Dienstag, August 31, 2010

An Uncomfortable Truth...

Thilo Sarrazin, a German politician (SPD) who is on the board of Germany's Central Bank (still around after the establishment of the European Central Bank for reasons too arcane to go into here). He's professionally trained as an economist (PhD Bonn 1973) and is in a world of trouble right now. The SPD is thinking of throwing him out of the party and the Bundesbank (the central bank) is under pressure to fire him.


Because he isn't afraid to rattle cages and point out some very, very unpleasant truths.

He recently wrote a book called ""Deutschland schafft sich ab", or "The Cancellation of Germany" (this is often translated as "Germany Abolishes Itself" or "Germany Is Doing Away With Itself", but those translations are, I think, clumsy).


This is a popular quote:

„Integration ist eine Leistung dessen, der sich integriert. Jemanden, der nichts tut, muss ich auch nicht anerkennen. Ich muss niemanden anerkennen, der vom Staat lebt, diesen Staat ablehnt, für die Ausbildung seiner Kinder nicht vernünftig sorgt und ständig neue kleine Kopftuchmädchen produziert."

My translation:

"Successful integration is the result of those who integrate. Anyone who does nothing (to integrate, ed.) deserves no recognition. I don't have to recognize anyone who lives off of the state, who rejects the state, who fails to ensure that their children become productive members of society, and who only produces new little girls wearing headscarves."

Provocative? Yep.

But not in any way different from what, say, Rush Limbaugh would say: he has the facts on his side and is in the process of goring the sacred calves of modern-day German liberalism, goring them beyond the ability of any veterinarian to save them.

While many have called for his head, there are dissenters who think that maybe the man has a point.

One of them is here. Unfortunately, it's only in German, but the article was written by a woman, muslim, with a doctorate in Sociology, who was used by Sarrazin as a reference in his book.

His fundamental thesis is that Germany is removing the basis for its success: demographic and societal factors that have led to the success of the German economy (and society!) are being dissolved, one by one, through political errors and mistakes that are leading to a different society than Germans realize. Not today, not tomorrow, but inevitably the pillars that support Germany's wealth creation and hence economic and political success are being undermined and destroyed, in some cases actively by those with agendas that do not match those of the German mainstream.

Fundamentally, the autochthone portion of the German population (meaning the "German" Germans) has too low a birth rate and that the German population is starting to decline. The non-Germans have a significantly higher birth rate, which leads to the population of those living in Germany (but not the Germans!) remaining relatively constant, but with problems.

Part of the problem is schooling: the schools with the smallest sized classes and the largest budgets are producing students with the lowest abilities and qualifications, a theme that, unsurprisingly, correlates with the US experience: the classic school system in Germany, for all its warts and problems, does produce kids with some great skills. Unless, of course, everything is watered down to meet low expectations for immigrant kids whose parents couldn't give a shit.

The other part of the problem, of course, is that the German birth rate is too low: while Germany provides support for families in the form of monthly subsidies for kids, etc., the core of the matter is that Germans have been having fewer and fewer kids not merely for a few years, but rather for over 100 years. It is the result of improved living conditions and the realization, for women, that when they do have kids, they are going to survive the first couple of years and that there is no need to have five or six kids in order to have two or three reach maturity. While obviously not true of all individuals, the tendency of wealthier societies to have fewer kids is normal.

So what is to be done?

Simple: immigration. It is the only real way to maintain the number of workers that Germany needs to continue its economy without decline. The problem? Current immigration laws prefer immigrants with relatively low qualifications, a remnant of the 1950s immigration policies during the "Wirtschaftswunder" when untrained factory workers were needed in large numbers because WW2 had decimated that cohort of workers in Germany.

Today? There are enough blue-collar workers because the industry has moved from blue-collar work to greater and greater value-added: this is also characteristic of developed economies and societies.

German immigration policy is broken: the facts speak volumes, with 65% of immigrants not willing to be integrated, with 15% of second-generation residents unable to speak German at all (and relatively few able to speak it like a native, i.e. without heavy accent and with proper grammar and vocabulary).

These are the uncomfortable truths. Sarrazin is under attack because he has the numbers on his side, the facts: his opponents aren't interested in facts, but rather in protecting the holy calves of their belief system. They are the ones doomed to failure, that now have a track record of 20 and more years of failure, that are sitting on the railroad tracks with their fingers in their ears, singing loudly so that they cannot hear the locomotive approaching.

What Sarrazin is saying is not racist, not populist, not derogatory and insulting. Unless you think that the truth will not make you free, of course.

The danger? Two-fold.

One: that Sarrazin's warnings will be dismissed out of hand and actively defamed. That is already happening.

Two: that Sarrazin's warnings will be taken out of context, abused by right-wing groups (Germany, of course, is particularly sensitive to this because of fairly recent history...) and outright racists and opportunists.

A sensible discussion could defuse this entirely. Of course, denying that there is a problem and denying that this is a topic that needs to be addressed makes the situation worse.

If you are not a part of the solution, you are part of the problem.

Dienstag, August 24, 2010

Worth Watching...

...not the least because it is telling the truth. The financial policy of the Obama Administration is unsustainable. Period.

VAT Redux...

I think that it can be taken for granted that the US will face severe fiscal and financial restraint whilst dealing with the deficit that the Obama Administration has created for the US taxpayer (and yes, it is his problem, not one he can blame on others: the fact that he tries to underscores the weakness of his character...).

