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Saturday, January 31, 2009

Not Chicken Little: the sky could really be near falling

Jesse is not an air-filled doomster, yet here he has become really sombre. Pound heading for parity with the Euro, major banks insolvent, action ineffectual, hush-hush all around so the common people don't realize the gravity of the situation. It's rumour, but rumour that Jesse, clearly an experienced financial man, finds plausible.

Like I said, you've had your warning. Prepare for the worst, hope for the best.

Every picture tells a story




Money and life

The previous post is a summary of Brad Setser's views on China and the dollar. What with the oil price coming down and the trade deficit reducing because of declining demand, it seems reassuring for Americans. But Michael Panzner also returns to one of his themes, the inflationary phase that he (and many others) fear may succeed the recession-depression.

Marc Faber has observed that this is the first time in history that economies around the world are affected simultaneously, since we are now much more inter-connected. So if inflation should take hold, perhaps it will not be fully reflected in the exchange rates - it might be that the dollar remains relatively buoyant against the pound, Euro, renminbi etc.

So maybe the real victims of global inflation, or hyperinflation, will not be this nation or that, but cash savers as a class. They have set aside some of the rewards of work, instead of spending it, and will come back to the cupboard to find it turned half-rotten, as happened in the 70s (if they'd put it in the stockmarket instead, it would only have been a bit mouldy).

How is it that China can award death sentences to those who adulterate milk with melamine, but adulterating the currency - the accumulation of millions of years of human labour - is not even punishable by loss of office? In the year George Washington took Presidential Office, "coining" in England was treason, and perpetrators were accordingly hanged, drawn and quartered (or, in the case of women, burned).

Money is stored life, and devaluing money is stealing life. Next month will be the 20th anniversary of my becoming a financial adviser, and the people I have advised would mostly not bother with investments if only their cash savings could hold their real value. What a scam this all is.

The Greenback is Red-backed

Brad Setser returns to a favourite theme, China's investment in the US. If I can summarise:

1. China buys American bonds directly, but also via the UK. Practically all the UK's purchases are on behalf of China.

2. American government bonds are either Treasuries (debts of the government of the USA) or Agencies (debts of US States and local government). Concerned about risk, China has recently been selling Agencies to buy Treasuries, because the latter are backed by the Federal Government.

3. China will continue to invest in the US, because this keeps up demand for the dollar and so keeps down the Chinese currency, the Renminbi. This means that Chinese exports to America will remain very competitive in terms of price.

4. China's continuing support will stop the US dollar from collapsing in the world currency market, as many have feared. Other countries who are also running a trade deficit and need financing, have much more reason to worry.

Friday, January 30, 2009

Dow 2,000: confessions of an optimist

Karl Denninger looks at one of the shapes chartists use to guess market movements, and concludes that a Dow fall to 2,000 points is one possible outcome.

Back in November, I did my own work on the "in-real-terms" Dow (i.e. adjusted for CPI), and if history repeats itself, a fall to below the equivalent of 2,000 points would merely be a repetition of what happened twice in the 20th century. But the second low (1982) was not so deep as in 1932, and in December I re-drew the graph with (sort of) reassuring curvy lines, which suggested that maybe the low point next time might only be c. 4,000 points.

This latter attempt of mine sturdily ignored two facts: debt, and its recent monetization (look at Tim Iacono's second graph here) have gone far past all previous levels; and so did the Dow in its "twin peaks" episode of years 2000 and 2007. Maybe the next low will be as devastatingly deep as the last peaks were dizzyingly high.

I will comfort myself with the illusion that the Dow will merely halve, until reality proves me wrong.

Thursday, January 29, 2009

An answer to global warming

Grow Azolla.

Preparing for the Abolition of Freedom in the USA

How many Americans are aware of this?:-

Establishing Martial Law in the United States

(htp: Global Research; referred to me by Paddington)

UPDATE: see this from Jesse re New Hampshire's Resolution HCR 6! Freedom is in the air again!

Tuesday, January 27, 2009

New Market Terms

[Making the rounds]
CEO --Chief Embezzlement Officer.
CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
BROKER -- What my broker has made me.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per share.
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.
INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse. PROFIT -- An archaic word, no longer used.



Radical chic

(Pic left: Ken Kesey's bus)

QandO has a good go at Bill Ayers, an education prof who once led the violent radical underground Weathermen movement (and is married to a former member). For those who want to know about one strand of the Baby Boomers, Ayers (born 1944) may be a touchstone.

The connection between radicalism and education is a very old one; modern mass communications also come under this category of vectors of revolution. Readers might like to consider how many other Ayerses there are, not actually getting their hands dirty anymore but getting well-paid and respected for influencing the agenda in classrooms, TV and the print media.
I'm not quite going to take the simplistic guntoting redneck line on them. People like this meant well, but they thought in abstracts, always dangerous with earthbound Man. If there is one thing we must learn from the past 40 years, it's that meaning well isn't enough. But they always wanted to do well for themselves out of doing good to others, and have fun doing it - isn't that human.

Sunday, January 25, 2009

Is "double jeopardy" wrong?

My apologies to readers who may find the following a bit scrappy in style - it is Sunday and I ought to be doing other things in my real life!

Scotland, where the murder rate is double that south of the border, is now considering allowing “double jeopardy”; that is, trying someone more than once for the same offence (this has been possible in England since 2005). Libertarians will worry that the State can persecute individuals using judicial process; even that possibility is something of an extra burden on the citizen.

Penalties for the most serious crime, murder, are not so severe as they once were. There is no death penalty, and life imprisonment rarely turns out to be that: the average time served for mandatory lifers in the UK is 14 years. (Other, non-mandatory life sentences end up as 9 years served, on average.)

Perhaps one could work out the change in penalty as some kind of life-related formula. Let's assume for the sake of argument that life in prison is the same as no life at all. In that case, the death penalty is the loss of 100% of the rest of one's life, irrespective of the time between conviction and execution.

By contrast, how much of the criminal's life does life imprisonment take away? It depends on how old he is when the crime is committed, and how long he might be expected to live afterwards. I can't easily find statistics on the average age of murderers in the UK, but in the US it appears to be around 27. In the UK, life expectancy at birth varies for males according to social class, from 80 to 73 years (further complicated, I should expect, by variations in infant and juvenile mortality rates). Thus the penalty of life imprisonment represents 14/(73 - 27)% = 30% of remaining life.

I've read that before capital punishment was abolished, British juries were more reluctant to convict in cases where the death sentence might be imposed, but I can only guess at how far this might alter the probability of a "guilty" verdict. Shall we say, a difference of 20%? That would mean a penalty factor of (100*0.8)=80% for the death penalty, versus 30% for "life".

The discrepancy may well be less than this, since for many convicts, prison is safer and healthier than the life they face outside. The retired prison doctor "Theodore Dalrymple" has often noted how his patients throve "inside", where largely they were off illegal drugs and were reasonably well-fed. If after serving his time the ex-convict lives a shorter (nastier, more brutish) life, then his prison sentence has consumed a greater proportion of his post-conviction existence.

Wrongful conviction is always a concern. In Parliament in 2006, Mr O'Hara asked "how many miscarriages of justice there have been in capital cases which have resulted in a payment of compensation in the last 30 years", to which the answer was, that there were only four cases. Perhaps it's because forensic science has advanced very considerably since 1964, when the last execution was carried out in England. But the American experience suggests other factors masking miscarriages of justice, including: "Lawyers in many capital cases are lousier than the norm." There's no making up for a mistake, in the case of capital punishment (unless we return to the ancient principle of "weregeld").

What about deterrence? From the foregoing, "life" seems to be perhaps half as onerous as the death sentence. Yet US criminologists appear to agree that the death penalty does not have a significant deterrent effect. Could we argue that in many murder cases, the circumstances of the crime are such the perpetrator simply doesn't consider the potential consequences for himself? Would the same number of such crimes be committed, even if there were no legal penalty at all?

One might argue that deterrence is not the main point, and the penalty, whatever it may be, is simply a punishment that fits the seriousness of the crime. In which case, why is the crime treated so much less seriously than before?

On the other hand, maybe deterrence is an argument, after all. The journalist Peter Hitchens has argued that the murder rate in Britain would be far higher (I think he said, by a factor of about 10), were it not for huge improvements in medical procedures over the last 40 years, that now save the lives of many victims of violent assault. If that is so, then there may well be a correlation between severity of punishment and the crime rate, after all.

Perhaps greater certainty of conviction is the greatest deterrence; but that can't be easily achieved. If re-trial significantly increases the probability of successful and just conviction, it might go some way towards evening-up the odds in terms of deterrence. But I doubt that it will greatly improve conviction rates overall, not least because there will be opportunities for the defence to claim that the outcome has been prejudiced in some way by matters relating to the previous trial and the associated publicity. And I would think there would not be many re-trials approved by the Crown Prosecution Service (or its Scottish equivalent), since they will have to consider the chances of "a result" second time round, and also bear in mind the issue of the presumed-innocent citizen's right not to have his life consumed by legal pestering, for which monetary compensation may never be sufficient.

