Class Issues in America Masquerading as Race Issues

As usual I'm gonna start off by attacking leftists, socialists, and statists for their stupidity by claiming the issues in the ghetto are race issues. The issues in the poor neighborhoods of America (whether white or black) are not race issues, but class issues. The problem is that we've created a permanent underclass with no class mobility or a mechanism of class mobility that's illegal. In my estimation, there are three key factors in the poor communities of America that MUST be dealt with in order to fix these problems:
1. The drug war and drug sentencing laws.
2. The incentives structures that discourage honest work or entrepreneurial behavior.
3. The lack of a family structure among the poorest communities.

Problem #1: Drug War and Drug Sentencing Laws:
I've previously spoken about the retarded nature of the drug war and how the drug war is the biggest national security threat to the US, but in this post, I'll be sticking to the discussion of its social impacts on the lower classes. First off, those charged of drug use tend to heavily skew towards the lower classes even if we do adjust for income. Basically, those in the lower classes get charged for drugs more often than those in the upper classes even though people in both classes still have similar issues with drug use.

Secondly, those of higher classes who do get charged using drugs can afford better lawyers, live in better areas, and can find/afford ways to avoid jail time and other excessive charges. Those in the poor communities without a proper family structure that either grow up with dead-beat fathers, single-parent households where there's no one to look after them, or those who don't have the ability to afford good lawyers due to monetary issues face the brunt of the damage. Keep in mind that almost all American prisoners are in jail for non-violent crimes.

Selling marijuana or cocaine on the street may be wrong, but if there's no violence involved, there's absolutely no reason why a 20 year old kid deserves jail time. It's not only wrong, but it's an active destruction of a person's life/future that doesn't benefit society in any way. If someone has real issues with drugs, throwing them in jail won't solve the problem because once they're out of jail, you're stuck with the same problem except they've spent more time in jail and lost a real portion of their lives wherein they could've been bettering themselves.

Problem #2: Incentive Structures Discouraging Education, Honest Work, or Entrepreneurial Behavior:
Under current incentive structures, many of those under welfare would actually lose income if they worked more for reasons including the taxation of new income and the elimination of previous benefits from new income. Of course, those who're currently on welfare tend to be the poor and those from poor families. If some kid in the family decides he's gonna start working for income, sure enough the family's income drops because of welfare cuts. So what does the kid do: not work, sit on his ass, and end up doing things that may not be productive (ex. drugs, gangs, violence).

So what if some kid has an idea that he could make and sell something on the street corner by setting up his own shop? Well, of course we need "regulation" and he'd need authority from a "regulatory body" to do that, so his shop gets taken down in the name of the "law". Of course, some leftist would claim "profit is evil and makes people worse" or some other nonsense to justify it, but such arguments only help eggheads hellbent on maintaining power in the name of "safety".

Of course, not only do these incentive structures affect the poor disproportionately from a first-order perspective, but they also prevent businesses and investors from investing in large areas with heavy poor populations. They discourage genuine investment that could actually provide the people in these communities with skills to improve not just themselves, but their entire communities in a self-organizing manner AND they eliminate profit opportunities for businesses.

In the case of education, the public schools in poor neighborhoods are absolutely awful. Private schools cost money that the poor simply do not have and due to the monopoly of schooling as per the way school districts are drawn up, there is simply no other option for poor kids other than to go to shitty schools with other kids that have similar backgrounds as them. Sure enough, a disproportionate amount of these children end up in crime, drugs, violent backgrounds, and end up in the same family issues as the ones they come from.

Problem #3: The Lack of a Family/Support Structure:
In areas with a heavy poor population, there tends to be a lacking family support structure. Of course, the middle and wealthy classes tend to have are less children, intact families, and a better support structure in general while the poor do not. The one stability in my life has always been my family and when we have troubles, those closest to us are the ones who're most likely to help.

In the poor communities, there's not much of a family structure so there's not much support if something goes wrong. When you have a father who's not at home alongside an uneducated mother on welfare who keeps popping out kids and has no clue of family planning, each and every child ends up being strained for resources (not only material, but also personal). Sure enough, this causes issues in a child's education, in a child's future ability to accumulate assets, and in future income potential.

In the end, the poor kids end up having no way out, get stuck where they are, and opportunities rapidly disappear as these children get older. Those who're in situations like this are far more likely to end up in drugs or crime simply because there is no real way out.

The lack of a family structure IS THE BIGGEST problem facing the lower classes. Improper leadership available for boys/young men and girls/young women stacks the barriers for these kids so high that there really is no way out.

Leftist Solutions Provide No Real Solutions:
Again, I'm gonna attack leftists, socialists, and statists for having no real solutions to this problem. Leftists always claim (correctly) that a lack of basic education is a major problem for those in poor communities. However, their solutions for education involve more direction from the federal government and centralization of education. Clearly, if the parents or families aren't involved in the kid's life, how can we ensure the kid gets a good education? This isn't just an issue for the poor, but for others. Leftists have also vehemently been against school choice with regards to issues like school vouchers. Naturally, the solutions of giving more power to those in power and relying on "trust" or "democracy" or "equality" while telling people mindlessly what to do is not gonna work, but this is what leftists, socialists, and statists rely on.

Secondly, there's the issue of "regulation" and incentive structures. Very few ideas proposed by leftists, socialists, and statists do anything to fix the real problems regarding incentive structures. Instead, on issues like education the first response of leftists is to throw more money at it, which solves none of the underlying problems. On issues regarding entrepreneurial or business activity in these areas, leftists actively want to discourage entrepreneurial or business activity that could actually lift entire poor regions out of poverty and provide some semblance of class mobility.

Thirdly, leftists do nothing at all to try and fix the problems of a lack of a basic family structure. Instead, the solutions usually involve increasing welfare and government handouts, which exacerbate the underlying problem. Leftists, socialists, and statists also attack religious organizations who actually provide/help community connections across a community. They're often against charter schools because of "religion" and a "state establishment of religion", which is just blatantly false. In many poor communities, it's the churches, temples, etc. that're the only organizations working for communal good and justice. They're the only things keeping kids off the streets and into community building projects. Discouraging these types of activities is foolish.

Another issue in regards to solutions provided by leftists involves labor issues like labor unions or high wage policies. Naturally, those that get screwed the most by high wage policies are gonna be those who don't provide businesses the productivity to pay for the higher wages necessary. Sure enough, these are going to be the poor.
Note: The effects of minimum wage and high wage policies depend on the capital structure of the businesses involved, which means capital intensive businesses won't be affected very much. Needless to say, smaller scale businesses tend to be more labor intensive, particularly those in very poor areas.
Note #2: I'm NOT arguing against high wage or a minimum wage policy. I'm just saying we need to be careful WHERE and HOW these policies are implemented. I'm also VEHEMENTLY arguing against one size fits all policies in this regard.

In the case of labor unions (mainly public sector unions), teachers unions have consistently been opposed to support for charter schools and school vouchers. Other public sector unions (ex. police unions) have consistently been against for drug sentencing laws, the drug war, and opposed to sensible ways to deal with drugs. Clearly, the actual solutions force us to break public sector unions like teachers and police unions, but leftists consistently trump how important unions actually are.

Solutions:
Although I've attacked leftist solutions to fixing class issues, the actual solutions aren't that complicated. Simply put, the solutions are:
1. End the drug war
2. Shift incentive structures for businesses to encourage opportunities in poor communities (ex. removing income taxes, remove structures discouraging honest work)
3. Shift incentive structures for entrepreneurial activities and wealth accumulated via honest work by the poor (don't require senseless "regulations" to prevent the "evils of profit" or other nonsense)
4. Break the unions actively trying to destroy these communities (ex. police unions, teachers unions) and ruin their power
5. Break regulatory structures discouraging genuine investment in poor communities (ex. placing "regulations" on hiring some kid on welfare)

Sure enough, leftists and socialists would only argue to solution (1), but strongly fight against all of the others while statists would fight all five. The solutions to fixing the real problems are relatively simple, but most are vehemently fought by certain groups that mostly support the left.

