How Hyperinflationary Policies Ushered in China’s Communist Rule

Austrian economist and professor at Northwest University Richard M. Ebeling in a recent article articulates how the Chinese government’s hyperinflationary policies, which financed her war with Japan 1937-1945 and the civil war compounded by the “dictatorial” Nationalist government, ushered in the communist tyrannical rule.

Here is a slice. From Epic Times (hat tip Bob Wenzel) (italics original)

Inflations have undermined the cultural and economic fabric of society, bringing about social chaos and revolution. Inflation is the enemy of social order and economic stability. Inflation can destroy accumulated wealth, ruin the entire well being of broad sections of a country’s population, and sometimes bring about radical change in a nation’s political system. When combined with war, inflations tear apart the human community.

One example is the Great Chinese Inflation of the 1930s and 1940s. Indeed, the destruction of the Chinese monetary system during this period helped Mao Zedong’s communist movement come to power on the Chinese mainland in 1949.

In the nineteenth and early twentieth centuries, Imperial and then Republican China had no central bank. The monetary system was based on a diverse network of private banks operating in the various regions of the country. While copper was widely used in coins, the primary medium of exchange was silver, and the entire Chinese economy functioned on an informal silver standard for most of this time. A year after Chiang Kai-shek’s Nationalist (or Kuomintang) Party came to power in Nanking in 1927, the Central Bank of China was established with its headquarters in Shanghai, and the country was formally put on a Chinese silver-dollar standard.

Read the details here

 

The real effects of inflationary policies to the Chinese political economy. Again Professor Ebeling

But it is nonetheless true that whatever basis of popular support Chiang’s government might have had against the communists at the end of the Second World War, especially among the country’s middle class, was undermined by the inflation. It destroyed the wealth and savings of the Chinese middle class, and created chaos in virtually all commercial dealings due to the loss of a reliable and stable medium of exchange for purposes of rational economic calculation and business planning.

In addition, the inflation and its effects drove some segments of the rural population into a more severe poverty than even the war had generated. Thus, whatever support the Nationalist government may have had in the countryside soon withered away, as well.

Also, during and after the war, the Nationalist government imposed unworkable price and wage controls as a supposed tool to “fight” price inflation that only succeeded in creating even more distortions and imbalances throughout the Chinese economy due to shortages, black markets, and mounting corruption.

Its policies produced the social and economic unrest that played right into the hands of the communists, as Mao’s revolutionary government promised to do away with the corruption and abuse of Chiang’s Nationalist government.

The hyperinflationary policy followed by the Nationalist Chinese government, therefore, helped bring about more than half a century of Marxist tyranny on the mainland of China, a communist tyranny under Mao Zedong that historians have estimated cost the lives of at least 80 million innocent men, women and children in the name of building the “bright socialist future.”

I find some relevance with China’s inflationary policies of 1930-40s with current stylized policies and politics. Except that the sequence appears to be backwards.

Then inflationary policies had been designed to finance China’s war economy. However today, both China and Japan have been inflating bubbles with the aim of generating economic growth (really—statistical growth, and really—subsidies to the cronies of the Chinese government and State Owned Enterprises (SOE) as well as Japan’s Wall Street) and the ensuring of the tenures of their respective political leaders. 

[Note I included Japan in the above commentary due to the recent controversy which has historical significance.]

However, slowing growth even from statistical measures from the intensifying embrace of bubble policies have placed increased political pressure on both governments. And instead, the current bubble (inflationist) policies have amplified on the credit risks (and other associated risks) for both economies amidst an environment of slowing growth.

So to divert the public’s attention from the real problems, both governments has resorted to diversionary tactic of brinkmanship politics via territorial disputes aimed at the incitement of nationalist sentiment to generate popular support for their respective governments. 

This has also been impliedly contrived to further justify their current inflationary policies with even bigger defense spending. Both China and Japan, a staunch US ally, will raise their defense budget this year.

The peculiarity is that despite the hullabaloo over Senkaku Islands and so the so-called “China threat’ as portrayed by western media, the Chinese government as well as partly Chinese investors continue to indirectly finance the US war machine via record acquisition of US Treasuries. 

The danger of inflationism has been its relationship with wars. The next question is what happens when all these seeming theatrics risks becoming real even by accident? Will massive inflationism lead to World War III or even a nuclear Armageddon?

Or will communism and its close sibling socialism rear its ugly head again, not just in China but to practitioners of inflationism elsewhere?  

Recently Adolf Hitler’s anti-semitic book 'Mien kampf' has seen a surge in sales.

Signs of things to come?

Bastiat on Why Protectionism is a Philosophy of War

Protectionism is a philosophy of war, partly through conquest.

The great classical liberal Frédéric Bastiat destroys the supposed moral high ground of mercantilism which are based on blatant self contradictions. (source Mises Institute, all bold mine)

There is one thing that confounds me, and it is this. Sincere publicists, studying the economy of society from the producer's point of view, have laid down this double formula:

1. "Governments should order the interests of consumers who are subject to their laws, in such a way as to be favorable to national industry."
2. "They should bring distant consumers under subjection to their laws, for the purpose of ordering their interests in a way favorable to national industry."

The first of these formulas gets the name of protection; the second we call outlets, or the creating of markets, or vents, for our produce.

Both are founded on what we call the balance of trade: "A nation is impoverished when it imports; enriched when it exports."

For if every purchase from a foreign country is a tribute paid and a national loss, it follows, of course, that it is right to restrain, and even prohibit, importations.

