I recently wrote about at least one of the problems that state and local governments face.
The City of Chicago is showing the way: its bond rating has now been cut. Using reserves to avoid making spending cutbacks is in the eyes of Fitch, the rating agency, not good.
They are right. Unless the City of Chicago cuts spending significantly, the outlook remains negative, as property tax increases are considered, largely politically, taboo.
Given the corruption in Chicago (which manifests itself largely in overpriced contracts and significant over-staffing), getting spending under control will mean either cutting services to the bone (which undermines the nominal contract with the population of providing good services in exchange for relatively high taxes and a tolerance for corruption) or that corruption will finally have to be addressed.
Or, on the other hand, the City of Chicago can continue business as usual, going deeper and deeper into debt as the city's creditworthiness falls apart due to the structural problems cited. This seems to be the path that will be chosen: according to the article linked to above, the Chief Financial Officer of the City of Chicago, Gene Saffold, doesn't think that the down-rating will have a significant effect on long-term borrowing costs.
Oh really? Well, a change from AAA to AA won't, but given the negative outlook, coupled with the likelihood of other rating agencies also downgrading their ratings (Standard & Poor's has a AA- rating), the moment when the rating drops further will also mean significantly increasing costs for lending.
But, as usual, Chicago politicians are pretending that this won't be a problem, counting on an economic recovery to help their incomes return.
This is a naive belief at best, otherwise plainly irresponsible: the process of the long and slow bankruptcy of Chicago has begun. It won't be quite as fast as, say, Detroit, but this is the beginning of the end of great city. It's really only a question of time, as long as the Chicago Democratic Machine is in control.
Like that's going to change.
Freitag, August 06, 2010
Donnerstag, August 05, 2010
A Ray of Sunshine In The Darkness...
I've been full of doom and gloom the last couple of days.
To counteract some of that, let me talk about a ray of sunshine in the darkness. But beware: that ray of sunshine isn't going to make your day.
As we all know (or should know: pay attention!), wages have been stagnant and net increases in earnings haven't helped consumers out of their doldrums, as they just haven't been showing up.
Consider this: both real and nominal wages have been pretty stagnant, indicating that while there are no real increases in wages, at least inflation is not eating up purchasing power.
What if I could present a scenario where purchasing power will increase over time?
It's called deflation, and it's where the economy is probably heading.
Consider this and understand what may well happen when the next credit crunch comes along: given the inevitability of a credit crunch towards the end of this year and into the next as all those non-performing commercial real estate objects have to be refinanced, this is almost a certainty, rather than being speculative. If inflation moves below 1% in the face of stagnating demand, the economy will enter a new equilibrium, like that of the Japanese economy, where deflation has kept growth down severely, preventing, as well, job growth and anything like a strong expansion.
Instead, deflation will, for the average working consumer, provide the first real increases in purchasing power as the economy continues to slow and growth becomes a fond memory.
Like I said, that ray of sunshine wasn't going to make your day.
During deflationary periods, monetary policy is ... well, difficult at best and usually completely ineffective. The only way to get out of deflation is to reverse consumer expectations (that prices will continue to fall) and to pump up prices artificially. However, this must be coordinated with all other players in the market to function properly (i.e. everyone has to raise prices, not just a few).
The only real way out of deflation is to run the printing presses at full speed in order to inject liquidity, liquidity, liquidity into the markets. This would be an option if the government wasn't already heavily in debt, and would drive the dollar down severely, drawing inflation into the country through imports.
Unless, of course, other countries are deflating as well...
Deflation, whilst wonderful for the consumer, will be devastating to the economy. Faced with permanently falling prices, companies will scale back investments and employment in order to maintain profitability, further worsening the situation. It destroys innovation, since the only investments will be in tool and techniques to reduce costs, rather than to innovate and bring new products on to the markets.
Hence: while there is a ray of sunshine in our darkness, it is really an indication of just how dark it really is.
To counteract some of that, let me talk about a ray of sunshine in the darkness. But beware: that ray of sunshine isn't going to make your day.
As we all know (or should know: pay attention!), wages have been stagnant and net increases in earnings haven't helped consumers out of their doldrums, as they just haven't been showing up.
Consider this: both real and nominal wages have been pretty stagnant, indicating that while there are no real increases in wages, at least inflation is not eating up purchasing power.
What if I could present a scenario where purchasing power will increase over time?
It's called deflation, and it's where the economy is probably heading.
Consider this and understand what may well happen when the next credit crunch comes along: given the inevitability of a credit crunch towards the end of this year and into the next as all those non-performing commercial real estate objects have to be refinanced, this is almost a certainty, rather than being speculative. If inflation moves below 1% in the face of stagnating demand, the economy will enter a new equilibrium, like that of the Japanese economy, where deflation has kept growth down severely, preventing, as well, job growth and anything like a strong expansion.
Instead, deflation will, for the average working consumer, provide the first real increases in purchasing power as the economy continues to slow and growth becomes a fond memory.
Like I said, that ray of sunshine wasn't going to make your day.
During deflationary periods, monetary policy is ... well, difficult at best and usually completely ineffective. The only way to get out of deflation is to reverse consumer expectations (that prices will continue to fall) and to pump up prices artificially. However, this must be coordinated with all other players in the market to function properly (i.e. everyone has to raise prices, not just a few).
The only real way out of deflation is to run the printing presses at full speed in order to inject liquidity, liquidity, liquidity into the markets. This would be an option if the government wasn't already heavily in debt, and would drive the dollar down severely, drawing inflation into the country through imports.
Unless, of course, other countries are deflating as well...
Deflation, whilst wonderful for the consumer, will be devastating to the economy. Faced with permanently falling prices, companies will scale back investments and employment in order to maintain profitability, further worsening the situation. It destroys innovation, since the only investments will be in tool and techniques to reduce costs, rather than to innovate and bring new products on to the markets.
Hence: while there is a ray of sunshine in our darkness, it is really an indication of just how dark it really is.
Mittwoch, August 04, 2010
Setting Up For A Fail...
Let's see if I've got this right.
First, the government, all of it (Federal, State and Local) has gone seriously into debt for any number of reasons. The debt right now is manageable because interest rates are held extremely low and because there are plenty of investors - most of them foreign - who are willing to put their money into the US because the outlook everywhere else was even worse (largely speaking, of course). meaning that supply - investor's money - and demand - government borrowing - were meeting at a very, very low point in terms of interest rates, but not in terms of volume. In standard supply/demand curve curve terms, the interest rate curve has gone flat while the volume has moved all the way over, reflecting the risk bonus that US bond stability has, despite very low interest rates for US bonds.
This is, for the US government, the perfect situation: they can sell all the bonds they want without paying anything more than a very small amount in interest payments, relatively speaking.
We know why there is a practically limitless demand side (the US government continues to have a serious jones for debt spending, and, if anything, the more the merrier). But where is the supply coming from?
First of all, it's recycled US dollars from trade partners that have extremely large positive trade balances with the US. Buying US government bonds is a safe way for these countries to maintain their best customer (or to put it a different way, they're keeping the deficit addict supplied with just enough dope to keep them alive and continuing their habit) in the lifestyle that lets them continuing to do more and more business with the US.
Second of all, despite very low interest rates, the US continues to be The Safe Haven world-wide. Until conditions improve elsewhere, the US is where people park their money.
Third of all, the US continues to be an attractive place to do business and hence companies in other countries (and, increasingly, countries directly via sovereign funds) invest in the US because their returns are better than elsewhere.
So far, so good, right? Sounds like a pretty good set-up for the US: debt financing till the cows come home, because there is enough cash out there.
Of course, it's a bubble and is unsustainable.
Why?
Let's work backwards.
First, a weakening dollar - and the dollar must weaken further if US competitiveness is to be restored! - makes further exposure to the dollar world less attractive. Add to that the emerging middle classes in China and India, as well as the (admittedly still very slowly) rising business liberalization of those countries (reducing bureaucracy and providing investment incentives in the form of tax breaks is a fairly cheap way of drumming up enormous interest and is more than offset by increased employment with regionally attractive wages) and you can see where a scenario develops that will reduce foreign investment in the US to that which foreign companies see appropriate to serve the US market, not the world market as a whole. Given that the US is only 25% of world GDP, other markets are going to become significantly more attractive for foreign investors, especially for large-ticket investments such as automobiles, chemical and other industrial plants, as well as refineries.
Second, when world trade recovers and demand increases, there will be more demand for investments elsewhere, leading capital away from the US.
Third, and this is the critical point, the sustainability of US government spending depends on these large inputs from foreign capital, as interest rates remain very low, held down by the Fed and the lack of alternatives for US dollar investments. This is very, very, very important: when capital starts to become less readily available, it increases in price.
In other words, interest rates rise.
This will first appear in junk bonds, but will quickly spread up the risk ladder until the rate increases hit AAA commercial paper.
At that point the bubble will start to burst.
If the US government - which in its infinite wisdom (thank you, President Clinton!) is now largely financed short-term - fails to succeed in oversubscribing a bond sale, the game is all but over. Normally, bonds are oversubscribed, meaning that there are more buyers than sellers and that all bonds are sold (and no government puts up bonds for sale when it doesn't actually need the money!). Failure to sell all the bonds would be disastrous: the market would be telling the world that there are better places to earn interest and that the demand is too large for the supply.
The result would be, in order to re-finance the deficit (and this is key: we're not talking about new debt, but rather rolling over old debt!), that the government would either have to raise interest rates or reduce the selling price of bonds (which is effectively the same thing).
The problem? The sheer volume of the US deficit, plus the fact that a significant majority of bonds are short-term, needing to be rolled over every 2-5 years, means that even a tiny increase in interest rates means significantly higher dollar outlays for the US government, which means that one of several things has to happen (dismal science, economics...).
Either the government reduces its debt by using taxes to retire bonds to match the new lower level of sustainable debt financing, or spending on interest payments will increase significantly (also paid for by tax dollars), or spending has to be cut, or taxes have to be increased (or supplemented by new taxes). In reality, there is a continuum of choices, but these are the four poles that cannot be moved.
Those are really the only four choices (although there is a fifth, more about later).
The first and the third are the fiscally prudent approaches that tells any banker that the entity in debt is actively moving to clear and retire debt, or, at least, reducing the exposure to debt. It means cutting discretionary spending, reducing or eliminating automatic spending increases, and cutting benefits to many who enjoy the breaks. It also means ruthless trimming of spending on pet projects (aka "pork") and bringing in federal wages back into line where they once were, smaller than in the commercial sector, with increased job security to compensate. All highly unpalatable decisions that will not be made unless the writing is clearly on the wall and a consensus can be reached.
The second and the fourth are the nightmares, because it means that the entity in debt is looking for a way to increase the debt without changing. That is the path paved with danger, because the lack of a commitment to change in the face of an existential debt problem is usually the sign that there is something seriously wrong and that wishful thinking is replacing serious analysis of how to get out from under water.
This is, largely, where we are now: no party is seriously calling for fiscal prudence because it means making spending cuts now, before the crisis arrives (since it will reduce the vulnerability to interest rate increases, this also pushes back any sell-by date into the future, giving the government time to reduce its vulnerability even further.
What is the fifth option?
It is the simplest for the borrower and it is the reason why interest rates are charged. It is debt repudiation, of refusing to pay any more, of bankruptcy. Where bankruptcy laws are heavily biased to the debtor, this is a popular way out because any real costs are mitigated by the inability of the lenders to actually take what was used as a security.
In the case of sovereign debt, the problem is even more complex: it is easy to renounce the debt, but it generally means that you lose access to capital markets until people have either forgotten or are, for some god-forsaken reason, willing to believe that this time it's different.
The security that the US has been (ab)using is the reputation of the US as a safe haven.
To put it bluntly, the current financial and fiscal policies of the US is setting up the US for a fall. If interest rates pick up, the whole house of cards starts to fall apart, as it will mean a mixture of massive cuts in US government spending and massive increases in taxes in order to finance those higher interest rates.
Bursting bubbles are never fun. The US government has never faced one with its own spending. It will not be a pleasant experience. It will also the be the death of Keynesian economic policy.
And not a moment too soon.
First, the government, all of it (Federal, State and Local) has gone seriously into debt for any number of reasons. The debt right now is manageable because interest rates are held extremely low and because there are plenty of investors - most of them foreign - who are willing to put their money into the US because the outlook everywhere else was even worse (largely speaking, of course). meaning that supply - investor's money - and demand - government borrowing - were meeting at a very, very low point in terms of interest rates, but not in terms of volume. In standard supply/demand curve curve terms, the interest rate curve has gone flat while the volume has moved all the way over, reflecting the risk bonus that US bond stability has, despite very low interest rates for US bonds.
This is, for the US government, the perfect situation: they can sell all the bonds they want without paying anything more than a very small amount in interest payments, relatively speaking.
We know why there is a practically limitless demand side (the US government continues to have a serious jones for debt spending, and, if anything, the more the merrier). But where is the supply coming from?
First of all, it's recycled US dollars from trade partners that have extremely large positive trade balances with the US. Buying US government bonds is a safe way for these countries to maintain their best customer (or to put it a different way, they're keeping the deficit addict supplied with just enough dope to keep them alive and continuing their habit) in the lifestyle that lets them continuing to do more and more business with the US.
Second of all, despite very low interest rates, the US continues to be The Safe Haven world-wide. Until conditions improve elsewhere, the US is where people park their money.
Third of all, the US continues to be an attractive place to do business and hence companies in other countries (and, increasingly, countries directly via sovereign funds) invest in the US because their returns are better than elsewhere.
So far, so good, right? Sounds like a pretty good set-up for the US: debt financing till the cows come home, because there is enough cash out there.
Of course, it's a bubble and is unsustainable.
Why?
Let's work backwards.
First, a weakening dollar - and the dollar must weaken further if US competitiveness is to be restored! - makes further exposure to the dollar world less attractive. Add to that the emerging middle classes in China and India, as well as the (admittedly still very slowly) rising business liberalization of those countries (reducing bureaucracy and providing investment incentives in the form of tax breaks is a fairly cheap way of drumming up enormous interest and is more than offset by increased employment with regionally attractive wages) and you can see where a scenario develops that will reduce foreign investment in the US to that which foreign companies see appropriate to serve the US market, not the world market as a whole. Given that the US is only 25% of world GDP, other markets are going to become significantly more attractive for foreign investors, especially for large-ticket investments such as automobiles, chemical and other industrial plants, as well as refineries.
Second, when world trade recovers and demand increases, there will be more demand for investments elsewhere, leading capital away from the US.
Third, and this is the critical point, the sustainability of US government spending depends on these large inputs from foreign capital, as interest rates remain very low, held down by the Fed and the lack of alternatives for US dollar investments. This is very, very, very important: when capital starts to become less readily available, it increases in price.
In other words, interest rates rise.
This will first appear in junk bonds, but will quickly spread up the risk ladder until the rate increases hit AAA commercial paper.
At that point the bubble will start to burst.
If the US government - which in its infinite wisdom (thank you, President Clinton!) is now largely financed short-term - fails to succeed in oversubscribing a bond sale, the game is all but over. Normally, bonds are oversubscribed, meaning that there are more buyers than sellers and that all bonds are sold (and no government puts up bonds for sale when it doesn't actually need the money!). Failure to sell all the bonds would be disastrous: the market would be telling the world that there are better places to earn interest and that the demand is too large for the supply.
The result would be, in order to re-finance the deficit (and this is key: we're not talking about new debt, but rather rolling over old debt!), that the government would either have to raise interest rates or reduce the selling price of bonds (which is effectively the same thing).
The problem? The sheer volume of the US deficit, plus the fact that a significant majority of bonds are short-term, needing to be rolled over every 2-5 years, means that even a tiny increase in interest rates means significantly higher dollar outlays for the US government, which means that one of several things has to happen (dismal science, economics...).
Either the government reduces its debt by using taxes to retire bonds to match the new lower level of sustainable debt financing, or spending on interest payments will increase significantly (also paid for by tax dollars), or spending has to be cut, or taxes have to be increased (or supplemented by new taxes). In reality, there is a continuum of choices, but these are the four poles that cannot be moved.
Those are really the only four choices (although there is a fifth, more about later).
