For the average person making sense of what the papers are saying regarding the state of economy, means taking a degree in Economics. No matter how simplified it seems, trying to figure why interest rates should be lowered/raised to make petrol at the pumps cheaper, seems somewhat convoluted. Even when I worked in the City, and I heard the first murmurs of something being wrong with the American sub-prime markets, my initial thoughts tended towards thinking that the US Cattle markets had been hit by a decline in quality.

Its not just individuals who lay claim to being confused, for whole nations have adopted monetary practices blindly - with tragic consequences. Take for example the IMF, which is the vanguard for monetarism on the international scene. The IMF-led monetary policies, can be broken down to two basic measures: the devaluation of currencies (to make exports cheaper) and raising taxes (to increase government revenues); all in the belief that this would reduce government deficits, and thus pave an easy road for such nations to achieve Western style economic prosperity.

Countries such as China, Mexico, Russia and Yugoslavia who followed the supposedly immutable logic of monetarism learnt first hand, when their market economies broke down under unstable currency and excessive taxes. Not being ardent observers (or just too trusting), Argentina, Indonesia, Malaysia, Philippines and Thailand later followed the same policies, this time being way worse off. Devastating hyperinflation turned 1st world Argentina in the space of a few years into a nation that resembled Mali, while the Tiger economies of Asia, became caged parrots. Their devalued and worthless currencies meant the large dollar-linked debts they had accumulated (to fund their then fast growth) became impossible to pay off; resulting in Western institutions panicking about their investments and pulling out en masse - leading to a wholesale catastrophic collapse of the South Asian stock markets.

How can we bring about economics that are simple and intuitive to understand? The answer lies in Hard Currency and Low Taxation. Does that sound confusing or weird? Confusing would be understanding the interplay between Keynesian Theory and the Chicago School of Thought.  Confused are the hordes of statisticians that pummel us with formulae and indices. Weird would be wondering how Donald Rumsfield bides his now free time. Weirder would be imagining him on crystal meth.

Relax, I’ll explain what hard currency and low taxation actually mean in my next post. Especially the relevence of Islam in relating to these two issues.

For now though, just ponder a little about the recent history of two nations; Germany and Japan.  Muslims talk a lot about how both nations after being utterly destroyed, rebuilt themselves to become leading nations within the space of a few decades - in comparison to our own lands, which given the same span of time, have contributed as much to world prosperity…  as Jane Goody has.  What we forget to mention (or don’t really know) is that key factors to their economic growth were stable currencies and low taxes!

Germany ended World War II under high taxes, price regulations and a rationing system that had all but destroyed the monetary system. Cigerettes and Chocolate circulated as currency. In 1948, the brilliant economics minister Ludwig Erhard replaced the worthless reichsmark with a deutsche mark linked to gold (or more properly linked to the dollar, which was then still linked to gold). Erhard lifted regulations on prices and rationing, he also radically slashed tax rates. Germany’s economic recovery after the war was dubbed a miracle.

Japan had a longer period under US occupation, until 1950 in fact. From the end of the war, they had been given an insanely repressive tax system. Keeping them crippled was the US’s main priority (interestingly you can still draw the same parallels today). Then in 1950, as the US started to worry about China’s ideological steering, they simply just let Japan off the hook. Following their Meiji forefathers, Japan slashed away at taxes incessantly. Indeed up until 1971, Japan had dropped taxes year-on-year. The Japanese postwar economic miracle bettered even that of the Germans.

[Update: Continue reading here:  Islam, The Gold Standard and Low Taxation (Part II)]

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