A Really, Really Bad Idea...

This is in today's FT.

It's a really, really bad idea. Time for some fisking...

First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

And large inflows of capital also made it possible for these countries to actually finance projects and businesses, allowing their economies to expand. The debt crises that developed, however, aren't a function of capital flows, but a lack of due diligence and proper credit risk analysis. Here the authors are confusing cause and effect, or at least they are muddling them. Again: the problem is a failure of capital management, and not inflows as such.

Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.

Again: confusion as to the problem. The real problem is that the lending banks and investors are failing to perform due diligence and to properly manage their credit portfolios, and has nothing to do with the volume of capital flows. Again, muddled thinking about what the problem is.

Causes and consequences vary, depending on which way capital flows. Developing country borrowing was associated with unsustainable fiscal policies (Latin America) and inappropriate exchange rate policies (Asia). But the financial sector was not blameless: for every overborrower there was an overlender.

Now this is indeed accurate. The financial sector has lost, basically, the ability to do good risk analysis, as lawyers and accountants make the decisions, not economists.

The pathologies were different when the US went on a borrowing binge. Large current account surpluses and the associated savings glut in the rest of the world fed a global liquidity boom, which stoked asset prices. Even though the roots of the subprime crisis lie in domestic finance, international capital flows magnified its scale.

Well, first of all the term "pathologies" is completely inaccurate. The US has not gone on a "borrowing binge" unless you refer solely to the volume of deals: measured as a percentage of GDP, other countries should be so lucky. But the next sentence is critical: current account surpluses are posited as the cause of a savings glut, when in reality the two positions are reversed: because local consumers do not have adequate consumption choices - and live in unstable countries where continuity is a problem - they save involuntarily, resulting in a savings glut that, due to the lack of investment choices domestically, leads to a current account surplus. Capital always seeks its rent: it is also uniquely fungible and goes to where the rents are. This can drive asset prices up, but not necessarily so: the problem arises when you do not have enough good bankers out there who can balance, properly, risks and returns.

Some would claim that the problem in all these instances was not liquidity but lax regulation, which turned what should have been prudent borrowing into a destructive binge. But this argument is too optimistic about the potential of prudential regulation to stem excessive risk-taking. In the US the entire policy apparatus avoided any regulatory action against lax lending. Even when the will is there, prudential regulation is bound to remain one step behind financial innovation.

Now this is where their analysis starts to turn silly. They are correct in saying regulation failed, abysmally, in preventing stupid people from being separated, permanently, from their money (aka they lost it all). But is that the job of bank regulations? Simply put, no: bank regulations exist to ensure that financial transactions are transparent and that risks are clearly stated: they do not exist to "protect" people from making stupid investment decisions. And that regulation always lags innovation: duh.

If the risk-taking behaviour of financial intermediaries cannot be regulated perfectly, we need to find ways of reducing the volume of transactions. Otherwise we commit the same fallacy as gun control opponents who argue that "guns do not kill people, people do". As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly.

And this is where the idea goes really, really bad. Basically: if we can't stop people from making bad decisions, then they shouldn't be allowed to invest. The "fallacy" that the authors bring up is a straw man: the error is that you cannot regulate everything. The British experience now with the basic ban of firearms has led to a major upswing in criminal behavior, as criminals no longer need fear that their victims will defend themselves: if you do so in the UK right now, you may well end up being prosecuted for having defended one's self, rather than waiting for the police to do so.

This is throwing the baby out with the bath water: they are basically saying that if people can't be prevented from making bad investment decisions, that they should not be allowed to invest. What comes next, prove that you are a good parent before you can become a parent? Do the writers fail to see the absurdity of that position?

What this means is that financial capital should be flowing across borders in smaller quantities, so that finance is "primarily national", as John Maynard Keynes advised. If downhill and uphill flows are both problematic, capital flows should be more level.

Ah, the long, cold, dead hand of Johann Gottlieb Fichte and his Closed Trade State (Der geschlossne Handelsstaat. Ein philosophischer Entwurf als Anhang zur Rechtslehre und Probe einer künftig zu liefernden Politik, 1800), which should be a part of everyone's education to show how not to do things. Put simply, Fichte called for state control of each and every external transaction, and the role of the state is to a) beggar thy neighbor and b) ensure that the guilds and closed economic systems never see any change. Historically a really, really bad idea: mercantilism and the guild system, dedicated to maintaining local monopolies on the means of production and coupled with the allocation of resources on the basis of power politics, invariably lead to economic crises as the misallocation of capital bears its bitter and indigestible fruit and local monopolies become repressive and prices become punitive, as they invariably do within monopolies.

The greatest achievement of the last millennium has been the liberalization of trade and market-based allocation of capital: that these do not work perfectly and have negative side effects is vastly outweighed by the very real positive benefits of both.

But how is such a levelling-off of flows to be achieved? In the current context, the source of liquidity is large current account surpluses in the oil-exporting countries and east Asia, especially China. Reducing these should be a high policy priority for the international community. Two concrete actions – one for each source of liquidity – suggest themselves.

The source of the large current account surpluses is that the countries they list have comparative advantages and it is in the interest of the consumer, the ultimate beneficiary of the world economy, to have them make goods and sell oil: reducing these comparative advantages is hidden mercantilism, plus the absurd Utopian idea that each and every country should be an island unto itself. Reducing consumer utility should be the LAST priority for the international community, not the highest: this is a fundamental misunderstanding of what economics is all about (hint: the best possible allocation of scarce resources is identical with the smallest ecological impact of such allocation, per definition).

First, some variant of petrol tax in the main oil-importing countries (including the US, China and India) is essential to cut demand and reduce oil prices and hence the current account surpluses of oil exporters. That such measures should be taken for environmental reasons or that they would reduce the size of sovereign wealth funds only adds to their attractiveness. Second, some appreciation of east Asian currencies is necessary to reduce their surpluses. Even though undervaluation is a potent instrument for promoting growth in low-income countries in general, at this juncture self-interest on both sides calls for an orderly unwinding of current account imbalances.

Translation: Tax the consumer to make him poor, making also those who supply the goods to the consumer poor as well. Raise exchange rates to make imports more expensive and further reduce consumer choices.

Further, and here is the real problem: current accounts, given comparative trade advantages, are never balanced, but always show imbalances. It's the way the world economy works, and the authors apparently really don't want the world economy to work, preferring, instead, poverty for billions, rather than using trade to improve their lives.

This appreciation can be achieved either unilaterally or, if necessary, multilaterally through the World Trade Organisation, as a recent Peterson Institute paper has proposed.

Again: a really, really bad idea. What makes this idea even worse is that the authors believe, apparently that the WTO, the World Bank, etc., can actually manage the world economy: they can't, just like NÖSPL failed to manage the economies of the former Warsaw Pact. People, it doesn't work, it makes things worse.

What the WTO can do is to help policy makers make policy that alleviates negative impacts of changes in the world economy that lead to runs on currencies, banking failures and the like. It can't run the world economy, deciding what interest rates should be, what exchange rates should be, what tariffs should be. That was the world of back when, which led to Smoot-Hawley and the Great Depression. The road there is paved with the best intentions, but please, learn from history.

Measures needed for when capital flows downhill are likely to take a different form. When appetite for emerging market debt is strong, neither prudential regulation nor macroeconomic policies does much to stem capital inflows. Developing nations need to rely on a broader set of instruments, targeting the capital account directly. Deposit requirements on capital inflows and financial transaction taxes are some of the tools available.

Again, throwing the baby out with the bathwater. Their approach is to stop change, rather than to ride it to greater prosperity for the greatest number: they want to stop markets from functioning, and we should know by now how well that works.

We need an enlarged menu of such options. Unfortunately, capital controls are such a bugaboo that the International Monetary Fund, to its discredit, has done little work on capital-account management techniques.

Uh, it's really a credit to the IMF that they don't get near the topic with a ten-foot pole.

But will not such interference with capital flows reduce the benefits of financial globalisation? Even leaving financial crises aside, those benefits are hard to find.

Tell that to the hundreds of millions in China and India who have moved into what passes for the middle class there.

Financial globalisation has not generated increased investment or higher growth in emerging markets. Countries that have grown most rapidly have been those that rely least on capital inflows. Nor has financial globalisation led to better smoothing of consumption or reduced volatility. If you want to make an evidence-based case for financial globalisation today, you are forced to resort to indirect and speculative arguments.

Sigh. Since when has financial globalization had anything to do with "consumption smoothing" or reduced volatility? There is so much wrong with these two sentences...

It is time for a new model of financial globalisation, one that recognises that more is not necessarily better. As long as the world economy remains politically divided among different sovereign and regulatory authorities, global finance is condemned to suffer deformations far worse than those of domestic finance. Depending on context, the appropriate role of policy will be as often to stem the tide of capital flows as to encourage them. Policymakers who view their challenges exclusively from the latter perspective will get it badly wrong.

Translated: as long as the world doesn't have a right and proper government, trade should be forbidden, unless it's done the way we want it to be done.

These ideas are really, really bad. They lead to greater poverty and reduce standards of living, all in the name of preventing the destruction of capital.

Got news for you: the destruction of capital is part and parcel of how the world economy works.

Capital is destroyed when bad investment decisions are made and as a result, capital is poorly allocated. This has everything to do with risk analysis and risk control: the authors seem to advocate the elimination of risk from financial transactions. This is so far removed from the realities of the world economy as is possible.

The problem that the authors try to address is that international financial transactions are fraught with risks and that probably the vast majority of these risks are not identifiable or even knowable when the transaction is made. The abysmal failure of national and international finance to do due diligence and proper risk analysis is a very serious problem, one that needs to be worked on (but which costs time, money, and denying the BSDs of the industry their playgrounds).

But these ideas? Really, really bad.


PS: NÖSPL is the German acronym for the closed feedback loop system for planning and direction (Neues Ökonomisches System der Plannung und Leitung) that was implemented in the COMECON in the 1960s. The man who was in charge of implementing it in Eastern Germany committed suicide instead. Literally.