The first and the third are the fiscally prudent approaches that tells any banker that the entity in debt is actively moving to clear and retire debt, or, at least, reducing the exposure to debt. It means cutting discretionary spending, reducing or eliminating automatic spending increases, and cutting benefits to many who enjoy the breaks. It also means ruthless trimming of spending on pet projects (aka "pork") and bringing in federal wages back into line where they once were, smaller than in the commercial sector, with increased job security to compensate. All highly unpalatable decisions that will not be made unless the writing is clearly on the wall and a consensus can be reached.
The second and the fourth are the nightmares, because it means that the entity in debt is looking for a way to increase the debt without changing. That is the path paved with danger, because the lack of a commitment to change in the face of an existential debt problem is usually the sign that there is something seriously wrong and that wishful thinking is replacing serious analysis of how to get out from under water.
This is, largely, where we are now: no party is seriously calling for fiscal prudence because it means making spending cuts now, before the crisis arrives (since it will reduce the vulnerability to interest rate increases, this also pushes back any sell-by date into the future, giving the government time to reduce its vulnerability even further.
What is the fifth option?
It is the simplest for the borrower and it is the reason why interest rates are charged. It is debt repudiation, of refusing to pay any more, of bankruptcy. Where bankruptcy laws are heavily biased to the debtor, this is a popular way out because any real costs are mitigated by the inability of the lenders to actually take what was used as a security.
In the case of sovereign debt, the problem is even more complex: it is easy to renounce the debt, but it generally means that you lose access to capital markets until people have either forgotten or are, for some god-forsaken reason, willing to believe that this time it's different.
The security that the US has been (ab)using is the reputation of the US as a safe haven.
To put it bluntly, the current financial and fiscal policies of the US is setting up the US for a fall. If interest rates pick up, the whole house of cards starts to fall apart, as it will mean a mixture of massive cuts in US government spending and massive increases in taxes in order to finance those higher interest rates.
Bursting bubbles are never fun. The US government has never faced one with its own spending. It will not be a pleasant experience. It will also the be the death of Keynesian economic policy.
And not a moment too soon.
Montag, August 02, 2010
Understanding State and Local Government Debt...
This is an object lesson on the challenges facing state and local government, explaining just how these entities got where they are today.
It is important to understand what is going on here at a higher level, because it is also one of the key reasons why debt is going to be such a problem and why it will keep growth rates down, making any recovery that much more difficult.
Put simply, any economic entity, be it personal, business or government, has a cash flow associated with its economic activity. You can really only do one thing with this cash flow: use it in one way or another to finance what you want to do.
Interest rates - normally - are a price signal: the interest rate is the price of money. If the signal comes along that money costs nothing, or that the price can be passed on to someone else, then something strange happens. People don't think about what they are doing, much, any more, since there is, in their perception, no risk: they are doing what they want with something that appears to have no cost (except, of course, for the capital: however, bear with me on this).
Hence if you can borrow $25k for 1% interest, that makes buying a new car attractive, rather than borrowing $5k for a used car instead (at the same rate). Being able to finance a large municipal bond issue by pledging future cash flows makes it attractive to spend the money for pet projects now, relying on either being out of office or on a fanciful business plan to generate the future cash flows. Being able to finance a large corporate bond issue for a new line of business, when the interest rates are artificially low, means that risk analysis won't be so important, since almost any return on investment will be able to finance the project.
This leads to a fundamental sin in the economic world: misallocation of capital. It is what dooms planned economies to necessary failure (by ignoring demand, or, more exactly, making consumption decisions for a population fully capable of making those decisions by themselves, as no one likes to be treated as a child) and it is, at least for the Austrian school, one of the major reasons for recessions, since bubble-driven demand during a bubble expansion will invariably invest in areas that are not capable of providing any returns when the bubble bursts.
Who is to blame?
Well, in the realm of the consumer, it is you and I, if you've financed more car than you can really afford with home equity. You bought a consumer durable, which is nonetheless consumed (it's called a durable because it lasts more than one year, unless you bought something from Detroit), by using a theoretical value of your equity (if you had sold the house and bought the car with your profits, that's another story entirely) to get a loan that you now can't pay back.
If you are a business, blame the folks who did the business planning with their brains turned off, as well as those who approved the spending. GM is building the Volt car, which will require significant subsidies to be sold (a compact car for $41k, folks, in the middle of a recession: what were they thinking? Might have great gas mileage and be all environmentally righty-ho, but if no one can afford to buy one, it's the new Edsel), a great example of misallocated capital spending that will result in GM not making money even longer.
If you are a government, it is invariably a cabal or two of politicians who, for whatever reason, have a grand vision and want the taxpayers to pay for it. A new stadium? Why not, the money will flow in from all the games (ignoring the fact that it's not where people want to go and there's no professional team in the town). A seventh swimming pool for a town of 200 000, where the other pools aren't filled up? Sure, let's make sure that things won't be too crowded, and what the heck, it's only taxpayer money.
Human stupidity knows no bounds, and indeed will bring down any system if greed and corruption are not held at bay by prudence and by the ability of people to control what their duly elected officials do, or, alternatively, to ensure that the board is held responsible by the shareholders or that a spouse knows what the other one is doing with the family's savings.
Being prudent and being responsible are, compared to the realization of grandiose dreams and sweeping changes, boring.
Odd, that. It's almost as if you were asking people to stop goofing off and act like adults.
Were that they would.
It is important to understand what is going on here at a higher level, because it is also one of the key reasons why debt is going to be such a problem and why it will keep growth rates down, making any recovery that much more difficult.
Put simply, any economic entity, be it personal, business or government, has a cash flow associated with its economic activity. You can really only do one thing with this cash flow: use it in one way or another to finance what you want to do.
Interest rates - normally - are a price signal: the interest rate is the price of money. If the signal comes along that money costs nothing, or that the price can be passed on to someone else, then something strange happens. People don't think about what they are doing, much, any more, since there is, in their perception, no risk: they are doing what they want with something that appears to have no cost (except, of course, for the capital: however, bear with me on this).
Hence if you can borrow $25k for 1% interest, that makes buying a new car attractive, rather than borrowing $5k for a used car instead (at the same rate). Being able to finance a large municipal bond issue by pledging future cash flows makes it attractive to spend the money for pet projects now, relying on either being out of office or on a fanciful business plan to generate the future cash flows. Being able to finance a large corporate bond issue for a new line of business, when the interest rates are artificially low, means that risk analysis won't be so important, since almost any return on investment will be able to finance the project.
This leads to a fundamental sin in the economic world: misallocation of capital. It is what dooms planned economies to necessary failure (by ignoring demand, or, more exactly, making consumption decisions for a population fully capable of making those decisions by themselves, as no one likes to be treated as a child) and it is, at least for the Austrian school, one of the major reasons for recessions, since bubble-driven demand during a bubble expansion will invariably invest in areas that are not capable of providing any returns when the bubble bursts.
Who is to blame?
Well, in the realm of the consumer, it is you and I, if you've financed more car than you can really afford with home equity. You bought a consumer durable, which is nonetheless consumed (it's called a durable because it lasts more than one year, unless you bought something from Detroit), by using a theoretical value of your equity (if you had sold the house and bought the car with your profits, that's another story entirely) to get a loan that you now can't pay back.
If you are a business, blame the folks who did the business planning with their brains turned off, as well as those who approved the spending. GM is building the Volt car, which will require significant subsidies to be sold (a compact car for $41k, folks, in the middle of a recession: what were they thinking? Might have great gas mileage and be all environmentally righty-ho, but if no one can afford to buy one, it's the new Edsel), a great example of misallocated capital spending that will result in GM not making money even longer.
If you are a government, it is invariably a cabal or two of politicians who, for whatever reason, have a grand vision and want the taxpayers to pay for it. A new stadium? Why not, the money will flow in from all the games (ignoring the fact that it's not where people want to go and there's no professional team in the town). A seventh swimming pool for a town of 200 000, where the other pools aren't filled up? Sure, let's make sure that things won't be too crowded, and what the heck, it's only taxpayer money.
Human stupidity knows no bounds, and indeed will bring down any system if greed and corruption are not held at bay by prudence and by the ability of people to control what their duly elected officials do, or, alternatively, to ensure that the board is held responsible by the shareholders or that a spouse knows what the other one is doing with the family's savings.
Being prudent and being responsible are, compared to the realization of grandiose dreams and sweeping changes, boring.
Odd, that. It's almost as if you were asking people to stop goofing off and act like adults.
Were that they would.
Sonntag, August 01, 2010
Welcome To Chicago...
This is a chilling read, a desperate appeal by Chicago police officers to prevent the complete collapse of the police force in Chicago.
Just as Chicago is on the fast track to anarchy, so surely will this spread in the wake of Chicago-style politics under President Obama.
It is just a matter of time.
Just as Chicago is on the fast track to anarchy, so surely will this spread in the wake of Chicago-style politics under President Obama.
It is just a matter of time.
Samstag, Juli 31, 2010
On Government Debt...And The Writing On The Wall
"As parents, we can have no joy, knowing that this government is not sufficiently lasting to ensure any thing which we may bequeath to posterity: And by a plain method of argument, as we are running the next generation into debt, we ought to do the work of it, otherwise we use them meanly and pitifully. In order to discover the line of our duty rightly, we should take our children in our hand, and fix our station a few years farther into life; that eminence will present a prospect, which a few present fears and prejudices conceal from our sight."
Thomas Paine, Common Sense, 1776
The founding fathers had it right.
The foundering fumblers of the last fourty-some years have failed future generations.
President Obama's legacy to the United States will be one of infamy and shame: he is indeed using our children and grandchildren meanly and pitifully. There will be a day when the government of the United States, in the form of the Congress, who controls spending, will have to make the decision whether or not to live without excess and within its means in order to ensure that the reputation of the United States, in the form of its bond ratings and hence credibility and honor, is not sullied and demeaned.
I dare say at this point in time we know the answer to that question. It is increasingly apparent to me that those wielding the not insignificant power of the purse in Washington are hell-bent on leaving a permanent legacy that will damage the United States as has never been seen before: repudiation of the Federal debt and the destruction of the trust that the entire world has placed in the United States of America as the country where at least their money was safe.
President Clinton once remarked that he'd like to be reborn as the bond market, as everyone was afraid of the bond market and the power it has.
Looks like the Democratic Party, seeing the writing on the wall, are determined to ensure that if they go down, the rest of the country will go down with them.
And this is the writing that was inscribed: MENE, MENE, TEKEL, and PHARSIN. This is the interpretation of the matter: MENE, God has numbered the days of your kingdom and brought it to an end; TEKEL, you have been weighed on the scales and found wanting; PERES, your kingdom is divided and given to the Medes and Persians.
Daniel 5:25–28
Thomas Paine, Common Sense, 1776
The founding fathers had it right.
The foundering fumblers of the last fourty-some years have failed future generations.
President Obama's legacy to the United States will be one of infamy and shame: he is indeed using our children and grandchildren meanly and pitifully. There will be a day when the government of the United States, in the form of the Congress, who controls spending, will have to make the decision whether or not to live without excess and within its means in order to ensure that the reputation of the United States, in the form of its bond ratings and hence credibility and honor, is not sullied and demeaned.
I dare say at this point in time we know the answer to that question. It is increasingly apparent to me that those wielding the not insignificant power of the purse in Washington are hell-bent on leaving a permanent legacy that will damage the United States as has never been seen before: repudiation of the Federal debt and the destruction of the trust that the entire world has placed in the United States of America as the country where at least their money was safe.
President Clinton once remarked that he'd like to be reborn as the bond market, as everyone was afraid of the bond market and the power it has.
Looks like the Democratic Party, seeing the writing on the wall, are determined to ensure that if they go down, the rest of the country will go down with them.
And this is the writing that was inscribed: MENE, MENE, TEKEL, and PHARSIN. This is the interpretation of the matter: MENE, God has numbered the days of your kingdom and brought it to an end; TEKEL, you have been weighed on the scales and found wanting; PERES, your kingdom is divided and given to the Medes and Persians.
Daniel 5:25–28
Freitag, Juli 30, 2010
Poverty in Gaza...
Poverty in Gaza appears to be a function of party membership.
Or, more exactly, the lack of party membership.
Read this and see.
And consider the source: an Egyptian journalist, published in the paper Al-Ahram.
The only reason there is poverty in Gaza is Hamas:
The problem is the vast differences in the distribution of wealth. The luxury resorts and wide range of consumer goods are enjoyed by "only a few groups," he said, primarily those who own smuggling tunnels to Egypt and those who work for international organizations such as the United Nations' UNRWA and who do not include or aid the rest of the population.
In other words, the situation in Gaza is no different than in the West Bank, or indeed anywhere else in the Arab world. A small elite, thoroughly corrupt and willing to kill to maintain power, dominates the state and economy, keeping the majority of the population in poverty, channeling the anger generated by poverty for political purposes.
There is no fundamental reason for those living in Gaza to be poor. The Israeli blockade is not the cause of poverty in Gaza.
Hamas is. End of story.
Or, more exactly, the lack of party membership.
Read this and see.
And consider the source: an Egyptian journalist, published in the paper Al-Ahram.
The only reason there is poverty in Gaza is Hamas:
The problem is the vast differences in the distribution of wealth. The luxury resorts and wide range of consumer goods are enjoyed by "only a few groups," he said, primarily those who own smuggling tunnels to Egypt and those who work for international organizations such as the United Nations' UNRWA and who do not include or aid the rest of the population.
Most of the new resorts "are owned by members, or associates, of Hamas," he reported. "In addition, the Hamas municipalities charge high fees, in Gaza terms, for the use of public beaches," he added.
Al-Houl quoted political activist Mustafa Ibrahim as saying that while Gaza's rich invest in the leisure industry, 80% of residents rely on UNRWA, and unemployment is approximately 45%. "This creates a distorted picture," Ibrahim explained.In other words, the situation in Gaza is no different than in the West Bank, or indeed anywhere else in the Arab world. A small elite, thoroughly corrupt and willing to kill to maintain power, dominates the state and economy, keeping the majority of the population in poverty, channeling the anger generated by poverty for political purposes.
There is no fundamental reason for those living in Gaza to be poor. The Israeli blockade is not the cause of poverty in Gaza.
Hamas is. End of story.
Freitag, Juli 16, 2010
The Real Agenda...
The real agenda of the Obama Administration is control: this underscores how they are pursuing it.
It is the abandonment of the rule of law, giving power to nameless, uncontrolled bureaucrats who will be heavily influenced by special interest groups from both sides, resulting in a regulatory nightmare that will result in extensive uncertainty for everyone except for those companies who can successfully manipulate the process by lobbying (aka corrupting the process). It's called the Doff-Frank Bill, named for two Congressmen who are amongst the most corrupt in the nation.
Don't think so? Consider this:
Now, the legislation hands off to 10 regulatory agencies the discretion to write hundreds of new rules governing finance. Rather than the bill itself, it will be this process—accompanied by a lobbying blitz from banks—that will determine the precise contours of this new landscape, how strict the new regulations will be and whether they succeed in their purpose. The decisions will be made by officials from new agencies, obscure agencies and, in some cases, agencies like the Federal Reserve that faced criticism in the run-up to the crisis.
This is, of course, the Chicago school of corruption: divide and conquer, play one constituency off another, ensure that decisions are made not according to the rule of law, but rather by the rule of men.
The legislation creates a council of regulators to monitor economic risks; establishes a new agency to police consumer financial products; and sets new standards for the way derivatives are traded. "These reforms will benefit the prudent and constrain the imprudent," Treasury Secretary Timothy Geithner said in a press conference. "Strong banks, the well-managed financial innovators, will adapt and thrive under the new rules of the road."
Secretary Geithner isn't being entirely parsimonious with the truth: what he is really saying is that strong banks, the well-managed financial innovators, are those who will know who to pay off at the end of the day so that they can continue to operate at the whim of their political masters. Those new masters are the "council of regulators" who are neither vetted nor elected, outside of the control of the Congress.
This establishes the rule of men and not the rule of law.
The finance overhaul will be implemented in a volatile environment. Profits on Wall Street are soaring, with J.P. Morgan reporting $4.8 billion in net profit in the second quarter. But the banking sector is contracting, with close to 300 banks failing since January 2008. Many businesses and borrowers are struggling to obtain loans.
While some might see a contradiction here, with many banks failing and some banks making money hand over foot, the reality is that the Democrats are hand-picking the banks that they want to survive, re-writing the market so that their fat-cat cronies will continue to pay their tithe to their masters, the Democratic Party. This is about as transparent and appalling attempt to institutionalize corruption in the best Chicago tradition as one can imagine. It is all about destroying independent operators in a field of business and making sure that your cronies are operating the companies left: I fail to see the difference between this and organized crime, to be bluntly and brutally honest.
