Why Can't Politicians Be More Like Scientists?

In my last post, I wrote about how scientific economists (hopefully not a contradiction in terms) go about studying an issue, and I defined the four principal elements of the object of their study. These four elements are:

1. Who-Does, or who is the actor in a given process ["Who"];

2. What-Does, or what that person does ["Action"];

3. Why-Does, or the reasons for his choice of action ["Why"]; and

4. The Range-of-Results, or the various effects of his individual and/or their collective choice(s) on both the object of their Action and the surrounding elements that might be affected, to the most accurate degree that a scientist is able to observe and describe these effects, which degree may be limited, and which description is eternally subject to revision ["Results."]

I also mentioned a fifth element that certain unscientific persons, such as environmental groups, like to include in their equations:

5. Should Do, or a prescribed Action an unscientific person thinks Who should choose, i.e. a kind of moral-straightjacket set of instructions for Who's proper Actions, which disrespectful instructions and unscientifically-determined Actions may disregard the accurate measurement of Results [we'll call this "Should"].

I am now introducing a sixth element that I will call:

6. Perverse-Partisan-Persuasion, or the efforts of said unscientific persons, most often activists or politicians, and most often for reasons tied into their own personal ambition, to convince Who that he Should choose a particular Action, in spite of his own potentially preexisting Why (which must then be overridden), and in complete defiance of the deleterious Results the superimposed Action will obtain ["P-P-P"].


[Thanks to buyanexperience.co.uk for the photo.]

An example of this:

Linda Chavez has a nice piece over at Townhall on the Democrats' intention to shoot down the President's idea of allowing tax breaks to encourage people to obtain health care coverage.

For reasons known only to themselves but that we can conjecture, the Democrats doing the shooting have either not studied the clauses of the President's proposal, or they are knowingly disregarding the content of those clauses.

The proposal simply restates the employer-paid health coverage premium as income for the employee, which it already is; then it gives all employees a set tax break for an amount probably higher than this (employer-paid) cost for the purchase of health insurance.

This is pretty much quid pro quo; and in every case the tax break either will result in no change at all to the employee's tax situation, or it will give the employee an added tax break that he didn't have before. If the employee is rich, he will benefit; but if he is not, he will also benefit. If the employee has no insurance, he will now be able to buy some at government expense. If the employee is poor -- oh that's right, in California he is already insured through Medical, and in other states the same applies, so even if he doesn't buy insurance (and doesn't get the tax break), he will still be insured.

In short, the President's plan would offer a tax break for every family, whether or not they are insured, and it most likely will encourage employees to purchase insurance. Ms. Chavez also goes into some other positive effects this incentive might have on the health insurance market. (She also eliminates some of the bad effects it might have, but that's not my point here.)

Although everyone may not end up buying health insurance, enough people probably will to make a difference in the market dynamics of the health care industry, and this would have a good effect on price competition for coverage. Incentives matter in economics, and even though we can't be sure this proposal will get everyone into a health care policy, we can assume that more people will have insurance than do now. This increased health market participation is also an important goal of the plan, and after all, it is useless to strive for perfection through this or any proposal.

To come back to my main point, we must conclude that Democrats against this proposal either (1) do not understand it (even though it is their job to study and understand such things); (2) they believe in some government-sponsored single-payor panacea as a better solution; or (3) they refuse to acknowledge that they do understand it. Whatever the precondition, they bring on the P-P-P (Perverse Partisan Persuasion) (otherwise known as Grandstanding) and seize this occasion to chant the hackneyed mantra about Bush's motive to "give tax breaks to people who don't need them, while continuing to deny essential health care to the most vulnerable."

Scientists and thoughtful people try to focus on Who, What, Why, and Results and learn to recognize and sidestep Should and P-P-P.

Rosia Montana: The Uneconomically Oriented and Their Misplaced Sentimentalism

Modern economics is all about the market process, dissecting it into four co-essential, interdependent, and interactive parts that I will name (1) Who-Does, (2) What-Does, (3) Why-Does, and (4) Range-of-Results. Economists study all four parts of market transactions, and they realize that no one part can exist without the other three.

As an illustration, take this case study. A few days ago, in Scotland I think it was, Global Warming Glitterati showed up in SUVs and other gas guzzlers to listen to Al Gore speak about his movie "An Inconvenient Truth."


[Thanks to oilempire.us for the photo (not necessarily the Glitterati's car.)]

Numbers 1 and 2 are easy. Who-Does in this case is the buyer and user of each vehicle. Number 2, What-Does, is the act of purchasing and using. Number 3, Why-Does, and Number 4, Results, are where we find some interesting data.

As for No. 3, buyers and users of SUVs just seem to love this type of car, and logic would have us believe that either (a) they do not believe that the SUV causes dangerous global warming, or (b) there are other factors that override their "better" judgment. Our Glitterati most likely fit into (b), somehow exempting themselves from their own rhetoric.

With regard to No. 4, the full Range-of-Results: If you take a simple look into the climate debate, you will see that the jury is not yet in on whether or not SUVs contribute in any way to global warming -- indeed, whether global warming exists, whether indeed it is caused by us, or whether it can be or needs to be "cured." Cool-headed free-market economists realize this, even if our Glitterati do not.

So what is going on here? The answer is fairly simple. The problem with most environmentalists and their cohorts, the politicians and other Glitterati, is that they are hypocritical, confusing a non-existent fifth element that I will call No. 5, Should-Do, with the reality of No. 3, Why-Does, and No. 4, Results. (And they also live by the catch phrase "Do as I say and not as I do.")

This is a common error that all moralists make. A scientist, however, realizes he must not take No. 5 (Should-Do) into account, because No. 5 is irrelevant when looking at economic reality.

In other words, we must make no moral judgment about other people's ethics, because each of us has his own code, and each is perfectly capable of making up his own mind about his moral choices, especially in a free society where uncensored information is everywhere, and in a representative democracy such as ours where individual liberty is king.

Hot-and-bothered environmentalists and their friends the politicians, on the other hand, not only make that judgment about and for us, but they do so while permitting themselves to transgress, acting like a bunch of Jim Bakker evangelists wailing about the dangers of being sent to hell.

Worse: They go a step further. They not only try to scare us; they try to prevent us from making up our own mind, professing to know better what is good for us than we do ourselves, and all the while they are committing the very crime they accuse us of committing.

I'm leading up to something, of course. It is the dispute now taking place in Rosia Montana, Romania, concerning gold mining.

Greenpeace and other activists would like to censor a film about this issue. Yes, I said "censor." They would like to prohibit the showing of a film. Are they against freedom of speech?

I admit the gold mining industry does not have a stellar reputation when it comes to human rights and human decency; but times they are a changin'. As a group, they have come a long way in spite of the fact that we could certainly still find a few examples of problem spots.

One of the more progressive and responsible companies is Gabriel Resources Mining of Canada, but this has not enabled them to remain outside Greenpeace's line of fire.

