Life, Liberty and the Pursuit of Happiness.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

This is probably the most important sentence in the American declaration of independence and one of the most important lines written in the history of mankind. While it doesn't list all human rights, it does list the three most important from which all others are derived. And it lists these three in order of importance.

All men are created equal. This is all humans have equal right to life, liberty and the pursuit of happiness. Nobody's rights come before anybody else's. Where a conflict of interests occurs the rights of the protagonists should be balanced according to their order of importance in resolving the dispute. This means that where the pursuit of happiness would result in another's loss of freedom or where one persons freedom would result in the loss of life of another then the judgement should go in favour of preserving the greater right.

1. Life. This is the paramount gift to be cherished and protected above all things. One person's life is above the liberty and happiness of the many. No person should have to fear for their safety or health and well-being. No war or other act of violence can ever be justified if it is not conducted for the protection and preservation of life. All threats to liberty or happiness must be repelled by other means. No person should ever be punished by forfeiting their life. The basic requirements of life are food, clothing, shelter and healthcare. A sufficient level of these should be provided to all and not be subject to price gouging or extortion.
2. Liberty. All individuals should be afforded freedom of movement, thought, belief, sexuality, and to be who they truly believe they are in as far as this freedom doesn't impinge upon the right to life or the freedom of others. No person should ever be considered the property of another. No person should be contracted or indentured or otherwise retained without a fair and reasonable option to exit the contract. Minors in the care of adults and those suffering an impairment which prevents them taking full responsibility for themselves should not be subjected to any loss of liberty beyond that which is necessary for their safety.
3. The pursuit of happiness. When a person has life and freedom they will want to make that life better. To do this they need education, an opportunity to contribute to society and to acquire better possessions and life experiences than they already have. Those who employ others to help them achieve greater success through business or other endeavour should do so without denying those person's their liberty or opportunity to pursue a happier future.
4. The rights of the group do not supersede the rights of the individual. This is where the surrender of one's conscience to the 'will of the group' leads to acts of evil and where absolute power corrupts absolutely. In the history of humanity murders, torture, genocide and other acts of brutality have been sanctioned and carried out by individuals pursuing a 'greater' cause. Be it an organisation, institution. religion or country, following orders is never justification for denying others their fundamental rights.
5. A crime committed against an individual is more serious than the same crime committed against a group. This is because the consequences to the individual are more severe. The members of a group share those consequences. When judging a crime the consideration should be to how much each individual victim has been affected. A person who steals $100 from a pensioner commits a greater crime than a person stealing $100 from a bank. If the bank robber commits the crime by brandishing a gun then this act of violence against the bank teller is an entirely more serious matter and should be judged according to the affect on the teller as a human being than upon the bank.
6. Organisations and institutions exist for the collective good of their members. Organisations should therefore be transparent and accountable to their members. While organisations are made up of people with needs and desires, organisations are not people and should never be treated on an equal footing with any individual human being. In disputes between an individual and an organisation the counsel for the organisation must prove that individuals within that organisation would suffer a greater injustice than the individual with whom they have a dispute.

Greed - It makes the World go Round

Is money the root of all evil or is the love of money the root of all evil? What makes one person richer than another.

There is definately a great divide between the world's wealthiest people and the world's poorest. In western countries the working classes enjoy lifestyles that were beyond the imagination of kings and emperors a few hundred years ago. It's not that they're richer than those kings and emperors but that science, technology and manufacturing have brought us a phlethora of new gadgets, foods and sensory experiences. We are also more educated and able to see the world around us in different ways.

But the poor of developing and undeveloped countries still live peasant lives, victims of the elements, unscrupulous landlords and corrupt officials. They are no better than the poor of any era going back to before the Romans and ancient Egyptians. And even though western workers live comparative lives of luxury they still struggle under the burdens of debt and inflationary pressures on the cost of living.

A great number of people desire wealth and the benefits of no longer having to worry about money. But what is it that makes a person wealthy or rich? Is it purely having a lot of money? Is it the cars, mansions and private jets that the mega rich own?

