This photoshopped image has been shamelessly stolen from Something Awful.


This photoshopped image has been shamelessly stolen from Something Awful.


Public Debt plus bailout

According to Barry Ritholz, the current cost of the bailout has reached $4.6165 Trillion.

Now at some point I would expect those figures to end up being added to the public debt. So far, though, it hasn't.

If we add the bailout figure to the most recent level of public debt, we get:

$4.6165 Tr + $6.40Tr = $11.0165 Trillion

or 76.40% of GDP.

Let me just repeat that:

PUBLIC DEBT + BAILOUT = $11.0165 Trillion

or 76.40% of US GDP

Sell your US Dollars. Now.

OSO's debt watch

Public Debt on 2008-11-26 was $6.40 Trillion

US GDP in 2008 Q3 was $14.42 Trillion

Debt/GDP Ratio: 44.38%
( [Debt ÷ GDP] x 100 )

Public Debt/Person: $20,936.85
(Public Debt
÷US Population)



Public debt is $6,395,157,193,349.84 Source
Latest GDP is $14,420.5 billion Source
Population in September 2008 is 305,449,862. Source (Resident population plus armed forces overseas).


1. October 2008 Census figures not out yet.

2. 2008 Q3 GDP figures revised downwards.


Delaying the undelayable

The consensus seems to be that the US Government should continue to spend hundreds of billions of dollars to prop up ailing financial firms, while at the same time prepare for the largest deficit spending on record in the name of economic stimulus.

I can understand the reasoning for this. The idea is that the government help prop up the economy during the current crisis, while taking upon itself a debt burden that will require repayment in the future. In other words, spend now, pay later and borrow now, save later.

Sound familiar? It's precisely this behaviour that has gotten the US in the mess in the first place. Ridiculously low interest rates and irresponsible fiscal practices typified the last eight years of Bush in power, and now we are supposed to sit back and listen to Obama and his current advisers outline their emergency plans without any sort of nagging concern?

The idea of mortgaging the future in order to splurge in the present is a well worn American path that started - let's face it - in the early days of Reagan. Clinton was able to pare back some of the excess by working with congress to pay back government debt, but did little else.

At some point, however, mortgaging the future no longer works because the future suddenly arrives into the present. The current crisis was, in many ways, an inevitability. Did they think that government deficits, trade deficits and current account deficits could be sustained indefinitely? The enormous amounts of debt piled up by the credit market since 1981 was always going to rebalance itself eventually. A day of accounting was always going to arrive - and that day has arrived.

And we think that we can simply postpone it it all, yet again, in the name of emergency spending, bail outs and stimulus? It sounds more like a drug addict's promise that he will get off the drug for good this time... but just one, last, big hit... please?

To be honest, I do not think president-elect Obama and his bevy of advisers would have made any other decision beyond "bail out and spend" in the face of the current crisis. No one wants to raise taxes and be a Hoover. No one wants to ignore standard Keynesian pump priming (deficit spending).

Here in my own country (Australia) the decision has been made to borrow and spend in order to stimulate the economy in the face of the economic crisis. I think it's a good move - but at least here we have had 12 years of fiscal prudence and a net elimination of government debt. Australia has room to move and to use Keynesian pump priming as a way of responding to the crisis. America does not, and neither does the United Kingdom.

I have argued previously that what America needs is a good dose of austerity. Despite the current crisis there is no other, possible way.

The reason why I argue this is simple: we cannot delay any more; we cannot put off the consequences of our actions any longer. And the reason why we cannot is simple - delay is now impossible. We no longer have the choice to put off the inevitable because the inevitable has occurred. The future is here. The chickens have come home to roost and are sitting in their hen houses now. What we have reaped is now being sown.

Any more appropriate metaphors?

The crisis is now. Let's take it bravely. The US government needs to rebalance its finances to ensure a long term financial surplus that will pay off the already massive debt that was accrued BEFORE the crisis began and is now growing steadily larger each time they bail out another financial institution. The Federal Reserve needs to fix monetary policy around price stability, no matter how much inflation is going to result from a collapsed dollar. People's money needs to retain its value throughout the crisis so that, once we reach the other side, they can use it to buy and lend and invest again.

In short, to survive the collapse we must let the collapse occur. It is impossible to put it off any further. Let it crash, let it crash, let it crash...


How GM's Bankruptcy can help America

There are currently two schools of thought about the impending demolition of General Motors.

The first school of thought is that GM should be allowed to go bankrupt and die. I'm one of those people and my following argument doesn't differ from this line. Strangely enough there are two sub-schools of thought within this school. The first sub-school says that GM should die because market capitalism rewards innovation and foresight and punishes sameness and near-sightedness. The second sub-school is based upon environmental politics and argues that GM should die off as a punishment for its inability to design and build eco-friendly vehicles and low-emission vehicles.

The second school of thought is that GM should be rescued and, by extension, so should Ford and Chrysler. The reasons for this are many are varied, but mainly include the warning that if GM should go bankrupt, there would be enormous ramifications throughout the economy. Just the refusal to bail out Lehman brothers was a tipping point to financial instability, so would the death of GM. A sub-school of thought also argues that America's security depends upon a robust industrial sector capable of providing skilled workers and factories to build military items - and the death of GM would threaten that security.

My position in economics is noticeably leftist - I believe in larger government spending to provide basic needs to society that cannot be reliably procured through the free market. Moreover, such larger spending would require higher taxes to fund it. Yet I am not a hard-line socialist or communist. The idea that the government should regulate and control every single sector of the economy - either through complex legislation or bureaucratic planning or a combination of the two - is one which I do not for a very good reason: It doesn't work. That's why I'm an Ordoliberal.

The auto industry is one sector of the economy that requires a modest but strictly enforced level of regulation. Safety regulations, along with emissions standards and fuel economy benchmarks must certainly be adhered to. Yet the fact is that GM, Chrysler and Ford are public companies, not government organisations. The profits they make benefit their shareholders, not the government. Bailing out "the big three" is thus problematic because their very existence depended upon the actions of the marketplace - and thus so should their (potential) death.

Of course, such an argument is ideological. There is, however, one very good practical reasons for letting GM go belly up - it will make Ford's and Chrysler's market position easier to sustain.

Forget for a moment the complex world of financial derivatives and leveraging and other such muck. Instead, focus upon basic economics - a product sold in a competitive marketplace, in this case, automobiles. If GM would go belly up, what would happen? Let's consider the laws of supply and demand.

The first thing to happen would be that the factories making GM automobiles would stop making them.

The second thing to happen would be a decline in the supply of new GM automobiles across America.

The third thing to happen would be an increase in price of new automobiles across America - those automobiles built by Chrysler, Ford and overseas manufacturers.

The fourth thing to happen would be increased profits experienced by the remaining manufacturers.

The fifth thing to happen would be an eventual recognition by banks and financial institutions that Chrysler and Ford are safer companies to invest in again, resulting in higher share prices for the "remaining two" and higher credit ratings for their corporate debt.

And as profits and sales increase, the final thing to happen would be increased investment and production, which would then result in higher demand for skilled auto workers, many of whom could be sourced from the laid off GM employees.

