Wednesday, December 31, 2008

How Many Strings Can We Push?

At the suggestion of my friend William F. Ford, Professor of Economics at MTSU and Summer Research Fellow at the American Institute for Economic Research, I have recreated the "string" cartoon as you see it here. Enjoy, and don't forget to eat, drink, and be merry because tomorrow....

[Click on the image for a larger version.]


Monday, December 29, 2008

Is Small Government Dead?

I present you today with both sides of the question of whether or not there is any life left in the small-government philosophy.

[Thanks to for the cross stitch pattern photo.]

We have the optimist's viewpoint expressed by Richard A. Viguerie in today's LA Times article.

With no sense of humor whatsoever, Mr. Viguerie, author of Conservatives Betrayed: How George W. Bush and Other Big Government Republicans Hijacked the Conservative Cause, expresses his hope that someone with a Reagan touch can revive our somnolent but innate comprehension of the original intent of the Constitution's Founding Fathers.

On the other side, and with his usual unique comic flare, we have the pessimist view of P.J. O'Rourke in this Cato article (also published at the Weekly Standard). His humor turns quite black at the end. The title says it all: "We Blew It."

These two writers are so eloquent that I won't excerpt them or add superfluous comment here. You'll enjoy the reads.

I once asked another proponent of small government, Robert Higgs of the Independent Institute, how he managed to find the courage to continue the battle for the idea of small government. He replied that he had no hope whatsoever for winning the war; but that his motive has become that of "bearing witness" through public condemnation of those who strip us of our liberties, whether anyone cared to take note or not.

Honorably said, and I concur. At the moment, as the sky grows prematurely dark at 5:00 p.m. on a December afternoon, I feel the same depressing lack of hope. But tomorrow I will wake up to daylight with enough energy to toll the bell once more.

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Sunday, December 28, 2008

Resuscitating Keynes: Oh No, Not Again

Dr. John Maynard Keynes must get tired of being dug up over and over again by economists looking for a mentor in times of crisis.

[Thanks to "Return of the Living Dead" for the image.]

I must say, his mistaken formulas sure do have staying power.

Dr. Martin Wolf, writing today in the Financial Times, goes digging again; but it's useless. Why? Because we are not all Keynesians now, even if a US president and Milton Friedman once said we were, probably in a moment of frustration.

In fact, the opposite is true: Keynes's unfounded notions of pushing on a string will subject us all to its deleterious effects today, just it did our ancestors back in the 1930s.

Bailouts, debt financing, government spending, inflating the money supply to save debtors and attempt the futility of restoring failing demand--all have been tried, and all have done much more harm than good.

No, Dr. Keynes did not teach us the following "three broad lessons" in spite of what Dr. Wolf says:

Non-Lesson No. 1

"... [Keynes believed] we should not take the pretensions of financiers seriously. ... Not for him, then, was the notion of 'efficient markets.'"

This is a non sequitur if I've ever seen one. Keynes may have been cynical about bankers; but I bet he'd love to rise from the dead to confirm that he always believed in efficient markets. Where does Wolf get the connection?

Non-Lesson No. 2

"The economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so."

Wolf talks of "the world" as if we were all parts of one entity acting in concert. In fact, each nation is acting as an individual; and each nation's government should act as an individual, i.e. should cut costs, indeed must cut costs when the money is no longer there to pay for them.

A government can only spend money it doesn't have in three ways: borrow it, confiscate it through taxes, or create it. Because we are already a debtor nation we should not do the first; the second will exacerbate the current shortage of discretionary income; and the third will eventually cause the dollar to collapse, thereby leading up to the confiscation of all dollar-holders' purchasing power--not something to do when foreigners hold a good chunk of your debt.

Of course demand is shrinking. You may not have noticed, but the bubble has burst. The demand we once had was a mirage. And you can't revive a nation's economic demand by stuffing it with borrowed or artificial money like the foie gras of some goose--or rather, you can, but it won't work because this goose is dead. You'll get nothing to show for your efforts except a bag of ruffled feathers.