What makes one person richer than his peers is simply having more of something everyone around him wants. If you gave everyone a huge pot of money you wouldn't get a lot of rich people. Instead you'd get hyper-inflation as they have in countries like Zimbabwe. The modern economy is built around supply and demand. Money itself is just a commodity that is bought and sold based on its perceived value. The Federal Reserve has been stimulating America's economy by over supplying money and in the process devaluing the US Dollar. This makes US products and services cheaper relative to its international competitors. Conversely Chinese demand for the Australian coal and metals is driving the Aussie dollar up.

China has a cheap resource—human labor. There are other countries that may be able to match it for price but China has the authoritarian resources that enable it to mobilise its workforce in ways no other developing country can. Its grand structures from ancient times such as the Great Wall and the buried army tell us that with cheap or slave labour humans can achieve anything. Even many of America's greatest construction achievements like the Hoover dam and Golden Gate bridge were built during the Great Depression when many Americans would work for any price. These days many western countries struggle to budget for new infrastructure while China builds dams, bridges and modern buildings that defy belief. 

But China's rise has also allowed westerners to buy most of their material needs at prices we couldn't imagine 10 or 20 years ago. Yet it has a negative impact on the lives of poorer people. Cheap commodities frees up money of wealthier middle class for other pursuits such as investing. And property is an important portfolio asset. So the houses that cost $100,000 when toasters cost $100 now cost around a million in the age of the $10 toaster. More and more people are becoming enslaved to their mortgage.

The huge amounts of funds being channelled into the financial markets through noble schemes like superannuation and 401K has caused rampant inflation in the sharemarkets over the last 30 years.  It has allowed speculation and greed free reign. Fund managers are given billions of dollars to play poker with. They pour it into rapidly rising equities focused only on their bonus and commissions and not on the future ramifications of the over inflated bubbles they help create. The only share purchase that actually helps the economy is the IPO. Its the only time the company represented by those shares actually gets a payout which in turn allows it to invest in research and development and jobs. If you aren't getting a reasonable return from dividends for your share purchases then you are speculating, hoping your supply will be outstripped by someone elses demand.

As Bob Katter the Australian politician puts it free markets are greedy people doing what they want. And he has a point. Too much government control stifles innovation. But too little allows money to be concentrated in too few hands. There are the arguments for socialism and there are the arguments for free market economies. Each side argues that its position is the right one. But like the world's weather system which tries to balance heat and cold through El Ninos and La Ninas the movement of money should also be rebalanced by moves from socialism to capitalism and back again. It was socialism that pulled England out of the mire of post WWII. It was Thatcherism that allowed it to emerge from the stagflation of the 70s and 80s. But the greed is good mentality has lead to the Global Financial Crisis and brought the west to its knees.

When the free markets are powering the economy upwards governments need to increase its tax revenues and put funds into paying down debt and into building future funds. When the inevitable crash comes the government needs to use that money to build new roads and infrastructure to keep the economy ticking over. Governments needs to identify the shortages and develop policies to increase supply. The housing shortage in Australia's main centres is a prime example. Australian builders are among the best paid tradespeople in the world, it is almost impossible to find Sydney property for under half a million and rents are soaring.  Everybody needs a place to stay. So Australians are working longer and harder to give more money to landlords and banks. We are slaves—but not our bosses.

Is Currency Investing Wise?

Few people look at foreign exchange as market to invest in. It is promoted by Forex dealers and trading platforms in such a way to maximise returns for the brokers and be as reliable as the blackjack table for returning money to traders. For instance a $100,000 contract can be bought or sold for around $1000. This may mean you are controlling a huge amount of money at very low cost but if the market moves 1 cent against you, your $1000 will be gone. The risk is huge if you don't know what you are doing. Trading platforms offer a range of indicators and tools like stop losses to manage risk but these can often make it easier to lose money than make it.

Trading any commodity or equity is risky and usually far more risky than investing. The difference between an investor and a trader is that traders look purely for short term capital gains. Investors are interested in more than capital gains short term or long term. They will look at the underlying value of the product being bought or sold, its potential to earn income while they own and what the hidden costs of ownership are. An example is the property investor who must weigh up rental returns against mortgage repayments and maintenance costs.


So how is buying and selling money a way to invest?