Treasury Department officials have taken initial steps to prepare the new consumer agency, called the Bureau of Consumer Financial Protection and housed within the Federal Reserve. Regulators are in the process of creating a system so that large, complex and failing financial companies can be broken up and liquidated without disrupting markets.
Right. Sorry: you cannot break up large, complex and failing financial companies without disrupting markets. This is like saying you can take bricks out of a building without ever endangering the building itself: in short time, the building will collapse, just as markets will collapse.
But that is the whole point: the goal is not to have markets, but rather to control the banks and ensure that financial activity only flows to the politically correct.
Despite creating the new consumer watchdog, the bill leaves America's patchwork regulatory framework largely intact, and most of the players will be familiar. That has irked critics on the left and right who say one of the bill's key flaws is that it relies on the judgment of officials rather than hard rules.
Bingo: it replace the rule of law - the hard rules, the inflexible rules - with judgment calls, with the law of men deciding what the law will be and imposing it.
"The same regulators who ignored consumer advocates' warnings about predatory lending have veto power over the consumer agency," said John Taylor, chief executive of the National Community Reinvestment Coalition. "That club of regulators is very insular, and usually in agreement."
In other words, the regulators have been, are and will continue to be compromised.
Fundamentally, the problem is that this opens the entire banking system to abuse: regulators will have enormous powers that can be abused at will, and which will be abused at will. This will be, bluntly, a nightmare for the country, because rooting out the corruption that will result will be extremely difficult.
The quotes above are from the link.
I'm still on the road and will be for some time, but seeing this being passed: what a nightmare.
It shows the true agenda of the Obama Administration: bringing the kind of institutional corruption that the citizens of Chicago "enjoy" in order to have basic services delivered in a timely manner to the entire United States. I've said it before and I'll say it again: this is the true agenda of the Obama Administration.
The result?
We're entering a period of serious instability, with classic correction methods failing. Inflation, exchange rates, interest rates are all failing to correct massive instabilities, leading to even more massive instabilities building up.
For the US to correct its current economic situation, it needs to massively devalue the dollar and wipe out the savings of a generation by inflating its way out of the debt trap it is in. This isn't happening. Interest rates need to move up strongly in order to dry up cheap credit that led to massive, truly epic failures in allocation of capital: this isn't happening.
If the control mechanisms fail, the result is going to be ... interesting at best and truly dismal at worst.
It is the abandonment of the rule of law, giving power to nameless, uncontrolled bureaucrats who will be heavily influenced by special interest groups from both sides, resulting in a regulatory nightmare that will result in extensive uncertainty for everyone except for those companies who can successfully manipulate the process by lobbying (aka corrupting the process). It's called the Doff-Frank Bill, named for two Congressmen who are amongst the most corrupt in the nation.
Don't think so? Consider this:
Now, the legislation hands off to 10 regulatory agencies the discretion to write hundreds of new rules governing finance. Rather than the bill itself, it will be this process—accompanied by a lobbying blitz from banks—that will determine the precise contours of this new landscape, how strict the new regulations will be and whether they succeed in their purpose. The decisions will be made by officials from new agencies, obscure agencies and, in some cases, agencies like the Federal Reserve that faced criticism in the run-up to the crisis.
This is, of course, the Chicago school of corruption: divide and conquer, play one constituency off another, ensure that decisions are made not according to the rule of law, but rather by the rule of men.
The legislation creates a council of regulators to monitor economic risks; establishes a new agency to police consumer financial products; and sets new standards for the way derivatives are traded. "These reforms will benefit the prudent and constrain the imprudent," Treasury Secretary Timothy Geithner said in a press conference. "Strong banks, the well-managed financial innovators, will adapt and thrive under the new rules of the road."
Secretary Geithner isn't being entirely parsimonious with the truth: what he is really saying is that strong banks, the well-managed financial innovators, are those who will know who to pay off at the end of the day so that they can continue to operate at the whim of their political masters. Those new masters are the "council of regulators" who are neither vetted nor elected, outside of the control of the Congress.
This establishes the rule of men and not the rule of law.
The finance overhaul will be implemented in a volatile environment. Profits on Wall Street are soaring, with J.P. Morgan reporting $4.8 billion in net profit in the second quarter. But the banking sector is contracting, with close to 300 banks failing since January 2008. Many businesses and borrowers are struggling to obtain loans.
While some might see a contradiction here, with many banks failing and some banks making money hand over foot, the reality is that the Democrats are hand-picking the banks that they want to survive, re-writing the market so that their fat-cat cronies will continue to pay their tithe to their masters, the Democratic Party. This is about as transparent and appalling attempt to institutionalize corruption in the best Chicago tradition as one can imagine. It is all about destroying independent operators in a field of business and making sure that your cronies are operating the companies left: I fail to see the difference between this and organized crime, to be bluntly and brutally honest.
Treasury Department officials have taken initial steps to prepare the new consumer agency, called the Bureau of Consumer Financial Protection and housed within the Federal Reserve. Regulators are in the process of creating a system so that large, complex and failing financial companies can be broken up and liquidated without disrupting markets.
Right. Sorry: you cannot break up large, complex and failing financial companies without disrupting markets. This is like saying you can take bricks out of a building without ever endangering the building itself: in short time, the building will collapse, just as markets will collapse.
But that is the whole point: the goal is not to have markets, but rather to control the banks and ensure that financial activity only flows to the politically correct.
Despite creating the new consumer watchdog, the bill leaves America's patchwork regulatory framework largely intact, and most of the players will be familiar. That has irked critics on the left and right who say one of the bill's key flaws is that it relies on the judgment of officials rather than hard rules.
Bingo: it replace the rule of law - the hard rules, the inflexible rules - with judgment calls, with the law of men deciding what the law will be and imposing it.
"The same regulators who ignored consumer advocates' warnings about predatory lending have veto power over the consumer agency," said John Taylor, chief executive of the National Community Reinvestment Coalition. "That club of regulators is very insular, and usually in agreement."
In other words, the regulators have been, are and will continue to be compromised.
Fundamentally, the problem is that this opens the entire banking system to abuse: regulators will have enormous powers that can be abused at will, and which will be abused at will. This will be, bluntly, a nightmare for the country, because rooting out the corruption that will result will be extremely difficult.
The quotes above are from the link.
I'm still on the road and will be for some time, but seeing this being passed: what a nightmare.
It shows the true agenda of the Obama Administration: bringing the kind of institutional corruption that the citizens of Chicago "enjoy" in order to have basic services delivered in a timely manner to the entire United States. I've said it before and I'll say it again: this is the true agenda of the Obama Administration.
The result?
We're entering a period of serious instability, with classic correction methods failing. Inflation, exchange rates, interest rates are all failing to correct massive instabilities, leading to even more massive instabilities building up.
For the US to correct its current economic situation, it needs to massively devalue the dollar and wipe out the savings of a generation by inflating its way out of the debt trap it is in. This isn't happening. Interest rates need to move up strongly in order to dry up cheap credit that led to massive, truly epic failures in allocation of capital: this isn't happening.
If the control mechanisms fail, the result is going to be ... interesting at best and truly dismal at worst.
Montag, Juli 05, 2010
On The Road...
I'm on the road for a few days and won't have much access: go forth and enjoy yourselves. :-)
Freitag, Juli 02, 2010
The Long View...
In these long, scorching days of summer, where the acuity of the mind is dulled by mint juleps and it's just too damned hot to do anything more sensible, my thoughts turn towards the long view.
Where are we going to be in five years? In 2015?
First and foremost: some things aren't going to change.
China will continue to be a sweltering, sodden bullet-time slow motion train wreck of a country, polluting like there is no tomorrow, bereft of the rule of law, corrupt and bustling like Ninsei Street, Chiba City (Chiba-shi) in Gibson's Cyberpunk Japan. The people will keep on trying to live their Confucian-values dominated lives of savings, education and ambition, held down by the government's need to keep the masses under control.
Europe will still be treading water, much the way it has since the 1990s. It's not getting tired doing that, and given the increasing paucity of trained workers, it's all they can do.
Japan will still be trying to figure out how a country is supposed to work when the population declines and not nearly enough are being born.
The US will see that living in a straitjacket really, really sucks. It's a bit of an eye-opener, but the institutionalized corruption of the Chicago system will have become the major driving force behind the Democrats. Gerrymandering and divisive politics - hallmarks of the Chicago system - will ensure that both parties have to agree on anything to get anything done, but both don't want to be a part of any success of the other side. The lawyers are exploring just how much money they can exploit from the health care system's "reform," but are also discovering that there's not much money left. A serious rejectionist movement is developing, demanding that the sins of the fathers are not forced upon their children, and baby boomer becomes a disparaging phrase.
South America will be mixed: abject poverty and political strife will dominate those countries where there are no adults in charge, and in those countries with a backbone to reject state intervention and crony capitalism, economies are moving increasingly towards development.
Australia remains Australia.
The rest of Asia? The countries with functioning societies will prosper. The countries with tribal societies won't.
Africa remains Africa. The Arabs and Persians continue to hate the Jews, who continue to ask "why me?"
Russia will increasingly resemble Japan, at least in terms of being clueless.
Second of all: things are going to change.
Pollution in China is going to start killing more and more, with the government covering it up more and more. People are going to realize that they can't eat money and that coughing your lungs up because the air is caustic sucks even more when you're middle class and finally have some leisure time and money to enjoy. China survives only because the Godless Communists (tm) are able to claim that it was they who allow people to improve their standards of living: once these start to decline, all bets are off.
Europe will start to come to terms with debt and will suck it up to survive. The Euro will survive, but European countries will increasingly lose their sovereignty to the Faceless Bureaucrats (tm) who are able to claim it was they who allow people to improve their standards of living.
Japan? It's hard for old people to change. The younger generation will increasingly be a generation of slackers, looking out for themselves rather than becoming a cog in the machine. Serious potential conflicts there as it makes little sense to work when taking care of your parents, your grandparents, three uncles and two aunts falls on your shoulders and leaves you with little cash (but lots of inherited properties that no one wants to buy). Japan is the canary in the system, the example of what will happen to Europe, China and Russia if they don't shape up, the proverbial example of what not to do.
In the US, you'll see outright disgust with mainstream politicians as people realize just how corrupt and nearly criminal they are. The death of Senator Byrd marked the turning point of the culture of pork, with earmarks increasingly viewed as being just a small, small step from outright bribery. The ability to bring federal money into a district will lose its appeal when it is largely done at the cost of other districts (that's how it is now, but no one cares). The Democrats will be firmly placed as the party of tax and spend and will be completely aghast when the classic Chicago political methods fail to work: minorities will be instrumentalized more than they are now, but the Democrats will lose the independents entirely. The Republicans will try to hang on to this, but are still struggling to do a mea culpa for the pork that they lived off during the Naughts. Disgust with politicians and with the parties incapable of change will change the political landscape: local politicians, this is your cue, and we will see natural leaders re-emerge (in sharp contrast to the appointed elites who think they are natural leaders and then go on to prove that they are not).
South America will go through the throes of re-discovering that socialism only works as long as you can use other people's money. Countries like Peru, Guatemala, Chile and Brazil are run by adults: the rest fail and revert to type.
There will be quite some changes in the Middle East: either Israel will be attacked and heavily damaged, ceasing to be a viable state because entire cities were wiped out, or Israel will be attacked and heavily damaged, wreaking vengeance of biblical proportions on those attacking them. In any case, antisemitism remains the driving force of the failed societies of the Middle East.
Finally, some things aren't going to happen.
There will not be a second term for the Obama presidency.
There will not be a permanent Democratic majority.
There won't be political hearings on corruption and fraud, since these would find so much that no one wants to destroy the facade of respectability.
There won't be a constitutional convention, despite it being talked about to "update the Constitution".
There won't be a withdrawal from Afghanistan or Iraq. Too little stability to leave, too few casualties to leave.
There won't be any political unrest or revolution, but there will be lots of people who are thoroughly disgusted and who do not trust the government.
Oh, and there won't be a break-down of the EU, neither will the Euro be abandoned. Too much political capital is tied up with both.
That's my long view. This is the 21st century schizoid man, and I approve of this message.
Where are we going to be in five years? In 2015?
First and foremost: some things aren't going to change.
China will continue to be a sweltering, sodden bullet-time slow motion train wreck of a country, polluting like there is no tomorrow, bereft of the rule of law, corrupt and bustling like Ninsei Street, Chiba City (Chiba-shi) in Gibson's Cyberpunk Japan. The people will keep on trying to live their Confucian-values dominated lives of savings, education and ambition, held down by the government's need to keep the masses under control.
Europe will still be treading water, much the way it has since the 1990s. It's not getting tired doing that, and given the increasing paucity of trained workers, it's all they can do.
Japan will still be trying to figure out how a country is supposed to work when the population declines and not nearly enough are being born.
The US will see that living in a straitjacket really, really sucks. It's a bit of an eye-opener, but the institutionalized corruption of the Chicago system will have become the major driving force behind the Democrats. Gerrymandering and divisive politics - hallmarks of the Chicago system - will ensure that both parties have to agree on anything to get anything done, but both don't want to be a part of any success of the other side. The lawyers are exploring just how much money they can exploit from the health care system's "reform," but are also discovering that there's not much money left. A serious rejectionist movement is developing, demanding that the sins of the fathers are not forced upon their children, and baby boomer becomes a disparaging phrase.
South America will be mixed: abject poverty and political strife will dominate those countries where there are no adults in charge, and in those countries with a backbone to reject state intervention and crony capitalism, economies are moving increasingly towards development.
Australia remains Australia.
The rest of Asia? The countries with functioning societies will prosper. The countries with tribal societies won't.
Africa remains Africa. The Arabs and Persians continue to hate the Jews, who continue to ask "why me?"
Russia will increasingly resemble Japan, at least in terms of being clueless.
Second of all: things are going to change.
Pollution in China is going to start killing more and more, with the government covering it up more and more. People are going to realize that they can't eat money and that coughing your lungs up because the air is caustic sucks even more when you're middle class and finally have some leisure time and money to enjoy. China survives only because the Godless Communists (tm) are able to claim that it was they who allow people to improve their standards of living: once these start to decline, all bets are off.
Europe will start to come to terms with debt and will suck it up to survive. The Euro will survive, but European countries will increasingly lose their sovereignty to the Faceless Bureaucrats (tm) who are able to claim it was they who allow people to improve their standards of living.
Japan? It's hard for old people to change. The younger generation will increasingly be a generation of slackers, looking out for themselves rather than becoming a cog in the machine. Serious potential conflicts there as it makes little sense to work when taking care of your parents, your grandparents, three uncles and two aunts falls on your shoulders and leaves you with little cash (but lots of inherited properties that no one wants to buy). Japan is the canary in the system, the example of what will happen to Europe, China and Russia if they don't shape up, the proverbial example of what not to do.
In the US, you'll see outright disgust with mainstream politicians as people realize just how corrupt and nearly criminal they are. The death of Senator Byrd marked the turning point of the culture of pork, with earmarks increasingly viewed as being just a small, small step from outright bribery. The ability to bring federal money into a district will lose its appeal when it is largely done at the cost of other districts (that's how it is now, but no one cares). The Democrats will be firmly placed as the party of tax and spend and will be completely aghast when the classic Chicago political methods fail to work: minorities will be instrumentalized more than they are now, but the Democrats will lose the independents entirely. The Republicans will try to hang on to this, but are still struggling to do a mea culpa for the pork that they lived off during the Naughts. Disgust with politicians and with the parties incapable of change will change the political landscape: local politicians, this is your cue, and we will see natural leaders re-emerge (in sharp contrast to the appointed elites who think they are natural leaders and then go on to prove that they are not).
South America will go through the throes of re-discovering that socialism only works as long as you can use other people's money. Countries like Peru, Guatemala, Chile and Brazil are run by adults: the rest fail and revert to type.
There will be quite some changes in the Middle East: either Israel will be attacked and heavily damaged, ceasing to be a viable state because entire cities were wiped out, or Israel will be attacked and heavily damaged, wreaking vengeance of biblical proportions on those attacking them. In any case, antisemitism remains the driving force of the failed societies of the Middle East.
Finally, some things aren't going to happen.
There will not be a second term for the Obama presidency.
There will not be a permanent Democratic majority.