Of course, this is not a perfect scenario as it does not take into account other variables, such as the severity of the recession. If the recession is more severe and longer lasting than normal, then there is a chance that either Ford or Chrysler may go bankrupt as well. Yet even that process, while painful, will eventually lead to higher levels of profitability amongst the remaining market competitors once another manufacturer goes bankrupt. It also doesn't take into account variables like Peak Oil or tougher emissions standards by governments in response to global warming. It doesn't take into account the potential costs of converting automobile output into entirely electric vehicles rather than those powered by  internal combustion engines.

Yet one fact remains - if GM is bailed out, not only will it not help the auto industry become profitable again, it will also not help the entire economy retool itself and cope with events when the variables are taken into account. Unless, of course,  Obama and Congress decide to nationalise and centrally plan the economy by paying auto workers to make cars no one wants to buy.

And as for the social effects of mass unemployment and the destroyed pension and health care plans of current and retired auto workers, those should be taken up by the federal government. Expensive? Yes. But probably not as expensive as bailing out an industry that doesn't deserve help.


Test cricket's 11 most mediocre batsmen

Like any professional sport, cricket celebrates its greats. Think Bradman, Lillee, Hutton, Gavaskar, Miandad, Muralitharan... great players who have been raised to the top of the game, and deservedly so.

But like all professional sports, these small amount of greats are more than outnumbered by those who have tried and failed, and those who have tried and occasionally succeeded. This second group, the so called "mediocre" players, are neither good nor bad, but it is rare for such players to have an extended career at the top.

But at least 11 batsmen have. Interestingly, 5 of them are openers.

The criteria was simple - look at the records of every Test nation and find out the lowest averages amongst specialist batsmen who have played 75 or more tests. The number 75 was arbitrary, but a line had to be drawn somewhere. Moreover I decided that "mediocre" should be defined as any batting average below 40 (40 being the arbitrary mark of greatness).

As I have stated, mediocrity is to be expected any any professional sport including Test cricket. What is unusual about these players is the sheer length of time they played and remained mediocre.

1. Michael Atherton (England) - 115 Tests, 7728 runs @ 37.69

Mike is Mr Mediocre... unlike Mike Hussey, who is Mr Cricket. No other player has scored so many runs at such an unimpressive average. "But hang on" I hear you say "Athers was a legend". And of course he was... when he was scoring runs. Yet for every magnificent day-long batting effort against Allan Donald there were multiple occasions of being dismissed by Glenn McGrath.

Atherton's figures bear this out well - his fighting qualities against South Africa reveal a batting average of 43.83 while his success against Australia is not as nice - 29.68. Atherton also excelled in the 4th innings of a match - scoring 1375 runs at 41.66. Atherton's talent was obviously brought out in tense circumstances, as his record in scoring runs in the fourth innings of a drawn match (1638 runs @ 52.83) shows. Obviously he was the sort of guy who could draw a match in the face of defeat.

The other thing notable about Atherton is his scoring rate. At 37.31 runs scored off every 100 balls, a team of Mike Athertons would be idling along at 2.24 runs per over.

Atherton's career is also noted for his lack of not outs. Of the 212 times he walked out to bat, 205 of them resulted in him eventually losing his wicket. For those with calculators, it means that he remained not out 3.3% of the time. "Ah yes but Athers was an opener" I hear you say, which is true. Except, of course, really successful openers like Matthew Hayden remained not out 8% of the time. Then again, Hayden averages over 50, which means he's exceptional.

2. Carl Hooper (West Indies) - 102 Tests, 5762 runs @ 36.46

The West Indies had, for 20 years, one of the greatest teams in history. Haynes, Greenidge, Richards, Richard's son, Lloyd... and then it all went ker-splat and things have not been the same since 1995.

But it wasn't as though West Indian cricket ran out of good players after 1995. Think Lara, Chanderpaul and Sarwan.

Carl Hooper, however, was one of those rare players who bridged both eras - the era of world domination and the era of decline. Sadly, his figures show a player who was never as good as his contemporaries when things were great, and who was never able to turn things around for his team when things were going bad.

We can look at Hooper's career as two halves. Up until the 4th Test in Jamaica in 1995 - the test which won Australia the series and is now seen as the moment when West Indies' domination of cricket ended - Hooper had played 47 Tests and scored 2238 runs at 30.65. For a team comprising Richards, Richardson and so on, that's not good. But from that moment on, Hooper's career was transformed and he applied himself better than before, and up until his retirement, he scored 3524 more runs at an average of... 41.46. A far better outcome to be sure, but certainly not enough to impose himself on enough matches to make a difference.

3. Nasser Hussein (England) - 96 Tests, 5764 runs @ 37.18

Back in 2003 I heard a joke about how the US Air Force misread its orders and bombed Nassar Hussein instead of Saddam. My own personal memory of Hussein was his amazing 207 in the first Ashes Test in Birmingham in 1997. After that innings (in his 18th Test), his average had popped up to a very respectable 43.22 - it was never to get that high again. More than that, despite scoring another century in the fourth Test, Hussein ended up only averaging 39.18 for the entire series - a rather downbeat statistic considering the effect a double century would have had upon series figures.

A rather sad little addendum to Hussein's statistics is his failure to score well against Zimbabwe. Yes, you heard me, Zimbabwe, the land of hyperinflation and unmown cricket grounds. In 6 Tests against them, Hussein managed to scrape together just 198 runs at an average of 22. And of those 6 Tests, 4 of them were played in England, where you'd expect him to at least score a few more runs than normal.

4. Arjuna Ranatunga (Sri Lanka) - 93 Tests, 5105 runs @ 35.69

Ranatunga was always a larger-than-life personality. In 1982 at age 18 he played in Sri Lanka's first ever Test match and scored the nation's first Test fifty against Willis, Botham and Underwood, three of England's better bowlers. But Sri Lanka was still a cricketing "minnow" in those days. Ranatunga was no exception, and his batting average never rose above 40 throughout his entire test cricketing career.

There were three major problems with Arjuna Ranatunga. The first was his inability to score runs outside of Sri Lanka. At home, the guy was able to average 40.72. Away, he averaged a paltry 30.87.

His second problem lay in an inability to score centuries. In 93 Tests and 155 innings he managed to pass three figures only four times. His 38 fifties show a 50/100 ratio of 9.5 to 1. At first class level, where he averaged 44.26, the 50/100 ratio was much smaller - 2.52 to 1.

His third problem was that he was not just larger than life, he was also larger than average. This led to a rather comical situation in a one-day match in Australia when he asked for a runner because he was getting too tired. Ian Healy, the Australian Wicket-keeper, responded to Ranatunga's request by saying "You don't get a runner for being an overweight, unfit, fat ***t!".

5. Marvan Atapattu (Sri Lanka) - 90 Tests, 5502 runs @ 39.02

You gotta feel for this bloke. 90 Tests and he ends up just 0.98 runs away from greatness. Atapattu was the guy whose batting career involved being just in reach of a 40+ average but who ultimately didn't get there. Yet Marvan didn't reckon with the law of averages. When he came out to bat for the last time, he needed to make 218 to push his average from 38.72 to 40.00. In the end he only made a pathetic 80 something.

Unlike Nasser Hussein, Atapattu scored heavily against weak sides, taking full advantage of mediocre bowling. His favourite opponent was Zimbabwe (1145 runs @ 95.41). Unlike Ranatunga, he was as equally effective overseas as he was at home (in fact he was a slightly better player away). But, unlike the greats, there were a number of countries who had his measure - none more so than South Africa.