And Dr. Wolf is forgetting that it is not for lack of will that we or our governments cannot "spend all our income." It is the "income" that simply isn't there, unless we attempt to fabricate it out of more monetary helium, which is how we got the bubble in the first place. (See my article, plus page 2 and 3 linked on my blog, for my view on how this happened.)

Non-Lesson No. 3

Now, this is the one that really gets my blood boiling, so I'm going to have to breathe deeply as I punch my keyboard.

"In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians--Ludwig von Mises and Friedrich von Hayek--argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions [my italics]: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis."

I don't have enough room here to analyze the error in Wolf's statements about the Austrians, but I'll say that the Austrian view of the 1920s is shared by more than one empiricist. I'll just name one: Edward C. Harwood of the American Institute for Economic Research.

To call the Austrians a "secular religion" may have a scrap of truth to it; but that doesn't mean they are wrong about their analysis of the 1920s. Dr. Wolf's criticism is more a statement about their description of their own methodology, rather than their theories; and in fact, the Austrians are quite empirical in their methodology in spite of themselves.

Even if they weren't, the Doctor mustn't throw out the baby.

More erroneous statements

Both Wolf and Keynes continue to err with the following affirmations:

- "[Keynes recognized] that the minimum state was unacceptable to a democratic society with an organised economy." Nothing could be further from the truth. Such a minimum state is unacceptable only to those who claim humans have the capability of organizing such a society's economy, which we can't, to wit our present mess.

- "Keynes would have insisted that ... [m]arkets are neither infallible nor dispensable. ... [T]hey can also go seriously awry and so must be managed with care." Keynes may indeed have so insisted; but no one has yet proven that humans can manage markets, in fact quite the contrary; the more we try to macromanage them, the more markets rebel.

- "The election of Mr. Obama surely reflects a desire for just such pragmatism." The election reflects no such thing. It reflects a slight majority's secular-religious belief in the spread-the-wealth Obama-Messiah, and/or shows an aversion to Bush and anyone like him.

- "The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended." You cannot sustain what doesn't exist. You can try to recreate it; but you will fail, just as Roosevelt did back in the 1930s. (See "pushing the string," above.) Roosevelt, with Keynes's encouragement, began the monetary inflating that is the scourge of the fiat-money 20th Century.

- "Also important will be direct central-bank finance of borrowers." This is a good way to transfer solvency problems from the private sector to the taxpayer; nothing more, nothing less.

- "A debt-for-equity swap is surely going to be necessary." Bailouts for special interests; nothing more, nothing less--and one of those special interests is politicians themselves, because it reinforces the electorate's belief in the politicians' capacity to "do something about it."

And on and on the good Doctor goes, making one Keynesian mistake after another.

Wolf finishes with a most sappy and hubristic "We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers."

Oh, gag me with a spoon. Who is the secular-religious one now?

Keynesian economists lack an understanding of simple market dynamics, and of how far the world has distanced itself from them. To blame the free market for 1929 or for our current turmoil is like blaming a train wreck on the train itself, instead of on the inebriated engineer.

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Monday, December 22, 2008

Advice for Obama: Listen to the Winners, not the Losers

I am a fervent capitalist, but that hasn't prevented me from complaining occasionally about the American businessman's apparent dearth of guts in the face of cumbersome big government, about their lack of idealism and economic philosophy when the going gets tough.

"If we can't beat 'em, we'll just have to join 'em," they seem to mumble as they sidle up to the nearest legislator, checkbook in hand, instead of taking the more honorable and idealistic high road of public political debate.

But Mr. Frederick W. Smith seems to be the exception to the rule.

[Thanks to for the image.]

This CEO, instead of lining up behind our automakers and bankers at the taxpayer trough, has chosen instead to speak out in ways that make perfect common economic sense.

His idea: Instead of bailing out the failing industries, give sustenance to those that are still strong and who might actually be capable of bringing recovery to our economy. And that sustenance should not be in the form of bailouts; but in the form of overdue corporate tax code reform.

