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.

How to spot a recession

Fire insurance claims. You'll recall that Ankh-Morpork burned down when the Tourist introduced an innkeeper to fire insurance. But it's not all fiction: it's odd how the last recession made textile warehouses explode into flame. This article relates recessions to car fires. But one can go too far: surely the recent recycling warehouse fire in New Zealand was entirely accidental. (UPDATE: and Findus' Crispy Pancake factory, too - htp: Henry North London)

Another factor is holidays. How many schools burn when they're empty?

We should therefore (a) all be rich and (b) never take a holiday, especially (not) with children.

ABC of inflation

Jesse lists postwar currency rots - not all of them in teeny-tiny banana republics. Argentina, Brazil, China - and loads of others.

Libertarianism, individualism - or survivalism?

If we insist that "we're all in the same boat", we shall all drown, because the one boat will sink. Those who hope to preserve civilization must accept that it is likely to sink into chaos in much of the world. The survival of some elements of civilization will require lifeboats that can be constructed only from communities, regions, perhaps nations, that are not now in overshoot. To preserve civilization at least some of these must choose to stay out of overshoot, establish independence in the production of food, energy, materials, and crucial manufactured goods, and defend their borders against the migrations that will tend to spread overshoot everywhere.

More here.

I've argued before now that we may need to move away from the "efficient" way to do things, towards the survivable way - click on the label below for some notes on what I call "Diversity, dispersion and disconnection."

History rhymes

The stock market is experiencing a snap-back rally, similar to what we saw in 1930, after the Crash of 1929.

You don't look that old.

Hickey: I wasn't around. They had a name for it, the "little bull market." It came about after the Federal Reserve slashed interest rates to 3.5% from 6%, and later to 1.5%...

More here.

Standing your ground

Libertarians enjoy challenging others' assumptions, and it's invigorating. But it's also time to challenge the assumptions of libertarians: freedom-lovers, make your case.

Here's a couple of shots between the redoubtable Devils' Kitchen and myself, from a couple of posts back. To me, this isn't about drugs, essentially; it's about whether we are, or can be, free.

Devil's Kitchen said...

Sackerson, "How is it reactionary to wish to protect young people from habits that impoverish and enslave them (and this is what black communities object to)? I think perhaps some libertarians haven't really defined what they mean by liberty."

I am all for proper drugs education; however, it is worth noting that I had a considerable amount of it, and it hasn't stopped me from taking just about every drug on the planet*.

And do you know what? I have never had to have any kind of hospital or other treatment; I have never lost a job; I have never even been late for work, after having taken drugs.

I have never assaulted anyone (most drugs, other than alcohol, put you in a frame of mind in which violence is the last thing you want to indulge in), nor hurt anyone, nor even caused a public nuisance whilst on drugs either.

I am not addicted to drugs either, despite heavy usage of a few of them (most are self-limiting, in that the effects begin to wane after a period heavy usage).

I have, on the other hand, laughed like a demon, make some excellent friends, danced, thrilled, been immersed in music in a way that's not possible sober, and had many fantastic times whilst on drugs.

You see, what I chose was to take the education that I was given, and the advice of friends, and my own experience, and indulge in a free and informed choice.

That is libertarianism, and it is still no business of yours what I put into my body, as long as I am willing to pay the consequences. And I am: that's why I am privately insured up to the hilt.

DK

Sackerson said...

DK: thanks for visiting, I'd have drawn a chalk circle if I'd known you were coming.

I agree that alcohol is pernicious and have argued that rather than attempt to ban it, we should reduce its availability a bit - currently you can get it from the supermarket, post office, petrol station etc. And it does make many people horribly aggressive, so there is an incentive for others to band together and act in this way.

I do understand that there are many functioning drug users (as indeed there are functioning alcoholics), and the question of product purity is certainly one of the arguments propounded for legalisation and regulation. Set against that is what might then happen. If the research referred to by Paddington above is correct, the tendency to addiction is genetic, so the principal factor is opportunity. If only 5% have the fatal flaw, and these products become as available as a six-pack of wife-beater from Tesco Express, we could go from thousands of addicts to millions.

So one issue is how do you weigh your wish for a certain kind of pleasure, against the awful suffering of some other people? Is this corner of libertarianism less a struggle to be free of oppression than it is callous selfishness?

And there is a deeper question of the founding assumptions of libertarians: are we really free and rational in any case? If half our behaviour is genetically determined, and much of the rest conditioned by social expectations, drug-taking is not the blow for liberty that it was represented to be from the 1960s onwards. You yourself say "...I chose was to take the education that I was given, and the advice of friends, and my own experience...", which makes me think that your "free and informed choice" was conditioned by the example and advice of your friends, and the opportunity to take part yourself. Indeed, this is how I started on cigarettes and it took me a decade to get back off them, so I have some idea how unfree we really are. You'll see from my next post that I query whether public schools such as Eton had a drug problem as early as the 1960s, and "as the twig is bent, so the tree will grow".

