Monday, December 13, 2010

Inflation and taxation – Clashing economies

Although we live in an era of globalization, we also live in an era of diverting economic styles. What I mean by that is that North American economies are running in a different set of circumstances than those of the BRIC countries or those of Europe. Even within Europe there are different economies when comparing Germany to, for example, Iceland or Greece.

Overall, North American economies are relatively young and they are closer to the stereotypical capitalist society than Europe which has a free market economy with an extensive and expensive social network. China offers, in spite of its communist history, a much rawer form of capitalism than both North America and Europe. These Chinese markets have a 'just getting started' feel to them. There is no social network to protect its citizens from economic adversity. So let's take the economies of those three areas, Europe, North America and China as simplified examples of the globe's economic diversity.

Europe is characterized as the old world where capitalism has evolved in a hybrid beast with lots of government regulation and extensive social services. As a result, Europe's population is much more egalitarian (in terms of economic wealth) than that of the U.S. and certainly than the population of China. China counts now numerous millionaires and billionaires with on the other side of the spectrum a large portion of the population that still lives in the abject poverty of a primitive agricultural setting. Chinese people have no pension plans, insurance, or U.I. to speak of; they need to save their own nest egg for poorer economic times. Taxation is relatively low because governments only look after the army and the country's economic interests. It has no expensive social burdens to carry.

In Europe we have the opposite and here economic wealth is much more evenly distributed and social net works are extensive. But this is only possible because of high taxes and high social insurance premiums that leave its citizens with relatively little means to build their individual wealth. But then they don't need it. The state is taking care of them. The problem is evident these days – the state does still not collect enough money from its citizens to finance all that social protection and so, in spite of all its revenue, it is heavily indebted. The high debt levels in the weaker Economies of Europe such as the U.K. Greece and Italy lies at the roots of the so-called 'European Debt Crises'.

The North America's economy style, the third economic style, is yet another form of capitalism. Governments extensively regulate the economy with ever more intricate laws and accounting guidelines. This society is becoming so litigatious that everyone feels the need to protect against personal liability and exposed privacy; Litigation fears have reach the point that it nearly stifles all initiative. Simultaneously, economic power and the possession of goods are sources of personal status admired by all. Consumerism and leverage are ideals to be pursued regardless of sustainability. The social protection network is not as extensive as in Europe but combined Government and private social obligations (i.e. pension plans), has led to staggering debt levels. The contrast between rich and poor is stark, although the North American middle class is nearly as large as that of Europe. However, contrary to Europe, taxation levels are moderate and even the thought of raising taxes is political suicide. Consequently, North American government revenue is inadequate to cover its social obligations; that and the expectations of its citizenry of ever higher standards of life are causing increasingly higher levels of debt.

Savings rates in the newest capitalist economies are excessive resulting in enormous trade surpluses; while Europe is characterized by over reliance on the state, resulted in low levels of saving and lessened entrepreneurial spirit. In North America entrepreneurship and economic control are pursuit by technocrat abusing other people's money and leverage. Governments finance social obligations and war efforts with an inadequate level of taxation and consumers try to keep up with the Joneses regardless of debt. Now, in the face of economic collapse shell shocked North American citizens are increasing their savings level again, while their governments use excessive amounts of debt try to keep the economy afloat and to recover from an era of irresponsible economic greed.

While North America, in particular the U.S., tries to lessen its debt burden by devaluing its currency over the last decade by more than 40%; many others such as Europe, Japan and Canada carry a significant part of this through investment write offs and a crumbling banking system. The latter bought too much 'safe' North American debt while undertaking risky financing in their own overheated real estate markets. China and several other countries who own a large portion of U.S. debt have tried to stave off paying for U.S. sins by tying their currencies to the U.S. dollar while simultaneously converting their U.S. debentures into hard assets throughout the world.

In fact there is a fourth type of economic style that we ought to consider. Europe, North America and the BRIC countries are producers of consumer goods. They require input from resource economies such as the Middle East (oil), Australia, and Canada. Many of these resource economies differ from each other. Australia and Canada are highly developed economies with a democratic system in many ways akin to the overall North American economy. Saudi Arabia and e.g. Venezuela are developing economies under dictatorships. But for now, let's group these resource economies together and consider how the interests of resource economies clash with those of the resource consuming economies (Europe, North America and BRIC).

The different economic styles clash everyday in the Global economy and are the source of significant economic distortion. Only time and worldwide cooperation may lead to a more stable and predictable economy. In the next posting we'll examine how these fourth economic styles evolved and clashed over the last century or so.

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