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Archive for December, 2009

(What to change)

(amended/edited 13.01.10).

This essay looks at the relationship of politics, money, interest rates and credit. These are macro financial considerations that are deliberated on and decided way above the heads of most of us. But unless we have some decent understanding of what is going on then we will be managed just as much as the money is. We need to know what is going on and how money works at this level. At the macro level, the money in the economy is a like a container of cash, there is a certain amount in there which is used to finance all the economy activity. That cash pays wages and salaries, it buys groceries and services, it finances houses and cars, and it pays for capital works building programs. All transactions large and small.

Now there are two dynamics going on here, one is the velocity of money and the other is quantity of money. In order to get the available money to do all the things that it needs to do, and also that there is a desire for it to do, we need to have enough cash in the hands of people that things can be done. The essential quandary is that there is never enough money to do everything that is necessary and desirable. But we can do several things that can improve the situation. We can increase the velocity of money and we can also just create more of it.

Velocity of money in its basic concept is easy enough. If I have a dollar and I spend it today and the person I give it to spends it tomorrow and the next day it changes hands again, etc, then we have a money velocity of a dollar a day. If we increase the velocity at which money changes hands and so it passes through two sets of hands per day then the effect is the same as doubling the amount of money in circulation. This effect however is very vulnerable to fluctuations, any reduction in public confidence will mean people are much more reluctant to spend the cash they have if they are not assured that their income is secure. The slowdown in spending creates a self-reinforcing feedback loop where the first action provokes even more of a slowdown in spending.

This can dramatically hobble an economy and the GDP, it is one of the economic dynamics that Central Banks are particularly wary of and therefore have contingency plans to deal with as quickly as possible. Their first response is the “Open Mouth” approach, they will essentially employ the big lie, saying things aren’t so bad, things are actually improving and that the long term trends are looking positive. They appreciate that consumer confidence is a critical part of the velocity of money and that if they can cheerlead the public debate then hopefully they can nip in the bud any over reactions due to fear. Under normal circumstances that is probably fair enough and even legitimate.

But if there is a genuine shock to the economy underway, where just trying to talk up the economy and the mood by being Happy-Clappy and positive isn’t going to cut it, more will need to be done. At that point Reserve Banks fall back on some of their other tools. If the velocity of money keeps falling, then in order to keep the economy and the money system rolling along at normal levels it becomes necessary to inject cash into the system in sufficient quantities to make up the shortfall. They have several standard ways of doing this, one is government stimulus spending and another is to lower the official interest(cash) rate.

This is where things start to get tricky, because for every action there is going to be reactions and consequences.  Pouring money into the economy in very large quantities, has very real and serious costs. Government borrowing will run up a very large debt very quickly and will encumber future generations with big repayment and interest costs. Really, it is just kicking the can down the road with the hope that later things will have turned around and we will be saved by providence, I call that “swing and hope”. Alternatively governments can just straight print more money to do the job, but that invariably leads to inflation, a-la Milton Friedman. We don’t really need or want to follow the lead of Weimar Germany or Zimbabwe. There are other costs to consider too. Increased Government spending inherently means that government ends up as a larger share of the economy, and if it gets big enough you end up with the equivalent of communism and the State owns and runs everything.

Also, the spending choices are going to be politically influenced, that is just inevitable, and history demonstrates that invariably poor quality choices are made. Consider some of the boondoggles that have occurred in Japan and the United States with their government stimulus programs. This is where we got the expression “a bridge to nowhere”. The degree to which cronyism and sector self-interest can overwhelm rationality is stunning. This form of economic miss-investment can actually do serious harm to an economic recovery. We end up promoting things we don’t want done and strengthening sectors of the economy that should have been left to contract. In other words we end up back where we started, not having learnt anything, having wasted time, money, opportunity, and prolonged the agony for the most vulnerable sectors of our society to boot. This is where we most blatantly see who the favoured elites and powerbrokers are, they are the ones who continue to prosper while everyone else is on Struggle Street.

Leaving aside the ethics and morality of politics and money for the moment though, we have now come to the most interesting aspect of the whole concept of the basket of cash and the velocity of money. The most significant modern trend in money and finance has been the substitution of credit for capital. Historically, the way finance works is that you became rich by spending less money than you earn. That creates a surplus of cash which is amalgamated either in stock markets or in Banks and then lent out or invested in productive enterprises that created further wealth and prosperity. The whole system was dependant and limited by the amount of accumulated savings, the system could not grow faster than the available supply of money.

And then we got “innovative” financing, starting with fractional reserve lending, we have been concocting innovative financial scams schemes ever since.

Fractional reserves are an interesting and clever concept; if a hundred people each deposit a hundred dollars, then the bank ends up with $10,000, which is available to be lent out to borrowers. Or rather, most of it can be lent out ($9,500 say), a small fraction must be retained as a reserve in order that any depositor who may wish to withdraw their money can do so. Historically we can project what sort of percentage of customers will wish to withdraw their money over a certain period and so figuring those averages gives us an appropriate margin for how much cash to keep on hand and not lend out. These margins and calculations are subject to Reserve Bank regulation and oversight and are part of a system the banking industry as a whole uses to stabilise and smooth fluctuations in the national finances. It maximises the capital available to be lent, while managing day to day cash-flow. If that was all there was to it then there wouldn’t really be any significant issues.