Greenpeace is an example of an environmental organization that thinks only of Should-Do No. 5, and never the other four, Who-Does, What-Does, Why-Does, and Range-of-Results. They're only concerned with No. 5 and their own self-righteous evangelism.

They and other environmental groups have focused in on the "plight" of Rosia Montana's rural peasants, whose village is sitting on gold and whose wonderful lifestyle will be "ruined" by Gabriel Resources. The truth is that the people of Rosia drive around in horse carriages, they have outhouses instead of bathrooms, and some of the citizens of this village crave the better way of life that mining will bring to them. In fact, it appears that the majority of the village people WANT the miners to come into town and offer them jobs.

And I ask you: What right have we, the Should-Do Police, to say that they can't? What right does anyone have to stop the showing of a film on the subject? Where is Michael Moore when you need him?

There are two sides to every story, and this one is no exception. You know what the greenies want and think. Do you know -- do you care -- about the other side of the story? Well, you should; and here is the place to find it: The Moving Picture Institute, their blog, and their film "Mine Your Own Business" (see the trailer.)

Greenpeace attacks them because their work was funded by Gabriel Resources; and yet Greenpeace is also funded by millionaires and corporations. No one can live without financial resources, and backer money doesn't grow on trees, whether it be for on-the-ground research by partial or impartial scientists, or for self-serving activists with their travel expenses and their aesthete morality-policing.

This independent group of filmmakers has gone over to Romania to get the other side of the story themselves, on the ground, straight from the people of Rosia in person. Who cares who paid for the trip? The evidence is the evidence.

Look at that other side and make up your mind for yourself. Don't let your No. 5 Should-Do Fascist heart get the better of you, before your Cool-Headed, Free-Thinking, Fair-Minded head has had a chance to look at Nos. 1, 2, 3, and 4.

Is Hillary Taking Lessons from Segolene?

Notice Hillary all in white recently? Notice that she's addressing questions to the public about their opinion regarding various issues?


[Thanks to Kathy Willens, Associated Press, for this photo.]

Wonder where she got this new look and style? She reminds me eerily of Segolene Royal, the French Socialist candidate for President in next year's election. (Anecdote: Hillary snubbed Segolene's request for a meeting recently.)

Segolene used to look a little frumpy (see before and after photos on this post), but has found a style that brings her into the big-time. Hmm, yes. Guess that's part of the presidential marketing-grooming.

Segolene's catch-words are "militant" (a socialist cousin of the communist "comrade," that even the French "right wing" flings around with abandon) and "democratie participative" (participative democracy.) Because she doesn't have much of a platform of her own, she likes to tell her future constituents that she will fish out there in the Great Blue Sea to see if anything comes up in the net that might be acceptable to the majority of them. Heaven forbid that she should appear to impose anything other than the people's will upon the public.

"Paticipative democracy" she defines as "the realistic possibility for citizens to have a direct influence on the orientation of government choices, including financial ones. Whatever form this might take -- participatory budgets, consensus conferences like they have in Scandinavia, citizen juries, referendums -- it recognizes the citizens' legitimate expertise : not just their usual knowledge of the decisions that concern them, but a real power to influence those decisions." (See original here.)

The only problem is that this is all campaign-speak. it is a facade. French socialists have no more intention of installing a participative democracy like the one in Switzerland than of sending Bush a bouquet of roses. In Switzerland, each canton sends a representative to the presidential council, and each one of them could potentially become the rotating president for a while. The Swiss president can walk around the streets of Bern without a bodyguard. Switzerland's referendum system is just what it says: Its citizens are requested to vote on various propositions on a regular basis. I will eat Bush's bouquet if France installs this kind of participative democracy.

But it sounds good. Therefore, need I say that I am not surprised to see that Hillary likes Segolene's style. (Takes one to like one -- socialist, that is. If you're wondering why I dislike socialism, read these posts.) In great Segolene style, Hillary has posed a question "to the people" in Yahoo recently:

"What do you think we should do to improve health care in America?"

If she is searching for the solution to the health care problem on Yahoo, she must indeed be looking for justification to bring Big Government into the issue just as she tried and failed to do during her husband's presidency. I'm willing to bet that a lot of people believe the one-payer system is the answer to our problems; but hopefully, the answer will not come from government, ever the proverbial elephant in the china shop. (See this post that will direct you to the best source of information on the health care issue.)

Remember: Big Government is anathema to Good Economics. Anyone who says otherwise is an ambitious scoundrel up to no good, someone who has sold his soul to the devil, usually for his own personal advancement.

I will keep my eyes and ears open for further signs of Hillary-Segolene copy-catting. (Meow.)

Another Big Mistake

This is not a political blog, it's an economics blog; but very often, the two are tied closely together. The reason for this is that the Democrats believe, and the Republicans act as though they believe, in Bigger Government, i.e. that federal legislation can solve problems. In reality, government intervention only makes things worse. Instead of leaving markets free to do their competitive thing, governments meddle, create quasi-monopolies, and screw things up.

Example: Energy.


[Thanks to Jason Reed and Reuters for the photo.]

Before the 2006 elections, the Democrats bragged about their intention to penalize Big Oil, and now they are beginning to act upon their word. Max Schulz over at TCS gives the perfect argument against their actions.

In sum, he says that the Dems want to (1) take away the Bush "tax breaks" from the big oil companies; (2) give subsidies to alternative fuel research; (3) "restructure the royalty payment system for leases in the Gulf of Mexico that they say will fleece taxpayers of more than $10 billion"; and (4) "repeal a manufacturing tax deduction ... for oil and natural gas companies...."

The only problems are (1) there were no Bush "tax breaks" for big oil companies, because the breaks in question were for the smaller oil companies and were encouraged and put in place by a Democrat named Mary Landreiu for Louisiana's smaller independent producers; (2) alternative fuels like corn and wind power only survive because of government subsidy and are therefore losers, and they produce "just a fraction of one percent of the energy we use" (never mind the fact that all this undeserved attention has just tripled the price of corn, the staple of the diet of much of the world's poor); (3) the inequities in the Gulf of Mexico leases were caused by officials of the Clinton administration who "failed to include the escape clause language" that should have been an integral part of each lease so as to "eliminat[e] the waiver if the price of oil climbs above $34 per barrel"; and (4) taxes are always passed along to consumers who pay higher prices and are therefore the ultimate victims.

Politicians profit from *not* learning economics. If they can profess ignorance, follow their noses, sniff the winds for their personal benefit and blame others for the damages they cause, they win at the taxpayers' expense and the public is none the wiser.

Both Democrats and Republicans are guilty, and until we fix the incentives that cause them to increase government power (i.e. their own), this problem will continue to erode our freedoms and our standard of living.

The Fed: A Case of the Blind Leading the Blind

Typical hubris of the high and mighty. Federal Reserve Governor Frederic S. Mishkin gave a speech on Wednesday that reveals a lot about the way the Fed thinks.


[Thanks to wnightingale.com and artist Linda Prokop for the picture.]

