Corruption & Inefficiency Under Fascism

Corruption and inefficiency are phenomena which we tend to associate with government. And yet, under a fascist system where many large businesses enjoy cushy relationships with government, we should not be surprised to encounter the exact same phenomena in those ostensibly “private” companies. When government instead of the consumer decides who survives and who fails, this is the inevitable result.

So how does government spread its ailments to the “private” sector? Here are a few of the most common approaches:

- Regulations restricting access to the industry (minimum capital, licenses, qualifications etc.)
- Regulations mandating the use of certain products and suppliers (think for example of all the regulations forcing doctors to use specific medications)
- Use of the courts to put weaker competitors out of business
- Bailing out well-connected companies
- Preferred access to government business
- Subsidized access to capital (think: Amazon)

All of the above apply, but the last one applies very broadly, and has a massive effect when real interest rates are subsidized as broadly as they have been in the last few years in Western Europe and North America. Calculating using honest measures of inflation, real interest rates for the favored few in these countries have been hovering around the -9% per annum range. This is a massive subsidy, and is the only reason why many of these inefficient corrupt entities have been able to survive against their smaller competitors. Booksellers in France complain about unfair competition, and to a certain extent they are right. How could Amazon finance interest rates of 10% per annum on its narrow margins? Probably not at all.

In the case of Amazon, we can be sure that a substantial portion of those “subsidies” goes towards capital investment and cushy salaries for leading executives. What percentage of these capital investments would make sense under a system where all market participants had equal access to the market for capital and had to real positive interest rates? While there is no precise way to calculate this, we can be sure that the answer is “a lot less”.

How much goes into corruption is unlikely to be a matter of public record.

As for the rest of the Fortune 500 set, I can confirm from personal experience that substantial amounts end up channeled into corruption – corruption which for the most part could not effectively exist without those massive subsidies. Deals with suppliers and landlords are regularly rigged, sometimes to the benefit of senior management and sometimes to the benefit of purchasing or other involved staff. It really doesn’t matter where the profits land; the result is the same. This continues despite the existence of fancy online bidding systems and the like. Plus ça change, plus c’est le même. And this should not surprise us.

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Straßen unter einem schwachen Staat

Wer das Leben unter einem schwachen Staat ausprobieren möchte, dem kann ich Paraguay wärmstens empfehlen. Der paraguayanische Staat interessiert sich fürs Absahnen (wie alle andere), aber grundsätzlich für fast nichts anderes. Der Staat macht sehr wenig, das absolute Minimum. Einkommenssteuern gibt es faktisch nicht. Mehrwertsteuer teilweise, aber nur in den größeren Geschäften. Reiche gibt es viele. Und Arme auch, wohl in erster Linie weil viele der Eingeborenen sich nur begrenzt für die “Money Economy” interessieren. Homesteading ist de facto Recht, d.h. wer sein Land nicht benützt, muß mit Squatters (Landbesetzer) rechnen. Und die Squatters sind schwer loszuwerden, denn da kommt Gewohnheitsrecht zum Zuge.

Dieses relativ anarchistische Paraguay gibt zumindest eine Antwort auf die Frage, wer die Straßen bauen wird. Die Antwort lautet: Niemand. Außerhalb der Hauptstadt gibt es kaum Straßen. Wirklich. Ein Paar Hauptstraßen ja, aber voll von Schlaglöchern. Will man einen neuen Belag vorm Häuschen, oder gar einen Bürgersteig, dann organisiert man am besten eine Sammlung in der Nachbarschaft. Jedes Stadtviertel sieht dadurch anders aus. Ja ja, es kann sein, daß Privatfirmen durch bessere Organisation der Eigentumsrechte zum Bauen motiviert werden könnten. Aber die Realität ist, daß dies nicht so einfach ist. Die meisten Menschen interessieren sich halt nicht für Straßen.

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Proper Names

“The beginning of wisdom is to call things by their proper names”

Intriguing quote often attributed to Confucius, where “proper name” is the translation used for 正名. It brings to mind the convolutions of meaning we find in Newspeak, reminding us that it is hard to make sense of reality if we don’t define our terms first, which, yes, includes calling a spade a spade, even if that is taboo.

That said, it is not so clear that this is what 孔子 was thinking of. Concretely, in Book 13 of the Analects he is said to have written: “名不正,则言不顺;言不顺则事不成”. In Legge’s loose translation, this is interpreted to mean: ‘If names be not correct, language is not in accordance with the truth of things. If language be not in accordance with the truth of things, affairs cannot be carried on to success.”

Interpretations of this have varied over the centuries, but here is one interesting one: “If you desire to discover the true and the false, nothing compares to making use of names.  Names reveal the true and the false as a measuring line reveals crooked and straight.  Investigate names and actualities, observe whether they depart from or coincide with one another; then there will be no mutual deception concerning the disposition of what is true and what is false.” (Dong Zhongshu, circa 110 BC).

(thought in progress)

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Free choice means mixed results

Success or Failure?This past week the bitcoin exchange Mt Gox went offline and eventually declared bankruptcy.

Massive media attention followed worldwide. And comments.

Though not all media coverage was accurate or informative, most refrained from direct editorial. Comments on the other hand, such as those here, were less restrained. While some were analytical, many were along the lines of “I told you” – especially in the US media.

In a free market choices have consequences. Some choices turn out to be good (i.e. utility-enhancing), others less so. This is normal and is the process which creates wealth.