I think we are in an age where the Enlightenment philosophy is as under threat from geneticism (and determinism generally), as Creationism was when evolutionary theory was formulated. Sartre refused to accept Freud's theory of the unconscious, because it fatally undermined his own position on existentialist free will.

So I think libertarians should move from questions of law, taxation, social liberty etc to re-examine the ground they are standing on.

The public school connection

Gosh, people get fussed when you suggest that complete licence isn't a good idea. Where did that start? Apparently I'm a 95-year-old reactionary, and a 21-year-old "righteous" (same accuser).

In 1969, I went to Cambridge University for an interview, and met my friend who'd just gone up. In general conversation, he told me that a third of the undergraduates at his college were Old Etonians, and that they were (a) a tight clique and (b) well into cocaine parties. This, at a time when I'd only recently heard of "pot", which for me conjured up the mental image of a Marmite jar.

That's 40 years ago now, just about. Eton was criticised a few years ago for taking a tough line on drugs. Wrong issue: their critics should have asked them just how long the problem had existed. What was going on in the study and the common room? Just don't ask Dave.

Drugs: a rope to hang ourselves with

Unity at the Ministry of Truth offers 15,000 words to justify the legalisation of drugs, and is cheered on by Devil's Kitchen and (or am I mistaken?) by James at Nourishing Obscurity.

On the other hand, ex-Birmingham prison medic Theodore Dalrymple points out that no-one has ever died from coming off opiates; de-addiction can be achieved in a limited time; and it's criminals who turn to heroin, not heroin-users who turn to crime.

"Ah, but we only want the same treatment as smokers and drinkers," will be the cry. Well, seeing the damage that fags and booze did to my 20-years-too-early departed parents (and friends and acquaintances, and Looked After Children I've worked with), I'm inclined to agree; but not in the way the libertarians wish.

I'd be interested to know all the costs, expressed financially, of the harm done by "cigareets and whisky". I very much doubt that the tax covers the expense of the disbenefits. Here's an example, relating to alcohol: "For the UK, the external costs are likely to be in excess of the £20 billion figure and indeed taking loss of life into account and using more usual figures to value this loss could bring the total closer to £45 –50 billion for the UK as a whole. This is clearly way in excess of the revenue yield of £12 billion in 2000/01."

Instead of battening on the addictions of its citizens, the government could easily forego the £18 billion revenue on tobacco and alcohol - that's only the same cost as the ludicrously expensive and probably unnecessary NHS IT project, "Connecting for Health". Then, freed from this compromising financial interest, it could begin to tackle the problems seriously - not through the unimaginative approach of Prohibition, but through better education, and limiting the outlets of these harmful substances, as I have already suggested here.

As for other drugs, what is this campaign to encourage us to spend half our lives in a doze, daze or haze? Is there a plan to subvert society, to leave us in the land of the Lotus Eaters? Are we to sleep like the hare, while the Eastern tortoise wins the race? Is the opiate of the masses to be opiates?

B*lls to the Politics of Ecstasy; it's just an excuse for the spoiled end of the middle classes to indulge themselves further, leading (like the Pied Piper) hordes of less safety-netted proles into oblivion.

And why should libertarians support addictions, which imprison the will and distort reason?

The next wave of bailouts

It's not just the banks that are short of money. Many US States and local authorities are also suffering financial problems, and this is affecting the trade in their bonds, i.e. their borrowings on the money market. ("What are bonds, exactly?" - see here.)

Michael Panzner reports that municipal bonds ("munis") offer a better yield than US Treasury bonds, but the difference is still not enough to pay for the extra risk. Professional investors are short-selling "munis". i.e. betting that they will fall in price. A steep fall may indicate imminent bankruptcy, and some say this is on the way for many authorities, as Mish reported at the end of December.

So, what will happen when the US Government is seen to be buying everybody's bad debts?

People (even here in the UK, where we tend to wait patiently for our wise rulers to solve all) are beginning to worry about inflation, and are thinking about investing again. An article in Elliott Wave International warns us not to be panicked into parting with our cash, and reminds us:

... there are periods when inflation does erode the value of cash. I mean, look at the seven years leading up to the October 2007 peak in U.S. stocks: big gains in the stock indexes, while inflation was eroding cash. No way did cash do as well as stocks during that time.

Right?

Wrong. Cash outperformed stocks in the seven years leading up to the 2007 stock market high. That outperformance has only increased in the time since.

Since this is the view I took and communicated to clients in the 1990s, you will understand that I didn't make much money as a financial adviser. But it was certainly good advice, even if it was based on strongly-felt intuition rather than macroeconomic analysis.

Not that analysis guarantees results, in a world where the money game's rules are changed at will by politicians with a host of agendas that they don't share with us ordinary types. But my current guess is that the stockmarket will halve again in the next few years, when compared with the cost of living.