In a commentary appearing in today's Financial Times, he hammers away once more at America's counterproductive, hysterical bailout policy and suggests a simple and probably much less costly remedy:

Allow "US companies to write off all their capital expenditures when they make them, as opposed to the current system of long-term depreciation. ... [O[ver time, every dollar of tax cuts for expensing adds about nine dollars of gross domestic product growth."

He explains the importance of bringing America into line with corporate tax rates abroad and the potential effect on domestic employment.

"The beneficial impact on our economy and longer-term federal tax receipts would far outweigh the relatively small near-term increase in the deficit, particularly when compared with other actions such as consumer rebates and/or increased government spending."

Never mind that it might prevent the destructive effects of current monetary "quantitative easing" and the folly of worldwide debasement of fiat currencies as our monetary authorities race each other to the bottom in an interest rate battle.

And think about this: It is one thing for Japan to try the quantitative easing formula all by itself with the rest of the world in a booming cycle; it is quite another for the whole world to do it in concert in a bust cycle.

You might like to read the interesting story of Mr. Smith's life as he tells it.

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Thursday, December 18, 2008

Pushing on a String: The Cartoon

Ben Bernanke, our current Fed Chairman, has spent much of his academic life studying the Great Depression only to conclude that, unlike the rest of mankind, he can push the string in spite of underlying fundamentals.

(Click on the image for a larger version.)

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Wednesday, December 17, 2008

Government Intervention Run Amuck No. 19: the SEC vs. Madoff

The Madoff scandal has the damaged investors looking for scapegoats--other than their own cupidity and Mr. Madoff himself, of course. Sooner or later the question had to be asked: Where was the SEC?

[Thanks to for the image.]

Now, goodness knows I am the last person in the world to defend the Securities and Exchange Commission. I don't know what there record is today, but in the 1980s one would have been hard-pressed to find a case where the SEC saved an investor a penny.

This may not be true today, I don't know. But what is certain is that they didn't do their job in the Madoff case, as Christopher Cox seems to be admitting publicly.

But is this really the SEC's fault? Yes of course it is; but it is also the fault of voters who elected the legislators who created the SEC in the first place.

Just like the FDIC, the SIPC, the PBGC, and (hiccup) now even the Federal Reserve, federal guarantee agencies can be grouped under the common heading "Lenders of Last Resort," a kind of national insurance policy for each risk involved (banks, brokerages, pension funds, and ... well, everything else).

The problem with national insurance policies is that, unlike private entities entering into any other venture, the government has no bottom line to manage.

A private insurance company would only insure risks it felt certain it could insure and survive. The government, on the other hand, insures whatever risks it thinks it must to protect the electorate, whether or not the government budget exists to pay for it.

This leads us to what economists call "Moral Hazard," where market players--who are not stupid--take into account the fact that what they are about to do is insured by the government, which allows them to take on more risk than they ordinarily would.

This backfiring of intent is a well-known phenomenon in economic research. For example, wearing seat belts actually causes more accidents because people feel safer and take more risks while driving. It distorts the incentives, as economists say.

Thus the government that started out to be the protector of the consumer becomes a kind of Risk Devil, encouraging more risk-taking than is healthy, eventually guaranteeing havoc in the marketplace, creating its own program's ultimate failure, and harming the very constituents it intended to protect.

Government oversight may sound like a good thing; but it often ricochets. We might do well to abolish these entities and create in their stead citizen watch-dog groups that will use current legislation to police the bad guys but guarantee nothing and no one.

Read more about the hubris of the financiers who were hit by Mr. Madoff's game in this great piece by John Kay in the Financial Times today. Also, read how Madoff investors are looking for people to sue. It'll just be a matter of time before they decide to sue the SEC--which is us, by the way; and instead of abolishing the SEC, just watch: Legislators, responding to your demands, will strengthen it.

Good grief. We'll never learn.

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Tuesday, December 16, 2008

Fed Comes to Debtors' Rescue

The Fed announced today that it will allow its target rate to reach zero percent.

