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Tuesday, December 29, 2009

Humorous and illuminating quotes

It is dangerous to be right when the government is wrong. --Voltaire
A politician is someone who will lay down your life for his country.
Everyone wants to live at the expense of the State. They forget that the State lives at the expense of everyone. --Frederic Bastiat
A government big enough to give you everything you want is a government big enough to takeaway everything you have. --President Gerald Ford
Useless laws weaken the necessary ones
Ninety-eight percent of the adults in this country are decent, hardworking, honest Americans. It's the other lousy two percent that get all the publicity. But then, we elected them. --Lily Tomlin
Bureaucrats do not change the course of the ship of state. They merely adjust the compass.
If presidents don't do it to their wives, they do it to their country.
Rome did not create a great empire by having meetings, they did it by killing all those who opposed them.
Never underestimate the power of very stupid people in large groups.
The decision doesn't have to be logical, it was unanimous.
We can't be so fixated on our desire to preserve the rights of ordinary Americans. -- President Bill Clinton
In the past we have tried too hard to prevent the making of mistakes. --Dan Quale
One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato
If they can get you asking the wrong questions, they don't have to worry about the answers. --Thomas Pynchon
In nature, there are neither rewards nor punishments--there are consequences.
No matter who you vote for, the government still gets elected.
Be Patriotic- Question Authority.
No one is free when others are oppressed.
I love my country, but fear my government.
The government is best which governs least --Thomas Jefferson
Under capitalism, man exploits man. Under communism the reverse is true. -John Kenneth Galbraith
Democracy's the worst form of government except for all the others. -Winston Churchill
The difference between a politician and a snail is that a snail leaves its slime behind.
Blessed are the young, for they shall inherit the national debt. --Herbert Hoover
Giving money and power to governments is like giving whiskey and car keys to teenage boys. --P.J. O'Rourke
The very powerful and very stupid have one thing in common. Instead of altering their views to fit the facts, they alter the facts to fit their views... which can be very uncomfortable if you happen to be one of the facts that needs altering.
I either want less corruption, or more chance to participate in it. --Ashleigh Brilliant
Those who desire to give up freedom in order to gain security, will have, nor do they deserve either one.
Without order, nothing can exist; without chaos, nothing can evolve.
Those who make peaceful revolution impossible will make violent revolution inevitable. --John F. Kennedy
Conquest is easy, Control is not. --James T. Kirk
Freedom is the right to be wrong, not the right to do wrong. --John G. Riefenbaker
The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not sufficent warrant. --John Stuart Mill
A man may die, nations may rise and fall, but an idea lives on. --John F. Kennedy
Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying all the wrong remedies. --Groucho Marx
Mankind has corrupted every institution into which it has entered.
The Church and the Government are two prime examples
--J. Mike Reed Jr.
Government logic-- Why get one when you can get two for twice the money?
God giveth, and the government taketh away.
When the legislative and executive powers are united in the same person, or in the same body of magistrates,
there can be no liberty. –Montesquieu
Vote Republican: It's easier than thinking...
War is politics carried out by guns and bullets. –Clausewitz
Democracy can survive anything but democrats
Many that live deserve death. And some that die, deserve life. Can you give it to them? Then do not be too eager to deal out death in judgment. For even the wise cannot see all ends.
--Gandalf the Grey, J.R.R. Tolkien
In America anyone can become President. That's just one of the risks you take. --Adlai Stevenson

