Zbigniew Piekarski Outlines the Six Comandments
"Every mania in financial history has been liquidity driven. You can go back to the South Sea Bubble or tulips in Holland. As long as the money is coming in, everything is fine."
- Raymond DeVoe, Dec. 11, 1995
This month the World Bank released a publication that should be given to each member of the Flower Power generation in an attempt to provide them with six commandments outlining the relationship between the State and the market.
Entitled "Doing Business in 2004", with a subtitle "Understanding Regulation" its conclusions are not open to misinterpretation, nor the endless debate which is the Polish cultural predisposition. It also contains many colorful illustrations so that even the semi-literate members of the respective parties will be able to understand.
These commandments are as follows: The more a country regulates, the poorer it becomes; the more a country regulates, the greater the corruption; the more a country regulates, the greater the unemployment; the more a country regulates, the lower the productivity; the more a country regulates, the higher the costs of expanding the economy; and finally, the pillars of a successful market economy are as little regulation as possible and contract law which should be simple, transparent, and quickly enforceable.
The real danger threatening our freedom and prosperity is the State itself. The bureaucratization and institutionalization upon which it relies in order to exert control, is of itself responsible for the denial of individual freedom and the curbing of individual responsibility.
Market activity is based on individual responsibility, as the taking of risks is always the attribute of individuals and never of groups. People herd together for security and not in order to innovate.
Even the very principles of the "Welfare State" originated from individuals, enlightened capitalists who saw that healthy, well-fed and educated workers were also efficient workers. People such as George Cadbury (1839-1922) and Benjamin Rowntree (1871-1954) in the UK are only two examples of a movement that was active in most capitalist countries before the First World War.
Once the State decided to take over and provide a level of basic security to all, the whole process became bureaucratized and divorced from the disciplines of the market. When the benefits became politicized, the fundamental economic principle of scarcity was replaced by the illusion of plenty, provided that resources were allocated correctly. Consequences that are unintended are therefore treated as resulting either from a lack of control or a fault in execution. The contradictions inherent in the system itself are rarely questioned.
The problem with this approach can be seen in the attempt of all governments to protect individual investors from the consequences of their own stupidity through regulation; whilst, at the same time, doing their utmost to ensure that the same investors repay government debt and lose some of their wealth in the process.
This trick relies upon flooding the system with easy credit. Easily available credit inflates the amount of money chasing limited assets. Assets that are perceived as being "a good investment" become overvalued and "bubbles" form. The collusion of institutions which benefit from this situation is required in order to convince the public that all is well.
Two investments perceived by most investors as being "safe and secure" are property and government debt.
In most of the world, property prices have increased dramatically and are still on a roll. Interest rates are at 45 year lows and the proliferation of financial institutions offering credit have made mortgages more accessible. The same financial institutions are stating that prices have increased further. Unfortunately, they are also at historically high levels in relation to earnings, and when you go into detail you find that the highest proportion ever of loans granted were not for the purchase of new properties, but for the release of equity within existing properties. The equity thus released is used to fund a few luxuries, pay off a few debts and then cover essentials.
First-time home buyers cannot afford to step onto the ladder, even though offers of loans of 120 percent of the value of the property abound. What will happen when there are more sellers than buyers? This will not be a temporary phenomenon. The effects of deflation will increase the loan burden, whilst reducing the value of assets. Equally, the fact that fewer individuals are being born implies that demand will weaken. With a lack of demand, a glut of supply, and declining income levels, how much will property be worth in ten or even five years time?
Investors in government bonds are often assured that they cannot lose, that governments rarely default and will pay the stated rate of interest. They may also be told that should interest rates rise, the capital value of their investment will fall. There is also another consideration that is rarely mentioned. Bond investors in the USA have experienced a rather dramatic fall in capital terms, even though the nominal rate of interest has not changed. A massive bond bubble 20 years in the making was pricked and as institutional investors scurried away from Treasuries, capital values fell heavily. After all, it's a question of supply and demand, and if you sell and no one wants to buy, then what is the real value?
This is a traders' market and will be for a long time to come. The old pillars that were once considered secure will provide the most unwelcome and unexpected instability. To accept what the future holds and benefit from the uncertainty that will prevail for years to come, you must be prepared to take calculated risks and seek new solutions. One such solution is on www.gpmanagement.com. Tell me what you think.
On the WSE: I hear that the boys and girls have been drinking copious amounts of slimming drink Figura. The effects will be seen over the weeks leading up to Christmas and then continue throughout the early part of 2004.
