Chyden Finance: profit from hypocrisy

Prior to the outbreak of WWI in 1914, the prevailing mood in Europe and the Americas was very different from what came afterward. Passports were uncommon and generally unenforced in Europe and the Americas prior to The War to End All Wars. The Austro-Hungarian, German, Ottoman, and Russian Empires that had existed for centuries all came to abrupt ends at that time. Airplanes, machine guns, poison gas, and tanks were introduced as war machines; previously, war was conducted on horseback, with cannons, rifles, bayonets, and swords.

Following the war, in what came to be known as The American Century, power shifted seemingly overnight from the imperial salon to the stock exchange floor in countries that did not descend into collectivism, and to the Central Committee in those that did. Prior to WWI, the concentration of total power into the hands of a few in Fascist Italy, Nazi Germany, and Soviet Russia, and its influence over the minutiae of individuals’ lives, was inconceivable; afterward, it was considered to be inevitable, as witnessed by the writings of John Kenneth Galbraith, Joseph Schumpeter, and countless other 20^th Century economists who ignored Friedrich Hayek’s proof of the impossibility of socialism to succeed over the long run.

We are entering a similarly disruptive transitional era today, where what was unimaginable yesterday will be commonplace tomorrow. Witness the vast sea of the Free and the Brave obediently disrobing partially and producing identification documents without complaint, before airport security will clear them for domestic and international travel; the theater of the discarding of beverages and toiletries at the security gate, in the name of protecting the integrity of airplanes in flight; and state-sponsored snooping into our private communications. Suggestions of such things would have been laughed out of court a couple of decades ago as the rantings of the lunatic fringe. (I speak from experience here. I was among those laughing at the conspiracy nutjobs of my acquaintance, whose predictions have proven remarkably prescient.)

As George Santayana wrote in 1905-1906 in The Life of Reason, “Those who cannot remember the past are condemned to repeat it.” Perhaps even more relevant today is his observation, “Fanaticism consists in redoubling your efforts when you have forgotten your aim.” Today, we call it The Surge.

In pre-WWI Europe, the old empires were seen as corrupt, intrusive, overly bureaucratic, and limping along on their last legs. As when the Roman Empire fell 1,500 years prior, and the great mass of individual Italians did not die along with it, so when the Great Powers fell in the WWI Era, new political and economic organizations replaced them.

Today, we are witnessing something of an anti-fall of the one remaining Great Power. Where once there was a bright shining Emerald City at the peak of the mountain — a magical and mysterious land called America — the sides of the mountain have risen, and the peak is more of a plateau now; some would argue that it is a crater, because some parts have risen dramatically.

Which are the most economically free countries in the world today? (Warning: PDF)

Hong Kong, Singapore, New Zealand, Switzerland, the UK, Chile, Canada, and Australia

The least corrupt?

Denmark, New Zealand, Sweden, Singapore, Finland, Switzerland, Iceland, the Netherlands, Australia, Canada, Luxembourg, Austria, Hong Kong, Germany, Norway, Ireland, the UK, Belgium, Japan

The countries from which individuals are least likely to pay bribes?

Belgium, Canada, the Netherlands, Switzerland, Germany, Japan, the UK, Australia, France, Singapore

The easiest in which to start a business?

New Zealand, Canada, Australia, Georgia, Ireland

The easiest in which to get business credit?

Malaysia, Hong Kong, the UK, South Africa, Singapore, New Zealand

The ones with the strongest investor protection?

New Zealand, Singapore, Hong Kong, Malaysia

The easiest in which to pay taxes?

The top slots go to Maldives, Qatar, Hong Kong, the United Arab Emirates, Singapore, and Ireland. The USA is way down the list, behind Lebanon, Zambia, Ethiopia, Macedonia, and Palestine.

The ones with the highest per-capita GDPs?

Liechtenstein, Qatar, Luxembourg, Bermuda, Kuwait, Jersey, Norway, Brunei, Singapore

Granted, the USA still appears near the tops of most of these lists, as befits the one remaining Great Power, but in all categories listed here, and in many, many others, including literacy, infant mortality, life expectancy, etc., the USA is not at the top, and Canada, Hong Kong, New Zealand, and Singapore keep coming up in this context.

The areas where the USA excels, including percentage of its citizens in prison, magnitude of government debt, number of military bases on foreign soil, and number of military personnel garrisoned abroad, are symptoms of over-extension, rather than signs of long-lasting strength.

If history and current events are any guide, the 11 September 2001 terrorist attacks on US targets mark an end of innocence on par with the assassination of Archduke Franz Ferdinand in 1914. The world twenty years from now could be as different from the world of twenty years ago, as 1933 was from 1893.

We already are seeing intrusions into our lives that would have been unthinkable a decade ago, which are as invasive as were the establishment of the Federal Reserve and the mandatory use of passports in international travel a century ago.

Some possible changes that we could see over the next few decades include:

• the supplanting of national governments by corporations as the seat of power (dominium vs imperium, as Wilhelm Roepke put it, seconded by Peter Drucker)
• the convergence of legal codes and accounting standards into a de facto One World regulatory structure
• the collapse of national currencies and their replacement by circulating title to earning assets (the end of money, as Richard Rahn put it)
• the integration of regions into supranations that correspond roughly with George Orwell’s Oceania, Eurasia, and Eastasia (leading eventually to a union and expansion of Oceania and Eastasia similar to The Alliance in Joss Whedon’s Firefly/Serenity series)
• some new Enemy to keep us awake at night that replaces radical Islam on the one hand and Imperial America on the other, which replaced International Communism, which replaced Colonialism, which replaced Monarchism, and so on and so on down through history
• the repeal of victimless-crime statutes and the rise of decadence, as the death of privacy leads everyone to realize that most of us are up to no good, that sinners are not hurting anyone except perhaps themselves, and that it is no one else’s business what individuals do on their own time
• the end of race, as individuals increasingly mate along class lines rather than ethnic lines
• the Sino-Anglicization of language and the decreasing importance of minority languages even in their home communities (perhaps even the beginnings of the next stage in the evolution of English, continuing the approximately 500-year cycle from Old English to Middle English to Modern English to, perhaps, Chinenglish)

This list is highly speculative and not exhaustive. The main point here is that financial professionals operate within institutional and cultural frameworks that change over time, and that History, Literature, and Sociology can be as informative to the financial professional as — if not more informative than — mainstream microeconomics, stochastic calculus, and empirical methods that assume Gaussian distributions in asset returns.

As the world changes, so do the opportunities and choices that we face. As Ludwig Lachmann said on so many occasions, the future is unknowable although it is not unimaginable. Even though we cannot say with accuracy precisely how it will differ, there is every reason to expect that tomorrow will bear very little resemblance to yesterday. History is discontinuous.

Invest accordingly.

CWE