Thursday, December 24, 2009

Savings in an Economy like Kenya

In Kenya, in order to save, you must invest.
Picture this, in the 1970s, one could buy a car with Kes 5,000. In the 1980s, one could only buy a motor cycle. It gets worse, in the 1990s, Kes 5,000 could only get you a bicycle. Now, Kes 5,000 is fit for only shoes. Imagine the individual who put aside Kes 5,000 in the 1970s and went to the shops to buy commodities. I think that the illustration gives on the picture. But this is a scenario played out in almost every country in varying degrees. The US Dollar is estimated to have lost more than 90% of its value over the last century. North Korea have just undergone a serious devaluation that has seen the holders of the current currency lose a significant amount of value.
One is therefore forced to ask why any government would think that destruction of wealth is a sure way to prosperity. Why would anyone save their money in a currency that is doomed to lose value? In other words, why hold your money in monetary form?
For those who doubt, the general purpose of a Central Bank is to, inter alia, hold prices steady in order to achieve a stable macro-economic environment. The main purpose of this is to instill confidence in the use of currency so that those who buy or sell are able to do so using local currency. Kenya’s Central Bank Policy is to hold annual inflation at 5% year on year. This means that the monetary authorities at Kenya’s Central Bank will allow a 5% reduction of the purchasing power of the Kenya shilling every year.
As earlier stated, the central purpose of a Central Bank should be to maintain stability in prices and the primary reason for this is to maintain currency as a credible store of wealth. For the general citizenry to be able to use currency, they should have faith that the value of their production is stored efficiently in whatever form until when they feel a need to exchange this value, commonly referred to as purchasing power, with another commodity or service that will satisfy their needs. In short, money is not held for its own sake, but to facilitate a transfer of value from one’s production to acquiring goods or services one needs in order to satisfy specific wants or needs.
One can already see the contradictions of the average Central Bank’s actions with its supposed role. A lot of Central Banks have adopted this inflationary policy that is sure to lead to metamorphosize into a currency crisis in the future.
The excuse a lot of Central Banks have given for this apparent inflationary policy is to sustain, nay, encourage economic growth. This is ostensibly done through two ways:
1. Inflationary policy aids in creating new money which can be used to make available credit to investors and consumers alike leading to higher investment and higher consumption; and
2. In some cases, this also helps hold down interest rates so that money can be ‘affordable’ to investors.
This inflationary policy has, however, its side effects. The first is that it can lead to a commodity boom. Low interest rates are fodder for speculation. In the international markets, this has been very apparent with money being used by large banks for speculation. Prior to the financial crisis, the world first witnessed a commodity boom which saw oil hit a high of USD 147/BBL. The commodity boom then went on to feed inflation into the general economy causing sever inflation. The commodity boom was, however, a bubble and just as the housing market earlier on, burst destroying a lot of wealth in the process.
Secondly, the low inflation regime was responsible for financing a lot of consumption and this was not sustainable as when the inflation rates forced interest rates up, there was a lot of demand destruction leading the economy to go into a depressionary spiral that threatened to turn deflationary.
Thirdly, the low interest rates discouraged savings which are essential to sustain investment and interest rates down and also helps temper boom-bust cycles.
In recent times, the governments and the monetary policy authorities have sought to intervene in order to ‘save the economy’ from the sever boom-bust cycles through stimulus packages and low interest rates. What we have then, is a highly unstable environment in which investors are supposed to conduct their economic activity. Interest rates are artificially low which is likely to lead to asset bubbles and later on inflation.
The fiscal stimulus is also likely to lead to inflated tax bills and possibly deflationary pressures in some industries when government is forced to withdraw its spending.
All this combined could lead to capital flight to safe currencies. However, seeing that the US Dollar, the Chinese Reminbi and the Japanese Yen face credibility challenges and the Euro, seeing the weakness in the Spanish, the Austrian, the English and the Greek economies, is also not very attractive, we may see people beginning to save in commodities, commodity stocks and in gold. I separate gold from commodities because, unlike other commodities, gold does is not consumed and therefore does not have a shelf life.
In summary, to save in the current world scenario, holding funds in local currency may lead to savings being wiped out. Government paper is looking more and more like the new sub-prime. We are only left with stocks and bonds. Bonds don’t look too good during inflationary times. This leaves stocks… especially commodity stocks and commodities as the only viable stores of wealth.

Wednesday, December 16, 2009

Greek tragedy: Is Kenya following in the same footsteps?