Asymmetry and the Law...

There's good article by Michael Pawlik in today's FAZ, titled "Der Terrorist will nicht resozialisiert werden", or "The Terrorist Does Not Want To Be Resocialized".

As usual, behind the subscriber firewall, link here. I'm not translating, merely laying out what he says and commenting on that.

The key point is that what terrorists do falls into gray zones, quite deliberately so.

On the one hand, terrorism, in its modern transnational form, is an act of war.

On the other hand, it's something that good police work has successfully dealt with on a local scale.

But the critical thing is that the standard ways of thinking about how to deal with terrorism - concerted police work with some involvement by the military - doesn't work with transnational terrorism, especially as the terrorists practice it and exploit the system to create sanctuaries and infrastructures.

The greatest danger is not realizing this and allowing them free action by not pursuing them as if one were at war: while those attacked may not have wanted a war and tried to prevent it, you only need one side to have a war, the side that doesn't resort to diplomacies and the niceties, but simply starts killing in order to achieve their political gains.


This is the critical point of Pawlik's post: the difference between the West and islamic terrorism is so great that there cannot be peace. This doesn't mean that there can't be peace between Islam and the West, but simply that the islamic terrorists are only concerned with winning. They have declared, effectively, an asymmetric war where they believe they can manipulate the rules of standard international relations to their advantage - and they have been very, very successful to date - because they know that they cannot match the West in a field of battle, regardless of how brave their fanatics may be and how willing they are to die for their cause.

Hussein Mussawi, who was head of Hisbullah in Lebanon in 1992 when the Israelis killed him, said, according to Pawlik, that they were not fighting for recognition and settlement of their grievances, but rather to destroy their enemy.

Now, without going into extreme detail, people like Mussawi do not believe that they are bound by the international rules governing warfare or international relations. Their most important tool is "senseless violence" or simple destruction, without warning or sense, because their goal is to destroy western societies and force them to behave as the terrorists so wish.

As an aside (Pawlik doesn't mention this), Spain was such a target: the Madrid bombings were aimed at changing Spanish politics, and it did: Spain left the Coalition and appeased the terrorists so as not to become targets again, an act of fundamental cowardice that has deeply, deeply chilled US relations with Spain and will continue to do so until Spain, as it were, "grows a pair" and starts acting like a sovereign nation, rather than doing exactly what the terrorists want them to do.


You can't deter terrorists; you can't take anything away from them, since they don't "have" anything to take away, there can be no reciprocal actions taken (excepting perhaps the Israeli eye-for-an-eye tactics, which don't prevent terrorists from acting, but goes ahead and kills them any way).

Now, Pawlik's point is that law has ignored the terrorist as he really is, an actor who has declared war. The problem is the asymmetry of the war: law is based on symmetrical relations between the parties.

Hence the difficulties the law has with dealing with terrorists: while they have done things that are illegal, treating them as common criminals ignores the reality of the situation, that they must be dealt with under the laws of war, meaning, for instance, that the detention of terrorists is not a legal matter, but rather one that follows the rules of war, with permanent detention until the conflict is resolved.

Normally, during wars between states, this is not a problem: a soldier, as Pawlik says, is a soldier and basta. Terrorists are a different breed, with nuances of seriousness and deadliness. Supporters of terrorism are as involved in the acts as the terrorists themselves, but how does one deal with them within a framework of law? Can one simply toss them into permanent detention and wait until the conflict is over - if it ever is - or does one differentiate and deal with the degree of complicity?

These are all gray areas that have been largely unexplored. Terrorist sympathizers and supporters are clearly complicit in the acts and can be just as dangerous and unrepentant as the terrorists themselves, but arresting people for their beliefs is abhorrent to any western legal system.

So what does one do? Ideally, laws are created to handle the problems with clear distinctions for the police and government lawyers to use. Germany, for instance, does not have a detention-style arrest, and no one wants it, celary for historical reasons. There is the infamous §129a, which makes the establishment of a terrorist organization a crime, but this is inadequate.

The alternative is the §89a of German law - and I am not a lawyer here, just an interested observer - which makes spending time in terrorist training camps a crime. Learning how to fire a gun, build bombs and fly planes is not itself a crime, but learning them to do terrorist acts should be.

This is legally difficult, since it is a crime of belief, rather than a play between actions and guilt, which is how western legal systems are built. Here you have to detain someone not because they are guilty of an action, but rather because that what they believe may entail an action that forces the state to prevent: you can't wait for a terrorist crime to happen before doing anything about it, unless, of course, you want to grant the terrorist legal sanctuaries for their preparations.

What this entails, however, is being able to make a distinction that cannot easily be made. On the one hand, the state can detain someone that they think is going to commit a crime if they have adequate proof thereof; on the other hand, how are they to be detained? Normally they'd go before a court of law, have their day in court, and most likely be freed, as there is no act-guilt chain to keep them in jail. The fact that they aren't soldiers, per se, means that normally you can't put them in a POW camp and simply hold them until the war is over; further, how can one make the differentiation in this case between soldier and non-combatant?

Ahhhh. This is where the asymmetry between transnational terrorists and western states really hits home. There has to be a legal way to define this problem, and the terrorists operate in such a way that it becomes, basically, impossible to resolve: on the one side you have Guantanamo with all the associated problems of civilian combatants, while on the other side you have the impossibility of normal legal resolution.


Hence there needs to be a third way. Pawlik points out that intelligence agencies, the military and police need to cooperate and merge in ways that are currently unthinkable, using methods that the police would reject but are widespread within the intelligence communities, such as misleading and confusing prisoners, isolating them and making them very uncomfortable in order to break their will to resist and tell what is needed to be known in order to prevent terrorist acts. This cannot be done by the police: they do not have the tools or the laws to do so.

Fundamentally, intelligence agencies must target the terrorists, either destroying them with military or police means, but also destroying their infrastructures and support networks. This is a key point that many underestimate: intelligence agencies must mutate, as it were, to anti-terrorist agencies that don't merely provide information that is then passed on, but rather integrate with the military and police in order to eliminate the threat, be it by physical elimination ala the Israelis, or by subverting the terrorists themselves and destroying them financially, morally and politically.

Pawlik also makes an interesting point regarding what he calls post-heroic societies, societies that see themselves as the culmination of societal development and who view any sort of harsh treatment as morally repugnant. Further, and this is the hard one, the question is also how much sacrifice can post-heroic societies demand of their citizens in the war against terror: there is great asymmetry between the sacrifice, be it simple data-protection laws that are loosened, and the effects, but the legal community does not appear to be willing to even contemplate this.

Pawlik makes the point that the terrorist challenge can be met, is being met, without giving up fundamental liberties: however, we need to get our concepts about fundamental liberties clear and call things by their true names.


And Pawlik's best point, perhaps, is that he clear states that none of this is very pretty, and you can't win elections with it.



Good work, worth a read if you know German.

Quote of the Month...

In today's Handelsblatt, a certain Torsten Hinrichs of S&P has, for me, the quote of the month:

in German: Die Black Box Rating muss möglichst transparent sein.

in English: The Black Box Rating has to be as transparent as possible.

Ouch.



Does he even think about what he is saying?

Now, to be fair, he doesn't mean that the rating itself is transparent, but rather that the relationship between rating agencies and emitters of financial instruments needs to be as transparent as possible.

Still, he chose his words ... poorly.

Why I Am Not A Democrat...

But rather a Reagan Republican...

This is the reason.

Now, I was 8 years old in 1964. As a matter of fact, I had just turned 8. I remember politics back then only as a very, very, very vague memory, disbelief a short time before that Kennedy had been shot and not understanding why we were in Vietnam, but also not understanding why people were calling the soldiers baby killers.

Simple stuff like that.

Simple stuff like this:

If you and I have the courage to tell our elected officials that we want our national policy based upon what we know in our hearts is morally right. We cannot buy our security, our freedom from the threat of the bomb by committing an immorality so great as saying to a billion now in slavery behind the Iron Curtain, "Give up your dreams of freedom because to save our own skin, we are willing to make a deal with your slave masters." Alexander Hamilton said, "A nation which can prefer disgrace to danger is prepared for a master, and deserves one." Let's set the record straight. There is no argument over the choice between peace and war, but there is only one guaranteed way you can have peace--and you can have it in the next second--surrender.

Admittedly there is a risk in any course we follow other than this, but every lesson in history tells us that the greater risk lies in appeasement, and this is the specter our well-meaning liberal friends refuse to face--that their policy of accommodation is appeasement, and it gives no choice between peace and war, only between fight and surrender. If we continue to accommodate, continue to back and retreat, eventually we have to face the final demand--the ultimatum. And what then? When Nikita Khrushchev has told his people he knows what our answer will be? He has told them that we are retreating under the pressure of the Cold War, and someday when the time comes to deliver the ultimatum, our surrender will be voluntary because by that time we will have weakened from within spiritually, morally, and economically. He believes this because from our side he has heard voices pleading for "peace at any price" or "better Red than dead," or as one commentator put it, he would rather "live on his knees than die on his feet." And therein lies the road to war, because those voices don't speak for the rest of us. You and I know and do not believe that life is so dear and peace so sweet as to be purchased at the price of chains and slavery. If nothing in life is worth dying for, when did this begin--just in the face of this enemy? Or should Moses have told the children of Israel to live in slavery under the pharaohs? Should Christ have refused the cross? Should the patriots at Concord Bridge have thrown down their guns and refused to fire the shot heard 'round the world? The martyrs of history were not fools, and our honored dead who gave their lives to stop the advance of the Nazis didn't die in vain. Where, then, is the road to peace? Well, it's a simple answer after all.

There are times I wonder what would have happened if Barry Goldwater had been elected president, rather than the charming, corrupt and amoral Mr. Johnson.

There is, of course, a parallel between the election of 1964 and the election of 2008. We have, once again, a charming candidate in the form of Barack Obama. Whether he is amoral and/or corrupt is something we may find out if he takes office and reveals his true character.

