Countries are firms that produce claims on assets and goods
If I were rewriting this today, it might read, “Countries are firms that produce claims on assets, goods, and income, and anything else they can dream of, in order to retain their privileged position.”
Countries exist for defense and internal justice. That’s the bare minimum; think of it this way: can there be rivals for defense and internal justice without a civil war? With many other issues, countries may be willing to share the load — charities that deal with the poor, in addition to welfare programs.
Countries have unique taxation rights, and though big businesses and other interest groups may bend countries to their will, the countries still have their rights. In a crisis, that could be significant.
FDR confiscated gold during a crisis. Cyprus swiped bank deposits in a crisis. Argentina meddles with pension monies. What could governments do as entitlement (welfare) payments rise more rapidly than taxes? I don’t know for sure, but you can bet there will be some desperate moves made, tapping many sources of income, transactions, and assets, as well as limit benefits via benefits taxation and other methods.
You could even see widespread purging of the SS Disability Insurance [SSDI] rolls in a real crisis. I think of an former neighbor, on SSDI because of a bad back who was regularly on his roof putting up and taking down Christmas lights. He always seemed hale & hearty to me, but there he was on the government dole.
To the extent that they can, countries establish the rules of the economic game. reserving the right to change the rules. It has to be this way, because aside from God, there is no greater power that can make countries change their ways by fiat. Yes, there are wars and civil wars, but those have no determinate outcome. No one orders a country around directly. Indirectly, things are different, as diplomacy may bring pressure that makes another country compromise.
The model where countries rule over others to get “a piece of the action” is a fair approximation economically of how countries act. Consider it as you invest, especially with foreign investing.
By David Merkel, CFA of Aleph Blog