And if every sale to a foreign country is a tribute received, and a national profit, it is quite right and natural to create markets for our products even by force.

The system of protection and the colonial system are, then, only two aspects of one and the same theory. To hinder our fellow citizens from buying from foreigners, and to force foreigners to buy from our fellow citizens, are only two consequences of one and the same principle.

Now, it is impossible not to admit that this doctrine, if true, makes general utility to repose on monopoly or internal spoliation, and on conquest or external spoliation.

I enter a cottage on the French side of the Pyrenees.

The father of the family has received but slender wages. His half-naked children shiver in the icy north wind; the fire is extinguished, and there is nothing on the table. There are wool, firewood, and corn on the other side of the mountain; but these good things are forbidden to the poor day-laborer, for the other side of the mountain is not in France. Foreign firewood is not allowed to warm the cottage hearth; and the shepherd's children can never know the taste of Biscayan wheat, and the wool of Navarre can never warm their benumbed limbs. General utility has so ordered it. Be it so; but let us agree that all this is in direct opposition to the first principles of justice. To dispose legislatively of the interests of consumers, and postpone them to the supposed interests of national industry, is to encroach upon their liberty — it is to prohibit an act; namely, the act of exchange, that has in it nothing contrary to good morals; in a word, it is to do them an act of injustice.

And yet this is necessary, we are told, unless we wish to see national labor at a standstill, and public prosperity sustain a fatal shock.

Writers of the protectionist school, then, have arrived at the melancholy conclusion that there is a radical incompatibility between justice and utility. 

On the other hand, if it be the interest of each nation to sell, and not to buy, the natural state of their relations must consist in a violent action and reaction, for each will seek to impose its products on all, and all will endeavor to repel the products of each.

A sale, in fact, implies a purchase, and since, according to this doctrine, to sell is beneficial, and to buy is the reverse, every international transaction would imply the amelioration of one people and the deterioration of another.

But if men are, on the one hand, irresistibly impelled toward what is for their profit, and if, on the other, they resist instinctively what is hurtful, we are forced to conclude that each nation carries in its bosom a natural force of expansion, and a not less natural force of resistance, which forces are equally injurious to all other nations; or, in other words, that antagonism and war are the natural state of human society.

Thus the theory we are discussing may be summed up in these two axioms: 

Utility is incompatible with justice at home.

Utility is incompatible with peace abroad.

Now, what astonishes and confounds me is that a publicist, a statesman, who sincerely holds an economical doctrine that runs so violently counter to other principles that are incontestable, should be able to enjoy one moment of calm or peace of mind.

For my own part, it seems to me that if I had entered the precincts of the science by the same gate, if I had failed to perceive clearly that liberty, utility, justice, peace, are things not only compatible, but strictly allied with each other, and, so to speak, identical, I should have endeavored to forget what I had learned, and I should have asked,

"How God could have willed that men should attain prosperity only through injustice and war? How He could have willed that they should be unable to avoid Injustice and War except by renouncing the possibility of attaining prosperity?

"Dare I adopt, as the basis of the legislation of a great nation, a science that thus misleads me by false lights, that has conducted me to this horrible blasphemy, and landed me in so dreadful an alternative? And when a long train of illustrious philosophers have been conducted by this science, to which they have devoted their lives, to more consoling results — when they affirm that liberty and utility are perfectly reconcilable with justice and peace — that all these great principles run in infinitely extended parallels, and will do so to all eternity, without running counter to each other — I would ask, Have they not in their favor that presumption which results from all that we know of the goodness and wisdom of God, as manifested in the sublime harmony of the material creation? In the face of such a presumption, and of so many reliable authorities, ought I to believe lightly that God has been pleased to implant antagonism and dissonance in the laws of the moral world? No; before I should venture to conclude that the principles of social order run counter to and neutralize each other, and are in eternal and irreconcilable opposition — before I should venture to impose on my fellow citizens a system so impious as that to which my reasonings would appear to lead — I should set myself to re-examine the whole chain of these reasonings, and assure myself that at this stage of the journey I had not missed my way."

But if, after a candid and searching examination, 20 times repeated, I arrived always at this frightful conclusion, that we must choose between the right and the good, discouraged, I should reject the science, and bury myself in voluntary ignorance; above all, I should decline all participation in public affairs, leaving to men of another temper and constitution the burden and responsibility of a choice so painful.

Beware of their hypocrisies

More Wall of Worry: Rising Accounts of Protectionism

Another area to be concerned with is the reemergence of protectionism.

Writes the Wall Street Journal Blog,

As worries rise about an economic slowdown, major nations around the world are ramping up measures to protect their economies from trade threats.

Global Trade Alert, an independent monitoring group, says in a new report today that at least 110 new protectionist measures were implemented around the world since the Group of 20 advanced and developing economies met in France last November. Of those 110, 89 were by G-20 members, who meet again next week in Mexico.

Protectionist measures such as export restrictions and higher tariffs spiked after the 2008 financial crisis but didn’t subside afterward. Since then, nations have been pursuing stealthier measures — “murky protectionism” — to circumvent international trade rules, the group says.

The latest updated tally names the 27-member European Union as the leading culprit since November 2008, with 302 discriminatory measures, followed by Russia and Argentina with about half that number each. China ranked at the top of a list of “number of trading partners affected” — with 193, or nearly all of them, followed by the European Union at 187.

Bailout policies are a form of protectionism. And they protect certain domestic politically privileged interest groups at the expense of the consumer.