Think of it more as a way of moving your money from one country to another or investing in countries. When you buy shares you are investing in companies. Buying Forex is investing in a country. At any time one country is doing better economically than another. As I write Australia is leading the other western economies because of its resources based economy and the growth of China, strong jobs markets, moderate inflation and interest rates above 4.75% means its currency the Aussie dollar (AUD) is far more attractive than the USD. So in the last year it has risen over 30% which is an impressive return on investment for anyone buying AUD in April 2010.

But capital gains like these are fickle and fear drives the markets down faster than sound economic reasoning drives them up. Just like share markets, when fear is in the air money exits foreign currencies and goes back into American accounts where it is perceived as being safe.

When this irrational fear is driving markets lower, savvy investors will go looking for reliable bargains. They can buy shares in a company with solid earnings and a good dividend or they can buy a piece of a country's economy. If you sell your USD for AUD, you can get 4.750% - 0.25% = 4.5% interest. This is far better than the interest offered by any US bank or even the dividends of many top US companies.


How do you trade currencies?

Before you do any investing, read, research, learn the way currency markets work and seek out professional guidance. Don't use the information provided in one article as an inducement to go and lose money.

If you have the means you can move money between international bank accounts. But most ordinary people don't. Forex trading accounts can provide a means provided you research all the providers' options and fees and choose the right one.

Some trading accounts allow you to hold all or part of your account in foreign currency without being 'in the market'. This allows you to trade without trading. It is useful if you believe a currency is undervalued or overvalued and want a lower risk way to achieve capital gains. But using this method to trade or invest will usually forgo the benefits of earning income from foreign interest rates.

Look also for accounts that allow you to vary the leverage on the trade. Don't enter trades at 1:100 if you can avoid it as you will find yourself gambling around $1000 for every 1 cent change in value on a standard contract. This doesn't allow you leeway to manage the volatility in the currency market. If you are trading with somebody else’s money make sure you use stops. Lower leverage will allow you to place them further from the action.

Understand the interest rates offered by each country. This is a major driving force behind the movement of money. It isn't just the current rate but the prospects of rate rises in the short to medium term that will determine the value of a currency. Interest rates are used by central banks to control inflation so look at the economic health and vitality of the country. Understand also the economics of a country. What does it sell to earn money? Is the price of those commodities going up or down?

Make sure you know the way the trading account charges you for the money you borrow each time you trade. Many will charge the interest differential if you sell a higher interest currency to buy a lower interest one. Doing this is not a wise investment decision but may be a good trading choice if the currency sold is overheated. If you believe several higher interest currencies are due to fall in value against a lower interest currency you should sell the one with the lowest interest rate to keep the daily fees low and avoid profits from capital gains being eaten.


How do you invest in currencies?

The investment potential of trading currencies comes when you sell a lower interest currency like the USD to buy higher interest currencies like the EUR, AUD or NZD. Some currency trading accounts will pay you a percentage of the interest the traded money is earning while in a foreign currency. FX account providers do make money from the interest differentials so look for one that returns a reasonable percentage to the trader on positive differentials. When a trade is earning you interest you can hold for longer in anticipation of more capital gains as that income from interest keeps the perception in the market that your position is a good investment.

Timing in Forex is very important and difficult to predict. Unlike a good share which can rise exponentially in value. Currencies trade in relatively narrow bands. The AUD has a 10 year high of USD1.10 and low of USD0.48. For the range to grow much wider than this either the US or Australia would have to default on its debt repayments or become an economic black hole. The same can be said for other major currencies. When a country's currency is too high its ability to trade profitably diminishes while its ability to buy foreign goods goes up. This can fuel inflation and interest rates but ultimately in an economy that relies on foreign trade for income the market will cool off as jobs are lost and interest rates fall to stimulate the economy.

In the end it is all relative. Modest growth in the US is perceived by the markets as being of greater value than high growth in rest of the world so a small increase in US interest rates or change in US monetary policy could see the higher interest currencies fall in value while still providing better income from interest rates. But these changes affecting US currency would likely also see other investments products like shares and futures fall in value as well.