Basically, what he says is that housing price bubbles don't really matter, that the central bank can take appropriate palliative action when the time comes, and that asset bubbles should not be regarded as important. He speaks as if housing price increases have no consequences, ignoring the proverbial widow on a fixed income whose property taxes double in the space of five years and who is forced out of her home.

Who is he to say that this poor woman's fate doesn't matter? I am disgusted.

His speech leaves out one important point about bubbles: Their cause. For some reason, the US Fed and a few other central banks want to deny (1) the classic economic theory that states that this type of price increase is caused by an excess of purchasing media chasing after too few goods (read assets); (2) that just because the general price level has remained relatively constant while these asset bubbles are occurring does not exclude the possibility that there is an excess of liquidity in circulation causing those bubbles; and (3) that the Fed and other central banks around the world have brought about this excess through their bouts of overly loose monetary policy.

I will quote excerpts from his speech in which he defends the US decision to disregard asset bubbles in determining monetary policy, even though the rest of the world with few exceptions is very much preoccupied with actively combatting this problem through monetary policy adjustments (with my comments):

"[Taking asset prices into account] in the conduct of monetary policy requires three key assumptions. First, one must assume that a central bank can identify a bubble in progress. I find this assumption highly dubious because it is hard to believe that the central bank has such an informational advantage over private markets. Indeed, the view that government officials know better than the markets has been proved wrong over and over again. If the central bank has no informational advantage, and if it knows that a bubble has developed, the market will know this too, and the bubble will burst. Thus, any bubble that could be identified with certainty by the central bank would be unlikely ever to develop much further."

(But the markets do identify these bubbles. If the Fed can't see the bubble in global housing prices, Governor Mishkin, you all should get some glasses. Every other country in the world sees it and most are taking action against it.)

"A second assumption needed to justify a special role for asset prices is that monetary policy cannot appropriately deal with the consequences of a burst bubble, and so preemptive actions against a bubble are needed."

(This means that you believe monetary policy CAN deal appropriately with those consequences through the further creation of purchasing media -- the old Keynesian push-the-string method that we all know doesn't work and that actually created the problem in the first place.)

"[T]he bursting of asset price bubbles often does not lead to financial instability.... House prices are far less volatile than stock prices, outright declines after a run-up are not the norm, and declines that do occur are typically relatively small.... In the absence of financial instability, monetary policy should be effective in countering the effects of a burst bubble."

(So, I guess that makes them okay. Who cares about that little old widow's property tax increases? Not Governor Mishkin, obviously.)

"Many have learned the wrong lesson from the Japanese experience. The problem in Japan was not so much the bursting of the bubble but rather the policies that followed. The problems in Japan's banking sector were not resolved, so they continued to get worse well after the bubble had burst. In addition, with the benefit of hindsight, it seems clear that the Bank of Japan did not ease monetary policy sufficiently or rapidly enough in the aftermath of the crisis..... A lesson that I draw from Japan's experience is that the serious mistake for a central bank that is confronting a bubble is not failing to stop it but rather failing to respond fast enough after it has burst. "

(Whatever happened to refraining from creating it in the first place? You say the Japanese didn't push-the-string hard enough? They seem to agree with you, because they still haven't stopped trying this impotent trick, and their stagnating economy shows it.)

"A third assumption needed to justify a special focus on asset prices in the conduct of monetary policy is that a central bank actually knows the appropriate monetary policy to deflate a bubble."

(How modest this sounds, yet it is just amazing that at no time does the Governor consider the possibility that the Fed might not know the effect of the loose monetary policy that probably caused the increased asset prices in the first place. Why is it that this lack of knowledge doesn't prevent them from doing it anyway? I can't believe the two-faced arrogance.)

"However, there is a further reason why I believe that a central bank should not put too much focus on asset prices. Such a focus can weaken its public support, making it harder for it to successfully conduct monetary policy to stabilize inflation and employment.... A central bank that focuses intently on asset prices looks as if it is trying to control too many elements of the economy.... A central bank that expanded its focus to asset prices could potentially weaken its public support and may even cause the public to worry that it is too powerful and has undue influence over all aspects of the economy.... Too much focus on asset prices might also weaken support for a central bank by leading to public confusion about its objectives."

(Now we get down to the nitty-gritty. He is afraid of losing his power and his position. Strangely enough, he doesn't realize that some of us already know the Fed is too powerful and has undue influence over all aspects of the economy, and we want nothing better than to see the Fed's role narrowed to privatized supervisor of the banks and defender of the consumer such as our poor widow.)

Al Gore Is lookin' like a chick-chick-Chicken (which we all know is not on the Endangered Species List)

That's according to an article by Flemming Rose and Bjorn Lomborg in the Wall Street Journal of today (unfortunately, I can't link because it's only available to subscribers), at first entitled "A Gorey Meltdown -- Couldn't Take the Heat!" and for some unknown reason changed to "Will Al Gore Melt?"


[Thanks to alltooflat.com for this image, which I have tweaked.]

Gore had originally given the okay for an interview today with the largest Danish newspaper, Jyllands-Posten, but he's backed out. Why? Because he was afraid to talk to the principal proponent of climate skepticism in Europe, Mr. Bjorn Lomborg.

The guy's a formidable debater, for sure; but the reason given?

"Bjorn Lomborg should be excluded from the interview because he's been very critical of Mr. Gore's message about global warming and has questioned Mr. Gore's evenhandedness."

[Pregnant silence.] Soo-o-o-o-o-o-o-o?? What's an interview for, if not to get to the bottom of someone's opinions and have them answer challenges?

Let me quote just one of the WSJ's examples of Gore's hysterical "misstatements" of data:

"Mr. Gore says that global warming will increase malaria and highlights Nairobi as his key case. According to him, Nairobi was founded right where it was too cold for malaria to occur. However, with global warming advancing, he tells us that malaria is now appearing in the city. Yet this is quite contrary to the World Health Organization's finding. Today Nairobi is considered free of malaria, but in the 1920s and '30s, when temperatures were lower than today, malaria epidemics occurred regularly. Mr. Gore's is a convenient story, but isn't it against the facts?"

Talk about inconvenient truth.

Oh, I can't resist it, here are a couple more:

"He considers Antarctica the canary in the mine, but again doesn't tell the full story. He presents pictures from the 2% of Antarctica that is dramatically warming and ignores the 98% that has largely cooled over the past 35 years. The U.N. panel estimates that Antarctica will actually increase its snow mass this century. Similarly, Mr. Gore points to shrinking sea ice in the Northern Hemisphere, but don't mention that sea ice in the Southern Hemisphere is increasing. Shouldn't we hear those facts? Mr. Gore talks about how the higher temperatures of global warming kill people. He specifically mentions how the European heat wave of 2003 killed 35,000. But he entirely leaves out how global warming also means less cold and saves lives. Moreover, the avoided cold deaths far outweigh the number of heat deaths. For the U.K. it is estimated that 2,000 more will die from global warming. But at the same time 20,000 fewer will die of cold. Why does Mr. Gore tell only one side of the story?"

