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Today, we'll talk about something that is rather
hard to put your finger on. I call it "the international
viewpoint." I hope that some of you NWE fans will gain the international
viewpoint at some point during your life or career.
In the U.S., most people are partisans. They are either Republicans or
Democrats. They see everything the Republican Way, or the Democratic Way.
They might even switch sides at some point, but often they remain partisans.
This is something innate: they learned, or it was burned into their DNA over
generations, that it is often good to join a large, dominant group. Once they
are part of a group, it is usually best to follow the precepts of the group
-- all of them, whatever they may be, no matter how stupid or nonsensical
they are. If you don't, you might be expelled from the group, or burned at
the stake as a heretic. The easiest wy to follow these precepts is to
genuinely internalize them, rather than just faking it. They really can't
deviate from the groupthink. Of course they think they can ... but they
can't. Or, at least, they never do. They never want to. This doesn't seem to
have much correlation with education. There are some people with little
education, who are nevertheless free thinkers. They might not quote
Descartes, but they say: "both 'dem Republicans and Democrats are
screwing us silly. They're both a bunch of sleazy liars." Which is
neither the Republican Way or the Democratic Way. In fact, I would say that
highly educated people tend to be more prone to groupthink, because
they have more to lose. Plus, most undergraduate and graduate education in
the U.S. is training in academic groupthink. You can generally identify an
independent thinker this way: they should be able to name three good things
and three bad things about any political party. Even the Nazi Party (which
did win a large portion of the German vote). Statistically, political
analysts say that roughly 65% of the U.S. population is partisan, and about
35% are independent.
You are one of those independent types, right? Yeah, sure you are. However,
even somewhat who is inherently an independent thinker tends to have their views
clouded by the present political and intellectual situation in the country at
the time. For example, George Bush Jr. lowered the top income tax in the U.S.
from 39.6% to 35%. This was coupled with some significant cuts in capital
gains and dividends, and even the elimination of the inheritance tax, but the
income tax rates gained an inordinate amount of the overall attention. I
hardly noticed any discussion about the inheritance tax, oddly enough,
although that was by far the most dramatic change. This 4.6 percentage point
drop in the top income tax rate was supposedly the "largest tax cut in
history," according to its proponents. Its opponents said the same
thing.
If you were either a partisan Republican or Democrat, you probably thought --
along with the groupthink -- that this was the largest tax cut in history.
Even if you were an independent, you probably were thinking a similar thing,
because everyone else was saying so.
But someone with an international viewpoint could easily see that it was a minor
twiddle. In 2004, four governments adopted a "flat tax" with a low
top income tax rate. Bosnia and Herzegovina replaed their existing income tax
system, with a 30% top rate, with a 10% flat tax. That's a ten percent top
income tax rate! Wow! Slovakia replaced their old tax system (38% top rate)
with a 19% flat tax. Ukraine's flat tax (15%) replaced a system with a 40%
top rate. Iraq also implemented a 15% flat tax, although that was something
of an oddity.
These were not just "tax rate reductions" within an existing,
legacy system, they were total replacements of the tax code. Georgia said
that its 20% flat tax, implemented in 2005, reduced the complexity of the tax
code by 95%. The government of Hungary said that its flat tax plan, to be
implemented in 2011, would replace 58 other taxes.
Those are some big tax changes. If you had the internationl viewpoint, you
would know about these things. Sometimes governments -- and the societies
they reflect -- are static and hidebound. At other times, they are dynamic
and accept huge changes as a matter of course.
At the same time, much of developed Europe was lowering corporate taxes
steadily. In the U.S., the official corporate tax rate (35%) has remained
unchanged for decades, like it was some sort of law of physics. Europe was
having a completely different discussion. Hey, we can change this stuff! So maybe we should!
To take another example: in the U.S. we talk a little bit about a high-speed
passenger rail network. Maybe, in ten or twenty years, someone will build a
little teeny something somewhere. The Chinese government, however, has a
completely different way of looking at things. For them, high-speed rail is
simply a necessity of modern life, along with electricity and good sewage
systems. Just like France, Japan, or Taiwan. This is especially true given
the possibility of increasing unavailability of oil in the future. So they
just build it. China plans to build 70,000 miles of new track over the next
ten years, on top of their existing rail network.