The real problems--as I've diagnosed above--aren't really race issues, but class issues. They affect those that're white, black, hispanic, or whatever given that those children are from poor communities. To say that these are race issues takes us further away from fixing the real issues while we end up fighting about complete and useless nonsense.

Global Decentralization and the Rise of Warlord States

This post will be the first in a series of posts (probably consisting of 2-3 posts) about market-states and the mechanisms of market-states, which have embedded in them market states. The topic of this particular post will be about the occurring global decentralization and the shift of the decentralization in the functions and organization of governments or states along with the rise of warlord regimes across the world. It will be split up into five sections:
1. Introduction
2. Basic Organizational Structure
3. Geopolitical Financial Organization of Warlord States
4. Fragility of Regions Controlled by Warlord States
5. Conclusion

Introduction:
Over the past 200-400 years (depending on how you wanna define things), we've had a world that's effectively been industrializing, a world that has through various cycles become more centralized, and we've seen the rise of nation-states. However, this process has effectively come to an end. Across most of the world, centralized governments are ruling ineffectively. Nowhere is this process more obvious than in regions like Arabia, North Africa, Sub-Saharan Africa, and Central Asia. Even in other places like India or even China and the US, we've seen lots of decentralization over the past 20-30 years.

In the poorer regions of the world, this decentralization process (via the incompetence of centralized governments) has effectively led to failed states or soon to be failed states. However, many of these regions like Angola, Nigeria or Iraq do have lots of natural resources while developed countries like the US, much of Europe along with developing countries like China and India have a need to import natural resources to sustain economic production and economic development, whether this production or development is good or bad is another question all together.

Due to the demand for natural resources in the large powers and the luxurious loot that can come from the extraction of natural resources, there has been a rise of institutions in natural resource rich places of the world that allow for the buying and selling of critical economic inputs. This has led to the rise of what I like to call warlord states, where we're seeing the rise of regimes that extract natural resources in one area to sell them to someone else, collect the revenue, and organize some structure to take advantage of power vacuums. In virtually all of these cases, what we have are warlord states embedded as a part of new market-states (there will be a future post on this topic).

Not only are we seeing the rise of warlord states from unofficial governments looking to seize opportunity, but we're seeing it from--for lack of better words--"official" or "internationally recognized" governments. What are these examples of these types of governments? It's governments like Nigeria, Saudi Arabia, Angola, and other similar places. In other words, it's not some nationality that's holding these states together, but the market for natural resources.

Basic Organizational Structure of Warlord States:
There's been a lot of talk about ISIS, Boko Haram, Al Shabaab, and other Islamic Caliphates in other places as places that're primarily driven by religious ideology, but these false assumption leads to erroneous conclusions. These Islamic Caliphates are really just groups of warlord entrepreneurs seizing profit opportunities via:
1. collecting booty and loot
2. extracting natural resources or commodities
3. selling vital economic inputs to economic actors in need of such inputs

These Islamic Caliphates are not rooted in Islamic tradition and care little for Islamic tradition. The role of ideology in the operations of these groups is primarily designed to:
1. garner public support
2. make the initial objective of seizing profit opportunities easier via social structures
3. to gain international support from sympathizers
4. gain financing from sympathizers
5. more technological or physical support (ex. fighting) from international actors, including governments

If we look at the way in which these groups operate, we will see little difference between a group like ISIS, Boko Haram, or Al Shabaab and actual governments like Nigeria or Saudi Arabia. However, these warlord states or official governments are only the representations in the Islamic world. In other similar regions of the world, we see the same patters, although we see different ideologies to make things happen.

In other places like Latin America, we see the same thing happen. Places like Venezuela and Argentina have historically been great for the extraction of natural resources. It seems difficult to notice much of a difference between the structure of Angola, Nigeria, or Venezuela vs ISIS, Boko Haram, or Al Shabaab when we remove the Islamic banner in the latter group. If we use the procedure and logic outlined in this post, we'll see that there really is no difference between these official governments in Africa, Latin America, or the Middle East and the new rise of warlord states.

Geopolitical Financial Organization Structures of Warlord Enterprises:
True to all of the warlord regimes and governments I've listed above, almost all of their revenue comes from natural resources or commodity extraction. Government revenue resulting from rent extraction is critical to the functioning of these states. Due to the fact that most of these states or regimes gain primary financing from rent extraction, the most important thing is to maintain the revenue that comes from the extraction of rent, even though the process is unsustainable.

In order to maintain the revenue, it's common for the leaders at the top to have ties to large companies, multi-national corporations, or similar entities across the globe. For this revenue to be protect, the first objective must be to make sure no one else can extract the natural resources or commodities in question. In other words, these groups must maintain their monopolies at all cost for their very survival. In order to do so, these groups must hierarchical from the top-down.
Note: Not only must these groups have top-down hierarchies, but rebellion at any level of the hierarchy cannot be tolerated because it threatens the necessary hierarchy. These types of systems can be split into roughly three kinds of systems: (1) patronage systems, (2) vertically integrated organizations that function like mafias, or (3) bureaucratic systems involving a military, "regulation", or some form of state monopoly.
1. In patronage systems, the money flows from the top to the bottom. The guys at the top receive the cash flow directly and distribute it to those who have supported them. In patronage systems, the initial cash flow is centralized to the guys running the show, usually by links to multinational corporations or by ties to natural resource producers or whatever the revenue source may be. Examples include countries like Afghanistan
2. In the case of vertical organization, we see money flow from the bottom to the top whereby the guys at the bottom level of the hierarchy extract some form of rent or bribery from the regular populace, tourists, governments, or whatever the cash flow mechanism is. Then, the hierarchical layer above the bottom layer takes a cut from the bottom layer. This mechanism continues up until the guys at the top. A classic example would be a country like Afghanistan.
3. Bureaucratic systems involve systems where the rule of law favors extremely wealthy elites. This can be run via the military to "fund programs" where most of the funding is stolen by the elites. It can also be run via regulatory or tax collection agencies that use regulations to penalize people who don't do what they want.

Another key aspect is that the local populace must be subdued in whatever manner necessary. A society that's in open rebellion to your regime has an obvious threat to your regime. Not only is there an obvious threat to your regime, but it's an all or nothing situation for the guys in running the show. These regimes end up being extremely repressive of all dissent and ruthlessly wipe out anyone who has any idea or thought of speaking against them.

As I've stated before, all of these enterprises get most of their revenue from the taking loot and the extraction of natural resources or commodities. However, it's important to note that taxation is a minor part of these regimes. Due to the fact that taxation is a minor part of these regimes, there is no economic or financial incentive to support the local populace. Instead, the consent of the governed matters little in governance. Unsurprisingly, this leads to poor governance.

Social, Political, Economic, and Financial Impacts of Warlord States:
Due to the fact that most warlord states rely on rent extraction for revenue and basic financing, these states are inherently unsustainable. Why are the economic and financial structures based on rent extraction unsustainable? Economic rent is defined by economic gain stemming from nonproductive activity. In almost all cases of warlord states, the extraction of rent is not only unproductive, but it is usually counterproductive and almost always destructive (I can't think of a counterexample).

These groups destroy capital in all of the cases where they extract revenue, which are:
1. In the extraction of loot or booty, there is no economic productivity that results from it and there's certainly aspects that destroy capital.
2. In the case of the extraction of natural resources, the result is environmental degradation and the resulting social, political, and economic structures that discourage capital formation and actively seek to destroy the creation of capital (ex. killing those who speak out against what's going on, discouraging qualities like intelligence or education among the populace, etc.)
3. The selling of vital economic inputs to other countries strengthens the financial ties of political actors, increases the geopolitical presence and power of warlord states, and creates international structures that undermine shifts in global incentive structures to create substantial shifts

It becomes important to notice that these warlord states do provide temporary political (pseudo-)stability in some regions by creating monopolies of violence and by violently putting down anyone who threatens their monopoly on violence. It can be argued (usually by those who benefit from warlord states) that these groups do some good by providing "stability", but this is a wrong statement.

The social, political, and economic impacts of these groups are entirely negative in every sense of the word. These groups, in every single case, destroy social, political, and economic capital of the regions they take. They make seem to be providing more "stability", but reduce the ability of these places adapt to future shocks by destroying necessary capital.