On the other hand, much like Barry Goldwater, we have someone who has time and time again proved his character: John McCain. While he's not perfect, nobody really is.

And that's the beauty of the US political system at its finest: it is designed for imperfect people. The founding fathers knew a great deal more about human nature, it seems, than all the modern-day pundits are capable of understanding.

PS: hat tip to No Pasarán. Check them out...

Implications...

Well, the intercept worked. Which shouldn't have been that surprising, despite what some arms control wonks thought (you know who you are...).

Details here: a single RIM 161 SM 3 mod was fired, intercepted the satellite at 153 miles altitude with a closing speed of 17k mph. Pretty damn close to the proverbial BB-hitting-a-bullet and a tribute to good old American engineering. More on the missile here: it is based on a SM2 Block IV missile with an additional third stage, guidance and warhead technologies. It is a follow-on system from Terrier LEAP of 1992.

So, what are the implications of this successful intercept - and I'm not going to get into whether this was a hidden test or not, that's for the folks who pretend that such things matter - and what does it mean?

First of all, it changes the status of any US ship capable of firing the SM 3 mod missile, from "mere" warship to anti-ballistic missile capable warship. This is a huge, huge change: it means that the capabilities of the US Navy have expanded enormously, giving them the ability not merely to defend against aerial attack, but also against missile attacks that were, up to now, considered invulnerable. There was no way, to date, to attack a ballistic missile once it was fired and had passed the boost phase (theoretically, you could use a conventional antiaircraft system to attack during the boost phase if you were within range; alternatively, you could use fighter aircraft to attack directly during the boost phase as well. But until this test, a potential enemy could place their missiles well out of range during the boost phase and you couldn't defend against them, just hunker down and hope for the best.

No longer: intercepting a ballistic missile with the SM-3 mod is now eminently feasible, unless, of course there are active measures involved from the ballistic missile, such as decoys and/or manouevering, and even then there'd be a very good chance of intercept, even from a single missile fired at the target.

This means that you can defend against ballistic missile attack on a tactical level: all you need is a US warship capable of firing the SM-3 mod.

Now, what are the implications of this?


One scenario for a US-Chinese conflict is a massive attack by the PRC against Taiwan over the Taiwanese Straights, which would entail heavy use of ballistic missiles to knock out the majority of Taiwanese air assets to prevent a massacre as the PRC transports troops to force a landing. If the PRC fails, they will lose the vast majority of their troops and the attack would fail. Further, given that the US would come to Taiwan's aid in the case of such an attack, the Chinese have invested heavily into medium-range, non-nuclear ballistic missiles to attack not only Taiwan, but also US carriers coming to Taiwan's aid: while Chine might have to fire 30 such missiles to get a hit, that is, for them, an excellent neutralization of the threat of US carriers (and it is a massive threat to such a landing attempt). China has put in some 800 medium and short-range missiles in and around the Taiwanese Straights for this purpose.

Basically, the Chinese plan was to identify a rough area of where the carrier and support ships would be, within a 5 square mile area, and then fire enough missiles to saturate that area within a very short period of time, forcing the US either to break off and run or face severe damage from such an attack, with a very decent probability of sinking not only a carrier, but most of the support ships in the task force as well.

Now this alternative has been, largely, removed. Being able to fire the SM-3 mod, support ships could destroy only those missiles that would actually come close to hitting US ships, enabling them to continue operations.

This means that the US interception now has created a great deal of uncertainty with Chinese planners: they cannot count on being able to take out a carrier and most of its support ships. They can continue to engage such ships, but unless they can destroy them or put them out of commission - kinetics alone would be damaging, let alone a conventional warhead - then the costs to the Chinese will be enormous in terms of US ability to destroy their invasion force.

That's deterrence.

It goes, of course, much further: if any ship capable of firing a SM-3 mod is also capable of intercepting a ballistic missile, that means that certain horror scenarios - of, say, Iran firing an IRBM from a freighter off the Eastern seaboard - can be called into question: instead of merely having to execute such a plan, now such a country would have to also know where such warships were to ensure that they are out of range, and this exceeds the abilities of such a country by quite a large margin - are no longer feasible.

That's deterrence as well.

Further, it disrupts any opponents' ability to use space-born assets with impunity for reconnaissance in wartime: they can be brought down, and without great effort. Just move the ship, charge up a SM-3 mod and move the ship to intercept: as far as these things go, fairly trivial, as has been proven.

That's deterrence as well.

The implications are severe: the US, basically, has proven to now possess a working anti-ballistic missile defense that has shown itself capable of working under real-world conditions.

For the US and their allies, that's good news: it is very, very bad news for anyone planning a war against the US and their allies.

And that is deterrence.


Oh, and what ships can fire this? Anything with an Aegis system.

Expect significant orders from both Japan and Taiwan...

Update on Islamophobia...

The article referred to here is now available, in German, online here.

Just thought you'd like to know... :-)

Marry Him...

I ran across this, which basically talks about how aging is affecting career women who find that they do want a family and children. It's by Mary Gottlieb, titled "Marry Him": very good read.

I've been married 18 years now, on 4 Aug it'll be 19 years.

When my wife and I were first going out, one of our conversations touched on what Mary has written. My wife basically asked "Why give up all the women in the world for me?" My answer - the only right one - was "Why give you up for all the women in the world?".

That's all. There is nothing more to say.

Most Astute Comment on the US Election So Far...

This is the best comment I have seen on the US election to date, and needs no additional commentary:

"The 2008 Democratic and Republican candidates for President will be...John F. Kennedy and Ronald Reagan."

'nuff said, Flame out!

What The Real Problem Is...

Well, Zumwinkler, the head of the German Post Bank, resigned on Friday because he's being nailed with a nasty tax evasion process.

The German government has started a wide-spread anti tax-evasion investigation, aimed mainly at those in higher income brackets that are using loopholes that aren't really loopholes (i.e. exist only in their imagination) to avoid paying German taxes. They've raided many offices searching for monies deposited illegally in countries like Lichtenstein, invested in ways so that income doesn't get reported, usually simply by obfuscation.

Let's take a look, briefly, at tax rates in Germany.

Let's start at the bottom: the first 7 664 € annual income are tax free. The tax rate runs progressively higher to the largest tax bracket, incomes from 52 152 to 250 000 €, where the marginal rate is then 42%. Beyond 250 000 € the marginal rate is 45%.

That is only for income tax: you have, then, as well, your state-mandated social security equivalent payments, which are 23% of your gross income up to a certain level, which for the employee works out to paying 21.4% of your income for social security, up to around 6 500 €/month: earnings beyond that are exempt from social security taxes. We're going to ignore health insurance for the time being...

Add that together, and you can see why tax evasion is probably numerically the greatest white-collar crime in Germany.


Now, what is a poor manager to do? We're talking folks earning beyond 250k €/year: let's take the example of someone earning 265k €/year. That's €22k/month: his income tax withholding on that is about €10k, and his contributions to social security is around €1500. Hence, without any other items, his €22k income has dropped to less than half that, with just a tad more than €10k. Now, while that sounds like a lot, it's not really, given the reasons why such folks earn such monies: their productive lives are being bought for the company, and nothing should distract them (well, that's the reason: reality, of course, is rather different, as we've seen by the number of incompetent and criminal managers...).

If that person can avoid paying taxes on, say, half of his taxable income, that's equivalent to getting a 100% raise. If half of your income is taxed away - and given German demographics, your social security contribution's return on investment will be negative if you are under the age of 60 or so - then you've got great incentives to find ways of avoiding paying those taxes.

Now, I'm not advocating not paying taxes: duh.

But the real problem isn't so much that these folks have to pay higher taxes: it's much more that the state in Germany, which of course has to be financed by taxes, is too large.

The real reason why tax evasion in Germany, amongst white-collar workers and managers, is a problem is that the taxes are, for the real world, too high. Tax evasion, to the extent that it is the problem that it is in Germany, is a symptom, rather than the result.

And given the amounts of waste and fraud - don't get me started, I'd have to spend the rest of my life working on it - in Germany, which of course white collar workers know about quite well, the motivation to play their part in the general welfare is downright negative.

Dezinformatsia and Active Measures...

This caught my eye this lovely morning.

It's, of course, typical active measures: it is the deliberate use of false information, be it forged documents, manuscripts, photos, or the spreading of malicious propaganda and fabricated intelligence.

In this case the disinformation that the CIA is transporting heroin out of Afghanistan with military aircraft.

In other words, the deliberate spreading of false information.You can see more about this here. We're not talking speculatively here: the link takes you to what a former KGB general says about the Soviet Union's active measures campaigns aimed at undermining the West, especially in the Third World. Active measures ("Активные мероприятия") was first and foremost a method of political warfare: the reason it was called "active measures" is that it involved actively setting up the means of spreading disinformation, such as the use of front organizations that would not exist otherwise. This wasn't some sort of side show: it was the heart and soul of Soviet intelligence efforts to weaken the West and, more fundamentally, to make the US look as bad as possible in order to discredit the enemy of the Soviet Union. Hence the spreading of the rumor by Jakob Segal that AIDS came from a biological war lab and is aimed at black people (see here).

But it didn't stop there: the Soviets were more than happy to use this to attack western allies in other countries, people who were true leaders and were, hence, obstacles to the triumph of Soviet politics, such as Masyrk of Czechoslovakia and the Shah of Iran; the attempt of Pope John Paul II was most likely an active measure as well.

What were other active measures? How about the training of terrorists, including the idea of hijacking airplanes. The Soviets actively backed the development of international terrorism: that is not speculation, that is what they, themselves have said (see here). Sure, they were able to build on resentments and prejudices, but the goal was, in the words of Andropov, "to install a Nazi-like hatred of Jews throughout the Islamic World, and to turn this weapon of the emotions into a terrorist bloodbath against Israel and its main supporter, the United States."

Well, that sure seems to have worked.


The point of disinformation and active measures isn't necessarily to support Soviet goals anymore: after all, the Soviet Union collapsed. But nowadays it is all about furthering Russian goals, and for the FSB, the follow-on of the KGB, the world is a zero-sum game that means that if the US and its allies are harmed, then Russia is helped.