There won't be political hearings on corruption and fraud, since these would find so much that no one wants to destroy the facade of respectability.
There won't be a constitutional convention, despite it being talked about to "update the Constitution".
There won't be a withdrawal from Afghanistan or Iraq. Too little stability to leave, too few casualties to leave.
There won't be any political unrest or revolution, but there will be lots of people who are thoroughly disgusted and who do not trust the government.
Oh, and there won't be a break-down of the EU, neither will the Euro be abandoned. Too much political capital is tied up with both.
That's my long view. This is the 21st century schizoid man, and I approve of this message.
Donnerstag, Juli 01, 2010
Keynes, Straitjackets and Cash-flow...
At the core of ours crisis is a bet.
The bet is a simple one: that revenues will grow, in the long term, in such a way as to enable governments to finance their debt.
Much of modern finance is all about cash-flow and leveraging that cash-flow to create the greatest value with the smallest risk. This is true for corporations, it's true for governments and it is true for private persons as well. Corporations use their cash-flow to finance loans for expansion; governments use their cash-flow to finance bonds to pay for politically mandated consumption and investment; private person use their cash-flow to finance house purchases and other big-ticket items.
Fundamentally, it's all fine as long as the cash-flows continue, the business plans unwind, the mortgages are paid It goes all wrong when the business plans stumble, when governments permanently expand spending at a fast rate than the economy grows, and when someone loses their job.
Unfortunately, we've all been getting it rather wrong.
The reason? Lack of recognition that there is risk out there. It is naive for a private person to leverage their incomes to the extent that if they lose their job - something completely out of their control - they will also lose their ability to finance debt via cash-flow. For mortgages there is insurance available for such an event, but not all debt is mortgage debt, and indeed it's a rather high cost (since it only gives additional playing room to find a new job, not to pay off your mortgage in its entirety: if it were the latter, it would be prohibitively expensive), for other debt instruments it's not so simple. Risk, after all, don't merely exist for the banks: for the private consumer, it is a catastrophe if their entire life style is based on leveraging their cash flow heavily. The same is true for companies: business plans generally are expected to unwind smoothly, but usually fail to take into account the fact that they are expected to do this in the future, resulting in companies failing when their business plan stumble and the companies are heavily leveraged and dependent on that cash-flow being generated. Governments rely on their economies to grow at least as fast as government spending increases so that revenues continue to flow such that government bonds can be repaid and debt rolled over.
Boy, are we getting it wrong.
The result? A fiscal straitjacket, regardless of corporate, government or private. Debt that can no longer be financed out of cash-flow has, given the demand for risk compensation in the form of interest rates, this nasty tendency to accelerate and continue to accelerate. At some point the debt cannot be paid back, especially if the crisis that led to the stumbling of the business plan, the loss of a job or an upswing in deficit spending doesn't go away quickly.
Krugman may actually have something right (if for the wrong reasons): we have reached a point where we are starting to enter a long depression, where debt burdens crush growth because profits have to be used to pay off debt rather than be used for other purposes.
Where he is horribly wrong is his call for continuing massive increases in government spending to get us out of the crisis.
Were that times were so simple as in the era of Keynes. He correctly identified that economies go into recessions, for one reason or another (for Keynes it is the stagnation of worker's wages) and that governments can work against the recession by spending money.
If, of course, the governments weren't already carrying punishing levels of debt that, if increased, would result in the necessity of default.
That is, however, the problem: hence Krugman is completely and horribly wrong to demand that government spending generate growth. He is horribly wrong because the government is, now, at the point where it is slowly starting to notice the straitjacket that it has placed itself in: with the cost of money virtually nil, governments have acquired debt such that if interest rates rise, the debt almost immediately becomes unsustainable and default occurs.
People are put into straitjackets to prevent them from hurting themselves and others. Corporations and businesses who find themselves in dire straits impoverish their owners, either via bankruptcy or legal requirements to supply the needed capital; governments default on their sovereign debt.
You cannot apply Keynes' solutions to recession when government debt is already in dire straits because politicians leveraged the government's cash flow so heavily that any growth slowdown destroys the game plan: this is exactly what has happened over the last, oh, 40 years or so.
The sooner that a house-owner realizes that they can't pay their mortgage because an income stream was lost, the easier it is to do something about it, be it jingle mail, mea culpa and refinancing with the mortgage issuer (I first wrote "bank" here, but given the lack of bank involvement nowadays, it's the mortgage issuer...), or life-style changes to prevent bankruptcy.
The sooner that a company realizes that the business plan isn't working, the cheaper it is to cut your losses and close that business unit down, or to re-do the business plan to save the business.
The sooner that the government realizes that government spending is unsustainable, the easier it will be to make changes in entitlements, cut discretionary spending and, even, raise taxes to get government debt back under control and within a new, changed revenue stream.
Instead, we see folks like Frank and Dodds re-arranging the deck chairs on the Titanic that is government spending in the US. Their failure?
To think that it's business as usual and that nothing needs to change: failing to recognize that there is a need to change is sheer and utter insanity, the kind that leads to straitjackets.
The bet is a simple one: that revenues will grow, in the long term, in such a way as to enable governments to finance their debt.
Much of modern finance is all about cash-flow and leveraging that cash-flow to create the greatest value with the smallest risk. This is true for corporations, it's true for governments and it is true for private persons as well. Corporations use their cash-flow to finance loans for expansion; governments use their cash-flow to finance bonds to pay for politically mandated consumption and investment; private person use their cash-flow to finance house purchases and other big-ticket items.
Fundamentally, it's all fine as long as the cash-flows continue, the business plans unwind, the mortgages are paid It goes all wrong when the business plans stumble, when governments permanently expand spending at a fast rate than the economy grows, and when someone loses their job.
Unfortunately, we've all been getting it rather wrong.
The reason? Lack of recognition that there is risk out there. It is naive for a private person to leverage their incomes to the extent that if they lose their job - something completely out of their control - they will also lose their ability to finance debt via cash-flow. For mortgages there is insurance available for such an event, but not all debt is mortgage debt, and indeed it's a rather high cost (since it only gives additional playing room to find a new job, not to pay off your mortgage in its entirety: if it were the latter, it would be prohibitively expensive), for other debt instruments it's not so simple. Risk, after all, don't merely exist for the banks: for the private consumer, it is a catastrophe if their entire life style is based on leveraging their cash flow heavily. The same is true for companies: business plans generally are expected to unwind smoothly, but usually fail to take into account the fact that they are expected to do this in the future, resulting in companies failing when their business plan stumble and the companies are heavily leveraged and dependent on that cash-flow being generated. Governments rely on their economies to grow at least as fast as government spending increases so that revenues continue to flow such that government bonds can be repaid and debt rolled over.
Boy, are we getting it wrong.
The result? A fiscal straitjacket, regardless of corporate, government or private. Debt that can no longer be financed out of cash-flow has, given the demand for risk compensation in the form of interest rates, this nasty tendency to accelerate and continue to accelerate. At some point the debt cannot be paid back, especially if the crisis that led to the stumbling of the business plan, the loss of a job or an upswing in deficit spending doesn't go away quickly.
Krugman may actually have something right (if for the wrong reasons): we have reached a point where we are starting to enter a long depression, where debt burdens crush growth because profits have to be used to pay off debt rather than be used for other purposes.
Where he is horribly wrong is his call for continuing massive increases in government spending to get us out of the crisis.
Were that times were so simple as in the era of Keynes. He correctly identified that economies go into recessions, for one reason or another (for Keynes it is the stagnation of worker's wages) and that governments can work against the recession by spending money.
If, of course, the governments weren't already carrying punishing levels of debt that, if increased, would result in the necessity of default.
That is, however, the problem: hence Krugman is completely and horribly wrong to demand that government spending generate growth. He is horribly wrong because the government is, now, at the point where it is slowly starting to notice the straitjacket that it has placed itself in: with the cost of money virtually nil, governments have acquired debt such that if interest rates rise, the debt almost immediately becomes unsustainable and default occurs.
People are put into straitjackets to prevent them from hurting themselves and others. Corporations and businesses who find themselves in dire straits impoverish their owners, either via bankruptcy or legal requirements to supply the needed capital; governments default on their sovereign debt.
You cannot apply Keynes' solutions to recession when government debt is already in dire straits because politicians leveraged the government's cash flow so heavily that any growth slowdown destroys the game plan: this is exactly what has happened over the last, oh, 40 years or so.
The sooner that a house-owner realizes that they can't pay their mortgage because an income stream was lost, the easier it is to do something about it, be it jingle mail, mea culpa and refinancing with the mortgage issuer (I first wrote "bank" here, but given the lack of bank involvement nowadays, it's the mortgage issuer...), or life-style changes to prevent bankruptcy.
The sooner that a company realizes that the business plan isn't working, the cheaper it is to cut your losses and close that business unit down, or to re-do the business plan to save the business.
The sooner that the government realizes that government spending is unsustainable, the easier it will be to make changes in entitlements, cut discretionary spending and, even, raise taxes to get government debt back under control and within a new, changed revenue stream.
Instead, we see folks like Frank and Dodds re-arranging the deck chairs on the Titanic that is government spending in the US. Their failure?
To think that it's business as usual and that nothing needs to change: failing to recognize that there is a need to change is sheer and utter insanity, the kind that leads to straitjackets.
Dienstag, Juni 29, 2010
Ghosts, Idiots (Useful and Real), and Vampire Ideologies...
Apparently, according to today's FAZ, there was a political conference in Berlin over the last several days.
The topic of the conference?
The Future of Communism.
Ye gods.
This is the Ghost of the Past, the Ideology that will not die despite having multiple stakes driven through its collectivist heart.
The Vampire Ideology.
It's not much of an article, but here are the highlights:
The new radical left is working hard to create a new basis for their ideology, combining Plato, Descartes, Heidegger, St. Paul, Marx and Lenin, all with the goal of liberating the concept of communism from its thoroughly discredited state. They've kidnapped Warlam Schalamow as the newly politically correct victim of the old system because his Kolyma works didn't try to discredit Stalinism; millions of dead are not worth speaking about; state communism as it was practiced was an accident of history and is only worth discussing because it damaged the concept of the communist utopia and put Marxism in bad grace.
Who can think this way?
Alain Badiou for one; Frank Ruda, Jan Völker, Cecile Winter, Slavoj Žižek, Bülent Somay. Those without links don't appear in Wikipedia.
They're all somnabulent post-materialist "thinkers" who, oddly enough, are either committed to the ideals of the communist revolution, believe that all life must be politicized, or who see themselves as critics of the supremacy of democracy.
Badiou talked about the need to question the very nature of democracy as it is becoming the major ideology. Ruda and Völker presented a philosophical manifesto, inspred from Descartes, which called for the courage and belief to support subjective judgements, as thought itself has been destroyed. Cecile Winters, Maoist, said that only communists could eliminate the State, but to do so required a new movement, one that creates "unrest that makes everything clear", and who sees the need for fifteen or more cultural revolutions to achieve utopia. Somay, apparently a hard-core Leninist, talked about the need to resurrect the working class, means of production and revolution. Žižek was apparently the highlight of the conference: he presented a marathon of anecdotes, jumps from one idea to another, no thesis, just a rambling discussion of terror and violence. Žižek is the pop star of the modern left, a showman who wants to bring new authoritarian "truth projects" to indoctrinate the young: his attempt, for instance, to resurrect Lenin is completely ahistorical, but talks about how the Revolution can succeed with brutality and class destruction.
The journalist, Regina Mönch, who wrote this up, points out in the article that the conference screened Alaxander Dovschenschkos classic work "Earth" from 1930, an aesthetic work about the destruction of the evil kulaks and the victory of the farmers, while ignoring the 10 mn killed by Stalin in the Ukraine.
The ghost of the title of this post is that of communism, in its purest and most devastating form, dedicated simply to the revolution and the destruction of the past in the name of utopia.
The idiots are both the useful idiots and the real idiots: the useful idiots are the hangers-on, the sycophants in the press and culture, who desperately want to believe in the utopia and hence are willfully, deliberately and malevolently blind.
The vampire ideology? An ideology that will not die, regardless of how many times it is shown to be wrong.
The irony of this all: it was Karl Marx who said the history repeats itself, first as tragedy, second as farce.
The collapse of the Soviets and Eastern European communist regimes was the tragedy: this is farce.
The danger, however, is real: given the problems inherent to capitalism, there is the danger that a new communism is reborn that once again promises utopia in exchange for obedience. We see this is the increasing criticisms - largely incorrect, but reported as if they were correct - that markets do not function, that capitalism always leads to collapse and ruin.
Beware of the beginnings. This vampire may have a stake through its heart, but as all good film-goers know, if the stake is removed, the vampire comes back to life.
The topic of the conference?
The Future of Communism.
Ye gods.
This is the Ghost of the Past, the Ideology that will not die despite having multiple stakes driven through its collectivist heart.
The Vampire Ideology.
It's not much of an article, but here are the highlights:
The new radical left is working hard to create a new basis for their ideology, combining Plato, Descartes, Heidegger, St. Paul, Marx and Lenin, all with the goal of liberating the concept of communism from its thoroughly discredited state. They've kidnapped Warlam Schalamow as the newly politically correct victim of the old system because his Kolyma works didn't try to discredit Stalinism; millions of dead are not worth speaking about; state communism as it was practiced was an accident of history and is only worth discussing because it damaged the concept of the communist utopia and put Marxism in bad grace.
Who can think this way?
Alain Badiou for one; Frank Ruda, Jan Völker, Cecile Winter, Slavoj Žižek, Bülent Somay. Those without links don't appear in Wikipedia.
They're all somnabulent post-materialist "thinkers" who, oddly enough, are either committed to the ideals of the communist revolution, believe that all life must be politicized, or who see themselves as critics of the supremacy of democracy.
Badiou talked about the need to question the very nature of democracy as it is becoming the major ideology. Ruda and Völker presented a philosophical manifesto, inspred from Descartes, which called for the courage and belief to support subjective judgements, as thought itself has been destroyed. Cecile Winters, Maoist, said that only communists could eliminate the State, but to do so required a new movement, one that creates "unrest that makes everything clear", and who sees the need for fifteen or more cultural revolutions to achieve utopia. Somay, apparently a hard-core Leninist, talked about the need to resurrect the working class, means of production and revolution. Žižek was apparently the highlight of the conference: he presented a marathon of anecdotes, jumps from one idea to another, no thesis, just a rambling discussion of terror and violence. Žižek is the pop star of the modern left, a showman who wants to bring new authoritarian "truth projects" to indoctrinate the young: his attempt, for instance, to resurrect Lenin is completely ahistorical, but talks about how the Revolution can succeed with brutality and class destruction.
The journalist, Regina Mönch, who wrote this up, points out in the article that the conference screened Alaxander Dovschenschkos classic work "Earth" from 1930, an aesthetic work about the destruction of the evil kulaks and the victory of the farmers, while ignoring the 10 mn killed by Stalin in the Ukraine.
The ghost of the title of this post is that of communism, in its purest and most devastating form, dedicated simply to the revolution and the destruction of the past in the name of utopia.
The idiots are both the useful idiots and the real idiots: the useful idiots are the hangers-on, the sycophants in the press and culture, who desperately want to believe in the utopia and hence are willfully, deliberately and malevolently blind.
The vampire ideology? An ideology that will not die, regardless of how many times it is shown to be wrong.
The irony of this all: it was Karl Marx who said the history repeats itself, first as tragedy, second as farce.
The collapse of the Soviets and Eastern European communist regimes was the tragedy: this is farce.
The danger, however, is real: given the problems inherent to capitalism, there is the danger that a new communism is reborn that once again promises utopia in exchange for obedience. We see this is the increasing criticisms - largely incorrect, but reported as if they were correct - that markets do not function, that capitalism always leads to collapse and ruin.
Beware of the beginnings. This vampire may have a stake through its heart, but as all good film-goers know, if the stake is removed, the vampire comes back to life.
Montag, Juni 28, 2010
The True Face of Democrats...
Read this and understand.
There is no excuse for this. None. Either the country is a nation of laws, impartially and fairly applied by courts and lawyers wanting to find the truth, or the rule of law breaks down and we end up with the kind of politics of corruption, of deliberately and with malice aforethought playing racial groups against each other, decisive and destructive, deliberately manipulative and extraordinarily cynical.
But that's the true face of at least this President. I know that there are other Democrats out there. But as long as this is allowed to happen, indeed as long as this is actively promoted, it is a blot on the face of the Democratic Party, one that puts the party to shame.