[Click on the image for a larger version of my latest cartoon.]

Up until now, the Fed has tried to bend its legal parameters just enough to absorb some of the bad debts of our banks and financial institutions in exchange for good credit, in order to prevent what they fear would be an economic crisis. (And for the moment, these are just fears.)

Today they announced that they will proceed forward with their intention to buy Treasuries outright, in an effort to replace the credit they think we are desperate for.

From today's statement:

"As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities."

Just as debtor nations have done in the past, the USA has once again decided to turn on the printing presses to save debtors. From my understanding of this commentary by Walker Todd of the American Institute for Economic Research, or of this one, the steps the Fed is about to take are inflationary. The Fed seems to be doing what it can to fight deflation through inflating the money supply, a counterproductive measure at best.

What the Fed should be (and probably is) afraid of is not so much deflation per se, but rather a deflationary spiral that causes fragile yet economy-essential entities to collapse. The problem is that they can't act on the deflationary spiral without stopping the deflating itself.

They will end up artificially propping up already inflated bubble-prices that are trying to right themselves through the deflating process.

Something I think we all forget is that when prices go down (i.e. deflate, in the loose sense of the term), we all get richer. When gasoline, bread, meat, lettuce and rice get cheaper, our purchasing power increases.

Inflation does the opposite. It favors debtors and makes the rest of us--and even the debtors themselves--all the poorer by decreasing our purchasing power relative to our income.

When you have an inflating of the money supply in a deflationary environment, you get the equivalent of a bubble under the surface, i.e. an unstable propping up of prices concomitant with the reduction of real wages.

Inflating may save the debtors, but it will only do so through the impoverishment of all of us.

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Saturday, December 13, 2008

Stephanie Pomboy: My Kinda Bear

I'd never heard of Stephanie Pomboy until this morning when I read this interview with her in today's Barron's. Now I have a second bear with whom I see eye to eye. (The first is Doug Noland at, although I have no idea what the latter invests in.)

[Thanks to for these cute bears.]

She is founder and president of MacroMavens, a company providing "macroeconomic research and commentary to the institutional investment community." The company strives "to identify major economic trends early while avoiding the typical overemphasis on short-term swings."

Isn't that what any wise investor should be trying to do? No one with a 401(k) should be speculating in any way, shape, or form; and that is what they are doing, albeit unwittingly, by ignoring the macroeconomic ebb-and-flow underneath us all.

She believes we should be "long 'socialism,'" that there will be more government intervention, or as she jokes, "partnering with the government." She thinks the next industry to receive a guarantee will be the municipal bond market.

She sees only two potential outcomes of our present interventionist fling: Higher interest rates or devaluation of the currency. She picks the latter, seeing a weaker dollar as being the choice Bernanke's Fed will make. As soon as interest rates start to climb significantly, they will begin a program of Treasury purchasing to prevent it, which will in turn lower the dollar.

It is this potentiality that makes her a believer in gold, for the medium-term profits and protection of capital. I would add that gold plays a role as a thermometer of monetary inflating. (My mantra, remember: You can take gold out of the standard, but you can't take the standard out of gold.)

Barron quotes her:

"We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that." [--Yes!--] "I do worry about preservation of capital from the standpoint of how many more unconventional policy actions we are going to have. If I'm correct about the economic deleveraging still ahead and that it will continue for many years, that's a legitimate concern. That's why I'm long gold. I view it as the best way to protect my capital."

Yes yes yes.

As she says on her own website and as quoted in The Weekly Standard in January of 2004, “'Far beneath the surface,’ she writes, ‘the tectonic plates under the U.S. economy have begun to shift, revealing a molten lava river of inflation below….'"

How right she is. I've been railing against inflation since I was born, and more recently since March of 2005 on this blog. The 20th Century's experiment with fiat currencies will very likely fail, as they always have in the past.

In the meantime, hold onto your ingots.