It has been the G-20 or developed nations (mostly the EU) that has initiated most or about 80% of protectionist measures.

This reveals of the state of their government’s growing desperation which aside from protectionism has resorted to various financial repression measures such as raising taxes, imposing capital controls, inflationism, negative interest rates, price controls and various regulatory proscriptions.

In addition, Russia and Argentina’s deepening slide to statism has also contributed to rising incidences protectionism.

China, as the report said, is likely to suffer most from the reversal of globalization or deglobalization. In reality, the whole world will suffer as economic doors close.

Unknown to many, the resurgence of protectionism is likely to provoke retaliatory responses which should lead to a deterioration in geopolitical relationships that increases the risks of military conflagration. The great depression of the 1930s paved way for World War II.

As the great Ludwig von Mises warned,

What is needed to make peace durable is a change in ideologies. What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.

Desperate politicians and their cronies would use every trick on their books to preserve their privileges, mostly in the cover of nationalism, that comes at the expense of long term interest of their constituents.

Nationalism serves no more than a ruse conjured by politicians and those of the political order to justify social controls.

I hope and pray that the growing trend of protectionism will be curbed and that wars will be avoided.

War on Outsourcing: The Specter of US Economic Nationalism (Protectionism)

The Malaya reports

President Aquino appears unfazed by US President Barack Obama’s endorsement of House Bill No. 3596 or "Call Center and Consumers Protection Bill" pending in the US Congress saying it may be an election-related statement.

"We have to take into account that this is an election year but at the end of the day, like any other country, the US would want to make their companies more effective, more competitive, etc. and outsourcing is one of the keys towards that," Aquino said in an ambush interview at the EXL Service Philippines Site at the Mall of Asia in Pasay City.

"At this present time, I was made to understand, that this was an issue that was brought up during the last elections in America and from that time which was four years ago and now, the situation has not changed. Perhaps there isn’t that much of a danger," Aquino said.

"I will assume that it (BPO) will continue, hopefully it will not change because that is one of our sunrise industries," he said.

Aquino said there are no plans at the moment to lobby against the passage of the bill and that he prefers to "cross the bridge" only when the bill is passed.

It’s good to know that Philippine President Noynoy Aquino recognizes what looks like an election ploy. It really takes one to know one.

But it’s unfortunate that President Aquino, beneficiary of the outsourcing boom, would remain passive on this issue. Never mind if America’s turn to protectionism might indeed harm the industry. It would seem better to be bullied into submission. Yet fawn over with plans by the US to expand military presence here.

President Aquino doesn’t seem to realize that the divide-and-conquer and class warfare strategies have been the hallmark of the Obama administration.

As Mike Brownfield of the conservative Heritage Foundation writes,

Obama enacted a purely progressive agenda with his expansion of the state under Obamacare, his trillion-dollar stimulus bill, the government takeover of the auto industry, the proliferation of regulations under the Dodd-Frank regulatory reform bill, the crony capitalism of the Solyndra scandal, and the illegal appointments to the unrestrained Consumer Financial Protection Agency and the National Labor Relations Board. The result: Some 13.1 million Americans remain unemployed, job creation has been abysmal for much of the past three years, and the President’s promise to turn around the U.S. economy has gone unfulfilled.

The difference is that Mr. Obama’s progressive agenda, during this election season, seems to have transitioned from a moderate to hard line stance.

Maybe’s this also part of the desperation to get re-elected considering the Mr. Obama’s near record low approval rating. (chart from Gallup)

Yet here is more proof of President Obama's protectionist urge.

From the Wall Street Journal,

China was dragged into the 2010 U.S. midterm elections, and President Obama is busy ensuring that it will be an even bigger political target during the 2012 campaign. In Tuesday night's State of the Union address, the President joined Republican candidate Mitt Romney in singling out China as a special trade violator.

In announcing that he will set up a new Trade Enforcement Unit to investigate "unfair trade practices in countries like China," Mr. Obama is promising to increase investigations against Chinese exporters. His Administration has so far brought five cases against China in the World Trade Organization (WTO). Late last year it began targeting China's solar industry, while last week it said it would investigate Chinese makers of wind energy towers.

By the way one looks at it, protectionism has been rearing its ugly head as politicians like President Obama and the mainstream Republican candidates appeal to the emotions of the uninformed via nationalism/patriotism to solicit for their votes.

Many are unaware that economic nationalism (or protectionism) fundamentally underpins the philosophy of war or of military conflicts. World War II, for instance has mainly been caused by rabid nationalism.

Again current events have been affirming the admonitions of the great Ludwig von Mises,

Economic nationalism is incompatible with durable peace. Yet economic nationalism is unavoidable where there is government interference with business. Protectionism is indispensable where there is no domestic free trade. Where there is government interference with business, free trade even in the short run would frustrate the aims sought by the various interventionist measures…

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war.

In short the President Obama’s war on outsourcing constitutes part of what seems to be an overall protectionist agenda, which translates to a war on trade against every nationality (including the Philippines).

President Aquino should negotiate to retain and expand free markets and abide by such principles. Otherwise, perhaps Marc Faber’s prediction may come true.

How War Policies will Hurt the US

The economics of war will eventually weigh on the US.

The following is an excerpt from a must read article by investing guru Doug Casey (bold emphasis mine)

An AK-47 costs less than $500 most places in the world; the bullets cost about 20 cents apiece, and the teenager to employ them costs nothing at all. In fact, teenagers in the Muslim world are in such oversupply that they can be said to have a negative cost.