So I think it's always going to be extremely important to "get it right first time," and I don't think a second pop at the target is going to make enough difference to justify the inconvenience to the accused in cases that don't succeed.

As to sentencing, an incorrect conviction is always wrong, but a death sentence for the innocent is absolutely wrong. Yet for the guilty, the penalty for murder is far less heavy than it used to be, and that, too, seems unjust and quite possibly it has also been one of the reasons for an increase in potentially lethal assaults.

So to me, it would be better to increase time actually served in jail, in cases where the judge determines that consideration of consequences was, or would likely, or (after making allowance for emotion) ought to have been in the criminal's mind at the time of committing the act. (a) I think it would increase the deterrent effect, and (b) opinion may differ, but I think it would be deserved, at least in "serious" cases.

There should also be the swiftest and fairest treatment of appeals, so that where there has been a miscarriage of justice, the innocent should be released as quickly as possible, and compensated handsomely. The State itself needs a deterrent.

You've had your warning

Lord Myners has been criticised for telling the truth too early, i.e. 3 months after the general public could have done anything to save themselves. On October 10, "major depositors" in the USA and Japan were preparing to withdraw their money, and were willing to paying any attached penalty to do so.

For the rest of us, the corralito: "The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals."

Even if they had caught wind of it, would we have learned anything of this from the mainstream media? (Scornful laughs) But what were MPs doing with their own money? Perhaps they'd have abandoned us to our fate, like Lord Jim. (I have often thought that the main reason for getting into politics is the opportunity to trade - in all sorts of ways - on inside information and networking).

Do you think the banks have been saved? Mish doesn't think so. Is the pound safe? Jim Rogers doesn't think so (though this business associate of the sterling-busting George Soros may be playing a nasty little game of market manipulation - which is, scarcely credibly, not an incarcerable crime but merely a civil offence.)

Within the past 12 months, the pound has gone from USD $2.12 to $1.43 and Euros 1.40 to 1.06; to put it another way, imports now cost 48% more from the States , and 32% more from Europe. (O&A typical cash rates)

At least you can still get your hands on your money; but for how much longer? It may be that the crisis is over; but it may be that we are in the eye of the storm. Personally, after settling debts I intend (a) to draw extra cash, keep the slip to prove it's been legally obtained, and store it safely away from a bank; (b) to keep at least some of my money in foreign currencies - perhaps the Yen* and Euro*; (c) to look for a variety of non-cash stores of value - and not all of them with Government guarantees, either.

My trust in banks, politicians and journalists is broken. My faith in them is gone, because they did not keep faith with me.

*Though The Big Picture thinks Japan will move to weaken the yen and the Euro-zone is struggling to hold its members together. So, US dollars?

Where in the World?

Birinyi Associates give their forecast for GDP growth in 2009:



Saturday, January 24, 2009

A turning point in the market?

Jesse has been doing some scrying, and perceives that a sudden market move is imminent.

"What's the McClellan Oscillator?" My understanding of this site's explanation is that movements in the share prices of a few large companies, heavily weighted in a stock market index, can mask what is going on in the market generally. And when those large companies quieten down, investors may notice an opposite trend has been developing, and they'll pile in after it.

For example, if shares in major banks have been crashing, but other companies have been rising, the market as a whole may drift down, but then...

Signs and portents, signs and portents.

Rolling back the State

... won't happen. Only a major disaster is capable of breaking the hands that are strangling us. But maybe that is what is now on its way.

Mish reported yesterday how the banks are insolvent, and in his opinion monetary reflation can't work , for three reasons:

1. Putting more cash into the system to create inflation to reduce the real burden of debt, won't create jobs, raise wages, or stop outsourcing (China's nominal GDP per capita is $2,483, America's $45,725, according to IMF figures).
2. But "quantitative easing" - monetary inflation - will lead to a currency drop (if it succeeds) and the reaction will be a raising of interest rates as lenders try to protect the real value of their loans.
3. And if government creates jobs directly, it again skews the economy, giving higher importance to the objects it chooses than the market would, if left to itself; in short, what economists call "malinvestment".

A longish essay over on Mises looks at how the State has seized the wealth and assumed many of the functions of the private citizen, and how the First World War and subsequent events helped accelerate a process that had begun long before.

Back in the 70s, I came across the work of Ivan Illich. His general thesis was that the State takes over activities that previously we performed ourselves - teaching our children, tending to our sick and injured, etc. These functions are then made into organisations with big buildings, many workers and officials, and large budgets - all paid for by taxation. Sociologists call this "reification". It increases the size and power of the State - and here we are.

They don't even do the job well.

As someone in education (as well as finance), I don't subscribe to the airy assertion that "our youngsters leave school illiterate", but they don't read or write as much or as well as they did, and what the liberals have done to the curriculum in English (for example) is painful to see. Heads of English in secondary schools in the 70s literally burned or threw out their schools' textbooks and coursebooks (I remember hearing of three separate cases); but the temptation to micromanage returned. It's like the historical irony that saw the French kill their King and end up with an Emperor.

And having seen the medical service in action on my wife a few years back, I no longer have the blind faith in doctors that I used to have. Phil Hammond (the GP/journalist/entertainer) tells us that the NHS kills or maims about 10% of its hospital patients, and Illich was ahead of him again (Medical Nemesis, 1974).

That's not to say we don't need doctors or teachers, but once created, institutions develop a will to live and purposes of their own, and can drift perilously off-task. Individuals who join them can become sidetracked by career opportunities and political hobby-horses, and in any case have to accommodate themselves to working in a structure run by others who have already done so and altered the operational rules to fit their interests.

Looks like the banks have done the same.

We have to hope that, however painful, after the coming changes there may be some better balance between the citizens taking care of their families, and that black hole of wealth and power, the State.

Abolish the Federal Reserve

On The Big Picture, a rude but concise video by Neal Fox about the Federal Reserve. As his catchy song points out, its existence defies the Constitution - the same Constitution that made President Obama say his Presidential Oath again.

Yet again, I say economic issues resolve into democratic ones. The Constitution is very clear that the power to create money (using gold and silver) must remain with Congress; yet in 1913 that power was given away to a newly-invented quango, run by people whose names and organisations are not permitted to be publicly known (which secrecy gives rise to some very paranoid theories!)

Why wait until its centenary to abolish it? No "four more years", please.

And while I'm on, let's have a massive cull of quangos in the UK, too.

Friday, January 23, 2009

Very scary

Mish doesn't come across as eager for Armageddon, which make his posts today really worrying. Is it time to get one's cash out of the dispensing machine, to avoid the Argentinian corralito?

Could US interest rates rise?

Brad Setser notes that far from declining in this recession, China's trade surplus is increasing, because although exporting less, it is also importing less. He estimates that China owns $900 billion of US Treasury bonds (and rising), some purchased indirectly via the UK.

However, enormous spending by the US means that it will have to issue a further $900 billion in bonds, and Setser opines, "China isn’t going to double its Treasury holdings in 2009."

If America needs to borrow more than China is willing to lend, the money must come from somewhere else, at a time when it's getting short generally. I have also recently read reports of concerns about the credit rating for US government bonds, which also supports the idea that rates will have to rise to pay for the increased risk of default.

How far will the dollar will be supported by this tendency? At least, in relation to sterling?

The UK is supposed to be an even worse basket case in terms of overall indebtedness, and that may make it politically very difficult to match rates with the US, because it could accelerate the rate of British house repossessions and business bankruptcies, even faster than in the US. So the pound could possibly fall even further against the dollar.

Perhaps Mr Cameron is right to warn that for the UK, the money may run out soon. Then we will have to pay high interest rates after all. And at last, we may be forced to borrow from the IMF and retrench savagely. Back to 1976. And will 1979 return? Cometh the hour, cometh the strong woman?

So, what's the implication of all this for the investor? Sell bonds and buy gold (despite its already high price) now, then reverse the process when high interest rates hit us?

Wise choices?

To my mind, having studied history, the equation is simple: a strong economy is dependent on control of the latest technology, which relies on strong basic science, and requires a core of well-educated scientists, engineers and mathematicians.

The British education system of the 60's and 70's that served me so well was very pragmatic: identify the students with obvious ability and work ethic, and pay them to learn. It was a cruel, elitist pressure cooker, but it produced the best university graduates in the world.

It has been replaced by a more inclusive American model. Standards are down, and many students are now under a crushing debt burden.

Why exactly did we change it?

Running repairs

VoxEU describes the international economic strains in the Euro area and the need to patch up the collective fuselage so it can continue flying. I'm not an expert, but it looks like a mess to me.

Pic: "A rocket fired by an enemy fighter inflicted this damage on The Sack, a B-17 of the 379th Group. A 14-inch fragment of the rocket tore the pants off of the turret gunner without hurting him."