Sock it to 'em, Skeptics. The economic repercussions of trying to reduce greenhouse gas emissions is huge, something to the tune of a 30% reduction in the standard of living of the average person, and (1) we're not even sure there will be any warming over the next century, and (2) everyone agrees that Kyoto's effect, even if everyone signed on, will be inefficacious to say the least.

Oh, and by the way, some credible climatologists are now expecting a cold wave that will last until the end of this century.

There is much food for thought, yes indeed, on both sides of this issue, and both sides should be open to live debates on TV and in the media on the subject. But seriously now, until we know more, we should take no action just yet and we should cease the grandstanding, for fear of making things worse than they already are.

For Once, I Agree With a Faction of This Government

The US Senate Committee on the Environment & Public Works. Yup. I'll admit it. I agree with them. Believe it or not, they have been one of the few bastions of common sense in this Global Warming hysteria. And their time is almost up, what with the change in government to Democrat control.


[Thanks to Stephanie Callahan and KNBC Channel 4 for this photo from today in sunny Globally Warm Southern California.]

Just a sample. Skeptics, it is claimed by the GW set, receive funding from corporations. Well, what about this:

"The alarmists also enjoy a huge financial advantage over the skeptics with numerous foundations funding climate research, University research money and the United Nations endless promotion of the cause. Just how much money do the climate alarmists have at their disposal? There was a $3 billion donation to the global warming cause from Virgin Air’s Richard Branson alone. The well-heeled environmental lobbying groups have massive operating budgets compared to groups that express global warming skepticism. The Sierra Club Foundation 2004 budget was $91 million and the Natural Resources Defense Council had a $57 million budget for the same year. Compare that to the often media derided Competitive Enterprise Institute’s small $3.6 million annual budget. In addition, if a climate skeptic receives any money from industry, the media immediately labels them and attempts to discredit their work. The same media completely ignore the money flow from the environmental lobby to climate alarmists like James Hansen and Michael Oppenheimer. (ie. Hansen received $250,000 from the Heinz Foundation and Oppenheimer is a paid partisan of Environmental Defense Fund)"

Read more from the EPW Committee report.

Corruption is everywhere; but it is also in economics, politics, and climatology. And believe me, it hurts me to say I agree with any government effort, truly it does. But this time, I must confess I do.

I wouldn't go so far as to say that the billions of dollars California's fruit growers have lost due to a "freak" cold spell is proof that global warming is not taking place. That would be as foolhardy as to say that there is sufficient evidence to draw the conclusion that any global warming that there might be is man made.

To understand where man is in his understanding of the universe, you should look at a video on Youtube.com. Search for "water bill cat" and watch any one of these that works. Imagine that this cat looked up at you and said, "I now understand Black Holes. I create them. No Black Holes exist that I don't create by pulling this lever. I am the master of the universe."

It doesn't matter whether the subject under study is Black Holes or Global Warming. We as scientists are no more prepared to talk about GW than we are about BH. (Well, maybe a little bit more, but not much.) Our climatology instruments are too new, our computers too primitive, our data collection too scanty, to be able to make any predictions or declarations whatsoever about the cause of any changes we think we see in global temperatures.

Once again, I talk about this subject because there is grave danger that the sciences in general, and climatology in particular, are reverting to a kind of Salem witch-hunting mentality. The effects on both the global economy and scientific progress would be devastating if GW hysteria were to catch onto public sentiment and begin to influence politics.

France is Losing Its Wealthy and It's All Switzerland's Fault

France's leftist politicians complain that their wealthy citizens are fleeing the country to "tax havens" like Switzerland. Instead of asking themselves why, they blame Switzerland for "illegal" activities, pursuant to Arnaud Montebourg, Presidential candidate Segolene Royal's press secretary, in his public statement: "Our Swiss friends should be reminded that international law does exist." (There's a second article here.)

Monsieur Montebourg is the author of a report on tax havens, those countries, called "paridis fiscaux" in French, that are just beyond the reach of the French taxing authorities. According to Monsieur Montebourg, there exist international agreements on unfair fiscal competition that the Swiss refuse to respect and that the French political right is using "to justify lowering taxes on people of wealth and on businesses."

Heaven forbid.

This is just another example of socialist ignorance. Look at the reality on the ground, as portrayed visually by the LAFFER CURVE. I tell you, it's a fact of life, not a moral choice.

You can have your Laffer Curve vertical, or horizontal, but they both tell the same story.



[Thanks to qando.net here for the vertical, and to raybromley.com here for the horizontal.]

The Laffer Curve demonstrates visually what happens statistically when you take too much money away from people. There seems to be a threshold beyond which taxation is intolerable -- and it makes sense. After all, we all can feel this pain; we all know about where that threshhold is. There's no reason anyone in his right mind would let someone else, even someone with good intentions, confiscate a good portion of his assets without putting up a fight, leaving town, or giving up the effort to create the assets in the first place.

And more importantly, when you penalize people for making money, you also penalize them for creating jobs.

So now we have this little war between the French socialists and the Swiss press [paraphrasing]:

Montebourg: The larger European nations should unite to combat these tax haven predators.

Swiss: The French leftists should take responsibility for their own errors, like the 35-hour week.

Montebourg: Even the Swiss citizens are beginning to realize that the less you tax corporations, the more you tax wage earners and management.

Swiss: Think so? That must be why one small Swiss county just voted to lower the tax on corporations to zero.

Yadda, yadda, yadda.

Here's the bottom line: As long as there is a market for tax havens, tax havens there will be.

Global Warming Shocker: Common Sense Out of Seattle?

Well, not exactly.

A Seattle school board has "restricted showings of Al Gore's movie on global warming" on the basis that it is a "cockeyed view of what the truth is" according to a parent in the district.

This is true; but these parents object, not because the Global Warming Hysteria is inferior science, but because "[t]he Bible says that in the end times everything will burn up, but that perspective isn't in the DVD."


[Thanks to ctrl-c.liu.se/stuttgart and baldilocks.typepad.com for the images, which I have combined and tweaked.]

Well, I'll take his conclusion, even if it comes out of wrong thinking.

On the other side of the aisle, you have the movie's co-producer Laurie David speaking in equally strange tongues:

'"I am shocked that a school district would come to this decision.... There is no opposing view to science, which is fact, and the facts are clear that global warming is here, now."'

This statement in and of itself is enough to raise the hair on my neck. First of all, science is nothing BUT opposing views. There are no "facts" in true science. There are only debates about the usefullness of descriptions in attempting to acquire a better understanding of the "facts" that in and of themselves are unknowable by the very nature of knowledge as it is defined by science. This statement applies to all sciences, whether it be physics, economics or climatology.

The importance of the Global Warming debate is humongous on several levels. The first is the climatology level. (See this post and this post to see my opinion about this.)