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Tuesday, December 09, 2008

Excessive Power: Why Big Government is a Bad Thing

This article at Smoking Gun is an eye-opener for anyone who doubts that there is corruption in politics. Read the transcripts of the FBI's case. I drank up every word. You'll find them fascinating.

[Thanks to for this world chart of corruption perception.]

Let me make a list of reasons why Big Government is bad:

1. All power is a corrupting force; and all human beings are susceptible to this force. It is a rare person who can resist the temptations offered by power, whether he or she be a Democrat or Republican.

2. Viewed from the other end, power is a magnet for the unscrupulous.

3. The free market works best without government intervention. (See my Economics and Government Lessons starting with my first blog posts in March 2005.)

4. The US Constitution's underlying message is the restraint of government power. Unfortunately, and of necessity, it allows for interpretation; and the present set of citizens has permitted its understanding of our Constitution to distance itself from the one originally intended. We no longer envisage the dangers from which the Founding Fathers were trying to protect us. It may not be our fault; we've just personally never experienced tyranny to any great degree.

5. Less government intervention in our life would mean more freedom to succeed and to fail, and failing is also a necessary part of the process of societal improvement.

6. I am convinced incomes would be more equally distributed not through more regulation (although rules, on the other hand, are essential), but through a freer market economy and through an economic system that relies not upon economist-humans like Bernanke to set the fiat money supply, but upon an objective and unflinching monetary standard like gold. Gold is incorruptible.

7. It is Big Government that becomes so powerful it can, for example, protect a trillion-dollar industry while that industry is creating the machine of its own destruction (e.g. credit derivatives).

These are some of the underlying reasons why the people of any democracy must struggle to contain the size of their government. No one in office should be faced with the incentives to act the way the various interlocutors in the Smoking Gun illustration are acting; and no office should be so lucrative that it attracts the criminally-minded. Yet I'm sure this type of conversation is rampant in today's Big-Government politics the world over.

But aren't we better than that? Well, see how the US ranks in competitiveness and corruption, according to

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Monday, December 08, 2008

Seeing the Humor in Obama's Bold New Economic Recovery Plan

Couldn't resist this one after reading about Obama's bold new economic plan.

[Click on the photo for a larger version.]

The Ghost of Times Past. The New Deal all over again. I guess we never learn.

In other news today, I read some interesting figures in an article by Martin D. Weiss, Ph.D. Although I'm not sure I can agree with his advice (he says we should all sell everything and buy Treasuries, keeping the faith that the dollar will maintain its credibility through this crisis), he points out this:

"By mid-year 2008, there were $52 trillion in interest-bearing debts in the United States, including mortgage loans, credit cards, corporate debt, municipal debt and federal debt; the federal government needed about $50 trillion for Social Security, Medicare and other commitments kicking in at a quickening pace; and U.S. commercial banks held another $182.1 trillion in side bets called “derivatives.” Grand total in the U.S. alone: $282 trillion. The numbers are not directly comparable, but just to give you a sense of the magnitude of the problem, that’s 402 times more than the $700 billion bailout package."

These are some pretty astounding figures.

(There's another fellow, Michael Hodges, who gives some great charts and data and whose horn I have been tooting for years now. See his wonderfully informative website.)

The rest of Weiss's article makes a lot of sense and even seems to point to the fact that the dollar is in great danger. But then he gives his recommendations to remain in dollar-denominated instruments.

If there is danger of a flight from the dollar and other paper currencies, as he warns Congress, isn't gold the only thing left?

For more about his warning, read the white paper he submitted to Congress on 9/25/08 (corrected 10/1/08) and other papers he links to therein.

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Friday, December 05, 2008

Automakers: Where's John Galt When You Need Him?

Neither Rick Wagoner, Alan Mulally, nor Bob Nardelli, the three CEOs of the biggest automobile companies in the US, could play a credible John Galt in th upcoming movie version of Ayn Rand's novel.