A US soldier, by contrast, is immensely expensive. Even though most of them come from lower socio-economic levels, a substantial investment has been made in taking them even through Grade 12. Then comes the cost of recruiting, training, equipping, paying, insuring, housing and transporting them in the military. I’m not sure the cost of a US soldier in the field has ever been accurately computed, but it has to be well over a million dollars for a simple grunt and much more for a specialist. That’s not counting the lifetime of pension benefits and medical care for the maimed. And with battlefield medical as good as it now is, the ratio of seriously wounded to dead is much higher than ever before. You may sympathize with the US soldier, but he’s definitely on the wrong side of the equation.

An M-1 tank costs about $5 million a copy. It, or any other vehicle, can be destroyed by an IED fabricated from fertilizer or unexploded ordnance. Even if it’s not destroyed, or not even severely damaged, the brains of its occupants are likely to be scrambled by the blast wave. This is, incidentally, something that is underappreciated. A blast wave bounces a brain around in a skull like an egg inside a tin can. Considering that IEDs are both devastating and extremely hard to detect, it’s no wonder they’re so popular.

Have you ever wondered why there’s no reporting on the numbers of tanks, APCs, Humvees, helicopters and other (immensely expensive) hardware being destroyed in the current US wars? It’s classified, because the numbers would be so embarrassing. Unlike in Vietnam, there’s no longer any body count of the enemy because that would be politically incorrect. But it doesn’t matter how large it is; every dead jihadi is a dragon’s tooth that will grow back as ten replacements. That’s why there’s really no way to win a guerrilla war before you go bankrupt – no way short of genocide or at least serious mass murder.

A $1,000 RPG will easily destroy a million-dollar armored personnel carrier and its occupants. A $10,000 shoulder-launched missile can take out a $10 million helicopter or a $40 million F-16. It may be practically impossible to shoot down a $1 billion B-2 bomber, but that’s academic; they were built to fight a nuclear war against the USSR. They’re useless except to deliver atomic weapons, but the new enemy lives in refugee camps and scattered within teeming cities. The B-2’s codename should be changed from Spirit to Albatross, because it’s not only totally uneconomic, it’s almost totally useless.

So the economics of guerrillas attacking an invading superpower are excellent. In response, the economics of a superpower attacking guerrillas or terrorists are disastrous. In its current wars, the US winds up using cruise missiles, at around $1.5 million each, to blow up wedding parties. The direct expense is bad enough; the vastly greater indirect expense is the creation of a clan of new enemies. The best result is for the missile to just pulverize some sand. Even if it hits a few mujahidin, that’s placing an implied value of several hundred thousand dollars apiece on their heads.

In other words, whether we’re looking at offense or defense, the economics of destruction are tilted not just 10 to1, not just 100 to 1, but probably closer to 1,000 to 1 in the favor of insurgents.

Perhaps you’re thinking further advances in technology will tilt the equation back toward the US. But as I explained above, the effect of each innovation will be just the opposite after only a short period of technological monopoly. People have a lot of misplaced confidence in the so-called "defense" establishment to come up with marvelous devices to confound groups designated as the enemy. Of course advances will be made, at least for as long as the US government has scores of billions to spend on R&D annually – which it soon may not, for financial reasons. But even if it diverts funds from its myriad other projects, the procurement process is stultifyingly bureaucratic, slow and costly. It’s not at all entrepreneurial, which it still was to a degree even during WWII, when the P-51, the best fighter of the war, was taken from concept to production in nine months and turned out for $50,000 a copy.

The US will even lose the war for new weapons as time goes on, simply because the Defense Department bureaucracy is so counterproductive. It’s like the company Dilbert works for in the cartoon pitted against millions of independent entrepreneurs in the Open Source world. Dilbert’s company moves like a dinosaur, while the Open Source world watches, imitates, innovates and improves at warp speed.

Today a ponderous state supposedly represents our side (I italicize that because, although I truly dislike many of the people it’s fighting against, I consider it to be an even greater danger). At best, it resembles a dim, tired old Tyrannosaurus up against hundreds of smart young Velociraptors intent on eating it. The outcome is obvious: a bunch of the attackers will get killed, but the T-Rex is dead meat.

Remember that there are more scientists and engineers alive today than in all of human history before them, the vast majority from non-OECD countries. The ones who are any good don’t want to work in a constrained, bureaucratic environment with no financial upside. Entirely apart from that, if the minions of the perversely named Defense Department come up with a real super-weapon, in today’s world it’s easy to replicate and improve on, and for a fraction of the original cost. That’s why there are scores of thousands of apps developed for most any electronic device that hits the market today – in addition to the device itself being "knocked off" illegally by small factories that could be anywhere.

Terrorism icon Osama bin Laden’s goal was reportedly to bankrupt the US. And the US has been fighting a 20th century modeled war, when times (or warfare’s evolving dynamics) has been dramatically changing.

In line with the way incumbent political institutions have been structured, the US political establishment has been failing to keep with the new realities (or with the emergent forces of decentralization). And at worst, they seem to be falling right into bin Laden’s ‘war of attrition’ trap.

Yet you can profit from terror (or political folly) as Doug Casey points out, read the rest here

Will the US Foreign Policy of Encirclement Stoke a South China Sea War?

Historian Eric Margolis sees a similar pattern to World War I developing in the Spratlys Dispute

Writes Mr. Margolis (bold emphasis mine)

China is usually very cautious in its foreign affairs. But of late, Beijing has been aggressively asserting maritime claims in the resource-rich South China Sea, a region bordered by Indonesia, Vietnam, Brunei, the Philippines, Malaysia, Taiwan and China.