Liquidity, Superannuation and the Markets

 Open another browser window and point it to finance.yahoo.com. Click on the chart for the Dow Jones (^DJI) and click on the Interactive chart link on the left. Expand this out to include all the years from 1960 or earlier to the present. What do you see?

The chart is ascending slowly but steadily from 1960 to just after 1980. Then the slope increases and gets steeper still. Not only does it get steeper and steeper, it becomes more jagged. From 1980 to the peak in October 2007 the Dow goes from 785 points to 14164 or 1700% growth. Did America's economy grow 18 times larger or its population increase by 18 times? No. This phenomenal growth is due in large part to the increase in liquidity into the markets. Of course a lot of America's top companies have increased their international presence and are returning profits in foreign currencies. But their share value growth has seemingly outstripped this.

The 401K can take some of the responsibility for the exponential growth. It came into effect in the early 1980's which happens to be around the time the share markets started to boom. When workers entrust their retirement money to investors they want to see returns better than the bank. Currently the average dividend on Dow Jones component shares is around 2.66%. Interest from banks on fixed term savings are around 0.6% to 0.9%. So shares would make a better investment assuming market stability. But the real attraction in shares is their ability to realize significant capital gains. And they have certainly done that.

Capital gains are often seen as a form of bigger fool investment. You buy something in the hope that around the corner there is a bigger fool waiting to buy it from you. Reliable wealth comes from income producing assets. Business profits, salaries and wages, royalties from intellectual property, rents, dividends and interest are all forms of income. They are certainly not assured as market forces will always dictate what is worthy and what is worthless. But they come from fulfilling certain needs and wants in society and are usually more stable. Significant capital gains on the other hand are temperamental and rely to a certain extent on hope, desire and greed.

There is nothing wrong with getting capital gains from your investments. But focusing on them is the wrong way to assess the quality of an investment. If an investment pays an income you can measure objectively: for instance how long before your investment has paid for itself. And if it is returning enough you can budget to live off or reinvest the returns without eating away your capital.

Now returning to 401K or superannuation. If your retirement funds are tied up in the share markets you may see phenomenal growth when markets rise and also phenomenal depreciation when they fall. The issue is that the liquidity (extra money) that comes from funds creates huge demand for the finite number of shares. Your investment is inherently relying on continued demand. In all markets where there is a surplice of money there is inflation. Things become overvalued. If the liquidity dries up and the bubble bursts you soon find yourself left with very little value, as happened in the sub-prime mortgage crisis. You need to take an active role in deciding when and where your money is placed to avoid being caught in the next bubble.

The smart investor will look at the markets as cyclic. This is due to money flow. When interest rates are low money flows into the markets and the value of shares and property over-inflate. When the interest rates go up the share and property markets correct. This is exacerbated by the huge amounts of capital held by investment funds and their ability to move it into and out of markets at will, usually in response to reserve bank rates and other market forces. You need to think counter intuitively. When interest rates are high look to buy quality shares and property but wait till you see strong evidence of deflation. When interest rates are low and inflation is climbing look to sell, especially when the talk on the street is that interest rates may be about to go up. But if you find an investment that is returning 5-10% or more on its purchase price keep hold of it for as long as it does this regardless of the capital gains and market fluctuations. As long as it is generating income and its balance sheet is good it will always bounce back when the market recovers. Quality should always be assessed by taking into account business fundamentals and rate of return on investment.

Is Outsourcing a Good Idea for the Economy

When the term outsourcing is used it means taking the functions of a business that don't produce income and contracting them out to other companies that specialise in these fields. Usual areas for outsourcing are IT, billing and accounting, payroll and office administration. Indeed small businesses are used to sending their paperwork down the road to the accountant's office or calling the computer shop when the PC won't boot.

Outsourcing can create greater efficiency by allowing another company to assume the costs and risks while providing your business with an SLA driven service for a predicable cost. Those costs can in turn be placed on another column of the balance sheet providing further tax benefits through smart accounting. In recent years many medium to large enterprises have moved a lot of their business functions out of the business. But they have also moved a lot of functions and processes more closely aligned to their own service offerings to outsourced service providers, many of these overseas.

If you ask this of big business or of emerging economies in India, Philippines and Malaysia they will say this is a great idea. Businesses can maximise profits while minimising costs. If a company has an International presence they can outsource to another branch and effectively offer these overseas services over their internal network.