Conspiracy, not c*ck-up

Michael Hudson sees the current crisis as deliberately fomented, and intentionally anti-democratic (htp: Anon, on Nourishing Obscurity). The economic is now shading into the political:

What do you mean “failure”? Your perspective is from the bottom looking up. But the financial model has been a great success from the vantage point of the top of the economic pyramid looking down. The economy has polarized to the point where the wealthiest 10% now own 85% of the nation’s wealth. Never before have the bottom 90% been so highly indebted, so dependent on the wealthy. From their point of view, their power has exceeded that of any time in which economic statistics have been kept.

You have to realize that what they’re trying to do is to roll back the Enlightenment, roll back the moral philosophy and social values of classical political economy and its culmination in Progressive Era legislation, as well as the New Deal institutions. They’re not trying to make the economy more equal, and they’re not trying to share power. Their greed is (as Aristotle noted) infinite. So what you find to be a violation of traditional values is a re-assertion of pre-industrial, feudal values. The economy is being set back on the road to debt peonage. The Road to Serfdom is not government sponsorship of economic progress and rising living standards; it’s the dismantling of government, the dissolution of regulatory agencies, to create a new feudal-type elite.

Meanwhile, Karl Denninger makes his case for the perpetrators of the credit crunch to be penalized under the US laws relating to mail fraud.

Stock market could halve again

As you know, I've been doing my own extrapolations recently, based on the Dow since 1928, and the implication is that the low point could be as deep as c. 4,000 points, i.e. another 50% off where it stands today.

Now, "Mish" looks at revised earnings estimates for companies and relates them to stock prices, applying various price-earnings ratios. His conclusion is broadly the same.

As Michael Panzer predicted* (reviewed here in May 2007) there's been a flight to cash, and now (as he also predicted) it looks as though inflation is set to roar. This will disguise what's happening to stocks, but underneath it I see that decline. As in the '60s-'80s. it may take some years after the apparent turnaround before real values increase again.

Provided you trust the government to pay up when due, and to calculate inflation fairly, National Savings Index-Linked Savings Certificates (or US TIPS) may be a valuable weapon in your anti-inflation armoury.

*"He predicts first a credit squeeze, which makes cash king and ruins our credit-dependent lives and businesses wholesale; then hyperinflation, as the government prints money to keep the system from complete collapse.

In this scenario, at first, stocks, corporate bonds, property, commodities (including gold), even government bonds and savings certificates, all decline in value against hard cash as everybody scrambles to settle their own debt, collect what's owed to them and continue to pay the bills. Then the hyperinflation hits and everybody tries to offload their currency."

Snap

Denninger:

JAIL the fraudsters, including those in Congress, Treasury and on Wall Street. Bluntly - if we can find a predicate felony to nail you with in this mess, off you go.
REMOVE all of the overseers. This includes The Fed. Set up a new agency that is charged with enforcing all of the laws related to the financial system including The Federal Reserve Act, and empower them with subpoenas. Direct that they must act and operate "in the sunshine", with everything published on The Web. You do an evil thing, the public sees it. They try to hide it, the public sees it.
DEFAULT all the bad debt. Yes, this "booms" a lot of banks. Tough.
SET UP new banks. Take the remaining $350 billion and capitalize ten banks with $35 billion each. IPO them to the public. By law no officer, current or former, of an existing public bank may serve on these firm's boards. Now we've got the means to replace the credit creation the boomed banks can't do any more.

Uncanny. We agree pretty much exactly. Either he's an amateur, or I'm a professional.

The disenfranchised shareowner?

A startling picture of how share ownership has shrunk - pretty steadily, despite the Conservatives' pledge in the 1980s to widen it. Though I can't tell from this to what extent it's down to individuals' purchase of unit trusts, investment trusts and collective pension funds.

htp: Patrick Vessey

P.S. I Like the flowers. Man.

Where to turn?

People are starting to run around looking for a haven for wealth. German bond issues partially unsold; US bonds yielding virtually nothing yet at risk of default and dollar devaluation; the UK's economic fundamentals worse than America's (without the advantage of having the world's reserve currency); others saying the PIGS (Portugal, Greece, Italy, Spain) may crash out of the Euro, and that the Euro itself may not see out another ten years.

Marc Faber is predicting that precious metals will outperform equities and bonds; this commentator reckons silver will outperform gold.

Dear me.

Money Management

As reported in The Hightower Lowdown, the Tribune Company is going under. It was bought last year for $8.2 billion by real estate magnate Sam Zell. Because he didn't have enough cash for the deal, he colluded with the CEO to use the employees' pension fund as collateral for a loan. The crushing interest rates meant that he had to slash payroll to try and make ends meet.

Not only is the deal itself troubling, but I do not see how a company can be bought with borrowed money, and then be profitable enough to pay the loans and make more.

Perhaps the whole idea of large amounts of credit is itself the problem?

A lesson from China

Shagang, the Chinese steel company owned by self-made billionaire Shen Wenrong, is raising its prices, according to Steel Business Briefing (4 January 2009).

