Wisdom in Cartoons

Danish Taxes

According to Wikipedia, "Denmark, with a mixed market capitalist economy and a large welfare state, ranks according to one measure, as having the world's highest level of income equality. Denmark has the best business climate in the world, according to the US business magazine Forbes. From 2006 to 2008, surveys ranked Denmark as "the happiest place in the world," based on standards of health, welfare, and education." The country is also pretty high in the GDP per capita and employment rankings. It pays generous unemployment benefits, and has free universal health care.

How is this utopia paid for? What a shocker - taxes. As of 2010, the top marginal rate of 42%, and the VAT is 25% (source). What's going on here? Something's gotta give, and sure enough, something does. Young Danes are leaving in droves - leaving, that is, after getting free education, which also includes English proficiency. From the article:

"The Organization for Economic Cooperation and Development, which is based in Paris, projects that Denmark’s growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor... studies suggest that about 1,000 people leave the country each year, a figure that masks an outflow of qualified Danes and an inflow of less skilled foreign workers who help, at least partially, to offset the losses."

Who would have thought that when you tax something, you get less of it? So when you tax productive people heavily, and pay others generously not to work... Gee, this is getting complicated. This is the point at which most politicians would stick their fingers up to their elbows in their ears, yell "La-la-la-la, I cannot hear you!", and hope you buy all the BS about the joys of equality and security - which are guaranteed if you only (re-)elect them, and doubly guaranteed if you only let them tax and spend more.

As a parting note, consider that 67% is not the total tax burden you pay in Denmark. The tax rate on non-electric vehicles is 200%, as noted by Dr. Perry at Carpe Diem. There is tax on income from securities, corporate tax, and property tax.

As some poet with economic literacy (or economist with poetic talent) wrote:

Tax his land, tax his wage,
Tax his bed in which he lays.
Tax his tractor, tax his mule,
Teach him taxes is the rule.

Tax his cow, tax his goat,
Tax his pants, tax his coat.
Tax his ties, tax his shirts,
Tax his work, tax his dirt.

Tax his chew, tax his smoke,
Teach him taxes are no joke.
Tax his car, tax his grass,
Tax the roads he must pass.

Tax his food, tax his drink,
Tax him if he tries to think.
Tax his sodas, tax his beers,
If he cries, tax his tears.

Tax his bills, tax his gas,
Tax his notes, tax his cash.
Tax him good and let him know
That after taxes, he has no dough.

If he hollers, tax him more,
Tax him until he's good and sore.
Tax his coffin, tax his grave,
Tax the sod in which he lays.

Put these words upon his tomb,
"Taxes drove me to my doom!"
And when he's gone, we won't relax,
We'll still be after the inheritance tax.

However, if something cannot go on forever, it will stop (Stein's Law), and socialists always run out of other people's money.

Quotes of the Day

"No lesson seems to be so deeply inculcated by the experience of life as that you should never trust experts. If you believe doctors, nothing is wholesome: if you believe the theologians, nothing is innocent: if you believe the soldiers, nothing is safe. They all require their strong wine diluted by a very large admixture of insipid common sense."

"After all, the great characteristic of this country is that it is a free country, and by a free country I mean a country where people are allowed, so long as they do not hurt their neighbours, to do as they like. I do not mean a country where six men may make five men do exactly as they like. That is not my notion of freedom."

"On general grounds I object to Parliament trying to regulate private morality in matters which only affects the person who commits the offence."

"There is no danger which we have to contend with which is so serious as an exaggeration of the power, the useful power, of the interference of the State. It is not that the State may not or ought not to interfere when it can do so with advantage, but that the occasions on which it can so interfere are so lamentably few and the difficulties that lie in its way are so great. But I think that some of us are in danger of an opposite error. What we have to struggle against is the unnecessary interference of the State, and still more when that interference involves any injustice to any people, especially to any minority. All those who defend freedom are bound as their first duty to be the champions of minorities, and the danger of allowing the majority, which holds the power of the State, to interfere at its will is that the interests of the minority will be disregarded and crushed out under the omnipotent force of a popular vote."

- Robert Cecil, 3rd Marquess of Salisbury.

Subliminal Messages

This is pure genius, and funnier still when you speak Russian.



H/T Depleted Cranium.

Hero of the Day

Dog present or not, when you are 91, and naked, and you not only scare the crap out of a 26-year-old burglar, but hold him at gunpoint until police get there to cuff him, you deserve a drink and a hat-tip. Well done, Mr. Thompson!