But where does this flexibility leave countries with strong currencies and high wages like Australia? The Labour push to introduce a National Broadband Network can only further increase opportunities for companies to outsource their workforce to other lower wage countries. In fact it won't just be the low income jobs that will be affected such as call centres and manufacturing. We've already seen those jobs go. It will also be possible for Australian consumers to consult with Doctors, Lawyers and Accountants in other countries.

You may question why anyone would want to trust a professional from another country with serious health, legal or tax issues? Well what if they've received Australia qualifications and certifications from Australian Universities and asscociations? And they'll be video conferencing on links so clear you'll feel you're in the same room. Australian education centres may be affected by the high Aussie dollar but they can also reduce costs by offering more services online to foreign students. Those students may never have to leave Mumbai, Kuala Lumpar or Manila to get a good Aussie education.

So what will be left for Aussie workers? Well if you can lift a spade or hammer, drive a truck or pour a good cup of coffee you will have job opportunities. It will also work in your favour if you can sell. You just need to be prepared (when not working from home) to walk into an office and log into a thin client that offers you a desktop session running on a server thousands of miles away. When you make a sale and fill in the forms, the product or service will be dispatched or set up on the other side of the world and shipped/emailed to your client. When they call you incessantly for support it'll be because they don't like having to repeat themselves over and over to your company's call centre staff. It'll be you who has to do that. 

If the Australian government is serious about protecting Aussie jobs it would do away with Payroll tax and other discouragements to business hiring local staff. It would also provide inducements for companies to hire locally. After all income tax is a big part of the government's income so it makes sense to encourage local job creation. Relying on individuals and businesses with dwindling incomes to spend locally is not going to work. There needs to be GST charged on international parcel deliveries to protect local retail jobs. Businesses of course can claim this back through the usual means. And a tax on bandwidth which is getting cheaper with every mile of the NBN would also assist with funding local projects.

Why were we so keen to follow the US economic model?

Once the greatest economic power on the planet the USA is now burdened by huge debt in excess of 14 trillion dollars and in danger of losing its AAA rating. Of course that 14,000,000,000,000 is in USD and one way to reduce it is to devalue the USD. This week following the months before it has seen the USD sink to new lows against the major currencies.

It seems that the pure capitalist model where government is kept small and everything is privately owned (except for money guzzling armed services that it uses to invade oil rich nations with autocratic rulers it has decided it doesn't like anymore) has done little to help America stay strong. China on the other hand has a government that owns and  controls a huge amount of industry, mining and utilities. Not only that, China owns a huge proportion of American debt, which US governments are seemingly powerless to repay.

How can the US government repay its debts? It doesn't believe in raising taxes. And it doesn't believe in owning anything that makes money. But it does love spending money it doesn't own on things that go bang in other people's back yards.

Its governments say it is the defender of democracy and freedom and yet in parts of the US it would seem the only entities with democratic rights are the mega corporations. For instance a well known seed producer can sue a farmer if its genetically modified plant materials are blown by the wind onto his property and fertilise his crops; and a water company can sue home owners for installing water tanks. Where's the justice in these situations.

For a long period during the 1980s, 1990s and early 2000s other western countries like Australia and New Zealand moved away from their 'socialist' style governments to a more US styled democracy, selling or privatising their assets. Fortunately they did couple this with fiscal responsibility, keeping foreign debt under control. But if a government has no assets what is it going to do when times are tough and tax income falls? It ends up borrowing money (or selling bonds).

The path to true wealth is simple. You need to create and grow multiple income producing assets. Don't look at the capital gains aspect of the asset's value but rather look at the residual income from things like interest, dividends, rent or turnover. Governments should do the same. They should own banks, utility companies, businesses and rental properties. They shouldn't try to weaken private enterprise or lessen competition by doing so but they should also keep big business honest, especially in areas where competition has been reduced. But government enterprises do need to be more closely monitored, to keep them competitive and free of corruption.

By not limiting itself to borrowing or taxing to raise income our governments could also achieve remarkable GDP growth  and improve the living standards for all citizens. That's what democracy is all about.