Thursday, January 22, 2009

The Oath

President Obama has re-taken the Presidential Oath, merely because he'd said the word "faithfully" in the wrong place (though still correctly, in grammatical terms). But it matters, because the wording is precisely set by the Constitution. And what a serious oath it is:

"I do solemnly swear (or, affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States."

The Vice-President's oath is set by Congress, and in its latest (1884) wording is even more determined to leave no room for lawyerly ratting-out:

“I do solemnly swear (or, affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter: So help me God.”

A foreigner who wishes to become a US citizen must say:

"I hereby declare, on oath, that I absolutely and entirely renounce and abjure all allegiance and fidelity to any foreign prince, potentate, state, or sovereignty of whom or which I have heretofore been a subject or citizen; that I will support and defend the Constitution and laws of the United States of America against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I will bear arms on behalf of the United States when required by the law; that I will perform noncombatant service in the Armed Forces of the United States when required by the law; that I will perform work of national importance under civilian direction when required by the law; and that I take this obligation freely without any mental reservation or purpose of evasion; so help me God."

My brother took this oath last year, and knowing him, will have meant it and will uphold it down to the last punctuation mark.

Compare that with the British version, with its room for legal manoeuvre and evasion:

"I (name) swear by Almighty God (or, “do solemnly, sincerely and truly declare and affirm”) that on becoming a British citizen, I will be faithful and bear true allegiance to Her Majesty Queen Elizabeth the Second, her Heirs and Successors, according to law."

I could wish that all our holders of political office in the UK would be compelled to use the American wording, substituting only "Kingdom" for "States of America".

And we appear to have forgotten (and compare it with the current US citizenship oath above!) the following extract from the Oath required by the 1689 Bill of Rights Act:

"I do declare that no foreign prince, person, prelate, state or potentate hath or ought to have any jurisdiction, power, superiority, pre-eminence or authority, ecclesiastical or spiritual, within this realm."

George III, whose actions were part of the causes of the American Revolution, knew the power of his Coronation Oath: “Where is the power on earth to absolve me from the observance of every sentence of that Oath? [...] I can give up my crown and retire from power. I can quit my palace and live in a cottage. I can lay my head on a block and lose my life, but I cannot break my Oath. If I violate that Oath, I am no longer legal Sovereign in this country.”

The Monarch's Coronation Oath has been amended (e.g. in 1937 - removing a vital reference to the "law and Customs" of the Kingdom) since then; and although the Common Law is enshrined in the 1701 Act of Settlement, it may have to give place to Europe's directives and such rights as its legislators are minded to grant (and, presumably, amend, suspend or withdraw).

In some senses, Britain is a younger country than the United States of America; and perhaps the worse for it; for here, I fear, one's word, oath, anciently (I believe) one's gesa, and the law itself, have become sandy; not a rock on which to build.

The Good Earth, Bad Money

A review on Triple Pundit of a book by Woody Tasch, about how the financial system incentivises damage to soil fertility. Or is this more eco-wibble?

Desperate diseases call for desperate remedies

Mervyn King at the Bank of England refers to "unconventional unconventional measures". One seems to be to stop publishing what he's doing; what else can he have in mind?

Brad Setser thinks the pound sterling may crash through the floorboards.

"If you cannot bring good news, then don't bring any."

Wednesday, January 21, 2009

Newsflash

All is well: the Dow has just sailed (well, snailed) back through the 8,000 barrier. But what's this? Brad Setser doesn't know what to think about China's role in US debt financing.

Here he thinks that a downturn in China's production will be panic their already-prudent populace into saving even more money, and
they'll also import less, which will screw our deflation down even tighter:

Bottom line: A big fall in activity in China will tend to drive China’s trade surplus up. It thus would tend to increase — not reduce — China’s (net) purchases of foreign assets. Someone in China will still buying foreign assets — and likely providing indirect support for the Treasury market — even if it is not China’s central bank. A big fall in activity also means less Chinese demand for the world’s products — as well as less Chinese demand for China’s products, which frees up capacity to export. That adds to the deflationary forces in the world economy.

... and here he worries about the switch from long-term purchases of Treasuries, to ones with short maturity dates:

At the same time, it is risky to finance a large external deficit with short-term debt. Even for the US. If the US deficit starts to head back up again — as, for example, the effect of the recent fall in oil prices wears off and a large fiscal stimulus in the US stimulates the world economy — without a shift in the composition of inflows, there would be cause for concern.

It's said that Charles Colson, an aide to President Nixon, had this motto framed in his office: "When you've got them by the balls, their hearts and minds will follow." Funny, until you're on the receiving end.

And as the Baby Boomers lindy-hop into old age...

Drugs are the answer to everything. Or maybe not, James wonders. What a spoilsport. Awww, maaaan...

WeaselWordWatch update: "Quantitative Easing"


"Aaahhh, that's better... Look out! Aaarghh!!"

Google references now up to 320,000 but news references down to 3,347 in the last 24 hours.
If QE is the answer, what was the question?

Worry-wart corner

From Brian Gongol:

Three badly-underestimated risks to humanity What's happening in the financial markets is a mess; there's no doubt about that. But it's a mess that has the public's attention. Here are three huge risks to the modern world that aren't getting their fair share of attention:

We don't have enough food to survive a natural calamity. A volcanic eruption in Indonesia in 1815 left behind a cloud of ash that blocked much sunlight for months and led to food shortages all over the globe. A similar eruption could happen at any time today. The population of the world was around one billion then; now, it's approaching 7 billion. We've dramatically improved food production, but we haven't improved food storage at a similar pace. World food reserves amount to only a few weeks' worth of normal consumption. If another volcanic eruption of similar magnitude were to occur today -- and it could -- then we could see a global hunger emergency on a scale never before seen nor comprehended.


Our computers are susceptible to catastrophic electrical attack. Virtually everything important in the world today depends upon computers. Yet, aside from the work of one member of Congress, almost no one seems to take seriously the threat of attacks on the computing infrastructure by electromagnetic pulse. In short, hostile governments and groups either already have access to or will soon possess the tools they would need to cripple most of the electronics over most of the continental United States in a single stroke. We have the capacity to create resistance to such an attack, but for the most part, nothing significant has been done. Lest the threat sound fictitious, it should be noted that NATO used special weapons in the campaign in Yugoslavia to disable the electrical system there during the late 1990s, in order to suppress the fighting power of the Milosevic regime.


We still don't have a real plan for containing a contagious pandemic. While avian influenza hasn't really made the leap to human-to-human transmission yet (as far as we know), the threat still exists, and people are still dying of the infection. At some time, whether it's H5N1 bird flu or something else, a disease outbreak will reach pandemic status, just like the Spanish flu of 1918. And when it happens, it will shut down many of the human systems upon which we depend, unless alternatives are put into place.

Frightening? Certainly. After all, each of the disasters in question has happened before. But these risks are surmountable, if we're willing to apply our minds, technologies, and resources to the solutions. Let's find better ways to store food -- perhaps by improving our capacity to freeze-dry food on a massive scale. Let's figure out how to protect our electronics from attack -- perhaps by making use of Faraday cages where appropriate. And let's take some of the lessons from Y2K preparations and apply them to the risk of a pandemic. These things can be done, and if we had more foresight as a species than the common goldfish, then we'd actually put our knowledge to good use.

Unfair advantage and reward, and how to get them.

It's not all in the genes.

This is a very intriguing post by Half Sigma, on memory versus active intelligence. There's a rich field to be explore here, about getting and maintaining advantage.

It's also about starting early - as early as pre-pregnancy, according to a doctor friend (and Phil Hammond). For example, the womb needs to be in good condition, not shrivelled by a smoking habit. It''s said that the foetus will steal whatever it needs, so surely there needs to be plenty of the right vitamins and minerals in the mother's body. And after birth, early, plentiful and positive emotional and intellectual stimulation.

Then there's education - being taught principles and strategies. I read somewhere that in Japan, trainee professional Go players aren't allowed to learn through play until their reading has brought them up to 1-Dan level (sort of like Black Belt). That's instead of learning the hard way. In any case, does the hard way actually teach you? Or do you decide to try harder next time? Or tell yourself the other guy was lucky? Or maybe just give up?

And the right social and professional connections. And choosing the right career, and the right place for it to flourish.

Some years ago, I watched a programme about a very senior British civil servant/politician in Hong Kong at the time of the handover to China. He quoted what appears to be an old saw, though I hadn't heard it before: "Eat right, work right, marry right."

Tuesday, January 20, 2009

The replacement of democratic government by carte blanche

Secret inflation: Mish relays a Telegraph article about yet another unscrupulous legal change to make government less accountable - the BoE will be able to increase the money supply without reporting it.

Increasingly, the British Government seem to me to have become a coup by loophole.

Pardon? Get your kicks on Route '66 (that's 1866)

He can't do any more, so here is Wikipedia's list of the people George W. Bush has pardoned, or whose sentences he has commuted.