Hence the stated goals of Soviet active measures have been adopted by the Russians. Fundamentally, these cover six points:

1. To influence America, European and world public opinion to believe that US military and political policies are the major cause of international conflict and crisis.

2. To demonstrate that the United States is an aggressive, militaristic, and imperialistic power.

3. To isolate the United States from its friends and allies, and to discredit those states which cooperate with the United States.

4. To discredit US military and intelligence establishments.

5. To demonstrate that the policies and objectives of the United States are incompatible with those of the under-developed nations.

6. To confuse world public opinion concerning Soviet global ambitions, creating a favorable environment for Soviet foreign policy

(source here)

Replace "Soviet" with "Russian" and everything applies.

And the Soviets taught well.

The war with Iraq was based on a web of lies and disinformation, but not that of the West: see here.

The main tools of disinformation in the Middle East are as follows:

• Staged suffering and grief
• Co-location of military assets and civilians
• Restricting journalists' movements
• False claims or disclosures
• False man-in-the-street interviews
• Self-inflicted damage
• On-the-record lies
• Covert dissemination of false stories
• Censorship
• Bogus, edited, or old footage and images
• Fabricated documents

We've seen all of these in action in the Middle East, be it in Gaza, Lebanon, the West Bank, or Iraq. To repeat: these are not the things that the West has done, but rather is done locally, or, in the case of Al Jazeera, internationally. Al Jazeera can be considered to be an independent news source only in the sense of contextual objectivity, i.e. Al Jazeera is viewed as more objective than the heavily censored official TV of Arab states, but it has proven to be the channel of choice for disinformation campaigns from non-government sources, and hence is included here.

Disinformation and active measures continue today. If you take a look here you can see what the post-Soviet Russians were doing immediately after the end of the Cold War. The "new thinkers" saw that they had to learn how to dominate the political arena in order to gain power.

Astute thinking: it underscores, however, the direction that active measures have been taking and, to a large degree, the success that they have enjoyed.

Western societies are under attack not merely from islamists, but also from the radicalized environmentalists. Part and parcel of a disinformation campaign?

Watermelons, anyone?

Islamophobia...

There is an interesting article in today's Handelsblatt: unfortunately, it's not online. Which is a shame.

Basically, Ferdinand Knauss has done a good job: he's identified what Islamophobia is and why it's important to know what it is.


First and foremost, it's got nothing to do with rejecting Islam: it's got everything to do with turning critics of Islam into mentally disturbed people.

Sound familiar? If you have ever taken a look at Soviet jurisprudence, one thing that stands out is the fact that many dissidents were condemned not for criticizing the Soviet state, but rather for being mentally ill.

The same is true for Islam.

Or, more specifically, the attempt to radicalize the religion and turn it into a mobilization tool to achieve political gains.

The first use of the concept "Islamophobia" was used - o wonder of wonders - in Tehran to stigmatize the opponents of the clerics, starting in 1979. The intent of those introducing the word was to pathologize opposition to Khomeini's brand of Islamism, to turn criticism into mental instability and sickness. This was fairly successful, and the Islamic Human Rights Commission used the term in advance of the fatwa against Salman Rushdie in 1988 to properly label him as someone sick and deranged.

This use has spread: the Commission for British Muslims and Islamophobia brought out a report in 1997 that demonized islamophobia as being equivalent to racial violence and anti-muslim discrimination. The commission belongs to the Runnymede Trust, a British think tank, financed in part by the British government. This was the first large-scale use of the concept in the press and spread the idea, the meme, that islamophobia is the same as racism.

This has spread to academia: the purported identity "islamaphobia = racism = danger" is not merely popular amongst political activists of the left, but has entered the mainstream in public documents. The EUMC, the European Monitoring Centre on Racism and Xenophobia, stated in Dec 2006 that Muslims in the European Union were victims of islamophobia.

But they don't define it.

How could they?

Fundamentally, a phobia, as Herr Knauss rightfully points out, is an irrational fear of something. Afraid of small areas? Claustrophobia. Fear of spiders? Arachnophobia. The problem is that this is rightfully a psychological disorder, where, for instance, someone literally panics when a small spider appears, or is constitutionally incapable of sitting in a small room. A phobia is an indication of severe emotional problems, and is right and properly a sickness.

Not so "islamophobia".

Here is an excellent example of political correctness run amok: for daring to criticize the darlings of the left and the media, the use of the label "islamophobic" is a pejorative, a mislabeling, a deliberate misrepresentation of the facts. This is not about an irrational fear, but rather it is one of criticism: the left and radical islam is absolutely intolerant of the existence of any kind of criticism.

The core of Islam critics aren't western intellectuals, but rather what Islam considers apostates, former Muslims, such as Ali Sina and ibn Warriq. They know Islam from the inside, and their criticism is viewed by the dogmatic representatives of that faith as being nothing less than a sickness.

The use of "islamphobia" to describe critics of Islam is nothing more than an ad-hominem attack: by placing criticism on the same level as mental illness, Islamics can work without fear of criticism.


Like I said, this is nothing less than what Soviet psychiatry practiced. Criticize the regime, and you end up in a mental institution for the criminally insane: the mere idea that you would even want to criticize is proof of your insanity, as the state is the embodiment of the best of human endeavors and is as such beyond criticism.

Those using the term are themselves nothing more than dogmatic islamophiles, using the term deliberately to slap down dissent and criticism. If you can't criticize the religion, you can't differentiate it form your own: if you can't criticize the religion, then what is the the difference between it and your own? If you can't criticize the religion, then by what means can you say that you don't want sharia law? If you can't criticize the religion, then how can you prevent it from taking over everything?


You can't. That is the nature of totalitarian movements, and, bluntly, that is what the Islamists are all about. Their fellow travelers of the left have plenty of experience with that.

True Stupidity and the Left...

True stupidity and the left... but I repeat myself.

We've all seen this by now. Berkeley wrote a nastygram to the Marines and gave Code Pink a parking permit in front of the office.


Now, that was stupid enough in itself.

But not the real stupidity comes: this is a quote from the link above.

"I was under the impression that we have the right of free speech," said Xanne Joi of Code Pink. "To me, I thought free speech meant you get to say what you want without recrimination."

Sorry: free speech means that you can say anything you want (within limitations that should be jealously guarded, such as calling "Fire" in a movie theater) and that no one can stop you from saying it.

It does not mean, has never meant, and never should mean that what you say should not have any effects.


Believing that is true stupidity, and explains a lot of the verbal nonsense that comes from the left.

Free speech has never meant that you can say whatever you want and no one can criticize you for it.

Free speech has never meant that you are not responsible for your words.

Free speech has never meant that others may not act upon what you have said.

Free speech has never meant that you are free from the effects of what you have said.

Free speech has never meant that you are free from restrictions, legal ones, on what you say, such as slander, libel, obscenity, perjury, contempt of court, hate speech, noise pollution, copyright infringement, divulging classified information, sedition, treason, blasphemy, just to name a few restrictions.

Free speech has never meant immunity from social approbation, of social criticism for what you have said.

And most importantly:

Free speech has never meant that you can force people to think of you as being anything but a complete and total idiot and fool.


Dear sycophants of the left, you nattering nabobs, free speech means that you can say whatever you want: it also means that I can say whatever I want. It also means that you bear the responsibility for what you say: if you find that chilling, then put on a sweater.

Escalatio and Salami Tactics...

First of all, hat tip to Belmont Club and also to Snapping Turtle, both via InstaPundit, for getting me to pay attention. Reality has been intruding lately...

Let's talk first of deterrence. Deterrence takes many forms: the various words for deterrence - Abschreckung (German), dissuasion (French) and устращение (Russian), as well as the Anglo-Saxon deterrence each have different meanings, even when the same thing is meant. The differences are subtle, but meaningful: while the English "deterrence" points to a weighing of alternatives and then a deliberate and conscious decision to not do something - a criminal is deterred if he decides not to rob someone because they may be armed, for instance - while the French "disuassion" points more to something along the line of dissuading someone, of the opposite of persuasion, which has fundamentally the same thing as the English.

The German "Abschreckung" isn't so simple: it's less a matter of intellectual analysis, but much more an emotional thing, of springing back from an action, and the word is based on the German for terror, with the "ab-" prefix adding to the effect.

The Russian устращение, ustrasenie, doesn't mean what the English and the French mean, let alone the German: the word means to cow or intimidate: back in the Soviet days (and according to the Soviet Military Encyclopedia) this word was always - with no exception - used in connection with NATO. It was first and foremost an ideological definition, and underscored what American nuclear weapons meant for the Soviets: they were there to intimidate them.

 

But back now to the topic at hand: the rebirth of deterrence.

 

Now, what is the whole point of deterrence?

 

Basically and most fundamentally, we have to go back to the immediate post-war period. The West had, largely, demobilized, while the Soviets, largely, had not. I'm simplifying, of course, but the countries of Western Europe, devastated by the war, had no will to remilitarize and create a large standing army. What to do, then?

Rely on nuclear weapons to dissuade, to deter, the Soviets.

But how did deterrence actually work?

Let's go back to the Soviets: they were, after all, those who were to be dissuaded, deterred. What would deter them?

Correlation of forces deterred them, dissuaded them: the calculus of Soviet military doctrine, of acquiring such superiority of force that their victory, whilst never guaranteed, would be inevitable. Great believers in inevitability, the Soviet military. If the correlation of forces were not favorable, the Soviet military informed the Politburo and decisions were made to address this. The Soviet military was tasked with ensuring that the Politburo could use the military to further its goals: to intimidate the bourgeois governments of the West in order to get them to stop resisting the inevitable development of history: the triumph, of course, of Soviet communism over capitalism.

So, what is the point of the links? What do they mean?

A group of retired military officers - actually, the elite of NATO - says quite bluntly that NATO must consider the first use of nuclear weapons, that NATO must retain a first-strike capability, nay a pre-emptive capability to destroy, utterly, the threat of attack by an enemy.