High speed
passenger rail station, Wuhan, China .
See what I mean? Some nations just talk about stuff, like it was a distant
fantasy. Others just do it, never imagining that it could be a problem.
Totally different political and intellectual situtions. Both within the realm
of human possibility.
I'll take one last example, regarding health care. In the U.S., we are stuck
in a late-19th century/mid-20th century formula of "free market
conservatives" and "big government liberals." In the U.S., a
universal health care system is imagined to mean much higher taxes, much
bigger government, regulation, bloat and waste. Ugh. However, no universal
health system means that tens of millions of people are neglected basic care,
and the rest suffer under an incredibly expensive for-profit private system.
Two pretty bad alternatives.
However, I noted that Hong Kong has a completely different way of doing
things. Hong Kong remains today one of the most pro-business, libertarian
places on the planet, with its rock-bottom tax rates and principle of stable
money, in the form of a U.S. dollar currency board. However, it also has a
government-operated universal health care system -- which is also
super-cheap, costing the government a mere 3% of GDP!
September
25, 2009: Does Hong Kong Have the World's Best Health Care System?
Hong Kong isn't locked in some intellectual dead-end, discussing whether we should
have "huge, bloated government/universal healthcare" vs.
"slim, probusiness government/fend for yourself with the predatory
private health system" discussion for generations on end. They just
established a solution, in fact one of the best in the world, without
suffering some sort of ideological short-circuit.
This international viewpoint transfers to investing as well. Some guy on CNBC
might insist that U.S. stocks are at "generational lows." What he
means is: they're the cheapest they've been for fifteen or twenty years.
However, they are still quite expensive. If he had an international
viewpoint, as was buying stocks in the Philippines, Korea or Russia for 3-6x
times earnings just a few years ago like I was, he wouldn't be saying idiotic
things like "U.S. stocks are very cheap." They are obviously not
cheap. If he had an international viewpoint, he would understand this.
Sometimes it's the other way round: in 1995, Philippines stocks were trading
at 25x earnings, and in 1989 Korea was at 28x. That's the historical
viewpoint. The combination of the international viewpoint and the historical
viewpoint is very powerful.
Today, we're also having a discussion about monetary policy. In the U.S. in
particular, the idea of "discretionary monetary policy" is
paramount. People say that a gold standard is impossible because that would
mean giving up discretionary monetary policy. However, other countries do
just fine without "discretionary monetary policy." China doesn't
have discretionary monetary policy. It has a dollar peg, and has had a dollar
peg (with a few stumbles) for the past sixty years. How are they doing? Not
too bad, right? Of course the countries of the eurozone gave up their
discretionary monetary policy, to enter the eurozone. The goal of these
countries is to create "stable money," not a currency that jumps
around according to some central bankers' latest discretion. For now, this
"stable money" means a peg to a major international currency,
either the dollar or the euro. Which is flawed, because neither of these
currencies are really stable. This currency-peg system only works in the long
term when you peg to gold.
If you don't have the international viewpoint, you tend to see things in the
form of "right" or "wrong." The Republicans are right,
and the Democrats are wrong. Or vice versa. With the international viewpoint,
you see that most all governments, and policy debates, are basically stupid
... but some are more stupid than others. It is just the endless grind of
human stupidity, year after year. However, sometimes a country manages to be
less-stupid for long enough to rack up some decent successes. China seems to
be on this track now, but I can already see that their decision to imitate
U.S.-style 20th century Hypertrophism (huge buildings, huge streets, lots of
Green Space, too many cars) which has already been proven to be a failure
will create intense problems for the next four or five generations of
Chinese, especially since the inherent problems of this format are
exacerbated by China's limited land and large population.
July 20,
2008: The Traditional City Vs. The "Radiant City"
Nathan Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United States, Japan, and the Middle
East. About the Book: Gold: The Once and Future Money (Wiley, 2007, ISBN:
978-0-470-04766-8, $27.95) is available at bookstores nationwide, from all
major online booksellers, and direct from the publisher at
www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.
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