality that someone like Mugabe would understand. The fact there were mass demonstrations may have finally got through to him, and now it must be galling that the crowds are cheering his departure. Still, he would know the usual exit for dictators is quite brutal, and there would be a time when the soft options would disappear.

Mugabe’s main positive claim to fame is that he led the Shona resistance to the white government the British colonial administration left as the government in Zimbabwe, or Southern Rhodesia as it was then called. For that he would get much gratitude from the Shona people, which would make him the obvious choice to become Prime Minister of the new government. It seems that at first he was reasonably enlightened, and expanded healthcare and education. Later, he would become President, but by then the signs were deteriorating.

This started when many of those of European descent fled, essentially for economic reasons. By itself, this was no great deal, however the skills they took with them was. It was the highly educated or those with money who could find a life most easily elsewhere. The economy started to contract, but Mugabe was not one to be put off his vision, and this is an unfortunate aspect with many dictators. They think their dream is the only one, and the reality of achieving anything is irrelevant. Means will be found, and they tend to shut their eyes at the consequences.

Worse was to come, because Mugabe now feared all those who had fought for revolution, and worse, there were scores to settle with the Ndebele. The Shona people hate the Ndebele for things that happened in the early 19th century, so then was the chance for revenge. To bolster his position, Mugabe ordered the training of the Fifth Brigade by North Korea, and set them loose on the Ndebele. Estimates are that there were 20,000 killed for no good reason.

Mugabe nominally was a Marxist, but he also realized that he should leave the economy working. Zimbabwe is naturally a rich country, and it was the breadbasket of Africa, and is also rich in minerals. The problem was, whites owned all the resources, so Mugabe set about confiscating them. The land seizures were declared illegal by the Zimbabwe courts, but Mugabe continued with them, declaring the courts irrelevant. Land was for Zimbabweans. It was all very well to put ill educated Shona as farm owners, but they did not know how to farm. Food became in short supply. Inflation soared to 7600%. Apparently, they even issued a banknote for 100 trillion dollars. But no matter how bad things got, Mugabe would not step down and let someone else try.

One of the bad aspects of revolution is that the people who carry out revolution are often not the best for what follows, and the history of revolutions is not a happy one. Not only that, but the leaders seldom if ever encouraged successors. South America was interesting because Jose de San Martin abandoned politics altogether after the successful liberation of the south, while Simon Bolivar did try to manage a major coalition of countries in South America and eventually gave up, leading to somewhat chaotic outcomes. The first Russian revolution was led by “nice” people who really had little idea what was required next, and we all know what Lenin and Stalin did to Russians.

One of the very few successful revolutions was carried out in America. What resulted after the British were ejected was a rather enlightened set of leaders who founded a truly great nation. And it is here that we see a great difference. This may sound awful, but in my opinion the best thing George Washington did as President was to step down after eight years. The reason I say it was the best is that while no doubt he did a number of other good things while President, they were relevant only at the time. His standing down and respecting the constitution, and I rather suspect he would have had the other option, has cemented that forever: no President would ever dare to suggest he was more important to the United States than George Washington, the man who effectively was responsible for it formation.

And here is Mugabe’s great failure: he could not put the country before his own personal wants. This was a tragedy. So what follows? Will Zimbabwe emerge into a bright new era? I am far from convinced prospects look good. The man replacing Mugabe is Emerson Mnangagwa, who was Mugabe’s “enforcer”, and was in charge of carrying out the killing of the 20,000 Ndebele. Not the most promising of starts. Worse, why the coup then? It appears that Mugabe fired Mnangagwa, and Mnangagwa had the generals behind him. You form your own conclusion.

Meanwhile, time for a quick commercial. This Friday, my new ebook, “The Manganese Dilemma” is released on Amazon. Russians, hacking, espionage, fraud, what more could you want over the weekend? Link: https://www.amazon.com/dp/B077865V3L

Politics and jail

The news this week is certainly attention grabbing. For my money, I suspect the most interest will fall on the indictment of Paul Manafort. I have read the indictments, and it is clear that while some of them are probably there for lawyer talk, there are two really serious ones. The first is he laundered money, at least $18 million worth, and maybe a lot more, and the second is that money mostly went for his personal benefit and he did not declare it as income. Tax evasion has been a classic way of sending bad guys to prison, an example being one Alphonse Capone.

The most obvious question to answer is, did he do it? If he did, it was not very bright of him to manage the US presidential campaign because politics, being what it is, sends too many people looking for a way to discredit you. Having committed obvious crimes, even if so far nobody has noticed, is an obvious weakness. The most obvious weakness is that Manafort is supposed to have avoided tax, but that also assumes he owned the money, as opposed to acting as an agent for the owner of the money. The indictment names a few properties, and I assume Manafort’s name will be on the property ownership papers as the owner. If so, he will be in trouble. However, he will be less so if he can prove he is merely an agent for the true owner. If he tries that, then he could be effectively admitting guilt to being an agent for a foreigner without registering, which is one of the other indictments. Interestingly, this appears to be being tried in a State court, rather than a Federal court. Does a State court really have jurisdiction over Federal matters? We await further developments.

