DABERIAM XXI

December 2005

"The intensity of the political divide has done more than alarm foreign investors and diplomats. It has crowded out practical policy debate and made consensus on important issues difficult. It has undermined the reputation and independence of public institutions. Finally, it is threatening to damage the economy by contorting electoral politics into a populist game of chicken. “By failing to address the real situation and by raising the wrong questions, politics in [.........] tends to create more problems than it solves" 

The above quote from Christopher Condon’s article on Hungary in the F.T. earlier this week seems to me to be equally applicable to the leading countries in the Western World. 

Political in-fighting a hundred years ago was much less of a problem as by and large countries got on with the business of commerce and creating prosperity without Government interference. When the size of Government is restricted to 10% of GDP the politics is less important, with the exception of when leaders go to War. Today where Government expenditure for US is 36% of GDP and Europe is in the high 40%s, Governments’ inability to direct resources efficiently is critical. Europe in particular seems to be incessantly mired in ridiculous squabbles about subsidies, which not only damage domestic economies but also the rest of the world, and a fascination with applying ever more complex rules to the shrinking productive sector is alarming for long term growth. 

By comparison China and India have, to a greater or lesser extent, Governments that can think strategically and at least have a vision beyond the next publicity event. Are we in the 21st Century embarking on a competition between methods of Government? Democracy came out on top in the struggles of the last Century between totalitarian regimes and democracy, but given no current competition the democratic states seem to become mired in petty politics, while failing to address the major issues of our time and ignoring the focussed but relatively benign Governments of China and India with their fast growing economies. 

On another tack, it is interesting to ponder on Western Central Banks apparent lack of interest in the questions of broad money and credit development to the point that the US Federal Reserve Bank is going to discontinue publishing M3 next year. 

The growth in money supply in the last few years has led to enormous rises in asset prices and commodities. I have for the past two years expected this increase in the money supply to drive up the cost of goods and services. As a dangerous generalisation I think this correlation seems to have been broken by China and India. These massive economies are relentlessly driving down the prices of goods and many areas of the service sector. Both economies are focussed on improving the well being of their people. This takes the form of an economic policy of encouraging capital investment, enabling people to work in comfortable conditions in factories, compared with the awfulness of life in paddy-fields and the like. The consequence of this investment is an enormous increase in the production of goods in China and of computer based services in India. 

These unbalanced investments, particularly in China, are deflationary and it is difficult to see how most of the new industrial production will be profitable in the short to medium term. 

The good news for this Christmas season is that the Western standard of living continues to improve in the short term on the back of these developments. 

A good point to leave you with my best wishes for a marvellous Christmas and a prosperous New Year.

Damon de Laszlo 
December 2005