|»Vivek Kaul's Diary|
What Really Separates a Rich Country from a Poor One?
18 FEBRUARY 2017
LOVINGSTON, VIRGINIA - On Wednesday, the Dow, the S&P 500, and the Nasdaq closed at record highs for the fifth straight day.
The last time this happened was in 1992.
Meanwhile, President Trump held his first presidential press conference. It was an amazing affair...unlike anything we've ever seen.
But beneath the newness is oldness.
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Let's go back to basics...
What separates a rich country from a poor one?
Yes, the rich have more money.
But money is just a claim on wealth. It is not real wealth. How do rich countries get more wealth?
Two of the richest countries - Japan and Switzerland - have few natural resources. And two of the world's poorest countries - Venezuela and the Congo - have plenty of natural resources of all kinds.
Japan and Switzerland have very different cultures. So do Venezuela and the Congo.
Political institutions? Infrastructure? Educational systems?
Well, dear reader, now you're just guessing wildly...
All of those things make a difference but none explains it. Even in the same country - with the same infrastructure, educational system, and political and legal institutions available to everyone - you see vast differences in wealth.
In Baltimore, for example, almost half the city lives more like residents of Venezuela or the Congo than like the Japanese or the Swiss.
And many African nations have taken the political models of the US, France, or Britain and applied them almost word for word...but with greatly different results.
As we explained recently, all else equal, a society that encourages win-win transactions over win-lose transactions will grow richer.
But here's another way to look at it...
In a sense, everything is built from the same atoms. We all have the same basic matter at hand; it all depends on how we put it together.
A skyscraper is nothing more than various basic elements...assembled in a certain way. Poor tribesmen in the Amazon don't know how to do it; rich people in New York, Tokyo, or Paris do.
The difference is 'information.' And knowledge. They are what tells us how to build a nuclear power plant... or make ice cream.
Information is also critical to an economy. How many ice cream parlors do we need...how much steel should we produce...how do you make a hit TV show?
An economy is a learning system. The participants learn every day. Then, they apply the lessons...test further...and learn more.
Do consumers want cherry Frappuccinos? Can you make a profit by selling ice cream cones to Eskimos? What is the real price of capital?
Markets give you the answers... and inform the economy...which reacts with more testing, more building, more trials, and more errors.
As these tests progress, the economy accumulates information...and the people in it grow richer.
Diary readers will already be racing to the important insight: Information drowns in the swamp.
First, dishonest money provides inaccurate information. You build a million-dollar spec house. It sells immediately. You build more of them. Then the market crashes.
Later, you realize that the information was false, based on fake money and fake credit provided at phony, artificially low interest rates. An economy doesn't need a high or low interest rate; it needs a true rate.
Second, markets must be allowed to speak. If the feds rush to stop a correction, they are slapping duct tape over Mr Market's mouth, stopping him from explaining himself.
Third, economies must be allowed to ditch their mistakes. Otherwise, the zombies take up all the parking places and hog all the savings. Learning stops.
When a company goes bankrupt, it should be taken out and buried. Keeping it on life support... providing below-market financing...and rewarding its managers with million-dollar bonuses sends the wrong information.
Instead, price information derived from win-lose deals is like 'intelligence' tortured out of a prisoner: Rely on it at your own peril!
The other important feature of a win-win deal is that you never know in advance who the biggest winner will be. Instead, Mr Market...nature...and chance decide.
This outcome then gives us the important feedback we need.
By contrast, imposing a winner - by force - stops the whole learning process.
Drain the swamp!
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