Throw the grenade, or put it in your pocket?

I was educated in the wrong things. Karl Denninger explains - in a way I struggle to understand fully - how the US government's schemes to support the banks must ultimately be financed by Treasury bonds on such a scale as to seriously damage their credit rating and pump up interest rates to a ruinous level.

This is a consequence of avoiding taking the right action, i.e. finding out who's insolvent and letting them go bust. I still remember Henry Paulson's panicky look when Congress threw out the bailout bill the first time.

Once you've pulled the pin out of a grenade, you can throw it, or you can hang on to it. Madly, it looks as though the government is following the latter course, and hopes to be able to handle the consequences.

UPDATE

Relevant to the above is Wat's resume of public debt history in the UK since World War II, showing how important it is NOT to get into debt, to fight inflation and control the finances.

A reason not to invest in pensions?

Argentina appears to be planning to seize private pension funds. Who is to say that, in extremis, it couldn't happen here? They're already taking tax on the dividends that were tax-free until 1997.

The Great Theft begins

I comment on The Great Depression of 2006:

Once inflation gets going it'll be Alice in Wonderland, I think. Real wages have to come down in relation to earnings in competitor countries, and house prices have to come down with respect to wages.

So whatever the nominal value, I think we in the West shall see a real depreciation in both houses and the stockmarket, plus a real decline in earnings relative to both consumer prices and foreign labour.

Am I wrong?

Do-it-yourself Dow prediction

I've battled Windows Vista to produce the above graph, which takes the Dow at the beginning of October each year from 1928 on and adjusts it for CPI.

The red dot is where we were on Friday; some are saying it could hit 6,000 or 4,000, also indicated (adjusted for CPI as at the end of September 2008).

The question is, how much of the fantastic gain of the past 20 years or so will be undone, and over what period? Where would you say we "ought" to be? (Not that Mr Market cares, obviously.)


Connect up the lows of the early 30s and the 70s and extend the line, and you get what? An implied 2,500 or so. Connect up the highs of 1929 and the 50s and extend the line, and you end up about where we were at the start of this month, nudging 11,000.

"Faites vos jeux, Mesdames et Messieurs." Too rich for me, I think.

UPDATE

Karl Denninger is now talking about the S&P 500 falling to 500 points, a level it first broke above in March 1995; this would mean a further c. 50% drop from its close on Friday.

And he gives his reasons (plausible to me) why the American economy is in worse shape to overcome the setback, than it was in the 1930s.

A note on abortion

We tried to watch a bit of "Sex and the City" last night, just to see why it's talked about. This episode was "Coulda, Woulda, Shoulda". The friends were, by turns, lying and boasting about their abortions. Apparently a baby wasn't in someone's "plan"; it's not as though these nitwits had any plans worth considering - for example, evidently they didn't plan to have a condom in their handbag. I've never seen a programme so louche and vapid. What can its makers think of us all?

I pass over the religious objections to abortion, and the arguments (to my mind, wholly specious and self-serving) about the humanity of the unborn. Do please spare me the hate mail.

But why is the political class so keen on it? And on the experimentation that continually encroaches on the right of human beings to live? (Don't tell me it will cure cancer and all the other things that make us mortal.)

Is it a financially-motivated plan to murder the poor, the deformed and the sick in their mother's wombs, so that they will not live to become benefit dependant and/or petty criminals? Is it about money? Has money become more real, more valid, than the people who earn and spend it?

Don't think it'll work anyway. A while back, I saw an interview with some serial shagger who didn't give a fig for any of his girlfriends, but there's one instinct he still retained. Remarking on his last, he said, "At least I got a kid out of her."

Abortion is a bloody and chaotic approach to sexuality and relationships. This study aims to correct some of the misunderstandings on the subject by both "conservative" and "liberals", and tends to support the greater use of contraception.

Will that work?

Are we headed for the Red Pond?

Recycled from my post of April 1st, 2008.

How do we get out of this?

I'm trying to understand the situation, and it's worrying that many experts freely admit they don't understand, either. Here is the simplified picture I'm building up:

Democratically-elected governments wanted their voters to get back the feelgood factor after the tech bubble burst and the stockmarket pretty much halved. So they undid the belts round the banks' waists and said, go eat.

The banks went at it like labradors at a full plate of Gravy Train, and got very fat on lending far too much money, with very few questions asked. Houses doubled in value and became the new stockmarket.

Then the bust, because whatever you treat like an investment will behave like one. Except houses are unlike shares: if you lose all your money on them you have nowhere to live, and this will make the losers very angry and vengeful. Also, housing is illiquid, which is bad news for banks, who can't put bricks and fridges in their vaults. And if the banks go bust their richer depositors (some of them Party contributors?) will get very upset, also the businesses that hold their balances in cash. This last is very important: a small fraction of bank accounts holds the majority of uninsured cash.

So now the "rescue". Billions - hundreds of billions - poured into the system. Who will pay the bill?

• Not the shareholders, since (in most cases) we didn't let the banks collapse.


• Not the majority of retail depositors - they have votes, and enough education to make trouble.


• Not the poor - they have nothing, and are more likely to vote for whoever keeps paying their benefits. That's if they vote at all, but non-voters will become very interested in democracy if their money runs out.


• Not the seriously rich - they have most of their personal wealth safely outside this thieving country and if annoyed, will not only move out but close businesses that employ many voters, which will dump smelly stuff on the heads of the Government and leave a big tax hole to boot.

I can see only two classes of juicy victims: taxpayers, and people who have saved up money.

Very few people understand that the combination of income tax plus National Insurance and employer's NI, is effectively a marginal tax rate on income of over 40% on all but the worst-paid. Raising direct taxation much more will only increase the incentive to give up work altogether, or to lay off employees. And there's only so much benefit to be gained by shipping-in zillions of low-paid foreign immigrants to replace them - that dodge is getting to be a public embarrassment, politically as well as economically.

Indirect taxation tends to be regressive, hitting the poorer worse (as a proportion of their income) - which implies a need to increase their benefits. Not impossible - there's a plan afoot for an extra levy on power bills, to finance heating costs for the poor. Doing it in this roundabout way preserves the illusion that we are a lower-tax economy, and appeals to the sneaky, surreptitious personality of the man currently running the country. There will be other subtle and economically suspect ways to raise tax, and Gordon Brown thought up many during his incumbency as Chancellor of the Exchequer - which, I think, has not yet ended.

And then there's the attack on savers. Means-testing is a good one, yielding a very high effective tax rate. Last time I looked, the combination of minimum income guarantee and savings credit for pensioners worked out to a 40% tax on poor pensioners who'd increased their pension income by voluntary savings.

Inflation is a fruity possibility. The government is going to have to borrow staggering amounts in coming years, to pay for the current bailout and future mass unemployment, so if the returns on its bonds can be lower than inflation it'll help the public finances a bit.

But who's got the money to sub our kleptomaniac Government? Maybe they won't bother to ask the people to trust them any more; maybe they'll just ask the Developing World to buy-in with their sovereign wealth funds. In other words, sell the country, piecemeal.

Isn't that what's happening? The younger generation will be taxed and worked half to death, the older ones will find they're not as wealthy as the illusory boom led them to believe, and meanwhile the New Pan-European Bureau-Aristocracy is selling us all to foreign powers and foreign businessmen, who do not have to answer to the electorate?

I must study the Highland Clearances, and the Flight of the Earls.