What Are They Smoking At Burger King?

Burger King, a venerable burger joint (if a chain with 12,000 outlets can be called that) is revamping its restaurants to give them "an upmarket feel". Huh? The thinking must go something like this: "We hate to be competing with McD and Wendy's... Let's go upscale and incur a cost disadvantage that will price us out of this market and go compete with Ruby Tuesday and Applebee's (perception-wise), and with Pizza Hut and Domino's (value-wise)."

Now, in my humble opinion, BK has the best french fries of all burger chains, and their burgers are pretty damn good. They had a lot going for them, not least brand equity - recall a famous Pulp Fiction dialogue? However, whoever is mapping their corporate strategy is smoking something really, really good. Many companies suffer an identity crisis at some point, and try to reposition themselves. There are good ways to do it. There are bad ways to do it. And then (to quote Al Gore) there is that little known third category that includes Burger King - the phrase "unmitigated disaster" comes to mind.

Let's try to see some of their advertising efforts:

This? Really? They share a golden shower?
This? Really?? The last time I wanted to wake up with a man in my bed was... I'll get back to you on this one, but do not hold your breath.
This? "So special, people may think you're special?" Are we positioning a friggin' BK burger as "what-I-do-not-eat-to-avoid-getting-assaulted-by-psychotic-bitches"?
This? Wow, edgy! Simon & Garfunkel! Mostly Garfunkel, of course. Was Bob Dylan not available?
This? Oh no, this is just too rich... "I like square butts and I cannot lie?" "Phone book implants?" "A butt with sharp right angles?" "He's so spongy?" "Shake that cubicle butt?" "Bob got it goin' on, been known to rock him a thong???!!!" I am.... bemused.
This? And my inner cowboy has what exactly in common with women with mustaches?
This? Maybe I don't?
This? Midgets and "jugs"? Classy!!!
This? There was something there, right up to the "EAT THIS MEAT" part... Yeah, and the 0:37 part where you need frame-by-frame replay to make sure that there was no hand-to-crotch action going on. And the "till my innie turns into an outie" part. And the "I need to stuff a big burger beef jalapeno good thing down" part.
This? The peep-show patron special. When you are so dumb you have not discovered the internet for your porn needs... you may just need a BK burger too. The combination of a sultry male voice and "a very generous king"... touche!
This? Right!!! Piss off one half of your potential customers with a sexist ad...
This? The nipple pinch? "They took my nipples?" I feel so... Well, I know there is a word out there for what I feel, and I'll find it one day. Suffice it to know, it's not a kind word.

Really, Burger King, what is your target customer base again? Maybe, just maybe, even the imperfect financial markets smelled a real stinker (sinker?) here.

In a Parallel Universe Called Washington, DC

Sen. Benjamin L. Cardin (D-Md.), has this profound insight about the health care bill: "The larger the bill is, the more it's going to save." Just so we do not decide he may be kidding, the genius senator adds emphasis: "and that, he said, is the key", according to the linked WaPo article.

I am going to look for my jaw in the basement.

Quote of the Day

"It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffett on gold.

I May Be Crazy...

... but at least I am not the only one. Here is what Julian Robertson thinks. According to his profile, this gentleman's hedge fund had gross compounded return of 31.5% between 1980 and 2000, and he closed his fund before the dotcom bubble burst. In 2008, Fortune reported that he had seen 400% return since he had closed the fund. It's hard to argue with such a record - you listen to a man like this, even if you do not agree with everything he has to say. Of course, politicians and bureaucrats who have hardly made an honest buck in their lives (Timmeh!) know better, and insist we have to spend more, begin to buy houses again, and while we are at it, allow them to "reform" health care as they see fit... because their track record is... oh, who cares, just let them do it finally, okay?!

A few weeks ago, Richard Russell of the Dow Theory Letters (subscription required) had this to say:

"Let me get this straight -- Obama's health care plan will be written by a committee whose head says he doesn't understand it, passed by a Congress that hasn't read it, and whose members are exempt from it, signed by a president who smokes in secret, funded by a treasury chief who did not pay his taxes, overseen by a surgeon general who is obese, and funded by a country that is broke.

What could possibly go wrong?"