But the system has grown and evolved, it has mutated and manipulated in lots of directions that have not been sufficiently supervised, anticipated or understood, certainly not by the man in the street. Finance has become a reserve of a high priesthood that is so shrouded in mystery and voodoo that it is effectively out of control, the “Temple of complexity”. Financial innovation has continued to the point where we have an economy where much of the money in circulation is no longer capitol and savings, but debt. An economy can be pushed along twice as fast if in addition to the money that people have saved being invested in the economy, we can also invest fictitious capital, money that is lent and borrowed but which has effectively been conjured out of thin air. It is one thing to take money that has been saved by one person and lend it to another, there is no nett change in the money supply, but if we can get innovative then anything is possible. When money becomes subject to innovation like this, the difference between Real money and Credit blurs into invisibility and gets spent in the economy exactly the same. Right up until the point where it has to be paid back, then suddenly it is all a very different story.

If the flow of money through the economy can be boosted by adding IOU’s on top of the basic pool of currency in circulation, then so much more activity can be undertaken. A lot of thought has gone into the theory of the supply of money vs the productive capacity of an economy, but it is by no means a straightforward calculus, Doctoral Theses are written on the subject. In spite of that, the reality of this relationship is that it is more often a result of chance, politics and expediency than science. Political imperatives are for growth by pretty much any means. As long as everything’s growing then everyone’s happy, right?  However, the longer that growth continues, the more the increased levels become the new norm and expected. Anything less becomes politically dangerous and unacceptable, the rules and systems will get reworked to extend that dynamic, systemic risk becomes endemic. But the danger with so much of the economy running on borrowed money, on debt, is that any slowdown in the velocity of money means an equal reduction in cash-flow and the ability to service debts, from there it is a cascading reaction of defaults and bankruptcies.

The systemic risk is a consequence of interest rates being artificially held too low for too long – or in other words: exactly what the major Central Banks around the world have been doing. By holding rates low and stable for so long, they have been able to flood money(lending) out into the economy and let the economy roar away. People have borrowed up to the maximum they can manage and have spent it on whatever took their fancy. That has inspired bubble economics and rampant price inflation, way beyond realistic and sustainable levels, in whole sectors of the economy, most notably in housing and Real-Estate. But consider for a moment what the consequences of a doubling of interest rates would be. People who have borrowed to the limit of their ability to service at a low interest rate loan and now finding the rate has doubled, are going to have to deleverage in a hurry.

Deleveraging means reverting to not owing 4, 6 or even 10 times more in debt than you have as capital, principal or as a deposit. Critically moreover, it all depends on the market for your asset not freezing up or prices declining precipitously. If that happens then your asset (your house for instance) is no longer worth what you paid for it and likely not even what you owe on it. That is the recipe for a very sad situation, particularly if the economy as a whole is running on extreme and excessive debt. One sinister effect of falling prices and deflation is that, opposite to the way inflation works, existing debts become larger relative to incomes. How many people have crushing mortgages, as well as a car loan and max’ed out credit cards? How many corporations have borrowed to excess, and how much commercial real estate is overblown and over leveraged? If the velocity of money slows down long term, then practically all that debt becomes unserviceable and ultimately must default.

And now comes the interesting stage when we find out where all the money originates from in the first place as the losses start to flow back through the system. There are going to be some very nasty surprises in here, because a lot of this money isn’t really money at all, but it is definitely a debt. Here’s how that works, Bank “A” loans some money out to a hedge fund, which loans the money out to a business, which uses it as collateral for a deal, which is part of a bundled security, which is sold back to the bank again and is then used to originate another round of loans and borrowings. The crude name for this is a circle-jerk. By the time dozens of actors have sliced, diced and circulated all these loans and financial instruments around and around, we have loans on loans on loans which all depend on complete honesty of all the parties involved to have truthfully stated and accounted for the underlying securities, assets, cash flows, insurance provisions and liabilities.

Leaving aside the possibility that market conditions might have changed so dramatically as to render any calculus for repossession and recovery of loans utterly unreliable, the real problem is that the money we have been using is fictitious. It spends like real money and it creates a debt obligation like real money, but was never real. At some point a loan on a loan on a loan, ad infinitum, is mathematically impossible to recover. A default at any point in the chain means that everything further along the chain collapses when there is no capacity to cover the losses. The assets to back the loan do not exist, there is only more debt. Proper oversight and regulation should in theory completely prevent such a situation from arising in the first place, but the realities are that Regulators have been captured by the money and the politics. While there was big profits to be made(and it was very big), a blind eye was turned. “Financial Innovation” took the path of least resistance and highest returns and that unfortunately means it all eventually segued into a scam. When financial systems extend to the point that mathematically it is impossible that it can ever be resolved properly then it is a Ponzi scheme.

We now are possessed of a fraudulent financial system. We owe money that can’t possibly be repaid and our governments are trying to prop up the system by borrowing or printing ever more money to reinflating bubbles and attempt to hold interest rates near zero. You can’t solve a debt problem with more debt, nor can you hold interest rates at zero forever. Following the great Depression in the 1930’s measures were implemented to prevent certain commercial and political practices. These were eminently sensible and practical rules, and while there were people alive who remembered the past, they worked for a while too. Except they prevented the gamblers from playing the system they way they wanted to, and in the end the political system was subverted to align things the way the gamblers wanted. It is corruption pure and simple and we will all be paying the price for a long time. The scammers got rich and we got fleeced.

There needs to be changes to the economic rules and recourse needs to be pursued against the phoney profits, but most of all, in the end, it is the political system that is the problem. It is an invidious situation, money and politics go together like a horse and cart, corruption and politics is the norm not the exception. Everything we learnt from the great Depression looks like it is going to have to be re-learnt all over again. The measures that were put in place to restrain speculation, reckless lending and borrowing, and feckless spending have been circumvented and ignored. Regulations have simply not been enforced and legislation has been manipulated to facilitate looting. In the convergence of politics and money there exists the genesis of corruption, unfortunately it has always been so. It is not that we haven’t had some valiant attempts over the years to ensure the virtue of our systems of government, it’s just that they have all eventually failed.