It's also important to note that the "stability" provided by these groups isn't actually stability. What they're doing effectively amounts to volatility suppression, whereby any sort of social, political, economic, or financial fluctuations are ruthlessly suppressed because of geopolitical financial incentive structures. Since there are no fluctuations that appear on the surface it appears to most people that the system is stable. However, the lack of fluctuations are a sign of weakness, not a sign of strength.

Everything in the world survives according to one principle: adapt or die. There is only one guarantee: change will happen. In these warlord states, change is not constantly occurring in small, regular intervals (as it does in capitalist republican institutions). So when the change occurs, the changes are sudden, drastic, large, and appear as tail events. In other words, the "stability", or pseudo-stability, provided by warlord states guarantees large blowups with virtually unbounded negative consequences. On top of this, the timing of these blowups is not only unpredictable, but the less often and less likely the blowup, the disproportionately large the consequences.

Fragility of Regions Controlled by Warlord States:
In times of large spikes or collapses in commodity prices or natural resources, these regions become even more sensitive to underlying shocks (whether internal or external). In other words, places controlled by warlord states become much more fragile under periods of high international geopolitical or financial volatility. The chances and costs of a rapid, discontinuous dislocation becomes far more likely.

In periods of high commodity prices, these regions become subject to larger geopolitical pressures and these regions become more valuable. Functional countries, governments, and multinational corporations view these regions as places of opportunity when commodity prices are high. These states become more likely to come under empires or quasi-empires while violence is more likely to break out over locations of natural resource or commodity extraction, over supply lines, over trade routes, and other areas I'm not thinking of.

In periods of low commodity prices, the revenue for warlord states collapses. Financing basic projects of infrastructure or providing social services to prevent populist uprisings becomes far more expensive. Using patronage to bribe or pay those lower in the hierarchy becomes far more expensive and costly. Debt can become heavily used, usually out of necessity, to preserve the regime under these periods of stress.

Basically, any sort of "unpredictable event" makes rapid dislocations in regions controlled by, or heavily influenced by, warlord states extremely likely. Usually, this event is a major geopolitical crisis, financial crisis, or a sudden collapse in commodity prices, but it could be other events as well. Any way you put it, these regimes are extremely fragile and rely on nothing going wrong all the time to sustain themselves. As volatility increases or the size of a shock rises, the harm from a further increase in volatility increases at a faster rate.

Conclusion:
Due to the shifts occurring in the world, we're seeing a radical decentralization that is absolutely necessary (some say China is centralizing, but China is decentralizing economically and financially although Xi Jingping is centralizing power politically). While this decentralization removes some risks, it creates others, including opportunities for certain profit seekers in areas with access to rent income, natural resource extraction, and/or in places with power vacuums.

Eventually, we've started to see the rise of warlord entrepreneurs come in to seize these profit opportunities. This can come as "official" or "internationally recognized" governments, but they've started to show up as criminal enterprises, "terrorist organizations", or other similar regimes. These regimes operate as ways to effectively extract rent and end up destroying capital, which makes them horrible at actually governing. These warlord regimes are effectively failed states, whether they're actual governments or not.

Due to the basis and organizational structure of the regimes along with the international basis that allow these regimes to exist, these places become highly fragile where small shifts can end up with massacres or famines. We could end up seeing large population corrections in these areas along with unprecedented levels of environmental degradation that creates environmental risks.

Capitalism, Tradition, and Spiritual Capital

In my previous post, I discussed how capitalism, by its very definition design, is more sustainable than socialism. In criticism from socialists and statists, there’s this conception and idea that capitalism is destructive for the environment, destructive for society, and destructive in general to everything because of “exploitation by the bourgeoisie”, the “profit motive”, and other similar nonsense. The socialist argument continues that the reason for this is because of the profit motive and nothing telling people not to destroy things. Of course, this is all just nonsense.

Even in capitalist thought, there are structures that govern society like tradition (ex. entire Austrian School) which most of the left (by left, I mean socialistic left based in Marxist thought) basically sets up as a strawman to attack based on faulty assumptions that allow these groups a sense of moral superiority. In the modern sense of the word religion, we think of centralized organizational structures primarily designed to structure society in such a manner as to protect a certain region from geopolitical threats (most versions of Islam and Christianity today). However, this has not been the case historically. These structures develop over time as ways to prevent environmental degradation, reduce social costs of various activities, and other reasons (that I think are spiritual as well, but don’t have to be for the argument I’m making). Actually, religion developed as rituals where deities were created later to consolidate those rituals. Note that ALL traditional religions emphasize environmental degradation as one of the worst vices: as a crime against God’s creation.
Note: This idea of paganism vs monotheism is really retarded if spoken in terms of belief. All religions are fundamentally monotheistic where pagan religions differentiate between a god and God (notice the capital G). The difference comes because theology in polytheism is decentralized while it is centralized in monotheism. Pagans in most places did not leave any books and the only polytheistic religion with books, that I know of, is Hinduism where the primary scriptures are almost entirely--if not entirely--metaphysical.

As I’ve discussed before, capital is any input in production that’s not land (natural resources) or labor. Therefore, we must also consider spiritual capital as an input in production. Most socialists and statists would respond that how does religion add value to society or to capitalist economic systems if religion is the reason for war. Of course, religion is not the cause of war; war is completely natural and occurs over a genuine conflict of interest arising between two parties and the sinew of war is usually (almost always) not money, but this is a different topic for a different day that I will probably write a post on later.

With regards to tradition in society, many would say that it’s “irrational” because religion is about “belief” and that these things aren’t true. They usually cite some biological evolutionary theory and use naïve Darwinism to support their point. The first point of contention would be that there’s a fundamental difference between the physical manifestation of a biological process vs the birth of our spiritual consciousness, but I don’t even need that fundamental truth to prove my point. All that’s necessary to prove my point is the simple fact that there’s a difference between knowledge of an underlying action, concept, or idea (or whatever else you can think of) vs our RESPONSE to the underlying action, concept, idea, etc..

For example, let’s take the simple idea of avoiding debt. I could avoid debt because I know that large amounts of debt can divert my entire income towards debt servicing costs, force my forecasts of the future to be exactly correct, and could potentially face underwater balance sheets if my assets were to fall. I could also avoid debt in the name of God. Either way, there would be no difference in my RESPONSE to shifts in my balance sheet. On the other scenario where I use some form of naïve rationalism to claim that large amounts of debt will be profitable because I can buy illiquid, risky assets on leverage and sell them a year later for a higher price because it’s “rational” since it can lead me to more profits if I’m correct. Obviously, following some blind interdict with little downside (that offers me CONVEXITY) in the name of God is the better option.

What I’m emphasizing is that there’s a fundamental difference between knowledge of some event or idea vs our RESPONSE to some underlying idea, event, etc.. In other words, controlling our response (or a system’s response) to some underlying variable is FAR MORE important than the underlying variable itself. Similarly, tradition and religion allow us to benefit from various heuristics reached via bottom-up experimentation and tinkering that have withstood the test of time. Basically, it’s far more rational to follow traditional religion than to go completely without it.

With that being said, am I arguing for a literal teaching of religious texts as the word of God? Hell no. In the case of Christianity, the Bible was compiled under the reign of the Roman emperor Constantine which was >300 years after the death of Christ. The idea that all the teachings of Christ and only the teachings of Christ were contained in the modern translations of the Bible is literally dumbfounded and retarded. Similarly, the rise of Islam came about with an Arab empire that stretched from the Middle East to, at its height, modern-day Spain in harsh terrain where other peoples were more savage than the ones in question. Again, taking the Qur’an as the literal word of God is retarded (and most Muslims do not actually think the Qur’an is the literal word of God). In the case of Hindu scriptures, the primary topic is about metaphysical principles (Hindu theology is decentralized).

