Massive inequality

See this series of slides for some eye-openers about the distribution of income and wealth, e.g.:

1. In the US, the top 10% have 81.5% of all the wealth, and 90.4% of financial wealth such as stocks, bonds and mutual funds.
2. Of OECD countries, the UK has the 3rd most unequal income distribution, after the US and (can we perhaps ignore it?) Luxembourg.

The first point may be significant for market speculators, since the top 10% are so wealthy that they are unlikely to be forced into dumping investments simply to make ends meet. But one wonders what they might be doing on the quiet - moving into land and commodities? That's if they anticipate inflation. On the other hand, Charles Hugh Smith thinks they'll be happy to see a deflationary economy as long as they hold Treasury bonds.

It's getting very "us and Them" these days, rather worrying if you're not able to sit it out like Cicero on his country estate at Arpinum, 70 miles from Rome. But even he could not hide forever, and Antony's thug Herennius found him at Formiae.

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Alas, we don't know

The system has become so distorted - some might say crooked, which includes the connotation of cheating - that economists are turning from their financial models to speculate about the future actions of governments.

Even Steve Keen, having come up with a model that shows the economic machine can shake itself to bits, admits that the State can throw a spanner into it first: "There’s a lot more work to do before the model is complete–notably including the impact of a goverment sector that can add its own spending power to a depressed economy."

Now John Mauldin, on his way to the annual Agora conference in Vancouver, notes that even among the pessimists, opinion is divided as to the severity of the economic consequences, and especially as to turning-points.

And as the sovereign debt crisis rolls on, differences between countries get to look more interesting. Mauldin considers the relationship between cyclical debt (owing to periodic upturns and downturns in the economy) and structural debt - the type that demands long-term cutbacks in spending. Hearteningly for any Italian readers, their nation doesn't look too bad, especially when (as he points out) it will be so easy to save money, for example on official Maseratis.

But after looking at the US, just look at the state of the UK. I fear that our new and amicable coalition government is asking us to clap hands to save Tinkerbell.


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Blow you, Jack, I'm all right

One of the 20,000 professional economists who didn't expect the Global Financial Crisis gives thanks for other people's unemployment. To quote Mel Brooks: "I cut my finger. That's tragedy. A man walks into an open sewer and dies. That's comedy."

This leather-armchair contemplation of other people's difficulties in abstract, aggregated terms tempts me into unfair comparisons with Ebenezer Scrooge, Dives and Lazarus, or the savage philosopher-tyrants of the East in the twentieth century. But it would be more charitable of me to ascribe his views to limited imagination, rather than hard-heartedness. Let him be, in his Flint ivory tower (or would that be the pleasanter purlieus of Washington?), while the State of Michigan slides into insolvency . Economics is only a dismal science for others.

More on drugs

I break the silence again, because yet again the high-ups are trying to get more drugs legalised; in this case it's the Chairman of the Bar Council. I've taken on the redoubtable (and courteous) Charon QC and expect to be hit over the head repeatedly by third-party Bolly-swiggers, but fear not the struggle naught availeth. I give below my objections, perhaps Devil's Kitchen will reappear and deny yet again that he's hooked.

M’learned friend has opened a can of worms. Those who would welcome liberalisation should first read, in a fair-minded way, the experiences and views of the former Birmingham prison doctor Anthony Daniels, aka the Spectator’s “Theodore Dalrymple.” (See his 1997 City Journal article here: http://www.city-journal.org/html/7_2_a1.html)

Readers may also wish to consider the different reasons for taking drugs. Some in the more successful and privileged levels of society may take them as a pleasure trip to stave off boredom, or to alleviate stress and mental overstimulation as they continue to pursue wealth and fame. A proportion will be caught in the toils of addiction, but their network of friends and their financial resources often (though not always) help cut them free.

Lower down, drugs licit and otherwise are a form of medication against unrelenting misery, even if that misery is carpeted and centrally heated. And they are a trap, just as much as the benefits system. They destroy initiative and ambition. This gestalt of hopeless idleness and fuddled fecklessness is then passed on to another generation, with the addition of negligent and abusive parenting. My teaching assistant also works in the evenings at a chemist, and told me yesterday how she was struck that practically everyone in Quinton (west Birmingham) was on a drug she didn’t recognise, so she Googled it up and discovered it was an antidepressant.

When I was at school, the futurologist’s choice was Huxley’s Brave New World or Orwell’s 1984. We now have a miserable coalition of both. Speaking of coalitions, there is a most unfortunate agreement between a government wanting to save money and so eyeing the allegedly unwinnable war on drugs, and a social elite (including members of the government) who grew up with drugs-for-fun and don’t see why anybody should be allowed to prevent one doing as one wishes. This glosses over the obligation to set an example to the less fortunate and to succour them. Much of the libertarian philosophy I read today seems to be a clever gloss on callous selfishness.