In the 12 tests he played against the Proteas, Atapattu scored 601 runs at an average of 26.13. Worse, his 8 tests against New Zealand (New Zealand!) resulted in 298 runs at 27.09. Yet his average against Australia was higher (31.25).

Atapattu was also a "first innings bully" - he averaged 48.72 in the first innings and 25.13 in the second - almost half. If we add his predilection for first innings runs to his known record against weak test nations, we end up with a player who can score heavily off bad bowling, but was never able to be consistent against good bowling - especially on the worn surfaces of a second innings dig.

6. John Wright (New Zealand) - 82 Tests, 5334 runs @ 37.82

When it comes to dour and mediocre, nothing beats New Zealanders. Think Ewan Chatfield. Think Martin Sneddon. Don't think Richard Hadlee or Martin Crowe, though.

John Wright, though, puts the sour in "dour". Half of his test career was spent trying to keep his average above 30. Wright was the sort of player who made a career of almost saving his team from defeat, but never managing to do so consistently.

Like Ranatunga, Wright's career favoured his home country - especially when you consider that he played 56% his Test matches there. An average of 41.86 in NZ and 33.24 everywhere else does not spell greatness. Wright did respond well to captaincy though, averaging 48.63 in the 14 tests he spent at the helm. Logically, therefore, had Wright batted only in New Zealand and had been made captain immediately he would've become one of the greats.

Wright, as an opener, obviously had his share of problems including a paucity of not outs. Unlike Atapattu, however, he was reasonably consistent in both 1st and 2nd innings. What is interesting is that he averaged 33.34 at no.1 but 43.31 at no.2. In other words, he was never really good facing the first ball and first over in a match, but was very good when facing the second over of the match. I can't for the life of me understand what the difference is between opening at no.1 and opening at no.2. John Wright does though.

7. Nathan Astle (New Zealand) - 81 Tests, 4702 runs @ 37.02

Again proving that mediocrity pervades New Zealand, Nathan Astle provides ample evidence that even the most unamazing of players can produce great things. His 222 off 168 balls against England remains the fastest double century in test cricket and continues a proud New Zealand tradition of doing brave things and still losing.

Against weaker opponents, Astle was generally quite good, blasting 800 runs at over 50 against Zimbabwe but only 55 at 18 against Bangladesh. Interestingly, he averaged over 40 on 3 New Zealand grounds but only 20.20 at Seddon Park. Maybe they didn't like him in Hamilton?

Pakistanis didn't like Astle though. He only played 5 tests against them but scored 22 runs in 7 innings, giving him an average approximate to pi.

8. Ravi Shastri (India) - 80 tests, 3830 runs @ 35.79

Ravi Shastri is an enigma wrapped in mystery placed in a dirty box that is sitting in someone's dusty attic, forgotten. Capable of averaging 41.08 in the 1st innings and just 25.36 in the second, Ravi Shastri rewarded India whenever it was able to bowl out the opposition twice, which wasn't very often.

Shastri's inability to bat in the second half the match is even worse when you look at his 4th innings average - 16.90. Whenever India was up against the wall and struggling to survive, Shastri wasn't able to perform. He certainly helped India win matches - he averaged 44.72 in matches won and 42.83 in drawn matches - but was never able to dig into himself when India needed it most. In fact, he averaged a paltry 19.47 in matches that India lost, which is considerably lower than his more esteemed colleagues. Given a guess, I would say that the pressure got to him a bit.

Mysteriously, Shastri performed best either as an opener (av 44.04) or at number seven (av 42.21). For whatever reason, Shastri shined when opening or when closing - the middle order was just not for him. Another mystery is his ability to score lots of runs in the third test of a series (1308 runs @ 52.32) but not the first (981 runs @ 37.73) or second (737 runs @ 24.56). Again - maybe this was a pressure thing, the third test of the series usually being played after the series has already been decided, more or less.

Nevertheless, Shastri was capable of scoring heavily. In January 1985 he hit six sixes in an over on his way to 200 not out for Bombay against Baroda. Of course the match finished in a draw.

9. Allan Lamb (England) - 79 Tests, 4656 runs @ 36.09

Allan Lamb was the man who stood up against the rampaging West Indians in 1984. He was the man who won a One-Day match against Australia by blasting 18 runs off the final over, bowled by Bruce Reid no less. Yet it was the West Indies and Australia who were his bugbears.

Lamb averaged just over 34 against both these teams, yet averaged over 40 against India and New Zealand (with Hadlee no less). Interestingly, Lamb averaged over 40 during Gooch's colourless and serious captaincy, averaged 35 during Gower's carefree and silly captaincy, and averaged 38 during Willis' carefree yet determined captaincy. He performed well in his own short time as captain, which probably indicates that a team committed to hard work was likely to rub off on Lamb's batting. This is probably a good reason why Gower was never suited to the England captaincy.

Lamb scored six centuries against the West Indians but only one against Australia. Yet he still managed to average 34 against either. For whatever reason Lamb also tended to score lots of runs in the fourth test of a series (av 55.93), while not doing very well in the third test of a series (av 30.64). Lamb also loved scoring runs at Lord's (959 runs @ 43.59) and at Old Trafford (374 runs @ 53.42) but not Birmingham (137 runs @ 13.70).

10. Mike Gatting (England) - 79 Tests, 4409 runs @ 35.55

In the topsy turvy world of professional cricket, Gatting managed to argue with an umpire and would regularly eat a loaf of bread for breakfast. He also enjoyed wine from the Barossa valley. In between those times he would murder bad spin bowling and generally not score enough runs.

In simple terms, Gatting loved spin bowling (1155 runs @ 55 vs India) and hated fast bowling (258 runs @ 15.17 vs West Indies). He also preferred to be in charge (1542 runs @ 44.05 under his own captaincy) though he did prosper under Gower's "hands off" rule (1377 runs @ 57.37).

Reinforcing the idea that he hated pace but loved spin was the fact that he averaged just 28.90 when his team batted first, but averaged 34.00 when his team batted last (obviously on worn pitches with spinners coming in).

There were three basic phases to Gatting's career. The first phase could be described as "young man not scoring many runs", where his first 30 Tests yielded 1144 runs at 23.83. The second phase could be described as "the phase where he scored lots of runs" where he played 30 Tests and scored 2529 runs at 58.81. The third phase could be described as "over the hill and pensioned off" where he played 19 Tests are scored 736 runs at 22.30.

So, essentially, Gatting for one glorious period was one of the world's premier batsmen. But this period was bookended by the young and careless Gatting and the old and cranky Gatting.

11. Mudasser Nazar (Pakistan) - 76 Tests, 4114 runs @ 38.09

Mudasser Nazar was a brilliant batsmen - so long as he played India and so long as he played in Pakistan. His record is quite stark - when he batted against India he scored 1431 runs at 62.21 and when he batted on home pitches in Pakistan he scored 2467 runs at 53.63. Remove him from those conditions and his record is not so great.

In fact, outside his native Pakistan Mudasser failed to even average over 30. His away average was 26.56 and the closest he ever got to a decent record outside of Pakistan was... playing India in India.

Like Atapattu, Mudasser was also a first innings bully. He scored 3177 runs at 44.74 in the first innings but only 937 runs at 25.32 in the second.