I’m gonna reemphasize the point that the traditional aspects of religion are extremely important for a society. All religions come from the same underlying principles and are rooted in metaphysics although the particulars of each tradition are different. I’d like to add that the particulars must be different for each of these traditions because of the different geographical roots. For example, the diverse Indian subcontinent requires very different traditions than the Latin Christianity that rose to power from its center in the Mediterranean which must necessarily be different from the Islam that was built around the Arab world. However, the underlying principles are fundamentally the same--see the work of Carl Jung, Rene Guenon, and many others).

Sustainable Economic Systems, Capitalism, Socialism, and Constraints Imposed by Empire

This post is primarily about socialism, capitalism, the means of production, and the constraints imposed by empire. I'll split this post into six sections:
1. Introduction.
2. Capitalism
3. Socialism
4. Constraints Imposed on the Means of Production by Empire and Warfare
5. Why Do Countries with Peacetime Capitalist Structures Generally Win Wars?
6. Conclusion

1. Introduction:
Among socialists, leftists, and statists there's a common idea thrown out which says that the basic idea and structure of capitalism is based for warfare while socialism is what we need to work towards as a more sustainable way that's less likely to lead to war. As regular readers of my blog know, we shouldn't take socialists, leftists and statists seriously as they almost always just spew nonsense. This case is no different.

A typical leftist, socialist, or statist would argue, how can anyone say that socialism is better suited for war when capitalism is all about "exploitation by the bourgeoisie" or "the lower classes are being oppressed" or "it's the upper classes that start/want war"? Of course, these people have simply shown the inability to think clearly by making such statements while adding nothing of value to the discussion. However, I'm gonna throw aside such nonsense arguments as they add no value and instead start by talking about the primary differences between the way capitalist and socialist economic structures operate.

Let's start by focusing on empire and the constraints imposed by empire. These constraints are the fundamental reason why truly capitalist economies, if their organizational structure remains completely unchanged, are completely incompetent and cannot survive in warfare. During wartime, capitalist economic structures are forced to give way so that the means of production can be directed to where they need to go as dictated by geopolitical constraints. 

2. Capitalism:
First, I'll start off by defining capitalism. Capitalism is a system of economic organization built on the private ownership of the means of production as a means to accumulate capital, which is any input that's not land (natural resources) or labor. As I've discussed in my post on the basics/dynamics of real wealth creation, an economy is like an ecosystem with inputs and outputs with outputs paying for inputs. The laws of thermodynamics tell us that you can't create something from nothing, so the only sustainable way to increase output is by increasing the use of natural resources, labor, or capital (which is, by definition, anything not land or labor).
Note: Environmental degradation, which almost always accompanies the extraction of natural resources, destroys capital, but natural resources are necessary for production.
Note: All natural resources can be extracted in different ways and most have substitutes. For example, the use of oil or natural gas can be substituted with coal or firewood/biomass. The only natural resource I can think of with no substitutes is water, which is usually far more limiting in terms of food production than land.

Therefore, the entire idea of accumulating capital is inherently sustainable. Not only is it inherently sustainable, but the idea of capital accumulation is the ONLY sustainable economic system over any sustained period of time. Increasing doesn't enhance living standards as people are simply working more to produce more. Increasing the use of pure natural resources is actually destructive, forces future generations to bear the costs, and can actually destroy capital because it forces costs onto future generations. Therefore, THE ONLY SUSTAINABLE ECONOMIC SYSTEM IS ONE BUILT ON CAPITAL ACCUMULATION!

3. Socialism:
Now, I'll talk about socialism. Socialism is a system of economic organization built on the social ownership of the means of production as a tool for society to use as it pleases. Again, socialism is not an economic system designed to accumulate capital, but one that allows society to use inputs as it deems best. This system--due to its lack of emphasis on the accumulation of capital and emphasis on the pleasures of society at a given time--is almost always unsustainable because the pleasures of society rarely desire a sustainable way to accumulate wealth as it takes smart work, risk-taking, volatility, and difficulty. Usually, society desires easy riches over hard-won sustainable wealth as they seem to require less work and provide more. The classic example is old-school imperialism where nations or empires would go into places to take loot. Again, many dictators, military men, and politicians have done this (and still do this) as a tool to gain the support of the populace to rise to, or maintain, power.

In other words, socialism is about controlling the means of production and the direction or use of the means of production (this comes straight from the definition) towards some common goal as society deems it. Unless the goal of society is specifically determined towards the accumulation of capital, whether knowingly or unknowingly, living standards and quality of life cannot sustainably increase under socialism.

Of course, a socialist, leftist, or statist might say that the people can determine and choose such an outcome or that a king/dictator/monarch can choose such an outcome, but I'd like to point out that this choice is rare and unlikely. Again, the accumulation of sustainable wealth (capital) is difficult and takes sacrifice. Wealth accumulation requires both prudence, temperance, and courage, which is hard to find in any large group of people. Note that I'm making an implicit assumption about human behavior that basically says prudence, temperance, and courage together are rare qualities for most people to possess. I find it naive to expect society at large will choose an organization wherein the society at large suffers what seem to be large, up-front costs for benefits that may accrue in the future with lots of toil and hardship. Keep in mind that winner-take-all benefits will dominate in the creation of wealth, which makes it even less likely for a society following a socialist model to take up.

4. Constraints Imposed on the Means of Production by Empire and Warfare:
Now that we have a basic idea on what socialism and capitalism comprise of and the underlying ethos on the organization of both economic systems, we can talk about the impact of these systems on war. War is an armed conflict between autonomous regions that are either governments or behave like governments (ex. confederation). Wars usually contain a certain objective (or they end up with nation-building and as a waste of time like the War in Iraq) with the goal of the government to achieve those objectives. Those objectives could be to seize a territory, kill a certain person, ruin a city, take natural resources, or whatever. The important point to grasp is that whatever the objective or goal, the means of production must be directed toward that goal.

For example, at least some of a country's manufacturing capacity must be directed towards the procurement of arms. Real resources used in elsewhere in the economy must be redirected towards other ends. Infrastructure must be built and maintained in order to secure the transport of various goods or services critical to fight the war, regardless of the impact of infrastructure on productive capacity. Supply lines for troops must be protected. Certain classes of society must be used towards goals as deemed by the constraints of war (ex. nurses and doctors must be transferred towards taking care of soldiers). Capital must immediately be redirected towards the financing and operation of warfare.

Basically, the constraints imposed by warfare implies that resources must be redirected towards some other alternative goal or desire than those of private wishes. Capitalism, as I've described it, becomes very difficult for a society to use in warfare simply because of its structure and design. Capitalism is the private ownership of the means of production towards the accumulation of capital, but the accumulation of capital is useless during warfare. The goal of warfare is victory and the goals of the war for a government is whatever that victory requires.

In socialism, the means of production can be redirected at will towards whatever goal society deems necessary. If a society suddenly goes to war, the very design of the economic mode of organization provided by socialism makes it very easy to shift economic inputs toward warfare. It's in the nature and design of the system.

5. Why do Countries with Peacetime Capitalist Structures Usually Win Wars?
After reading until here, a socialist, leftist, or statist would often respond with a statement like, if socialism is better fit for warfare, why do capitalist economies perform better in warfare? That must mean that socialist economies cannot be designed for war. On the surface, such statement would seem to make sense, but capitalist economies are forced to shift their economic mode of organization in wartime when certain geopolitical constraints are present. In other words, capitalist economies basically turn socialist (or at least partially socialist) in times of war by constraints imposed on political systems.

Also keep in mind that capitalist systems, due to the emphasis on the accumulation of capital, tend to have higher levels of productivity, more wealth, better technology, and are more sustainable than socialist systems (as discussed above). This is why when capitalist societies do shift their economies towards war time, they often times overwhelm the other side given that they can fully transition to a wartime state given that they've secured key natural resources and supply lines (ex. US in World War I and World War II).

As ironic as it may seem, peacetime capitalist economic structures have won more wars and are more capable of winning wars not because they're built for warfare, but because they're built towards sustainable wealth creation. In warfare, all economies are, at least partially, socialist. However, war drains economic inputs that could be used elsewhere that end up being directed toward destruction and control. Increasing or diverting production towards goods and services purely designed to destroy other things is not a productive use of resources. It's just that peacetime capitalist structures just have a much large source of resources and inputs that can be wasted or put towards unproductive causes, which is why they tend to win wars.
Note: I'm assuming all else is equal when comparing capitalist and socialist economic structures during wartime. Of course, all else is never equal.