I was looking at the short history of Greece. The uncontrolled government spending in the name of welfare, the high taxation, the corruption...etc. The only thing that Greece out-does Kenya is government deficit which is projected to be 12% of GDP (the EU thinks its going to be higher) and the high level of indebtedness. My God!! We are walking down the same path! And they don't have a restrictive economy with protectionism in Agriculture and energy sectors. Boy are we in trouble. Follow the story here

Dec 15 (Reuters) - Greece has been in turmoil since then Prime Minister Costas Karamanlis called early elections in September, 2009 seeking a new mandate to deal with Greece's economic slowdown.
The government was dragged down by discontent with the economy, scandals, the worst riots in decades and its handling of bushfires which had ravaged large areas of the country.
Oct. 2009 - The snap election on Oct. 4 returns George Papandreou's socialist PASOK party to power with a comfortable majority. It will hold 160 seats in the 300-seat parliament. The new government discloses the 2009 budget deficit will be 12.7 percent, more than double the previously announced figure.
Nov. 2009 - The new government pledges in its 2010 draft budget to save the country from bankruptcy by cutting the deficit while keeping electoral promises to help the poor amid the economic crisis. The final budget draft is submitted on Nov. 20 and is due for adoption on
Dec 23. 2009 - Greece aims to cut its budget deficit to 9.1 percent of GDP in 2010 to assure EU partners and markets it is serious about restoring fiscal health, its final budget draft shows.
-- It also sees public debt rising to 121 percent of GDP in 2010 from 113.4 percent in 2009. EU forecasts on Greece for 2010 are worse, with the deficit seen at 12.2 percent of GDP and national debt rising to 124.9 percent of GDP, the EU's worst.
Dec. 2009 -- S&P on Dec.7 puts the country's A- sovereign rating on negative watch. By 1215 GMT the next day, Greek bank stocks <.FTATBNK> shed almost 6 pct, extending the previous day's losses, as the S&P report said Greek lenders faced the highest risk in Western Europe. The broader Greek market <.ATG> falls 3.6 percent. Yield spreads between Greek and German 10-year government bonds widen to as much as 226 basis points - the highest since April.
-- The same day, Dec 8, Fitch Ratings, which had cut Greece to A- when the government revealed the higher deficit, cuts Greek debt to BBB+ with a negative outlook, the first time in 10 years a ratings agency puts Greece below the A investment grade.
-- Shares in Greek banks deepen losses to fall almost 8 percent while the euro hit a day low after the downgrade. On Dec. 9, Papandreou says he is determined to win back the country's lost credibility.
-- On Dec. 14, Papandreou outlines policies to cut the country's ballooning budget deficit and try to regain the trust of investors and EU partners before a strike planned by leftist parties for Dec. 17 to protest against austerity measures.
-- Papandreou announces a 10 percent cut in social security spending in 2010. Says he will abolish bonuses at state banks and slap a 90 percent tax on private bankers' bonuses. Vows a serious fight against corruption and tax evasion, calling them the country's biggest problems.
-- He announces a drastic overhaul of the pension system in six months and a new tax system that will make the wealthier carry more of the burden.
-- On Dec. 15, markets fall in reaction to Papandreou announcements and workers immediately protest the cuts in social security.
-- Greek bank shares drop 2.9 percent in early trading, with analysts citing market concerns about the government failing to announce tougher measures to shore up the country's finances.
Copyright 2009 Reuters, Click for Restriction