In a controlled “market” by contrast, choices are restricted – and of course results are, as well. In Socialism v2.0, typically the idea is to provide (limited) choice between very similar “options”, in combination with security and predictability. At least that’s how it’s marketed.

If in a certain sector of society free choices are severely curtailed – as is the case for investment and money in the United States – then many people will tend to forget the fact that free choice comes at a price. In such a case, they may well react with shock when witnessing the consequences of bad choices. Why? For the simple and understandable reason that they have little experience with the upside offered by good ones.

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Capital controls in Italy not worth reporting

On February 13th Il Sole reported that Italian banks had been required by the government to withhold 20% of all incoming wire transfers to personal accounts, the so-called “ritenuta fiscale”. The banks would get to keep the loot until July 16th. Moreover, the measure would be applied retroactively starting Feb. 1st, presumably in order to make a catch those not in the loop. I guess this sort of retroactive application is only possible in a place like Italy, where no-one is surprised when banks take two weeks just to credit an account. [We can assume that the banks were privy to this information before it was published in the press, but that's a detail.]

After a week of protests, on the 19th it was announced that the implementation of the measure would be delayed until July 2014, and that the funds confiscated thus far would be returned the following week.

Bank Bailout or Bail-In?As for the measure itself, while on the surface a nice sop to the banks, with a confiscatory policy like this in place, realistically not very many idiots are likely to be wiring large sums to Italy. So one has to wonder what the point was.

What is however perhaps more interesting is the fact that this whole affair went almost completely unreported outside of Italy.  As far as printed newspapers are concerned, if Google is to be believed, one of the few mentions was in a leading Austrian paper with a headline referring to the “strengthening of anti-money laundering measures in Italy”. That was about it.

What did get a lot of press was the supposedly dynamic leadership of Italy’s new 39-year old socialist prime minister. It seems that the new 20% tax was not worth even a mention.

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E-Currency Trading in China – Addendum

HUOBI TOPS 180K

HUOBI TOPS 180K

According to the self-reported volumes, today huobi.com reported a volume of 186,000 bitcoins traded – close to 1 billion RMB. #2 worldwide was OKCoin with about 46,000. While impossible to verify, given the actual market liquidity and rapid movement, there is certainly no reason to doubt that huobi.com was in fact #1.

Today I see that bitcoinity finally added Huobi to their CNY exchange lineup: http://bitcoinity.org/markets/huobi/CNY

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E-Currency Trading in China

Chinese financial markets don’t typically get a lot of press in the English-speaking world, with the occasional exception of some finger wagging about the lack of proper government controls over what goes on, or the occasional reference to a “shadow banking system”, something which presumably takes place in dark and foreboding back alleys. [The more mundane descriptions - e.g. people loaning money to one another - just don't sound exciting enough, do they?] Though I have shared a few observations from the front on such topics, e.g. here, here, here and here, no doubt I am also partially responsible for not taking a lot of time to do so.

Bitebi CrazeAt least to a certain extent, the recent euphoria over the electronic currency phenomenon has been an exception, as well. Since the recent price surge in late 2013, various commentators have dutifully credited BTCChina with being the world’s largest exchange in terms of trading volume. Despite this limited acknowledgement, if we overlook some of the China-oriented blogs, e.g. Tim Swanson’s “Of Numbers” site, other major Chinese exchanges such as huobi.com or okcoin.com got virtually no English-language press at all. Calculations of “market share” simply left them out of the calculations. Even bitcoin-specific sites such as bitcoincharts.com simply left (and leave) them out of their lists. I am fairly positive that an exchange like fxbtc.com, which was the world’s second-largest litecoin exchange for most of 2013, was never once mentioned in English-language media. True,  these sites lack an English-language interface, so they are less accessible to international observers. Nonetheless, even if one factors in the fact that trading volumes can be falsified, to neglect them completely is to communicate a rather distorted view of reality.

Despite the substantial publicity given to recent pronouncements by the PBoC specifying some ground rules, objectively speaking China remains far and away both the largest and the freest market for trading in electronic currency. Where else can you trade for free as well as deposit and withdraw fiat within hours 24×7? Where else do you have 10 or more active exchanges competing for market share? Nothing in the recent pronouncements casts any doubt on the explicit commitment of the PBoC to the free exchange of electronic currency.

To take the opposite extreme, look at India, where until recently the exchanges got away with charging a 3% fee on EACH SIDE OF THE TRADE. Now of course the RBI (the Indian central bank) has banned bitcoin trading completely. Needless to say, there was little bitcoin trading going on in India, even before the ban. Is it a coincidence that the prosperity gap between India and China increases with every passing year?

Of course, to a certain extent this merely reflects the general laissez-faire approach which characterizes the Chinese government’s approach to private wealth, an aspect of Chinese reality which understandably attracts little coverage in countries with more voracious governments. The reality on the ground is in fact almost unimaginable to younger inhabitants of, say, the United States or Western Europe. Not only is there is no capital gains tax in China, but C2C bank transfers are for the most part instantaneous and unlimited. I can send 50000 yuan to my buddy in Xinjiang and he will have it in seconds, all for a token transmission fee. You can also walk into any bank in China with the equivalent of one million euro in cash and deposit it with no questions asked. Simply put, the government’s policy is to leave people and their money alone. While they do endeavor to tax some income at the source, for the most part that’s about as far as they go.

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