The second is the methodology level, applicable to all the sciences. It is very important to realize that the scientific method is a very carefully debated and refined procedural outline that applies to all learning. Science is learning; nothing more. There is no such thing as "truth" or "fact" in science. The fact that Ms. David makes the above statement reveals her (and probably Mr. Gore's) ignorance of what science is. (Read this to find more information about the scientific method.)

The third is the economic level, and that's why I include the subject in this blog. It is important for the public to realize that: (1) The goals of Kyoto (the intergovernmental agreement to reduce global warming over time) are useless, by the admission of the very "scientists" who have stirred up this hysteria; (2) They would cost the world untold trillions and would set us back a century or two; (3) They are unenforceable; (4) They pretend to solve a problem that no one can agree exists, because there are as many reliable climatologists who do not agree with the GW Hysteria as there are that do, only the skeptics' arguments are not as newsworthy so you haven't heard their argument. (For a great summation of the skeptic position, go to this set of four videos and watch them to the end. No cheating.)

Poor science leads to hysteria of the likes of Global Warming; and what happens to climatology is also happening to economics. Sometimes even the scientists themselves get lost in the maze of their own thoughts and desires, which usually have an excessive smattering of personal ambition in them.

The word "science" is bandied about all too freely by people who would like to think of themselves as an elite, but who are really nothing more than attention-seekers. Al Gore is the epitome of this type of person.

The Wolves in Sheep's Clothing Are Back: America's Unions

Listen to the nice sounding ring of this new bill working its way through Congress: "Employee Free Choice Act."

Isn't that cute. It sounds so democratic, so worker-friendly.


[Thanks to Professor John Vernon Lord and reginacoeli.org for the image.]

You can always tell there's something amiss when a law, a bill, or a proposition has a name like "We Want To Help The Little Guy."

Why is it that when the underhanded politicians want to pass out money to their partners in crime, they sugarcoat the law proposal with a name that implies the diametric opposite of what it really is? They should have called it the "Screw The Employees Act."

Matt Kibbe has written an article over at Townhall.com pointing out the hypocrisy of this Ted Kennedy-sponsored legislation.

WATCH OUT, little sheep, the Big Bad Labor Union Wolves are staging a comeback. How did they manage to rise back up to this position of power? Look at this:

"According to the Department of Labor, union members paid $7 billion in mandatory dues in the past year. Those dues go to union salaries, strike funds, and political donations. The same Department of Labor report paints a decidedly partisan trend in union support. Of the $8,500,000 spent by the American Federation of State and County Employees, 99 percent went to Democrats, and in a similar fashion, 99 percent of the $7,200,000 given by the UAW went to Democrats as well. According to its campaign reports, the AFL-CIO has spent $8,200,000 to support Democrat leaning 527 groups. The International Brotherhood of Electrical Workers and the Steelworks also gave 95 percent of all political contributions to Democrats."

Even though union membership has slipped to 7.8 percent, somehow these guys manage to obtain millions of dollars and contribute them to political campaigns to buy influence.

This "Card Check" stuff (see his article) is just another effort to take away the employees' right to vote with a secret ballot. I don't have to explain why the union leaders want to take that away, do I? Okay, I will anyway. Obviously, they need this Card Check clause to twist some arms and eat some leg of lamb.

Kibbe sums it up nicely:

"Power corrupts, and nothing corrupts more than powerful special interests allied with big government."

PS To My Schwarzenegger Comment About Nationalized Health Care

Michael D. Tanner has a followup to the article I cited in this post, wherein he states:


[Thanks to regulationmagazine.org for the photo.]

"After all, California has an auto insurance mandate, but more Californians drive without auto insurance (25 percent) than go without health insurance (20 percent). And many of the state's uninsured—the unemployed, mentally ill, transients, and illegal immigrants—are beyond the reach of any mandate."

Professor Tanner had told me before that the number of uninsured was smaller than I thought; but I still think 20% is enough to skew the figures. On the other hand, he makes a great point that the uninsured, whether it be automobile insurance or health insurance, are virtually uncontrollable, especially since an unknown portion of them might be illegals and others who slip through the system.

He also says this:

"[T]he cost between 3 and 5 percent [for] uncompensated care is a problem but hardly a crisis large enough to justify such a radical response."

This is also surprising. I have trouble believing that it is so low, especially in my and Schwarzenegger's state; but that's what the stats say, and it is an interesting point.

Tanner also says this:

"California already has a blizzard of insurance regulations covering everything from dental anesthesia to in vitro fertilization. These raise the costs of insurance, particularly for the young and healthy, who often choose to go without insurance rather than paying excessive premiums."

One of the questions that Tanner's article poses has to do with the mechanics of how the regulations increase premiums. You will find a great explanation of this in his original piece at Cato.

I can't emphasize enough how important it is for all of us to understand the dangers of nationalized medicine, and how these recent efforts in Massachusetts and California are simply the same rose by another name.

Cut The Europe Envy, Please

I'm so sick of Americans feeling inferior to Europe. The Progressives in this country do not have their eyes lined up with the holes in their head, as they say in French. ("Ils n'ont pas les yeux en face des troux.")

How much longer do we have to put up with this lack of vision? What is this global fascination with trying to hang on to elements of socialism as though it were a sign of religious virtue, when in fact it's a symptom more common to that horrid personage the ancients named Envy?


[Thanks to Karel Dujardin for this (edited) rendition of the goddess, published at homepage.mac.com/cparada.]

There are even economists, apparently, who feel that socialism is a good thing, even though "socialist economics" is an oxymoron. Tech Central has a nice piece on the subject by a Dane named Henrik Rasmussen, in response to a series of articles by Jonathan Cohn of the New Republic (available here but only to subscribers.)

Let me give you Rasmussen's little black list of three economists who should know better:

Kevin Hassett, who said this: "The Scandinavians show that you don't have to have a terrible economy if you have a big welfare state and high taxes." (It helps (a) to reintroduce some free-market elements into your socialist soup, and (b) to calculate your unemployment by a method that shaves off 1.6% vis-a-vis the European method. Oh, and did I mention that Denmark has a huge and burgeoning oil industry?)

Jeffrey Sachs, a professor at Columbia: "A generous social-welfare state is not a road to serfdom but rather to high levels of satisfaction, fairness, economic equality and international competitiveness." (Hayek must be spinning.)

Former Treasury Secretary Robert Rubin: "I think I would like to move to Denmark." (Well sir, please do, and you can take the whole bunch of Progressive legislators with you.)

What always amazes me is that most people who revere European socialism haven't lived there. Rasmussen, on the other hand, was born there, and he makes a very convincing case about how misguided these people are.

Among his best points:

"In recent years, [...] globalization and freer movement of labor within the European Union have given many young Danes opportunities to live and work in countries with lower tax-rates than Denmark. As more and more Danes realize that high taxes are a bad deal, the political elites will either have to lower tax rates and cut social spending or face a massive exodus of the people that suffer the most in the current system: Talented and hard-working citizens with high incomes. In fact, this mass exodus is already taking place. For instance, estimates of Danes living in London vary between 35,000 and 70,000, which is roughly 1% of the total Danish population of 5.4 million. According to the leading Copenhagen business daily Børsen, the average income of these Danish Londoners is more than $100,000 per year."