Wednesday, December 2, 2009

Liberty and Economics-What ails Kenya

Sun Tzu says, “All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.”
We in Kenya keep seeing and marvel at the riches of countries like the US, Japan, Asia and Europe. We go further and profess at the love of the lifestyle of the citizenry of these countries. We always ask ourselves, “how can we be like them?”
The founding fathers of America were clearly great thinkers. They came up with the quotes below:
• If we can prevent the government from wasting the labors of the people, under the pretense of taking care of them, they must become happy.-Letter to Thomas Cooper (29 November 1802)
• Our legislators are not sufficiently apprized of the rightful limits of their power; that their true office is to declare and enforce only our natural rights... and to take none of them from us. No man has a natural right to commit aggression on the equal rights of another; and this is all from which the laws ought to restrain him... and the idea is quite unfounded, that on entering into society we give up any natural right.- Letter to Francis W. Gilmer (27 June 1816); The Writings of Thomas Jefferson edited by Ford, vol. 10, p. 32
• Government big enough to supply everything you need is big enough to take everything you have ... The course of history shows that as a government grows, liberty decreases.- Commonly quoted on many websites, this quotation is actually from an address by President Gerald Ford [ to the US Congress (12 August 1974)
• "Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an intolerable one."- Thomas Paine
• That government is best which governs least.
• Where the people fear the government you have tyranny. Where the government fears the people you have liberty.
This betrays their underlying thought… Capitalism is based on liberty of man, free from the tyranny of government and largely dependent upon the sweat of his brow, not the handouts from other men.
The founding fathers of the US and subsequent leadership were very skeptical of government because their reason was government is a conglomeration of individuals who act in their own interest first and others later… and they were right. Throughout history, we have seen politicians who seek popularity expand government ostensibly to solve people’s problems. They end up taxing the populace more and as a result, the government ends up transferring resources from the most productive members of our society to the lesser productive members of society thereby wasting resources.
When taken to extremes, we have a situation like we have in Kenya where people keep talking in terms of “naomba serikali inisaidie…” The more this culture of dependency is ingrained into the national psyche, the more likely the nation is going to be ultra competitive during elections. The rationale of the populace will of course be, since those in government eat (read waste), then we would rather our people waste.
The problem in Kenya’s set up is too much government. If we look at the worst performing sectors of the economy, they all have one thing in common. They suffer from micromanagement by government. These include the fields of energy and agriculture. These two are regulated, nay, controlled by thought that is based on a mixture of feudalism and mercantilism- where the state favors a few existing at the expense of many.
Adam Smith and Ricardo showed us arguments such as ‘The government is protecting home grown industries’ does not make sense because cost of maintaining these industries to society is much more than the general ‘welfare’ that these so called home grown industries offer society in general… classic broken window fallacy. Secondly these industries never become as efficient as they ought to be during the time of protection so it is rarely a logical argument that this mercantile approach to doing business actually helps anyone.
When all is said and done, the ultimate cost the mercantile/feudal policies of Kenyan government are a disincentive to investment and therefore there are fewer entrepreneurs wiling to venture in these murky waters. These policies ultimately make society poorer and the resultant economy is one of high dependency, low tax base, high black market activity and a volatile society. Kenya anyone?

Friday, November 27, 2009

Communism through the back door

Someone once said something I would like to paraphrase, "when we think of Equality, we only think of parity with those more wealthier than us, not those less wealthier than us"
The Committee of legal experts have made economic prescriptions that they themselves do not understand... when it comes to economic prescriptions, all I saw in the draft was share, share, share! What is this we are sharing exactly? Why is one individual being forced to share with another?
All is see is Kenyans with PhD mentality (Pull him Down!). It seems that in Kenya, to achieve parity, the average Kenyan would rather pull down the hardworking than work harder to catch up with him. This is a sad state of affairs.
The reason why South Korea and Indonesia are ahead of Kenya in terms of gross domestic income par capita, is more to do with productivity of the average worker than any other factor. They logic is simple. They earn more because they not only work harder, but they work smarter too.
When Kenyans will stop sitting on their behinds and start putting in some hours, you'll begin to see the growth of a middle class worth talking about. Otherwise, the performance of Kenya will worsen with all this welfare being thrown at us. Remember, money is nothing if not backed by increased productivity.
Even though its not advisable to look to government for solutions, there is one thing the government can do for us... get out of the energy and food sector and the problems of Kenya will begin to sort themselves out.

Wednesday, November 25, 2009

Why we are on the slow road to state sponsored collectivism

If you can stay calm, while all around you is chaos...then you probably haven't completely understood the seriousness of the situation. so they say... they were right.
New constitution? Chaos! Old Constitution? Chaos! Kenyan economy? Chaos! Government finances? Chaos! What to do?
And it looks like its going to get worse, the government is finding it, more and more, difficult to get any finances as it moves on. Note that the government is expected to incur a higher debt burden because of the compounding nature of debt.
How then do we get ourselves out of this hole?
Smaller government and increased productivity- very unpopular but very necessary!
Are we going to see this? No! Why? We are going to, more and more, see an intrusive government that will tend to tax more and control more to limit the damage of its intervention. In the next five years, we will be printing money, be in danger of defaulting and the currency will be tending towards worthlessness.