And like John Wright, Mudasser as an opener had difficulty with the no. 1 position (1996 runs @ 31.68) but not the no. 2 (1791 runs @ 44.77). Moreover, Mudasser was also like Shastri when confronted with a lost cause, averaging 19.86 in lost matches but 53.96 in won matches.

All this points to a cricketer who seemed to be born and bred to play in Pakistan and to perform well against bowlers on good pitches. But, as we all know, greatness involves more than just performing when things are in your favour.

Honourable Mentions

Stephen Fleming (New Zealand) - 111 Tests, 7172 runs @ 40.06

Fleming's batting average dipped below 40 in his 4th Test and never exceeded 40 again until his 101st Test, and then dipped below 40 again. Entering his final (111th) Test, Fleming had 7047 runs at 39.81. His last two innings were 59 and 66 - just enough to push his average above 40 again and out of mediocrity.

Alec Stewart (England) - 133 Tests, 8463 runs @ 39.54

Who knows how many runs Stewart could've scored had he not been wicket-keeper for 82 of his 133 Tests? His record as a specialist batsman - 3923 runs at 46.70 - speaks volumes. Had Adam Gilchrist not turned up, Stewart would probably have been remembered as the greatest wicket-keeper batsmen in Test history.

Next: Test cricket's most mediocre bowlers.

Deflation and the "Nuclear Option"

If Mish and others are right, and if my own predictions of a dollar crash are wrong, then we are entering a deflationary period not experienced since the great depression.

And this has certain advantages, namely the ability that central banks have that is now being called "The Nuclear Option" - Money Printing.

It's considered a "Nuclear Option" for very good reason. Everyone knows about Weimar Germany and Mugabe's Zimbabwe - creating money has the effect of stimulating inflation. Too much of it and hyperinflation results.

But with prices potentially dropping over the long term, and with no room left to lower interest rates, there arises the potential to judiciously engage in money printing.

Ben Bernanke knows this. His nickname, "Helicopter Ben", was attributed to him for his suggestion that money printing could be used to reinflate a deflating economy. Thus the picture of Bernanke flying a helicopter and throwing money all over the country was born.

Of course, such a "Nuclear Option" could only work if the amount of money created was enough to avert deflation without causing any damaging inflation. For example, if the Fed created $1 Billion by fiat and pumped it into the economy the inflationary effect would be lower than, say. creating $1 Trillion by fiat and pumping it into the economy.

The question is, of course, what to do with the money once it is created. Where is it sent? One option would be to send it in the form of a stimulus check to ordinary Americans. This would certainly have a level of popular support as it would be going directly to help people suffering from the economic downturn.

Another option would be to use it as an additional bail out. It could be granted to financial institutions still reeling from the credit crisis. Given the sheer amount of cash already spent on this venture, it would probably not have popular support nor would it necessarily be the best choice.

The third option, though, is my favourite - create the money and use it to pay off federal government debt. This would have the dual effect of reinflating during a deflationary period while, at the same time, addressing a serious economic imbalance. As long time readers know, federal government debt is one of my bugbears and has always stood in the way of effective government fiscal stimuli. The money used to pay off government debt would then find its way to the financial institutions who have invested in treasuries, thus granting them extra liquidity to relieve them of debt. Thus paying off government debt would have the same effect as a broad bail out package.

Then again, this idea is predicated upon the belief that the US Dollar isn't going to crash. If the Dollar does crash, the only thing to do is to "go Volcker" and raise interest rates to destroy inflation. In an economy already seriously weakened, such an option would be deadly. But, then again, a US Dollar crash would bring the US economy closer to collapse than at any point since the Civil War.

But if I'm wrong, and foreign investors decide to altruistically prop up the US economy by NOT selling off the Dollar, then implementing the "nuclear option" and paying off government debt should be seriously considered.

I now think this is a BAD idea.


Fear levels are rising

Despite my predilection for assertions to be based upon careful analysis, judiciousness and even-handedness, I must admit that often I trust my "gut".

And at the moment, my gut is detecting a heightened level of fear. Reading financial news and econ-bloggers in the last couple of days has created this. It has moved on from assertions that this is a very, very bad crisis to hard facts proving that this is a very, very bad crisis. In short, the doomsayers are being proven right and some - myself included - are finding that their own predictions of doom were actually quite mild compared to what has actually happened.

As I mentioned a month or two back, I feel like I've predicted a Category 5 hurricane and hundreds of deaths, only for a Category 6 hurricane to arrive and kill thousands.

And yes I know a Category 6 is not a real category. I claim artistic licence.

A while back when the Dow was cliff diving, I made a little joke about "Dow 3600.00", a sort of econ-doomer reponse to that awful book Dow 36,000 that was published back when the tech boom was supposedly disproving everything we knew about finance and economics.

And when I check up Angry Bear, what do I find? A link to a report from CNBC saying that the DJIA could drop down to 4500 within the next 12 months.

Furthermore, Brad Setser has now declared that "There is now little doubt that this is the biggest financial crisis since the depression". We doomers have been predicting it for years. Now that it has happened, it makes it even more frightening.

And then I read this:
Total US Dollar Credit Market Debt Now Stands at 350% of GDP. This cannot be sustained. Certainly a certain portion of credit will be written off in defaults. But notice that the strategy of the US is not to make structural reforms but to try and restart the debt creation engine. This will require continued subsidies from foreign sources with waning appetites for US debt that can never be repaid.
...which neatly ties in with all the dollar-doomer articles I've been writing for a while.

This is all just so terrible.

US to Bail Out Federal Government

Exploring the depths

Just how far are we away from the bottom? You know, the point when all those graphs begin to bottom out into troughs? Well, if you've been reading Calculated Risk, the news is not good:

  • Commercial Real estate "is going to be another tipping point for the economy". [link]
  • Dow at 7997. By comparison, the Dow hit 7286 on October 9, 2002, so we're getting close to the worst result in the 21st century. [link]
  • A comparison of previous stock market crashes (1973-1974, 1986 and 2000-2002) proves that the current crash is "epic". [link]
  • The "Architecture Billings Index" is at its lowest point since 1995. [link]
  • The CMBS market, a debt market designed for hotels, offices and shopping malls, has melted down in the last 3 weeks.  [link]
  • Housing starts are the worst for 27 years. [link]
And you know what? All that bad news was just from today, and reported faithfully by Calculated Risk.

Add it all up and you get a good picture of what is happening. This is not your run-of-the-mill, garden-variety, generic economic slowdown. This is something much, much worse.

And it hasn't hit the bottom yet.


Yew Tork Nimes:
In another sign that the struggling economy continues to slow, consumer prices tumbled by a record amount in October, carried lower by skidding energy and transportation prices, raising the specter of deflation.

A key measure of how much Americans pay for groceries, clothing, entertainment and other goods and services, fell 1 percent in October, according to the Labor Department, the biggest drop in the 61-year history of the consumer price index. Much of the decline could be traced to a sharp drop of 14 percent in the price of gasoline, but the cost of a broad range of goods including clothes, milk and vegetables also fell sharply.

A sustained drop in prices could worsen the slowdown by straining businesses and workers. It could also blunt the impact of interest rate cuts and other actions by the Federal Reserve and force policy makers to use more unconventional tools to revive the economy.