One approach to increase tax revenues would be to impose a VAT, a Value Added Tax. This is a tax on every stage of value added in the economic chain: when raw materials are processed into semi-finished goods, a tax is added; when semi-finished goods are transformed into factory goods, another tax is imposed (subtracting the first tax, though, to avoid double-taxing); when the goods move from the wholesaler to the retailer, another tax is imposed (subtracting the previous step, of course); and when the goods are finally sold, they are taxed once again. Hence, for instance, a 20% VAT tax is imposed at every stage of production: when raw materials worth $10 are transformed into semi-finished, they are sold for $12 and $2 is sent to the government; when they are input into a product that is sold to a wholesaler for $100, $20 is added, but the $2 is discounted, so that the government gets $18 from the factory; the wholesaler sells for $200, adding $40 but discounting $20; the retailer sells it for $400 ($80 VAT) but discounts $20. Hence $2+($20-$2)+($40-$20)+($80-$40) = $80 for the government on the final sales price of $400.

Of course, this is a marvelous way to raise revenues: it takes consumption, most of which is fairly involuntary, as we consume to live (and it does tax those who prefer to live to consume...) and turns it into a revenue generator of significant proportions.

Of course, there are downsides: it is highly regressive, tax those who can afford it the least proportionally the most (and for this reason alone should be rejected by all politicians who claim to represent the little people...), and while you can free certain necessities (or impose a lowered VAT) such as food, housing and clothing, the tax burden remains on those who consume.

There is, however, another component that people have completely forgotten to include, and one with sever and unintended consequences: the VAT must also be imposed upon imported goods when they arrive, in the form of an import tax that is the same level as the VAT. Hence when you, coming from a country without VAT, export to a country with VAT, your goods have a import tax placed on them at the port of entry that is equivalent to the VAT, with the importer paying for this.

The unintended consequence of a US move to a VAT would be this import tax, which will be viewed by many as a major change in the US policy of freedom of trade: the imposition of a VAT in the US could be interpreted as an act of protectionism, leading to a significant worsening of international trade relations.

Just something to think about when y'all are contemplating how we are going to pay for Obama's Follies.

Freitag, August 20, 2010

The Best Proof...

One of the best proofs of the worth and efficacy of a political system is what others, not inclined to be sympathetic to the system, think of it.

This is interesting.

Key quote:

Liu's backing of democracy is purely practical, and really has nothing to do with political beliefs. He describes American democracy as a system designed by a genius for effective use by stupid people. As Liu puts it, ''a bad system makes a good person behave badly while a good system makes a bad person behave well. Democracy is the most important reform for China, for without it there can be no sustainable growth.''

That's Chinese Lieutenant General Yazhou Liu, by the way, a political officer in the Chinese military.

Can't get a better endorsement for the wisdom of the founding fathers than this.

Of course, even a system designed by a genius for effective use by stupid people can be destroyed by those who think they can do it better. No system can be designed to be fool-proof, especially when those who meddle with the system in the name of "progress" are the biggest fools.

This also points to ... interesting changes going on in China.

Liu points out that communists can compete in a democratic environment, especially since Chinese communists have abandoned the most destructive aspects of traditional communist doctrine (state control of the economy). But growing corruption, especially among communist officials, is crippling China and threatens the economy, as well as continued communist control of the country. Better to compete in a democratic environment, and risk losing national power, than to proceed with the current system and risk everything. Liu is being listened to by a lot of senior officials, both military and government, who back clean government. But the "dirty communists" are opposed, and that is a formidable opponent for someone like Liu.

Liu is a special kind of officer. He's a political officer, a job invented by the Russians during the Soviet period. The political officer is assigned to units from company size on up, and is second in command of the unit. The political officer is responsible for the political loyalty of all the officers and troops in the unit. He also acts as a (non-religious) chaplain, morale officer and publicist for the unit. These days, political officers rarely say much about communist doctrine, as few Chinese care for it. Political officers do serve as a source of grassroots information on what's going on with the troops, and the word is that corruption is a big issue with military personnel as well. Change is in the air, whether communist officials want it or not. Liu offers a way out, but there's no guarantee that enough of these officials will take it.

If the events that Liu hopes for come to be, this would be, for the Chinese, the best of all worlds. Clean, non-corrupted government could be that which saves China from collapse and chaos. The US system of checks and balances has been proven time and time again to be the best system to prevent corruption of the entire government: while parts go bad now and then (and more now right now than then...) it is virtually impossible, despite the best efforts of the Chicago machine, to corrupt all parts of the government within a single legislative period.

Whether they continue to try during the rest of the President's term is yet to be seen.

Donnerstag, August 19, 2010

Accountants, Transparency and Sheer Idiocy...

There are days when I come close to despair.

I've just read about how the accountants want to handle leasing.

Leasing is an attractive business because it gives users the usage of a piece of equipment without having to add it to their capital stock, returning it to the owner when the leasing period is over. It's not exactly rent for that piece of equipment, but rather the customer pays for the depreciation of an asset plus costs plus a profit for the owner of the asset.

As such, it belong to the capital stock of the owner and is a cost for the user. The owner takes it off-balance, as it is part of capital stock and can be taken off-balance, while the user never puts in his balance beyond the simple position in the cost sheet.