One of the more interesting indictments is that he acted against the interests of the United States by carrying out contract work for Yanukovich, then President of Ukraine. Since when is it against the interests of the United States Government to carry out work for a democratically elected President of a foreign government that is not a declared enemy of the United States?

The other interesting issue is Catalonia. The Catalan regional parliament has voted to declare independence from Spain, on the basis that 90% of the 43% that voted in a nominally illegal referendum voted for independence. The Spanish Prime Minister, Mariano Rajoy, declared the vote and the declaration to be illegal, although what that means remains to be seen. The Catalan President, Carles Puigdemont, had paused and I thought he might even step away from going ahead with the declaration, but he has elected to declare seccession. Meanwhile, the UK, Germany and France have supported Spanish unity. So, what now? Puigdemont nominally faces up to 30 years in jail, but I doubt that that will be enforced unless something goes really wrong between now and then.

On the other hand, Madrid has apparently arrested a number of senior Ministers of the Catalna government who declared independence, and presumably they will try them in court. Puigdemont is apparently in Brussels, and claims he will not return to Spain until the threat of arrest is removed. Whether that will work is a matter of interest, but from Madrid’s point of view, they may not care. Puigdemont out of the way is probably just as useful to them and they do not want a political martyr.

Suppose the Catalans did secede, what would happen? The main “reason” for independence cited is to preserve the language, and to give a feeling of independence. They also feel that Catalonia pays €10 billion more to Madrid than it gets back in spending. Of course, not counted in that “paid back” are the services Madrid pays for, such as border patrol, customs, international relations, defence, a central bank, the tax service and air traffic control are some of them. As an independent country, it would have to set up these. There is also a sense of selfishness here; why should we send money to the poorer parts of Spain?

However, even in finance, there is a problem. The Catalan regional government owes €77 billion, of which about 2/3 is owed to Madrid. Then, of course, Madrid would expect Catalonia to share its proportion of the Spanish national debt. Further, two thirds of Catalonia’s exports go to the EU, and if Catalonia seceded it would be out of the EU, and would have to go to the back of the queue to get back in. Spain would then have the power of veto. Further, if it gained independence, it would have to leave the euro zone, and again Spain, and friends, could block re-entry. Either way, it would have to set up its own currency in the meantime. Of course countries like San Marino uses the euro without being an EU member with the eorozone’s approval, since they are so small. Nobody knows whether Catilonia would qualify, but Spain could block that. Apparently Kosovo and Montenegro use the euro without the EU’s approval. After all, a bank note is a bank note. However, a problem will arise if they ever need credit. If you use someone else’s currency, you have to earn it. Who knows what will happen?

Collusion, Treason, Evidence of Interfering With Elections

Yes, I know you have heard all this before, but maybe this is different? The last Presidential election in the US has a lot to answer for, but wait, there’s more! And with evidence to go with it! First, some background. New Zealand has a law that states that anyone with one New Zealand parent is automatically a New Zealand citizen. Australia has a law that states that to be a member of parliament, you must not be a citizen of another country. It turned out that an Australian reporter found out that the father of Barnaby Joyce (the Australian Deputy Prime Minister) was a New Zealander and therefore Joyce was a New Zealand citizen by descent. Barnaby Joyce was born in Australia and as far as we know has never been to New Zealand. The journalist wrote to Joyce’s office, the New Zealand High Commission in Canberra, and the New Zealand Department of Internal Affairs for clarification and got no response. A further relevant piece of information is that New Zealand is shortly to have an election and very recently, thanks to appalling poll results, the leader of the Lahour Party here, who are in opposition, was replaced by Jacinda Ardern, who is somewhat younger and more vibrant. Two weeks into the job the following mess descended on her.

It is less clear exactly what started this, but the New Zealand MP Chris Hipkins raised the issue of dual citizenship by submitting questions to the New Zealand Parliament, which is in its dying stages. Exactly why he did this is the unclear part. One story is that an assistant to Penny Wong, the shadow foreign affairs spokesman for the Australian Labour Party, primed Hipkins. Whatever the source or the reason, clearly Hipkins had a brain fade. You don’t start commenting on the constitutional aspects of another country if you are in Parliament; you don’t raise an issue formally (had he really wanted the answer as opposed to making a public statement he could have asked one of the legal aspects available to Members of Parliament) unless you have an objective, and finally if you don’t know where an issue might go, you do not raise it about six weeks before an election, especially with a new leader struggling to find her way. Ardern quickly lashed Hipkins, verbally at least, as soon as she had found out, but the fuse had been lit.