However, that is not a reason not to attempt to change things where we have problems, or to not strive to create a better system. Optimism, blind or not, is probably our only real asset and must ultimately carry us if we are to succeed. It is a big ask, looking to transform politics, money and bureaucracies. Overturning the moneylenders tables in the temples wont solve the problem, we need better systems. I think it is possible, at the very least we do actually know what not to do and the very best start would be to not repeat the mistakes of the past.

Here are a few simplistic, but true nonetheless, principles to work with:

The process of politics cannot be allowed to be captured by moneyed interest. Man is a rationalising animal, not a rational animal, and there will always be reasons and excuses for politicians to favour their friends with money. The instant that starts it is the slippery slope to perdition. Whatever it takes, however it works, money must be removed from the political process. Ergo, election systems that run on “campaign contributions” have got to go. Probably that means elections and democracy as we know it. Not that it can’t be democratic, but it can’t be the current system that bribes the electorate, buys elections and propagandises the political debate. The media particularly must not be captured by moneyed interests.

Governments cannot be allowed to set interest rates, whatever the temptations to do so. There is zero evidence politicians or bureaucrats have any clue what interest rates “should” be. They only ever know what they would like then to be and that is certainly a recipe for disaster. More-so, in that the inevitable attempts to “correct” for the consequences of their actions only make the situation worse. Additionally, the economic sectors with the most to gain from a particular economic policy and interest rate will be whispering in the ear of the politicians to swing things to their advantage. It doesn’t even need to be corruption, it can just be the squeaky hinge effect and the voice you hear most often, if it is plausible enough then actions will get taken without fully understanding the consequences. The only solution to that is to take interest rates out of the control of everyone and let a genuinely free market set the rates. That actually is technically achievable, the trick is to stop the political and financial manipulation.

Credit and debt must never again become the out of control monster it currently is. Managing credit isn’t really that difficult, main-street banks and credit unions have been doing it for decades and the system works. Right up until the financial innovators got to work and the system ended up bowing down to the temple-of-complexity. Yes, the general public needs to be a lot better educated about money, but when an averagely bright person can’t follow what is happening within a complex financial deal then guaranteed there is some sort of scam afoot. By the time we get to CDO’s, MBS’s, Derivatives and the like, the system is well past crooked or redemption. It needs to be slashed and burned in order to let some new honest growth come through. The big financial corporations need to be broken up, assuming they actually survive the consequences of their follies. Left to stay afloat without any bailouts from the public, I doubt they would. It would not be the disaster they predict either, except for them, and frankly my dear I don’t give a damn. The great thing about money is that it will flow like water to where it is needed if it is allowed to do so. The chokehold of the financial robber barons must be broken, we will never breath free otherwise.

And finally:

The volume and velocity of cash in our society is critical to our economic wellbeing, it influences interest rates, prices, production and prosperity. Therefore this must be as open and transparent as possible. We can’t have bureaucracies, politics, corporates or ideologies capturing the system again. Now that really is a big ask, but not impossible. First and foremost is transparency. An educated and interested public is necessary as well as accurate information. What that specifically means needs to be formulated and defined. If the current system is going to break down under its own failings, then we need to have a replacement ready to step into place, otherwise the same old actors and factors will take up where they left off.

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I will follow up on these themes further in subsequent posts.

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Says it all

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When some-one else has already said it all, why bother reinventing the wheel – a link to another CHS post at “Of Two Minds“. Actually I have already made this point myself somewhere else on my blog – but some things bear repeating.

The real con of today is “more complex is better.”

I am not proposing everybody is capable or should be allowed to fly a jet airliner or operate a nuclear power plant. And research & development as well as advanced manufacturing is definitely becoming more complex often for good reasons.

But the important or necessary parts of everyday life like shopping, household budgeting, insurance, taxes, and even retirement investments need to be handled adequately by the broad majority of people without weeks of special training or consulting a real or self-declared expert.

Otherwise the highly intelligent have just disenfranchised the masses, from there exploitation is just a tiny step away…

The whole article is here.

When things are so complicated almost no-one knows what is going on, then you can almost guarantee someone is trying to pull a fast one.

There are also a number of other interesting links in the article to other related topics.  It is well worth a read and reminding ourselves to be aware and to beware of these forms of scams.

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“ …then again perhaps it is just a matter of “have violin must fiddle”, they just can’t leave things alone and feel they have to be seen to be doing something – or not be seen to be doing nothing.

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(What to Change)

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This essay is about money in the biggest sense, about its nature and how it is handled on a national (even international) level.

In one sense at least that is a pretty easy thing to sum up, it’s handled really badly. That is because it is political of course and look how good politicians are at anything, why should we expect their handling of money to be any different. However, in the macro sense something has to change, it is going to have to be done differently, because we can’t continue along the same old path we have been following. The current economic mess isn’t either an accident or unforeseeable, like some would have us believe.

Money at a National level is pretty much completely under the control of Central Reserve Banks. Except it isn’t and can’t be. All those terribly smart people who work for the Reserve Bank will tell you all about why what they do matters and how delicately and well it is all managed. It’s a lie, none of it is true, whatever smoke screens and justification they may trot out. The irrefutable evidence is all around us, the Great Depression and this current one, are entirely man made.