Must one say more? Why don't all economists get this basic point? What is the employment equivalent of the Laffer Curve? Somebody, quick: Create one now on this conjecture: Smart and able people just will not stand to be shorn like sheep but will rather move out of the country to greener, freer pastures. Call it *Your Name Here* Curve.

I've given Europe its comeuppance in this article and in this article a year or so ago. Now it's your turn.

Schwarzenegger More Interested In Votes Than In Common Sense And Reason

The Big Pushover Arnold has once again shown his lack of solid backbone as he trudges along that quicksand path to the Presidency. And what makes it worse: His ideas aren't even original.


[Thanks to briansdriveintheater.com for the photo from Pumping Iron, which I have obviously tweaked.]

Take his latest proposal to solve California's health care problem. He wants to insure every child in California, legal or not, plus make doctors, hospitals and businesses pay the price for it. In other words, he wants a top-down solution.

Mitt Romney tried something similar in Massachusetts, and we have yet to see the outcome. They both want to solve the health care "crisis," and who doesn't. But instead of freeing up the health industry and opening it up to competition, they throw the baby out with the bath water (now one of my favorite expressions, because it is such a frequent occurrence these days) by making government the health care dictator.

In fairness I will admit that there is another side of the coin. Both Arnold and Mitt have tremendous Democrat strength in opposition to any free-market instinct they might want to allow to flower. Therefore, they have chosen to compromise. The question becomes: Is the compromise cure worse than the sickness?

There are people who have done such a good job at analyzing the problem that I will let their work stand. Please read Cato's Michael D. Tanner in his briefing paper for a concise and clear explanation of this whole mess.

For those who find my gadfly blogiating more palatable and/or more amusing, I will sum up my view of the problem in as few words as I can.

I see four reasons for the ridiculous medical pricing in this country. First, there is not enough price transparency. I have seen this fact up close and personal. Providers will refuse to give you their real prices, instead quoting something that can be as much as five times the price they have actually agreed and contracted to receive from insurance companies. If you are persistent, you can find out this price by insisting on the "cash price;" but it takes a lot of work and a lot of patience, because they'll give you the run around until the cows come home, for reasons that no one can explain, not even themselves.

What we need is open and free price competition in health care; and it would be very helpful if everyone were billed the full amount for services rendered, with reimbursement coming from their insurance. That way, they would see what treatment options cost UP FRONT, and they could make a reasoned choice instead of picking whatever the doctor recommends at whatever price.

Second, we have what I'll call Doctor CYA Overkill in the analysis and treatment. Doctors work from a CYA (cover your ass) philosophy. Instead of giving you what they think you need, they conjure up that 1% chance that they'll misdiagnose the problem and recommend multiple parallel tests just to be sure so they don't get sued.

By the same token, when it's time to treat, they pick the most expensive option -- after all, who cares? It's paid by insurance. (See my posted personal story.)

Third (and this is my own view, perhaps not that of Professor Tanner), I would instate a requirement that everyone obtain at least catastrophic coverage, just like auto insurance. This requirement I approve of, because without it, the incentive just isn't there for young healthy adults to buy insurance, and for good reason: Young healthy adults have very little chance of falling ill -- and I know, because I used to be one, and an uninsured one at that.

If you disapprove of people gambling, why would you disapprove of their not buying health insurance? The odds are heavily bent in the same direction (although of course they are not quite as exaggerated.) And young people do not have assets to lose if they need expensive care and the provider tries to pursue them for payment afterward.

Young people must be required to pay into the system, otherwise they will just take their chances. Also, don't forget they are insured for auto accidents already, and this is the most likely source of health problems for the great majority of them. Now, I realize this forced insurance idea is not a free-market suggestion; but I am taking into consideration that the other option just doesn't exist in today's political climate. Government will always vote to have taxpayers absorb the pork-barrel expense of free medical care for the indigent. This is just a fact of life. Hence my acceptance of this compromise. But the compromise stops here.

Once the catastrophic-coverage obligation is put into law, the health care market should be allowed to open wide. Providers should feel free to publicize the cost of treatment just like the price of a pound of apples. There should be no hidden negotiations as there are now -- the present hush-hush system is tantamount to price fixing. (See my stories.) And the various state and federal governments should GET OUT OF THE HEALTH CARE BUSINESS, stop trying to regulate it, stop providing it, and get back in line with everyone else if they choose to subsidize a certain sector of the population. They should do this by encouraging the formation of nonprofit NGOs set up for that purpose. (However, I realize that this is a pipe dream, and that's why I adopt the above small degree of compromise.)

The fourth factor explaining the high cost of medical care is the variety of top quality, innovative and therefore expensive care that is available in this country. We've invented most of it, and we use it. Why not -- as long as we can afford it? 'Nough said.

Illegals are a separate issue. Obviously, the illegal love-hate hypocrisy must stop. As to health coverage, I believe they should not be covered for anything, with one exception: I would hate to be the decider who sentenced someone to death for lack of payment potential. I personally know a young fellow who is illegal, who was hit in a car accident through no fault of his own, and who received hundreds of thousands of dollars of treatment at no cost. There is no question but that this treatment saved his life. Having said that, I believe he should have been shipped back to a Mexican hospital as soon as he was well enough to travel. He was not; on the contrary, the whole family came up illegally to be at his side for months on end. (They even accidentally set fire to his apartment, as an aside, with a prayer candle lit for his benefit.)

As for the expenses the hospital forked over, I think that if someone is in this country illegally and is hit by a car and in danger of death, perhaps the hospital should have a charitable section of its budget; but it should also be able by treaty to bill the country of origin, assuming the person is indigent.

Another tongue-in-cheek solution: Perhaps all those US supporters of illegals can devote some of their charitable contributions to covering hospital and travel expenses, instead of pleading for the wrong cause?

Having said all of this, I am all for the experimentation that Arnold and Mitt's ideas represent. If every state came up with some idea of how to solve this sticky situation (I don't think it's a crisis), we could have 50 trials. Surely one of them would work.

My main message: KEEP THE FEDERAL GOVERNMENT OUT OF THE HEALTH CARE BUSINESS.

Euro Takes Over The Dollar's Hot Seat

Privateer, in his December 29, 2006 commentary, points out this interesting fact:


[Thanks to Matt Carmody, cartoonist, over at synd.org, for the image.]

'It has recently been reported that worldwide, the amount of CASH Euros in circulation now exceeds the amount of CASH US Dollars in circulation. This is quite astounding. Please remember that the US Dollar has been the world's reserve currency since 1944. Please remember that to this day, the majority of all GLOBAL trade in raw materials and basic commodities is done in terms of US Dollars. For decades, and up to a very short time ago, the ultimate "getaway money" throughout the world was a ten or twenty or hundred Dollar bill to much of the "developing" and a lot of the "developed" world. And lastly, please remember that the Euro did not even EXIST as a CASH currency until the beginning of 2002.'