The Australian Prime Minister immediately accused Bill Shorten, the leader of the Australian Labour party, of conspiring with a foreign power. That accusation may have been the first Shorten knew of the issue. However, it left the average New Zealander in a funny position. On the whole, leaving aside sporting contests, we consider ourselves rather friendly with Australians, although I suppose the temptation of either side to give the odd raw prawn is still there. But fancy that – we are accused of being a power. First I’ve heard of that one. Then, obviously having got the rhythm, the conspiracy is to undermine the Australian government, and that is treason!

There was more stuff for this fuse to ignite. The Australian Foreign Minister, Julie Bishop, could not be restrained, and accused the Australian Labour Party of trying to use the New Zealand Labour Party to undermine the Australian government. Collusion and treachery! She was also quoted on TV (evidence!) as saying “New Zealand is facing an election. Should there be a change of government I would find it very hard to build trust with those involved in allegations designed to undermine the government of Australia.” That is effectively the Australian government intervening in the New Zealand election.

So, what of Jacinda Ardern? She seemed somewhat unfazed by these accusations. She certainly sent Hipkins to the dog box and she tried to diplomatically engage with Ms Bishop, so far with no luck. But she refused to apologise. So, will this have any effect on the election? We have to wait and see, but my guess is the only effect will be from Ms Bishop’s attack, and that will help Jacinda. As one of our previous Prime Ministers once said, New Zealand politicians don’t lose votes by refusing to bow down to Australian politicians. As for the Australian Labour politicians, I understand their response to accusations of treachery and collusion was to sit back and laugh, which is probably the only response worth making.

I have no idea what the average Australian thinks, but my guess it will be either shaking the head in disbelief or laughing. And in New Zealand? This morning’s newspaper had two items that probably represent our feelings. The first was a cartoon with an aboriginal sitting outside a hut and being told about this electoral law fiasco. His response” Wow! Pity they didn’t have that law 200 years ago.” There was also a letter to the editor, with the proposal that, in the spirit of good relations and friendship with our Aussie neighbours, that New Zealand immediately convey New Zealand citizenship on all Australian politicians.

Trump on Taxation

President Trump has announced the intention to make sweeping tax reform, and a significant tax reduction for companies, at present reducing from 35% to 16%. His argument is that by doing this, he will encourage multinational companies to stop hoarding money in offshore tax shelters and bring it back to invest in the US. So what to make of this? The tax reform is an extremely good idea. The simpler and more transparent the tax law is, the less time everybody wastes on minimizing tax and the more they devote to actually earning money. Everybody accepts tax reduction is good for them, but the problem then is, does the government earn enough money to pay for what it wants done? That is a detail that has to be left because it depends on what is available to tax, and how much the government wants to spend.

Company tax is an odd animal because one argument is that you collect more or less the same tax irrespective of the rate. It goes like this. A company earns money, but those earnings are spent in four basic ways: investing in new plant; buying goods/services from other companies; paying staff; paying dividends. Looking at these in inverse order, money transferred to dividends becomes personal income, and that is taxed, so what we are avoiding is double tax. Many countries avoid such double taxation by giving company tax credits with the dividends, and while I am unaware of US tax policy on this, as a general rule as long as there is no double taxation, lowering the company tax rate has no adverse effect on dividends because those on the low tax rates in general cannot afford the stock. The important thing is that unlike people, companies do not spend on themselves, leaving aside “perks” such as company jets. My view is such “luxury expense” for senior staff should be taxed as a personal benefit to them.

Paying staff means the staff pay tax on their earnings. Now, if the staff are low paid, lowering company tax does reduce the tax collected, because most staff do not pay the 35% rate, although some may be on a higher rate. Similarly, buying goods and services from other companies simply transfers the taxable profits, although if the goods are imported, the profits go elsewhere. The question here is, then, will the US increase local production? The reason many multinationals manufacture offshore is that wages there are seriously lower, and they do not have to pay benefits and compliance is less strict. There is rationality in thinking that such goods manufactured offshore should be taxed as if the company met home compliance and had paid home benefits and wages because that levels the playing field from the “own country” point of view, but of course it hurts developing countries.

The virtuous part, according to Trump, is that by lowering company tax, multinationals will bring back more of the offshore funds accreted, and all companies will have more money to invest and create new jobs, or pay dividends. The next question is, is this valid reasoning? I am not so sure. The problem with investing to create new jobs is you have to have something to invest in. That is not so easy to find. There is no real evidence that company tax is inhibiting investment because there is no real evidence that, leaving aside small individual companies in trouble, there is a widespread shortage of money. What I see is more a general shortage of ideas. Thus we see the new product is another mobile phone that is only a little bit different from the last one. Ask yourself this: what would you really want that is not currently available if you had the money to buy it?

What that suggests is the economic slowdown is not caused by higher corporate tax, but more through inequality. Those with money already have most of what they want, and those without money cannot afford much of what is there. If we really want to promote growth, then I am afraid the poorer have to have more purchasing power, because they are the only ones at the moment who could power acceleration in sales. Of course the rich will keep on buying, but only at their current rate, and that will not power the growth President Trump wants. So my question is, will President Trump do anything to reduce inequality?