Robertson says the U.S. has to "quit spending, cut back, start saving, and scale backward". But that does not re-elect politicians - quite au contraire. Thus, while the American consumer/taxpayer is doing just as Robertson suggests, the US government is doing it's darnedest to offset it by spending, expanding, borrowing, and "scaling forward". Much as I hate to bet against the Fed and the Treasury, I cannot help but tip my hat to Robertson's steepener bet. In his own words: "I've made a big bet on it. I really think I am going to make 20 or 30 times... I'm amazed at the amount of money the government is throwing at this thing. You don't even react anymore unless somebody's talking about $1 trillion. I genuinely admire the administration's courage in doing what it's doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it's almost a bribe to get people to put on more leverage ... I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening."

Hear, hear!

About Obama and Health Care

President Obama's speech on health care (full text here) was not a big surprise - lots of smoke and mirrors on costs, a perfunctory attempt to bring a couple of Republicans on board with a vague promise on tort reform, some posturing, and (pardon the profanity, and expect more) a big hearty fuck-you to young people.

"Now, even if we provide these affordable options, there may be those -- especially the young and the healthy -- who still want to take the risk and go without coverage... The problem is, such irresponsible behavior costs all the rest of us money. If there are affordable options and people still don't sign up for health insurance, it means we pay for these people's expensive emergency room visits."

The young and the healthy cost us money? This is patent fucking bullshit of jaw-dropping proportions. Obama is demonstrably ignorant about basic economics ("profits and earnings ratios"?!), but even he does not believe such tripe. Here's a neat chart of health care costs broken out by age in several countries - and in the US those 75 and older use well over half of the spending. On average, the young and healthy uninsured simply do not pay for the unhealthy old. The government needs the cash and good actuarials of the young to push guaranteed issue and community rating on the insurance companies without bankrupting them promptly. Obama, of course, cannot say that, so he has to resort to a blatant lie, hoping enough of hoi polloi are economically challenged enough not only to not catch it, but also to tune out when the experts call him on it. Puke break.

"Unfortunately, in 34 states, 75 percent of the insurance market is controlled by five or fewer companies. In Alabama, almost 90 percent is controlled by just one company. And without competition, the price of insurance goes up and quality goes down. And it makes it easier for insurance companies to treat their customers badly -- by cherry-picking the healthiest individuals and trying to drop the sickest, by overcharging small businesses who have no leverage, and by jacking up rates.

Insurance executives don't do this because they're bad people; they do it because it's profitable."

In Alabama, that would be Blue Cross Blue Shield Alabama, which is a non-profit. Thus, they do not do it because it's profitable. They probably control the market because they do a good job and offer the best rates, and because regulation at the state level prevents others from selling insurance there. Care to try again? Puke break.

"...we've estimated that most of this plan can be paid for by finding savings within the existing health care system, a system that is currently full of waste and abuse."

As Arnold Kling noted: "And if we don't pass this plan, does he intend to keep the waste and inefficiency, out of spite?" How about first eliminate the abuse and waste, show us the bundle of money saved, and then propose ways to spend it? To propose to pay for a new health care program by making a fucked-up older one run as it should does not exactly inspire high trust in your ability to run health care programs... or any other programs. Departments of Energy and Education... Social Security... Medicare... For Christ's sake, "cash-for-clunkers" has pushed some dealers to the brink of insolvency as they wait for reimbursements. And these people want to run health care. Puke break.

"Now, much of the rest would be paid for with revenues from the very same drug and insurance companies that stand to benefit from tens of millions of new customers."

Customers, eh? I suppose you can call us (I am one of those young, healthy uninsured - the irresponsible prick, you know, who has used $0.00 of health care in the last 10 years) that, much like someone arrested for public intoxication is a "customer" of the county jail. Puke break.

"Now, I don't believe malpractice reform is a silver bullet, but I've talked to enough doctors to know that defensive medicine may be contributing to unnecessary costs. (Applause.) So I'm proposing that we move forward on a range of ideas about how to put patient safety first and let doctors focus on practicing medicine. (Applause.) I know that the Bush administration considered authorizing demonstration projects in individual states to test these ideas. I think it's a good idea, and I'm directing my Secretary of Health and Human Services to move forward on this initiative today. (Applause.)"

Oh, my, what a staunch commitment! It's already a couple of days past, and I have not heard Sebelius' plans to test the blindingly obvious - that $200K/year malpractice insurance premiums increase the cost of care (through defensive medicine) and drive physicians out of business. Puke break.

"For some of Ted Kennedy's critics, his brand of liberalism represented an affront to American liberty. In their minds, his passion for universal health care was nothing more than a passion for big government. "

Damn right it was. Extended puke break.