The reason behind this? Simply put, proliferation, or, more exactly, the threat of proliferation: the danger that with more and more countries - with less and less responsible leaders - will acquire the ability to use nuclear weapons in a conflict, leading to an increased likelihood that they will be used.

You see, after the collapse of the Soviet Union and the Warsaw Pact, the threat of the use of nuclear weapons was largely removed from the realm of politics.

It is now returning with heavy, heavy footsteps. It's not so much the simple likelihood that nuclear weapons are apparently being developed: it's much more that those developing them are not doing so because they want to shift correlation of forces to place pressure on the West (or, more exactly, that is not the primary reason), but those who are actively developing them - let's drop the sham, that's Iran - are developing them because they want to use them.

And that is what is so intensely dangerous.

The pundits in the West who seem to care little of whether Iran develops nuclear technology to the point where it can generate enough weapons-grade fissile materials to manufacture nuclear weapons, as long as they don't actually do it, are missing the point about nuclear weapons: they are a Rubicon that has not been crossed since 1945.

With the weakening of the UN and the apparent increasing rise of non-nation players - be these NGOs or movements like al-Qaeda - that do not play with the same rules as the classic nation-states of Westphalia, the problem becomes more acute.

So, what is the point of the threat of pre-emptive usage?

Simple: however organized the non-state actors may be, they still must operate within a framework of nations. Right now there is no way to prevent weak states - or sympathetic ones - from harboring non-national actors, and indeed these actors predicate their operations on being able to hide amongst the populations of such countries.

Political attempts to make this impossible have failed: both Afghanistan and Iraq underscore the fundamentally messy and protracted nature of asymmetric, but conventional, non-nuclear combat.

The generals here are pointing out that if the West is to succeed in fighting an ideologically motivated opponent, one committed to intimidating the secular governments of the West in order to get them to stop resisting the inevitable development of history, the triumph of Islam over the West, then it must revert to the balance of terror that sustained it through the Cold War.

But not, this time, by believing in rational, cool thinking that characterized Soviet military planning, but in recognizing that the opponent is, in our eyes, in the eyes of the enlightenment, fundamentally irrational. Hence the need to transform deterrence into what the Soviets always believed that it was: intimidation.

A pre-emptive philosophy, of fundamentally saying to the Muslim world, "Do not think of obtaining nuclear potentials to use against us, for we shall destroy you beforehand", can function only if it is used to intimidate, in the sense set out above, the nations involved into refusing to be a part of anyone's plans to actually use nuclear weapons.

And there are reasons that this needs to happen: if, for instance, a modest nuclear weapon of, say, Hiroshima yield, were to be detonated in Tel Aviv (after, say, being smuggled there by truck), it would gut Israel's society and kill between 1mn and 2mn people. The reprisals, say against Iran, would, given a 15-missile counter attack against the major Iranian cities, kill over 30mn.

What the real threat, though, is for the attack to be on Rome.

Normally, this would be deterred by guaranteed retaliation: but if al Qaeda executes the attack, who do you retaliate against? This is, of course, the deliberate policy of al Qaeda, of asymmetric warfare, of denying the West the ability to use the strengths of the West against al Qaeda,

But put nuclear pre-emption into the equation, believable - and that is the point the generals are making - pre-emption, and you get vastly different kinds of behavior.

But it's all a question of believability: call NATO's bluff on such, and you've exposed the paper tiger and won a massive propaganda victory. If NATO is going to go for such a philosophy, it has to be believable, which is what the generals are saying.

With the way things are going right now in NATO, with the abject German inability to grow a backbone and live up to its treaty commitments, believability is a major issue.

Put simply, deterrence will not work, has not worked, and believing that al Qaeda is a rational actor - as we understand that - and can actually be deterred is foolish at best and downright criminal at worst.

Hence: let NATO intimidate the countries we are talking about into deciding that they will no longer suffer al Qaeda to operate within their national borders. That is essential to destroying that group.

Escalatio, or the art and science of political intimidation by military threats, is a moot point; the enemy is engaged in operating at very low levels, of always making sure that they remain under the threshhold, operating as the Soviets did with "salami tactics" that constantly, slowly shift the barriers around. The West has lost its ability to play escalatio, not the least due to the nattering nabobs of the MSM, and if that is gone, there is only one game left to play, that of naked power politics.

And a small follow-up...

I ran across this today.

It just goes to underscore that the Greens are willing to sacrifice anything and everything to protect their version of the truth and remove any dissent from the program: it is, has been and will always be about control.

And here is a top-ten list that simply - and sensibly - lays out what environmentalists need to consider:

10. Go after pollution sources with the highest benefit/cost ratio, not those which are most noticeable.

9. It is always best and often vital to utilize existing infrastructure and capabilities when implementing new methods or technologies.

8. "Natural" "Organic" and "Bio" do not mean "good."

7. Plans for the future should not be made on the most optimistic predictions and should consider the most pessimistic reasonable predictions.

6. Simply attacking an environmentally damaging activity is not effective unless a better alternative of similar or better economics and usefulness is presented.

5. Taxation, price increases and caps on energy are inherently regressive and cause great damage.

4. It is unreasonable to expect the general public will accept major reductions in living standards or comfort and convenience. Simply put, it won't happen.

3. Depending on continuous heavy subsidies is not sustainable.

2. Every little bit does not help.

1. Sacrificing the needs of an economy for the environment will destroy both.

While each and every point is good, it is 5 and 4 that lead to 1. The damage caused is real, in terms of opportunities lost and futures denied: anyone wanting to deny progress, real progress instead of the reactionary nature of "progressives", is fundamentally interested in controlling his fellow men and should be seen as a fundamental threat to any and all democratic, representative governments. It's really as simple as that...

And now I'm just waiting for someone to tell me to take this down because it's harmful to the environmental movement...go to the link to see what I mean (see the comments...)

Global Warming Redux...and the Watermelon Movement...

This time it's a lacunae by Cockburn. You can read it here.

What Cockburn says is that he doesn't quite understand why the left has gone so heavily for the environment and the scare tactics of global warming.

He says:

This turn to climate catastrophism is tied into the decline of the left, and the decline of the left's optimistic vision of altering the economic nature of things through a political programme. The left has bought into environmental catastrophism because it thinks that if it can persuade the world that there is indeed a catastrophe, then somehow the emergency response will lead to positive developments in terms of social and environmental justice.

What really is going on is this: the left is really only interested in one thing only, and that is control. They still truly believe that they can reach the promised land if they can only control the means of production.

What Cockburn really should have written is this:

The left has usurped the environmental movement because it thinks that if it can persuade the world that there is indeed a catastrophe, then by giving the environmentalists control over the world's economy, the catastrophe can be averted.

Now does that make more sense?

His further points, however, are completely correct and underscores how truly, deliberately anti-progressive the left has become: the Luddite aspects of the environmental movement mesh beautifully with the left's desperate desire to control how people live their lives.

But this time it's enormous: they want to stop the Third World from moving away from poverty into affluence: just think of it, if the Third World lived like us how much damage that would create! Hence we have to keep those poor and misled fools from making a mess of their lives and ensure that they only may live as we see fit to choose.


Seriously, how can anyone, nowadays, be a leftist? Be a progressive? The world has turned these movements on their head, exposing their absurdity, and yet...

There is indeed a sucker born every minute. Those on the left who truly believe this are the useful fools of Lenin. They work, to borrow from Chomsky - hah! - with the bought priesthood of the left, the climate priesthood of the global warming apocalypse, kept happy and complacent with academic grants and positions of power within the climate science peer group and who ensure that peer review takes on new meaning.

The mainstream media, the synodiporia of the Watermelon Movement - green on the outside, red inside - is complacent as well. They are fellow travellers, at the best unwitting agents of influence, manipulated to take actions in the interest of the Watermelon Movement. These are those whose opinions fit into the goals of the Watermelon Movement, for whatever personal reasons: they are interested, for instance, in furthering their own careers, and are more than willing to cooperate, to accept support that would otherwise be severely embarrassing if found out.

Wonder why the image of the US has been so under attack? it is because so many have been able to do so well by attacking the image of the US for their own reasons and interests. The constant beating of the BDS drum, the constant harping and criticism by journalists whose only real interest is ensuring that they get more column-inches than anyone else working for their paper, has a cumulative effect, especially when alternative news sources are limited.

The seduction of the Watermelon Movement is fairly straightforward and literally takes its cues from Soviet-era KGB false flag recruitment techniques (i.e. telling someone that they are spying for Israel when in reality they are being run by the KGB), where careful and deliberate duplicity is the main mode of operations.

This method is goal-oriented disinformation, and the global alarmists are excellent at manipulating the main-stream media journalists: after all, their work is peer-reviewed (failing to mention that the peers in this case all share, basically, the same goals of getting money for their academic careers) and they're scientists, they can't be wrong. So let's not learn the science, find that non-statisticians are using advanced statistical methods that they don't know how to use (and try to hide how they manipulated the tools so that they always get the results they want), that the fundamental data underlying the models is biased due to urbanization and incorrect proxies and is increasingly simply bad science, but instead parrot the goal-oriented disinformation that the activists want spread.

But back to Cockburn: he's right. The global warming alarmists are truly medieval with their new-found ability to buy indulgences.

The Kyoto Accord is and remains fundamentally reactionary, with the goal of ensuring that underdeveloped countries be actively denied progress in meeting the needs of their citizens.


So who are the members of the Watermelon Movement? They are the the NGOs and government people who attend the conferences on global warming, they are the NGOs and government people who write the articles and are quoted in the mainstream press. They range from all over, but have one goal: to get their own goals advanced.

In other words, the Watermelon Movement is based on individual self-interest, but not in terms of the matter at hand, but rather how these groups can best attach themselves parasitically to the world's economy.

Who's behind them?

Good question.

It's a mixture of guilt-ridden financiers like Soros, dinosaurs of the left like MoveOn and the other ancient leftist groups. But who are they exactly, what are their interrelationships?