Perhaps the smart thing to have done would have been to charge the entire American financial establishment and pardon them. *

Still, if he listens to the Village Voice, President Obama now has the chance to pardon Bush and Cheney.

* Perhaps unnecessary. The VV article quoted above says an 1866 Supreme Court ruling means you don't even have to be charged to be pardoned.

Obama's speech

He certainly delivered it confidently. Whoever wrote it, this is President Obama's inauguration speech.

Oscar Wilde said something to the effect that the best, sincerest response to a fine piece of writing is the attempt to write one of your own, and as I listened I couldn't help wondering what I would have said had I been on that podium. If he can pull the American nation together, that will be a great start.

But for the irreverent (or habitually drunk and cynical), here is a cheeky cod-Obama-speech generator.

Gold, silver, what you will... but not sterling

Jim Rogers says exit the pound and sterling-denominated assets. (htp: Wat Tyler)

Inflation and gold

(1) Times of Malta (htp Jesse)

Gold is a currency and Phillip Manduca is proving this once and over again.

He seems to have gambled his entire professional reputation on gold, reaching the $2,000 threshold by the end of 2010.

He is well worth listening to. His words are illuminated by a previous outstandingly successful record.

The high gold price seems, for the time being, to have reached a plateau, but Manduca of Titan Investments sees a price of gold at $1,000 a troy ounce as a distinct possibility in the near future. He said so a few days ago.

China is now moving part of its massive dollar reserves from the dollar into the euro and gold.

Madoff can be said to have harmed Wall Street, but he has certainly helped the prospects of a booming gold price. The money the Fed is pumping into the economy is proving insufficient to reignite it.

(2) Article from the Economic Times on our options (htp: Jesse, again). It thinks there are three: writeoffs/bankruptcies, increase GDP, inflation. The first is politically unacceptable, the second cannot be achieved by monetary means alone, so it's to be the third:

The stage is set for a long period of slow growth as debts are worked down and a rise in inflation in the medium term.

Vice versa

“Good morning, Bank. Customer here.”

“Er, good morning...”

“I’ve been looking at your account with me –“

“I was going to give you a call...”

“ – and there are some matters we need to discuss.“

“I’m very busy at the moment..”

“ Tomorrow morning at nine, if you please.”

“Er, nine, yes.”

Click.

Monday, January 19, 2009

Maybe it's not really so bad?

The Coyote points out that redundancies are happening faster than drop in output, so he thinks at least part of the crisis is anticipatory behaviour.

Another possibility that occurs to me, is that the credit crunch is a pretext for businesses to become more efficient and cut out deadwood in a way they'd long been planning to do anyway.

Sunday, January 18, 2009

Monetary policy: chameleon on a tartan

Our government has contradictory objectives, and something will have to give.

1. It has ordered banks to rebuild their cash reserves, because they loaned out far too high a multiple of what they kept in their vaults. Normally, the way to do this would be to widen the margin between the interest they pay and the interest they charge, making bigger profits that could be salted away; or to become far more cautious in their future lending, increasing the ratio of good loans to bad ones. In a recessionary economy, where many businesses are more likely to fail, this would also imply calling in business loans and trimming their overdraft limits

2. It has called for banks to pass on the full benefit of recent cuts in interest rates, and to maintain lending, especially to businesses.

If (1) is not done, the crisis continues. And if (2) is done, it counteracts (1).

Besides, unless the government nationalises the banks, it's not in a position to force them to do (2). It must know this. Maybe (2) is merely for us punters and voters to hear, not for real action.

As Aeschylus said 2,500 years ago: "In war, truth is the first casualty. "

Hi yo, Silver

Jesse surveys measures of monetary growth in the USA. He concludes that inflation is likely to drag the dollar down and shares upwards (N.B. in the 70s, they didn't rise as fast as inflation); as to commodities: "silver may be one of the first commodities to break out because the government maintains no significant physical inventory of it as it does for gold and oil."

UPDATE (re silver): Tim "Mess that Greeenspan Made" Iacono thinks so, too.


Limits to growth: rare elements

An article from the New Scientist, first published in May 2007, discusses another challenge to our current way of living: modern technology's dependence on rapidly-shrinking supplies of rare earths. (htp: Paddington)

Greens take turn this into a message about reuse and non-use; selfish investors may consider the implications for funds specialising in industrial metals, metal recovery companies and associated technology.

"End lending altogether" - Waldman

I've been wondering why we shouldn't bust our criminal banks immediately and replace them with a system that simply transfers money. For a half-serious proposal to end lending altogether, see Naked Capitalism on Steve Waldman.

Evolution Inaction

Some time ago, on this forum, Sackerson discussed the disdain that the ancient Greek philosophers had for those who actually made things, dismissing them as 'artisans', and noted that this attitude appeared to be alive and well in the UK, where engineers are treated much worse than their counterparts in Germany.

As early as 1959, C.P.Snow noted in 'The Two Cultures' that engineers and scientists were not considered 'real' academics at universities. That attitude is alive and well still, and the ranks of academic administrations are full of professors of education, philosophy and psychology.

The recent bailouts in the US add another data point. Wall Street, which produces nothing, was given over $350 billion with no conditions, yet the auto industry was raked over the coals for asking for $25 billion in loans.

I don't think that it is a coincidence that the amazing US Constitution was written by men who were not only were versed in the classics, but knew the science and mathematics of their day.

It is a fact that most of the ruling elite in China have engineering degrees, as do many of the business leaders in Japan. The CEO's of BMW and Volkswagon have always been doctors of engineering.

I am convinced that one of the reasons for our current problems is that our social and political structures have not adapted to the Scientific and Industrial Revolutions. While living in imagination may be more fun than being constrained by reality, we need leaders who can make the hard decisions.

Saturday, January 17, 2009

A hand hovers over the chain

Marc Sobel:

Do I understand the net of this posting to be that the US is much more vulnerable to a quick run on the debt, i.e. being mainly financed by short term debt which constantly has to be rolled over ?

Brad Setser:

Yes, that risk is rising...

Read the whole thing here.

Friday, January 16, 2009

Taxation is inflationary, not deflationary

I've often wondered whether that's the case - now the Mogambo Guru says so. If taxes cut our take-home income, we insist on more income to make up for it.

Thursday, January 15, 2009

Jealousy

The WSJ has published a list of the 200 best jobs (htp: Paddington). This should stimulate about 5 of the Seven Deadly Sins. Some surprises - e.g. a teaching assistant is 21 places above a teacher - though I do know a teacher who gave up to become an assistant. Find where you are in the pecking order - happy seething!