“This month, it’s more than slowing, it’s outright contraction,” said James O’Sullivan, United States economist at UBS. “And yes, if you extrapolate that, it’s deflation.”
Deflation is the natural result of a decline in demand. Since goods and services are no longer being purchased, the value of money rises in comparison, which causes the price of these goods and services to drop.

While the month saw a 1.0% decline, the year on year - ie annual - figures are still positive at 3.7%. This is because inflation in the last 12 months was still going way up, especially when the US Dollar was being sold off. The recent rise in the US Dollar has ensured that imported goods decrease in value, adding more deflationary pressure.

As any long-term reader of my blog knows, I am an "Inflationista". I won't pretend that the current reports clash with my own longer term predictions from 6-12 months ago. But then I didn't foresee a US Dollar bubble forming either, which is responsible for much of the downward pressure on consumer prices in the last few months. In fact, so convinced was I of the inflation position that when Mike Shedlock predicted lower inflation in August, I deliberately bookmarked the page in the hope of debunking him in the near future. Having just read that page, let me quote one of his classic lines:
There is going to be a stunning drop in the CPI coming up that will smack inflationistas square in the face. Unfortunately that wake-up call is highly unlikely to stop silly talk about cost-push inflation.
So give Mish some kudos here, he certainly deserves it.

Having said that, let me now remove my hair shirt and issue my standard warning - as long as the US economy remains vulnerable to capital flight there will always be a serious possibility of a US Dollar collapse, a process that will inevitably produce an inflationary environment. And this will be true even while aggregate demand falls. This is the lesson we have learned from Russia and Asia in the 1990s, who experienced capital flight and who battled economic contraction and inflation at the same time.

But so long as the US Dollar remains at its current level, deflationary conditions will exist.

As an aside, the huge deflationary drop in October 2008, which the NYT reports as the biggest fall in the 61 year history of the consumer price index, is also a precursor of an upward spike in unemployment levels. In fact, I think that November's unemployment figures will either be a record jump or the worst for a few decades. In 1974-75, for instance, unemployment jumped from 6.0% in October 1974 to 6.6% in November 1974, then to 7.2% in December 1974, then to 8.1% in January 1975 and thence to 9.0% in May 1975. That rise was 300 basis points (6.0% to 9.0%)  in 8 months and probably the fastest ever increase in unemployment in US history since the Depression. I think we can expect similar results in the next few months.


OSO's debt watch

Public Debt on 2008-11-19 was $6.36 Trillion

US GDP in 2008 Q3 was $14.43 Trillion

Debt/GDP Ratio: 44.07%
( [Debt ÷ GDP] x 100 )

Public Debt/Person: $20,820.19
(Public Debt
÷US Population)


Public debt is $6,359,522,811,655.01 Source
Latest GDP is $14,429.2 billion Source
Population in September 2008 is 305,449,862. Source (Resident population plus armed forces overseas).


1. October 2008 Census figures not out yet.

2. Revised 2008 Q3 GDP figures are due on 25 November.

Mordor is in North Korea


The Ryugyong Hotel is Mount Doom:

Juche Tower is Barad-dur:

The Arch of Reunification is the Black gate (painted white):

And what about the darkness that dwells in Mordor? No electricity:

The abandoned village of Panmunjom between North and South Korea is the abandoned city of Osgiliath, lying between Gondor and Mordor:

Annatar was Sauron's name when he had a fair visage to deceive the elves:

US Dollar gains on a weak foundation

Everyone's talking about Brad Setser and by everyone I mean that if St Paul has noticed him then everyone has. The reason why everyone is noticing him is that he is scary. Not scary in a vampire like way, but scary in a scientific, "my research indicates that the pathogen is resistant to all antibiotics and is reproducing and mutating faster than we can handle and we need to contact the CDC immediately" sort of way.

I mean I'm not scary compared to Brad. I may have a mug ugly enough to scare little children but little else.

So what's scary Brad told us today? Well, he's been reporting about Agency debt. Basically he has discovered that foreign investors have sold off huge lumps of such debt and have been buying up treasuries.

It's taken me a while, but I think I am beginning to understand how the US Dollar market works. In the past year when I was looking at sharemarket performance I was intrigued by the inverse relationship between the forex market and the sharemarket. Put simply, every time the sharemarket tanked, the US dollar would creep up and when the sharemarket boomed, the US dollar would creep down. This sort of behaviour was not always consistent, however, as the US dollar would move often without any sharemarket influence. Yet when the sharemarket did move, so would the US Dollar, and in an inverse direction.

It is my theory - and tell me if I'm wrong - but the value of the US Dollar is based entirely upon treasuries - government bonds. In other words, whenever the market buys up government bonds, the US Dollar goes up and when they sell them off the dollar drops. So when it came to the sharemarket, whenever people sold off shares during a market tank, they were buying treasuries, the demand for treasuries increased, and the US Dollar rose. Conversely, whenever the sharemarket began rising quickly, investors would sell off some treasuries to buy shares, thus lowering the value of the dollar.

Well, that's my theory and I'm sticking with it at the moment (unless someone out there can show me where I'm wrong which would be most appreciated).

So when it comes to agency debt - government backed securities from private companies - the market is obviously unhappy. These securities are typically the ones issued by Fannie and Freddie - private companies whose debts are guaranteed by the US government. What Brad Setser has shown is that foreign investors have divested themselves of these agencies and have bought treasuries instead. And, just like the share market, selling off agency debt to buy treasuries increases the value of the US Dollar.

Moreover, with the Forex market operating the way any normal market does, as soon as big foreign investors (and by this we are looking at foreign central banks and oil-rich nations) start moving massive amounts of money around, the little people begin to notice and take advantage of it. They have invested in US Dollars not because it is safe but because the rest of the market has done so and they want in on the profits.

Sort of like what happened with the subprime bubble.

Brad, of course, doesn't say any of this. He's too busy talking about the trade deficit to notice. Maybe I've just discovered something more frightening than he has.

What are the implications of this? Simple. The US Dollar has increased in value because of market behaviour that is not based upon the security of the US economy but is a reaction to its weakness. Moreover, once treasuries are bought they are only one step away from being sold off and used to purchase other currencies. While we might look at the forex market and say "wow, the US IS the place to invest in a crisis", what we should really be worried about is the fine print. In this case, agency debt has been sold off in droves.

And this, of course, reinforces the "reverse tsunami" idea that was thought up by Peter Dorman over at Econospeak:
This afternoon I co-led a forum on the financial crisis with my Evergreen colleague Peter Bohmer. I had a flash as I was preparing: at some future point we could be in for a reverse tsunami.

Here’s the idea: A real tsunami begins with an outward flow of water. If you’re standing on the beach and suddenly the water line retreats 10 or 20 meters, it’s time to race for higher ground. Now consider the opposite phenomenon. The massive Fed/Treasury spending spree to hold the crisis at bay, thus far unsuccessful, is being financed by a massive capital inflow. Some of this comes from foreign CB’s eager to do their part, but a big part is the result of global capital flight to the supposedly least risky currency. Suppose we get out of this alive and calm returns to the markets. Most of those people are going to want to bring their money back—that’s the reverse tsunami. How do we finance that? The Fed’s balance sheet will be wall-to-wall junk.
So. Evidence that the US Dollar is booming like a investment bubble. At some point Dorman's reverse tsunami will suddenly wash back leaving the US high and dry with a tanked currency, 1930s type unemployment and 1970s type inflation.