Good point. See my previous post for a discussion of the slipping of the dollar's prestige.

I had also heard of two alarming developments, both stories coming out of South America.

1. A friend was on a boat in the Amazon, and she was surrounded by local village children at one of the stops. The kids stuck their hands out in that annoying but good-natured custom of tourist-hitting. She reached in her pocket to pull out a $5 dollar bill, and the kid said: "No, don't you have any of those other ones, the euros?"

2. Last year, a large drug bust in South America turned up a suitcase full of -- no, not dollars; euros. As I pointed out before, this could be one of two things: Either the Europeans are getting into cocaine in a big way, but that seems like nothing new; or it could be that the tide is shifting for the US dollar.

[Not] A New Dance Step: Fed-Skirting Around The Issue

Federal Reserve member Donald L. Kohn's speech gives a refreshingly upbeat view of the economy, and it tempers the market's skittishness a bit.

I do like this guy Kohn. He seems to shoot from the hip, most unlike our previous -- or even our current -- Fed Chairman.


[Thanks to eigakoji.seesaa.net for the image.]

Of course, he has to use that Fed hot-cold rhetoric that is so "de rigueur" these days. He tells us that inflation should probably tame over 2007, and the economy should find a good strong pace; but then he throws in the usual "we must wait for the actual figures" to keep us from jumping to any conclusions about future Fed actions.

He describes the Fed's present Catch 22 this way (see my previous post for my description of the problem they face):

"Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed.... We also do not know whether the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations."

Let me put that into simpler terms. I think he is saying that the possibility that the Fed's previous accommodative monetary policy might be the factor that pushed home prices and sales to those elevated levels raises the fear that the market might react poorly if the Fed were to decide to lower accommodation even more than it already has.

This is pretty much in line with my own thinking as expressed in the above-linked post. The language he uses is typical of the Fed; they hate to implicate themselves as the cause of any of the damage that we note (prohibitive and/or speculative [depending on your frame of mind and pocketbook] housing price increases, for example), and they even apparently feel a need to scrummage up technical argumentation in defense of themselves. See this post for a description of one such econometric attempt that, IMHO, falls flat on its face.

Another Dollar Pegger Bites the Dust

Hong Kong is now talking about abandoning the dollar in favor of a basket of currencies, "to better control inflation" according to Jake Lee at Bloomberg.


[Thanks to dragon-gate.com for the image.]

At this point, the recent statistics that favor the Fed's choosing to raise Fed rates in 2007 is the only thing holding up the dollar on the international marketplace.

Will they do it? Stay tuned. The temperature changes around this issue about every five minutes, just like the weather in New England.

[Note: Is it Pegger or Peggor? Probably not in the dictionary yet.]

Good News For Cows, Bad News For Science

You may recall my tweaked cow image. My brother had invented a way for their methane emissions to be controlled.


[Thanks to treehugger.com for the original cow image.]

Well, it now turns out that the methane problem is not as bad as we thought. Read this.

This whole Global Warming hysteria is particularly infected with pseudoscientific voodoo (PV for short.) A lot of common economic nonsense is similarly blighted -- ideas like "tax the rich," "raise the minimum wage," "nationalize health care," and "the Fed maintains proper control of the money supply."

Acceptance of junk science as gospel is probably THE biggest problem our world faces today, and I'd even put it right up there with terrorism. It is probably created by a lethal mix of public naivete, media coverage and junk science, much like that parallel explosive mix: public susceptibility, media coverage and terrorism. Neither terrorism nor GW hysteria could endure if it weren't for the media. I'm not blaming the media in either example; it's just a fact of modern life.

The sciences that seem to muck themselves up with a lot of PV are:

Climatology
Economics
Psychology
Anthropology
Sociology
Political Science
History
Jurisprudence
Linguistics

Interesting that with the exception of black-sheep climatology, these are all behavioral sciences. I'm not quite sure how climatology managed to slip in there. There seems to be no real reason, because it should be based on measurements and historical data. Perhaps because there is little data to work with?

So for whatever reason, perhaps (1) for lack of appropriate tools and (2) given the nature of most of these sciences (i.e. their subject centers around humanity, with the exception of climatology), progress in these fields is limited, and yet public thirst for information is great. Hey, that's only normal, it's about ourselves.

Given the vacuum created by our thirst and the lack of input, PV tends to fill up the void. With climatology? I guess it's just the vacuum created by lack of concrete data.

When In Doubt, Raise the Reserves

China has decided to try to curb inflation (or shall we say more inflation) by requiring that banks hold a higher amount of reserves. (Source)


[Thanks to reefsanctuary.com and Witfull for this photo.]

You see, they have so many dollars and dollar instruments already in their collective accounts that there would be excessive credit expansion without someone intervening.

Mind you, there wouldn't be need of this intervention if they hadn't intervened in the dollar/yuan exchange rate already. (See this post for an explanation of Chinese pegging.)

The Chinese have been accumulating dollars and dollar instruments at a rate that is inconsistent with international trading and monetary practices; but they have been doing it anyway, and in spite of much international mock-frowning. They must park the stuff somewhere, so they park it in their bank reserves. Then, because banks' whole purpose in life is to create credit, and because they do this on what is called a reserve banking system, this means that for every $100 or 100 yuan they hold as deposits, they can create 900 more, making a total of $1,000 or 1,000 yuan worth of liabilities (assuming that they, like us, have a 10% reserve requirement. In fact, they're at 9.5% now.)

They have already lifted the reserve requirement three times last year to help alleviate the problem of excess credit (or, more appropriately, excess excess credit), and now they have to do it again.

Why can't they just stop intervening in the dollar/yuan exchange rate and let things work themselves out? Well, this is a long story that I have delved into at the above-mentioned link, and here.

British Pound Account: 12.5% interest; US Dollar Account: 1% Interest

This interesting phenomenon just in from Barclays:



Source

Cato's View of the Dollar Drop A Little Oversimplified

I love Cato and have great respect for them. They have some of the best minds on earth. BUT -- sometimes they irritate me with what I'll call, diplomatically, their excessive sense of propriety.

Richard Rahn of Cato argues in an article entitled "How Far Will The Dollar Fall?"that currency value swings, and more specifically the fall of the dollar, are a bad thing. Hear-hear. The main reason, he says, is the uncertainty it creates in the minds of dollar investors here and abroad. Now, that is certainly a mild way of putting it.

(Click on the photo to see what happens.)

[Thanks to pickens.k12.sc.us/dhsteachers for the photos.]

He points out that, although a fall in the dollar may help our exports, it simultaneously makes imports more expensive, and we import a lot including a good percentage of our raw material and parts. (Does petroleum ring a bell?)