"But those of us who knew Teddy and worked with him here -- people of both parties -- know that what drove him was something more. His friend Orrin Hatch -- he knows that. They worked together to provide children with health insurance. His friend John McCain knows that. They worked together on a Patient's Bill of Rights. His friend Chuck Grassley knows that. They worked together to provide health care to children with disabilities."

Sheesh, those right there might be a good part of any thinking person's reason to despise the Republicans too. The cream of the douchebag cream. Major puke break.

"That large-heartedness -- that concern and regard for the plight of others -- is not a partisan feeling. It's not a Republican or a Democratic feeling. It, too, is part of the American character -- our ability to stand in other people's shoes; a recognition that we are all in this together, and when fortune turns against one of us, others are there to lend a helping hand; a belief that in this country, hard work and responsibility should be rewarded by some measure of security and fair play; and an acknowledgment that sometimes government has to step in to help deliver on that promise."

And, if the helping hand is not extended, we will have the government twist it, and, if necessary, rip it off? It's not easy to puke and curse at the same time.

"You see, our predecessors understood that government could not, and should not, solve every problem. They understood that there are instances when the gains in security from government action are not worth the added constraints on our freedom."

This almost makes sense, but is, of course, unadulterated bullshit. Our predecessors understood more than that. They understood that the government could not, and should not solve MOST problems. Puke break badly needed, but postponed in expectation of the coup de grace.

"But they also understood that the danger of too much government is matched by the perils of too little; that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, the vulnerable can be exploited. And they knew that when any government measure, no matter how carefully crafted or beneficial, is subject to scorn; when any efforts to help people in need are attacked as un-American; when facts and reason are thrown overboard and only timidity passes for wisdom, and we can no longer even engage in a civil conversation with each other over the things that truly matter -- that at that point we don't merely lose our capacity to solve big challenges. We lose something essential about ourselves."

Those same predecessors also crafted a Constitution, which enumerates what the government MAY do, not what it MAY NOT do. It has no exceptions for carefully crafted and beneficial measures or for people in need. The government has no monopoly on facts or reason; moreover, most of the time it has neither. Reagan put it best: "The best minds are not in government, if any were, business would hire them away." And civil conversation necessitates the right of all parties to turn around and walk away without being robbed. Nothing left to puke... just a mixture of disbelief, bitter anger, and sadness.

Milton Friedman on Government Spending

Think about that next time someone on government payroll tells you that the government adds value.

HT: Dr. Mark J. Perry at Carpe Diem.

On The Nature of Liberty

A brilliant, if I may say so, analysis of liberty and self-determination in a libertarian society. Consent is the key, and withdrawn consent can be discouraged only by civil litigation for damages, not through aggression.

Are there problems with a libertarian society? Sure. There is no perfect society. Libertarian ideas, however, overwhelmingly point the way to a better society these days - we just have too much government, and it is growing to overtake functions that belong with the private citizen.

Cash For Clunkers

Hard to add much to this. Next proposal: add to the federal first-home buyer subsidy a second-home buyer subsidy, which kicks in if you credibly destroy the plumbing and and electrical wiring of your old "inefficient" home, as long as the new home's electric and utility bills are 10% lower. Of course, you can still re-sell the wood and the roof shingles - that's okay.

Paging Ray Bradbury

I have been a non-rabid fan of good science fiction for a long time. It challenges, makes you think, puts things into perspective... and entertains. My taste in sci-fi is peculiar, and changing - for example, I was never blown away by Asimov and Bradbury, got disappointed eventually in Orson Scott Card, developed a liking for Heinlein late (although it keeps growing), and I adored Robert Sheckley. Lately, I find my appreciation for sci-fi tilting towards a different aspect of it: it appears elements of its more dystopic visions begin to materialize around me. Without further ado, I tip my hat ever-so-slightly to Ray Bradbury's foresight - coming to a bookstore or library near you, courtesy of the US government, bookburning. You could have almost missed that hat tip, and there is a reason for it - Bradbury stated that "451 Fahrenheit" was not about censorship, but about how television destroys interest in reading literature.

Bradbury is, of course, entitled to his interpretation. Perhaps he picked up a meme without fully realizing it - a testament to his keen perception, if not his sharp intellect - and his creation took on a life of its own. I see it differently. I am not in the least bothered by people glued to their TV's, iPods, or gaming consoles. Such is human nature, and throughout history the vast majority of people have lacked the interest and capacity for elitist, intellectual, abstract knowledge, which was until recently almost exclusively stored and distributed in the form of paper artifacts. I am profoundly bothered, however, when the government restricts access to knowledge.