Reserve Banks set interest rates by market interventions, but why? Because they think they know best and think they can achieve something useful of course. Leaving aside for a moment just who it is useful for, lets just stick with the macro situation. The point of playing around with interest rates is because there is a lovely theory that if an honest, market neutral, referee can act to smooth out the fluctuation in markets then the conditions for steady and continuous growth can be promoted. It was a grand theory and for a long time everyone went along with it, unfortunately it is all bolloxs. Reserve Banks don’t have any better idea at what level interest rates should be set than anyone else. They know what level they would like them to be set, and they know what timing and level is the best for getting their political masters re-elected. Whatever the rhetoric about Reserve Bank independence, the reality is that monetary easing pops up just prior to every election. Everyone knows what side their bread is buttered on.

There is a great little saying that man is not a rational animal, but a rationalising animal. We do whatever is in our perceived best interests and then find a reason to justify it. All the waffle in the world about Nobel Prizes and advanced degrees in economics, paying the best to get the best, careful modelling of probabilities etc, is just so much garbage and the proof is the stinking mess now sitting in our laps.

Reserve Banks have no idea where to set interest rates and they shouldn’t even be trying. In fact why are they trying? If the market is pushing rates in a certain direction, then what you should be doing is listening, they are trying to tell you something about the economy. But instead we have know-it-alls manipulating one mechanism or another in order to push the result in a direction that suits them better and which they think will solve some perceived problem. What is now painfully obvious is that all those manipulations have stopped nothing, and in the end have made the fluctuations even worse and more extreme. So stop it!

There is nothing wrong with interests rates climbing to the sky, it is what stops reckless and worthless investment in non-productive businesses. Yes it slows down economic growth, but perhaps what needs to be promoted here isn’t rapid growth but useful and sustainable growth. There isn’t the sorts of profits in slower sustainable growth that there is in bubble economics, but there isn’t the busts either. One thing we can say for good and certain, is that the whole boom bust cycle is a function of runaway debt and credit. So the more that a Reserve bank tries to smooth out the economic cycle, the more it promotes bad behaviour, what they call “moral hazard”. The more the economic cycle is smoothed out, the more that risk is removed from the system. The more that certain types of risk is removed from the system the easier it is to replace it with other different risks. If you don’t know what the exchange rate or interest rate is going to be next week then you will be more conservative with investing. But if you know for a fact that the interest rate is going to stay at one percent for the next year because the Reserve bank has decreed it so, then the money traders will promptly borrow up to the max and start speculating in whatever they can.

By suppressing one type of risk, you encourage another. Whatever the eggheads of economics might tell you, they don’t actually know best, or even what is really going on at all. They are just making a best guess, and then aren’t ever held accountable for any cock-ups that follow. They just cycle between business and government, looking after each other and taking a cut of the proceeds along the way. Ask how many of them would want the job if their right hand was on the line and would be chopped off if their projections didn’t work out? In the end what we have here is the real macro problem with money, nobody actually knows what is going on, it is all just a bit of a crap shoot. That being the case, we need to review just what exactly we are doing, it is certainly time to stop with the current nonsense.

Reserve/Central Banks set interest rates, try to influence exchange rates, decide on the quantities of currency in circulation and set regulations for the banking and finance sector. As a very good argument can be made that they don’t have a clue what they are actually doing, why exactly are we letting them do it at all. The simple answer is because it seemed like a good idea at the time. Suddenly it doesn’t seem like such a good idea anymore. I am sure it is in some-ones best interests if Interest Rates are controlled, and exchange rates too, etc. Likely those very same people have a nice cosy relationship with politicians and government. But it’s time to sever that link, the rest of us have now been shafted altogether too much by this.

“ Find out just what people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them; … The limits of tyrants are prescribed by the endurance of those whom they oppress “ ~ Frederick Douglass

I would like to think we might have just about reached the stage where Joe Public has had enough of these clowns running the system to suit themselves, and making a right royal mess of it in the process.

Rule one: you, me, anybody does not have the first idea about what levels interest rates or prices or anything else should be. That is what you have a market for, to achieve price discovery. Too bad if you don’t like what the price is discovered to be, it’s not Governments job to save you, its governments job to stop you from interfering in the market. No, I know you can’t let Markets run everything, they often don’t price in all sorts of things that are important, but at least have the honesty and integrity to let them set prices in the things they should, and are good at. People manipulating Markets and pricing has a long and infamous history, but it is now time that sort of thing stopped, the cost of it is getting out of hand. It is what brought down the Roman empire, and it will do the same now to the global economy if we let it. The collapse of empires is catastrophic, people often die in large numbers. Lets try and avoid going there if we can, shall we.

There is no reason in the world why market participants can’t be obliged to declare what they are doing and why. If trades can be done electronically with security and speed, then there is no technical reason why every trade couldn’t be tagged with who the traders are and what the price is. That information should be publicly and freely accessible. That would be a very interesting exercise for a while wouldn’t it while everyone adjusted. We get to see and trace just who is buying and selling what. If it is universal then there is no disadvantage to anyone, everyone is in the same boat. Except of course there is no advantage to be gained either – that would be a shocking change of mindset to many. It would knock insider trading on the head if all trading was out in the open. Once again of course, the problem is that there isn’t the big money to be made if everyone has to play fairly and honestly, that would upset a lot of Playerz who have managed to suck up so much already.