This isn't about history and payback: this is about the rule of law. Abandon that, and you lose everything else.
There is no excuse for this. None. Either the country is a nation of laws, impartially and fairly applied by courts and lawyers wanting to find the truth, or the rule of law breaks down and we end up with the kind of politics of corruption, of deliberately and with malice aforethought playing racial groups against each other, decisive and destructive, deliberately manipulative and extraordinarily cynical.
But that's the true face of at least this President. I know that there are other Democrats out there. But as long as this is allowed to happen, indeed as long as this is actively promoted, it is a blot on the face of the Democratic Party, one that puts the party to shame.
This isn't about history and payback: this is about the rule of law. Abandon that, and you lose everything else.
The Eternal Return Of The Same...
Nietzsche wrote of the Eternal Return of the Same: to live your life so well that you wouldn't want to do it over in any way. Hence the phrase: live your life as if you were to live it over time and time and time again, unto eternity.
We seem to have that with the Congress right now, but in a completely different manner.
The Eternal Return of the Same is now the introduction and passage of legislation that no one has read, no one understands, and contains things that no one would expect.
Take the newest fiasco: the Dodd-Frank Act, aimed at regulating the financial industry.
Key:
The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets.
Just like the health care bill failed to address some of the core problems behind health care costs - tort reform, anyone? - this bill fails to really do anything.
It assigns the choices of what to do to regulators, who, given such discretionary powers, will make a right muddle of things.
The bill doesn't even touch some of the core problems behind the financial troubles we've had - Fannie Mae and Freddie Mac aren't even mentioned - and even the Volcker Rule (requiring banks that accept insurance for deposits to avoid risky investments) is left to regulators to decide what needs to be done.
The irony of the Dodd-Frank Act is that it will probably become law of the land, but is designed, at heart, to undermine the law of the land: by leaving so much up to regulators, implementation of the law will be a decision made by individual regulators, who may or may not apply the law at their discretion.
In other words, a shift from rule by law to increasing rule by men, in this case relatively nameless bureaucrats who are no where responsible for their actions.
The Democrats are showing that they are indeed embodying the Eternal Return of the Same, but in its neurotic incarnation: pass legislation that no one understands but makes them look good to their constituencies and when things go horribly wrong, they can blame those who carried the law out.
In other words, live your life such that you can can do whatever you want to do, avoid blame and follow your lesser instincts. It's what makes the Democrats so distinctive.
We seem to have that with the Congress right now, but in a completely different manner.
The Eternal Return of the Same is now the introduction and passage of legislation that no one has read, no one understands, and contains things that no one would expect.
Take the newest fiasco: the Dodd-Frank Act, aimed at regulating the financial industry.
Key:
The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets.
Chris Dodd and Barney Frank, those Fannie Mae cheerleaders, played the largest role in writing the bill. Congressman Paul Kanjorski even offered a motion to memorialize it as the Dodd-Frank Act. It's as if Tony Hayward of BP were allowed to write new rules on deep water drilling.
The Federal Reserve, which promoted the housing mania and failed utterly in its core mission of monitoring Citigroup, will now have more power to regulate more financial institutions and more ability to dictate the allocation of credit.
Just like the health care bill failed to address some of the core problems behind health care costs - tort reform, anyone? - this bill fails to really do anything.
It assigns the choices of what to do to regulators, who, given such discretionary powers, will make a right muddle of things.
The bill doesn't even touch some of the core problems behind the financial troubles we've had - Fannie Mae and Freddie Mac aren't even mentioned - and even the Volcker Rule (requiring banks that accept insurance for deposits to avoid risky investments) is left to regulators to decide what needs to be done.
The irony of the Dodd-Frank Act is that it will probably become law of the land, but is designed, at heart, to undermine the law of the land: by leaving so much up to regulators, implementation of the law will be a decision made by individual regulators, who may or may not apply the law at their discretion.
In other words, a shift from rule by law to increasing rule by men, in this case relatively nameless bureaucrats who are no where responsible for their actions.
The Democrats are showing that they are indeed embodying the Eternal Return of the Same, but in its neurotic incarnation: pass legislation that no one understands but makes them look good to their constituencies and when things go horribly wrong, they can blame those who carried the law out.
In other words, live your life such that you can can do whatever you want to do, avoid blame and follow your lesser instincts. It's what makes the Democrats so distinctive.
Freitag, Juni 25, 2010
Totally Out Of Control...
How out of control is sheer government stupidity?
In California, welfare recipients were using their welfare money to gamble.
See this.
Key quote:
There is no hope for California at this point: "timely legislative oversight" my ass.
Excuse my vernacular, but this system is fucked.
People on welfare should feel poor and cash-strapped, because they're living off the taxpayers. It should be damned unpopular, embarrassing and something to be avoided. It has a role to play, but this?
There went $1.8mn in welfare benefits over 8 months. Paid for by suckers supporting the indulgent, made possible by the naive and complacent.
This is a clear example of what happens with no adult supervision.
Ye gods.
In California, welfare recipients were using their welfare money to gamble.
See this.
Key quote:
Democrats, who have been fighting to preserve the state's fraying social safety net in the face of a $19-billion budget gap, angrily rejected a Schwarzenegger proposal last month to eliminate the cash portion of welfare.
That was before anyone in Sacramento realized the money could be withdrawn by someone strolling from a poker game to a blackjack table.
Democratic leaders steered away from specifics while discussing calls for reform.
"We will conduct timely legislative oversight," said Senate President Pro Tem Darrell Steinberg (D-Sacramento). "We want to make sure all families are spending the money on the children it's intended to serve."
There is no hope for California at this point: "timely legislative oversight" my ass.
Excuse my vernacular, but this system is fucked.
People on welfare should feel poor and cash-strapped, because they're living off the taxpayers. It should be damned unpopular, embarrassing and something to be avoided. It has a role to play, but this?
There went $1.8mn in welfare benefits over 8 months. Paid for by suckers supporting the indulgent, made possible by the naive and complacent.
This is a clear example of what happens with no adult supervision.
Ye gods.
Donnerstag, Juni 24, 2010
Well, He Would Say That, Wouldn't He...
George Soros, the man who broke the Pound Sterling, is back at it again. This time it's Germany and, according to George, the ridiculous idea that government debt isn't the best thing in the world.
Read it here.
Germany's fiscal policy - which, by the way, is nothing new - isn't a threat to stability and democracy in Europe.
Rather, it's a threat to George Soros and his ability to make money off of other people's troubles.
Good old Paul Krugman is quoted again, saying that he doesn't have any trouble balancing the books in 10 years, but right now, we gotta spend, spend, spend.
What Dr. Krugman doesn't realize is that government debt, if it were to continue to spend, spend, spend, won't be able to be balanced in 10 years, or even 20. We're well past the point where Keynes would say that it is necessary to spend our way out of a recession: we're at the point of wide-spread fiscal irresponsibility.
But that's the way George Soros likes it: get the governments of the world so heavily in debt that they become truly subservient to the financial sector.
Hence: the best argument for fiscal austerity is that George Soros is against it.
Read it here.
Germany's fiscal policy - which, by the way, is nothing new - isn't a threat to stability and democracy in Europe.
Rather, it's a threat to George Soros and his ability to make money off of other people's troubles.
Good old Paul Krugman is quoted again, saying that he doesn't have any trouble balancing the books in 10 years, but right now, we gotta spend, spend, spend.
What Dr. Krugman doesn't realize is that government debt, if it were to continue to spend, spend, spend, won't be able to be balanced in 10 years, or even 20. We're well past the point where Keynes would say that it is necessary to spend our way out of a recession: we're at the point of wide-spread fiscal irresponsibility.
But that's the way George Soros likes it: get the governments of the world so heavily in debt that they become truly subservient to the financial sector.
Hence: the best argument for fiscal austerity is that George Soros is against it.
Montag, Juni 21, 2010
Just Because You Have A Nobel Prize...
...doesn't mean that anything you say automatically makes sense.
Paul Krugman got his Nobel for working on economic geography. He deserves it because he did do some great work there.
Other than that, he's a polemicist for the Democratic Party, one who, according to the Ombudsman from the New York Times (where he has his column), has a rather ... liberal view of the truthfulness of the facts that he cites (i.e. for the clueless: is willing to twist the facts to fit his story).
Unfortunately for the state of US finances, he has the ear of the President and the Presidential Cabinet.
According to Krugman, the time is ripe for further, full-blown Keynesian pump-priming to "get the economy rolling," regardless of the effect that this has on finances.
Now, from a purely opportunistic political-economy viewpoint, this is right: if the government goes on a spending spree, the economy, in the short term, will pick up and hiring would resume from its still-stand today.
The problem is that Krugman and, by extension, the Obama Administration, severely underestimate the power of markets. Specifically, bond markets.
Let's run a scenario on what would happen if the Obama Administration were to follow the Keynesian path of those advising the Democratic Party (not only Krugman, but Robert Reich, for instance, as well):
1) The US government embarks on, say, a $2 tr "System To Utilize Productive Industry Domestically" or STUPID. STUPID takes government funds and buys domestic products (no imports or foreign-owned companies need to apply) for distribution to low-income cohorts, bypassing retail stores because there shouldn't be any profits made except for the industry (another reason to call this STUPID). The US debt ceiling is moved to $20tr from the current $14tr to accommodate this and other spending plans (since the current debt is $13tr and in order to spend more than that, the debt ceiling has to be moved);
2) This is financed by the sale of US government bonds;
3) With more and more dollars flooding the market and with US debt levels reaching Third-World levels, the bond prices start to fall, driving up the effective interest rate on US bonds. Rating Agencies do not down-rate the US because a) they know the repercussions for their business plans and b) they also fear criminal proceedings brought by the US Department of Justice if they dared to do so. The market, however, realizes that the US has, effectively, entered the Twilight Zone of government finances by exceeding 100% of GDP, and starts to decline to buy US government bonds because the yields are too low for the risk involved;
4) The US Treasury, in order to acquire the dollars needed for STUPID, accepts decreasing bond prices as a proxy for higher interest rates due to the increased perceived risk, and a run starts to develop on bond prices, given that existing holders see their assets start to show serious decline;
5) In order to ensure that there is not a run on US bonds, bond yields are raised;
6) Increases in bond yields percolate through the system, but everyone is happy because the increase in bond yields has now stabilized and the price run has been stopped;
7) The US government has to refinance older bonds and discovers to its dismay that effective interest rates are now 5%, not 0%;
8) STUPID kicks in (hard) and the economy starts to recover, with growth rates for 2011Q1 of 6%;
9) The US government discovers that in order to refinance older bonds, effective interest rates are now 7%, not 5%;
10) Rating agencies are losing all credibility by continuing to give the US government, whose debt now stands at 122% of GDP (despite STUPID), a AAA rating;
11) More US government bonds are refinanced;
12) More US government bonds are refinanced;
13) The amount of tax revenues used for financing US government debt on the bond market goes from currently ca 9.5% of total government spending (#4 position in the budget) to over 20% of total government spending, raising further warning flags for financial observers;
14) Growth in the US continues to increase strongly, 2010 ended up growing by 4% and 2011 looks to be 5%;
15) US government debt continues to accelerate despite increasing tax revenues, as the revenues lag debt growth;
16) More and more US debt issues are short-term as interest rates invert because fewer and fewer bond buyers believe that the US government has any long-term sustainability;
17) The US government discovers that in order to refinance older bonds, effective interest rates are now 12%, not 7%;
18) STUPID effects are over and the economy slows back to 3% growth rates;
19) In 2012, US government debt stands at 210% of GDP and interest servicing is now the largest single position in the US budget;
20) President Obama runs for re-election on a platform that STUPID was just the start, the economy will turn around with STUPID II;
At that point I will stop. The US government has blown its wad, shot off its munitions, gone the whole nine yards and has gotten so deeply into debt that it will be unable to finance the retirement of the Baby Boomers under any circumstances.
Keynesian pump-priming, if you bother to read Keynes, is only sensible when it is a one-time thing to get our of a business cycle hole and get people back to work. It must be accompanied with debt retirement when the business cycle is on an upswing.
It cannot and will not work if you are already heavily burdened with debt because the political class cannot understand that permanent deficit spending doesn't mean that you can permanently ratchet up government spending (permanent deficit spending means that it's not necessarily a good idea to have long-term government surpluses, as this means that government, unless it is actively retiring debt, is collecting too much in the way of taxes.
What Krugman believes, basically, is that if you are severely in debt because you have been consuming too much, then get another credit card, use it to pay off all the debt, and then keep on getting credit cards with higher and higher limits because if you have to repay, the whole house of cards falls apart and that means you'll never realize your dreams of utopia.
We can already see the face of what will happen if the Euro remains weak: Krugman, in today's Handelsblatt (German equivalent of the WSJ), says that Europeans will be amazed what Congress will demand from them if the Euro were to fall to parity.
He doesn't realize that the Europeans don't dictate the value of the Euro: financial markets do.
The fiscal policy of the Obama Administration is sell bonds and spend: their only solution is to continue to spend and damn the consequences. It's almost as if they know they will be trounced in 2010 and that President Obama will be a one-term wonder in 2012, leaving the grown-ups who come in (note I do not say Republicans...) a true fiscal ruin that will require some rather unpalatable changes in US fiscal policy, one aimed at getting the Democrats back into power in 2012.
Germany is supposed to give up its export surplus and start having their consumers spend like there is no tomorrow. It is the ultimate conceit of the misinformed and willfully ignorant that everyone is supposed to play the game according to their game plan.
The world is not America. Fiscal irresponsibility doesn't disappear "because I said it does."
Ye gods.
Paul Krugman got his Nobel for working on economic geography. He deserves it because he did do some great work there.
Other than that, he's a polemicist for the Democratic Party, one who, according to the Ombudsman from the New York Times (where he has his column), has a rather ... liberal view of the truthfulness of the facts that he cites (i.e. for the clueless: is willing to twist the facts to fit his story).
Unfortunately for the state of US finances, he has the ear of the President and the Presidential Cabinet.
According to Krugman, the time is ripe for further, full-blown Keynesian pump-priming to "get the economy rolling," regardless of the effect that this has on finances.
Now, from a purely opportunistic political-economy viewpoint, this is right: if the government goes on a spending spree, the economy, in the short term, will pick up and hiring would resume from its still-stand today.
The problem is that Krugman and, by extension, the Obama Administration, severely underestimate the power of markets. Specifically, bond markets.
Let's run a scenario on what would happen if the Obama Administration were to follow the Keynesian path of those advising the Democratic Party (not only Krugman, but Robert Reich, for instance, as well):
1) The US government embarks on, say, a $2 tr "System To Utilize Productive Industry Domestically" or STUPID. STUPID takes government funds and buys domestic products (no imports or foreign-owned companies need to apply) for distribution to low-income cohorts, bypassing retail stores because there shouldn't be any profits made except for the industry (another reason to call this STUPID). The US debt ceiling is moved to $20tr from the current $14tr to accommodate this and other spending plans (since the current debt is $13tr and in order to spend more than that, the debt ceiling has to be moved);
2) This is financed by the sale of US government bonds;
3) With more and more dollars flooding the market and with US debt levels reaching Third-World levels, the bond prices start to fall, driving up the effective interest rate on US bonds. Rating Agencies do not down-rate the US because a) they know the repercussions for their business plans and b) they also fear criminal proceedings brought by the US Department of Justice if they dared to do so. The market, however, realizes that the US has, effectively, entered the Twilight Zone of government finances by exceeding 100% of GDP, and starts to decline to buy US government bonds because the yields are too low for the risk involved;
4) The US Treasury, in order to acquire the dollars needed for STUPID, accepts decreasing bond prices as a proxy for higher interest rates due to the increased perceived risk, and a run starts to develop on bond prices, given that existing holders see their assets start to show serious decline;
5) In order to ensure that there is not a run on US bonds, bond yields are raised;
6) Increases in bond yields percolate through the system, but everyone is happy because the increase in bond yields has now stabilized and the price run has been stopped;
7) The US government has to refinance older bonds and discovers to its dismay that effective interest rates are now 5%, not 0%;
8) STUPID kicks in (hard) and the economy starts to recover, with growth rates for 2011Q1 of 6%;
9) The US government discovers that in order to refinance older bonds, effective interest rates are now 7%, not 5%;
10) Rating agencies are losing all credibility by continuing to give the US government, whose debt now stands at 122% of GDP (despite STUPID), a AAA rating;
11) More US government bonds are refinanced;
12) More US government bonds are refinanced;
13) The amount of tax revenues used for financing US government debt on the bond market goes from currently ca 9.5% of total government spending (#4 position in the budget) to over 20% of total government spending, raising further warning flags for financial observers;
14) Growth in the US continues to increase strongly, 2010 ended up growing by 4% and 2011 looks to be 5%;
15) US government debt continues to accelerate despite increasing tax revenues, as the revenues lag debt growth;
16) More and more US debt issues are short-term as interest rates invert because fewer and fewer bond buyers believe that the US government has any long-term sustainability;
17) The US government discovers that in order to refinance older bonds, effective interest rates are now 12%, not 7%;
18) STUPID effects are over and the economy slows back to 3% growth rates;
19) In 2012, US government debt stands at 210% of GDP and interest servicing is now the largest single position in the US budget;
20) President Obama runs for re-election on a platform that STUPID was just the start, the economy will turn around with STUPID II;
At that point I will stop. The US government has blown its wad, shot off its munitions, gone the whole nine yards and has gotten so deeply into debt that it will be unable to finance the retirement of the Baby Boomers under any circumstances.