More doom and gloom. My wife just made a nice banana and date cake though, so it's not all bad.


Why did America invade Iraq?

I've been thinking about this lately - not just in terms of the reasons America felt at the time but in terms of the reasons many Americans now believe they felt.

1. Saddam was one of those responsible for 9/11.

Well, that one went out ages ago. Most Americans believed it even though George W. Bush didn't literally say it (although it was obvious that he believed it too).

2. Iraq had weapons of Mass Destruction and were a threat to America.

Well that one went out ages ago too. Five years later and still nothing... unless you bought into all the bull about them being shipped to Syria.

3. Saddam was a bad man and deserved to be overthrown.

That Saddam was a bad man is unquestionable - but the guy was no Hitler. He was a tinpot dictator in charge of a small country who gassed his own people. But did he deserve to be overthrown? If invading Iraq because Saddam was bad is a good enough reason then surely the case could be made for invading any number of nations around the world being run by tinpot dictators. Why Iraq?

I mean, think back to the 1980s when War-Hawk Ronald Reagan DIDN'T INVADE Libya and DIDN'T EXECUTE Colonel Gaddafi. Operation El Dorado Canyon was as bad as it ever got, and Gaddafi is still alive today, continuing to not be a threat to anyone any more.

In any case, life after "Mission Accomplished" was terrible for Iraq. Violence on a daily basis in the form of car bombs, suicide bombers and religious extremism did not exist while Saddam was in power. America replaced a cruel tinpot dictator with chaos, and the result was worse. Living under Saddam was certainly better than living under American rule. One possible reason why violence has tapered off recently may simply be that millions have either left the country or are internally displaced.

4. Our Intelligence was mistaken.

Forged, more like. I've already addressed this issue in an article I wrote 3 years ago. If the intelligence was so good, why was Colin Powell producing satellite pictures of water trucks and telling the U.N. that they were really mobile Chemical weapons labs?


So. Those are the stated reasons. Here are some of my own.

1. We really, really thought that WMDs were there.

This is one of those "faith based community" verses "reality based community" issues. I'm not talking here about American Evangelicals (although they fit into it) but rather the idea that our thoughts/beliefs shape reality, rather than the other way around. In this case, it didn't matter how many UN inspectors were running around Iraq in 2002 and finding nothing or how many times Hans Blix said "Iraq is co-operating... we still haven't found anything" - the fact was that Saddam was a bad man who said he had WMDs and we believe him! Nothing here about due process, nothing here about innocent until proven guilty. Instead we get Condoleeza Rice warning us that the smoking gun could be a mushroom cloud or Donald Rumsfeld reminding us that absence of evidence is not evidence of absence.

Having faith in something doesn't mean you stop thinking altogether. Was it right to be concerned about potential Iraqi WMDs? Absolutely. Was it right to invade based upon the available evidence? Not at all - especially in hindsight.

2. We really, really thought that Iraq would be happy after we got rid of Saddam.

There's something Liberation of Paris that makes pro-war Americans lose their ability to think cogently. The thinking goes that if country A is ruled by dictator B, then sending troops to remove B will result in the liberation of A and make everyone love America. Sadly this rule doesn't always work, and when it doesn't the temptation is to either a) criticise the liberators for being ungrateful or b) repeat the mantra that everything is going fine and the media hates America and is reporting lies because they are in league with the terrorists.

The reality was that once Saddam's political and governmental regime collapsed, it was replaced not with a new order but with chaos. Rosy thinking - again the result more of "faith based" thinking that hard reality - being the cause.

3. We were still angry after 9/11 and had to attack someone.

I think this is the main reason. After Afghanistan was rightly invaded by America and its allies, the ease of the victory and the absence of Osama Bin Laden was too much. There was still too much anger at the horror of 9/11, but there was no way to direct or control that anger. Instead, Bush used the opportunity to invade Iraq for no other reason than misplaced revenge.


I want your comments.

Many of you who read my blog are American. I would really like your comments as to what you felt and thought at the time of the invasion of Iraq. Did you really think that Iraq was linked to 9/11? Did you really think Iraq had WMDs? If you changed your mind, what prompted it? I would like to find out.

Addicted to Stimulus

The picture to the left is a line of Meth. As many of us know, Meth is a stimulant, offering the user pep, focus, energy and confidence. Most of us use stimulants without realising it. Caffeine and Nicotine are stimulants. My drug of choice is caffeine, and I will be brewing up a batch on my stove when I finish writing this article.

But it's not as though stimulants aren't very useful. A cup of coffee can really get your day going. Moreover, it's a well known fact that the US Air Force plies its pilots with stimulants to give them focus and energy when they are flying often (especially during combat), thus allowing them the "cheat codes" to avoiding weariness while flying multi-million dollar machines.

But, as we know, stimulants can be dangerous. The short term positive effects can be outweighed overwhelmingly by long term negative effects. These include becoming "jittery", overconfidence, personality changes and an inability to understand things properly. This is why we see Coke and Meth addicts acting strangely not just when they get their Jones, but also when they have had their shot. Addicts often discover that long-term addiction to stimulants are needed just to make them feel "normal".

I'm obviously using this as an economic metaphor. As the economic crisis deepens, calls for more stimulus are growing louder. Moreover, those who disagree are thrown into the "Hoover" bin, who made the mistake of raising taxes during the depression.

By itself, increasing government spending to stimulate the economy is a good thing. Keynes pretty much proved this decades ago, and economic downturns around the world have often been cushioned by deliberate increase in government spending - whether in the form of expanding government services or in the form of "stimulus checks" sent to citizens or in the form of tax cuts given to households and/or businesses.

And just like a pilot popping Amphetamines before embarking on a dangerous mission, so can government stimulus be necessary as it embarks on an economic rescue mission.

But here's the problem - the US economy is already addicted to stimulants. The level of Public Debt is 44% of GDP and growing, and this is hardly the worst it might get.

This means a couple of important things. First of all it means that any additional fiscal stimulus will be limited in scope - rather than creating growth, it may only help the economy move slightly closer to "normal". Secondly, it means that the addiction gets worse, which results in even worse conditions later.

I have never had the displeasure of being addicted to hard drugs. The worst I ever got was about 17 years ago when my coffee pot broke and I refused to drink instant coffee and had to endure caffeine withdrawl. Real drug addicts - those addicted to Meth and Cocaine and others - have to undergo a painful period of "cold turkey" in order to rid themselves of their drug dependence. The cold turkey process is not fun - it is apparently a period of intense pain and illness lasting several days as their body reacts to the chemical imbalance.

Go back to economics and you see a similar picture. Nations which are addicted to stimulus - to net growth in government debt - will find it incredibly difficult to cope with the current economic crisis. Added stimulus will not only be less successful, it will also depress the economy in the long run.

One of the more basic things I discovered early in my "learning economics" days was that short-term stimulus - either through budget deficits or lower interest rates - resulted in a downturn later. Similarly, a short-term contraction - either through budget surpluses or higher interest rates - resulted in a return to growth later. The economy responds to these changes by rebalancing itself.

I'm writing all this because at some point in the future, the government will simply run out of things it can effectively do. Bailouts and stimulus checks are all very well at the moment, but in 6-12 months time, will we still be talking about further bailouts and stimulus checks? At some point, someone has to get up and say "No more. We can't afford to bankrupt the entire economy in order to save it".