Both user and owner are supposed to put leases into their balance sheets "to better judge the potential risks".

Insanity: the effect that this has will be wide-spread and, I sincerely hope, unintended.

Basically, the new rules will require leasing companies to carry the remaining time period of the lease as a debt position, with a review of this debt position (since it is a position that will be carried out in the future) every 3 months as to the ability of their customers to pay their leasing costs. For the leasing customer, the sum that has to be paid yet for the leased good must also enter into the balance sheet because it is a future cost that must be included, as a leasing obligation.

Ye gods.

While this sounds like a trivial thing, it is most assuredly not: it will mean that companies which use leasing extensively will see a significant increase in their debt, even though their debt has not, actually and really, changed. Sudden increases in debt levels, however, trigger bank reviews of customer creditworthiness, usually leading to higher costs due to increased risks. Under normal conditions, this is true: however, in reality, nothing has changed.


So what, you say? It's just that in 2013, when this becomes the rule for accountants, the balance sheets of thousands of companies will take a turn for the worse, We're not talking a couple of bucks, but rather an increase of around 25%: there are companies, such as airlines, which will then see their debt skyrocket, as they are heavy users of leased airplanes and equipment. What do I mean by skyrocket?

Well, Lufthansa, for one, had €2.5bn in net debt on its books in 2009, with an additional net leasing obligations of €2.251bn. This new rule means that Lufthansa has then not €2.5bn in debt, but rather €4.751bn, an increase of no less than 90%.

This means, not only for Lufthansa and other airlines, but in general, that in 2013 there would be a significant worsening of cash flows, as leased - not owned, but leased - equipment, buildings and the like have to be included in the balance sheet, even though these are a pure cost and not a capital acquisition.

This could well mean the virtually complete loss of leasing as an alternative to capital spending, meaning not only the loss of jobs in the leasing industry, but also the loss of flexibility in planning, as while today you can expand capacity by leasing something for a short period of time, in the future you'll have to buy the equipment and depreciate it yourself, tying up capital.

It's also sheer stupidity for the real world, since you are worsening the financial shape of a company without them actually doing anything: given the fact that this will hit business in 2013, about when the upswing will finally have reached everyone, it's like tossing a wooden shoe into machinery.

Otherwise called sabotage.

The accountants are clearly out of control. First "mark to market" which destroyed the financial industry during a downswing, now this. Can anyone please tell me what motivates the accountants to make such changes?

Not what they say motivates them (to have a better picture of "true" liabilities and obligations), but what really motivates them? To have power over the economy and force others to do as they please?

David Tweedle, the head of the IASB, once said he'd like to sit in an airplane that actually appeared on the balance sheets of the airline.

What he is going to get instead is no airline, since it can't afford to tie up its capital in something more properly leased. The major US airlines have failed to be profitable because they own their own aircraft: Ryan Air, on the other hand, leases all of its aircraft and is profitable.

I guess he wants a level playing field where nobody makes any money except the accountants.

Montag, August 16, 2010

The Environment, Politics and Dead-Ends...

This is worth taking the time to read.

My relationship to the environment can be found there as well: while we were not long-distance walkers, we spent our summers in the wilderness, camping in National Parks and enjoying as much nature as possible.

I remember, in my teens, paddling out on the Allegheny and Monongahela Rivers to take water samples near where companies were dumping industrial waste into the rivers. My first disillusionment set in when one of the researchers said that the water wasn't dirty enough and, in violation of how we were to collect the waters, collected it from what was being poured out of the pipe directly in order to make his case. I stopped helping that group of environmentalists shortly thereafter, since they were faking their results to achieve what they wanted: publicity to stop industrial waste being dumped into the rivers.

Disillusioned, I ceased to be involved. Good thing, too.

Here's the money quote for me:

So there was a reason for environmentalism's shift to the left, just as there was a reason for its blinding obsession with carbon. Meanwhile, the fact of what humans are doing to the world had become so obvious, even to those who were doing very well out of it, that it became hard not to listen to the greens. Success duly arrived. You can't open a newspaper now or visit a corporate website or listen to a politician or read the label on a packet of biscuits without being bombarded with propaganda about the importance of "saving the planet". But there is a terrible hollowness to it all; a sense that society is going through the motions without understanding why. The shift, the pact, has come at a probably fatal price.

Now that price is being paid. The weird and unintentional pincer-movement of the failed left, with its class analysis of waterfalls and fresh air, and the managerial, carbon-über-alles brigade has infiltrated, ironed out and reworked environmentalism for its own ends. Now it is not about the ridiculous beauty of coral, the mist over the fields at dawn. It is not about ecocentrism. It is not about reforging a connection between over-civilised people and the world outside their windows. It is not about living close to the land or valuing the world for the sake of the world. It is not about attacking the self-absorbed conceits of the bubble that our civilisation has become.

Today's environmentalism is about people. It is a consolation prize for a gaggle of washed-up Trots and at the same time, with an amusing irony, it is an adjunct to hyper-capitalism; the catalytic converter on the silver SUV of the global economy. It is an engineering challenge; a problem-solving device for people to whom the sight of a wild Pennine hilltop on a clear winter day brings not feelings of transcendence but thoughts about the wasted potential for renewable energy. It is about saving civilisation from the results of its own actions; a desperate attempt to prevent Gaia from hiccupping and wiping out our coffee shops and broadband connections. It is our last hope.