Japan, India, South Korea and the United States also assert strategic interests in this hotly disputed sea, which is believed to contain 100 billion barrels of oil and 700 trillion cubic feet of natural gas.

China has repeatedly clashed with Vietnam and the Philippines over the Spratly and Paracel islands and even mere rocks in the China Sea. Tensions are high.

In 2010, the US strongly backed the maritime resource claims by the smaller Asian states, warning off China and reasserting the US Navy’s right to patrol anywhere. Beijing took this as a direct challenge to its regional suzerainty.

Last week, Washington raised the stakes in this power game, announcing it will permanently base 2,500 Marines at the remote northern Australian port of Darwin.

Marine regiment can’t do much in such a vast, remote region, but Washington’s symbolic troop deployment is another strong signal to China to keep its hands off the South China Sea. China and nearby Indonesia reacted with alarm. Memories in Indonesia of 1960’s intervention by CIA mercenaries and British troops remain vivid.

The US is increasingly worried by China’s military modernization and growing naval capabilities. Washington has forged a new, unofficial military alliance with India, and aided Delhi’s nuclear weapons development, a pact clearly aimed at China. China and India are locked in a nuclear and conventional arms race.

US military forces now train in Mongolia. China may deploy a new Fourth Fleet in the South China Sea. Washington expresses concern over China’s new aircraft carrier, anti-ship missiles and submarines, though these alarms coming from the world’s leading naval power seem bit much.

The US is talking about selling advanced arms to Vietnam, an historic foe of China. The US is also modernizing Taiwan’s and Japan’s armed forces.

These moves sharpen China’s growing fears of being encircled by a network of America’s regional allies.

The recent ASEAN summit in Indonesia calling for a US-led "Trans-Pacific Partnership" was seen by Beijing as an effort to create an Asian NATO directed against China.

Rising tensions over the South China Sea disturbingly recall the naval race between Britain and Germany during the dreadnaught era that played a key role in triggering World War I….

US foreign policy has become almost totally militarized; the State Department has been shunted aside. The Pentagon sees Al-Qaida everywhere.

Read the rest here

I’d further add that prevailing economic conditions in developed nations like the US may prompt their politicians to divert the public’s attention by inciting geopolitical tensions. And this also exhibits how the state loves and thrives on war.

Archeological Findings: The Origin of the State: War

Sociologist Franz Oppenheimer theorized that the state was born out of war.

From Mr. Oppenheimer

The State, completely in its genesis, essentially and almost completely during the first stages of its existence, is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished, and securing itself against revolt from within and attacks from abroad. Teleologically, this dominion had no other purpose than the economic exploitation of the vanquished by the victors."

No primitive state known to history originated in any other manner. [1] Wherever a reliable tradition reports otherwise, either it concerns the amalgamation of two fully developed primitive states into one body of more complete organisation, or else it is an adaptation to men of the fable of the sheep which made a bear their king in order to be protected against the wolf. But even in this latter case, the form and content of the State became precisely the same as in those states where nothing intervened, and which became immediately 'wolf states'." (p. 15)

Recently some archeologists have found evidence in support of Mr. Oppenheimer’s theory.

From the New York Times, (bold emphasis mine) [hat tip Charles Burris]

Some archaeologists have painted primitive societies as relatively peaceful, implying that war is a reprehensible modern deviation. Others have seen war as the midwife of the first states that arose as human population increased and more complex social structures emerged to coordinate activities.

A wave of new research is supporting this second view. Charles Stanish and Abigail Levine, archaeologists at the University of California, Los Angeles, have traced the rise of the pristine states that preceded the Inca empire. The first villages in the region were formed some 3,500 years ago. Over the next 1,000 years, some developed into larger regional centers, spaced about 12 to 15 miles apart. Then, starting around 500 B.C., signs of warfare emerged in the form of trophy heads and depictions of warriors, the two archaeologists report in last week’s Proceedings of the National Academy of Sciences…

Dr. Stanish believes that warfare was the midwife of the first states that arose in many regions of the world, including Mesopotamia and China as well as the Americas.

The first states, in his view, were not passive affairs driven by forces beyond human control, like climate and geography, as some historians have supposed. Rather, they were shaped by human choice as people sought new forms of cooperation and new institutions for the more complex societies that were developing. Trade was one of these cooperative institutions for consolidating larger-scale groups; warfare was the other.

Warfare may not usually be thought of as a form of cooperation, but organized hostilities between chiefdoms require that within each chiefdom people subordinate their individual self-interest to that of the group.

“Warfare is ultimately not a denial of the human capacity for social cooperation, but merely the most destructive expression of it,” the anthropologist Lawrence H. Keeley writes in his book “War Before Civilization” (Oxford, 1996).

The primary innate instinct of every state is to establish and preserve political control through violence.

Graphic: World’s Largest Armed Forces

Because of the Spratly’s brouhaha, many Filipinos seem to be searching the web for the odds of winnability for the Philippines, in case of a military escalation that could lead to a war with China.

I think these people, whom have not experienced the horror of wars, seem to desire it, perhaps in the doltish presumption that any war won’t get them involved or that wars function as some form of sporting event.

In wars, the losers have always been the people, as both combatants and non-combatants get slaughtered, aside from the economic hardship, physical dislocation and the psychic or mental trauma that arises from such hellish events.