As Wikipedia describes the hero of Atlas Shrugged:

"Galt is discovered to be a creator and inventor who embodies the power of the individual. He serves as a counterpoint to the social and economic structure depicted in the novel. The depiction portrays a society based on oppressive bureaucratic functionaries and a culture that embraces the stifling mediocrity and egalitarianism of socialistic idealism. He is a metaphorical Atlas of Greek mythology, holding up the world and namesake for the title Atlas Shrugged.

"An engineer by trade, Galt's actions include withdrawing his talents, 'stopping the motor of the world,' and leading the 'strikers' (in this case the captains of industry) against the 'looters' (in this case the mob rule of strikers and the common man)."

No, none of our three CEOs is going to play this heroic role, at least not this time around. They are incapable of fighting the unions on their own, one-on-one. And let's face it: They're probably making an astute business move in the context of the present economic climate. All three giants banded together, plus the government, against the UAW, now that's going to be a match worth watching. If only the government didn't have such a bad record of messing things up.

What a pitiful trio they are as they raise their right hand in unison before a grandstanding Congress, begging for help, the picture of utter defeat--or at best of pragmatic, cynical groveling. You almost could have heard them mumbling through their teeth-clenched grin, as they step out of their symbolic hybrid driver's seat: "There is no level to which I will not stoop."

[Thanks to for the picture.]

They might have a more successful acting career if they tried out for the other Galt, Henry, the main character of Garet Garrett's 1922 book The Driver.

In Garrett's story, Henry Galt is "an entrepreneur, ... blinded by the intense wealth and power ..., [against whom] the general population and government turn, ultimately destroying him instead of celebrating his success."

Ayn Rand was an optimist; Garrett apparently a pessimist.

Is there any hope left for the American entrepreneur in this strange new country in which we live? Since 1913 government has been screwing around with our monetary unit. Now we have to undergo the embarrassment of watching as they nationalize our banking system, our mortgage financing, and soon our auto industry.

What got us here?

I maintain that it is not corporate greed. The root cause is not, as President Bush claims, housing; nor is it the securitization process.

It is not China; it is not speculation per se. It is not Wall Street. It is not the wealthy, or special interests.

The cause of this crisis--i.e. what turned what would normally have been a healthy business cycle contraction into a recession, and perhaps a depression, are the over-expanded governments of the world, and most particularly their mishandling of the money supply. It's that simple.

For some of the tenets of my argumentation, see my previous blog posts, as well as this and this, (my article page 1 and 2); and this, this, and this (another one, pages 1-3).

Let's hope that Congress doesn't use the upcoming bailout of the Big Three as an excuse to pass the compensatory and ironically named "Employee Free Choice Act," which would take away an employee's right to a secret ballot, thereby pushing the U.S.A. towards the U.S.S.R.A. by allowing unions to put pressure on employees to agree to (and finance) the unionization of their workplace.

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Tuesday, December 02, 2008

Queen Wears Same Dress Twice: Recession Proven

Yes, according to an article appearing in, a French newspaper website, "the Queen wore the same red coat that she wore for a ceremony at the Sandhurst military academy in the autumn of 2005. During a ball in Slovenia, she wore the same twenty-year-old evening gown.... The Duke of Edinborough had readjustments made to a pair of pants dating back to 1957. The well-published night club excursions of the Princes William and Harry have become more rare. 'The economic situation is atrocious': Her Majesty, who never comments on the news, lost her cool during a ceremony at the London School of Economics, asking her hosts, 'Why didn't anyone realize what was going on?'"

[Thanks to for the great artwork.]

Very good question, Your Highness.

The answer is that many people did realize what was going on. They just didn't have the guts and/or the power to stop it. See some of my previous blogs and links to the Bank of International Settlements' ruminations about the problem since the early 2000s.

We learn a number of interesting things in the French article. For example:

- The Queen is only 264th on the list of wealthy Brits.
- She has no checking account, no credit cards, no money on her person.
- Her fortune is worth about 320 million pounds (about $477 million).
- A new book by Jon Temple, Living Off the State, accuses the royal accountants of confusing the State's assets with their own private interests.

Ah, the English. The royal family can always bring us a smile, even in the direst of times.

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