If environmentalists were really serious about preserving the environment, they'd be out there buying land and just letting it be, much like the Western Pennsylvania Conservancy. That's where the real environmental work is being done. Anything else is just lipstick on a pig.

Think of that the next time someone accosts you demanding your attention to whatever is selling these days within the Watermelon society.

Mittwoch, August 11, 2010

The Coming American Insolvency...

There's a Bloomberg commentary by Laurence Kotlikoff (see here) that should put the ever-loving fear of God into you. Seriously.

Fundamentally, as he correctly points out, the US is bankrupt: we cannot pay the debts we owe with the means we have at hand.

You can take a look at the numbers behind what he is saying here (PDF from the IMF).

First: structural unemployment is up by 150 basis points, which is one of the reasons that we haven't seen unemployment decline;

Second: consumer de-leveraging (i.e. reduction of consumer debt) will probably take at least 6-8 years, with much more savings needed;

Third: both lending and consumer spending will remain depressed for the mid-term, reducing growth significantly;

Fourth: the debt will outstrip foreign financing, resulting in the need for domestic financing, crowding out many other investment instruments;

Fifth: Existing debt, entitlements and the aging of the baby boomers conspire to ensure that US debt will continue to grow, rather than to decline;

Sixth: the fiscal gap (difference between government revenues and government spending as a long-term trend) cannot be closed without running a permanent fiscal surplus for as along as the eye can see (i.e. permanent), meaning that taxes must essentially double across the board (and finally affect the close to 50% of Americans who currently do not pay any taxes);

Ye gods.

Right now, entitlement mandates, especially those of health care (including the Obama "reform"), will boost entitlement spending to over 18% of GDP by 2050. Given that long-term US government spending, until very recently, was around 18%, this means that all government spending, without any changes between now and then, will be spent on entitlement mandates. leaving nothing else available unless taxes are raised to around double where they are right now.

To quote from the Kotlikoff article linked to above:

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It's also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework.

Given this situation, no accountant could, in good faith, sign off on the US national accounts. The US is bankrupt unless it raises taxes significantly AND reduces spending drastically. The chance of this happening earlier, rather than later?

Nil. This will fester and fester until it pops. As I have said already, we are in the middle of the sovereign debt bubble, and when it pops, it will take down the state.

Keynes cannot save us now: this is a permanent structural problem, not a business cycle problem. Keynes could, at best, help to solve a business cycle problem, but Keynes is a not a solution to structural problems: his policies make them worse, not better.

May the Good Lord have mercy on us all.

Dienstag, August 10, 2010

Finally Someone Says The Truth...

...because the truth shall set ye free.

Read this and understand: dedicated enemies to our lifestyle (especially you of the LGBT community!) are deliberately and with malice aforethought abusing our own sense of liberalism and tolerance in order to establish their own intolerance and, most importantly, to build themselves a triumph mosque in the shadow of where the World Trade Center once stood.

There are seven right and proper mosques already in the Borough of Manhattan. This would be the eighth. Mosques are understood by Muslims to be exclusive places of worship, where unbelievers are not welcome or tolerated. A community center associated with a mosque is strictly limited to Muslims, sharply reducing the meaning of "community" to something that folks like Mayor Bloomberg and others fail to comprehend.

Key quote:

The fact we Muslims know the idea behind the Ground Zero mosque is meant to be a deliberate provocation to thumb our noses at the infidel. The proposal has been made in bad faith and in Islamic parlance, such an act is referred to as "Fitna," meaning "mischief-making" that is clearly forbidden in the Koran.

Fitna (pl. fitan) (فتنة) is an Arabic word with connotations of secession, upheaval and chaos: it can also be translated as sedition, of mischief-making,

Fitna indeed. This is fitna at its finest, of making mischief amongst the infidels, who are so stupid so as not to understand that this mosque - named after Córdoba,

So what's with the name "Córdoba?"

From Wikipedia:

Under the orders of the Great Umayyad Caliph Al-Walid I, Tariq ibn-Ziyad led a small force that landed at Gibraltar on April 30, 711. After a decisive victory at the Battle of Guadalete on July 19, 711, Tariq ibn-Ziyad brought most of the Iberian Peninsula under Muslim occupation in a seven-year campaign. They crossed the Pyrenees and occupied parts of southern France, but were defeated by the Frank Charles Martel at the Battle of Poitiers in 732. However Poitiers did not stop the progress of the Berber Arabs and in 734 Avignon was conquered, Arles was attacked and the whole of Provence was overrun. In 737, the Muslims reached Burgundy, where they captured a large quantity of slaves to take back to Iberia. Charles Martel responded with continuous campaigns against the Muslims in the south of Gaul between 736 and 739 and twenty years later, in 759, the Franks under the leadership of Pepin the Short expelled the Muslims from Septimania which was one of the five administrative areas of Al-Andalus.

The Iberian peninsula, except for the Kingdom of Asturias, became part of the expanding Umayyad empire, under the name of al-Andalus. The earliest attestation of this Arab name is a dinar coin, preserved in the Archaeological Museum in Madrid, dating from five years after the conquest (716). The coin bears the word "al-Andalus" in Arabic script on one side and the Iberian Latin "Span" on the obverse. At first, al-Andalus was ruled by governors appointed by the Caliph, most ruling for periods of under three years. However, from 740, a series of civil wars between various Muslim groups in Iberia resulted in the breakdown of Caliphal control, with Yūsuf al-Fihri, who emerged as the main winner, effectively becoming an independent ruler.

