“If you have to convince a group of people who are not directly dependent on the solution of a problem, you will never succeed.” Ludwig Von Mises, Socialism lesson
In the last Looking Backwards Looking Forwards I mocked a homeowner that had refinanced his or her house into a 52-year mortgage. Mocked is the word, and I wasn’t mocking the transaction itself, it is far from my business to judge how one wants to finance their shelter needs, but I did mock the lack of accountability that the homeowner took when he or she tried to levy the blame on the lender when it takes two parties to negotiate a contract. I am a huge proponent of accountability and letting people learn from their mistakes, but I carry with me the sense that I am in the minority somehow. After all, we live in an age when presidents can lie under oath about having sexual relations and remain in their job, companies get bailed out because they are too big to fail, and markets get bailed out by the Fed when they are about to financially punish those that invested poorly. We seem to have short circuited the learning mechanism somehow. This sits poorly with me, this ability to be freed from the consequences of poor decision making and I spent some time wondering why I carry that bias in my thinking. I was able to discover the answer more quickly than I imagined.
We also mentioned my new favorite fighter last week in Looking Backwards Looking Forwards, Renato Moicano, the potty mouthed advocate for Austrian economist Ludwig von Mises. He told people to go read Mises’ six lessons of Austrian economic thought and I attached a link to the six lessons for our followers. Hopefully some of you, my dear readers, were among the 50,000 new downloads that the Mises Institute reported. I then sat down and read the lessons myself as it has been many years since I had done so. I quickly discovered the answer to my previous question. This is from Mises’ second lesson on socialism.
“The fact is that, under the capitalistic system, the ultimate bosses are the consumers. The sovereign is not the state, it is the people. And the proof that they are the sovereign is borne out by the fact that they have the right to be foolish. This is the privilege of the sovereign. He has the right to make mistakes, no one can prevent him from making them, but of course he has to pay for his mistakes. If we say the consumer is supreme or that the consumer is sovereign, we do not say that the consumer is free from faults, that the consumer is a man who always knows what would be best for him. The consumers very often buy things or consume things they ought not to buy or ought not to consume.”
Long ago when I was young and trying to develop my own logical framework, or latticework as Charlie Munger used to say, about the way the world works and how to create my own path through it I had read Mises and understood that nation states that allow mistakes are capitalistic, but the losses must be born by those that decide poorly. No one makes a mistake in North Korea because the citizens aren’t allowed to even try. The president controls their actions, their beliefs, and their occupational path. The president is infallible and directs all traffic so there is no possibility of mistakes. This leads to little trial and error and little progress.
Fortunately, in America, the number of mistakes has been tremendous, look at the number of people betting on the Dallas Cowboys for the last 25 years. but with that comes tremendous gains or leaps forward in the standard of living due to the productivity miracle of capitalism.
Our country’s greatest strength is our ability to increase the standard of living for our citizens, it is the envy of the entire world. Don’t think for a minute that the rest of the world hasn’t noticed, hasn’t studied it for a hundred years, and hasn’t tried to duplicate it. The US has managed to move from the wilderness fighting Indians for survival, to agrarian homesteaders, to the world’s largest manufacturer and producer, and now we have tipped over the edge to bloated consumer. However, the American period from 1865 to WWI was one of the greatest advances in the standard of living in the history of mankind. During this time there was no Federal Reserve, no income taxes, no Medicare, and no social security. There were depressions like 1873 and 1893, but they were largely caused by debt. But capitalism has now been copied in some form by others, not because it is trendy but because it works. Governments are organized to advance the standard of living of its people and capitalist governments have been more successful at doing that.