So, back to our modern-day Guy Montags. I am not a conspiracy theorist, and thus I do not think what the article describes is, per se, outright censorship. These books are just victims of the crackdown on things that those who have been given the power to crack down on things think they ought to be cracking down on, and of the law of unintended consequences. What does get my panties in a bundle, however, is that it does have an element of censorship. It is this element that bothers me, as I expect the modern "firefighters" will soon sense it, and see it a feature, not a bug. What I mean is that by "protecting" little Johnnie and Jane from books printed before 1985, the Agent Smith's are also preventing them from learning about any number of realities from the world before political correctness, multiculturalism, environmentalism, gun control, etc., took hold. Bingo, we are on the proverbial slippery slope. How long do you think it'll be before protecting children from noxious lead-infused illustrations extends into protecting them from noxious thoughts and ideas? Something along the lines of "reading books has been found to contribute to sedentary lifestyle, and hence obesity, therefore thou shalt not read" is not as far out as it seems. That's the danger - the slow creep of the "you may not do it for your own safety" argument as acceptable. When the government gets a tool/weapon, it uses it, sooner or later.

Before you think I am hyperventilating in the paranoid grips of a bad LSD trip, think about pubs in the UK (and increasingly elsewhere). A staple of the British lifestyle, if there is any, and yet a thorn in the side of health Nazis, who prefer a healthier tax base that costs less and pays more in taxes without discussing it too much over a pint. Banning pubs and bars immediately would lead to a revolution, and that's not an exaggeration. So... let's ban smoking there on the grounds that "it's for your own good". Not a ban, sure, but enough to shrink the customer base enough to make many of these fine establishments unprofitable, as enough smokers get tired of shivering in the rain outside to get a puff, evicted from a private property the owner of which would gladly admit them, were not his or her license on the line. Unsurprisingly, pubs are going out of business, and the government has achieved its goal through the back door, without torches and pitchforks being shaken outside Westminster.

I have put Aldous Huxley's "Brave New World" and Orwell's "Nineteen Eighty-Four" and "Animal Farm" near the top of my (re)reading list. I am currently reading Vernor Vinge's "Ungoverned".

Quote of the Day

Democracy is the theory that the common people know what they want and deserve to get it good and hard. - H. L. Mencken

Cashless Japan

In Japan, they are not messing around - the Japanese government appears to be considering the abolition of cash. This is evil that everyone remotely concerned about freedom should be willing to rise in arms against.

As can be expected, the idea is sold as kind of cool, sci-fi, futuristic, avant-garde to hoi polloi. A noble justification is ready for the slightly more sophisticated - "we" need to fight the evil deflation. This is BS of epic, retch-inducing proportions.

The Japanese government is drowning in enormous and growing debt, even though Japan has the highest corporate tax rate in the civilized world, and is no tax haven by any stretch of the imagination when it comes to personal taxes. It is becoming increasingly hard to squeeze more taxes out of the Japanese economy. The Yen has been strengthening, which is a millstone on the neck of the export-oriented Japanese industry. The population is shrinking, especially that of working (and tax-paying) age. Furthermore, the Japanese have been enjoying a Clinton-style peace dividend for the last six decades in terms of light spending on defense - "we are pacifists now, let the Americans defend us". Yeah, well, now they've got a very assertive, industrialized China next door, a nut job in North Korea, and a "new" America that does not seem to be as eager to defend them - even if it formally keeps them under a nuclear umbrella. What's a government to do?

Borrow and spend? It tried the Keynesian prescription in the 90's, spending over 100 trillion yen in 10 fiscal stimulus packages. That did not help, since the spending was concentrated into politically favored industries, notably construction, which took a vicious hit in 1989-1992, with real estate prices falling by 80%. Only a government bureaucrat-genius can think you can cure a burst oversupply bubble by supplying more of the good that you have a glut in. A good chunk of the money also went into keeping zombie companies "alive", even though they could never realistically be expected to become profitable and viable again. Even Paul Krugman, back when he was a reasonably bright economist, wrote: "Japan's postal savings system which channels money into public works projects that have little if any social payoff, is monumentally inefficient; so is the practice of rolling over the debts of companies that will never regain profitability and hence keeping capital employed producing what nobody wants." (Krugman 2001) What those stimulus packages did accomplish was to predictably and spectacularly expand public debt to unheard-of proportions. So to borrow now is kinda difficult, and it would help as much as it did in the 90's, unless you believe that politicians can stop being politicians.