Lets consider another macro economic issue here too. The statistic get thrown around often that something like 60 percent of the wealth is owned by 10 percent of the population. I am not sure of the exact numbers (is anyone?), but it probably isn’t too far off the Pareto principle of 20/80 in any-case. So assuming that being true, just where exactly are we in regards to the national tax take? No doubt we will be deeply into the realm of “Lies, Damned Lies and Statistics” here, but I believe I can confidently say that the 60 percent (for the sake of argument) of the national wealth owned by ten percent of the population is definitely not contributing 60% of the tax take. It should be.

Tax revenues come predominately from wage and salary earners and from GST. That would be the 90% of the population that doesn’t own 60% of the wealth who are paying tax, one way or the other, on pretty much everything they do. First their income is taxed before they get it and then when they spend what they have left, they are taxed again through GST. There are also yet additional taxes on things like fuel, local body rates and water. Businesses don’t really get taxed in the end because either they write-off taxes against losses and expenses or the tax ultimately get passed on to the customer. Capital likewise has plenty of loopholes to exploit as well to minimise tax. So in the end it is the ordinary working people who can’t escape the taxman who end up lumping the majority of the burden – if the rich aren’t paying it then some-one has to. Whatever justifications any-one ever comes up with to defend their own circumstances, in the end the macro money reality is that burden does not lie equally over everyone. If your total nett worth is under $500,000 then your percentage tax contribution will be higher than some-one who is worth 5 million. One way or another that has to change.

Our problem is that money is something that tends to be either left to others to manage for us, or isn’t very well understood at all in the first place. Leaving others to manage our money is a recipe to get ripped off. And not understanding what money is and how it works is another bad recipe. The temptation strongly is to fiddle, and then fiddle some more, without any understanding of what we are doing or the unintended consequences. We are in the midst of the consequences of exactly that situation. Macro money is a mechanism for exchange and mediation. There is absolutely no public interest reason why that can’t be done out in the open and largely left alone to serve its purpose. In the larger/macro sense, money will do its job and find its level perfectly adequately without intervention. The people advocating interfering and hiding or obscuring the process are either angling to wangle themselves an exclusive advantage, or they are aiming to coopt and finagle an alliance to promote their narrow interests – or both.

Lastly:

Governments live or die on the money supply. Governments are the ultimate money junkie. They will do anything they need to do to survive, they will borrow recklessly, print wildly, spend profusely in order to achieve their objectives. Unfortunately, the objective is not the well being of the people ultimately, it is the well being of government and the people will be sacrificed on the alter of expedience if that is what it takes. Therefore, letting governments determine the parameters of money is a very dangerous game. They have proved that they can’t be trusted to regulate the finance sector effectively, indeed they are captured by it. They also often come up with hair-ball schemes to set or regulate exchange rates. Exchange rates can’t be fixed without causing stresses and vulnerabilities elsewhere. Interest rates likewise are not within the power of governments to manage without grossly distorting the economy. Governments deciding unilaterally that this is how the economy is going to work and “we are not going to allow this or that to happen” is sheer arrant nonsense. Unfortunately, just as governments are a product of money, money is a product of governments. Currency is the expression of the State in a most direct sense, and the sins or strengths of a country are inextricably linked with its money. That being the case, then government is going to have to change, to become more virtuous, because money cannot change, its nature is to flow like water. The holes in our logic, theories and virtue are where our wealth will drain away and eventually leave us all destitute.

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I noticed that it is almost exactly a year since I started writing my blog. my first entry was dated Dec 2008. I haven’t written as much as I would have liked in that time unfortunately, but I guess nothing happens overnight and I have taken a while to get into the groove. Also, some weeks I just haven’t been in the writing mood. But hopefully my writing is improving and I can make a New Years resolution to do better next year. The section “What to Change” could do with a lot more entries and effort, I will do my best. Unfortunately it is also a section that needs a lot of thought from me on many of the topics, otherwise this will all just come across as the ravings of a Nut-job; assuming that anyone ever gets so far as to read them of course, haha .

In any event, I think it is important that some-one is writing about this stuff and that we can all start to generate some momentum for a national debate on this. I look forward to continuing to write posts for this blog and I hope you continue to enjoy reading them.

Happy Christmas everyone and all my best wishes for a happy New Year.

I think we may well need all the luck we can get.

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If much of the media and our own esteemed Prime Minister are to be believed, we have weathered the storm and we are now looking at a slow but steady recovery next year. Or are we?

Prime Minister John Key says there is “light at the end of the tunnel” and New Zealanders can feel more confident they will keep their jobs, after half-yearly accounts painted a better picture than the Budget.

Finance Minister Bill English said New Zealand had gone through the worst, and was on the road to recovery.

PM: Economy’s revival means safer jobs ~ by Audrey Young, NZ Herald 16/12/09

When I started this blog it was with the assertion that we are in for a dire economic crash, and that the best we could hope for from it all was that it will provoke and stimulate a Revolution in our attitudes, economics and politics.

To date there certainly has been some hardship as a consequence of the economic conditions, but nothing of the sort of order that could instigate a breakdown in the social order or the status quo. As these things go, our recession has actually been surprisingly mild really, especially considering what has been potentially possible over the last year. Apparently we haven’t done so bad. All the people feverishly working to keep the balls in the air have managed by hook or by crook to prevent a crash of the system. I would say well done to them for that, except, it is the ways and means of that which suggests things are not as rosy as is being touted.

Why do I say that?  Well, consider these couple of factors for a moment:

I have been looking through the paper at the ‘Situations Vacant’, this for a city of some 1.5 million people, and the number of vacant job opportunities advertised was 105. Of that total; about half were for the public sector, another quarter would have been for the hospitality industry (notorious for rapid turnover of staff) or for “ladies” (arguably also hospitality). The last quarter was predominantly for sales reps. So, those could be characterised as service sector jobs. Quite frankly there are very, very few actually productive jobs, or ones which aren’t sucking off the government tit here.