This is because capitalism is like a recipe. A baker can create a wonderful pastry by taking ingredients and processes and combining them into something wonderful, and capitalism is no different. Invested capital, freedom, abundant resources, education and other ingredients all go into making a society better than a dictatorship and everyone that has tried capitalism knows this. Now, we have examples around the world proving that imitation is the best form of flattery. South Korea was among the poorest nations on earth not 75 years ago, yet today they enjoy a very high standard of living. How? They invested in education, not dollars but time, as the average child studies many hours a day more than American children. They have saved and invested in technology that has proven successful. Singapore is another fantastic success story as Lee Kuan Yew set up the state of Singapore from one of aristocracy and British rule in 1959 to one of meritocracy. Today, Singapore resides near the top in all most free places to live and do business lists. This process took less than 60 years. Who did they learn from, America. LKW, as he was known, was the model that the Chinese have tried to emulate. China began leaning capitalistic in the early 1970s and look at the progress they have made. People can say that they aren’t capitalistic but communist and I would say they are correct in their government structure, but their businesses are capitalistic and very successful. Much like America’s depressions of the late 1800’s, these countries are learning their own lessons largely through the irresponsible or unsuccessful experiences with debt. Debt is a dirty word and too much of it has been the cause of most of a country’s financial problems throughout history. A little bit of salt flavors a recipe but too much ruins it. Debt is the salt of a financial recipe. Prudent use can be a benefit, but excessive use leads to ruin.
China has studied and learned from the American mistakes and this process is ongoing. Learning doesn’t stop at studying the successful periods, but also the lowest of moments as well. About 10 years ago, China was flying, it was overheating. Their stock market, their property markets, and their disposable income spending were at all-time highs. Jack Ma was the next internet whiz crafting an Amazon like businesses through promises of future growth. The stock of Alibaba shot to the moon. Real estate prices were among the highest on the planet. The citizens poured into the gambling enclave of Macau, gambling billions of dollars and enriching American casinos.
President Xi, a student of history, saw the potential disaster path of the tornado and started implementing restraints. Junkets and junket operators bypassing monetary rules were cracked down on and put out of business costing casinos hundreds of millions of dollars. Jack Ma, was placed in a time out, and in essence some of the internet boom stocks have slowly came back down to more reasonable valuations. The communist nature of China might be interfering with the markets thinking it is applying the lessons of history by slowing down the overspeculation.
Instead of depressions, perhaps China will feel recessions instead as they learn their way through their capitalistic journey. Perhaps, they are taking away capitalism and dictating policy too much to the markets, which would defeat one of the basic tenets of capitalism. The US is now trying to mandate their agendas like EV cars and green energy and as we have been documenting, it is and will be a colossal failure. This story has yet to be written, but I think we can see that China is trying to learn from America’s mistakes past and present. They are also trying to make sure their citizens learn from their mistakes as well.
Brian Spegele wrote an article about this very subject in the Wall Street Journal, “Qin Huangsheng once imagined a better life in the city when she left her home village to become a factory worker at age 16.
Now, in her early 40s, she has $40,000 in personal debt and a base salary of $400 a month. Debt collectors are hounding her. She is blocked from buying tickets on China’s high-speed rail, just one of the penalties the government is increasingly imposing on people who don’t pay their bills.
On the aging slow trains she is left to ride, Qin sometimes looks at the other passengers and thinks: “I wonder if they’re all bad debtors like me.”
This is a fine line that China is toeing between freedom and government involvement. This was not the case in America during our formative years. There were no restrictions and people were free to make mistakes and that led to severe problems and great excess. Attempting to put safeguards on capitalism is an interesting experiment that might succeed or not. This could be a great Chinese mistake that people will study, or it could become a success. Mandating good habits like saving and accountability in your citizens should be a positive attribute. It also risks neutering capitalism completely. I think that is what is happening in a different way with American capitalism, by not letting people fail and learn from their mistakes we are just becoming a casino, and everyone is playing with play money. After all, it is just printed money so the wilder your gamble the more it can pay off and if you swing and miss, you file bankruptcy and start over or you get bailed out by the Fed or the government directly. Ludwig’s lessons teach us the importance of failure and learning from those mistakes, and it is cheaper to learn from the mistakes of others than experiencing them yourself.