01. Mathematician
02. Actuary
03. Statistician
04. Biologist
05. Software Engineer
06. Computer Systems Analyst
07. Historian
08. Sociologist
09. Industrial Designer
10. Accountant
11. Economist
12. Philosopher
13. Physicist
14. Parole Officer
15. Meteorologist
16. Medical Laboratory Technician
17. Paralegal Assistant
18. Computer Programmer
19. Motion Picture Editor
20. Astronomer
21. Petroleum Engineer
22. Insurance Underwriter
23. Web Developer
24. Physiologist
25. Bank Officer
26. Architectural Drafter
27. Broadcast Technician
28. Stenographer/Court Reporter
29. Medical Secretary
30. Geologist
31. Publication Editor
32. Vocational Counselor
33. Aerospace Engineer
34. Jeweler
35. Dental Laboratory Technician
36. Electrical Technician
37. Musical Instrument Repairer
38. Audiologist
39. Bookkeeper
40. Anthropologist
41. Nuclear Engineer
42. Medical Records Technician
43. Librarian
44. Market Research Analyst
45. Dental Hygienist
46. Purchasing Agent
47. Set Designer
48. School Principal
49. Industrial Engineer
50. Medical Technologist
51. Archeologist
52. Tax Examiner/Collector
53. Dietitian
54. Typist/Word Processor
55. Chiropractor
56. Hotel Manager
57. Chemist
58. Personnel Recruiter
59. Psychologist
60. Technical Writer
61. Occupational Therapist
62. Electrical Engineer
63. Optometrist
64. Speech Pathologist
65. Financial Planner
66. Museum Curator
67. Zoologist
68. Pharmacist
69. Judge (Federal)
70. Clergy
71. Civil Engineer
72. Office Machine Repairer
73. Social Worker
74. Mechanical Engineer
75. Newscaster
76. Piano Tuner
77. Industrial Machine Repairer
78. Flight Attendant
79. Advertising Account Executive
80. Artist (Fine Art)
81. Telephone Installer/Repairer
82. Attorney
83. Bookbinder
84. Stockbroker
85. Communications Equipment Mechanic
86. Appliance Repairer
87. Fashion Designer
88. Corporate Executive (Senior)
89. Occupational Safety/Health Inspector
90. Photographic Process Worker
91. Podiatrist
92. Optician
93. Author
94. Cosmetologist
95. Computer Service Technician
96. Insurance Agent
97. Compositor/Typesetter
98. Engineering Technician
99. Architect
100. Psychiatrist
101. Dentist
102. Agricultural Scientist
103. Orthodontist
104. Automobile Assembler
105. Barber
106. Teacher's Aide
107. Bank Teller
108. Disc Jockey
109. Construction Foreman
110. Cashier
111. Physical Therapist
112. Public Relations Executive
113. Precision Assembler
114. Receptionist
115. Telephone Operator
116. Airplane Pilot
117. Conservationist
118. Sewage Plant Operator
119. Railroad Conductor
120. Sales Representative (Wholesale)
121. Real Estate Agent
122. Shoe Maker/Repairer
123. Veterinarian
124. Forklift Operator
125. Photographer
126. Vending Machine Repairer
127. Teacher
128. Buyer
129. Electrical Equipment Repairer
130. Shipping/Receiving Clerk
131. Recreation Worker
132. Furniture Upholsterer
133. Advertising Salesperson
134. Construction Machinery Operator
135. Respiratory Therapist
136. Farmer
137. Surveyor
138. Heating/Refrigeration Mechanic
139. Tool-And-Die Maker
140. Reporter (Newspaper)
141. Janitor
142. Physician (General Practice)
143. Nurse (Registered)
144. Plumber
145. Carpet/Tile Installer
146. Physician Assistant
147. Electrician
148. Dressmaker
149. Guard
150. Highway Patrol Officer
151. Drill-Press Operator
152. Travel Agent
153. Automobile Body Repairer
154. Waiter/Waitress
155. Machine Tool Operator
156. Surgeon
157. Aircraft Mechanic
158. Truck Driver
159. Salesperson (Retail)
160. Glazier
161. Choreographer
162. Chauffeur
163. Bartender
164. Undertaker
165. Machinist
166. Bus Driver
167. Photojournalist
168. Correction Officer
169. Maid
170. Actor
171. Drywall Applicator/Finisher
172. Plasterer
173. Nurse's Aide
174. Police Officer
175. Stevedore
176. Carpenter
177. Stationary Engineer
178. Dishwasher
179. Meter Reader
180. Bricklayer
181. Firefighter
182. Child Care Worker
183. Painter
184. Nurse (Licensed Practical)
185. Nuclear Decontamination Technician
186. Butcher
187. Automobile Mechanic
188. Sheet Metal Worker
189. Mail Carrier
190. Construction Worker (Laborer)
191. Ironworker
192. Roustabout
193. Welder
194. Garbage Collector
195. Roofer
196. Emergency Medical Technician
197. Seaman
198. Taxi Driver
199. Dairy Farmer
200. Lumberjack

Under the floorboards

The Contrarian Investor reports that the Chinese will have difficulty stimulating demand within their own country, if the Western buying spree stalls. Poverty, compulsive saving by those who can, and stacks of cash hidden under corrupt officials' floors mean that helicopters filled with banknotes won't tempt the population to get out and blow their wads.

In-Equitable treatment

Victims of Equitable Life are to be paid off by the taxpayer, says the FT.

Equitable Life ran a with-profits fund, a form of collective investment that only goes up (as long as you maintain it to the end of the agreed term). Once awarded, bonuses on with-profits funds cannot be taken away. EL's undoing was that, like some other companies, they dragged in extra pension business a long time ago on the selling point of guaranteeing (in their case) a 12% annuity rate when the plans matured. That is, for every £100 in the fund, the life time income would be £12 per year.

When we moved from a high inflation/high interest environment to low/low, this promise became a ticking time bomb. When annuity rates generally have dropped to 6% or less, you need to double the fund to create the same income. So since there wasn't enough in the kitty, EL had either to renege on the guaranteed annuity rate (GAR), or take away much of the bonuses already awarded. I believe they tried both approaches and the courts wouldn't let them.

This GAR depth-charge was well known, or should have been known, to actuaries. The IFA network I was with in the 90s used to have a shortlist of approved companies (including non-commission payers) for each product, and at some point EL quietly dropped off the list. If outsiders could see the disaster looming, we have to assume the technical advisers on the inside knew even better what would happen. Yet EL carried on awarding bonuses to investors as though nothing was wrong.

Now, it seems compensation is to be paid because industry regulators failed to spot the coming crisis and step in. It's as though houseowners could sue the police for not stopping Bill the Burglar. Perhaps it helps EL investors' case that so many of them happen to be lawyers and journalists?

However, what is sauce for the goose is sauce for the gander. The same arguments can be applied to victims of the mortgage mis-selling of the past few years. For Equitable Life, read banks; for investors, read borrowers. And in both cases, it's the same regulator now.

Compensation, please.

Why can you stand up in buses?

How come coaches, taxis, even airplanes have seat belts, but many buses don't - and allow standing passengers, to boot? Yes, buses are safer than cars - but.

Wednesday, January 14, 2009

Unity rebuts

The drugs debate continues. Some will say that I have misunderstood the thrust, the tendency of the original 15,000-word salvo; others may say that some subsequent participants did not thoroughly read or understand Theodore Dalrymple's 1997 contribution (he does tend to over-write, I grant you).

Misunderstanding is an important factor. I remember the confused glee of a group of 15-year-olds when cannabis was reclassified as a Class C drug - they were part of a project I was involved with, rehabilitating youngsters for college and work (lovely kids, essentially). They didn't understand the rubric, but they thought they understood the message that dear hip Tony Blair was sending. Though the message was not aimed directly at them, of course, but to their middle-class fellows. Who gives a damn about pasty, ill-nourished white trash, self-protectively aggressive black thuglets-in-training, and Muslim kids for whom only born-again Islam is the way off bud? They don't vote, much less contribute to Party funds.

And when cannabis was re-elevated to the minor peerage, it was ostensibly for the benefit of young people, but perhaps also - perhaps more - for the readers of the Daily Mail.

Though it may be step-by-step rather than in a single bound, crossing the Rubicon is a momentous decision. Though it may be slice by slice, the salami will get eaten. Policy-makers, policy-proposers, note that you may be more sensitive to the faults of present arrangements than to the defects of the alterations you propose; and a process may be easier to start than halt.

Common Sense?

An open letter that I received via email:
____________________________
To: Troy Clarke President
General Motors North America

Response from: Gregory Knox, Pres.
Knox Machinery Company
Franklin , Ohio

Gentlemen:

In response to your request to contact legislators and ask for a bailout for the Big Three automakers please consider the following, and please pass my thoughts on to Troy Clark, President of General Motors North America.

Politicians and Management of the Big 3 are both infected with the same entitlement mentality that has spread like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping this nation, awaiting our new "Messiah", Pres-elect Obama, to wave his magic wand and make all our problems go away, while at the same time allowing our once great nation to keep "living the dream"...

Believe me folks, The dream is over! This dream where we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the worlds most overpaid, arrogant, ignorant and laziest entitlement minded "laborers" without paying the price for these atrocities...this dream where you still think the masses will line up to buy our products for ever and ever.

Don't even think about telling me I'm wrong. Don't accuse me of not knowing of what I speak. I have called on Ford, GM, Chrysler, TRW, Delphi, Kelsey Hayes, American Axle and countless other automotive OEM's throughout the Midwest during the past 30 years and what I've seen over those years in these union shops can only be described as disgusting.

Troy Clarke, President of General Motors North America, states: "There is widespread sentiment throughout this country, and our government, and especially via the news media, that the current crisis is completely the result of bad management which it certainly is not."

You're right Mr. Clarke, it's not JUST management...how about the electricians who walk around the plants like lords in feudal times, making people wait on them for countless hours while they drag ass...so they can come in on the weekend and make double and triple time...for a job they easily could have done within their normal 40 hour work week. How about the line workers who threaten newbies with all kinds of scare tactics...for putting out too many parts on a shift...and for being too productive (We certainly must not expose those lazy bums who have been getting overpaid for decades for their horrific underproduction, must we?!?)

Do you folks really not know about this stuff?!? How about this great sentiment abridged from Mr. Clarke's sad plea: "over the last few years ...we have closed the quality and efficiency gaps with our competitors." What the hell has Detroit been doing for the last 40 years?!? Did we really JUST wake up to the gaps in quality and efficiency between us and them? The K car vs. the Accord? The Pinto vs. the Civic?!? Do I need to go on? What a joke!

We are living through the inevitable outcome of the actions of the United States auto industry for decades. It's time to pay for your sins, Detroit ...

I attended an economic summit last week where brilliant economist, Alan Beaulieu, from the Institute of Trend Research , surprised the crowd when he said he would not have given the banks a penny of "bailout money". "Yes, he said, this would cause short term problems," but despite what people like politicians and corporate magnates would have us believe, the sun would in fact rise the next day... and the following very important thing would happen...where there had been greedy and sloppy banks, new efficient ones would pop up...that is how a free market system works...it does work...if we would only let it work..."