And this is where the US Dollar comes into it.

The US government has already dug itself into a substantial fiscal hole since 2001. Now with the entire world gripped in an economic crisis, the US does not have much fiscal room left to use. It's a damned-if-you-do, damned-if-you-don't scenario. On the one hand, cutting spending and/or raising taxes might seem too "Hoover" to succeed. But, on the other hand, running even bigger deficits will bring the nation closer to bankruptcy, making investors nervous.

And when investors get nervous, they begin to sell. In this case, the US Dollar may plunge.

Check out how the US Dollar has performed in the last 12 months. For some, the sudden upturn in the value of the US Dollar indicates a boom, a "bull market" in the US Dollar. For others, this sudden upturn can only result in a sudden downturn, as investors pull out of a investment bubble. Since perpetual, permanent upturns went out with copies of Dow 36,000, the only realistic result of the current dollar boom appears to be a bust.

Months ago I recommended a series of policy goals that went something like this:
  • Cut military spending
  • Raise taxes on the rich
  • Run a fiscal surplus to pay back public debt
  • Use monetary policy to keep inflation low
  • Create and enforce stricter financial regulation so (a financial bubble) doesn't happen again
  • Fire Ben Bernanke
These goals are based broadly upon The Washington Consensus, a set of policy goals that the IMF requires of third world nations in financial strife. Sadly, these have gone out of favour after the Asian crisis - yet I cannot see any other way. At some point the US government can do no more than fix its own problems and then sit back and wait for the economy to sort itself out over time.

Sounds horrid doesn't it? Imagine it - Obama and Congress cut spending, raise taxes and instruct the Federal Reserve to keep a tight rein on inflation, while at the same time US businesses are going bankrupt and unemployment pushes into double figures. Not good is it? Painful isn't it? Imagine the outcry and the complaints. Imagine all those people losing their jobs and falling into poverty. But it reminds me of something.

It reminds me that cold turkey is the only way to get off destructive drugs.

The alternative to the policy goals above is "MOTS" - more of the same. More debt, more government spending, looser monetary policy. And that will lead to? More addiction to debt.

Faced with a nation out of control fiscally, investors will panic. The US Dollar will tank. And the US won't have enough money to satisfy its Jones any more. Think about 1930s unemployment with 1970s inflation and you'll get the picture.

The US is damned if they do and damned if they don't. The choice is between a painful period of cold turkey or an even more painful period of cold turkey. There's no "magic bullet" that will make things better.

As for me, I'm enjoying my coffee.


Parable of the burning state

Inspired by this:
California Governor Arnold Schwarzenegger remained upbeat today about the progress of the state's devastating wildfires.

"Hopefully we can adjust the direction of the fires towards more heavily populated areas. The more homes it destroys, the better."

Economists around the nation have reacted swiftly to the news of the fires, calling it the beginning of the end of the subprime crisis.

"With thousands of houses already torched beyond repair and tens of thousands more likely to perish, this mass immolation will reduce the surplus supply of houses in California." said Professor Saul O'Hara of the New York School of Economics today. "With a drop in supply there will come an increase in prices, which will then reinvigorate the state's, and the nation's, property market".

Steps have already been taken to ensure the destruction of as many houses as possible. Earlier today, Governor Schwarzenegger called in the California Air National Guard to begin fire bombing the Inland Empire.

But despite the efforts of California's bravest, the Governor has called upon neighbouring states to help, as well as Federal Assistance.

"Our men are doing a great job - as of 30 minutes ago Palm Springs and Fontana have been reduced to smouldering ruins as a result of the Air National Guard. But there is still so much to do - so many more cities and houses to burn to the ground. Our men are tired. We need federal assistance as soon as possible."

President George Bush was unable to comment, but sources say that he was "willing and able" to send as many troops and munitions as possible to the area.

President-elect Barack Obama, however, criticized the federal government's slow response to the crisis.

"The people of America need hope. They need change. They need more than just a few hundred of California's finest. What they need is an entire squadron of B-52s dropping incendiary bombs in as many built up areas of the state as possible." Obama said

"We should start in the poorest parts of Los Angeles. South Central, Compton, Inglewood..."

Leaders at the G20 summit reacted positively to the news of California's immolation, some suggesting that the global economic crisis may have even reached its bottom.

"The news of California's fires has encouraged the entire world" said UN Secretary-General Ban Ki-moon "Hopefully the destruction can spread across the entire United States, causing house prices to boom and re-employing the millions of unemployed to refurbish and refit any properties that remain."

Former Russian President and current Prime Minister Vladimir Putin, also at the G20 summit, pledged to send any support he can.

"We have 100 brand new Tu-160 strategic bombers ready at a moment's notice to enter US airspace." Putin revealed, "President Bush needs only say the word and I will order them to attack."

Dow futures rose considerably on the news.

"The more houses that are destroyed, the more current house prices will appreciate and the more chances we have of burning our way through the current recession" said Bloomberg Analyst Layton Ken. "When most of America's houses have gone, the housing market will boom".

Governor Schwarzenegger, however, warned of over-optimism.

"At this stage we have an entirely localized immolation. We are doing our best to stoke it but our resources are few. There is a real danger that the fires might go out. We need to pray that God sends rain... of fire".


Let it crash, let it crash, let it crash

An interesting argument:
I'm concerned about America's infatuation with throwing money at things. Money problems? Throw more money in the pit.

Lets take the auto industry: GM is basically out of business because they are losing billions of dollars every month. Why? Well, I'll tell you why: Because people are not buying their cars and trucks, they're buying other manufacturers stuff. GM has lost market share. It's very simple.

So, what does our government want to do? They want to take YOUR and MY tax money and give it to them to "rescue them." See, I am a capitalist. I believe that companies should rise and fall based on how they do in the free market. There is no need to rescue a company because the market has already decided they are done.

I have made a personal decision to buy Toyota when we purchased our last two family cars. I did this based on research, value, repair history, models available, and price. I chose NOT to give my money to GM, and I don't want the government to make that decision for me.

Lets do a comparison: The ice block delivery business was huge in the early 1900's, and there were many men and women employed in this industry. When the refrigerator was invented in 1911 - these companies started to fail. They lost "billions every month". They employed "thousands of hard working Americans". What if the government decided to rescue them? Throw money at the ice block delivery companies to keep them in business? What would have happened to the refrigerator companies? I'll tell you what: It would have significantly slowed PROGRESS. Innovation and the MARKET decided together that having ice delivered to an ice box wasn't as good as a refrigerator. Simple as that.

GM is an ice delivery company. Let them go if they can't innovate - don't SLOW PROGRESS!

Dear Government, let capitalism reign. Let good companies grow and poor companies shrink. Go ahead and let the bubble burst, it'll hurt for a while but the state of the economy in a few years will be much better than if you just prolonged the inevitable. Think of it like a forest fire, it's deviating when it's happening but in a few seasons you will see fresh, new, healthy growth.
Being the centre-leftist that I am, it would be tempting to answer such an argument by pointing out all the problems of letting businesses like these crash and burn. But, to tell you the truth, at this point I'm a raging capitalist.

I suppose it's a "live by the sword die by the sword" argument - if an individual or business is profiting from a market economy, then when the market turns against them, they can't complain if they go under.