[Charon then directs me to a podcast interview with an American judge who also thinks the war is lost.]

OK, have now skimmed the transcript (for which, thanks). Now let’s have a look at some of these worms wriggling out of the can:

Racism: yes, a lot of non-whites in jail. Connect that to justice being like the Ritz. Also (maybe) more usage at the desperate end, and less ability to stay out of sight of the cops – no haciendas to fall apart on. And please consider what I have heard black colleagues in the looked after child system say more than once: the whites permit the plague of drugs, because it keeps the blacks down.

Judge Kane compares the “unwinnable” war on drugs to Prohibition. I understand that by and large, Prohibition worked. It was repealed after the Great Crash because the government needed a way to raise more revenue.

Legalisation means pure drugs, clean needles – point taken, so to speak. But I expect customers also got clean straw during the Gin Epidemic. “If it is available like an aspirin, then there is no market for it.” May I ‘umbly draw His Honor’s attention to the aforesaid epidemic.

Prisons are overcrowded: build more. This freeing of offenders for reasons of accommodation is part of the feedback system that tells the offender that the law has no teeth and will only gum you gently after the 150th offence. A firm – and class-blind – approach would send the message very quickly. I read not so long ago about a magistrate in a Scottish court (in the 60s?) who warned publicly that carrying a knife would be punished as severely as possible; the next offender got 10 years; knife crime ceased abruptly, immediately and for the remainder of the magistrate’s time on the Bench.

Prisons are expensive: not so much as crime. Cost of a year at Her Majesty’s pleasure £30k, savings in costs of crime £300k I have read recently. Perhaps a proportion of insurance premiums should be hypothecated to the prison system so the connexion might be made more explicit.

Legalisation means “no need to rob”. So how come liquor store robberies?

The war on drugs is unwinnable in the same sense that the war on murder, robbery etc are unwinnable. What you don’t see in advance is what will happen when the restraints are off; but we have historical precedent to teach us. The judge speaks of a steady 1.7% addiction rate to heroin and opium, but forgets (a) that there are now many other drugs available and (b) that in a far wealthier and more leisured society legalisation and ready supply could spread use and multiply addicts much, much faster.

Doubtless I’ll be told how pernicious tobacco and alcohol are; I agree, and I am also in favour of increasing restriction on both. The former shortened both my parent’s lives by some 20 years, I believe; and I recall when the latter was available from pub, offies and vintners, but not from supermarkets, garages, post offices etc and often at all hours. I recall one of my looked after children went home to celebrate his father’s release from prison; the poor sap of an adult drank everything in the house and then went out and got caught stealing a bottle of vodka from his local shop. Back in the jug agane.

I think the real driver in all this handwringing declamation of failure is the reluctance of the authorities to prosecute famous people as they will in cases of tax evasion.

Now, Charon will you read Daniels for me?

The case continues.

S&P dividend yield suggests 50% fall appropriate

A good metric to determine the valuation of stocks is the dividend yield. The current dividend yield on the S&P is a paltry 2.1%. The historical average dividend yield is a much greater 4.36%. The lowest dividend yield was 1.11%, which was reached in August of 2000. The highest dividend yield was 13. 84%, this was achieved in June 1932. Therefore, on a dividend yield basis, the market is currently significantly overpriced.

Michael Pento

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

The real villains of the Global Financial Crisis: teachers

Headline radio news today: a London primary headteacher earned £276k. Imagine! Actually, read the news item linked above to find out that it wasn't just for being a headteacher; then decide whether you think he's earned his corn.

Of course, it's still only about two-thirds of what Fred Goodwin, slayer of the Royal Bank of Scotland, gets as a pension (early, to boot); and Fred would have had twice that if he'd got his way.

And it's not a patch on the bonuses at Goldman Sachs and other doers of "God's work".

Who sets the news agenda?

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Will the workers of the world end up on the same wages?

Yes, unless the US (and the PC-obsessed UK) take real, hard-fact-and-logic education and R&D seriously again:

Question. Why do workers in developing nations earn a fraction of the wages American workers earn? While protective and regulatory factors such as trade barriers, unionization, and differences in labor laws have some effect, the main reason is fairly simple. U.S. workers are, on average, more productive than their counterparts in developing countries. While the gap between U.S. and foreign wages can make open trade seem very risky, it is simply not true that opening trade with developing nations must result in a convergence of wages. The large difference in relative wages is in fact a competitive outcome when there are large differences in worker productivity across countries.

The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.

John Hussman (who says in the same piece that the US stockmarket is 40% overvalued - get ready for a correction).

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.