This is why spendthrifts like Donald Trump can file bankruptcy six times and still prosper. After the first bankruptcy, no vendor or supplier should have done business with someone like him until he had remedied the first people that he had harmed. Instead of learning a lesson, they went on to repeat it and again and again and again. Trump famously brags about using the same tax advantages as Hillary Clinton’s donors in their debate and bankruptcy is another strategy that he uses like a financial get of jail free card. What he might be doing is legal and within our broken system parameters, but it isn’t moral or the right thing to do. This means our system is broken because our system was designed as an extension of what is right and wrong and sadly our American system no longer benefits those that are of morality but benefits those that lack it. Look no further than the bank accounts of Nancy Pelosi, Chuck Schumer, and Mitch McConnell.
This is why I am despondent to see this country resort to patching over its mistakes with money printing. Losses are what teach those around us the correct path forward. We have seen America attempt to bury their mistakes with money printing as if they didn’t exist where no one learns a lesson, China trying to adjust policy to teach its citizens a lesson, and at the other end of the spectrum is Vietnam. Truong My Lan, a Vietnamese businesswoman, was convicted of perpetrating the largest fraud in Southeast Asian history. She was sentenced to death. This is part of Communist Party Secretary Nguyen Phu Trong’s “Blazing Furnace” campaign against corruption according to Charlie Campbell in Time magazine. Campbell writes “Today, countering Beijing’s regional assertiveness takes precedence for the U.S.” Imagine if China did this to one of their largest executives or if the US did this to someone that had defrauded its customers and had to file bankruptcy. Elizabeth Warren would faint onto her pile of arrowheads and dreamcatchers.
Let’s think about it this way. We have a factory town where everyone makes the exact same amount and most people have a car maybe a Corolla or a Datsun, but one guy Jean-Luc drives a Ferrari and he eats at a fancy restaurant every night and gets the cutest girl because he is always buying her things, but he has the same job that everyone else does. He borrows money from everyone and promises to pay them back, but no one else knows that he borrows from everyone else, they think he is only borrowing from them. He is in unsustainable situation, and eventually the money runs out and everyone gets hurt OR the man continues to do this over time because he is taking the potential disposable income from all of the other town members and enjoying it himself. Why wouldn’t he do this? If no one else says anything, then what’s the problem. Our 1% have been doing this to the populace. Our politicians have somehow joined this 1% despite their salaries saying otherwise. They have stolen potential disposable income from the citizens and used it for themselves. When a family pays rent, utility, and food bills and have little left over it is because the corrupt gentry have taken it for themselves. This will continue like our factory town example until someone says something. You owe me money why are you eating out at the fancy restaurant, and I am eating Quaker Oats? Everyone says, wait he owes you money as well?
Luckily for us in this country we have that knowledge, it the debt clock and approaching $35 trillion. The top 10% own 93% of the inflated stock bubble right now. How do we fight back, easy. Sell your stock, cash out your 401k, buy hard assets, and stop frequenting their institutions. No more concert or sports tickets enriching the very owners you despise. No more social media or daily amazon revenge shopping. No more popular restaurants and stores. Live local, buy local, and return to living simply. Stop spending and their stocks and dollars, which is what their wealth is in, will soon collapse. If you don’t change your behavior then Jean-Luc, Pelosi, and Trump continue to win at your expense.
I don’t know which degree of accountability with regards to debt is the best path to follow, but I am merely trying to think and explore them all to better understand and guide my own actions. I’m simply thankful to my victorious UFC fighter fave Renato for sending me back to Ludwig to refill my cup of assurance that capitalism is the way and why. But don’t take my word for it, here is some more from Ludwig.
“People believe that there are in the market economy bosses who are independent of the good will and support of other people. They believe that the captains of industry, the businessmen, the entrepreneurs are the real bosses in the economic system. But this is an illusion. The real bosses in the economic system are the consumers. And if the consumers stop patronizing a branch of business, these businessmen are either forced to abandon their eminent position in the economic system or to adjust their actions to the wishes and to the orders of the consumers.”
And with that, a simple Psalms…
“The Wicked borrows and does not pay back” Psalms 37:21
Sincerely Yours,
C Thomas Printer
On this date in history… 20 years ago today, beauty magnate and American businesswoman Estee Lauder died in Manhattan.
Also born on this date, known simply as the God of Cricket, Sachin Tendulkar.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.