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Tuesday, July 19, 2011

Rules and Red Tape

When I worked as a city planner in my former "life-before-trading" profession, I used to play softball with my female and male co-workers after work once a week during the warmer months of the year and then we'd gather at the pub for a laugh. At first, there were only two teams and no rules...they would give me a chance and let me swing until I hit the ball. I was a crappy ball player, but my team didn't seem to care, and it was fun. Over the years, our little group grew into a "beer league" consisting of 12 teams...rules came into play after the addition of the third team and they grew exponentially thereafter each year. The game got serious and it was no longer fun. So I eventually stopped playing...I missed the camaraderie that we used to enjoy, but not the stress and hassle of all the seriousness and formalization that resulted from the growth of our once-cozy little group. Others who were also part of our original group dropped out along the way for the same reasons.

It seems that with the growth of any entity comes the establishment and growth of rules, as well. This phenomenon certainly applies to countries and their protectionist rules and red tape that have been implemented over the years in relation to trade between countries. As economic conditions falter and growth slows in countries, some rules get re-written and other new rules get added. This, of course, causes delays in the clearance of products across borders and costs money to the affected companies. Since these costs affect a company's bottom line, they end up being passed on to consumers.

At some point, consumers become vigilant in their budget and spending priorities. Today, the retail sales report showed a slowdown in year-on-year sales from 5.4% to 3.8%. Perhaps the growing costs of cross-border red tape is reflected in and partly responsible for the slowdown in retail spending. This would, of course, add pressure to the woes of the slowing economic growth, higher unemployment, as well as higher inflation currently surfacing in the United States. As a result, it appears as though a reduction in consumer spending would not necessarily equate with a reduction in the price of goods (or services) unless cross-border rules/restrictions and red tape are sufficiently relaxed.

It remains to be seen as to whether or not such a measure would actually materialize at some point, or whether taxes and interest rates will be raised to cover the shortfall on GDP revenues. Personally, I don't see this happening...only higher costs and higher taxes...so I doubt whether my theory would ever be tested.