Good question.

Why The Subprime Crisis Came About...

This is one of the best explanations of the subprime crisis I've seen to date, and is from a banker. The first part, which has less to do with the sub primes, is here. Thumbs up to the blogger...

What was/is the problem?

The fundamentals of banking are, in reality, rather simple: if you want to get money from the bank, they need to know the likelihood of you paying that money back. The more likely that is, the less you will have to pay for that money. If you have savings and want to invest that money, the higher the interest rate, the greater the likelihood that you will not see any of your money back.

The banks live on asymmetric information (if the borrower could tap the lender directly, they wouldn't need the bank!) and fees for services provided. They pay interest rates on savings that are lower than the rate they charge to borrow that money, and the interest difference is where they make their money (service fees serve only to lower their overhead). They can turn their liabilities (unpaid loans) into assets by discounting the future value plus repayment risks and selling their portfolio at a discount. You normally don't do this, as the banks want the cash flows. It's their bread and butter.

So, what happened in the sub prime crisis?

The banks no longer needed to worry about whether the money got paid back. They jiggered their internal rating systems to make all loans look good, misrepresented those loans to external investors, and laughed all the way to the ... bank. They were more than happy to do so, since if one had properly discounted the loans, they'd have been true junk, with maybe ten cents on the dollar. So they broke even and cashed in on their fees.


The external investors invested like they believed that all sub primes were actually prime loans, and were overcome by one of the most fundamental human emotions: greed. They thought they were getting solid investment instruments with great rates of return, and I cannot fathom why their due diligence failed so abjectly.


The borrowers were complicit and stupid. On the one hand, the banks were actively looking for such folks, and normally would never, ever have lent them these monies, but since the bank was selling the loan immediately, it didn't care: someone else would pay the bill.

So, it's a tragedy: billions "lost", careers ruined, homeowners evicted, and this will cost probably around 50-75 points of GDP growth for the next several years each and every quarter until the mess is cleaned up and proper banking re-emerges.

Wind Power Redux...And A Return To The Planned Economy?

Christian Bartsch, who writes for the FAZ, has an article here, unfortunately behind the "pay me" firewall.

It's an important piece, albeit short, as it dismantles the idea that wind power is an alternative energy source.

Put simply: Germany, right now, has an installed base of 21.5 Gigawatt (21500 Megawatt) of wind power. Bartsch took the trouble of taking a look at what that installed base actually generated, and it is, put very bluntly, pathetic.

The industry itself calculates that you can only "count" on the installed base providing an average of 10%, i.e. from 21500 MW down to 2150 MW. But this is highly misleading: if you take a look at the real performance for October, you get two days - that's 2, the number between 1 and 3 - where, for a few hours, 1/3rd of the installed base actually delivered electricity, and another 2 days where ca 20% of the installed base was generated. The rest of the time? Under 20%, and there were several days where no electricity was generated, either because it was too windy or not windy enough.

This was even worse during the transition from 2007 to 2008: on 29 Dec., for a few brief minutes - !!! - 50% of the installed base generated electricity, after that a sharp decline to virtually nothing as weather inversions kept winds down. There was a jump on 2 Jan, but the windmills had to be closed down because a storm was brewing on the North Sea, resulting in zero energy being generated.

Now, this fairly pathetic performance is going to get worse: current installation plans call for another 3100 MW capacity to be installed by 2012 alone in the North Sea, with 10 wind farms with 660 wind mills. Since these are off-shore, they have to be cabled: 1900 km (!) of cable will have to be installed. Since installing such cable in the North Sea costs close to € 8 mn/km, this is ... ca € 15'000 mn, just for the cable alone.

In order to pay for this, wind energy is paid for with a 30% additional fee on the average cost of a generated kWh. Since more wind power is due to be installed, this means that energy prices, for Germany, will continue to climb regardless of the price of oil or coal.

Given that Germany is supposed to turn off its nuclear and coal-powered plants in 2020, this also means that Germany will have to import energy, with the enormous irony that this energy will come from French and Czech nuclear power plants.

Bartsch also looks at some of the alternatives: sun energy, for instance, costs the German consumers 50 cents per kWh, and even the German environmental minister acknowledges that sun energy in Germany is a dead-end street.

But what are the alternatives?

Biomasse costs 14 cents per kWh; wind power - when it deigns to deliver - 9 c/kWh; burning garbage is 6 c/kWh.

Coal? Lignite or brown coal is 2.5 c/kWh, as is nuclear; hard coal is 5 c/kWh. Sure, the purported "commons costs" are not included here, but the costs of current standards for air cleanliness and the like are.

Renewable energy is raising the costs of energy and reducing living standards in Germany, since sharply increasing energy costs means that you have to spend money on energy, rather than on consumption of other goods.


But there is something more important, and fundamentally more sinister, going on here, as Bartsch points out:

This points, to a large extent, to the end of energy markets in Germany, if not throughout Europe. The principles of supply and demand are being systematically dismantled.

If wind energy were even fractionally as promising as the wind energy fanatics would have you believe, then why are there no wind-powered ships on the oceans? They were abandoned the moment that steam-powered ships made it clear that shipping was no longer dependent on the vagaries of the wind.

The same is true for electrical energy generation: wind energy is simply to flighty and unstable to be truly considered an alternative.

The real problem is that this is now being regulated by law. The Renewable Energy Act in Germany (Erneuerbare Energiegesetz or EEG) is dismantling the free markets, replacing them with regulations and control mechanisms with punishment for failing to break the laws of physics.

Germany, one of the strongest economies in the world, an industrial country with 82mn population and a very high standard of living, is, via laws like the EEG, driven by politicians whose ignorance of the natural sciences is more than outweighed by their quasi-religious belief that they are going to be viewed by future generations as the saviors of mankind, is on the best way to becoming the first planned economy of the 21st century.

And that despite the obvious failure of any and all planned economies. People have a way of finding the loopholes to exploit the system.

And more fundamentally, I find it bizarre and a clear sign of a complete and total ahistoricity that this is even a topic for discussion. Climbing energy prices means that food will become more expensive and that the German industry will increase its move overseas to more conducive environments.

The environmentalists are increasingly watermelons: green on the outside, red inside. As I've said before, it's all about control: if they can't control the economies directly, they will do it indirectly, with, as far as I am concerned, a single goal.

Control.

But for what?

Nothing less than becoming a permanent parasite. These watermelons aim at becoming the tapeworm in the belly of capitalism, taking the best nutrients and passing on the remnants to the host, of thriving and spawning at the cost of the host becoming lethargic and apathetic. These watermelons aren't interested in raising the standards of living and improving the lot of the common man: they hold up the chimera of future generations and demand their wergeld.

PS: just saw that a total of 15 off-shore wind parks have been approved for the North Sea and 3 in the Baltic; installed capacity of 6'000 MW with a total of 1200 wind mills @ 5 MW... all of which makes the waste involved even worse.

A Disturbing Parallel...

Let's take a look back in history.

The Japanese, prior to WW2, were an expansionist, imperialist - in the literal sense - local power, one that had liberated itself, so to speak, from fearing the West by their victory over the Russians in 1904. They believed that they were ordained to unify the world under hakko ichiu, or "all 8 corners of the world under 1 roof", with the first step the liberation of Asia from western imperialists.

This was the driving force behind the Japanese war against China. The Japanese had entered China during the Boxer Rebellion (�和�之�). While the Boxer Movement (义和团运动; literally "The Righteous and Harmonious Society Movement") was an anti-imperialist movement based on the domination of China by western powers, it failed to stand in the face of western firepower and a western willingness to spend Chinese lives to achieve their goals of restoring the dynasty. The Japanese were happy to be involved, as it was proof of their acceptance as an advanced country: they contributed close to the half of the western troops involved in the fighting, and indeed Tianjin was liberated by one Col. Kuriya. The Japanese never left China after that: while they only got a small share of reparations - only the US got less - their troops remained in China, and after their victory over Russia in 1904 they took over Russian interests in China, leading to the virtual annexation of Manchuria and ultimately to the Sino-Japanese conflict.

The Japanese were not alone in their interest in the Chinese market, but demanded "paramount interest", akin to monopoly powers over international trade, which were largely opposed by most other nations trading with China, not the least of which was the US. The Japanese use of force to gain their goals in China - the Mukden Incident, for instance, was trumped-up by the Japanese - meant that unless the US was willing to go to war for Chinese markets, sanctions were the alternative.

The only problem was that such sanctions were highly asymmetric: the loss of Japanese markets for US industry was, bluntly, fairly trivial, while the loss of US goods was, for the Japanese, critical. The Japanese imported steel scrap and oil from the US, and both were critically needed for the Japanese war effort.

In other words, Japan declared war on the US because the US had hit it with sanctions that would have forced peace if the sanctions had been allowed to work.

Why did the Japanese, with only a portion of the population of the US, with virtually no raw materials of their own, and with large military, heavily capitalized (they don't call them capital ships for nothing!), declare war on the US?

Because of a monumental error in judgment. The Japanese attacked Pearl Harbor in order to destroy the US Pacific Fleet - which almost happened - with the express goal of gaining time to consolidate their growing Asian empire, exploit the natural resources there, and then end up at the negotiating table to work out an end for the war.

Why did the Japanese think this would happen?

Because the Japanese believed, truly believed, that they would carry the upper hand. A wide-spread Japanese prejudice was that America, that polyglot nation that touted its diversity, could not and would not act with a united singular resolve, but rather was a mongrel that spend its time squabbling and bickering, such that it could not and would not be able to react to the singular goal of Japan, which was to dominate Asia and to be the primus inter pares in an "Asia for the Asians". Japan had seen how easy it was to divide the Chinese - which are, in fact, not nearly as homogeneous a folk as the Japanese - and "knew" that the US would be an easy target, with a devastating attack being all it would take to dishearten the American public and to divide the nation. There was plenty of information that supported this thesis: the "America First" movement and the various pacifist groups, along with a large German population that had more than a little sympathy with the National Socialists in Germany.