But for some nondescript reason we are now deciding that the rest of the world is right and that capitalism doesn't work - that we need the government to step in and "save us"...Save us my ass, Hell - we're nationalizing...and unfortunately too many of our once fine nation's citizens don't even have a clue that this is what is really happening...But, they sure can tell you the stats on their favorite sports teams...yeah - THAT'S really important, isn't it... Does it ever occur to ANYONE that the "competition" has been producing vehicles, EXTREMELY PROFITABLY, for decades in this country?... How can that be??? Let's see... Fuel efficient... Listening to customers... Investing in the proper tooling and automation for the long haul...

Not being too complacent or arrogant to listen to Dr. W. Edwards Deming four decades ago when he taught that by adopting appropriate principles of management, organizations could increase quality and simultaneously reduce costs. Ever increased productivity through quality and intelligent planning... Treating vendors like strategic partners, rather than like "the enemy"... Efficient front and back offices... Non union environment...

Again, I could go on and on, but I really wouldn't be telling anyone anything they really don't already know down deep in their hearts.

I have six children, so I am not unfamiliar with the concept of wanting someone to bail you out of a mess that you have gotten yourself into - my children do this on a weekly, if not daily basis, as I did when I was their age. I do for them what my parents did for me (one of their greatest gifts, by the way) - I make them stand on their own two feet and accept the consequences of their actions and work through it. Radical concept, huh... Am I there for them in the wings? Of course - but only until such time as they need to be fully on their own as adults.

I don't want to oversimplify a complex situation, but there certainly are unmistakable parallels here between the proper role of parenting and government. Detroit and the United States need to pay for their sins.

Bad news people - it's coming whether we like it or not. The newly elected Messiah really doesn't have a magic wand big enough to "make it all go away." I laughed as I heard Obama "reeling it back in" almost immediately after the final vote count was tallied..."we really might not do it in a year...or in four..." Where the Hell was that kind of talk when he was RUNNING for office.

Stop trying to put off the inevitable folks ... That house in Florida really isn't worth $750,000... People who jump across a border really don't deserve free health care benefits... That job driving that forklift for the Big 3 really isn't worth $85,000 a year... We really shouldn't allow Wal-Mart to stock their shelves with products acquired from a country that unfairly manipulates their currency and has the most atrocious human rights infractions on the face of the globe... That couple whose combined income is less than $50,000 really shouldn't be living in that $485,000 home... Let the market correct itself folks - it will.

Yes it will be painful, but it's gonna' be painful either way, and the bright side of my proposal is that on the other side of it all, is a nation that appreciates what it has...and doesn't live beyond its means...and gets back to basics...and redevelops the patriotic work ethic that made it the greatest nation in the history of the world...and probably turns back to God.

Sorry - don't cut my head off, I'm just the messenger sharing with you the "bad news". I hope you take it to heart.

Gregory J. Knox, President
Knox Machinery, Inc.
Franklin , Ohio 45005

Filling their boots and fleeing

Karl Denninger accuses the elite of delaying system rectification so they can get their money out of the country. Everybody who is anybody board the Gold Train, eh?

On a bad day, I'm half-inclined to believe it.

Tuesday, January 13, 2009

Smugness, alla Italia

Jonathan Russell writes in the Telegraph:

Spain's finances are in the dock thanks to Standard & Poor's, the spreads on Greek bonds have soared and Germany's economy is set to deteriorate faster than ours, according to the OECD. Suddenly the euro doesn't seem like such a one-way bet.

But where is the usual suspect, Italy, in all this euro-doom? Sitting pretty according to its finance minister Giulio Tremonti. The country didn't get involved in the sub-prime crisis and GDP figures could be significantly better than reported.


How do you work this out? "Our banks suffered little from the sub-prime crisis. There are few of them where English is spoken," he told Les Echos newspaper, no doubt not in English.
And GDP? "One should be suspicious of GDP figures …they do not include the informal economy."


The Italian "informal economy"? I'm sure there is another word for that.

And as one of my earlier posts shows, they've also invested less than 1% of their officially-declared GDP in US Treasuries.

Happiness: a different doctor writes

I'm coming to the end of Phil Hammond's funny, outrageous, informative and wise book "Medicine Balls". Here's a bit (from p. 248) I'd like to throw into our communal soup:

There's no doubt that we're richer and living longer than we were in 1948, and the NHS can take some credit for that. But we don't seem to be any happier. Indeed, Labour has somehow contrived a health service where we have the best-paid doctors in the world and among the least satisfied. The research on happiness is pretty clear. Humans are social animals and are most content in communities where people unite around, and conform to, a shared ideal. We like to trust each other, we don't like change - particularly if it's constant and we don't understand it - but we're very resilient and adaptable if needs be. We're happier being involved and figuring out what to do ourselves rather than being dumped on from on high. More money, above a comfortable level, doesn't make us happier and neither does the aggressive, competitive attitude needed to earn it. Compassionate, positive people tend to be happiest of all, and also healthiest. If you can sort your brain out, your body tends to follow.

Drugs: a doctor writes

It's stuff like this (from 1997) that gives me pause for thought, whenever I'm tempted down the road towards the Hellfire Club (motto: Fay ce que voudras). The author has wide experience of the effect of drugs on his patients, in and out of the prison context, and if you've read him in the Spectator you'll know he's not remotely left-wing. It's long (4,700) but very readable, and still only a third the length of Unity's recent piece. Do give it a go.

Don’t Legalize Drugs

Theodore Dalrymple

Advocates have almost convinced Americans that legalization will remove most of the evil that drugs inflict on society. Don’t believe them.


There is a progression in the minds of men: first the unthinkable becomes thinkable, and then it becomes an orthodoxy whose truth seems so obvious that no one remembers that anyone ever thought differently. This is just what is happening with the idea of legalizing drugs: it has reached the stage when millions of thinking men are agreed that allowing people to take whatever they like is the obvious, indeed only, solution to the social problems that arise from the consumption of drugs.

Man’s desire to take mind-altering substances is as old as society itself—as are attempts to regulate their consumption. If intoxication in one form or another is inevitable, then so is customary or legal restraint upon that intoxication. But no society until our own has had to contend with the ready availability of so many different mind-altering drugs, combined with a citizenry jealous of its right to pursue its own pleasures in its own way.

The arguments in favor of legalizing the use of all narcotic and stimulant drugs are twofold: philosophical and pragmatic. Neither argument is negligible, but both are mistaken, I believe, and both miss the point.

The philosophic argument is that, in a free society, adults should be permitted to do whatever they please, always provided that they are prepared to take the consequences of their own choices and that they cause no direct harm to others. The locus classicus for this point of view is John Stuart Mill’s famous essay On Liberty: “The only purpose for which power can be rightfully exercised over any member of the community, against his will, is to prevent harm to others,” Mill wrote. “His own good, either physical or moral, is not a sufficient warrant.” This radical individualism allows society no part whatever in shaping, determining, or enforcing a moral code: in short, we have nothing in common but our contractual agreement not to interfere with one another as we go about seeking our private pleasures.

In practice, of course, it is exceedingly difficult to make people take all the consequences of their own actions—as they must, if Mill’s great principle is to serve as a philosophical guide to policy. Addiction to, or regular use of, most currently prohibited drugs cannot affect only the person who takes them—and not his spouse, children, neighbors, or employers. No man, except possibly a hermit, is an island; and so it is virtually impossible for Mill’s principle to apply to any human action whatever, let alone shooting up heroin or smoking crack. Such a principle is virtually useless in determining what should or should not be permitted.

Perhaps we ought not be too harsh on Mill’s principle: it’s not clear that anyone has ever thought of a better one. But that is precisely the point. Human affairs cannot be decided by an appeal to an infallible rule, expressible in a few words, whose simple application can decide all cases, including whether drugs should be freely available to the entire adult population. Philosophical fundamentalism is not preferable to the religious variety; and because the desiderata of human life are many, and often in conflict with one another, mere philosophical inconsistency in policy—such as permitting the consumption of alcohol while outlawing cocaine—is not a sufficient argument against that policy. We all value freedom, and we all value order; sometimes we sacrifice freedom for order, and sometimes order for freedom. But once a prohibition has been removed, it is hard to restore, even when the newfound freedom proves to have been ill-conceived and socially disastrous.

Even Mill came to see the limitations of his own principle as a guide for policy and to deny that all pleasures were of equal significance for human existence. It was better, he said, to be Socrates discontented than a fool satisfied. Mill acknowledged that some goals were intrinsically worthier of pursuit than others.

This being the case, not all freedoms are equal, and neither are all limitations of freedom: some are serious and some trivial. The freedom we cherish—or should cherish—is not merely that of satisfying our appetites, whatever they happen to be. We are not Dickensian Harold Skimpoles, exclaiming in protest that “Even the butterflies are free!” We are not children who chafe at restrictions because they are restrictions. And we even recognize the apparent paradox that some limitations to our freedoms have the consequence of making us freer overall. The freest man is not the one who slavishly follows his appetites and desires throughout his life—as all too many of my patients have discovered to their cost.