Keynesian pump-priming, if you bother to read Keynes, is only sensible when it is a one-time thing to get our of a business cycle hole and get people back to work. It must be accompanied with debt retirement when the business cycle is on an upswing.
It cannot and will not work if you are already heavily burdened with debt because the political class cannot understand that permanent deficit spending doesn't mean that you can permanently ratchet up government spending (permanent deficit spending means that it's not necessarily a good idea to have long-term government surpluses, as this means that government, unless it is actively retiring debt, is collecting too much in the way of taxes.
What Krugman believes, basically, is that if you are severely in debt because you have been consuming too much, then get another credit card, use it to pay off all the debt, and then keep on getting credit cards with higher and higher limits because if you have to repay, the whole house of cards falls apart and that means you'll never realize your dreams of utopia.
We can already see the face of what will happen if the Euro remains weak: Krugman, in today's Handelsblatt (German equivalent of the WSJ), says that Europeans will be amazed what Congress will demand from them if the Euro were to fall to parity.
He doesn't realize that the Europeans don't dictate the value of the Euro: financial markets do.
The fiscal policy of the Obama Administration is sell bonds and spend: their only solution is to continue to spend and damn the consequences. It's almost as if they know they will be trounced in 2010 and that President Obama will be a one-term wonder in 2012, leaving the grown-ups who come in (note I do not say Republicans...) a true fiscal ruin that will require some rather unpalatable changes in US fiscal policy, one aimed at getting the Democrats back into power in 2012.
Germany is supposed to give up its export surplus and start having their consumers spend like there is no tomorrow. It is the ultimate conceit of the misinformed and willfully ignorant that everyone is supposed to play the game according to their game plan.
The world is not America. Fiscal irresponsibility doesn't disappear "because I said it does."
Ye gods.
Dienstag, Juni 15, 2010
But The Pension Fund Was Just Sitting There...
That's a line, of course, from one of the early Doonesbury comic strips, where Duke, the character that Trudeau modeled on Hunter S. Thompson, uses the Pension Fund to finance hiring a Samoan for the football team, which Duke was coaching. Duke's idea was to surprise opponent teams with this huge player and use judicially placed bets to ensure that the money could be won back before anyone noticed.
The problem was that the Samoan was uncontrollable, and Duke spoke these immortal lines: "Get me the dart gun..."
Now, and a hat tip to Zero Hedge, we seem to find a modern-day variance of this, with the Illinois Teacher's Pension Fund entering the arena for sheer and utter insanity.
Go read the article for a taste of the future.
Fundamentally, this is a prime example of private profits and public losses: the fiduciaries of the fund - who apparently, even if they are nice folks, really are playing the wrong game without the necessary training and competence (and the 32 hours of training they get is a hoot) - are heavily into extremely leveraged plays, knowing that at the end of the day, if all goes belly up, the taxpayers will assume the losses. Given that, there is no incentive for them not to go broke.
And go broke they will. They lost money in years the market went up, and are underfunded to the tune of over $40bn, or roughly 60% of their total liabilities: this means that they have only 40% of the money they are supposed to have at this point in time, which normally means that school teacher's pensions are, largely speaking, worth less than half of what the future pensioners think they are going to get.
Solution? Bet everything that they can pull themselves out of the hole that they've dug. As an informed observer put it, the portfolio is aimed purely at generating the highest possible returns without consideration of risk.
That's fine if you're a trust fund kid playing with your inheritance from Grandpa: if everything goes down the toilet, you might have to work for a living, but at least you're not going to screw over innocents. This is far from the case: here the fund is going for broke, with no less than over 80% of its investments in highly risky instruments, and Illinois TSR, the fund, is on the risk-carrying side of the OTC deals it is investing in, cashing in the risk fees to take on the risk. To repeat: the Illinois TSR isn't merely investing in risky instruments, it is generating them.
The leverage? According to Illinois TSR, the notional value of their OTC business is $1.1bn, but the market value is $5mn. So far, they're losing money.
Now, to be clear, there is nothing preventing them from doing this. No legal obstacles, no clearly laid out investment guides, zilch.
But to paraphrase Hadrian: Just because you can doesn't mean you should.
Recourse for the teachers if it all collapses? They can sue the fiduciaries. That's it. The government - which means the taxpayers - will have to turn things around for them.
Hence: we continue to see, all around us, continuing evidence that no one, really no one, appears to be actually looking at what is happening in the world and adjusting their behavior appropriately. A pension fund should be invested in very long-term, prosaic investments generating modest returns, well funded and with moderate liquidity.
Instead it's uncontrollable. Where is that dart gun when you need it?
The problem was that the Samoan was uncontrollable, and Duke spoke these immortal lines: "Get me the dart gun..."
Now, and a hat tip to Zero Hedge, we seem to find a modern-day variance of this, with the Illinois Teacher's Pension Fund entering the arena for sheer and utter insanity.
Go read the article for a taste of the future.
Fundamentally, this is a prime example of private profits and public losses: the fiduciaries of the fund - who apparently, even if they are nice folks, really are playing the wrong game without the necessary training and competence (and the 32 hours of training they get is a hoot) - are heavily into extremely leveraged plays, knowing that at the end of the day, if all goes belly up, the taxpayers will assume the losses. Given that, there is no incentive for them not to go broke.
And go broke they will. They lost money in years the market went up, and are underfunded to the tune of over $40bn, or roughly 60% of their total liabilities: this means that they have only 40% of the money they are supposed to have at this point in time, which normally means that school teacher's pensions are, largely speaking, worth less than half of what the future pensioners think they are going to get.
Solution? Bet everything that they can pull themselves out of the hole that they've dug. As an informed observer put it, the portfolio is aimed purely at generating the highest possible returns without consideration of risk.
That's fine if you're a trust fund kid playing with your inheritance from Grandpa: if everything goes down the toilet, you might have to work for a living, but at least you're not going to screw over innocents. This is far from the case: here the fund is going for broke, with no less than over 80% of its investments in highly risky instruments, and Illinois TSR, the fund, is on the risk-carrying side of the OTC deals it is investing in, cashing in the risk fees to take on the risk. To repeat: the Illinois TSR isn't merely investing in risky instruments, it is generating them.
The leverage? According to Illinois TSR, the notional value of their OTC business is $1.1bn, but the market value is $5mn. So far, they're losing money.
Now, to be clear, there is nothing preventing them from doing this. No legal obstacles, no clearly laid out investment guides, zilch.
But to paraphrase Hadrian: Just because you can doesn't mean you should.
Recourse for the teachers if it all collapses? They can sue the fiduciaries. That's it. The government - which means the taxpayers - will have to turn things around for them.
Hence: we continue to see, all around us, continuing evidence that no one, really no one, appears to be actually looking at what is happening in the world and adjusting their behavior appropriately. A pension fund should be invested in very long-term, prosaic investments generating modest returns, well funded and with moderate liquidity.
Instead it's uncontrollable. Where is that dart gun when you need it?
Montag, Juni 14, 2010
The Face of Institutionalized Corruption...
Go read this.
It is nothing but the attempt to institutionalize corruption in the US, ensuring that the Fed will become a servant of politically correct appointees who will ensure that any Fed lending meets politically determined socially and politically correct lending practices.
If this passes, it means the end of the Fed and the degradation of the American banking system to serve the "needs" of the Democratic Party (and you can bet that once political appointees are in there, they'll be there for life to "ensure their independence," meaning that the looting will continue.
Ye gods.
Key quote:
Having recently lived through a financial mania and panic caused in part by political pressure for "affordable housing," Congress will now order regulators to allocate credit by race and gender. Isn't the point of this financial reform supposed to be to make regulators better judges of systemic risks, which means focusing on financial safety and soundness? If the Waters provision passes, federal regulators will have to put racial and gender lending at the top of their watch list when they do their checks on the banks and hedge funds they are regulating.
That way lies madness.
It is also symptomatic of the Democratic Party at this point in time. After destroying California, they're looking for additional targets to screw up.
The Fed is being told to lie back and enjoy it:
This is political thuggery at its most subtle: it remains political thuggery.
It is nothing but the attempt to institutionalize corruption in the US, ensuring that the Fed will become a servant of politically correct appointees who will ensure that any Fed lending meets politically determined socially and politically correct lending practices.
If this passes, it means the end of the Fed and the degradation of the American banking system to serve the "needs" of the Democratic Party (and you can bet that once political appointees are in there, they'll be there for life to "ensure their independence," meaning that the looting will continue.
Ye gods.
Key quote:
Having recently lived through a financial mania and panic caused in part by political pressure for "affordable housing," Congress will now order regulators to allocate credit by race and gender. Isn't the point of this financial reform supposed to be to make regulators better judges of systemic risks, which means focusing on financial safety and soundness? If the Waters provision passes, federal regulators will have to put racial and gender lending at the top of their watch list when they do their checks on the banks and hedge funds they are regulating.
That way lies madness.
It is also symptomatic of the Democratic Party at this point in time. After destroying California, they're looking for additional targets to screw up.
The Fed is being told to lie back and enjoy it:
Fed regional presidents are often the main proponents of tight monetary policy. The presence of a diversity czar is one way Congress and the White House can intimidate these regional presidents to go along with the policies they favor. No Fed bank president will want to take the risk of being hauled before Congress to answer a report that the banks under his jurisdiction aren't racially or gender sensitive enough in their lending.
This political sway is already clear from how meekly the Fed as an institution is bowing to the Waters provision. The Senate bill doesn't have the same provision, so it could be removed in the House-Senate conference that begins this week. But we're told that Fed officials in Washington have told the regional banks to keep quiet because it can't be stopped and Ms. Waters and the House might punish them if they try. In other words, the political intimidation is already obvious even before the provision becomes law.
The joke here, as well, is that the Democrats set up a straw man to facilitate this:
Blame for this Congressional intrusion goes to Treasury Secretary Tim Geithner and former Goldman Sachs executive Stephen Friedman for orchestrating the selection of former Goldman economist William Dudley as Mr. Geithner's replacement at the New York Fed.
Mr. Friedman chaired the search committee to replace Mr. Geithner even as he increased his ownership of Goldman shares. Though this violated Fed rules, Fed Vice Chairman Donald Kohn and the Board of Governors gave Mr. Friedman a conflict-of-interest waiver. Congress has now seized on this to justify putting the New York Fed chief on a Washington political leash.
This is political thuggery at its most subtle: it remains political thuggery.
Welcome to Chicago politics, folks: just put your wallets, jewelry and watches into the bag and no one gets hurt.
Mittwoch, Juni 09, 2010
In Case You Were Wondering...
...how the Left can push for programs that not only make no economic sense, but actually damage the economy and work against what their purported goals are, read this.
Turns out that Liberals and Progressives really are that dumb.
Peruse the comments to that: the only reply from those shown to know virtually nothing about economics is ad hominem attacks.
Liberals and Progressives don't need facts. If anything, the empirical world must be changed. The hell with economics if it gets in our way.
Sigh. The Gods of the Copybook Headings will return with a vengeance.
Turns out that Liberals and Progressives really are that dumb.
Peruse the comments to that: the only reply from those shown to know virtually nothing about economics is ad hominem attacks.
Liberals and Progressives don't need facts. If anything, the empirical world must be changed. The hell with economics if it gets in our way.
Sigh. The Gods of the Copybook Headings will return with a vengeance.
Sonntag, Juni 06, 2010
Swine Cycle Reappears...
Part of the business cycle can be explained as being based in the swine cycle. This is the part of the business cycle that will never go away, and you'll see my point in a moment.
For those who aren't economists, the swine cycle is a simple explanation - but a very accurate one - of what happens when farmers raise pigs for profit and sell them on a market that always clears (supply is such that there remains no demand for a given point in time t) and where there are no price controls.
To make things simple, let's postulate 100 farmers that each produce 10 swine for sale in period t. Total demand is 1 000 swine, there are 1 000 swine produced, and farmers have fairly similar size productivity and resources. It costs 100 to raise a swine to selling age (hence 1 000 swine cost 100 000 per time period) and the profit is 5%, i.e. selling price is 105 000. Other farm activities may or may not have more attractive profit margins. Consumers like their pork, and consume everything produced at this price point; however, there are asymmetric price elasticities that no one knows, i.e. when prices increase, demand decreases and, inversely, when prices decrease, demand increases, but both are non-linear and not easily mapped out (and vary from t to t).
Now, while each farmer produce 10 swine in period t, it takes 6t to raise new swine (i.e. increase their inventory), so farmers entering the market (or increasing their inventory) need 6 time periods t to raise 10 swine for sale, with an inventory, in the pipeline, of 70 swine. If they decide to get out, they sell off their inventory as demanded until they have sold all swine, if they decide to get back in, it takes 6 time periods to have enough swine to sell. They can sell off their inventory all at once if they so desire, but don't have to.
I was originally going to illustrate this with numbers, but because of the variability of farmer behavior, I'd have to break out a spreadsheet, and it's a lovely Sunday out. Hence: doing the calculations are an exercise left to the reader.
What happens? Some farmers decide that swine farming isn't that much fun, and sell off their entire herd at once, increasing the supply for a very brief period, driving down prices. Faced with lowered prices and hence lowered profits, more farmers decide to get out of the swine business, and after several periods of this, the number of swine on the market has fallen significantly below demand. The market tightens up, prices start to rise, farmers start thinking that maybe swine aren't so bad after all, especially given the higher prices. So most of the farmers head back into the business and several periods later, there are so many swine on the markets that prices start to fall again, leading to a permanent cyclical pattern that is, oddly enough, called the swine cycle.
Depending on how farmer behavior is modeled, this can be a strong, erratic, chaotic cycle or a smooth and well-behaved and modulated cycle. Up to the reader to calculate.
So, what does this have to do with anything?
Simple: the important thing is cycles happen because there is a time lag between changes in demand and changes in supply, and changes in supply will cause changes in demand based on prices. In the swine cycle, this is relatively short, but there are other markets that behave, largely, the same, but with rather greater time lags.
This is why this and this is happening.
Real estate is going to tank over the next 20-30 years as supply - housing placed on the market to sell - and demand (especially in the face of strongly tightened credit requirements) find a new equilibrium, one that clears the market of surplus housing (aka baby boomers selling off their houses because it is their nest egg as equity for fixed income for retirement purposes). That's what you can see in the chart in the first link: how the cycle is hitting different regions right now, based on the cyclical position of these regions in the business cycle for housing. Given the long lead times, the amount of capital involved, and the sincere hope of all of those retiring baby boomers that they can outfox the decline by timing it well (ensuring that lots of housing will remain off the market, re-entering just at those times when the market starts to recover, effectively killing off, time and time again, any price recovery), this is going to a swine cycle of epic proportions.
Education, especially higher education, hasn't had many cycles. In the US it is hitting its first major cycle (go see the second link) and it's going to follow the swine cycle, since academia has acquired such heavy costs (thousands of very well paid tenured professors in fields that are pure luxuries and yes, gender and womyn studies, I am talking about y'all, along with most of the humanities beyond the basics) that it is now driving a generation of consumers - I'm going to call them Generation B (for baby boomer grandchildren and broke because of university-related debt that no longer disappears when you declare bankruptcy) - into relative poverty because they either ended up studying something that only the indulgent and idle would bother to study or studied something no longer in demand (or, more accurately, studied because they were supposed to do so based on an assumption that getting any sort of college education automagically resulted in higher life-time wages).