Monday, November 23, 2009

Social Security?

The root of the 20th and 21st Century economic discourse... so far the communist's economic system collapsed just like Freidrich August von Hayek said it would and the mercantilist economic theories were put to death by Adam Smith and Ricardo. So far the right is winning over the left.
The collapse of communism is attributed to the lack of a price system which, as Ludwig von Mises put it, deprives the participants of the economy important information such as overproduction or underproduction- also known as the economic calculation problem.
Mercantilism, as Adam Smith and Ricardo put it, is not necessarily an economic system, rather, it is a selfish growth system that uses tax payers to favor a certain clique of people to make money. It usually is about using state resources to favor this clique and protectionism is usually the name of the game... but the resources used to sustain this game are usually more than the benefits that accrue from it.
Now there are only three economic systems worth looking at... the Keynesians, the monetarists and the Austrians. The first two are not really distinguishable in that both have some degree of central planning in them though the Monetarists are not necessarily in favor of government spending.
Austrians on the other hand seek for market based economic systems with minimum government involvement.
The current debate on what caused the Global Economic Crisis and therefore solutions are actually a debate on which system caused it (nb. it cannot be Austrian therefore it is not supposed to be examined but because it is about free markets, it gets dragged in).
The central question in this debate is, "Is it the freedom in the markets that caused the GEC or was it government intervention that caused it?
It is, more and more, becoming clear that there was overcapacity in the economy in various sectors brought on by easy credit. The credit became 'easy' due to manipulation of the interest rates by the fed. It is this same low rates that make the financial engineering that went on possible- classic business cycle as described by Hayek and Von Mises.
What does this have to do with Welfare and Taxes one may ask? The need for social justice, whatever that means, is what drives the government to central planning... you will remember the communist dictum 'to each according to his need, from each according to his ability'. This need for government to control and to reduce 'inequality' leads to a taxation system that can both support welfare ventures that can support 'the needy' and at the same time reduce income inequality. What the government ends up with ultimately is an economy of lazy people and the lack of productivity ultimately leads to a collapse of the economy.
This was von Mises prediction of a communist country, and one that is not communist will get hit time and again by violent business cycles. That's what von Hayek predicts for Kenya should we adopt that clause in the bill of rights.

Thursday, November 19, 2009

Harmonised Constitution?

Someone referred to the draft constitution as lacking harmony... he could not have been more right. the draft lacks internal consistency. When I heard one Nzamba Kitonga go on and on about the principle of separation of powers, I wore a guarded smile. Guarded because I don't trust anyone who calls themselves experts... I prefer them to let me judge that for myself.I was nevertheless smiling because for the first time I thought Kenya will have an executive that does not have any member from the legislature and vice-versa.
I thought we are finally going to have a legislature that legislates, an executive that executes and mercifully a judiciary that arbitrates in the name of justice. Clearly I was mistaken. The so called Committee of Experts (COE from now henceforth since I can't bring myself to call them experts) lack even the basic knowledge of principles of governance, the theories of power etc. The most sorry part of this all is that the COE let themselves get dictated to by a bunch of know-it-alls and ne'er do wells who came to them submitting 'wisdom' under the banner of wanjiku. Its sad but true... just look at the clauses of the Central Bank. First of all, who even says that we necessarily need a Central Bank. Even if we decided we needed a Central Bank, do they know that the CBK is just but one player in the financial markets. Even then, the COE goes even further to prescribe a mandate that they know nothing of.
The primary responsibility of a Central Bank is to ensure price stability so that money in the economy can be viewed as a store of value, otherwise it loses other functions such as a unit of accounting or even a unit of exchange as no one would exchange their goods or services for certificates that are volatile in value or even valueless. Sadly COE did not think that they needed advice from experts from the fields of money, finance and economics so all we can do is stare at the draft in amazement before we can know what to do with it.

The new Bill of Rights

I heard someone somewhere saying that the bill of rights is fantastic. I haven't read it all except for a small provision within the bill or rights.
Social security
61. (1) Every person has the right to social security.
(2) The State shall provide appropriate social security to persons who are unable to support themselves or their dependants.