Worst, people from opposing camps shoulder the burden of paying for such outrageous exercise.

Yet if there are any winners, they have always been the politicians, who see people fighting and dying in their behalf and paying for their reckless adventures in the false name of nationalism.

This graphic from the Economist.

The above graph only shows that a war with China is suicidal.

The better alternative is to engage them in more trading activities that should ease geopolitical pressures. Trade and not war is the answer.

Quote of the Day: Killing is Never Great

Great one from Dr. Robert Higgs,

But mere killing is never great, and those who carry out the killings are not great, either. No matter how much one may believe that people must sometimes commit homicide in defense of themselves and the defenseless, the killing itself is always to be deeply regretted. To take delight in killings, as so many Americans seem to have done in the past day or so, marks a person as a savage at heart. Human beings have the capacity to be better than savages.

We Are All Africans: Exposing the Falsity of Nationalism

This 2007 article says that all human origin is from Africa.

From Reuters, (bold emphasis mine)

An analysis of thousands of skulls shows modern humans originated from a single point in Africa and finally lays to rest the idea of multiple origins, British scientists said on Wednesday.

Most researchers agree that mankind spread out of Africa starting about 50,000 years ago, quickly establishing Stone Age cultures throughout Europe, Asia and Australia.

But a minority have argued, using skull data, that divergent populations evolved independently in different areas.

The genetic evidence has always strongly supported the single origin theory, and now results from a study of more than 6,000 skulls held around the world in academic collections supports this case.

I am asking forgiveness in advance to those Christians who might think that this may seem as heresy: But I just can’t help deduce, based on these findings, that our version of genesis or Adam and Eve could have their roots as Africans.

But this is beside the point.

Regardless if we all came from Africa or not, the scientific finding only reveals what has been obvious—that we are all human beings.

This means that the conceptualization of “anti-foreign bias” or “nationalism” practiced and preached by many have all been premised on falsehoods, whether applied to trade, migration, investment, culture or etc…

Instead, nationalism or a form of groupthink (me against them mentality) has actually accounted for as mainly a political scarecrow meant to manipulate the ignorant and to advance the vested interests of certain political classes mostly by imposing controls which ultimately inhibits people’s freedom to act and produce.

As Ludwig von Mises wrote,

Interventionism generates economic nationalism, and economic nationalism generates bellicosity. If men and commodities are prevented from crossing the borderlines, why should not the armies try to pave the way for them?

Nationalism has been a pivotal force that has led to many devastating wars like the World war I with estimated deaths at 15-65 million and World War II (40-70 million)

And given that we are all one, there simply is no justification (science, philosophical, economic or political) to raise barriers to advance social civility based on voluntary cooperation from free trade.

Ludwig von Mises and Bettina Bien Greaves explains,

The market is that state of affairs under which I am giving something to you in order to receive something from you. I don't know how many of you have some inkling, or idea, of the Latin language, but in a Latin pronouncement 2,000 years ago already, there was the best description of the market — do ut des — I give in order that you should give. I contribute something in order that you should contribute something else. Out of this there developed human society, the market, peaceful cooperation of individuals. Social cooperation means the division of labor.

Is Social Cooperation A Product of Evolution?

Some people mistakenly think that social cooperation is merely a product of evolution.

They seem to forget that if evolution is about the “survival of the fittest” then men would always be at war perennially with each other. And societal advancement at current conditions would not have occurred as people would have lived off from each other through violence (war and plunder).

Yet there is no compelling reason for people to simply co-opt outside free trade. Altruism and or political submission (Social Darwinism) cannot be held as sustainable conditions for progress.

Murray Rothbard has seen through such Social Darwinist nonsense. He writes,

``For the Social Darwinist erroneously saw history and society through the peaceful, rose-colored glasses of infinitely slow, infinitely gradual social evolution. Ignoring the prime fact that no ruling caste in history has ever voluntarily surrendered its power, and that therefore Liberalism had to break through by means of a series of revolutions, the Social Darwinists looked forward peacefully and cheerfully to thousands of years of infinitely gradual evolution to the next supposedly inevitable stage of individualism.”

The only sustainable way for people to attain lasting social cooperation is via division of labor and specialization through voluntary exchange.

To quote Henry George, (bold emphasis mine)

Civilized nations, however, do not use their armies and fleets to open one another's ports to trade. What they use their armies and fleets for, is, when they quarrel, to close one another's ports. And their effort then is to prevent the carrying in of things even more than the bringing out of things—importing rather than exporting. For a people can be more quickly injured by preventing them from getting things than by preventing them from sending things away. Trade does not require force. Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do. Protective tariffs are as much applications of force as are blockading squadrons, and their object is the same—to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.

And obviously deepening free trade around the world has caused greater access to more products at more affordable prices, which has led to longer lifespan (see above chart), more conveniences, diffusion of knowledge, advancement in technology that has increased connectivity and productivity.

Of course perhaps one of the unseen benefit has been the reduced scale of international wars.

In other words, free trade has raised the world’s standard of living (even if measured in per capita GDP).

Evolution cannot be the principal driver of societal advancement because man emerged from a hostile (predator-prey) environment.

And the nasty and belligerent experiences by our forebears seem to have been hardwired into people’s intuitive aversion to free exchange.

As Paul Rubin eloquently explains,

There are two aspects of our evolved psychology that help explain beliefs about trade. First, humans tend towards zero-sum thinking. That is, we do not intuitively understand the possibilities of economic growth or the benefits of trade in achieving it.