6. Conclusion:
Controlling the direction of labor, nationalizing entire industries, shifting natural resources to certain areas at certain times for certain goals, large and sudden increases in manufacturing capacity, the construction of large-scale infrastructure at will for whatever purpose, increases of certain kinds of production at certain times, control of certain lanes to supply certain groups in certain places, and other things of this sort for the "desire of society" is socialist, but it's also necessary for warfare.

Suppose we have a firm in a capitalist providing a service for, say, providing underlying technology infrastructure for other businesses or individuals. Taking control of the firm to direct the firm's assets, its workers, and its capital toward a societal goal is socialist, but that's exactly what happens in war. Profit and capital accumulation become secondaries to the common goal of victory in wartime. Capitalism, by itself, has no mechanism of organizing itself for warfare when necessary.

In essence, the idea that capitalism is suited for warfare is wrong. Capitalism is not built for war and cannot function in wartime while still maintaining its underlying structure. Socialism has a much better design for warfare than capitalism, which is why peacetime capitalist structures are forced to morph under the guidance of political systems when geopolitical constraints become imposed on the society in question.

The American Republic: An Anti-Democratic Constitutional Republic

In this post, I'm gonna talk more about politics than economics, finance, or geopolitics. This post will be about the differences between a constitutional republic and a democracy. First, I need to define a democracy vs a constitutional republic.

DEFINITION: Constitutional Republic (can also be called a "libertarian democracy" with the term mostly used in Europe)--A governmental system that comes from the Latin word res publica which is Latin for public thing. In other words, a Constitutional Republic is about a rule of law and a protection of basic libertarian rights with the goal being liberty (not in the Marxist or socialist sense, which is highly flawed and blatantly retarded because it's designed to set up a straw man to attack). Individual provinces have a large and varying degrees of autonomy that're constitutionally protected. This kind of system is closer to an empire than a democracy because of the autonomy given to states and localities with the federal structure serving a role only in defense and other tail-risks.

DEFINITION: Democracy--A form of government that's built on the principle of equal participation and equal power in the people. In this government, the national will of the people reigns supreme over individual rights, liberty, minority rights, and state/local government rights if the people deem it so. These kinds of systems usually do have Constitutions, but they emphasize equal representation and "the will of the people" over a strict rule of law designed to protect individual rights. Due to the nature of the political system, these political systems tend to be more authoritarian and can easily devolve into dictatorships during times of crisis or war (ex. currently Russia).

I'll split this post into five different sections, in order:

1. Constitutional Republic/American Political System

2. Democracy/Parliamentary System

3. Political Organization in the American Political System

4. Political Organization in Most Democracies

5. Conclusion

Constitutional Republic/American Political System:

Usually, socialists, leftists, and current statists (and most Europeans) within the US refer to the American political system as a democracy, but as usual socialists, leftists, and statists are spewing nonsense. THE AMERICAN POLITICAL SYSTEM IS NOT A DEMOCRACY! Why do I say that the American political system is not a democracy when socialists, leftists, and statists keep telling us it is? The reason is the political structure of the United States. The US is a Constitutional Republic and, from now on, I will interchangeably use Constitutional Republic and the American political system.

First off, the hallmark of the American political system is one of checks and balances between different groups called factions with three separate branches of government: the executive branch, the legislative branch, and the judicial branch. It's important to notice that all of these branches tend to favor the power of individual states and the autonomy of the different states than they do the people at large.

The executive branch is led by a President elected by the electoral college, which is not done by popular majority. Usually, a leftist, statist, or socialist would respond that the winner of the election is almost always the winner of the popular vote. Remember how I emphasize on my blog how it's not just the end conclusions that matter, but the procedures by which we reach these conclusions. In the electoral college, all Presidential candidates target winning most of the electoral votes, which means that a candidate focusing on California or Texas is really a waste of time. What it also means is that a vote for a Presidential candidate in state like California or Texas is effectively a useless vote because we all know how the states on the extremes will vote. This changes how much of the population shows up for the vote along with other factors that make the system less democratic. By this very nature, the Executive is undemocratic and that a popular vote will lead to very different outcomes even though the results have historically been the same. It also becomes important to note that the Executive branch, even though undemocratic and highly republican at its core, is still the most democratic part of the American political system. However, the Executive branch cannot pass any bills, even though it remains very powerful in foreign affairs.
Note: The President is akin to a king in a Constitutional Monarchy that's effectively elected by the populace with term limits. The President has no legislative authority (only veto power) with the emphasis again being on checks and balances instead of democracy.

In the case of the Legislative branch, we have a bicameral legislature with a House of Representatives (lower house) and a Senate (upper house). In the House of Representatives, each state has a certain amount of districts apportioned by population with the districts selected via gerrymandering by individual states. So in the House of Representatives, we have state governments having lots of power in the outcome of Representatives that makes this system inherently undemocratic. The state governments have the ability to set the gerrymandered districts in such a manner that represents the interest of the particular state far more than giving each person equal representation. In other words, the inherent idea of equal participation that's necessary for democracy is nonexistent in the House of Representatives while individual states have a lot of autonomy to operate. Therefore, the House of Representatives is inherently undemocratic, although the people have far more of a say here than they do in the Senate with states maintaining a strong degree of sovereignty.

In the Senate, each state must have two senators. Clearly, the Senate is inherently undemocratic because the states have wildly varying populations that can only have two senators. Again the principle of equal representation in a democracy is violated. Also note that many Senators are from different states that have different interests. So regardless of the party they're from (the parties in this system are extremely weak and have little power), they have to support and represent the popular interests of the state which is necessarily opposed to the popular interests of the entire United Sates. In the case of the Senate, we have a filibuster which takes 60/100 votes of the Senate to end (cloture) and every bill must be agreed upon by both the House and the Senate. Again, the Senate is obviously undemocratic while giving individual states lots of power on how to determine their representatives. The mere choosing of the Senators, the role of the filibuster, and the basic passing of bills gives the states a disproportionate amount of power and the democratic principle of equal representation is inherently violated. Yet again, the interests of the states are supported at the expense of equal representation.

Note: Due to the nature of the Senate, the Senate generally represents the interests of the elite more than it does the people as a whole. This is not a bad thing and there are many reasons why this is the case. The Senate is more constant (as the interests of the elite end to be) while the House is more volatile and fickle (as the people tend to be).

In the Judicial branch, each Supreme Court judge is appointed by the President and must be confirmed by both the House of Representatives and the Senate with the other national judicial appointments having no part coming from democratic institutions. As we can see, the Judicial Branch is obviously undemocratic and there's no reason for me to go any further here because the rest should be obvious.

So what does this imply about the political organization seen in this system. This kind of political system forces people to unify into political groups called factions. In other words, the US has a factional political system. In order for this type of system to be sustainable and strong, the country must have a many different factions each fighting for power so that no one is able to take it. The reason this system usually fails in most places it's tried is because this kind of system forces national unity to take a backseat to individual and state's rights.  Trying to enforce and artificially create internal national unity is not compatible with this system. The American political system can only go hand in hand with a large, diverse populace in a country that's united by a moral principle (ex. life, liberty, and the pursuit of happiness). This political system will become highly corrupted and infeasible with nation-states.

Note: In a country like Argentina, this system will fail because national unity is expected to be very tight. Instead, this type of system devolved into a populace supported autocracy or an elected dictator. Again, diversity is a necessity for this kind of system.

Remember that the essence of this type of system is checks and balances so if a country lacks diverse factions, the checks and balances will not work. If not enough factions exist, one faction will be able to pull power away from the other factions. The American political system can only work if everyone is in the minority at a given point in time because the heart of the system is liberty. Liberty can only be preserved and strengthened if a diverse group of factions feel their rights threatened by everyone else on certain important issues. In other words, liberty is the air of the faction and a political system of diverse factions each with independent rights and a decentralized federal structure is the best way to preserve liberty.