In a manufacturing recession, this is a counterintuitive move by the man who bought what was left of the German "Phoenix" steelworks and shipped it to the Yangtze, reasoning that a ready-made factory would not only get into production faster, but (at the scrap price he paid for it) without the debt burden that would ruin his competitors when (as he foresaw) the next downturn came.

The company may also push ahead with its plan to "go public" and expand its operations.

We could do with people like him, over here.

Time for another Jubilee

Karl Denninger elegantly demonstrates that compound interest on debt will always tend to blow up the economy, if the interest rate x is more than y (the average rate of economic growth) + z (the average rate of default).

Lenders will try to achieve this blessed state of affairs, but if they succeed, they will eventually end up owning everything, and the system will go "pop" long before that point. Which is why the Bible talks about a Jubilee year of total debt forgiveness, occurring every half-century.

Getting governments to take over all bad debts interferes with that reset, and so the "pop" must be louder when it finally, inevitably happens.

They could be right, darn it

The British Government claims it wants to do more for our health.

There's the new Change4Life campaign, encouraging us to eat less fat, take more exercise and live longer; and there are the perennial pushes to give up smoking and (after they've extended the licensing hours and vastly increased the number of licensed outlets) reduce alcohol consumption.

On the other hand, we have the prospect of the State pension system hitting the buffers, thanks to millions of coffin-dodgers; not to mention the cost of care homes and the bed-blocker burden on the National Health Service. And if we all became totally abstemious, we would cost the State its £10 billion annual revenue from tobacco, and £8 billion from alcohol. At first sight, if you wanted to destroy the State, you'd follow its advice - a novel strategy of subversion by civil obedience.

Hence, tabloid-style contrarianism! I haven't found the evidence, but I expect that staying healthy (and working longer) will more than pay for itself, by reducing the costs of chronic ill-health and increasing revenue from taxes on income.

Deflation, low interest rates and the poor old saver

The British Government claims it wants to do more for the saver. Actually, it's already done a lot: the Daily Telegraph reports that the Halifax estimates house prices fell by 16.2% in 2008. Putting it another way, someone holding cash in a shoebox has made 19.33% tax-free, measured in house price terms; or 32.22% gross for a 40% taxpayer.

And that's a point: the government doesn't tax you on the gains of deflation. But I'm sure they're keen to rectify that: normal inflation will be resumed as soon as possible.

MSM admits keeping shtum

Edmund Conway breaks journalistic ranks to admit he should've said something sooner.

A safe haven?

Just a thought.

Disaster deferred (and increased), not averted

Karl Denninger goes back to basics, explaining how the reflation is merely paying you-now from you-future's account. Knit faster, we're running out of wool.

Murky business

Brad Setser does a very interesting bit of detective work and concludes that much of the UK's holdings of US Treasury securities, are on behalf of China. He gives us a graph demonstrating that when the UK's official holding declines sharply (usually in June), China's suddenly rises.

Setser estimates that China owns $1.425 trillion in Treasuries and Agencies, which is equivalent to about 10% of US GDP. ("Treasuries" are debts directly owed by the US Government, "agencies" are debts of the US Government's organisations, as explained in this Federal Reserve handbook from 2004.)

He ends by calling for more transparency in British accounts of these holding - that would be most welcome all round, generally. Half our problems (and, I assume, opportunities for fatcat swindlers) stem from our not knowing the real position of the world's finances.

Pop

Perhaps the fall will be faster.

In this piece, Charles Biderman explains that the value of a stock is set by marginal purchases, which do not reflect what you'd get if you sold all the company's shares at the same time. He estimates that from 2003-2007 the world's equities increased in notional value by $25 trillion, on nothing more than $1.5 trillion cash, a bit of borrowing and mostly, illusion: "Market cap and money aren't necessarily related."

When the illusion goes pop, so do all the gains. First out gets the most.

htp: zgirl

Elliot, Kondratieff, or normal service resumed?

On 26th June I looked at the progress of the FTSE since around 1984 and thought that the next low would be no worse than c. 4,500. Here's what actually happened:



The lows were certainly lower, and we have only recently learned just how close we came to a banking collapse. The question now is, are we where we "should" be - following a trend set by the last 25 years - or are there longer cycles due to make hay of the pattern of the last quarter-century? Elliot wavers and Kondratieff followers say yes.

My guess is that, after the steep stockmarket falls and the horrid crisis apparently averted, there will be a bounce in the next 1-2 years, then a decline in real (inflation-adjusted) terms for maybe another 5 years after that. Your guess?

By the way, I'd also be interested to know your views on why the bankers and brokers have been allowed to Get Away With It. To me, it seems like a big fat moral hazard and unless there is some real squealy punishment for all this bad behaviour, I'd advise any bright, conscienceless youngster to become a banker.