Our ancestors lived in a static world with little intertribal trade and virtually no technological advance. That is the world our minds understand. This doesn't mean that we can't grasp the crucial concept that trade benefits both parties to a transaction--but it does mean that we must learn it.

Positive-sum thinking doesn't come naturally. By analogy, we learn to speak with no teaching, but we must be taught to read. Understanding the mutual benefits of exchange is like reading, not speech.

Second, we evolved in a hostile world. Our ancestors engaged in constant conflict with neighbors, much like present-day chimpanzees. We developed strong in-group and out-group instincts, and for many aspects of behavior we still have such feelings.

These feelings are benign when applied to something like rooting for local sports teams, but are more harmful when applied to international trade. They are most harmful when they generate actual warfare. Yet the metaphor of a "trade war" shows how close to the surface harmful instincts are.

These two sets of beliefs interact to explain our natural (mis)understanding of trade. We believe that the number of jobs is fixed (a result of zero-sum thinking) and that as a result of trade these jobs go to foreigners, whom in a deep sense we view as enemies. Both beliefs are incorrect, but both are natural. And in many cases politicians are only too eager to capitalize on these beliefs to be re-elected.

In short, the anti-trade sentiment is rooted fundamentally from archaic or primitive martial instincts than from rational arguments based on people’s growing acceptance of trade as means to achieve social cooperation.

Awhile back, I recall a socialist colleague mentioned a popular axiom—that “money makes the world go around”.

I said that this misleads, because money isn’t wealth, but only a medium of exchange. And what makes wealth truly go around is trade. Without trade money is useless.

Aside from wealth, the deepening of trade also means people are learning to get past our evolutionary instincts of bellicosity, aggression and hostility.

Thus, free trade not only enriches society but also is the principal way to achieve lasting peace and order.

Marc Faber: China Next Shoe To Drop, Bullish Japan, Possible War Ahead

Here is an audio of Dr. Marc Faber's latest interview (source Marc Faber)

some excerpts...

China’s Imminent Implosion

My guess is that the economy despite all the stimulus is growing at between 0% to 3 ½%...

Bank lending went mostly into further misallocation of resource, it created another bubble in the share market and probably led to over construction in properties around major cities...

When will the Chinese economy also implode? And I think that is still a shoe to drop on the global economy. Maybe it is going to happen in 2010 and maybe they can postpone it for another year or 2 and so forth…

We have a credit bubble in the US, in China we have an investment bubble with overcapacity arising in the export industries..in the property market. When you try to kindda of support these bubbles markets with intervention through fiscal and monetary measures, you don’t solve the problem but you postpone it...

My view is that the economy globally will remain weak, maybe we have a period of recovery that last 6-9 months, because of all the stimulus packages, and then the economies weaken again, but that asset markets in some cases despite the weak economy will go up for the simple reason central banks will keep on printing money...

Bullish on Japan

In the case of Japan I would add that when the market bottomed out in March 2009, we were at the 30 year low basis, we were at the same level then we were in 1981, so if you took the S&P down to that level we would be at 120...

So we have in Japan a secular bear market, in other words we peak out in 1989 and from 89 we went down and we had several rallies of over 40% and finally bottomed out in 2009 and in my view this is a major secular low, the way we had a secular lows in the US in the 1940s in real terms and in 1982, we were we had significant increases in share prices. So on any setback, I would consider increasing my position in Japan...

Possible War Ahead

Nothing at all has been solved or improved..

Policymakers took decisions that will actually make the system less transparent and more vulnerable than before..

What kind of policy that try to create prosperity out of bubbles?...that’s the mentality of the Federal Reserve..

The entire capitalist system will totally collapse…I don’t whether it will collapse in one year’s time or in 5 years time or 10 years time…

Total collapse is ahead of us…

Before everything collapse what governments usually do is to go to war so they can distract attention for awhile, and stay in power, and then eventually everything goes sour….

Buy gold but keep it out of the US

The Philippine Peso And The Phisix: With A Little Help From Our Neighbors

``Any currency is both a means of payment and a store of value. So when you try to determine what it's worth, you have to consider both what it can buy in terms of goods, and what it can earn if you hold it as an asset. An exchange rate is just the price of a currency. So a given foreign currency might be quoted as so many dollars per unit ($/FC).”-Dr. John Hussman

The Philippine equity benchmark fell 2.64% for the first time in 5 weeks following a massive 17% rally during the previous four. The much needed correction came amidst regional sluggishness and importantly drifted “independently” from the pendulum swings of the US markets.

Of course technical factors have weighed in on last week’s activities as the Phisix had been in overbought conditions following four furious weeks of rallies. So the recent actions could have somewhat diminished the profit selling pressures.

Fundamentally, some suggested that the ongoing military action in Mindanao has helped depressed sentiment, we don’t share that view.

While the military action in Mindanao is inflationary and won’t help the cause of the Philippine Peso as discussed in Toynbee’s Generational War Cycle: In Mindanao or In Georgia/South Ossetia?, because war spending will add pressures on our fiscal balance sheets and cause undue burden to the Peso, which fell anew by .75% to 45.65 to a US dollar, the operation has been largely isolated. But then again this war-related Peso loss shouldn’t be seen from the prospects of the Philippine currency alone. The US dollar is itself very much belabored from the strains from its financial markets and the economy.