Given this belief, the Japanese convinced themselves that not only could they win, they would win: the Americans would be forced to accept the "new reality" of Japanese superiority and of course the paramount interests of Japan in Asia.

Now, what is the parallel that I refer to in the title?


Well, there is the obvious one: that anyone reading US internal politics with all its noise, flash and silliness as a way of judging US resolve in dealing with international problems is making the same kind of fatal error. Iran, for instance, can do a one-off attack, coupled with propaganda and terror acts, that could, perhaps under certain circumstances, damage or even sink a US carrier in the Persian Gulf (and don't think that Iran isn't contemplating this: it's probably the key to their war-fighting scenarios...), but it would take a concerted effort by the pacifist components of US society to prevent Iran from being severely pummeled and fundamentally destroyed.

But while it is tempting to run the parallel between Japan of then and Iran of now, the real danger is elsewhere.




China.

Huh? China doesn't even have much of a Navy, let alone one that had any sort of correlation of forces that approaches Japan's correlation with US forces at the beginning of WW2.

But bear with me: it's all about perception.

If you look here, you can see what I mean.

This is the key portion of that analysis - which is based on Chinese sources, not US speculation - with my emphasis and some slight reformatting:

China's experts concede its army would lose a head-on fight, with one senior colonel comparing such a scenario to "throwing an egg against a rock." Instead, the Chinese would attempt what Rand calls an "anti-access" strategy: slowing the deployment of U.S. forces to the Pacific theater, damaging operations within the region and forcing the U.S. to fight from a distance.

"Taking the enemy by surprise," one Chinese military expert wrote, "would catch it unprepared and cause confusion within and huge psychological pressure on the enemy and help [China] win relatively large victories at relatively small costs." Another military volume suggests feigning a large-scale military training exercise to conceal the attack's buildup.

...

Because the American public is "abnormally sensitive" about military casualties, according to an article in China's Liberation Army Daily, killing U.S. airmen or other personnel would spark a "domestic anti-war cry" on the home front and possibly force early withdrawal of U.S. forces. ("The U.S. experience in Somalia is usually cited in support of this assertion," according to the Rand report.) Once this hard-and-fast assault on U.S. bases commenced, the Chinese army would "swiftly divert" its forces and "guard vigilantly against enemy retaliation," according to a Chinese expert.

The PLA also would likely use less conventional attacks on the American military's vital communications network. The goal, as one Chinese expert put it: leaving U.S. combat capabilities "blind," "deaf" and "paralyzed." Losing early-warning systems designed to detect incoming missiles would be, for the Air Force, the most devastating setback ― one that could force the service to exit the region altogether, according to Rand.

Why, thank you President Clinton for Somalia...

Now do you see the parallel? The Chinese realize that they cannot win a WW2-style war with the US, and hence must attack so that the US is "blind, deaf and paralyzed", allowing the Chinese to real their military/political goals (in this case, the taking of Taiwan), relying on domestic public pressure to stop a US response in its tracks, disheartening the public and dividing the nation.

This is extremely dangerous: the parallels are clear, at least in my mind. The same kind of "Pearl Harbor" isn't possible anymore, but I think what the Chinese are thinking is that they would start an invasion of Taiwan under cover of a large-scale exercise and that if US carriers came any where near, they'd be attacked with massed ballistic missile attacks: after all, you only need one hit, and if the Chinese could take out one carrier with each 100 ballistic missiles - no nukes here - then they'd be happy to. A given the Chinese build-up of medium-range ballistic missiles around Taiwan - right now estimates place the number of such missiles anywhere from 300 to more than 800 - in Fujian province, and you can see the risks of a "sudden" non-nuclear first strike that would be damned hard to avoid: having 100 ballistic missiles inbound can cover a lot of sea space, and it may not be possible for a carrier to maneuver its way out of such a tactical situation.

Now, why would China do such a thing?

Simple: it is heavily, heavily dependent on foreign trade. It gets 60% of its energy from the Persian Gulf; as long as the US can control the Indian Ocean and the South China Sea, Chinese economic growth is held hostage to US military might (if you are paranoid and see the world this way: in reality, the Chinese benefit enormously form the fact that the US help control piracy in the region...).

For the new mandarins in China, it must be galling to realize that the China trade exists under the sufferance of the US Navy. Given their attitude of cultural superiority, eerily similar to that of Japan in many aspects, then the parellels become even more disturbing...

How Terrorists Win...

There's an editorial in the Financial Times here.

What the FT argues is that it is not merely intolerable that those living in the Gaza strip be punished for the actions of their leadership, but downright prohibited by international law. According to the FT, the Arabs and international mediators should immediately seek an armistice with Hamas and that Israel cease the blockade of Gaza. The Islamists should be brought into the talks, with the goal of an independent Palestinian state on the West Bank and Gaza, with its capital East Jerusalem, and then Hamas and all Arab countries should be required to recognize Israel.


Good lord, what is in the water at the editorial offices of the FT? Bottle it and sell it to the decadent, because it apparently takes the best and the brightest into a land of delusions and insanity.


Seriously: this is so wrong on so many levels.

First of all, the likelihood of Hamas recognizing Israel has the same likelihood that a snowball in hell has of maintaining its temperature. Who, pray tell, is going to take it upon themselves to "require" that Hamas and Arabs in general are going to recognize Israel? Anyone want to explain that mechanism?

Second of all, this is tantamount to suing for peace. The terrorist group known as Hamas - and somehow the FT failed to mention the financing of Hamas via Iran - wins under these conditions.

Hamas is using the captive population of the Gaza as a political tool to achieve its aims. Nothing more, nothing less. By giving in, by saying that it is intolerable that a population so held in thrall be punished for the actions of its political leadership, is to effectively say the Hamas and the Hamas-like thugs elsewhere that all they have to do is to take such a population hostage and the West will capitulate in order to protect the hostages.

Because what the FT calls for is surrender: it is letting the terrorists win.


What about the civilians living in Gaza? What about their frustrations, their rage, their abject poverty.


You have to make it clear who is to blame, and the West and Israel fails to do so: the situation in Gaza is nothing less than the result of the politics of Hamas, and alleviating the terrible situation there without removing Hamas is nothing less than rewarding Hamas for behaving as they have, giving them absolutely no incentive to change their politics. None whatsoever.

If anything, it gives them incentives to active make things worse. Every dead child in Gaza, every picture of the hopelessness of that population, is of use to Hamas as a political weapon to extort money from western countries who can be called naive and humanitarian at best, but who remain mind-bogglingly ignorant of what is going on.


To repeat: if the West and Israel were to follow what the FT calls for, only the terrorists win.

Put bluntly, this is an appalling editorial, filled with platitudes and outrage that the population of Gaza is suffering. This is woolly-headed thinking at its worst, and if it is indeed indicative of the thinking of London's finest, then ... good night, turn out the lights behind you.

The Market Moves...

Ah, the hysteria of the markets.

A colleague got fairly upset when he saw what had happened to his portfolio. I simply asked him if he had stop-loss orders in place and had liquidated his position.

Of course he hadn't, and indeed hadn't sold anything.

So I am asked him: what then did you lose?

 

Ahhhh.

Helping the poor...

I've been catching up on my reading, and just recently got to some Spiegel magazines.

There's an article in Spiegel 51/2007, from 17.Dec, that talks of the German "Gerechtigkeitslücke". This is best translated as "justice gap", and points to the fact that apparently the distribution of income in Germany has gotten steeper, rather than broader.

Of course, the article in question - couldn't find any link to it, but it's in that particular issue - found all the reasons why German income inequality has worsened: globalization, manager's greed, awful capitalism, the usual suspects.

What they didn't talk about was the fact that Germany, with its reliance on VAT for a good portion of its income, uses a regressive tax system that means the poor bear an larger burden of taxes, proportional to income, than the rich.

Hence here is my recommendation for helping the poor in Germany: get off their backs. Sink the proportion of government spending of GDP from over 40% to less than 30%, and that 10% difference should be used to reduce the VAT.

Anything else is a waste of time, and will only ensure that the poor will continue to be worse off, rather than better.


Likelihood of this happening: nil.

Likelihood of any German politician realizing what the problem is: even smaller.

Why A Fair Tax Isn't Fair... And The Laws of Unintended Consequences...

Ever since Huckabee won the Republican vote in the Iowa Caucus, there has been renewed interest in what he calls a Fair Tax.

In interest of fairness, let me provide a link to those supporting a Fair Tax that allows you to read what they say.

Basically, the Fair Tax idea is to tax consumption and not income. Income taxes are to be abolished, all other taxes as well (more or less), and everything is financed via the Fair Tax, which is differentiated from a Value Added Tax by being paid not at all stations of the value chain, but rather ONLY by the end consumer.

Hence, the basic example being the $100 widget, the current state of affairs is that you pay $100 for the widget plus your local sales tax (where applicable, not every state has sales taxes). Let's postulate that you have $100 income that is taxed at 23% (their example), that means you have to earn $130 in order to spend $100. So you had income of $100, spend $100 (assuming no current sales tax: it's clothing in New Jersey, for instance, the government gets $30.

Now, under the Fair Tax, you'd have your full $130. The widget would cost you $130, of which would be $100 plus 30% Fair Tax, the government gets $30.

So what's the difference and why all the fuss?


Simple: this is not reality.

First of all, final consumer goods are not priced according to what it costs the maker to make them, but rather what the market will bear. If incomes go up, prices will follow them as manufacturers seek to maximize their profits.

Hence in the above example, the Fair Tax advocates assume that the manufacturer would drop their prices to reflect their savings on taxes.

This is, at best, a rather naive assumption that has little or no likelihood of ever occurring.

Remember, goods are priced not COGS (cost of goods and services, i.e. all possible inputs into the production process) plus profits to cover the cost of capital and investments. Goods are rather priced at what the market will bear: the MP3 player that you readily buy for $100 online ( i.e. leaving the trade chain out of the story) costs, factoring in all possible costs, at best $25 to make (in quant 200'000) and get to the final consumer. The fact that you pay $100 for it is irrelevant: the difference is the company's profits.