Note: The elites can also count as a faction, but usually different types of elites serve as parts of different factions.

In the American political system, the only time national unity occurs is in war out of necessity. As soon as the war is over, the system devolves into healthy infighting and attempted power grabs by various factions, which are necessary to protect liberty.

Democracy or Parliamentary Democracy in Most of the World:

In most of the non-autocratic systems across the world that happen to be Parliamentary, the lower house is decided by a multi-party system whereby each voter has an equal say and equal representation in that house. The upper house consists of either elites or those appointed by  that can almost always be overruled by the lower house with just a simple majority and the power of the upper house is really just ceremonial (ex. Germany, India, the UK in its current form, and many others). In reality, the people have most of the power. In this kind of system, the principle of equal representation is upheld and these systems are highly democratic--far more so than the American one.

Due to the nature of these systems, state, local, and provincial governments have relatively little say in what happens nationally (and often times locally as well). The elites also have considerably less power as the people get, for the most part, what they want. In these kinds of systems, the power and role of basic constitutional protections of individual rights are effectively close to nil. In most of these countries, the freedom of speech, freedom of religion, a free press, the right to peaceful assembly, and the right to petition the government can be overruled by the majority of the populace.
Examples:
-In France and the UK, people can be placed in jail for attacking public officials.
-In France, they've put restrictions against Muslims wearing certain clothing.
-In the UK, they've actually put restrictions on pornography.
-In the case of Germany, they say they have a freedom of speech, but apparently have to respect human dignity, which is in direct conflict with the freedom of speech. The entire point of the freedom of speech is to say whatever I want without fearing retribution regardless of what I say as long as I don't affect anyone else's rights. "Dignity" is subjective and not a right.
-In France, they placed laws on the "positive representation of drugs" while placing prison sentences and hefty fines on those that disobeyed these laws.
-In Germany, there are bans and a revocation of fundamental rights to various groups. Assemblies are also required to register and certain places are banned from possible protest areas.
-In Germany, "Dissemination of Means of Propaganda of Unconstitutional Organizations" is banned
-In Greece, there's a ban on the press to insult the President of Greece as well as any religion recognized by the state.
-In Finland, blasphemy is banned.
-I can go down the list for a very long time.
-In the US, there are basic rights exceptions like defamation, obscenity, incitement to violence, fraud, and primarily parts that are legitimate infringements on the personal rights of others or involve the protection of property (like defamation with regards to money, business, etc.). THESE EXCEPTIONS AREN'T EVEN BANNED, BUT COULD BE BANNED IF DEEMED NECESSARY--like wartime, but in reality, there's little chance of actually banning them. In the US, even hate speech is legal. Note that defamation is not a criminal issue either; it's purely a civil issue intended to protect businesses from competitors trying to defame others--in other words, it's an issue of property rights. Also note that most of these bans are enforced on a local scale, not a national one.
NOTE: Many of the free speech/free press organizations that publish rankings for this stuff are bullshit because they don't penalize and some times (maybe even most of the time) reward political correctness, bans on hate speech, and other issues like that. Please do not use those rankings against me as an argument because their very assumptions are highly flawed. POLITICAL CORRECTNESS IS CENSORSHIP!

Many of these governments rely on the unity of the populace, which means these countries have difficulty in assimilating immigrants--as we're currently seeing in many of these countries. In this kind of system, individual rights and local autonomy are usually given as a secondary importance relative to the will of the people. There's also no checks and balances as the legislative and executive branches are effectively the same. These kinds of systems are liable to collapse into dictatorships at virtually any time if the people desire it so (and historically often have).

These types of systems are more in line with nation-states because national unity is far more important than liberty. If the people deem it so, they can simply wipe out or imprison minority populations in peacetime. This is one of the reasons we're seeing rising anti-Islamic violence in Europe and the rights of the minority are rarely protected in this kind of system.

Note: These types of governments are technically republics in name, but they're republics in name only. In reality, they throw away and effectively spit at all of the basic foundations of a healthy republic in favor of democracy and "will of the people".

Political Organization in the American Political System:

In the American political system (also in Indonesia and other countries), political parties are weak. Due to the fact that people are chose with a plurality, you get two sides (parties), but there's nothing to enforce discipline. Instead, the individual matters much more than the party and it's extremely common for people in a certain party to buck the party line, which happens all the time. Again, this system is republican in the sense that people elect specific leaders with the ability to throw out the leaders any time they please.

In this system, the President or head of state can, and often does, go against his own party on critical issues. He doesn't depend on his party for support; he depends on the electoral college. In other words, his administration has the ability to change things far more than a typical administration in a democratic system.

Also note the importance of the autonomy of state and local governments. In a typical political axis, the region he represents matters more to the positioning of the legislator on the axis than the party (ex. a Southern Democrat is more "right-wing" than a Northern Republican). In this system, the local and state parties are also run completely independently of the national parties, which means they get to set their own agenda on how they run things.

Again, this type of system is republican which means that each ruler has lots of autonomy with the people having the ability to replace the ruler and the Constitution setting the power of rulers. The political parties are weak and decentralized, which is healthy as political parties are to not be trusted (the entire point of a political party is to usurp power, which makes powerful political parties extremely dangerous).

Political Organization in Most Democracies:

In a more democratic political system, political parties have lots of power. They're highly centralized with anyone who bucks the party line at extreme risk of getting ousted, so bucking the party line is rare. The parties represent the will and ideas of the people that elected them, so the party has to fulfill the will of the people who elected them.

Of course, there are many parties and each party rarely has >50% of the vote so they form coalitions. In the majority coalition, a prime minister is chosen. The Prime Minister basically must do what the parties tell them or they won't be there for very long. Individualism is thrown away at the expense of the group, as is the nature of the government. In this case, the direct will of the people overpowers the will of the other autonomous actors in everything (not just national defense, but property rights and the enforcement of contracts).

Due to the organizations of the parties, the resulting nature of the political system is very different than the republican one. There's more centralization with little leeway for the system as a whole to adapt and take different forms. Also note that elections can be called at any point, so a group of people who feel like they can have an edge can call an election at any point to increase their majority. This idea and thought process continues to spit on the basic foundations of a healthy republic, which makes this kind of system inherently democratic and anti-republican.

Conclusion:

If the American political system can be run by a country, it's a superior system. However, that system requires a large, diverse populace and has the structure of an empire. In the American system, the power of the people is curbed and majority rule is, in many cases, pretty much useless. The interests and direction of the American system is multifaceted and difficult to take over to make into an autocracy. In this kind of political system, we see large amounts of mudslinging and internal volatility between factions in times of peace (this is a great thing that should be held in high regard). The only time the American system is united is in a time of war when the people view their liberty or when a critical national interest is threatened. The elites also hold far more power in this kind of a system.

It may seem like the regular tumults and mud-slinging between different factions is a bad thing, but it's necessary volatility. Volatility is disseminated immediately and volatility suppression rarely occurs. People can peacefully petition the government to have their grievances addressed, which creates volatility, but is the only way to result in policies that protect liberty.

In a more democratic system, there's far less volatility, less individual and local autonomy, and volatility is often suppressed. Certain minority groups are often targeted and attacked by the majority because this system is a majority rule based system. These kinds of systems are far less robust when even when working at their optimum than the American political model; however, these systems are easier to implement in most places. The people have more power, property rights are effectively shat on when the people deem it so as commerce, trade, finance, and risk-taking tend to be discouraged.

The democratic system seems far more appealing--particularly to socialists, leftists, and statists, but it's far more dangerous. It's liable to large blow-ups when the people deem that something be done even though the consequences could be disastrous.

The role of the people in the American political model is limited to removing bad leaders. There's a clear hierarchy of power even though everyone is equal in front of the law. In the democratic model, there is no limits on the wills of the people, which can result in large, violent blow-ups that end up with dictators or authoritarianism. It's due to this reason that constitutional monarchies are far more robust than regular democracies because there are simply more checks and balances.
Notes:
-The democratic systems do have constitutions and a rule of law, but the constitution and the rule of law takes a backseat to the "will of the people", equal representation, and other nonsense.
-Edit: This doesn't apply to countries Norway or Sweden that do have strong protection for basic rights and also have lots of autonomy. Even though these countries have high degrees of redistribution; they're also highly capitalist.