In 750, the Abbasids overthrew the Umayyads for control of the great Arab empire. But in 756, the exiled Umayyad prince Abd-ar-Rahman I (later titled Al-Dākhil) ousted Yūsuf al-Fihri to establish himself as the Emir of Córdoba. He refused to submit to the Abbasid caliph, as Abbasid forces had killed most of his family. Over a thirty year reign, he established a tenuous rule over much of al-Andalus, overcoming partisans of both the al-Fihri family and of the Abbasid caliph. For the next century and a half, his descendants continued as emirs of Córdoba, with nominal control over the rest of al-Andalus and sometimes even parts of western North Africa, but with real control, particularly over the marches along the Christian border, vacillating depending on the competence of the individual emir. Indeed, the power of emir Abdallah ibn Muhammad (circa 900) did not extend beyond Córdoba itself. But his grandson Abd-al-Rahman III, who succeeded him in 912, not only rapidly restored Umayyad power throughout al-Andalus but extended it into western North Africa as well. In 929 he proclaimed himself Caliph, elevating the emirate to a position competing in prestige not only with the Abbasid caliph in Baghdad but also the Shi'ite caliph in Tunis—with whom he was competing for control of North Africa.

The period of the Caliphate is seen by Muslim writers as the golden age of al-Andalus. Crops produced using irrigation, along with food imported from the Middle East, provided the area around Córdoba and some other Andalusī cities with an agricultural economic sector by far the most advanced in Europe. Among European cities, Córdoba under the Caliphate, with a population of perhaps 500,000, eventually overtook Constantinople as the largest and most prosperous city in Europe. Within the Islamic world, Córdoba was one of the leading cultural centres. The work of its most important philosophers and scientists (notably Abulcasis and Averroes) had a major influence on the intellectual life of medieval Europe. Muslims and non-Muslims often came from abroad to study in the famous libraries and universities of al-Andalus after the reconquista of Toledo in 1085. The most noted of these was Michael Scot (c. 1175 to c. 1235), who took the works of Ibn Rushd ("Averroes") and Ibn Sina ("Avicenna") to Italy. This transmission was to have a significant impact on the formation of the European Renaissance.

The Córdoba Initiative, which is the driving force behind this mosque, is not named as an accident.

The complete and utter lack of achievements of modern-day Arab and Muslim scientists and writers is a monument to the repressive nature of Islam as it is practiced by so many today, reflecting the obsession with dogma and the insistence that hermeneutic analysis of the Koran is strictly proscribed and controlled. Córdoba was the last and many say only shining light of the Caliphate, but what most do not realize that it was repressive and non-Muslims were treated as second-class citizens, subject to taxes. While Córdoba under the Caliphate did not apparently directly prosecute non-believers, this was a matter of choice and conscience, not one of structure: unbelievers did well only when they did what they did in the name of and in service to the Caliphate.

There were, after all, the Martyrs of Córdoba, the 48 Christians who stated their beliefs publicly, for which they were executed. They were executed for blasphemy against Islam under sharia law, which does not permit anyone who is not Muslim from having a public religious life.

This is the intolerance that the Córdoba initiative celebrates as well: you cannot separate the good from the evil.

The mosque of the Córdoba Initiative is a deliberate provocation, done subtly and with great skill, tweaking the nose of the Great Satan directly in the shadow of the World Trade Center.

As such it should not be built. Shame on Mayor Bloomberg and the other New York City politicians for failing to do even a little bit of homework and failing to understand that to give an inch is to give a mile. They have invited into their houses, effectively, those who scoff and scorn them, all in the name of tolerance that tolerates intolerance.

That way lies madness.

The 2010 Election and Democratic Tactics...

The Democrats are set up right now, so goes the conventional wisdom, for an epic loss, with the House falling and possibly - but only possibly - even the Senate.

Will that happen?

Well, according to this and this, the Democrats are already working on their campaign strategy, and it is not pretty.

First: Scare tactics to paint the Republican party as failed and incapable of representing an alternative.

Second: subversion and preemption of the developing threat from the center, aka "Tea Party", both by painting them as racist extremists (this process is already underway) and by subverting the informal, loose organization from within with the aim of discrediting the movement and by putting up the weakest possible candidates.

Both are marks of desperation and exhaustion: desperation in the realization that the Democrats cannot run on their platform and actually win; exhaustion because it indicates that the Democrats have shot their wad, have reached the point of no return, fully and completely incapable of understanding that it is they who have lost touch with reality, not their opponents.

The 2010 election is going to be one of the most ugliest campaigns out there. It will be full of dirty tricks, a suborned and captive pet press that will be fully and completely part and parcel of the Democratic campaign, with only the internet and blogs really capable of providing alternative information to the propaganda that will commence come October. You will see the most outlandish stories appear just before the election, aimed at making alternative choices to Democratic candidates as unappealing as possible, with little or no time for rebuttal.

Welcome to Chicago, America. Vote the bastards out.

Montag, August 09, 2010

This Ain't Our First County Fair...

Beautiful quote, that one, from a certain Dave Freudenthal, Governor of Wyoming.