Nonetheless what needs to be shown is that the present actions in the currency front seem to reflect regional actions as shown in Figure 7.Figure 7: finance.yahoo.com: Malaysian Ringgit and Taiwan Dollar

Including the Chinese Yuan, the US dollar has risen against Asian currencies. On the left is the Malaysian Ringgit and on the right is the Taiwan Dollar. My intent is to show the representativeness of the region’s currency activities from both the Southeast and East Asian economies. Even in South Asia, India and Pakistan have shown similar US dollar rally patterns.

Again a lot of this has been predicated on the US dollar as safehaven status over the prospects of a severe slowdown as tackled above. Others insist that it is about economic growth which should eventually be shown as unfounded especially when compared to the region’s potentials. For us, it’s been either a scare story that has been peddled in the financial markets or a “momentum trade” that has largely been bought into by financial institutions.

The odd thing is that the supposed impact from the scare stories have not yet caused a meltdown where it is due but instead impelled some volatility in external markets.

While the momentum trade is a function of a cognitive bias called survivorship bias- people tend to look at the “winners” or survivors and pile into them and ignore the rest, thereby skewing any analysis.

The important point to address is that relative to the equity markets, it is hard to see an immediate transition to an advance phase from the present “bottom” phase of the Phisix without some signs that part of the region could be improving.

In short, it is going to be difficult, but not improbable, to have the Phisix transition into a bullmarket or advance phase alone see figure 8.

Figure 8: Bloomberg: Select Asian Equities: The Phisix Seems Not Alone!

All of Asian markets have suffered from the recent bear market cycle (measured from 20% fall from the peak). But as shown in figure 8, while 3 national bellwethers (China-green, Phisix-dark orange, Vietnam blue) turned lower almost synchronically (but Vietnam fell first!), Indonesia (yellow) has had a “asynchronous” or lagged impact.

Noticeably too, based on a one year period, the performance (or returns) of Indonesia could be assessed as only slightly negative compared to the Phisix, China or Vietnam. Such disparities give us further room to question the validity of the religion like “recoupling” dogma.

The most important and encouraging observation now is that following the most recent crash, Vietnam (blue) appears to have hurdled its first bump-where it broke its previous resistance-and can be construed as in an upward momentum.

Meanwhile, the Phisix, which turned lower almost at the same time with China last October, appears to have followed pace of Vietnam (albeit belatedly) but has yet to breakout from its recent high.

Of course, bear markets can always lead to false dawns. But as we pointed out, the Phisix is likely to be in a bottom considering the cyclical nature of the recent decline. Besides, a global contagion is most likely to force a consolidation than see a outright collapse unless those “end tails” become a reality as discussed last week.

We don’t know much about Vietnam except for the fact that market seems to signal either previous excessive selling or a prospective economic recovery.

According to Deyi Tan and Chetan Ahya of Morgan Stanley, ``The aggressive tightening undertaken by the State Bank of Vietnam (SBV), hiking the base rate from 8.75% in May to 14% in June, has had an effect on Vietnam’s macro environment. Coupled with declining commodity prices and administrative measures, indicators are showing signs of cooling off. This has increased the markets’ hopes for a meaningful cut in banks’ lending rates over the next 3-4 months.”

So the tapering off of inflation expectations aside from a slowdown in economic growth seems to be shaping expectations for a possible monetary easing and could be instrumental in boosting Vietnam’s market or the Ho Chi Minh Index from the recent nadir.

But such prospective policy actions could be limited since Vietnam still is in negative real rates and risks stoking future headline inflation.

For now we will observe if the Phisix-Vietnam tandem will be successful in their distinct attempts to move higher and if they can help influence other regional bellwethers such as Indonesia or Thailand. With a little nudge from our neighbors we might get the much needed momentum into moving forward.

A Government Cardinal Sin That Results To A Bear Market? War!

What is one of the government prompted cardinal sins that results to a bear market? The answer is War! We have dealt with this in our past article, Phisix: Learning From the Lessons of Financial History.

So now it appears we have a LIVE unfolding showcase: Russian assets have been collapsing since the military conflict with Georgia erupted!

Courtesy of Danske Bank

From Lars Christensen and Lars Rasmussen of Danske Bank (highlight mine),

``Russia’s financial markets remain under pressure today following the news. Performance has been negative in FX, fixed income and equity markets, and among derivatives. The Russian rouble (RUB) at one point weakened more than 1.3% against its dual currency basket (45% EUR and 55% USD) to trade around 30.10. The Russian central bank (CBR) has since stepped in to support the currency. The RUB basket currently ranges between 29.70-29.90, a few percentage points weaker than last week.

``Meanwhile, Russian share indexes have hit their lowest levels for almost two years. Russia's benchmark RTS stock index fell more than 4% this morning, to its lowest level since November 2006, although it has rebounded somewhat in the last couple of hours. Overall, Russian equities are down more than 30% from their peak in mid-May.

``Going forward, the Russian markets will remain under pressure for as long as there is no move towards a resolution of the conflict. In addition, further falls in oil prices could add to the downward pressure on Russian assets. Caution is thus clearly warranted in the Russian financial markets.”

Additional observation…

From the New York Times,

``Mr. Saakashivili, the Georgian president, said Russia’s oil riches and desire to assert economic leverage over Europe and the West had emboldened Kremlin country to attack. Georgia is a transit country for oil and natural gas exports from the former Soviet Union that threatens Russia’s near monopoly.

“They need control of energy routes,” Mr. Saakashvili said. “They need sea ports. They need transportation infrastructure. And primarily, they want to get rid of us. ”

Hmmmm. It seems to sound more like a conflict premised on commodity geopolitics!