The result will be financial collapse of many universities and colleges that expanded rapidly because credit was easily available. Go into debt for $100k to get your law degree? No problem, easily financed, and you thought that specializing in humanitarian law was idealistic and noble, not knowing that 90% of such lawyers never earn anything near what is needed to pay back that $100k. Or go into tort law, ignoring the fact that hundreds were doing the same thing and market demand meant that you would never be able to pay back those loans unless you were absolutely brilliant - or, more specifically, you found clients who believed this - or extremely lucky.
If you base going into serious debt in the hope you get lucky, play the lottery. It's not nearly as expensive and, given you apparent lack of understanding about statistics, it's about as good as you're gonna get.
Hence: knowing the swine cycle and, by extension, the business cycle isn't merely a good idea: not knowing about it means you are going to make major mistakes, ones that you can't get out of.
For Generation B, the kids growing up right now, the swine cycle, as well as most of economics, isn't really that hard to learn. Ignore it at your financial peril. Your parents and grandparents have ignored it, and as a result, you're kind of screwed. See what ignoring economics does to you?
For those who aren't economists, the swine cycle is a simple explanation - but a very accurate one - of what happens when farmers raise pigs for profit and sell them on a market that always clears (supply is such that there remains no demand for a given point in time t) and where there are no price controls.
To make things simple, let's postulate 100 farmers that each produce 10 swine for sale in period t. Total demand is 1 000 swine, there are 1 000 swine produced, and farmers have fairly similar size productivity and resources. It costs 100 to raise a swine to selling age (hence 1 000 swine cost 100 000 per time period) and the profit is 5%, i.e. selling price is 105 000. Other farm activities may or may not have more attractive profit margins. Consumers like their pork, and consume everything produced at this price point; however, there are asymmetric price elasticities that no one knows, i.e. when prices increase, demand decreases and, inversely, when prices decrease, demand increases, but both are non-linear and not easily mapped out (and vary from t to t).
Now, while each farmer produce 10 swine in period t, it takes 6t to raise new swine (i.e. increase their inventory), so farmers entering the market (or increasing their inventory) need 6 time periods t to raise 10 swine for sale, with an inventory, in the pipeline, of 70 swine. If they decide to get out, they sell off their inventory as demanded until they have sold all swine, if they decide to get back in, it takes 6 time periods to have enough swine to sell. They can sell off their inventory all at once if they so desire, but don't have to.
I was originally going to illustrate this with numbers, but because of the variability of farmer behavior, I'd have to break out a spreadsheet, and it's a lovely Sunday out. Hence: doing the calculations are an exercise left to the reader.
What happens? Some farmers decide that swine farming isn't that much fun, and sell off their entire herd at once, increasing the supply for a very brief period, driving down prices. Faced with lowered prices and hence lowered profits, more farmers decide to get out of the swine business, and after several periods of this, the number of swine on the market has fallen significantly below demand. The market tightens up, prices start to rise, farmers start thinking that maybe swine aren't so bad after all, especially given the higher prices. So most of the farmers head back into the business and several periods later, there are so many swine on the markets that prices start to fall again, leading to a permanent cyclical pattern that is, oddly enough, called the swine cycle.
Depending on how farmer behavior is modeled, this can be a strong, erratic, chaotic cycle or a smooth and well-behaved and modulated cycle. Up to the reader to calculate.
So, what does this have to do with anything?
Simple: the important thing is cycles happen because there is a time lag between changes in demand and changes in supply, and changes in supply will cause changes in demand based on prices. In the swine cycle, this is relatively short, but there are other markets that behave, largely, the same, but with rather greater time lags.
This is why this and this is happening.
Real estate is going to tank over the next 20-30 years as supply - housing placed on the market to sell - and demand (especially in the face of strongly tightened credit requirements) find a new equilibrium, one that clears the market of surplus housing (aka baby boomers selling off their houses because it is their nest egg as equity for fixed income for retirement purposes). That's what you can see in the chart in the first link: how the cycle is hitting different regions right now, based on the cyclical position of these regions in the business cycle for housing. Given the long lead times, the amount of capital involved, and the sincere hope of all of those retiring baby boomers that they can outfox the decline by timing it well (ensuring that lots of housing will remain off the market, re-entering just at those times when the market starts to recover, effectively killing off, time and time again, any price recovery), this is going to a swine cycle of epic proportions.
Education, especially higher education, hasn't had many cycles. In the US it is hitting its first major cycle (go see the second link) and it's going to follow the swine cycle, since academia has acquired such heavy costs (thousands of very well paid tenured professors in fields that are pure luxuries and yes, gender and womyn studies, I am talking about y'all, along with most of the humanities beyond the basics) that it is now driving a generation of consumers - I'm going to call them Generation B (for baby boomer grandchildren and broke because of university-related debt that no longer disappears when you declare bankruptcy) - into relative poverty because they either ended up studying something that only the indulgent and idle would bother to study or studied something no longer in demand (or, more accurately, studied because they were supposed to do so based on an assumption that getting any sort of college education automagically resulted in higher life-time wages).
The result will be financial collapse of many universities and colleges that expanded rapidly because credit was easily available. Go into debt for $100k to get your law degree? No problem, easily financed, and you thought that specializing in humanitarian law was idealistic and noble, not knowing that 90% of such lawyers never earn anything near what is needed to pay back that $100k. Or go into tort law, ignoring the fact that hundreds were doing the same thing and market demand meant that you would never be able to pay back those loans unless you were absolutely brilliant - or, more specifically, you found clients who believed this - or extremely lucky.
If you base going into serious debt in the hope you get lucky, play the lottery. It's not nearly as expensive and, given you apparent lack of understanding about statistics, it's about as good as you're gonna get.
Hence: knowing the swine cycle and, by extension, the business cycle isn't merely a good idea: not knowing about it means you are going to make major mistakes, ones that you can't get out of.
For Generation B, the kids growing up right now, the swine cycle, as well as most of economics, isn't really that hard to learn. Ignore it at your financial peril. Your parents and grandparents have ignored it, and as a result, you're kind of screwed. See what ignoring economics does to you?
Sheer, Basic Incompetence...
I once applied for a job with the State Department. Went through the written test, went through the orals, wasn't hired. No hard feelings, there. Seriously.
Because I'd hate to be associated with the fools running State today.
Read this.
Seriously? These folks can't even get the very basic stuff right? This is on the level of complete and total amateur failure.
Thank goodness there aren't any serious problems in the world, like tension between North and South Korea after the Norks sank a South Korean ship (and I for one will be happy the day when we only have one Korea....), or rabid peace activists getting killed by Israeli troops defending themselves, or ...
Oops.
My bad.
My God, we are screwed.
Because I'd hate to be associated with the fools running State today.
Read this.
Seriously? These folks can't even get the very basic stuff right? This is on the level of complete and total amateur failure.
Thank goodness there aren't any serious problems in the world, like tension between North and South Korea after the Norks sank a South Korean ship (and I for one will be happy the day when we only have one Korea....), or rabid peace activists getting killed by Israeli troops defending themselves, or ...
Oops.
My bad.
My God, we are screwed.
Dienstag, Juni 01, 2010
On The Israeli Blockade, Bording of Ships, and International Law...
Those loudly declaiming that Israel's seizing of the ships that tried to break the blockade yesterday was an act of piracy, or that the ships were in international waters and hence were not allowed to be attacked, don't know what they are talking about. Period.
The current international law on conflicts at sea is the San Remo Manual on International Law Applicable to Armed Conflicts at Sea, from 12 June 1994, which can be accessed here.
I'm going to quote them here:
SECTION II : METHODS OF WARFARE
Blockade
93. A blockade shall be declared and notified to all belligerents and neutral States.
94. The declaration shall specify the commencement, duration, location, and extent of the blockade and the period within which vessels of neutral States may leave the blockaded coastline.
95. A blockade must be effective. The question whether a blockade is effective is a question of fact.
96. The force maintaining the blockade may be stationed at a distance determined by military requirements.
97. A blockade may be enforced and maintained by a combination of legitimate methods and means of warfare provided this combination does not result in acts inconsistent with the rules set out in this document.
98. Merchant vessels believed on reasonable grounds to be breaching a blockade may be captured. Merchant vessels which, after prior warning, clearly resist capture may be attacked.
99. A blockade must not bar access to the ports and coasts of neutral States.
100. A blockade must be applied impartially to the vessels of all States.
101. The cessation, temporary lifting, re-establishment, extension or other alteration of a blockade must be declared and notified as in paragraphs 93 and 94.
102. The declaration or establishment of a blockade is prohibited if:
(a) it has the sole purpose of starving the civilian population or denying it other objects essential for its survival; or
(b) the damage to the civilian population is, or may be expected to be, excessive in relation to the concrete and direct military advantage anticipated from the blockade.
103. If the civilian population of the blockaded territory is inadequately provided with food and other objects essential for its survival, the blockading party must provide for free passage of such foodstuffs and other essential supplies, subject to:
(a) the right to prescribe the technical arrangements, including search, under which such passage is permitted; and
(b) the condition that the distribution of such supplies shall be made under the local supervision of a Protecting Power or a humanitarian organization which offers guarantees of impartiality, such as the International Committee of the Red Cross.
104. The blockading belligerent shall allow the passage of medical supplies for the civilian population or for the wounded and sick members of armed forces, subject to the right to prescribe technical arrangements, including search, under which such passage is permitted.
According to this, the applicable law - and please do correct me if I am wrong here - the Israelis have done everything according to the rule of law. The blockade was properly declared; the Israelis have provided the civilian population of the blockaded territory with adequate provisions, it is not starving the civilian population or denying it other objects essential for survival, and it is not applying the blockade in an excessive manner; the decision made to capture the ships was made based on military requirements.
Further:
SECTION VI : CAPTURE OF NEUTRAL MERCHANT VESSELS AND GOODS
146. Neutral merchant vessels are subject to capture outside neutral waters if they are engaged in any of the activities referred to in paragraph 67 or if it is determined as a result of visit and search or by other means, that they:
(a) are carrying contraband;
(b) are on a voyage especially undertaken with a view to the transport of individual passengers who are embodied in the armed forces of the enemy;
(c) are operating directly under enemy control, orders, charter, employment or direction;
(d) present irregular or fraudulent documents, lack necessary documents, or destroy, deface or conceal documents;
(e) are violating regulations established by a belligerent within the immediate area of naval operations; or
(f) are breaching or attempting to breach a blockade.
Capture of a neutral merchant vessel is exercised by taking such vessel as prize for adjudication.
147. Goods on board neutral merchant vessels are subject to capture only if they are contraband.
148. Contraband is defined as goods which are ultimately destined for territory under the control of the enemy and which may be susceptible for use in armed conflict.
149. In order to exercise the right of capture referred to in paragraphs 146(a) and 147, the belligerent must have published contraband lists. The precise nature of a belligerent's contraband list may vary according to the particular circumstances of the armed conflict. Contraband lists shall be reasonably specific.
150. Goods not on the belligerent's contraband list are 'free goods', that is, not subject to capture. As a minimum, 'free goods' shall include the following:
(a) religious objects;
(b) articles intended exclusively for the treatment of the wounded and sick and for the prevention of disease;
(c) clothing, bedding, essential foodstuffs, and means of shelter for the civilian population in general, and women and children in particular, provided there is not serious reason to believe that such goods will be diverted to other purpose, or that a definite military advantage would accrue to the enemy by their substitution for enemy goods that would thereby become available for military purposes;
(d) items destined for prisoners of war, including individual parcels and collective relief shipments containing food, clothing, educational, cultural, and recreational articles;
(e) goods otherwise specifically exempted from capture by international treaty or by special arrangement between belligerents; and
(f) other goods not susceptible for use in armed conflict,
151. Subject to paragraph 152, a neutral vessel captured in accordance with paragraph 146 may, as an exceptional measure, be destroyed when military circumstances preclude taking or sending such a vessel for adjudication as an enemy prize, only if the following criteria are met beforehand:
(a) the safety of passengers and crew is provided for; for this purpose the ship's boats are not regarded as a place of safety unless the safety of the passengers and crew is assured in the prevailing sea and weather conditions, by the proximity of land, or the presence of another vessel which is in a position to take them on board;
(b) documents and papers relating to the captured vessel are safeguarded; and
(c) if feasible, personal effects of the passengers and crew are saved.
Every effort should be made to avoid destruction of a captured neutral vessel. Therefore, such destruction shall not be ordered without there being entire satisfaction that the captured vessel can neither be sent into a belligerent port, nor diverted, nor properly released. A vessel may not be destroyed under this paragraph for carrying contraband unless the contraband, reckoned either by value, weight, volume or freight, forms more than half the cargo. Destruction shall be subject to adjudication.
152. The destruction of captured neutral passenger vessels carrying civilian passengers is prohibited at sea. For the safety of the passengers, such vessels shall be diverted to an appropriate port in order to complete capture provided for in paragraph 146.
So, let's review: because they were attempting to break the blockade, the ships became legitimate targets and were legitimately captured; the Israelis avoided the destruction of the captured vessels and violated Paragraph 67 of the San Remo Manual.
Which is this:
SECTION V : NEUTRAL MERCHANT VESSELS AND CIVIL AIRCRAFT
Neutral merchant vessels
67. Merchant vessels flying the flag of neutral States may not be attacked unless they:
(a) are believed on reasonable grounds to be carrying contraband or breaching a blockade, and after prior warning they intentionally and clearly refuse to stop, or intentionally and clearly resist visit, search or capture;
(b) engage in belligerent acts on behalf of the enemy;
(c) act as auxiliaries to the enemy s armed forces;
(d) are incorporated into or assist the enemy s intelligence system;
(e) sail under convoy of enemy warships or military aircraft; or
(f) otherwise make an effective contribution to the enemy s military action, e.g., by carrying military materials, and it is not feasible for the attacking forces to first place passengers and crew in a place of safety. Unless circumstances do not permit, they are to be given a warning, so that they can re-route, off-load, or take other precautions.
68. Any attack on these vessels is subject to the basic rules in paragraphs 38-46.
69. The mere fact that a neutral merchant vessel is armed provides no grounds for attacking it.
And let's cover paragraphs 38-46:
SECTION I : BASIC RULES
38. In any armed conflict the right of the parties to the conflict to choose methods or means of warfare is not unlimited.
39. Parties to the conflict shall at all times distinguish between civilians or other protected persons and combatants and between civilian or exempt objects and military objectives.
40. In so far as objects are concerned, military objectives are limited to those objects which by their nature, location, purpose or use make an effective contribution to military action and whose total or partial destruction, capture or neutralization, in the circumstances ruling at the time, offers a definite military advantage.
41. Attacks shall be limited strictly to military objectives. Merchant vessels and civil aircraft are civilian objects unless they are military objectives in accordance with the principles and rules set forth in this document.
42. In addition to any specific prohibitions binding upon the parties to a conflict, it is forbidden to employ methods or means of warfare which:
(a) are of a nature to cause superfluous injury or unnecessary suffering; or
(b) are indiscriminate, in that:
(i) they are not, or cannot be, directed against a specific military objective; or
(ii) their effects cannot be limited as required by international law as reflected in this document.
43. It is prohibited to order that there shall be no survivors, to threaten an adversary therewith or to conduct hostilities on this basis.
44. Methods and means of warfare should be employed with due regard for the natural environment taking into account the relevant rules of international law. Damage to or destruction of the natural environment not justified by military necessity and carried out wantonly is prohibited.
45. Surface ships, submarines and aircraft are bound by the same principles and rules.
SECTION II : PRECAUTIONS IN ATTACK
46. With respect to attacks, the following precautions shall be taken:
(a) those who plan, decide upon or execute an attack must take all feasible measures to gather information which will assist in determining whether or not objects which are not military objectives are present in an area of attack;
(b) in the light of the information available to them, those who plan, decide upon or execute an attack shall do everything feasible to ensure that attacks are limited to military objectives;
(c) they shall furthermore take all feasible precautions in the choice of methods and means in order to avoid or minimize collateral casualties or damage; and
(d) an attack shall not be launched if it may be expected to cause collateral casualties or damage which world be excessive in relation to the concrete and direct military advantage anticipated from the attack as a whole; an attack shall be cancelled or suspended as soon as it becomes apparent that the collateral casualties or damage would be excessive.