Currently, my preferred fantasy solution is to bust all the overextended banks, leave the shareholders with zilch, sack the senior bank managers and ban them from being company directors for at least 5 years, halve all mortgages, and give the book of business to more prudent operators including well-run building societies. In my view, this was never ever going to happen, because the FSA, the BoE and the government are also implicated. So, not so much "too big to fail", but too well-connected to fail.

But there's a price to pay, anyway: it's now clearly Us and Them. Perhaps, since they are immeasurably more powerful, we should give up trying to rectify the world and merely ape their cynicism and corruption. Moralists will demur; and so this is truly an age when we can say, "Affairs are now soul size".

Am I the idiot, or are they?

For years, at least since the Reagan era, we in the US have heard the Republican Party mantra that the answer to growing the economy is to cut taxes for the richest, since they will 'invest in business'.

It never made sense to me, especially as I saw such a transfer of wealth to those same rich people, who spent their money on luxury imported goods. Incomes for the middle and lower class barely kept pace with inflation, even as industry became ever more efficient.

Today, thanks to posts here and elsewhere, I finally realized what is wrong with the claim above: buying stocks does not 'invest in a company', unless you are buying stock directly from that same company. All it does is put money in the pockets of the stockbrokers, while you have a piece of paper that must rise in value by profit plus fees, and find another sucker to buy it. The real estate market is no different.

Nonetheless, all of the experts that I have talked with over the years insisted that I simply didn't understand, implying that I was an idiot. Am I?

Fun with extrapolation

Since the 1990s, the stockmarket has been showing such freakish returns that many thought we were in a "new paradigm", whatever that means.

So I've looked at the Dow adjusted for CPI since late 1928, and calculated max/min lines on the basis of the highs in 1929 and 1966, and the lows in 1932 and 1982, to see just how unrepresentative the last decade has been. If we saw a return to these imaginary trends, the next Dow low could be less than half the present value. If, if, if...

Coincidentally, Jim Kunstler is predicting much the same:

By May of 2009, the stock markets will resume crashing with the ultimate destination of a Dow 4000 before the end of the year.

But I think it may take longer than that. The Elliott-wavers are looking for a final upwave first. Having said that, the last 10 years have been out of all comparison with the 70 years before.

Debt forgiveness, inflation and welching

Thus Jesse, discussing Michael Hodges' visionary "Grandfather Economic Report" and US indebtedness:

In a simple handwave estimate, one might say that the debt will have to be discounted by at least half. That includes inflation and selective defaults...

... something has got to give. The givers will most likely be all holders of US financial assets, responsible middle class savers, and a disproportionate share of foreign holders of US debt.

While the debtors hold the means of payment in dollars and the power to decide who gets paid, where do you think the most likely impact will be felt?

I give below the US Treasury's data on foreign holdings of their government securities as at October 2008, but I also reinterpret it in the light of each country's GDP, to show relative potential impact (please click on image to enlarge).

Mind you, even a complete repudiation would only take care of $3 trillion. Funny how not so long ago, $1 trillion seemed a high-end estimate of the damage, and now it's something like seven times that. And that still leaves a long haul to get to Hodges' $53 tn - equivalent to, what, one year's global GDP?

Ed Rates of the Caribbean

Vorsprung durch Technik

Is gold a hedge against inflation?

There are problems with using gold as an insurance against inflation.

1. Governments interfere with it - from making it the legal base of their currency, as in the US Constitution, to making it illegal to have any, as in the US in 1933; from guaranteeing the exchange rate of gold against the dollar (post WWII) to the Nixon Shock of 1971, when the gold window was closed.

2. Central banks claim to hold it, then (it is widely suspected) lend or sell it surreptitiously.

3. There is so little of it, that speculators can have a significant effect on the price, especially if (as appears to have happened in recent years), the speculation has been powered by vast amounts of borrowed money.

Below, I give three graphs, all comparing the price of gold per ounce in US dollars with inflation as measured by the Consumer Price Index (and that's another can of worms). It's clear that gold has a very volatile relationship with inflation and can spend a very long time above or below trend.

In the fourth graph I divide the Dow by the price of gold. It seems obvious that gold is a contrarian position for equity investors, rather than a simple hedge against inflation.

Currently, the Dow has come back to something like a normal ratio to gold, but past history suggests there will be an overshoot. And gold itself seems above trend over all three periods chosen; which suggests that both still have a way to fall in nominal terms, but the Dow more so.

(N.B. gold prices to the end of 1967 are annual averages, then monthly averages to the end of 1974, then the price is as on the first trading day of the month; all gold price figures from Kitco).

Nominal and real

Marc Faber's latest interviews on Bloomberg and CNBC show him estimating the recession to last "2, 5, 10 years". He also says that Asia is better placed to recover, because after the panic of 1998 they deleveraged, i.e. reduced borrowings.

So it's time for me to review my guesses about when the recovery will come for us. A key consideration is inflation, which Faber says is being stoked up for the long term by all the "stimulus" currently put in by panicky Western governments.

