Democracy Isn't So Bad...On a Small Scale - Vivek Kaul's Diary
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Democracy Isn't So Bad...On a Small Scale

May 13, 2016


PARIS - Yesterday, brick-and-mortar retailers - such as Macy's - led US stocks lower.

The Dow lost about as much as it had gained the day before. Nothing much to talk about there...

When we left off yesterday, we posed two questions:

Shouldn't your editor (under torture, of course) confess his sins, renounce his apostasy, and register to vote before it is too late?

And...isn't democracy - for all its faults - still the best game in town?

Readers voiced their opinions in yesterday's Mailbag. We will give just a minute.

Trump Is Right

First, we pause to note that when Donald Trump suggested that he might, as president, default on America's debt, it brought screams of doubt and pain from all over the financial world.

US debt, said the pundits, was the 'glue'...the 'foundation'...the sine qua non...of the entire system. Any trace of 'renegotiating' or 'discounting' it would lead to a huge crisis.

Mr Trump is right: There is too much debt; one way or another, it will have to be discounted.

He was merely proposing to do it honestly. Out in the open.

But his critics are right, too: It will surely bring about a crisis when Treasury bond investors - including millions of US retirees - realise that they are in for a haircut.

Cockamamie System

You may have noticed that for months we've been coaxing out an insight.

It helps explain many of the strange and startling features of the world's financial system.

Such as how China's economy grew so fast...what caused the crisis of come $9 trillion of debt is now trading at negative yields...and why growth has now stalled, despite more money spent to stimulate the world economy than ever before.

The short explanation is this: The US financial system - in place since 1971 - runs on debt, not wealth.

A dollar no longer represents accumulated earnings or savings. It comes into being, courtesy of a few keystrokes, when the government spends or someone takes out a bank loan.

It represents the expectation of future wealth, not the recognition of wealth that has already been made. And that dollar will never have real value unless and until the economy grows enough to make it worth something.

The system worked passably well for three decades. But like everything in nature - including a cockamamie money system - there are loops...and unwelcome consequences.

A debt-based system hits the wall when growth slows and debtors can no longer pay. That happened in the US mortgage sector in 2008. It is happening today with student debt, auto debt, and junk corporate debt.

Government debt will be the last to fall. You know that the feds are always good for the money; after all, they print the stuff. The trouble is, the feds' money is not always good for you.

Stay tuned...

Big Boy Pants

Back to politics...

In response to our questions about democracy above, the preponderance of reader opinion is this: It may not be a perfect system...and God knows we may not have perfect candidates...but we should still 'put on our big boy pants', get in line, and do our duty.

Besides, most readers are 100% certain that 'The Donald' would make a better president than 'The Hillary'...and it will be your editors' fault (and the fault of other abstainers) if he doesn't get elected.

Perhaps it was all those years we spent in Washington, trying to get politicians to spend less of our money. (Before setting up our publishing company, we worked at the National Taxpayers Union.)

Or perhaps it was all those years we've spent in finance, trying to figure out where the markets were going.

Those experiences have made us cynical. You tell us that 'gold is headed to $10,000'. You say 'oil can't drop below $50'. You say Donald Trump will 'make America great again'.

'Un-huh', we answer.

 Modi 2016: An Agenda For Revival
 The Modi Report The landslide victory of 2014 handed Modi more than just a clear mandate...It handed him immense responsibility of a nation dreaming of great progress.

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Who will answer the question how Modi can turn this ship around and get India back on track?

Vivek Kaul has the answer and he has put it all down, along with his deepest thoughts on the challenges India faces, in our latest special report titled - Modi 2016 - An Agenda For Revival.

And the best part is that he wants to give you this special report for free!

So, don't delay...Click here to download this special report right away!

When Democracy Works

'The problem with democracy', we explained to a friend yesterday, as she looked at her watch and hoped her phone would ring, 'is a matter of scale.'

'We see the New England town meeting as a model,' we explained. 'It's a democracy that seems to work plausibly well. Everybody knows everybody else. They are all families, friends, coworkers.

'So everybody knows the important details - for example, that the mayor is a scalawag and that you have to stay off the streets when Ms Jones gets behind the wheel.

'In a small town, you can know real things...and vote on things that concern you all. You can do central planning, too... You almost have to. Where to put the town dump. When to schedule the next town fair. How much to charge for parking in the town's lot.

'Everybody has to do central planning. When you get up in the morning, you have to plan your day. When you have a business or a family, you have to make decisions... You have to decide what you're going to do and how you're going to do it.

'On a small scale, central planning is necessary and effective. And democracy is not bad, either. It helps build the consensus you need to set goals and get everyone behind them.

'But even then, you still get a lot of bullying and bumbling. There are always some jackasses who want to tell everyone else what to do. But in a small community, most people learn to get along with one another.

'In a big community, on the other hand, central planning and democracy are completely different things. People elect leaders they've never met...based on slogans and brand advertising. Nobody really knows what they will do, or why.

'And then, the leaders get away - literally - with murder. But people think it's okay because they think it is just a big version of the town meeting. It's not. Large-scale democracy is something entirely different. On a large scale, central planning and democracy don't work.'

We'll tell you why...tomorrow...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Democracy Isn't So Bad...On a Small Scale"

Hormuzd M

May 13, 2016

Vivek - while it is good to look at it (from an income generation viewpoint), it is equally true, that lowering the income tax slab will mean more tax burden on the salaried class, which as you know is always the easiest to browbeat as they have no choice with tax being deducted at source. The others (business, agriculture) who earn more collectively end up paying no/ lesser taxes or conveniently avoiding tax. Your suggestion will result in a more regressive tax structure largely borne by salaried tax payers. Of course, indirect taxes are even more regressive.

The solution is to start taxing income from all sources (including agriculture) even if politically not expedient) above a certain limit....not to lower the tax slabs.

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