Political and Financial Implications of China's Growth Contraction

In previous posts, I've spoken about the Chinese economic/financial system and China's geopolitical conundrums. In my previous posts, I was rather negative, but this post will contain a lot of good news for China. In 2013, Xi Jinping and the new leadership took over. I'm gonna split this post into several different parts:
1. Anti-corruption Campaign
2. Chinese Financial System and China's Rebalancing
3. Historical Implications of Development Model and Current Circumstances (Falling Growth)
4. Possible and Likely Scenarios
5. Political Shifts Necessary for Rebalancing
6. Conclusion and Fragmentation Risks/Scenarios
I'll start off with the topic I know the least about: the anti-corruption campaign. Once we get that out of the way, I'll talk about the stuff I understand a bit better.

Anti-Corruption Campaign:
There's a lot of focus on the "anti-corruption" campaign, but I pay little focus to this. I view the anti-corruption campaign as a way to get rid of the guys in the old leadership and for Jinping to put his cronies in charge. I basically view it as a swapping of cronies from a leadership that originated in Beijing to a leadership that originates in Shanghai. This is my current understanding of what's going on, which is something I don't understand particularly well and certainly isn't my area of expertise. If someone reading this post knows more about this topic than me, please comment and tell me what I do not understand, know, or what I'm failing to grasp.

Chinese Financial System and China's Rebalancing:
As I discussed in my post on the Chinese development model, this model is nothing new and has its roots in Alexander Hamilton's American System (except Hamilton wanted high wages to sustain strong internal demand). The basic idea of the model is to turbocharge production levels by implicit subsidies to producers (corporations/governments) at the expense of consumers (households). These subsidies are:

1. Financial Repression (as defined by negative lending rates: interest rates minus NGDP growth)--In financial repression, consumers (primarily households) lose out on income from lower interest rates earned on bank deposits while producers get access to capital at very cheap rates. In a flexible financial system, households have savings options other than bank deposits. However, in a tightly controlled financial system like China, households have no other alternatives and are forced to put their entire savings in bank deposits.
2. Wage Suppression--China has held wages below productivity, which is a transfer from labor/workers (households) to capital/business (firms).
3. Undervalued Currency--Currency undervaluation causes the cost of imports to go up and the benefits go to the export sector. The urban middle class (households) are the primary consumers of imports, so they pay the price.

China is bringing down the growth rate of state directed investment, particularly in real estate. Investment in real estate is growing at <10% yoy right now (in February 2014, investment in real estate was growing >20% yoy) while investment in properties with over 144 sq. meters is declining by ~8% (which was growing 15% yoy in February 2013). Since investment accounts for most of China's GDP and GDP growth, it's no surprise that GDP growth rates are coming down.
Note: All of this data is from Stratfor, but the chart requires a subscription to see (I have a Stratfor subscription), so I cannot show it on my blog.

If the Third Plenum reforms of the current Chinese leadership are taken up, the Chinese economy will rebalance. The current Chinese model relies on subsidies from the household sector to the firm/corporate/state sector, which has created major economic, social, and political imbalances. A rebalancing means that the subsidies must be stopped and reversed, which is exactly what the Third Plenum reforms will do. How will the Third Plenum reforms rebalance the Chinese economy?

• Land Reform--Under the current system, land sales had to be carried out through local and provincial governments who were able to acquire land from peasants (households) for extremely low prices. Under the reform, the increase in land value will benefit the original owners as revenue will be transferred from local and provincial governments (the state/corporate sector).
• Elimination of Residency Requirements--Due to the process of urbanization that's been occurring in China, many have moved from the countryside to the city, but those that have moved usually don't have the residency requirement (hukou) to live in the urban areas. In other words, they lack many of the same legal rights as other urban residents. An elimination of the hukou would be a transfer from the state sector to the household sector by giving citizens rights instead of letting corporations and firms use these people as they please by detaining legal rights from them.
• Financial Market Liberalization--Slowly, the repression of interest rates and the constraints placed on the Chinese financial system will be removed. Remember that a requirement of the current Chinese model is a tightly controlled financial system because it allows the PBoC to set deposit and lending rates while preventing households from having other savings options. These reforms will transfer resources from the state/corporate sector to households.
• Other Reforms that I won't discuss--These include reforms like a removal of the one-child policy among others. It's not important what these reforms necessarily are, but the important part is that they redistribute resources from producers (corporations/governments) to consumers (households). Keep in mind that I'm not an expert on China's political situation.

Through all of these reforms, China is preparing to rebalance its domestic economy towards a consumption-based model by transferring resources from the state sector (or its proxy corporates) to the household sector. China will do this by a combination of legal reforms and a reversal of policies that led to the massive growth rates over the past few decades. Keep in mind that the rigidity of China's political system means that these changes have to occur slowly. If they don't occur slowly, the system will crash.

Historical Implications of Development Model and Current Circumstances (Falling Growth):
As I've discussed earlier and in previous posts, the Chinese development model is nothing new. In the 1900's this model was taken up by the US in the 20's, Nazi Germany in the 30's and early 40's, Brazil in the 50's and 60's, the Soviet Union in the 60's and 70's, Japan in the late 70's and 80's, Korea in the 80's and 90's, China in the late 90's until today, and probably other countries I can't think of. In this model, the results end up in a similar manner:

• A debt crisis that causes massive social disruption
• The excess capacity from the model, funded by middle-class savings is used to build armaments, weaponry, and ends in war and ruin
• 10-20 years of slower growth
• Or some various combination of the three

Notice that there has been a drop in China's growth rates since the leadership transition in 2013. Growth rates are currently around 7% and will probably fall below 7% by either March or June. I think we'll probably see growth rates near 6% (possibly even 5%) towards the end of this year with maximum growth entering near 3-4% in the next 3-4 years. A few years ago, the idea of China even growing at 7% seemed preposterous to many, but China will be growing at <7% from now until the end of our lifetimes (I think this is a very safe thing to say). To me, this makes the intention of the leadership very, very clear.

Possible and Likely Scenarios:

I'm happy to say that I do not see war resulting from the current model (at least the kind of war we saw in Europe during WWII). I'm not saying war cannot result, but it won't end like Nazi Germany since the middle-class savings haven't been used to fund weaponry and armaments. The Chinese leadership seems to have already started slowly transitioning the country for a different development model, which means war is off the table. If we do get wars and political instability, it'll be from within and inside of China, not some nutcase trying to conquer the world under a bullshit ideology because his economic system effectively forces him to do so to maintain power. I don't think Xi Jinping is a nutcase to say the least.

Although war is, for all effective purposes, off the table, I do think there is a possibility of a debt crisis. Remember that this model creates a massive run-up in private debt held by the corporate sector by providing capital at extremely cheap rates. A debt crisis occurs when debt/debt servicing capacity ratios hit debt capacity constraints. In China, debt is still continuing to grow, although the growth rate is starting to come down because of the falling growth rates. If China is unable to bring its growth rates low enough in time for debt to stop increasing to the point where the financial system hits debt capacity constraints, then China will have the kind of rebalancing the US had in the Great Depression where growth rates go extremely negative for a few years, unemployment spikes, and social unrest becomes a real issue. If this scenario happens, we'll probably see the Chinese government fall, massive chunks of China fly off into chaos, other parts of China (ex. Southern China) try to draw in foreign investment, and the rest being completely uncertain. The quicker and sooner China can reduce its growth rates in a sensible manner, the less likely this scenario becomes. As of right now, this scenario is highly unlikely.

I think the most likely scenario is the scenario where China experiences a decade or two of much lower growth. The reason I think this is the most likely scenario is because this is what seems to be happening. Investment growth rates in China are coming crashing down with investment growth possibly being negative the next year or two. Using very conservative estimates, Michael Pettis arrives at the conclusion that the maximum growth rates China can achieve are 3-4% over the next 10-15 years after China begins to actually rebalance. I believe there's a realistic possibly that over the next 15-20 years, China's growth rates once it fully starts to rebalance towards domestic driven consumption could easily be less than that of the US.