Seems that the State of Wyoming has a shortfall in education funds that the US government isn't going to help out with. Not surprising, given the fact that, despite Mr. Freudenthal being a Democrat, Wyoming voted 65% for Senator McCain. If anything, it's the reddest of Red States.

So: what does the Governor want to do?

Simple: the State of Wyoming owns, among other things, land for which it has a mandate: to manage the land for maximum profit the generate funds for education in Wyoming. Some of this land is currently leased out to a rancher and generates a rather modest income of only $3000/year. Given the location of the land, it is worth quite a bit more, especially if it were leased out, say, to a developer in perpetuity. The land is valued, conservatively, at being worth around...$125 mio. The State of Wyoming has been talking with the Federal Government for over a decade about how to make better use of the land. They have gotten nowhere, and now the Governor is calling their bluff.

It's 550 hectares or 1360 hectares that make up part of ... Grand Teton National Park.

President Obama's choices have real-world consequences.

The real irony: Governor Freudenthal's name means, in German, "joy valley". Supremely ironical, to say the least...

Read the whole thing here.

Sonntag, August 08, 2010


A popular leftist meme is the following:

"Dissent is the highest form of patriotism."

It is commonly attributed to Thomas Jefferson, the Third President of the United States.

The problem is, he would never have said that.

In a letter to Thomas Pinckney, from 29 May 1797, he wrote:

"Political dissension is doubtless a less evil than the lethargy of despotism: but still it is a great evil, and it would be as worthy the efforts of the patriot as of the philosopher, to exclude it's influence if possible, from social life. The good are rare enough at best. There is no reason to subdivide them by artificial lines. But whether we shall ever be able so far to perfect the principles of society as that political opinions shall, in it's intercourse, be as inoffensive as those of philosophy, mechanics, or any other, may well be doubted."

Not convinced? Read here...

The left cannot rely on anything but the legends they create for themselves. As the Germans would say: Geschichtloses Pack.

Translation: Ahistorical bunch, but in a rather pejorative sense.

Freitag, August 06, 2010

And The Process Begins...

I recently wrote about at least one of the problems that state and local governments face.

The City of Chicago is showing the way: its bond rating has now been cut. Using reserves to avoid making spending cutbacks is in the eyes of Fitch, the rating agency, not good.

They are right. Unless the City of Chicago cuts spending significantly, the outlook remains negative, as property tax increases are considered, largely politically, taboo.

Given the corruption in Chicago (which manifests itself largely in overpriced contracts and significant over-staffing), getting spending under control will mean either cutting services to the bone (which undermines the nominal contract with the population of providing good services in exchange for relatively high taxes and a tolerance for corruption) or that corruption will finally have to be addressed.

Or, on the other hand, the City of Chicago can continue business as usual, going deeper and deeper into debt as the city's creditworthiness falls apart due to the structural problems cited. This seems to be the path that will be chosen: according to the article linked to above, the Chief Financial Officer of the City of Chicago, Gene Saffold, doesn't think that the down-rating will have a significant effect on long-term borrowing costs.

Oh really? Well, a change from AAA to AA won't, but given the negative outlook, coupled with the likelihood of other rating agencies also downgrading their ratings (Standard & Poor's has a AA- rating), the moment when the rating drops further will also mean significantly increasing costs for lending.

But, as usual, Chicago politicians are pretending that this won't be a problem, counting on an economic recovery to help their incomes return.

This is a naive belief at best, otherwise plainly irresponsible: the process of the long and slow bankruptcy of Chicago has begun. It won't be quite as fast as, say, Detroit, but this is the beginning of the end of great city. It's really only a question of time, as long as the Chicago Democratic Machine is in control.

Like that's going to change.

Donnerstag, August 05, 2010

A Ray of Sunshine In The Darkness...

I've been full of doom and gloom the last couple of days.

To counteract some of that, let me talk about a ray of sunshine in the darkness. But beware: that ray of sunshine isn't going to make your day.

As we all know (or should know: pay attention!), wages have been stagnant and net increases in earnings haven't helped consumers out of their doldrums, as they just haven't been showing up.

Consider this: both real and nominal wages have been pretty stagnant, indicating that while there are no real increases in wages, at least inflation is not eating up purchasing power.

What if I could present a scenario where purchasing power will increase over time?

It's called deflation, and it's where the economy is probably heading.

Consider this and understand what may well happen when the next credit crunch comes along: given the inevitability of a credit crunch towards the end of this year and into the next as all those non-performing commercial real estate objects have to be refinanced, this is almost a certainty, rather than being speculative. If inflation moves below 1% in the face of stagnating demand, the economy will enter a new equilibrium, like that of the Japanese economy, where deflation has kept growth down severely, preventing, as well, job growth and anything like a strong expansion.

Instead, deflation will, for the average working consumer, provide the first real increases in purchasing power as the economy continues to slow and growth becomes a fond memory.

Like I said, that ray of sunshine wasn't going to make your day.

During deflationary periods, monetary policy is ... well, difficult at best and usually completely ineffective. The only way to get out of deflation is to reverse consumer expectations (that prices will continue to fall) and to pump up prices artificially. However, this must be coordinated with all other players in the market to function properly (i.e. everyone has to raise prices, not just a few).