Which rather nicely segues into the next point. Just how big a part of our economy is the government sector now? In other words, how many people are reliant on government taxes to pay their wages and salaries? It all rather begins to look like communism, and communism collapsed under that impossible construction. A crippled and shrinking private sector, grossly overshadowed by the state sector is still somehow expected to finance it all, are we setting up for the same result?

If we read further into the article I linked to above, it goes on to say: “ Heavy borrowing will continue, but at $10 million less a week than the $250 million a week being borrowed on average to fund the deficit. ”    I’m sorry… WHAT???

This may not sound like much in an American context for instance, their deficits are in the trillions afterall, but $250 million x 52 weeks = 13 thousand million (or 13 Billion dollars) – just in one year! Divided by 5 million people that equals $2,600 each, and that doesn’t include any interest payments. Worst of all it is that greatest of crimes, to my mind, of passing off the cost and burden onto future generations to have to deal with. Man, that sort of thing should be a criminal offence. If the money borrowed was to be used for a productive enterprise that would be one thing, but that isn’t what is happening, it is being used to sustain our current spending and consumption.

Now consider this, if the government wasn’t spending all this borrowed money into our economy, just were would that leave us? What sort of depression do you think we would be in then? Hmmm, yes… exactly! We would be exactly where I said we would be, in a very deep dark hole. Without this government stimulus package of 13 Billion borrowed dollars a year half the country would be unemployed and half the houses in the country would be in mortgage foreclosure. I don’t imagine that would do much for real-estate values – you know, that place where most Kiwi’s retain most of their net wealth.

The big immediate question here is, just how long can the government keep borrowing this kind of money? Under “normal” circumstances the sovereign credit of a country can be extended to amazing extremes and debt can be piled on beyond what any reasonable person would imagine. In fact New Zealand did just that until the mid eighties, then we spent the next 20 something years clawing our way back out from under it. These are not normal circumstances however. Now practically every country in the world is accumulating record deficits, Even Germany is looking to bust the EU limits in a major way (German deficit twice EU limits ). Let alone every other country in Europe who are blowing out their budgets by even larger amounts.

That being the case, what are the odds that we are going to find it harder and harder to even find a lender, let alone consider what sorts of interest they are going to charge? Our time is running out. There is only one route out of this conundrum that Governments and Reserve banks are likely to take (if they can’t borrow what they want) and that is to simply print money. That’s a bit like the Tiger Woods situation – how do you possibly imagine that is going to end well…?

I think NZ is still in for a very nasty shock. It is only the timing that is in debate.

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When once a republic is corrupted, there is no possibility of remedying any of the growing evils but by removing the corruption and restoring its lost principles; every other correction is either useless or a new evil.  ~ Thomas Jefferson

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There is nothing new under the sun is there!

I have just been reading an article that was written (published?) back in 1893. Apart from the fact that the language is a bit archaic in places, it could otherwise have been written yesterday. It examines exactly the same sorts of economic sins we are suffering from today. What’s that say again – about being forced to repeat history if we forget it… ???

So for anyone who like a long read, here is the link if you are interested:

From ~ Literary, scientific, and political views of Orestes A. Brownson (1893)

The credit system, the system of making debt pass for capital, is itself failing, in consequence of its own expansion…  The principle of the system is to do business on credit and to rely on the profits of the business done to pay the interest on the borrowed capital and to discharge in time the loan itself. This would, perhaps, be well enough if the capital borrowed were real capital, for the volume of business would then not exceed the ability of the country to sustain and no general depression of business could occur. But it is credit, not capital, that is borrowed. The banks do not lend money, they simply lend their credit, and consequently depend on their debtors for the means to sustain their own credit or to redeem their bills; and these depend on the amount and profits of the business they do on their borrowed credit. If they fail the bank fails, or suspends, as it is politely called…

The various remedies suggested, whether by the president or by prominent merchants, traders, and bankers, are puerile, and not even palliatives. There is no remedy for a gangrenous limb or safety for the patient but in amputation, and not always even in that…

It goes on, and like I say it is a long essay, but scary just how pertinent it is to our current times. Apparently we are making exactly the same mistakes we were making over 100 years ago. I think it is time we changed things.

Brownson didn’t claim to know what the remedy was, but we might have a shot at it.

In any case I encourage you to read the essay, you might even enjoy the historical style of the writing, at the very least it is a great education on just how little things have changed since his time.

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” It is my observation that the more that is done for a person, the more trivial and petty their concerns become ” ~ Charles Hugh Smith

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From some of my reading this morning I gleaned a couple of interesting pieces of news and commentary.

This ~ from Sean Broderick: uncommonwisdomdaily.com/we-need-to-delink/

And also, further related to the same subject ~ this from Karl Denninger: Jackass of the year

Apparently the Gulf Cooperation Council States are setting up their own joint currency.

This is not all done and dusted yet, it will still take a while to come into effect. But this is what decoupling looks like. It doesn’t happen overnight, but it does happen, because it must. It is the process of protection of self-interest. When the United Sates and the United States Dollar are a threat to the security and prosperity of other countries then they are going to look for mechanisms to insulate themselves from that threat.