He mentions a common error:

"Some argue our large trade deficit (or current account deficit) is responsible for the fall in the dollar's value. They have it backward. It is the flow of foreign investment dollars (the capital account) into the U.S. economy that drives the trade deficit."

I don't quite agree. I would put these two factors into the chicken-or-egg category. Neither is really responsible for the other. Neither was the first force to begin this cyclone of dollars leaving the US, and the corresponding imports and foreign investment coming in. It is not the cheap goods from abroad, nor the high foreign demand for US investment instruments. There is a symbiotic relationship going on here; and after all, the dollars are coming from somewhere.

He goes on to say:

"So long as the U.S. continues to offer a higher return on capital than its foreign competitors, both foreign banks' and private investors' demand for dollars grow, and the current account deficit can be sustained."

But higher demand for dollars would normally mean a higher price for those dollars, and we are now talking about a falling dollar. Could there be an oversupply?

Secondly, since 2000 or so, American savings rates were below inflation, and only for the past year have they climbed up a bit. Surely this is because there is too much liquidity, i.e. too many dollars coming back in from abroad, satisfying the US demand for capital (even over-satisfying it, to be precise -- have you noticed the housing, the CLO and ABS, the M&A, and the corporate bond markets lately? Remember: Capital doesn't have to flow into production; and [over]supply creates its own demand...)

A third unmentioned factor: What about the Chinese and Japanese pegging and support of the dollar? On this, he does say that "[t]he export-driven economies of Asia and Europe cannot afford for the dollar to fall too much, both because their markets will dry up and the value of their dollar assets in their own currencies will decline." As indeed these latter are starting to do.

If anything, the continued foreign interest in US investments is maintaining the dollar's value above where it normally should be, not the opposite; i.e. it is preventing a total collapse of the dollar.

So unlike me, what does he blame for the dollar's fall? Recent government moves.

"[T]the U.S. government made a series of mistakes that have discouraged foreign investors." These are the Patriot Act (think back to the Arabian effort to buy the US port handlers), Sarbanes-Oxley, higher withholding on dividends for foreign investors, and a threat of a new foreign interest-reporting requirement.

I would say that even these have not prevented foreigners from preferring dollars to their own currency, through a combination of the tallest dwarf syndrome and of having to park somewhere the import dollars we are handing over to them. Remember Bernanke's "global savings glut"? I would have been a bit more grateful and called it a "global saving-grace." Without their magnanimity, our treasury would be in big doo-doo. (On the other hand, it might teach us a good lesson if they'd just take our government's doggie bowl away.)

Could it be that the dollar is falling because there are just too many of them and the global economy can't swallow any more? He makes no mention whatsoever of the Fed's recent loose monetary policy episode(s) as a contributor to the dollar's fall.

He also neglects to mention three specific dangers of a falling dollar:

1. The coming home to roost of that famous "loan without interest" represented by the 50% of our monetary base that is floating around outside our borders, which could happen if and when the whole world begins to lose confidence in it as a store of value (never mind the consequent loss to the US of seignorage rights);

2. The imperilment of the dollar reserve accounts of a number of very large and/or instrumental countries (China and the OPEC nations, for example), not to mention the other millions of individuals and corporations who hold dollar assets and who would be royally disappointed, to put it mildly -- and don't forget to include every man, woman and child of America in that group; and

3. The danger that the above actors in this global tragicomedy will reject our dollar at the same time, creating what is called "a flight from the currency" -- and we're not just talkin' any old currency.

In order to reinstate the dollar's reliability, it will not suffice for Congress to repeal S-O and soften foreign investment disincentives. Someday, someone, somewhere will have to confront this excess global liquidity mess head on, and the US is not the only culprit. It may not be the right timing for a righting (tightening) of monetary policy to reestablish the dollar's equilibrium and keep our assets from bubbling off into the stratosphere; but that time will inevitably come, whether we are ready for it or not.

Gold Quietly Asserting Itself

The dollar recuperated a little today, on news that US production wasn't as bad as expected last month. Once again, rumors and numbers have the speculators all atwitter.


[Thanks to merazdesigns.com for the image.]

Meanwhile, back at the ranch, gold is holding its own. It gained 23% over 2006. Saudi Arabia recently announced it would switch 8% of its reserves from the dollar into the euro, and today we have news about the European Central Bank. It seems a member has begun to purchase gold bullion, a rare move as France and other EU nations have been selling it over the past few years.

As this article states:

"Any indication that Europe's big guns are at last switching to the buy side, even if tentatively, could have a profound effect on investor psychology at a time when central banks worldwide want alternatives to US dollar reserves. ... [but a]n ECB spokesman called the latest purchase an end of year 'technical' adjustment."

Yeah, right.

The dollar may not yet have mutated from the tallest dwarf to a hot potato, but the heat is rising.

The Fed's Market Expectations Squeeze

Interesting to see the prognostications on various sides of this now-I'm-up, now-I'm-down economy. They change from week to week.

For example, today a Bloomberg article by Deborah Finestone quotes several sources as believing the Fed will lower interest rates in 2007. Just prior to that, the speculators were saying the Fed would probably not lower interest rates in 2007.

I have no idea how they come to either conclusion. As a skeptical economist-gadfly, I know there exists no method for figuring out what the Federal Reserve will do during the next 356 days, because: (1) we don't yet have in hand the statistics they use; (2) we don't know how they will interpret those stats; and (3) the Fed regulators themselves don't know what they would do even if they did have the figures and the interpretations.

But gamblers being gamblers, the setters of odds are waxing and waning, and now waxing again, that the Fed will relax it's grip on interest rates in 2007.

If the Fed does this -- i.e. if they lower the target Fed rate from 5.25 to, say, 4.75 as one spokesman expects, they will be loosening the credit spigot again and encourage more dollar liquidity.

Now, this might help strapped mortgagees and keep housing prices from falling sharply; but what will it do for the dollar? In other words, what pressure would this place on the foreign exchange evaluation of the dollar?

Yes, you have figured out that it will add pressure to lower it. And guess what? The exchange futures market has also expected this: The dollar just slipped another notch back down to $1.33 a euro, to cite only one alternate currency.

In coming to their action decisions, the Fed members state that they look at the stats. They also look at the markets for some input. (See my previous post for a more detailed explanation coming from one of their members.)

But ... doesn't that mean that the market is watching the Fed, and the Fed is watching the market?

Yes it does. And because both sides are observing each other, the Fed has what they themselves have called a "mirror problem," i.e. while they are looking at the market for signals of where the economy will go and what the players expect, they find that the market is looking right back at the Fed for signs of what it's own future actions will be.

Disconcerting, to be looking at someone and realize that you're looking at yourself.

So the market will continue to attempt to outguess the Fed, and the Fed will have the choice of going along with market expectations or of disappointing market expectations. Which will they choose?

Either way, the amount of money in play is staggering. I hope the Fed is getting good at Market-Squeeze Poker.

[Thanks to lilligren.com for the photo -- a composite, surely.]