The only real way out of deflation is to run the printing presses at full speed in order to inject liquidity, liquidity, liquidity into the markets. This would be an option if the government wasn't already heavily in debt, and would drive the dollar down severely, drawing inflation into the country through imports.

Unless, of course, other countries are deflating as well...

Deflation, whilst wonderful for the consumer, will be devastating to the economy. Faced with permanently falling prices, companies will scale back investments and employment in order to maintain profitability, further worsening the situation. It destroys innovation, since the only investments will be in tool and techniques to reduce costs, rather than to innovate and bring new products on to the markets.

Hence: while there is a ray of sunshine in our darkness, it is really an indication of just how dark it really is.

Mittwoch, August 04, 2010

Setting Up For A Fail...

Let's see if I've got this right.

First, the government, all of it (Federal, State and Local) has gone seriously into debt for any number of reasons. The debt right now is manageable because interest rates are held extremely low and because there are plenty of investors - most of them foreign - who are willing to put their money into the US because the outlook everywhere else was even worse (largely speaking, of course). meaning that supply - investor's money - and demand - government borrowing - were meeting at a very, very low point in terms of interest rates, but not in terms of volume. In standard supply/demand curve curve terms, the interest rate curve has gone flat while the volume has moved all the way over, reflecting the risk bonus that US bond stability has, despite very low interest rates for US bonds.

This is, for the US government, the perfect situation: they can sell all the bonds they want without paying anything more than a very small amount in interest payments, relatively speaking.

We know why there is a practically limitless demand side (the US government continues to have a serious jones for debt spending, and, if anything, the more the merrier). But where is the supply coming from?

First of all, it's recycled US dollars from trade partners that have extremely large positive trade balances with the US. Buying US government bonds is a safe way for these countries to maintain their best customer (or to put it a different way, they're keeping the deficit addict supplied with just enough dope to keep them alive and continuing their habit) in the lifestyle that lets them continuing to do more and more business with the US.

Second of all, despite very low interest rates, the US continues to be The Safe Haven world-wide. Until conditions improve elsewhere, the US is where people park their money.

Third of all, the US continues to be an attractive place to do business and hence companies in other countries (and, increasingly, countries directly via sovereign funds) invest in the US because their returns are better than elsewhere.

So far, so good, right? Sounds like a pretty good set-up for the US: debt financing till the cows come home, because there is enough cash out there.

Of course, it's a bubble and is unsustainable.


Let's work backwards.

First, a weakening dollar - and the dollar must weaken further if US competitiveness is to be restored! - makes further exposure to the dollar world less attractive. Add to that the emerging middle classes in China and India, as well as the (admittedly still very slowly) rising business liberalization of those countries (reducing bureaucracy and providing investment incentives in the form of tax breaks is a fairly cheap way of drumming up enormous interest and is more than offset by increased employment with regionally attractive wages) and you can see where a scenario develops that will reduce foreign investment in the US to that which foreign companies see appropriate to serve the US market, not the world market as a whole. Given that the US is only 25% of world GDP, other markets are going to become significantly more attractive for foreign investors, especially for large-ticket investments such as automobiles, chemical and other industrial plants, as well as refineries.

Second, when world trade recovers and demand increases, there will be more demand for investments elsewhere, leading capital away from the US.

Third, and this is the critical point, the sustainability of US government spending depends on these large inputs from foreign capital, as interest rates remain very low, held down by the Fed and the lack of alternatives for US dollar investments. This is very, very, very important: when capital starts to become less readily available, it increases in price.

In other words, interest rates rise.

This will first appear in junk bonds, but will quickly spread up the risk ladder until the rate increases hit AAA commercial paper.

At that point the bubble will start to burst.

If the US government - which in its infinite wisdom (thank you, President Clinton!) is now largely financed short-term - fails to succeed in oversubscribing a bond sale, the game is all but over. Normally, bonds are oversubscribed, meaning that there are more buyers than sellers and that all bonds are sold (and no government puts up bonds for sale when it doesn't actually need the money!). Failure to sell all the bonds would be disastrous: the market would be telling the world that there are better places to earn interest and that the demand is too large for the supply.

The result would be, in order to re-finance the deficit (and this is key: we're not talking about new debt, but rather rolling over old debt!), that the government would either have to raise interest rates or reduce the selling price of bonds (which is effectively the same thing).

The problem? The sheer volume of the US deficit, plus the fact that a significant majority of bonds are short-term, needing to be rolled over every 2-5 years, means that even a tiny increase in interest rates means significantly higher dollar outlays for the US government, which means that one of several things has to happen (dismal science, economics...).

Either the government reduces its debt by using taxes to retire bonds to match the new lower level of sustainable debt financing, or spending on interest payments will increase significantly (also paid for by tax dollars), or spending has to be cut, or taxes have to be increased (or supplemented by new taxes). In reality, there is a continuum of choices, but these are the four poles that cannot be moved.

Those are really the only four choices (although there is a fifth, more about later).

The first and the third are the fiscally prudent approaches that tells any banker that the entity in debt is actively moving to clear and retire debt, or, at least, reducing the exposure to debt. It means cutting discretionary spending, reducing or eliminating automatic spending increases, and cutting benefits to many who enjoy the breaks. It also means ruthless trimming of spending on pet projects (aka "pork") and bringing in federal wages back into line where they once were, smaller than in the commercial sector, with increased job security to compensate. All highly unpalatable decisions that will not be made unless the writing is clearly on the wall and a consensus can be reached.