Currently, because of the spread and strength of the US dollar, it has been expedient to use it as a universal currency, as the standard settlement mechanism for the trading and purchase of commodities like oil. But there is no law of nature that says it has to be done that way, and if the cost of using the US Dollar becomes too great and there exists a viable alternative then things will change. A Gulf Monetary Pact offers a realistic and viable option. It would mean that countries looking to buy middle-eastern oil would first need to buy the Gulf Common Currency in order to complete and settle the transaction. At the moment US dollars are sufficient to do business everywhere in anything, everybody recognises and deals in dollars. Which is great for the USA for a variety of reasons, but for every other country the process of buying the trading currency in order to settle an oil transaction is already a complicating step they have to go through in any event. In theory at least, it would make no difference whether the trading currency they were obliged to buy was the US dollar or a Gulf Common Currency.

The question at this point is why would you use and hold US dollars if it was being debased and diluted disastrously by perverse political policy decisions in Washington? Actually, more and more people are finding that they wouldn’t. The Euro was set up in part to be a counter balance to the US Dollar, the Gulf Common Currency is the next out of the blocks, and as Karl Denninger says in the link above it looks like the Chinese aren’t going to be too far behind with a regional common currency also. That is what is known as decoupling; separating your financial interests and dealings from dependence on the hegemony of the dominant system. If the US economy and US dollar hadn’t been so badly abused by elite American financial interests then the status quo might have continued. But the politicians, banksters and shysters couldn’t resist exploiting a privileged position to further themselves at everyone else’s expense.

Interestingly, it is possible to rook others to a surprising extent and to continue to get away with it. Eventually however, the already inequitable and dishonest simply becomes the new normal and so the rort gets extended further and further. The gamblers and crooks running the system are so addicted to their money fix that they run their advantage far past any sustainable level and so it must collapse. The Oil-States and the Chinese have accumulated vast reserves of US dollars, but a debasing, de-valuing dollar is effectively stealing their wealth from them. Looks like they aren’t going to take any more of that.

It will be interesting to see to what extend it is possible to decouple, to insulate yourself or your region from the global economic crisis. In theory it is just a mater of constructing a trading regime that is not subject to interference by third parties. If only it were so straightforward, I deal with you, you deal with me and we don’t have anything to do with the US dollar… Unfortunately, the US economy is so massive that it is currently a major part of everyone else’s economies as well. Their toxic finances are our problem too. With time and will that need not continue to be the case however. And the example I have just heard about is a very telling indicator of what direction things may be heading (and fast).

New Zealand, like most of the rest of the developed world was also swept up in the real-estate/housing bubble. Cheap and easy money meant that prices soared and every man and his dog was piling on to own a bit of the bonanza. However, New Zealand has always been capital poor, so in order to finance it all it was necessary for the banks to source money from offshore, that typically meant from America and City of London. Then along came the crisis and there was no money to roll over loans and mortgages. Our banks were in a very tight situation, two, three and five year mortgages that were perfectly healthy could still have been impossible to refinance because there was no roll over happening. The loan principals were being sucked back to the originators on maturity as fast as possible in order for those banks to maintain statutory reserves in the face of massive losses and the general freeze on credit. What were the local banks to do? Well, what they did do was turn to the Chinese. The Chinese had large reserves and a strategic interest in supporting friendly countries. New Zealand has not only had long standing good relations with China, we are also an increasing and significant supplier of food to them as well. There is a very tidy little bilateral relationship that conveniently cuts America out of the loop and insulates us both to a certain extent.

So, to what extent does that relationship extend? How about over 90% of our mortgage finance now being supplied from China! Actually I can’t absolutely guarantee that figure, but I do believe it to be substantially correct (if anyone has better data I would be interested to see it). That is a dramatic transformation in less than two years. If that is something that is being mirrored elsewhere around the world then there is a very fundamental shift going on that is not really causing any ripples on the surface just yet, but it will.

The thing about de-coupling is that it is not so much about cutting existing ties, it is more properly about creating new ones: ones that are capable of doing the heavy lifting that previously was done elsewhere.  It is a very interesting time to take a bit of a nosy look around actually, and see just who is cuddling up and getting comfy with whom. Japan and China for instance are getting surprisingly buddy/buddy. There are coalitions, compacts and concords spring up all over the place. The fundamental change is underway.

The only real question left is, can this restructuring happen fast enough and with enough depth to keep us from spiralling into an economic Armageddon.  It would be nice to think that we might be able to pull back from the big sucking vortex and leave Wall Street and London to suffer the consequences of their own sins without taking the rest of us with them. That is a decoupling I could cheer.

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Eczema

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And now for something a little bit different.

In this Post I will have a look at a completely unrelated subject – and the subject for the day is: Eczema.

I had eczema as a child and it was treated pretty successfully with Betnovate, a corticosteroid cream, and in due course I grew out of it – mostly. Except not entirely, I still get it around the T of my face and, irritatingly, in my ears. It is an occasional thing, in that it comes and goes, it hasn’t been a serious problem at all and for 20 years or so as an adult I have either just put up with it or randomly tried one remedy or another to cure it. (lately it has become a more significant issue for me because my young daughter suffers from it)

I have tried various face washes, soaps, non-soap soaps, creams, moisturisers and ointments, I have tried medications and snake oil, I have changed my diet and looked up information on the internet – and you know what: basically, there is no cure.  Either it just goes away by itself or it you knock it back when necessary with medicines that suppress the symptoms like corticosteroids. Actually, apparently what they do is suppress the immune system, so that would suggest that basically eczema is an auto-immune disease effectively. It is your body attacking itself, or at least what it takes to be an invasive pathogen. For some reason your body causes an inflammation and rash where it thinks there is something wrong. Presumably things like anti-bodies are flooding into a small area of skin and creating a problem that is inappropriate and an over reaction. Why does it do that?

