In years gone by, powerful leaders exerting maximum control could plausibly claim they needed this power to protect the governed from attack or to lead them to “More” by taking it from others. Fighting with and taking from others was justified by presenting your culture as superior to others. From Imperial Rome to Imperial China outsiders were considered barbarians. Much easier to take their goods and enslave if you see them as inferior. In the modern world, these claims just don’t hold up. Recent German history illustrates the point. Prior to World War II Hitler claimed the Germans were being denied their Lebensraum. Invading Poland and other “inferior” nations were imperative to give them the territory needed for its natural development. Today even with unification Germany has less territory yet is much wealthier. With a declining birthrate, the country has had to actually import workers and allow in migrants. After spending 2 Trillion euros on joining east with the west, the country has no interest in taking over Poland or Ukraine anyone else.. Much more profitable to just trade with them. Closer to home, we would love to back what we spent occupying Iraq and Afghanistan. It surely didn’t gain us “More.”

As we pointed out in our last post, innovation was at best a very slow contributor to humanity gaining “More.” Top-down government and culture were essential. The educated elite made and recorded the laws, maintained calendars, and made the proper tallies. For most of mankind being an elite was gained by heredity. 10% or less of humanity used their positions to acquire whatever “More” there was to be had. The rest of mankind was mostly at the bottom. For thousands of years, this was mankind’s basic organization. Then the 15th Century A.D. came and the pace of innovation accelerated to the point it is the main determinate of gaining “More.” As change could now come from anywhere at any time we, in turn, have to be more nimble and flexible. Top-down governance of everything just can’t keep up with what is happening from the bottom up. The more controlling a government is the less efficient. If this wasn’t true the Soviet Union with its 5-year plans would’ve won the cold war.

Today the most controlling top-down governments such as Cuba, Egypt, North Korea, Iran, and Venezuela not only have failed to lead their citizens to”More,” but managed to provide “less”. The question is whether China will join them. Taiwan and South Korea liberalized from one party states to a democratic market dominated countries and gained much “More.” For a while, it appeared China was heading in the same direction. Then Xi Jinping took over. Facial recognition, the social credit policy and concentration camps for Muslims match or exceed anything George Orwell ever penned. It looks like the Chinese Communist Party is bent on joining the “we have to stay in power at any cost club”. President for life Xi seems aligned with those leaders with lifetime job security in we provide “Less” club. The one thing all the members have in common is they have maintained absolute control over their citizens no matter how much pain they have to inflict on their citizens just to maintain control.

China because of its size is of utmost importance to continue the march of humanity to “More.” The nation is at a crossroads. It either to moves to a responsive flexible society like its neighbors Taiwan, South Korea, and Japan and continues on its journey to “More” or it becomes North Korea or Venezuela on a much greater scale. Remember the Chinese Communists went down that road before with Mao’s Great Leap Forward. A failure setting China back for decades. Worse it cost 45 million lives. Is Xi out to break that record?

In our 1/2/18 post “2018” we suggested that the only group that could supply new funds to push the stock market higher was the public at large.  The figures for December and January are in they show this group’s participation was the greatest since the “Great Recession.” They bought pushing the market to the stratosphere. Unfortunately, with no more new money available, the market was set up for a change of direction.  The reason given for the subsequent sharp down move was rising interest rates.  The bulls argue the market hadn’t had a correction for an abnormally long time and was overdue. In any case interest rates are historically low. Even the recent rise and the projected Federal Reserve moves should be easily handled by worldwide growth. After all, economic expansions in the past faced much higher rates and still thrived.  In the US profits will be greatly enhanced by the recent tax revisions.  Wages and optimism are rising.  Solid reasons for expecting the economic expansion to continue accompanied by rising profits.  This should be reflected in higher stock prices.

On the surface this makes a lot of sense but what if the recent interest rate rise even from such low levels is indicative of a much more dangerous situation?  In our series the Long Journey to “More” the post Free Capital to Finance “More”  attempted to show how the world’s central banks led by our Federal Reserve had caused massive distortions to the traditional risk pyramid.  Instead of a base of relatively safe assets tapering up to high risk, we had a pyramid of mostly risky assets.  With so much risk already, investors might really be reluctant to go after the really high risk/high reward ventures.  We thought this might help explain the tepid growth throughout the era worldwide “Quantitative Easing.”  The theory behind the central bankers move to zero or negative interest rates was to drive up the value of risk assets giving their owners gains resulting in a “wealth effect.” This would result rise in greater consumption driving growth.  Some economists claim this indeed added to growing  GDPs.  The consensus in the US is that it added about 1/2% to our GDP.  Even granting this might be true, it has left investors far and wide with horribly unbalanced portfolios.  Across the board they’re out of line with normal risk tolerance.

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