Political Shifts Necessary for Rebalancing:

I've discussed the reforms that are being slowly introduced by the Chinese leadership and the shifts in the growth model, but I'm gonna discuss the political shifts necessary for this transition to take place. Due to the nature of China's growth model, I've discussed how this model creates a very unbalanced nature to growth whereby elites and those well connected to the leadership end up getting very, very wealthy while households see their portion of the pie contract. This is basically how the growth model works. Rebalancing, as I've stated above, necessarily means a reversal of this trend. What are the political implications?

• The first political implication is that the power of the elite weakens. If the elites got rich by screwing over households and you no longer transfer those resources from households to the elite, the elite will no longer be able to get rich in the same way. Not surprisingly, we've seen a massive spike in EB-5 Visas from China into the US. The former elites seem to be trying to get out, which isn't only surprising, but has lots of implications.
• The second political implication is that we need some sort of political power shift from the elite to someone else. In a society with democratic institutions (this doesn't have to be a democracy), usually this power gets transferred to the populace at large. However, I think it's safe to say the chances of China turning into a democracy over the next 5-10 years are nil, which means that power will have to be transferred to someone else. This person is Xi Jinping, who is the head of the new leadership.
• In other words, we're likely to see China shift to a more centralized political system as China's economic system decentralizes. China will likely become more autocratic over the next decade or so as the role of the state decreases gradually. I think this is the only way China has a non-chaotic rebalancing.

Conclusion and Fragmentation Risk/Scenarios:

With that being said, all of the political implications in the section above implicitly assume that China will not have a chaotic rebalancing. If China decides to turbocharge growth again and says screw the rebalancing, all of these bets and most of what I've said no longer really matters. With that being said, I think (and certainly hope) the Chinese rebalancing isn't disastrous and doesn't lead to a lot of political fallout.

If we do see China hit debt-capacity ratio limits, China will enter chaos. The risk of China mismanaging its current rebalancing is probably the largest security threat to the world. Chunks of China may go flying off even with a good rebalancing, but at least the mainland should be relatively secure. With a bad rebalancing, shit will hit the fan and everything will go haywire.

Keep in mind that with a political system like China, there are always serious political risks due to the repressive nature of the regimen. If something is politically mismanaged, the risks of a political explosion and the consequences of such an explosion are massive. However, political centralization is, I think, absolutely necessary in order for China to have a non-catastrophic rebalancing, even though other risks can potentially be created.

What Do I Do on this Blog?

In most of my posts, I usually ramble on about whatever ideas or thoughts are floating around in my mind in that particular period of time, but this time, I'll talk about something different. I'll talk about what my perspective is and what I do on this blog, it's purpose, and so forth. I'll split this up into six parts:
1. Rigor and Building Frameworks of Thought
2. Probabilistically Thinking
3. Interfacing Across Different Fields
4. Systemic Thinking
5. Toolbox Approach
6. Conclusion

Rigor and Building Frameworks of Thought:
My primary training is in mathematics, statistics (more so probability), and engineering, but I venture out into other fields ranging from politics to economics to finance to geopolitics. So what does this allow me to bring to the table? Due to my training in mathematics, statistics, and engineering, I bring a very rigorous way of thinking. What do I mean by rigor? By rigor, I mean mathematical rigor. All mathematical rigor is really just a sound way to think about things. It allows us to build conceptual frameworks and models on the fly while understanding all of the assumptions (both implicit and explicit) we're making. It allows us to craft different ways of looking at the same thing as necessary while understanding exactly what the framework's limitations are.

With this rigor, I combine my understanding of concepts from economics, finance, politics, and a whole host of other fields. This allows me to literally construct models to find different ways of looking at all sorts of different things within a very short period of time. It allows me to understand a system's qualitative behaviors and possibly see various scenarios coming; however, there is something more important I have.

Probabilistic Thinking:
I have the ability to think probabilistically. What do I mean by this? I mean that when I look at the world, I don't see something that can be determined. I see something that's constantly shifting. When I look out into the world, I see something that has its own way of operating or working. I see that each individual is a small, useless cog in some self-organizing mechanism--an organism. I view economies and countries as living organisms that need to constantly be adapting and changing as times change.

In every part of every way we look at the world, there is uncertainty involved. On top of this uncertainty, the response of the system or the agent to the uncertainty of some dose is usually far more important than the dose itself (in mathematics, it's equivalent having a stochastic dose with a nonlinear response). For options traders, this concept is very easy to understand. Leverage and scale matter, a lot. What matters isn't just which direction the move happened, but the degree to which the move happened and each added degree of the move changes the scale of the impact on us.

Interfacing Across Different Fields:
I have interests ranging across lots of different fields and while I'm nowhere close to a specialized expert on each of these fields, I do have fundamental basics in fields ranging from politics to economics to geopolitics to finance to mathematics to even history. Thus, I try to build models that link across economic, political, geopolitical, financial, ecological, and other kinds of systems. I'm able to take my view of risk and overlay it across differing assumptions to give me possible scenarios.

Since I'm able to think soundly about different fields, I can integrate and across many different fields, that automatically gives me a huge advantage. Then, if you add in my ability to think probabilistically, I have a sound way of thinking about possible scenarios. Due to my understanding of probability, I also have the seemingly rare ability to understand and think about winner-take-all systems (very few people fully understand the implications of winner-take-all effects). This allows me to have a healthy way of thinking about risk, developing ways of thinking that's robust to what we don't know and don't understand, and visualize possible scenarios along with possible pathways for the development of the system that interconnects many different fields.

Systemic Thinking:
Due to my mathematical ability, I have a very easy way of thinking in terms of systems. When you add in all of the other abilities I bring to the table, I have ways of understanding things that few do. On top of this, I combine all of this with key concepts and ideas from politics, economics, finance, geopolitics, international relations, and so on. Through this method, thinking in terms of systems is relatively simple for me.

The ability to think systemically means not just focusing on what happens next, but on what the possible sequence of events are. In mathematics, we call these higher order effects. In the real world, the impacts of what we do aren't straightforward and linear. On the contrary, they're complex and nonlinear. My ability to think systemically allows me to understand complex, nonlinear systems better than most.

Toolbox Approach:
In my daily approach to things, I like to take what I call a toolbox approach. I have various concepts, ideas, and frameworks that stem across differ across fields. I like to be able to create and design whatever I need in order to better understand what's going on at a certain time about a certain system. How can I do this? As I stated, I build models using different concepts and ideas, make simplifying assumptions, and then add in constraints into the system. I'm able to shift the concepts/ideas, the assumptions, and the constraints as I please to understand the limit to each model or conceptual framework I build.

Basically, I create and build tools on the fly to do understand as much as I can. I don't try to regurgitate other models or the same models because that limits our perspective. Instead, I try to gather as much understanding as I came from any way of thought I can. Then, I integrate across each of these areas by making assumptions and adding constraints. This allows me to take a toolbox approach to understanding what's going on and how to engineer systems/my behavior (I bet on the stuff I say here too BTW) to create a response that allows the system/me to benefit the most.

Conclusion:
The central key to my approach is adaptability. My goal is to build a way of understanding, looking at, and dealing with things that's robust in the face of or gains from what we don't understand/don't know/don't know we don't know. This is why I take a toolbox type approach. If one model doesn't apply, I like to play with it and tinker with it in such a way where I can get something about the system from it while making sure I understand the model/framework/whatever's limitations.

My primary concern is not in eliminating error (such a view of the world results from stupidity and sucker thinking). Error cannot and should not be eliminated while volatility cannot be suppressed. Instead, we want lots of error while gaining from the corresponding error; volatility must be dissipated and information must be disseminated. In other words, we want to be adaptable. The key aspect I strive for in my approach is adaptability. I try to look at the world where I can change my mode of operation/understanding/engineering with the times.

I'm not looking for one theory or underlying framework about how the world works--I think that's stupid and pointless. Instead, I focus on a fundamentally sound process that's highly adaptable with little downside risk, primarily tail risk, that allows me to catch the upside from the positive tail.