The second and the fourth are the nightmares, because it means that the entity in debt is looking for a way to increase the debt without changing. That is the path paved with danger, because the lack of a commitment to change in the face of an existential debt problem is usually the sign that there is something seriously wrong and that wishful thinking is replacing serious analysis of how to get out from under water.

This is, largely, where we are now: no party is seriously calling for fiscal prudence because it means making spending cuts now, before the crisis arrives (since it will reduce the vulnerability to interest rate increases, this also pushes back any sell-by date into the future, giving the government time to reduce its vulnerability even further.

What is the fifth option?

It is the simplest for the borrower and it is the reason why interest rates are charged. It is debt repudiation, of refusing to pay any more, of bankruptcy. Where bankruptcy laws are heavily biased to the debtor, this is a popular way out because any real costs are mitigated by the inability of the lenders to actually take what was used as a security.

In the case of sovereign debt, the problem is even more complex: it is easy to renounce the debt, but it generally means that you lose access to capital markets until people have either forgotten or are, for some god-forsaken reason, willing to believe that this time it's different.

The security that the US has been (ab)using is the reputation of the US as a safe haven.

To put it bluntly, the current financial and fiscal policies of the US is setting up the US for a fall. If interest rates pick up, the whole house of cards starts to fall apart, as it will mean a mixture of massive cuts in US government spending and massive increases in taxes in order to finance those higher interest rates.

Bursting bubbles are never fun. The US government has never faced one with its own spending. It will not be a pleasant experience. It will also the be the death of Keynesian economic policy.

And not a moment too soon.

Montag, August 02, 2010

Understanding State and Local Government Debt...

This is an object lesson on the challenges facing state and local government, explaining just how these entities got where they are today.

It is important to understand what is going on here at a higher level, because it is also one of the key reasons why debt is going to be such a problem and why it will keep growth rates down, making any recovery that much more difficult.

Put simply, any economic entity, be it personal, business or government, has a cash flow associated with its economic activity. You can really only do one thing with this cash flow: use it in one way or another to finance what you want to do.

Interest rates - normally - are a price signal: the interest rate is the price of money. If the signal comes along that money costs nothing, or that the price can be passed on to someone else, then something strange happens. People don't think about what they are doing, much, any more, since there is, in their perception, no risk: they are doing what they want with something that appears to have no cost (except, of course, for the capital: however, bear with me on this).

Hence if you can borrow $25k for 1% interest, that makes buying a new car attractive, rather than borrowing $5k for a used car instead (at the same rate). Being able to finance a large municipal bond issue by pledging future cash flows makes it attractive to spend the money for pet projects now, relying on either being out of office or on a fanciful business plan to generate the future cash flows. Being able to finance a large corporate bond issue for a new line of business, when the interest rates are artificially low, means that risk analysis won't be so important, since almost any return on investment will be able to finance the project.

This leads to a fundamental sin in the economic world: misallocation of capital. It is what dooms planned economies to necessary failure (by ignoring demand, or, more exactly, making consumption decisions for a population fully capable of making those decisions by themselves, as no one likes to be treated as a child) and it is, at least for the Austrian school, one of the major reasons for recessions, since bubble-driven demand during a bubble expansion will invariably invest in areas that are not capable of providing any returns when the bubble bursts.

Who is to blame?

Well, in the realm of the consumer, it is you and I, if you've financed more car than you can really afford with home equity. You bought a consumer durable, which is nonetheless consumed (it's called a durable because it lasts more than one year, unless you bought something from Detroit), by using a theoretical value of your equity (if you had sold the house and bought the car with your profits, that's another story entirely) to get a loan that you now can't pay back.

If you are a business, blame the folks who did the business planning with their brains turned off, as well as those who approved the spending. GM is building the Volt car, which will require significant subsidies to be sold (a compact car for $41k, folks, in the middle of a recession: what were they thinking? Might have great gas mileage and be all environmentally righty-ho, but if no one can afford to buy one, it's the new Edsel), a great example of misallocated capital spending that will result in GM not making money even longer.

If you are a government, it is invariably a cabal or two of politicians who, for whatever reason, have a grand vision and want the taxpayers to pay for it. A new stadium? Why not, the money will flow in from all the games (ignoring the fact that it's not where people want to go and there's no professional team in the town). A seventh swimming pool for a town of 200 000, where the other pools aren't filled up? Sure, let's make sure that things won't be too crowded, and what the heck, it's only taxpayer money.

Human stupidity knows no bounds, and indeed will bring down any system if greed and corruption are not held at bay by prudence and by the ability of people to control what their duly elected officials do, or, alternatively, to ensure that the board is held responsible by the shareholders or that a spouse knows what the other one is doing with the family's savings.

Being prudent and being responsible are, compared to the realization of grandiose dreams and sweeping changes, boring.

Odd, that. It's almost as if you were asking people to stop goofing off and act like adults.

Were that they would.

Sonntag, August 01, 2010

Welcome To Chicago...

This is a chilling read, a desperate appeal by Chicago police officers to prevent the complete collapse of the police force in Chicago.

Just as Chicago is on the fast track to anarchy, so surely will this spread in the wake of Chicago-style politics under President Obama.

It is just a matter of time.