Inflate? The monetarist prescription was tried as well. The discount rate was lowered from 6% in 1990 to 0.5% in 1995, and held there for five years. M2 grew in this period at about 2.5% per annum. This did not translate into commensurate credit expansion - the banking system was clogged with bad loans. Even an abbreviation solution was tried - yes, TARP, TALP, PPIP, etc. have a venerable predecessor - the Fiscal Investment and Loan Programme (FILP), which tried to extend loans by bypassing the banks, and loaning directly to businesses. Extend them it did, but surely enough mostly to the businesses best connected to the LDP, not to the ones that generate growth.

Shrink, cut spending, and deregulate? Okay, comical relief break over. That would be a bit too Austrian, we cannot have such nonsense.

So... the government needs to stimulate consumption, which is politically easier to tax than savings. What's the best way to do that? Stealthily tax savings. Two-birds-with-one-stone solution, if there ever was one. If you remove cash from the economy, and then make interest rates negative, those evil people do not have the notorious option of stuffing cash in mattresses, which is every Keynesian's nightmare. Being able to deny access to money with a phone call to their banker to anyone who you do not like is just an added feature which would never be abused, right? Right? RIGHT?

The scary part is that Japan is already deemed a "testing ground". Which means, if history is a guide, that this is coming soon to an economy near you. It's just too good for any government to pass up.

"Meat Free Monday" by Paul McCartney

Paul McCartney wants you to bow to the altar of health and environmentalism, and observe the Meat Free Monday. Homer Simpson notably exclaimed once upon a time: "Rock stars... is there anything they don't know?"

Dude, you were cool and cutting-edge 45 years ago, and that was mostly by piggybacking on John Lennon. Now you wanna do the same with Bono - he may be an economic ignoramus too, but at least he was mostly original. Go spoon with Al Gore.

I hereby announce and begin promoting Paul McCartney Free Decade.

These People Want to Run Healthcare Too

Another moment of sheer brilliance from the U.S. Congress - we can get more people to visit the USA by... charging them $10 each in order to tell them to do so. Words fail me.

Word of the Day

Pareidolia - basically, the tendency of the human brain to search for meaningful patterns in
random, meaningless data.

Quote of the Day

"Fear is the key element for the IRS in achieving its mission. Without fear, the IRS would have a difficult time maintaining our so-called system of voluntary compliance..." - Santo Presti, former IRS Criminal Investigation Agent.

H/T Strike The Root

The Bond Vigilantes Are Back

Who woulda thunk? The bond vigilantes are back. Of course, "bond vigilantes" - negative connotations and all - are just investors with a healthy dislike for being screwed over, even if the Fed promises it will pull out in time. One must wonder if Timmy and the Lords of the Underworld really believe bond investors are about as gullible as girls on prom night. Quote: "The surge in the 10-year note is especially notable because its rate helps to determine mortgage lending rates. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars more in this effort. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher."

The yield on T-Notes hit 3.7%, while current Wall Street lore says that Timmy and Ben want to keep it near 3% to prop the housing market. Makes perfect sense - who would want a market-clearing price, markets are so passé. We would not want a market to self-correct quickly, much better to keep it deflating for years and avoid those scary pops.

History is also passé. Last time the Fed Funds Rate was kept under 2% for 3 years from Dec 11, 2001 till Nov 10, 2004 (and under 1.5% for 1.5 years from Nov 6, 2002 till Aug 10, 2004) we got... that's right, a huge asset bubble. But, as Sir John Templeton would say, "The four most dangerous words in investing are 'This time it's different." This time, the Fed Funds Rate has been at 0-0.25% since Dec 16, 2008 - the idiots did not even have the cojones to call it 0%, and had to bullshit about targeting a range now, eliciting smirks from professionals who had been watching the bond markets for decades. That's not cheap money - that's free money. Is the expectation that all those who got burned in the CDO implosion are going to think "You know, we were wrong, those things are good, after all, let's pile back into them?" Says Ed Yardeni:"Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever." Bonds normally do well in times of recession with low inflation. For Q1, US GDP tanked at a 5.7% annual rate, and mild deflation was reported, yet bonds are selling off - anyone dare take a guess as to what kind of inflation expectations are baked into this turd cake?

We are being set up for a massive flight from the US dollar and dollar-denominated assets. When that happens (remember the commodity bubble), you get bubbles everywhere, becasue of the sheer size of the outflows. Watch oil, which has just about doubled from the bottom. Watch the commodity currencies - the Canadian and the Australian dollar. I profess lack of trust in and understanding of gold, but watch that too.