So this part is supposed to have been genius... except for one thing... it is probably the clause that will finnish Kenya as a country. Does anyone think I'm exagerating?
Lets take a walk through history. USSR anyone? Used to be one of the largest countries in the world! what happened? it has something to do with " from each according to his ability, to each according to his need!" What about California, one of the largest economies in the world? Broke! Venezuela? Broke! Cuba? Broke! Western Europe? In dire need of social reform... Germany is already taking steps with the new government towards that end!
One may ask, what has that got to do with social security?
The answer lies in the means of financing it. Who's gonna pay for it? As we speak Kenya is broke! How do I know that? We have a budget deficit that no one knows how we are gonna pay for it. Our Honorable Finance Minister directed during his last budget speech that all statutory pension funds should buy nothing but bonds. This is exactly what the Argentine government did before defaulting on debt. I see the Kenyan government walking down the same road.
Kenya needs to cut down spending for two reasons:
1. To balance the government income and expenditure
2. To cut taxes so as to stimulate the economy to grow.
Even right now, government cannot afford to undertake any more social welfare. As it is, we need to reform the government run pension fund. The current system is broke! That is the reason why government pushed the retirement age to 60. The healthcare system is becoming unmanageable and the education system is proving too heavy for the government. On the other side, the government is beginning to miss revenue targets that the government had set for the Kenya Revenue Authority. We need to solve that first and allow the private sector to flourish if we are to avert a looming disaster! Remember the riots in Argentina or the collapse of the USSR, or more pertinent to Kenya, the rise of Mungiki, Sabaot land defence force?
You can make up your mind on whether the problem in Kenya is primarily political or just trying to push an unsustainable economic system that has its roots in Communism/Socialism.

Tuesday, November 17, 2009

New constitution

Wow, have you seen the work done by the committee of experts... I know how they got it done. Its called cut and paste. How anyone is supposed to vote yes for this unphilosophical document is beyond me. Did I call it unphilosophical? Let me take that back, the underlying philosophy for the draft is called compromise- It is the art of harmonizing two extreme positions.
Why did they do this one may ask. They were interested in harmonizing various individuals' views whether one point of view is wrong or not. In fact, they harmonized views of two completely wrong points of view. To put it in perspective, if they were King Solomon, there's a baby who would have been split into two! Luckily, the Jews had Solomon as their King.
I think the reason why I could not be accused of being in expert is because I subscribe to the view of GIGO... GARBAGE IN GARBAGE OUT!

Monday, November 16, 2009

New Kenya?

The funniest thing occurred to me today...Kenyans actually think that they will solve their problems by enacting a new constitution. I got news for the rest of us... our biggest problem is economic in nature and is caused by the one agent everyone is looking to solve their problems... its called GOVERNMENT!
Kenya is in trouble and our biggest problem isn't distribution of resources or income disparity. The problem with Kenya is productivity... or rather, the lack of it. Being in Kenya, there is virtually no incentive to be productive in almost any sector. ICT- high licensing fees, agriculture- de facto price controls, finance- over-regulation, energy- not liberalized, and finally the kicker, the high taxation that government imposes on its people. The taxes that do the most damage are:
1. Value added tax (VAT. By its very definition, it is a tax on productivity. It should not exist in a country that wants to progress economically. It is probably one of the reasons why France needs Francophone Africa to survive otherwise their economic model is not sustainable... even the French prefer to start businesses in London than in France.
2. Income tax- It is not a bad tax per se but if government would be acquainted with the laffer curve, at least the basic philosophy of the concept, they would realize that the income tax code is poorly designed and is a big disincentive to work.
3. Licenses- Suppose the license for ICT services were not Kes +1bn, how many companies would be offering 3G services. The licensing regime was clearly a rent seeking venture by government and the only beneficiary was Safaricom... guess who sits on the board... government!
4. Quantitative easing- like VAT, printing money is a stealth tax on those who save and only serves to benefit government.
There are many more but I'll stop there for now. The taxes only serve to do one thing, shift wealth from the most productive part of society (private sector) to the most unproductive unit in the economy (the public sector)