Now, let's take a look at what may not be done:
SECTION III : ENEMY VESSELS AND AIRCRAFT EXEMPT FROM ATTACK
Classes of vessels exempt from attack
47. The following classes of enemy vessels are exempt from attack:
(a) hospital ships;
(b) small craft used for coastal rescue operations and other medical transports;
(c) vessels granted safe conduct by agreement between the belligerent parties including:
(i) cartel vessels, e.g., vessels designated for and engaged in the transport of prisoners of war;
(ii) vessels engaged in humanitarian missions, including vessels carrying supplies indispensable to the survival of the civilian population, and vessels engaged in relief actions and rescue operations;
(d) vessels engaged in transporting cultural property under special protection;
(e) passenger vessels when engaged only in carrying civilian passengers;
(f) vessels charged with religious, non-military scientifc or philanthropic missions, vessels collecting scientific data of likely military applications are not protected;
(g) small coastal fishing vessels and small boats engaged in local coastal trade, but they are subject to the regulations of a belligerent naval commander operating in the area and to inspection;
(h) vessels designated or adapted exclusively for responding to pollution incidents in the marine environment;
(i) vessels which have surrendered;
(j) life rafts and life boats.
Conditions of exemption
48. Vessels listed in paragraph 47 are exempt from attack only if they:
(a) are innocently employed in their normal role;
(b) submit to identification and inspection when required; and
(c) do not intentionally hamper the movement of combatants and obey orders to stop or move out of the way when required.
Loss of exemption
Hospital ships
49. The exemption from attack of a hospital ship may cease only by reason of a breach of a condition of exemption in paragraph 48 and, in such a case, only after due warning has been given naming in all appropriate cases a reasonable time limit to discharge itself of the cause endangering its exemption, and after such warning has remained unheeded.
50. If after due warning a hospital ship persists in breaking a condition of its exemption, it renders itself liable to capture or other necessary measures to enforce compliance.
51. A hospital ship may only be attacked as a last resort if:
(a) diversion or capture is not feasible;
(b) no other method is available for exercising military control;
(c) the circumstances of non-compliance are sufficiently grave that the hospital ship has become, or may be reasonably assumed to be, a military objective; and
(d) the collateral casualties or damage will not be disproportionate to the military advantage gained or expected.
All other categories of vessels exempt from attack
52. If any other class of vessel exempt from attack breaches any of the conditions of its exemption in paragraph 48, it may be attacked only if:
(a) diversion or capture is not feasible;
(b) no other method is available for exercising military control;
(c) the circumstances of non-compliance are sufficiently grave that the vessel has become, or may be reasonably assumed to be, a military objective; and
(d) the collateral casualties or damage will not be disproportionate to the military advantage gained or expected.
So, under the San Remo Manual, the ships are "innocent" and may not be attacked if they meet criteria under Paragraph 47 c ii and 47 e:
(ii) vessels engaged in humanitarian missions, including vessels carrying supplies indispensable to the survival of the civilian population, and vessels engaged in relief actions and rescue operations;
(e) passenger vessels when engaged only in carrying civilian passengers;
Do the ships in question meet these criteria?
No. The supplies carried were not indispensable to the survival of the civilian population, and we know that they weren't carrying civilian passengers exclusively.
The ones in violation of international treaty are those who tried to break the blockade: their lawyers served them very poorly if they thought that this would protect them. Only by making up the fiction that the population of Gaza is starving can there be any justification for what they did.
As usual, the Big Lie is being told.
Israel handled properly and according to international treaty. The groups behind the attempt to break the blockade did not.
The current international law on conflicts at sea is the San Remo Manual on International Law Applicable to Armed Conflicts at Sea, from 12 June 1994, which can be accessed here.
I'm going to quote them here:
SECTION II : METHODS OF WARFARE
Blockade
93. A blockade shall be declared and notified to all belligerents and neutral States.
94. The declaration shall specify the commencement, duration, location, and extent of the blockade and the period within which vessels of neutral States may leave the blockaded coastline.
95. A blockade must be effective. The question whether a blockade is effective is a question of fact.
96. The force maintaining the blockade may be stationed at a distance determined by military requirements.
97. A blockade may be enforced and maintained by a combination of legitimate methods and means of warfare provided this combination does not result in acts inconsistent with the rules set out in this document.
98. Merchant vessels believed on reasonable grounds to be breaching a blockade may be captured. Merchant vessels which, after prior warning, clearly resist capture may be attacked.
99. A blockade must not bar access to the ports and coasts of neutral States.
100. A blockade must be applied impartially to the vessels of all States.
101. The cessation, temporary lifting, re-establishment, extension or other alteration of a blockade must be declared and notified as in paragraphs 93 and 94.
102. The declaration or establishment of a blockade is prohibited if:
(a) it has the sole purpose of starving the civilian population or denying it other objects essential for its survival; or
(b) the damage to the civilian population is, or may be expected to be, excessive in relation to the concrete and direct military advantage anticipated from the blockade.
103. If the civilian population of the blockaded territory is inadequately provided with food and other objects essential for its survival, the blockading party must provide for free passage of such foodstuffs and other essential supplies, subject to:
(a) the right to prescribe the technical arrangements, including search, under which such passage is permitted; and
(b) the condition that the distribution of such supplies shall be made under the local supervision of a Protecting Power or a humanitarian organization which offers guarantees of impartiality, such as the International Committee of the Red Cross.
104. The blockading belligerent shall allow the passage of medical supplies for the civilian population or for the wounded and sick members of armed forces, subject to the right to prescribe technical arrangements, including search, under which such passage is permitted.
According to this, the applicable law - and please do correct me if I am wrong here - the Israelis have done everything according to the rule of law. The blockade was properly declared; the Israelis have provided the civilian population of the blockaded territory with adequate provisions, it is not starving the civilian population or denying it other objects essential for survival, and it is not applying the blockade in an excessive manner; the decision made to capture the ships was made based on military requirements.
Further:
SECTION VI : CAPTURE OF NEUTRAL MERCHANT VESSELS AND GOODS
146. Neutral merchant vessels are subject to capture outside neutral waters if they are engaged in any of the activities referred to in paragraph 67 or if it is determined as a result of visit and search or by other means, that they:
(a) are carrying contraband;
(b) are on a voyage especially undertaken with a view to the transport of individual passengers who are embodied in the armed forces of the enemy;
(c) are operating directly under enemy control, orders, charter, employment or direction;
(d) present irregular or fraudulent documents, lack necessary documents, or destroy, deface or conceal documents;
(e) are violating regulations established by a belligerent within the immediate area of naval operations; or
(f) are breaching or attempting to breach a blockade.
Capture of a neutral merchant vessel is exercised by taking such vessel as prize for adjudication.
147. Goods on board neutral merchant vessels are subject to capture only if they are contraband.
148. Contraband is defined as goods which are ultimately destined for territory under the control of the enemy and which may be susceptible for use in armed conflict.
149. In order to exercise the right of capture referred to in paragraphs 146(a) and 147, the belligerent must have published contraband lists. The precise nature of a belligerent's contraband list may vary according to the particular circumstances of the armed conflict. Contraband lists shall be reasonably specific.
150. Goods not on the belligerent's contraband list are 'free goods', that is, not subject to capture. As a minimum, 'free goods' shall include the following:
(a) religious objects;
(b) articles intended exclusively for the treatment of the wounded and sick and for the prevention of disease;
(c) clothing, bedding, essential foodstuffs, and means of shelter for the civilian population in general, and women and children in particular, provided there is not serious reason to believe that such goods will be diverted to other purpose, or that a definite military advantage would accrue to the enemy by their substitution for enemy goods that would thereby become available for military purposes;
(d) items destined for prisoners of war, including individual parcels and collective relief shipments containing food, clothing, educational, cultural, and recreational articles;
(e) goods otherwise specifically exempted from capture by international treaty or by special arrangement between belligerents; and
(f) other goods not susceptible for use in armed conflict,
151. Subject to paragraph 152, a neutral vessel captured in accordance with paragraph 146 may, as an exceptional measure, be destroyed when military circumstances preclude taking or sending such a vessel for adjudication as an enemy prize, only if the following criteria are met beforehand:
(a) the safety of passengers and crew is provided for; for this purpose the ship's boats are not regarded as a place of safety unless the safety of the passengers and crew is assured in the prevailing sea and weather conditions, by the proximity of land, or the presence of another vessel which is in a position to take them on board;
(b) documents and papers relating to the captured vessel are safeguarded; and
(c) if feasible, personal effects of the passengers and crew are saved.
Every effort should be made to avoid destruction of a captured neutral vessel. Therefore, such destruction shall not be ordered without there being entire satisfaction that the captured vessel can neither be sent into a belligerent port, nor diverted, nor properly released. A vessel may not be destroyed under this paragraph for carrying contraband unless the contraband, reckoned either by value, weight, volume or freight, forms more than half the cargo. Destruction shall be subject to adjudication.
152. The destruction of captured neutral passenger vessels carrying civilian passengers is prohibited at sea. For the safety of the passengers, such vessels shall be diverted to an appropriate port in order to complete capture provided for in paragraph 146.
So, let's review: because they were attempting to break the blockade, the ships became legitimate targets and were legitimately captured; the Israelis avoided the destruction of the captured vessels and violated Paragraph 67 of the San Remo Manual.
Which is this:
SECTION V : NEUTRAL MERCHANT VESSELS AND CIVIL AIRCRAFT
Neutral merchant vessels
67. Merchant vessels flying the flag of neutral States may not be attacked unless they:
(a) are believed on reasonable grounds to be carrying contraband or breaching a blockade, and after prior warning they intentionally and clearly refuse to stop, or intentionally and clearly resist visit, search or capture;
(b) engage in belligerent acts on behalf of the enemy;
(c) act as auxiliaries to the enemy s armed forces;
(d) are incorporated into or assist the enemy s intelligence system;
(e) sail under convoy of enemy warships or military aircraft; or
(f) otherwise make an effective contribution to the enemy s military action, e.g., by carrying military materials, and it is not feasible for the attacking forces to first place passengers and crew in a place of safety. Unless circumstances do not permit, they are to be given a warning, so that they can re-route, off-load, or take other precautions.
68. Any attack on these vessels is subject to the basic rules in paragraphs 38-46.
69. The mere fact that a neutral merchant vessel is armed provides no grounds for attacking it.
And let's cover paragraphs 38-46:
SECTION I : BASIC RULES
38. In any armed conflict the right of the parties to the conflict to choose methods or means of warfare is not unlimited.
39. Parties to the conflict shall at all times distinguish between civilians or other protected persons and combatants and between civilian or exempt objects and military objectives.
40. In so far as objects are concerned, military objectives are limited to those objects which by their nature, location, purpose or use make an effective contribution to military action and whose total or partial destruction, capture or neutralization, in the circumstances ruling at the time, offers a definite military advantage.
41. Attacks shall be limited strictly to military objectives. Merchant vessels and civil aircraft are civilian objects unless they are military objectives in accordance with the principles and rules set forth in this document.
42. In addition to any specific prohibitions binding upon the parties to a conflict, it is forbidden to employ methods or means of warfare which:
(a) are of a nature to cause superfluous injury or unnecessary suffering; or
(b) are indiscriminate, in that:
(i) they are not, or cannot be, directed against a specific military objective; or
(ii) their effects cannot be limited as required by international law as reflected in this document.
43. It is prohibited to order that there shall be no survivors, to threaten an adversary therewith or to conduct hostilities on this basis.
44. Methods and means of warfare should be employed with due regard for the natural environment taking into account the relevant rules of international law. Damage to or destruction of the natural environment not justified by military necessity and carried out wantonly is prohibited.
45. Surface ships, submarines and aircraft are bound by the same principles and rules.
SECTION II : PRECAUTIONS IN ATTACK
46. With respect to attacks, the following precautions shall be taken:
(a) those who plan, decide upon or execute an attack must take all feasible measures to gather information which will assist in determining whether or not objects which are not military objectives are present in an area of attack;
(b) in the light of the information available to them, those who plan, decide upon or execute an attack shall do everything feasible to ensure that attacks are limited to military objectives;
(c) they shall furthermore take all feasible precautions in the choice of methods and means in order to avoid or minimize collateral casualties or damage; and
(d) an attack shall not be launched if it may be expected to cause collateral casualties or damage which world be excessive in relation to the concrete and direct military advantage anticipated from the attack as a whole; an attack shall be cancelled or suspended as soon as it becomes apparent that the collateral casualties or damage would be excessive.
Now, let's take a look at what may not be done:
SECTION III : ENEMY VESSELS AND AIRCRAFT EXEMPT FROM ATTACK
Classes of vessels exempt from attack
47. The following classes of enemy vessels are exempt from attack:
(a) hospital ships;
(b) small craft used for coastal rescue operations and other medical transports;
(c) vessels granted safe conduct by agreement between the belligerent parties including:
(i) cartel vessels, e.g., vessels designated for and engaged in the transport of prisoners of war;
(ii) vessels engaged in humanitarian missions, including vessels carrying supplies indispensable to the survival of the civilian population, and vessels engaged in relief actions and rescue operations;
(d) vessels engaged in transporting cultural property under special protection;
(e) passenger vessels when engaged only in carrying civilian passengers;
(f) vessels charged with religious, non-military scientifc or philanthropic missions, vessels collecting scientific data of likely military applications are not protected;
(g) small coastal fishing vessels and small boats engaged in local coastal trade, but they are subject to the regulations of a belligerent naval commander operating in the area and to inspection;
(h) vessels designated or adapted exclusively for responding to pollution incidents in the marine environment;
(i) vessels which have surrendered;
(j) life rafts and life boats.
Conditions of exemption
48. Vessels listed in paragraph 47 are exempt from attack only if they:
(a) are innocently employed in their normal role;
(b) submit to identification and inspection when required; and
(c) do not intentionally hamper the movement of combatants and obey orders to stop or move out of the way when required.
Loss of exemption
Hospital ships
49. The exemption from attack of a hospital ship may cease only by reason of a breach of a condition of exemption in paragraph 48 and, in such a case, only after due warning has been given naming in all appropriate cases a reasonable time limit to discharge itself of the cause endangering its exemption, and after such warning has remained unheeded.
50. If after due warning a hospital ship persists in breaking a condition of its exemption, it renders itself liable to capture or other necessary measures to enforce compliance.
51. A hospital ship may only be attacked as a last resort if:
(a) diversion or capture is not feasible;
(b) no other method is available for exercising military control;
(c) the circumstances of non-compliance are sufficiently grave that the hospital ship has become, or may be reasonably assumed to be, a military objective; and
(d) the collateral casualties or damage will not be disproportionate to the military advantage gained or expected.
All other categories of vessels exempt from attack
52. If any other class of vessel exempt from attack breaches any of the conditions of its exemption in paragraph 48, it may be attacked only if:
(a) diversion or capture is not feasible;
(b) no other method is available for exercising military control;
(c) the circumstances of non-compliance are sufficiently grave that the vessel has become, or may be reasonably assumed to be, a military objective; and
(d) the collateral casualties or damage will not be disproportionate to the military advantage gained or expected.
So, under the San Remo Manual, the ships are "innocent" and may not be attacked if they meet criteria under Paragraph 47 c ii and 47 e:
(ii) vessels engaged in humanitarian missions, including vessels carrying supplies indispensable to the survival of the civilian population, and vessels engaged in relief actions and rescue operations;
(e) passenger vessels when engaged only in carrying civilian passengers;
Do the ships in question meet these criteria?
No. The supplies carried were not indispensable to the survival of the civilian population, and we know that they weren't carrying civilian passengers exclusively.
The ones in violation of international treaty are those who tried to break the blockade: their lawyers served them very poorly if they thought that this would protect them. Only by making up the fiction that the population of Gaza is starving can there be any justification for what they did.
As usual, the Big Lie is being told.
Israel handled properly and according to international treaty. The groups behind the attempt to break the blockade did not.
The Tea Party Phenomenon Isn't Limited To The US...
This lovely, ludicrous video of the Iceland "Best" Party - which got 6 of 15 seats on the Reykjavik city election - underscores that perhaps the best reaction is for citizens to take back their governments from the professionals who have so thoroughly screwed things up...the best line of all is indeed that the blathering loons should be given a home in the City Zoo...
"Peaceful" Activists...
You can see how "peaceful" these folks were. Watch the whole thing...watch how the "peaceful" activists swing those iron bars...
Abonnieren
Posts (Atom)