Pravda, nyet?

This comes from Pravda... Join me in my drunken sobbing.

H/T to Counting Cats.

Bill Gross Wants In Too

Bil Gross of PIMCO fame (soon to be infamy?) wants in on the gang rape of the American taxpayer, and he even has shaved for the occasion. Quote: "PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk." The much worse news is Bernanke seems to be buying this (badly-)flavored sewage. By now, probably the only entities with exposure to Shittygroup are probably AIG, the Fed, and PIMCO, judging by Gross' Quagmire-ish horny groveling. He deserves not a haircut, not a mustache shave, not a Brazillian bikini wax, but a full-blown beheading, along with anyone dumb enough or cheeky enough to be still exposed. There was plenty of time to pull out, pun very much intended. Yes, I know, a whole lot of pension funds and insurance companies would take a size 16 boot in the crotch (like they have not already!), and the boomers - the richest generation in human history - will be able to spend less on golf and cruises. I am fresh out of sympathy - let them check again when they prove they can behave as adults and vote into office something higher on the evolutionary ladder than toe fungi.

Read also about Gross' "shake hands with Uncle Sam" pickup line, and excuse me while I throw up and take a two-hour shower, which I know will not make me feel any cleaner or less violated.

We Are So F*#@ed

Are you an American? Or maybe you just live and work in the USA? Or maybe you live elsewhere, but hold US dollar-denominated assets? If you answered yes to any of these, follow-up question: have you been feeling optimistic lately? Yeah, well, snap out of it now. Timmy and the Lords of the Underworld - Tim Geithner, Ben "Helicopter" Bernanke, and our glorious POTUS Obama - have just pillaged and raped you in a manner and to an extent that would make flagellum dei Atilla the Hun and Genghis Khan look like benevolent amateurs, and Bernie Madoff like a harmless two-bit hustler. John P. Hussman describes the PPIP - Public-Private Investment Program (I am not even gonna try to ponder what genius came up with the "public-private" oxymoron) well here. The key number from his excellent analysis: $10-14 trillion - the amount for which US taxpayers have been put on the hook for. Feel raped yet? And no lubrication is forthcoming, mind you. This is a pretty conservative estimate, which, somewhat implicitly, assumes that housing prices have bottomed out. Is that so? Subprime mortgages have by and large already reset, and it is believable that we have seen the worst of the foreclosures from those. However, the option ARM's and Alt-A tsunami is about to hit, and hit hard, and that's not even giving a thought to commercial real estate.

In Retard Timmy's parallel universe:
1) The banks are not lending.
2) They are not lending because they are stuffed up their eyeballs with bad assets.
3) The assets are bad because the market does not appreciate that they are actually good.
4) Ergo, if the banks are helped to unload those assets, they will lend again, and the economy will recover.

In our universe, meanwhile, the banks are lending, just not quite as much as before, mostly because they have come to the realization that lending to borrowers who are unlikely to repay is not all that smart. What is not "lending" is the securitization markets, which at the peak of the craze provided more funding to the economy than the banking system. Good luck reviving that charred corpse. Also in our universe, the bad assets are really pretty damn bad.

Oh, wait, you do not feel royally screwed yet? Here's an example of how the PPIP will work, with made up, but plausible numbers. Bank X holds a boatload of bonds that the market values at 25 cents on the dollar. The Fed and the FDIC give investor Y (not you or me, there are requirements to qualify - $500 mln in private capital and $10 bln in eligible assets under management) non-recourse loans so Y can leverage 6:1. It may actually be 12:1, since the rules are a bit unclear, but let's assume 6:1 - that's horrible enough. Thus, if Y buys the junk for 70 cents on the dollar, he/she puts up 10 cents, and the taxpayer is shafted for the rest. The 10 cents is Y's maximum loss, and that's if the asset goes down to zero in value. There is very little to prevent X from lending Y the money for this - in fact about the only protection is "Asset managers may not purchase eligible assets from sellers which are affiliates of such asset manager or of any private investor which has committed at least 10% or more of the aggregate private capital in the PPIF." Some protection. Thus, if the market's current valuation of 25 cents on the dollar is correct, 45 cents of loss is realized, and the US taxpayer eats about 38.5 cents of that.

I do not know about you, but I want to see Timmy and the Lords of the Underworld swinging from the nearest lightpole, although I would compromise and travel to Washington, DC to watch.