If you compare this to allergies like food, or like insect stings for instance, here also you get the body reacting massively to something that isn’t generally a problem under normal circumstances. And yet the body can and will react rapidly and spectacularly if you happen to be allergic. Again, what’s that about?

I heard an interesting comment once that said, assuming you are sleeping properly, if you find that you have dark circles under your eyes, that is a symptom of you being allergic to something. Well, that was definitely something that I have had for many years and hadn’t thought anything about. But that comment certainly made me think.

Also, about the time I turned 30 I had a look at my diet and decided to cut dairy out of my diet, I thought that might have been something contributing to any allergic reactions there may have been. That was a bit of a traumatic shock to the system for a while, over the years dairy had become such a large part of my diet that taking it out left a very sizable hole. Eventually I found other things to eat and didn’t miss it at all. But it also didn’t change anything in terms of allergies or eczema. Dairy simply wasn’t a factor for me. Although, my skin did clear right up and I never had any more problems with pimples after that. So if you or your children are suffering from pimples, cut cheese out of the diet is my advice – take that for what it’s worth…!

So, dairy isn’t a factor with me, and neither is any other food type as far as I have been able to tell. Washing with various soaps or other products hasn’t made any difference either. The only thing that works at all is the steroid creams like Advantin (methylprednisolone), or an immunomodulator like Elidel. So there you go, what works for me is to suppress the immune system in the specific location. And I am left wondering just what is going on there to make this happen, and how hard can this be for science to figure out what’s the problem and sort if out properly. Quite specifically and obviously, there is something happening on my skin that is provoking an immune response.

Now my type of eczema and circumstances may well be a different from the problem than anyone else may have. I have no problem with the idea that there might well be a dozen different factors or triggers that will cause eczema. But from what I can see, it all comes back in the end to the immune response. I had a skin specialist say this to me a number of years ago, that eczema appeared to be an immune system problem and there wasn’t a lot that could be done. At the time I wasn’t too impressed with that, it made no sense at all because to me it had all the signs of an allergic reaction. So I went away dissatisfied and continued to ponder on it all, wondering what sort of thing there might be that I might be allergic to and which could be triggering the eczema. I even had a series of allergy tests done to see if that might shed some light. Well, apparently I definitely am allergic to cats (which I knew already anyway), and to Birch. But as I don’t live with cats and am not in the habit of being birched, that didn’t advance the theories any.

I wondered for a while whether it might be a case of something like the herpes virus, something that lives in the nerve cells and then occasionally breaks out and provokes an immune reaction. But that didn’t really fit the facts either. I was still convinced that it was some sort of allergic reaction to something, I was just at a loss as to what that something might be.

But I have now come up with a theory that I like. Now I am no scientist and have absolutely no quantifiable data or anything to back this up, so yes this is essentially pulled out of my arse. But on the other hand, its not like the scientist have come up with anything particularly brilliant either now is it. First though a very quick background on what started my current train of thought. I came to the conclusion that I was chasing little outbreaks of eczema around from one place to another; it was like it breed or something. Actually, I now think that is exactly what it does.

I think the agent that provokes the skins immune response is a biological agent like a bacteria, a fungus, or a yeast, maybe even a combination of these. I think it lives on your skin and then when it finds just the right combination of factors, it will grow into the skin and that is what provokes the immune response. Not that the intrusion is such a big deal in the first place, but I suspect the immune system is sensitised to whatever the agent is and just over-reacts completely.

Well that is my theory on the antigen/immune system dynamic, but what is the really significant point is the part that we play in the process. What we do is scratch, and rub and a hundred and one other things that picks up the contagion at one place and then moves it around all over our body and infects another place. We never get ahead because it is always somewhere, probably causing no problems there, but when it gets moved around, it eventually ends up back in those same old trouble spots. If we don’t kill it completely all over our body at one time then it is just a matter of time before we rub that part of our body where is still lives and then move it back to where it becomes a problem. Unfortunately we are basically monkeys with this, we are always rubbing and scratching ourselves all over.

Therefore, if the agent lived under our fingernails for instance, it is going to go wherever we poke our fingers. However, I also think it is even more tricky than that. I suspect the agent actually lives in and likes damp places. In fact I suspect it lives normally in our gut, part of the normal flora of our intestines (which may be where some foods play a part in promoting its development). And having a shower or a bath is not going to solve our problem if it is quite happy in water, that just becomes a medium for transporting it all over our body. Even worse, my guess is that it finds quite a good home in our clothes and our bedding particularly, for as long as it takes for us to re-infect ourselves.

In the absence of science coming up with a proper fix to the immune over-response problem, that would leave us with the option of cleaning or arranging our environment so that we suppress the antigen as effectively as possible. Assuming for the moment that it is a fungus or a yeast and that its spores could be almost anywhere and everywhere, then the most effective solution would be to clean with anti fungicides and/or an anti-yeast agent. First your body (ketaconazole?), and then the textiles in your home. A little bleach in your washing and a shampoo for the carpet (again with some bleach perhaps).

I really don’t know if this theory is brilliant or a complete load of rubbish, but I will give it a go and see what happens. If any of you want to try this too, I would be interested to hear about your experiences. If nothing else, it should keep me busy and off the streets for a while, haha. If there are any scientist out there that would like to properly test my theory, that would be cool too. It is probably about time that we managed to solve this one.

That would be a revolution of a different kind.

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(02/07/2010)

On the other hand, whenever I actually do have a cold etc, and my immune system does have ajob to get on with, my exzema does seem to clear right up.

So maybe the is something to the idea that it essentially an auto immune disease.

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