This is fundamental: costs are on the one side, prices on the other. The ability to not merely balance the two, but rather to create the largest possible difference between the two, determines the success or failure of a company. Companies that balance the two fail, since they lack the funds to expand and improve their products; companies that maximize the difference, despite competition, thrive and succeed.

The real world is vastly more complex than our simple and simplistic example. You don't have income of $100 that goes for a single widget: that is a construct to make the basic idea simple. This is misleading: what you really have is gross income of, say, $63,497 per year, and you spend, say, 60% of that on consumption, with another 20% being taken up in income taxes/FICA and the rest used to pay down debt or to save. To give that real-world flavor, say $38,098 in consumption, $12,699 in taxes and $12,700 in debt servicing or savings.

Now, under the Fair Tax, you'd be spending 90% of your income on consumption (your 60% + 30%), nothing on income taxes, leading to a theoretical difference of -10% in savings (40%+20%+40% without FairTax; 70%+0%+30% under Fair Tax).

That means your disposable income went from $50,767 ($38,098+$12,669) to $63,497, an increase of 25% (63497/50767=1,2508).

Now that sounds good, doesn't it?

You consumption, though, goes from $38,098 to $49,527, a 30% increase that you, as the final consumer, pay under the FairTax concept. You're left with 63497-49527, or $13,970, which compared to your previous savings of $12,700 is an increase of 10% (13970/12700=1,1000).

Now that sounds great, doesn't it?

But what happens when a FairTax is implemented? Remember, everything you buy is now 30% more expensive in terms of perceived utility, and you have "only" a 25% increase in your disposable income. That means you will perceive your real purchasing power ability as having dropped by 5%.

Your consumption patterns *will* change.

In the real world, people have spending limits, either informal or formal. Personally, I have no qualms about spending $100 for that MP3 player: for me, that is disposable income. I don't do it every week, though: once a month is what I am comfortable with. If I were to have 25% more money in my pocket, that would jump to $120: I'm fiscally conservative. However, someone else may feel comfortable spending $150 on their MP3 player when their incomes increase, i.e. are fiscally liberal.

Now, companies making that MP3 player set price points: they know how their consumers behave (and spend huge amounts of money finding that out!). If they see incomes jump, say by the 25% in the above example, then they're going to try to increase their prices accordingly. Not immediately, but rather when the next product comes out, with "new" and "improved" added to the product description along with the price increase. Knowing how your customer reacts when his income stream increases is key to commercial success, and cannot be ignored: prices will grow, and you won't be moving up in terms of quality, but rather companies will price their products according to the disposable income of their customers. That's how the real world works, folks: anything else is an academic exercise at best.

After all, the goal of the company is to charge the maximum that the market will bear: if they can get away with charging $150 for a $35 item, they will, but will be happy enough to live with a $100 price.

Now one of the fundamental tenets of the FairTax folks is that companies will charge less for their products, as their products cost them less to manufacture. This is where the FairTax falls flat on its face: for it to work, companies must reduce their prices - pass on the benefits from lowered costs - in keeping with this reduction in their costs from lower taxation. Unless this is written specifically into law and companies are forced to do so, they won't: there is no incentive for them to do so, as all companies work within the same environment. As the FairTax FAQ correctly states, company taxes are passed on in one form or another to consumers, forcing prices up. Companies don't have a choice of doing this or not: they pass on cost increases as a matter of principle. If taxes were eliminated, there is only one incentive to reduce prices.

To gain market share.

Companies reduce prices for one reason only: to gain market share, either for ongoing products by expanding the customer base in excess of losses per unit, or by attacking the markets of their competitors to hurt their earnings greater than internal losses. Companies reduce prices to increase the perceived utility of their products, not because their costs are lower: this only works for companies who can gain a price advantage over their competition, and because this applies for all companies, this doesn't play here.

To reiterate, for the FairTax to work, companies would have to drop their prices: if they do not, then the calculations don't work.

What you've really done with the FairTax is to give inflation a huge push, as companies seek to maximize their portion of increased incomes. Again: prices in the real world are not priced at the marginal return price of the last unit made, but are priced according to what the market will bear. There are some efficient markets that will tend to lead to the marginal price of the last unit made, but there are plenty of inefficient markets out there as well.

In other words, that widget isn't going to fall from $100 to $77: it is going to stay as close to $100 pre-tax as possible, since that is the point where consumers buy. What improves is profit margins. The idea that there is a 100% trade off is naive at best.

Now, I've labeled this post as what a FairTax isn't fair.

Why?

Because at the very core of it, it's a regressive tax. There is no way to get around the fact - not opinion, but absolute, inconvertible fact - that lower income people spend more of their income on consumption than those with significantly higher incomes or wealth. It's not a life-style choice, either: the rich can, past a certain life-sustaining minimum, chose to consume; the poor must consume, meaning that someone rich can adjust their lifestyles to match what they are willing to pay in taxes, but someone at the bottom of the food chain cannot make any such decisions, as 100% of their income goes to consumption.

Now, this is rejected as an argument by the FairTax advocates, who argue that by giving something called a prebate (cash before the transaction, as opposed to a rebate, cash after the transaction) you can equal out the regressive nature of the beast.

Sorry: this assumes that this will make a real difference to the low-income consumer.

Someone who is, pre-FairTax, consuming 85% of their income, paying 15% in taxes with no savings, will, after a 15% prebate, spend 85%+30% = 115% of their pre-FairTax income, which will have risen to 115% to leave them in exactly the same situation as before.

Or let's be more exact: someone who is at the bottom income levels today, according to the FairTax FAQ, would get a 19% prebate to compensate for 30% in taxes.

How is that fair?

For me that's a 11% difference, a negative difference, that low-income folks can't avoid.

How is that fair?

Ultimately, changing the admittedly arcane and bizarre current tax code with this would have major unintended effects.

1) Inflation would increase as manufacturers exploit increases in income. This adds to the regressivity of the FairTax, as inflation will always lead corrections to any sort of prebate, resulting in real purchasing power loss, rather than gain.

2) Consumption patterns would change. We have no way of knowing what the effects will be: it may be moderate, it may be severe. If new houses are included, but existing houses are not, then fewer new houses will be built and existing houses will become significantly more expensive, creating a bubble in existing house prices, as demand chases a drastically reduced supply. This is merely one aspect: while those who are timid souls and who save a significant portion of their income regardless of taxation rates would benefit, this merely postpones the problem, as their later consumption will be taxed when their incomes are least able to finance the tax.

3) Is increasing savings and reducing consumption good for the country? Or more pertinently, is it good for me? This is more complex than I want to get into right here, but suffice to say that if consumption were to be reduced by, say, 15%, that means the flow of goods and services would be reduced by that amount as well, which drives down GDP. If that is the goal of the system, then fine: it certainly does not, however, sell itself as that. This is a serious point: I do not see how using the tax system to create greater preferences for savings against consumption can improve the lives of US taxpayers, since many, if not most, define their happiness - one of the god-given rights in the US - via material and services consumption.

4) The incentive to complete the final transaction outside of the realm of this tax would increase. Black markets would be created to complete final transactions outside of the system for high value items: if I pay 20% less for an illegal transaction, the seller has 10% more money and I've got 20% more money, with the government losing 30%; the enforcement of the FairTax would have to be wide-spread and draconian if it were to succeed, and this raises more problems than it solves.


Summing up - and this has gone on way too long already - the FairTax is neither Fair nor a good idea.

If you want to make the tax system fair, a Flat Tax is the way to go, with no deductions: everyone pays their share. A billionaire with $100,000,000 income from dividends and interest pays 20%, as does the local barber or the traveling salesman. You set it by dividing total income from all sources by needed government expenditures to get the base rate: it goes up and it goes down accordingly, each and every year, and the only way to increase income is for people to earn more or increase the tax rate.

The eternal return of the same...not.

One of the blogs I occasionally read is Global Warming Politics from Philip Stott. You can find it here.

In this post he points out, or rather points to a scholarly work that points it out, that there are problems with statistics used by environmentalists.

In this case, there have been revisions to the data such that a supposed deforestation trend appears and then after a revision disappears, repeating itself at every revision, and has been since the 1970s.

But this statistic continues to be quoted and then extrapolated to show that massive deforestation is our future.

Let me quote him:

Dr Grainger first examined data published every 10 years by the United Nations Food and Agriculture Organization (FAO) since 1980. These cover all forest in the humid and dry tropics and appear to indicate decline. FAO's Global Forest Resources Assessment 2000, for example, showed that all tropical forest area fell from 1,926 million hectares to 1,799 million hectares between 1990 and 2000. Ten years earlier, however, FAO's previous report said that tropical forest area fell from 1,910 million ha to 1,756 million ha for the same 90 countries between 1980 and 1990. 'Owing to corrections to the earlier study, the 1990s' trend was just like a 're-run' of that in the 1980s,' said Dr Grainger. 'The errors involved in making estimates for forest area could easily be of the same order as the forest area reported cleared in the previous 10 years.'

Woah.

That last says it all: the errors are of the same magnitude as the deforestation process.

What does that tell us?

That such statistics are fundamentally useless.

If the error rate for a time series is so large that it makes any movement of the time series meaningless - say a rate change of 5% when the error rate is 10% - then any analysis based on that time series has just been discounted to nothing: you simply cannot make any judgment about cause and effect, of trends, of correlation, if that which you are observing is smaller than the average error rate.

The title of this post comes from Nietzsche: the eternal return in his philosophy is the ultimate affirmation of living, to accept the idea - terrifying that it is to him - that your life will constantly recycle, not merely with the joy and happiness, but also the worries, pains and despairs, the embarrassments and horrifying moments. While Nietzsche finds it frightening, to accept life this way is to place high marks on being alive, of accepting degradation and shame in order to continue to live (what one can draw out of that for pacificism is another story entirely...).

But the eternal return to faulty statistics, to incorrect conclusions and misled judgements: that is not something to be desired.