I've suggested that we might compare the present, not to the 1929-32 collapse, but the period 1966-1982, when inflation sometimes growled and sometimes roared. The result was that the nominal and inflation-adjusted low points are very far apart: the start-of-month level for the Dow hit bottom in September 1974, but adjusted for CPI, the real bottom was in July 1982.

So when the upturn comes, depends on your definition. I am still guessing that there will be a nominal recovery in 2010, but inflation will erode gains over time and the real turning point may not come until, say, 2016.

"Efficiency" vs. survival

"...we have to build back into the system Resiliency. This means that each region has to work to become largely energy, food and financially self sustaining and that each region needs to network into the others. In effect we shift from an efficient machine to a resilient network."

Robert Paterson, as quoted by London Banker.

Like I keep saying, it's about diversity, dispersion and disconnection - please click on the label below for my posts on this subject.

It's not about dinosaurs

Would you rather explain away the following, or share in it?

1. The death of William Blake, 12 August 1827:

“Just before he died His Countenance became fair. His eyes Brighten'd and he burst out Singing of the things he saw in Heaven”

2. The experience of St Thomas Aquinas, 6 December 1273:

LXXIX: The witness went on to recall that while brother Thomas was saying his Mass one morning, in the chapel of St. Nicholas at Naples, something happened which profoundly affected and altered him. After Mass he refused to write or dictate; indeed he put away his writing materials. He was in the third part of the Summa, at the questions on Penance. And brother Reginald, seeing that he was not writing, said to him: 'Father, are you going to give up this great work, undertaken for the glory of God and to enlighten the world?' But Thomas replied: 'Reginald, I cannot go on.' Then Reginald, who began to fear that much study might have affected his master's brain, urged and insisted that he should continue his writing; but Thomas only answered in the same way: 'Reginald, I cannot - because all that I have written seems to me so much straw.' Then Reginald, astonished that ... brother Thomas should go to see his sister, the countess of San Severino, whom he loved in all charity; and hastening there with great difficulty, when he arrived and the countess came out to meet him, he could scarcely speak. The countess, very much alarmed, said to Reginald: 'What has happened to brother Thomas? He seems quite dazed and hardly spoke to me!' And Reginald answered: 'He has been like this since about the feast of St. Nicholas - since when he has written nothing at all.' Then again brother Reginald began to beseech Thomas to tell him why he refused to write and why he was so stupefied; and after much of this urgent questioning and insisting, Thomas at last said to Reginald: 'Promise me, by the living God almighty and by your loyalty to our Order and by the love you bear to me, that you will never reveal, as long as I live, what I shall tell you.' Then he added: 'All that I have written seems to me like straw compared with what has now been revealed to me.'

Relativism

It's hard to measure what's going on, because currencies have turned out to be rulers made out of very stretchy elastic - especially for us Brits, recently.

In this article, Kurt Kasun reproduces a chart from Marc Faber's latest newsletter, showing an estimated drop of c. 50% on the world's stockmarkets - a loss of some $30 trillion.

So I've looked at the Dow and the FTSE, as priced in Euros, since the Euro appears to be more stable than either the dollar or the pound sterling (until we discover the supermassive black hole at the centre of the European financial galaxy, no doubt).

Fasten your seatbelts

I've relayed rumours of these things here earlier: a dollar crash and US bond default. Now a respected Japanese ratings agency is preparing us for the reality. (htp: Karl Denninger)

Democratic deficit

How come I can vote several times a week at Waitrose, but only once every five years or so in national elections (and with a result that's a foregone conclusion)?

Vengeance is mine

Following comments on the last post, I see the feeling that scores should be settled is spreading - see Denninger and a threatening post to which he's linked.

UPDATE

And Jim Kunstler, too.

Every little thing's gonna be all right

From what I read, some people are becoming survivalist: storing food, water, medicines, cash, even weapons.

Perhaps it's no coincidence that BBC is currently screening a remake of Terry Nation's gripping 1975 post-catastrophe series, "Survivors". But that series assumes that most people have died suddenly because of a virus, so the ecosystem has not been destroyed by desparate, starving victims. I don't think Survivors is the model we should use. If we are to survive, it'll be together, in our populous societies, because if society breaks down, you and I are unlikely to emerge as the last people standing. Lone heroes don't win; this is a fantasy.

I think spare supplies are a good idea, because there could be some disruption, which could affect the very young and elderly; so we need ways to keep warm, eat and have clean water in an emergency. And it's important to make your home secure against a rise in burglary, which is associated with economic downturns; and not to go out after dark without at least one or two companions. Weapons are another matter: "guns in the home are far more likely to be used against members of the household than against intruders."

Pace the doomsters, the UK and the USA will feed itself. We may end up eating more veg and less meat; and we may be using public transport instead of cars; personally, that would simply take me back to the 70s, when I was slimmer and fitter. Globally and locally, there is enough to feed the world, although not enough to overfeed it or encourage unproductive men to sire children.