We are prepared to accept limitations to our freedoms for many reasons, not just that of public order. Take an extreme hypothetical case: public exhibitions of necrophilia are quite rightly not permitted, though on Mill’s principle they should be. A corpse has no interests and cannot be harmed, because it is no longer a person; and no member of the public is harmed if he has agreed to attend such an exhibition.

Our resolve to prohibit such exhibitions would not be altered if we discovered that millions of people wished to attend them or even if we discovered that millions already were attending them illicitly. Our objection is not based upon pragmatic considerations or upon a head count: it is based upon the wrongness of the would-be exhibitions themselves. The fact that the prohibition represents a genuine restriction of our freedom is of no account.

It might be argued that the freedom to choose among a variety of intoxicating substances is a much more important freedom and that millions of people have derived innocent fun from taking stimulants and narcotics. But the consumption of drugs has the effect of reducing men’s freedom by circumscribing the range of their interests. It impairs their ability to pursue more important human aims, such as raising a family and fulfilling civic obligations. Very often it impairs their ability to pursue gainful employment and promotes parasitism. Moreover, far from being expanders of consciousness, most drugs severely limit it. One of the most striking characteristics of drug takers is their intense and tedious self-absorption; and their journeys into inner space are generally forays into inner vacuums. Drug taking is a lazy man’s way of pursuing happiness and wisdom, and the shortcut turns out to be the deadest of dead ends. We lose remarkably little by not being permitted to take drugs.

The idea that freedom is merely the ability to act upon one’s whims is surely very thin and hardly begins to capture the complexities of human existence; a man whose appetite is his law strikes us not as liberated but enslaved. And when such a narrowly conceived freedom is made the touchstone of public policy, a dissolution of society is bound to follow. No culture that makes publicly sanctioned self-indulgence its highest good can long survive: a radical egotism is bound to ensue, in which any limitations upon personal behavior are experienced as infringements of basic rights. Distinctions between the important and the trivial, between the freedom to criticize received ideas and the freedom to take LSD, are precisely the standards that keep societies from barbarism.

So the legalization of drugs cannot be supported by philosophical principle. But if the pragmatic argument in favor of legalization were strong enough, it might overwhelm other objections. It is upon this argument that proponents of legalization rest the larger part of their case.

The argument is that the overwhelming majority of the harm done to society by the consumption of currently illicit drugs is caused not by their pharmacological properties but by their prohibition and the resultant criminal activity that prohibition always calls into being. Simple reflection tells us that a supply invariably grows up to meet a demand; and when the demand is widespread, suppression is useless. Indeed, it is harmful, since—by raising the price of the commodity in question—it raises the profits of middlemen, which gives them an even more powerful incentive to stimulate demand further. The vast profits to be made from cocaine and heroin—which, were it not for their illegality, would be cheap and easily affordable even by the poorest in affluent societies—exert a deeply corrupting effect on producers, distributors, consumers, and law enforcers alike. Besides, it is well known that illegality in itself has attractions for youth already inclined to disaffection. Even many of the harmful physical effects of illicit drugs stem from their illegal status: for example, fluctuations in the purity of heroin bought on the street are responsible for many of the deaths by overdose. If the sale and consumption of such drugs were legalized, consumers would know how much they were taking and thus avoid overdoses.


Moreover, since society already permits the use of some mind-altering substances known to be both addictive and harmful, such as alcohol and nicotine, in prohibiting others it appears hypocritical, arbitrary, and dictatorial. Its hypocrisy, as well as its patent failure to enforce its prohibitions successfully, leads inevitably to a decline in respect for the law as a whole. Thus things fall apart, and the center cannot hold.

It stands to reason, therefore, that all these problems would be resolved at a stroke if everyone were permitted to smoke, swallow, or inject anything he chose. The corruption of the police, the luring of children of 11 and 12 into illegal activities, the making of such vast sums of money by drug dealing that legitimate work seems pointless and silly by comparison, and the turf wars that make poor neighborhoods so exceedingly violent and dangerous, would all cease at once were drug taking to be decriminalized and the supply regulated in the same way as alcohol.

But a certain modesty in the face of an inherently unknowable future is surely advisable. That is why prudence is a political virtue: what stands to reason should happen does not necessarily happen in practice. As Goethe said, all theory (even of the monetarist or free-market variety) is gray, but green springs the golden tree of life. If drugs were legalized, I suspect that the golden tree of life might spring some unpleasant surprises.

It is of course true, but only trivially so, that the present illegality of drugs is the cause of the criminality surrounding their distribution. Likewise, it is the illegality of stealing cars that creates car thieves. In fact, the ultimate cause of all criminality is law. As far as I am aware, no one has ever suggested that law should therefore be abandoned. Moreover, the impossibility of winning the “war” against theft, burglary, robbery, and fraud has never been used as an argument that these categories of crime should be abandoned. And so long as the demand for material goods outstrips supply, people will be tempted to commit criminal acts against the owners of property. This is not an argument, in my view, against private property or in favor of the common ownership of all goods. It does suggest, however, that we shall need a police force for a long time to come.

In any case, there are reasons to doubt whether the crime rate would fall quite as dramatically as advocates of legalization have suggested. Amsterdam, where access to drugs is relatively unproblematic, is among the most violent and squalid cities in Europe. The idea behind crime—of getting rich, or at least richer, quickly and without much effort—is unlikely to disappear once drugs are freely available to all who want them. And it may be that officially sanctioned antisocial behavior—the official lifting of taboos—breeds yet more antisocial behavior, as the “broken windows” theory would suggest.

Having met large numbers of drug dealers in prison, I doubt that they would return to respectable life if the principal article of their commerce were to be legalized. Far from evincing a desire to be reincorporated into the world of regular work, they express a deep contempt for it and regard those who accept the bargain of a fair day’s work for a fair day’s pay as cowards and fools. A life of crime has its attractions for many who would otherwise lead a mundane existence. So long as there is the possibility of a lucrative racket or illegal traffic, such people will find it and extend its scope. Therefore, since even legalizers would hesitate to allow children to take drugs, decriminalization might easily result in dealers turning their attentions to younger and younger children, who—in the permissive atmosphere that even now prevails—have already been inducted into the drug subculture in alarmingly high numbers.

Those who do not deal in drugs but commit crimes to fund their consumption of them are, of course, more numerous than large-scale dealers. And it is true that once opiate addicts, for example, enter a treatment program, which often includes maintenance doses of methadone, the rate at which they commit crimes falls markedly. The drug clinic in my hospital claims an 80 percent reduction in criminal convictions among heroin addicts once they have been stabilized on methadone.

This is impressive, but it is not certain that the results should be generalized. First, the patients are self-selected: they have some motivation to change, otherwise they would not have attended the clinic in the first place. Only a minority of addicts attend, and therefore it is not safe to conclude that, if other addicts were to receive methadone, their criminal activity would similarly diminish.

Second, a decline in convictions is not necessarily the same as a decline in criminal acts. If methadone stabilizes an addict’s life, he may become a more efficient, harder-to-catch criminal. Moreover, when the police in our city do catch an addict, they are less likely to prosecute him if he can prove that he is undergoing anything remotely resembling psychiatric treatment. They return him directly to his doctor. Having once had a psychiatric consultation is an all-purpose alibi for a robber or a burglar; the police, who do not want to fill in the 40-plus forms it now takes to charge anyone with anything in England, consider a single contact with a psychiatrist sufficient to deprive anyone of legal responsibility for crime forever.

Third, the rate of criminal activity among those drug addicts who receive methadone from the clinic, though reduced, remains very high. The deputy director of the clinic estimates that the number of criminal acts committed by his average patient (as judged by self-report) was 250 per year before entering treatment and 50 afterward. It may well be that the real difference is considerably less than this, because the patients have an incentive to exaggerate it to secure the continuation of their methadone. But clearly, opiate addicts who receive their drugs legally and free of charge continue to commit large numbers of crimes. In my clinics in prison, I see numerous prisoners who were on methadone when they committed the crime for which they are incarcerated.

Why do addicts given their drug free of charge continue to commit crimes? Some addicts, of course, continue to take drugs other than those prescribed and have to fund their consumption of them. So long as any restriction whatever regulates the consumption of drugs, many addicts will seek them illicitly, regardless of what they receive legally. In addition, the drugs themselves exert a long-term effect on a person’s ability to earn a living and severely limit rather than expand his horizons and mental repertoire. They sap the will or the ability of an addict to make long-term plans. While drugs are the focus of an addict’s life, they are not all he needs to live, and many addicts thus continue to procure the rest of what they need by criminal means.
For the proposed legalization of drugs to have its much vaunted beneficial effect on the rate of criminality, such drugs would have to be both cheap and readily available. The legalizers assume that there is a natural limit to the demand for these drugs, and that if their consumption were legalized, the demand would not increase substantially. Those psychologically unstable persons currently taking drugs would continue to do so, with the necessity to commit crimes removed, while psychologically stabler people (such as you and I and our children) would not be enticed to take drugs by their new legal status and cheapness. But price and availability, I need hardly say, exert a profound effect on consumption: the cheaper alcohol becomes, for example, the more of it is consumed, at least within quite wide limits.