The sort of socialism that I like being practised is when people - not businesses - who suffer from the ups and downs of the marketplace are given a safety net to cushion them from the fall. If one or more of the "Big 3" automakers in the US go bankrupt and are closed down, the result would certainly be unemployment and suffering for those directly involved. Instead of throwing money at the auto makers (who have failed to remain profitable in the market), money should be diverted to the former workers as they get their lives together and seek alternative employment - employment that the market will eventually provide.

Of course, it would be far better had a market crash been prevented in the first place. The market itself can't prevent its own crashing, so this is up to government.

What could the US government have done to prevent this economic crisis? Had interest rates been higher after 2001 a housing bubble would never have formed, and had Bush not enacted tax cuts during his first term, money would not have been thrown into this bubble either (not to mention lower levels of public debt).


Gold vs Fiat

The more I look into it, the more convinced I am that fiat currency is superior to a gold standard.

In short, the gold standard is the idea that money/currency should be backed by gold, so that people who exchange money are, in fact, exchanging ownership of an amount of gold. This supposedly gives people confidence in that their money retains its value and is linked to a real, physical "thing" that can be measured and given worth.

Fiat currency, on the other hand, is money with no backing at all. Fiat currency is created through the fractional banking system as both the central bank and commercial banks create it as it passes through deposits and loans.

There is a lot of talk around the internet at the moment about the horrors of fiat currency and the importance of putting money back onto a gold standard. The Ron Paul political movement was not the creator of this movement, but did certainly help it along the way.

Let me just simplify some of the concerns I have about returning to the gold standard.
  1. A Gold standard was in place before 1929 and continued through the great depression. If anyone thinks that returning currency to the gold standard will somehow solve the current economic crisis ignores that simple fact. It was not the gold standard that caused the great depression, but it was not the gold standard that helped the world's economies recover from the depression. Similarly, the current economic crisis is not a result of fiat currency and the fractional banking system.
  2. Gold is only valuable because people attribute value to it. Gold is not somehow valuable in and of itself, like some sort of philosophical ideal. No. Gold is only valuable because human beings want it. Money, like gold, is something that people can value. Money created within a fractional banking system - ie not backed by gold - can and does retain its value. Japan, for example, has a fractional banking system, and they have experienced deflation over many years (deflation is when money rises in value against goods and services).
  3. Like all goods and services, gold's value is determined by the marketplace. If currency were backed by gold, what would happen if there was an oversupply of gold? With more supply comes lower prices, which means that money backed by gold can easily devalue (and cause inflation) if gold supplies increase. Restricting gold mining is an option, but a gold standard would turn gold mining companies into the world's central banks. These companies are not mining gold in order to keep the world economy stable, they are mining gold because it makes them rich. If a gold mining company strikes a very rich gold seam and begins to flood the market with gold then it would, of course, result in a currency devaluation.
  4. A fiat currency is controlled by a central bank. The supply of money can be easily regulated through monetary tools like interest rates, bonds and reserve requirements. Inflation is, of course, an issue in any economy but it is not sourced in a regulated fractional banking system. Even though central banks have the potential power to create an infinite amount of money, they do not because money's value needs to be retained in order for it to be used effectively. Put simply, hyperinflation and hyperdeflation are contrary to a central bank's purpose.
  5. While it is true that a fractional banking system could create an infinite amount of money, the reality is that money is used by humans, who pick and choose when to buy or save or invest or borrow. This slows down money creation. It is therefore entirely possible (and proven in Japan's case) that a fractional banking system can maintain price stability.
The picture is of a gold coloured Fiat. Yes, that is how bad my humour can get.

Bail Out


Dubai, again

Rosa Brooks:
But even ultra-affluent Dubai is fragile these days. You see, this gem of the postmodern, globalized economy doesn't really produce anything of value -- its oil accounts for only about 5% of gross domestic product. Its economy relies on services, tourism and ... that's about it, actually. Those elaborate hotels, malls, amusement parks and skyscrapers? Heavily leveraged -- built out of the shifting sands and the same intoxicating thin air that sustained Wall Street until recently.

And Dubai may be going down. The oil-rich neighbors that helped finance its boom have seen oil prices plummet, and worldwide, credit for speculative real estate projects is drying up. On Wednesday, the Dubai Financial Market closed lower than at any time in nearly four years; down 61% this year. Sooner or later, even the suntanned loafers here are going to feel the pinch.

I'm tempted to cheer, but unfortunately, the pain won't be confined to the super-rich.



John Neville as Baron Munchausen

I have learned from experience that a modicum of snuff can be most efficacious

Sting plays a soldier who is executed for being too brave.

This sort of behaviour is demoralizing for the ordinary soldiers and citizens who are trying to lead normal, simple, unexceptional lives. I think things are difficult enough as it is without these emotional people rocking the boat.

Eunuchs singing at the Sultan's palace.

Cut off in my prime... and surrounded by beautiful women... A eunuch's life is hard...

Berthold (Eric Idle) chases after a bullet heading for the Baron.

Is there a Doctor in the Fish?

The King of the Moon (Robin Williams) turns into a lunatic.

I'm back! I got lips again and I'm gonna use 'em, baby!

The Queen of the Moon (Valentina Cortese) rescues the Baron, Sally and Berthold from prison

If he discovers my head's with you - ooh! Quickly, quickly. Quickly! Climb into my hair.

Venus (Uma Thurman) arrives in spectacular style.

I am a goddess! I can do what I like!

Vulcan (Oliver Reed), Venus' husband.

And I am The God, so shut up!

The Baron finally succumbs to death.

...and that was only one of the many occasions on which I met my death. An experience I don't hesitate strongly to recommend.

The Adventures of Baron Munchausen.

OSO's debt watch

Public Debt on 2008-11-12 was $6.36 Trillion

US GDP in 2008 Q3 was $14.43 Trillion

Debt/GDP Ratio: 44.07%
( [Debt ÷ GDP] x 100 )

Public Debt/Person: $20,821.75
(Public Debt
÷US Population)


Public debt is $6,358,869,286,267.95 Source
Latest GDP is $14,429.2 billion Source
Population in September 2008 is 305,449,862. Source (Resident population plus armed forces overseas).

Note: Hopefully the Census figures will be out soon for estimated population in October 2008. That should reduce the public debt/person figures.

Picking your sources

So I come to the computer this morning and one of my favourite blog sites proclaims that "52% of evangelicals who voted for McCain think Obama is a Muslim". So I follow the link, salivating at the thought of yet another blog post proclaiming the stupidity of American Evangelicalism.

And as I read the source text, I find this important statement:
The survey is not scientific or based on random sampling. It was advertised throughout Beliefnet's Web site and newsletters. From November 3 through November 6 4,400 users completed the survey.
Which pretty much sums up the poll's usefulness, ie not very. The only stupidity being exercised here is by Beliefnet who somehow think that unscientific polls are worth taking notice of in today's politically polarised world. Americablog, the lefty blog who posted the link that I followed, is guilty too, not of stupidity but ignoring the dumbness of the poll.


Cloverfield - the map

Did you watch that monster movie Cloverfield? Are you not a New Yorker and wondered where all the events happened? Well, someone with a LOT of time on their hands put together a map showing where all the major events of the film occurred, including some educated guesses as to where Clover was when he drop kicked the head of the Statue of Liberty.

Click here.