Two aspects of the current crisis worry me:

1. The present method of organising resources may be replaced, not by one dreamed of by well-fed Western socialists, but by a cruel, remote, commanding elite as in North Korea or East Germany, who far from minimising scarcity will use it to get and maintain power.

2. The transition from this system to whatever replaces it, may be disorderly and involve suffering for many people.

This is why I think the underlying issue for us is to preserve and strengthen democracy, to increase the chances that both the journey and the journey's end are acceptable.

Why banks?

Banks require re-capitalisation. The capital is required to cover losses. Capital is also needed for assets returning onto their balance sheet (as the vehicles of the “shadow banking system” are unwound). This capital is required to restore bank balance sheets. Additional capital will be needed to support future growth. Availability of capital, high cost of new capital and dilution of earnings will impinge upon future performance.

Satyajit Das (htp: Jesse)

Nope. Banks need destroying, as does all this bank-created debt. The mistake is to try to keep things as they are. How did we come to buy houses "on tick", then cars, and now our clothes and groceries? Why is there any lending for consumption, seeing how it only means reduced future consumption? Why should banks be kept going, requiring a significant proportion of our earnings, so that wages have to be high for us to live on what's left, making us uncompetitive with the developing world?

I am reminded of the pitiless response of the Comte d'Argenson to the satirist, Desfontaines:

Desfontaines: I must live.
D'Argenson : I do not see the necessity.

The lesser of two weevils

In an apocalyptic - but carefully-reasoned - post, Karl Denninger says that when the deficit expansion stops, US government spending will have to be cut by 50 - 60%, unless there is to be a "general default" on debts.

I have no idea what a general default would look like, but in a closely-interwoven and distant-from-nature modern industrial society I can only fear it might prove utterly destructive. So we're back to contemplating the lesser, but still vast disaster.

I also have no idea how much worse it might be in the UK.

Someone else please read this unberobed OT prophet and tell me where he's wrong.

PS

Jesse:

While the Obama Administration cannot take a 'weak dollar' policy it is the only practical way to correct the imbalances brought about by the last 20 years of systemic manipulation. It is either that, or the selective default on sovereign debt, most likely through conflict, a hot or cold war.

Christmas viewing

Hilarious new animation in which the daring but accident-prone duo attempt to undo the damage caused by an idiot who sold off half of Britain's gold and let the bankers blow up the economy. From the makers of "The Wrong Assets" and the full-length "The Curse Of The Weird Scotsman".

How will the future look?

Thanks to the glacial catchup by the mainstream media, the public is finally worrying about economic depression, and consoling itself with the thought that we've messed it up for everyone, so at least the Chinese won't prosper and come over here as tourists, overdressed, overpaid and taking too many pictures for their digital photoframes at home.

Short-sighted, I think. On the CapitalistsatWork blog, I comment:

I think we should turn our eyes, not on the Depression, but how things will look afterwards. The East will generate demand as it aspires to the lifestyle we used to enjoy, and meantime we have been allowing them to transfer the means of production to their co-prosperity sphere. So the Chinese factories will re-open, perhaps after some of the light industry has relocated to Thailand, the poorer parts of India, and other neighbouring regions?

And I shouldn't discount India as potentially the real industrial powerhouse of the 21st Century, while China scrabbles about annexing territory for extra lebensraum, water and wood.

I think, by the way, that econinvestguru Marc Faber took up residence in Chiang Mai, northern Thailand, not to pursue a monastic existence (hardly characteristic of the formerly ponytailed playboy), but because he's close to "where it's at", or even better (and typical of this farsighted man), where it will be.

Europe is keeping China (and America) going

A very interesting piece by Brad Setser, where he shows that the EU's currency strength and growing imports from China have offset the levelling in demand from America. His bottom line is that China's making money from us and lending it to the US.

Default

I relayed Jesse's comments on Ecuador's moves to default here on November 28th, and now it's happened. Any big ones coming, do you think?

The seventh seal

Denninger's question:

With the $7 trillion dollars we have committed we could have literally given every homeowner with a mortgage a fifty percent reduction in the principal outstanding.

This would have instantaneously stopped all of the foreclosures by putting all (essentially) homes into positive equity - overnight!

So why wasn't this done?

His answer: the government is trying to cover the staggering bets of the derivatives market. With borrowed money. The Treasury has swallowed the grenade and put its fingers in its ears.

This is the fourth horseman of the financial apocalypse that Michael Panzner predicted, as summarized here on Bearwatch on May 10, 2007.

UPDATE: Jesse comments on another fresh sum - tens of billions - needed to cover AIG's losses. As he says, there is an air of expectancy; but also of unreality, like the announcement of a major war.

Inappropriate gloat

I came to the US fresh out of university, and went to graduate school. Consequently, I was mostly oblivious to the details of 'real life', like taxes, bills and repairs.