I have personal experience of this effect. I once worked as a doctor on a British government aid project to Africa. We were building a road through remote African bush. The contract stipulated that the construction company could import, free of all taxes, alcoholic drinks from the United Kingdom. These drinks the company then sold to its British workers at cost, in the local currency at the official exchange rate, which was approximately one-sixth the black-market rate. A liter bottle of gin thus cost less than a dollar and could be sold on the open market for almost ten dollars. So it was theoretically possible to remain dead drunk for several years for an initial outlay of less than a dollar.

Of course, the necessity to go to work somewhat limited the workers’ consumption of alcohol. Nevertheless, drunkenness among them far outstripped anything I have ever seen, before or since. I discovered that, when alcohol is effectively free of charge, a fifth of British construction workers will regularly go to bed so drunk that they are incontinent both of urine and feces. I remember one man who very rarely got as far as his bed at night: he fell asleep in the lavatory, where he was usually found the next morning. Half the men shook in the mornings and resorted to the hair of the dog to steady their hands before they drove their bulldozers and other heavy machines (which they frequently wrecked, at enormous expense to the British taxpayer); hangovers were universal. The men were either drunk or hung over for months on end.
Sure, construction workers are notoriously liable to drink heavily, but in these circumstances even formerly moderate drinkers turned alcoholic and eventually suffered from delirium tremens. The heavy drinking occurred not because of the isolation of the African bush: not only did the company provide sports facilities for its workers, but there were many other ways to occupy oneself there. Other groups of workers in the bush whom I visited, who did not have the same rights of importation of alcoholic drink but had to purchase it at normal prices, were not nearly as drunk. And when the company asked its workers what it could do to improve their conditions, they unanimously asked for a further reduction in the price of alcohol, because they could think of nothing else to ask for.


The conclusion was inescapable: that a susceptible population had responded to the low price of alcohol, and the lack of other effective restraints upon its consumption, by drinking destructively large quantities of it. The health of many men suffered as a consequence, as did their capacity for work; and they gained a well-deserved local reputation for reprehensible, violent, antisocial behavior.

It is therefore perfectly possible that the demand for drugs, including opiates, would rise dramatically were their price to fall and their availability to increase. And if it is true that the consumption of these drugs in itself predisposes to criminal behavior (as data from our clinic suggest), it is also possible that the effect on the rate of criminality of this rise in consumption would swamp the decrease that resulted from decriminalization. We would have just as much crime in aggregate as before, but many more addicts.

The intermediate position on drug legalization, such as that espoused by Ethan Nadelmann, director of the Lindesmith Center, a drug policy research institute sponsored by financier George Soros, is emphatically not the answer to drug-related crime. This view holds that it should be easy for addicts to receive opiate drugs from doctors, either free or at cost, and that they should receive them in municipal injecting rooms, such as now exist in Zurich. But just look at Liverpool, where 2,000 people of a population of 600,000 receive official prescriptions for methadone: this once proud and prosperous city is still the world capital of drug-motivated burglary, according to the police and independent researchers.

Of course, many addicts in Liverpool are not yet on methadone, because the clinics are insufficient in number to deal with the demand. If the city expended more money on clinics, perhaps the number of addicts in treatment could be increased five- or tenfold. But would that solve the problem of burglary in Liverpool? No, because the profits to be made from selling illicit opiates would still be large: dealers would therefore make efforts to expand into parts of the population hitherto relatively untouched, in order to protect their profits. The new addicts would still burgle to feed their habits. Yet more clinics dispensing yet more methadone would then be needed. In fact Britain, which has had a relatively liberal approach to the prescribing of opiate drugs to addicts since 1928 (I myself have prescribed heroin to addicts), has seen an explosive increase in addiction to opiates and all the evils associated with it since the 1960s, despite that liberal policy. A few hundred have become more than a hundred thousand.

At the heart of Nadelmann’s position, then, is an evasion. The legal and liberal provision of drugs for people who are already addicted to them will not reduce the economic benefits to dealers of pushing these drugs, at least until the entire susceptible population is addicted and in a treatment program. So long as there are addicts who have to resort to the black market for their drugs, there will be drug-associated crime. Nadelmann assumes that the number of potential addicts wouldn’t soar under considerably more liberal drug laws. I can’t muster such Panglossian optimism.

The problem of reducing the amount of crime committed by individual addicts is emphatically not the same as the problem of reducing the amount of crime committed by addicts as a whole. I can illustrate what I mean by an analogy: it is often claimed that prison does not work because many prisoners are recidivists who, by definition, failed to be deterred from further wrongdoing by their last prison sentence. But does any sensible person believe that the abolition of prisons in their entirety would not reduce the numbers of the law-abiding? The murder rate in New York and the rate of drunken driving in Britain have not been reduced by a sudden upsurge in the love of humanity, but by the effective threat of punishment. An institution such as prison can work for society even if it does not work for an individual.

The situation could be very much worse than I have suggested hitherto, however, if we legalized the consumption of drugs other than opiates. So far, I have considered only opiates, which exert a generally tranquilizing effect. If opiate addicts commit crimes even when they receive their drugs free of charge, it is because they are unable to meet their other needs any other way; but there are, unfortunately, drugs whose consumption directly leads to violence because of their psychopharmacological properties and not merely because of the criminality associated with their distribution. Stimulant drugs such as crack cocaine provoke paranoia, increase aggression, and promote violence. Much of this violence takes place in the home, as the relatives of crack takers will testify. It is something I know from personal acquaintance by working in the emergency room and in the wards of our hospital. Only someone who has not been assaulted by drug takers rendered psychotic by their drug could view with equanimity the prospect of the further spread of the abuse of stimulants.

And no one should underestimate the possibility that the use of stimulant drugs could spread very much wider, and become far more general, than it is now, if restraints on their use were relaxed. The importation of the mildly stimulant khat is legal in Britain, and a large proportion of the community of Somali refugees there devotes its entire life to chewing the leaves that contain the stimulant, miring these refugees in far worse poverty than they would otherwise experience. The reason that the khat habit has not spread to the rest of the population is that it takes an entire day’s chewing of disgustingly bitter leaves to gain the comparatively mild pharmacological effect. The point is, however, that once the use of a stimulant becomes culturally acceptable and normal, it can easily become so general as to exert devastating social effects. And the kinds of stimulants on offer in Western cities—cocaine, crack, amphetamines—are vastly more attractive than khat.

In claiming that prohibition, not the drugs themselves, is the problem, Nadelmann and many others—even policemen—have said that “the war on drugs is lost.” But to demand a yes or no answer to the question “Is the war against drugs being won?” is like demanding a yes or no answer to the question “Have you stopped beating your wife yet?” Never can an unimaginative and fundamentally stupid metaphor have exerted a more baleful effect upon proper thought.
Let us ask whether medicine is winning the war against death. The answer is obviously no, it isn’t winning: the one fundamental rule of human existence remains, unfortunately, one man one death. And this is despite the fact that 14 percent of the gross domestic product of the United States (to say nothing of the efforts of other countries) goes into the fight against death. Was ever a war more expensively lost? Let us then abolish medical schools, hospitals, and departments of public health. If every man has to die, it doesn’t matter very much when he does so.


If the war against drugs is lost, then so are the wars against theft, speeding, incest, fraud, rape, murder, arson, and illegal parking. Few, if any, such wars are winnable. So let us all do anything we choose.

Even the legalizers’ argument that permitting the purchase and use of drugs as freely as Milton Friedman suggests will necessarily result in less governmental and other official interference in our lives doesn’t stand up. To the contrary, if the use of narcotics and stimulants were to become virtually universal, as is by no means impossible, the number of situations in which compulsory checks upon people would have to be carried out, for reasons of public safety, would increase enormously. Pharmacies, banks, schools, hospitals—indeed, all organizations dealing with the public—might feel obliged to check regularly and randomly on the drug consumption of their employees. The general use of such drugs would increase the locus standi of innumerable agencies, public and private, to interfere in our lives; and freedom from interference, far from having increased, would have drastically shrunk.

The present situation is bad, undoubtedly; but few are the situations so bad that they cannot be made worse by a wrong policy decision.

The extreme intellectual elegance of the proposal to legalize the distribution and consumption of drugs, touted as the solution to so many problems at once (AIDS, crime, overcrowding in the prisons, and even the attractiveness of drugs to foolish young people) should give rise to skepticism. Social problems are not usually like that. Analogies with the Prohibition era, often drawn by those who would legalize drugs, are false and inexact: it is one thing to attempt to ban a substance that has been in customary use for centuries by at least nine-tenths of the adult population, and quite another to retain a ban on substances that are still not in customary use, in an attempt to ensure that they never do become customary. Surely we have already slid down enough slippery slopes in the last 30 years without looking for more such slopes to slide down.