Rambling...

Found this piece by John Stossel over at at Morgan's place.

I first ran into this concept about ten years ago. As I recall, it takes an average of 17 years in calendar time, and over a man-year in personal effort to get clear title to untitled land in Mexico, even if your family has lived on it undisputed for as many generations as anyone can recall. And you probably spend an entire year's income in bribes, as well, on top of legitimate fees.

Similarly in Egypt, it was something like 23 years.

In societies which don't enshrine personal property as a basic human right, the vast majority of the people will always be poor, because only those with enough wealth to enforce their claim with raw physical violence will ever accumulate a surplus.

Capitalism is the leveraging of surplus wealth (and wealth is a VERY relative term, it may simply mean enough extra that one is sure to be fed until the next crop comes in) by loaning out the surplus. By investing that surplus instead of simply consuming it, one is able to create greater surplus (or wealth) but such an investment always comes at the cost of risk. If you plant the extra corn instead of just eating it at a feast, it may not all grow. If I loan it to you to plant, you may instead simply eat it, and have nothing left to repay me. Interest is the cost of borrowing money, a combination of the price I require to defer my consumption (of my own asset, mind you. I'm lending you my corn instead of eating it at a feast) plus the risk that you won't repay me. The aggregate return from all my investment has to at least cover defaulted loans plus my opportunity cost in deferring my consumption, just to break even.

Without trust (usually in the form of a combination of solid contract law and collateral) the cost of a high-risk loan (and indeed, all loans) is higher because the rate of default will be higher. This higher cost has to be absorbed by someone, - this is a direct cost to the lender, so they pass on a portion of it to all the borrowers, in the form of (higher) interest.

So fluid capitalism and easy credit requires trust. This is where both culture and strong rule of law come into play. This is the natural and right Venn diagram intersection of government and the economy: enforcing private property rights (and by extension, contracts made in regards to one's property). Without recognized property rights, one may not have the collateral to engender trust, to reduce the risk (and therefore the COST) of a loan.

This is one reason why the economy does poorly with Democrats at the helm. They don't do enough to guarantee property rights, and even undermine some of them- e.g. the the bail-outs of the Banking, Inusrance, and Auto Industries. Contract law clearly spells out how to deal with bankruptcy. A neutral 3rd party (the courts) is supposed to restructure the contracts to be as fair to all creditor parties as possible. Everybody gets a proportionate chunk of the debtor's assets, according to what they are owed, even if they don't get everything they are owed. Well, they can't get EVERYTHING they're owed, because the point of bankruptcy is that adequate assets no longer exist to conceivably pay off all debts.

In the case of the bail-outs, the administration stepped in an voided 200+ years of solid contract and bankruptcy law, by high-handedly determining who gets what, and handing out deals to their supporters: the unions, in the case of the auto industry, and the big financial firms, in the finance industry. Make no mistake, this a pretty straight-up case of quid pro quo.

But the rule of law has been undermined. Property rights have been undermined- not all creditors got what they deserved. This makes everyone more skeptical of contracts and increases the perceived risk of default. This increases the natural interst rate, but lo and behold, the feederal reserve, which sets the prime rate, has been keeping it artificially low, and "encouraging" high risk lending through threat of investigation and criminal punishment for "discrimination". Institutions and business are even still, holding onto money instead of lending. This indicates a great deal of worry about default. These people iare in essence, saying the risk of default is so great, I will just hold onto my seed corn instead of lending it to you, or eating it myself. This is why business are reporting record profits, because investing that money or lending it out normally, would have prevented it from having to be counted as profit.

The problem is, seed corn goes bad if you hold onto it too long, and so does money, especially when the Fed starts printing more by the billions. This is called inflation. When more currency is released into the economy, but the overall value of the economy has not gone up either via expansion to new markets or increased efficiency, then having more currency is meaningless. It's simply more markers for the same amount of stuff (or value). If I say my house is worth $180k or 2,241,450 pesos, it doesn't mean it's more valuable in one currency or the other, it is simply more counters of the same amount of value. This means that the value of the counter, or marker, that we call "dollars" has gone down. A dollar literally doesn't go as far as it once did.

It is entirely possible to inflate the currency so much, that it becomes cheaper to use it as wallpaper than to buy realy wallpaper with it. This has actually happened in other countries. And the more it happens, the faster it goes in a spiral until people literally change the prices on real goods every hour, and you need a wheelbarrow of cash to buy a loaf of bread. Where millon-dollar bills become common.

Now, I mentioned Democrats above, and it's true they are bad. The Republicans are slightly more fiscally responsible. The problem is, the government has lots of incentives to make things look better without actually making them better, which is much simpler, but much harder. Simpler because mostly they need to just leave it alone. Harder because they all want to have control, exert control, and generally have people see them "do something".