Working my way into the system, it all seemed that it couldn't possibly work: too many people with no discernible talent were earning too much, and prices were lower than I thought they should be, particularly fuel prices. I thought the problem was that I wasn't intelligent enough, and just didn't understand.

The one personal satisfaction that I can get from the current mess is that I was right - it doesn't make sense.

WeaselWordWatch update: "Quantitative Easing"

Okay, it's a phrase, not a word. But 4,094 references on Google News in the last 24 hours. And Mish is at it, too, though of course in an ironic way.

On yer bike

Thus Denninger:

Bernanke clearly thinks ... that he can "restart borrowing." ... This is causing the dollar to get slammed - at least for a little while... These sorts of actions ignite wars. Choose between a trade war (about 75% chance) and a shooting war (the other 25%).

The dollar weakness, by the way, won't last. Either sort of war puts every other nation in the world in worse shape than us, which over time leads to the same place - "we're screwed but they're screwed worse."

He's not wrong. Total US debt, foreign and domestic, has recently been calculated as 392% of GDP; but alas for us Brits, UK external (foreign) debt alone is running at 400%. I just don't know what a like-for-like comparison would show.

The TV news here tried to put a merry gloss on sterling's collapse, reporting how it helps exporters like a bicycle firm they visited. A bit desperate: the start of the 'Oxford Automobile and Cycle Agency’, this isn't. You know you're in trouble when they tell you to "smile, smile, smile."

Unstoppable

From an engineering standpoint, I think that this crisis was unavoidable. Once we de-coupled the concept of wealth from production, we generated a positive-feedback loop. The profits from manipulating money were greater than could be made in manufacturing, and so even more money flowed in.

I cannot help but think of Douglas Adams' 'Shoe Event Horizon', where eventually every shop becomes a shoe shop.

The answer is blowing in the wind

I said on Friday, "I think 2008 will be seen in retrospect as the year that the global balance of power underwent a sudden tectonic shift, from West to East." I forgot to add, "...and from North to South, too"; but Michael Panzner is not alone in seeing America's exclusion from the Brazilian summit as a straw in the wind.

In the news

Conservative leader David Cameron is making noises about prosecuting crooked bankers. Nice to see he's getting with my program.

Also in the Daily Mail, Alex Brummer says Madoff has queered the pitch for hedge funds generally. Damn: I had started to look at how to set one up, using links supplied by Jim from San Marcos. If I'd started a couple of years ago, I'd have got everyone into cash and made a packet for them and myself. 2 and 20, 2 and 20.

Odds on the bankers and hedgies Getting Away With It? Pretty fair, I'd have thought - especially when you bear in mind (as Denninger points out - and Jesse, too) all the others who could be implicated. To quote Oscar Wilde: "The good ended happily, and the bad unhappily. That is what fiction means."

On Competitiveness

Consider a group of players in a game of chance. If all conditions are equal, the long-term results will be randomly distributed, with some big winners, and some big losers.

Change the conditions so that some players have an advantage, and eventually those players will be the only winners. How long this takes depends on the size of the advantage.

This is the basis of the mutation and natural selection portion of evolution theory.

For a generation after World War II, the US had a huge advantage: capital, undamaged manufacturing capacity, cheap energy, and most of the scientists and engineers. Thus, we 'won' the economic game, and it was attributed to Americans being 'better'.

We failed to notice that many other nations were catching up in education and technology. That the government and industry chose to dis-invest in research in the 1980's just accelerated the process.

As the playing field is now level (or even tipped against us), we should carefully consider how to gain back that advantage. We have done so before in the short term: arming in World War II, the Manhattan Project, the Space Race.

Do we have the will to do this when not faced with war, but with long-term economic decline?

The elephant in the room?

In 'Great Expectations', Charles Dickens wrote: "Annual income 20 pounds, annual expenses twenty pounds and sixpence, result misery" (or words to that effect).

In the 1960's, the US undertook an orgy of spending on the Great Society and the Cold War (including the Vietnam War and Space Race). At the same time, the typical middle-class American lived an extravagant lifestyle, relatively speaking. This was all fueled by cheap American oil, gas and coal.

By 1973, we had used so much that OPEC had us over a barrel, and by 1975 we had our first large trade deficits, which have grown every year.

Since about 1980, not much has come out of our industry that the rest of the world seems to want to buy.

Did we go broke 30 years ago, and are just now noticing it?

There's more truth in humour ...

Today's 'Non Sequitur' cartoon strip:

C.E.O. talking in his palatial office talking to a man with a wrench in his hand:

"We crunched the numbers over and over on where we could cut back, and it kept coming down to whatever it is you guys do on the assembly line..."

In a nutshell

London Banker sums up what went wrong over the past 25 years, in 1,610 words. It's a reprint from May, but he's right to show it again: it pretty much says it all.

Those who are old enough may remember having to do a precis in English. This is a very valuable, rational, intellectual exercise, which perhaps is one of the reasons it was ditched in New Teaching.

Do you think you could distil LB's observations in, say, 600 words?