Dr. Laffer on Tax Rates

It should not be a hard concept: if you increase tax rates to punitive levels, the ones who pay the most tax would find ways not to pay, be it legal backdoors or outright relocation. Quote: "Laffer readily admits that middle and lower-income folks lack the flexibility of the rich when it comes to changing behavior in response to changes in tax rates. Where the rich can shelter, defer and give away income, taxpayers at the bottom rung are like lambs going to the slaughter. Raise tax rates, and they fork it over to the government. Lower tax rates, and the government gets less revenue."

Quite so. I would contend, however, that the middle and lower income folks have a different weapon at their disposal - numbers. If they were to simply start massively underreporting income, they would be in theory criminals, but the government would not have the means to enforce, and most singular audits, let alone lawsuits, would not be cost efficient for the government. The bureaucrats may know Joe Average is screwing with them, and this may get any single Joe in trouble, but not any reasonable number. As it is, the IRS audits approximately 1% of individual returns, with a heavy focus on those with "red flags" - tax shelter investment losses, complex investments, large business expenses relative to income, tax transactions without explanation, etc. Thus, Joe Average is (mostly) safe, and the government is reduced to raising the rates on the "low-hanging fruit" - the wealthy and the corporations. This is precisely the counterproductive thing to do. Quote #2 from the above article: "If the government is truly interested in maximizing its revenue, not in redistributing income, it should cut taxes on the rich. Blasphemy, I know."

As Churchill put it, "If you destroy a free market, you create a black market. If you have ten thousand regulations, you destroy all respect for the law." Transocean, Weatherford, and Tyco are just the pioneers moving to corners of the world where capital is treated with respect, not villified and extorted.

China Stuck with US Bonds

From the lips of Luo Ping, director-general at the China Banking Regulatory Commission comes some rare honesty, mixed, unsurprisingly, with a healthy dose of statist paternalistic garbage. Quote: "We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do... Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."

Yes, he gets it. China has become a de facto shareholder in the US dollar through its gargantuan holdings of US Treasuries, and is about to get severely diluted. It must suck really bad to hitch a ride on the US economy, and watch it derail. You (China) are left holding boatloads of bonds you cannot sell to anyone, and will have the pleasure of watching them melt away slowly... or not so slowly. You have tens of thousands of factories that cannot survive the plunge in exports, and will in addition get hit by a weaker dollar, if you let the yuan keep appreciating. If you devalue the yuan, you are only adding to the your US bond pile, with very little effect. Meanwhile, the laid-off factory workers are not happy campers, and are not exactly the domestic consumption you badly need. And since the Party is never wrong, you can only blame it to deregulation in the US. You did not bet the house, and keep reinvesting any gains and virtually all your income, on the wrong horse - the jockey did not whip the horse hard enough. There, you got an oh-so-not-free lesson in capitalism, Comrade Luo - you could have learned from Japan's experience trying to take over the US economically, but you were too smart... and we love the deflation you were exporting for us.

Zimbabwe - Numbers You Do Not See Often

Another update in Zimbabwe's saga of suffering. Quote: "To get a true sense of the economic problems facing Zimbabweans Professor Steve Hanke from the CATO Institute developed a hyperinflation index that puts the annual inflation rate at around 6.5 quindecillion novemdecillion percent - that is 65 followed by 107 zeros. He noted that prices of basic goods double every 24.7 hours, and this is the reason why shops are refusing to accept Zimbabwean dollars."

This is not a typo, the math actually works: 2^(365/(24.7/24))=5.7817E106.

As I said here, Mugabe needs to pay an elite list of his supporters in foreign currency, but there is not enough of it to pay every ZANU-PF thug. If you - the dictator - do not pay your constituencies, you get unrest. Quote: "Last year saw a number of unprecedented riots involving soldiers, who looted shops and attacked foreign currency dealers after not being able to access their money from cash strapped banks. The past few weeks have seen more spontaneous protests across the country by angry and impatient soldiers, raisings fears of a possible mutiny." Oops. Another quote: "...a separate uniformed gang ... raided a farm belonging to Reserve Bank Governor Gideon Gono and forced farm workers to load their truck with chickens." Oops again. Have the chicken come home to roost?

So what will Mugabe do to get to the diamonds the needs to stay afloat for just a little longer? Try shooting to death of villages from helicopter gunships and torture, including rape and abduction, on a 'massive' scale. I must admit that I have some doubts about the veracity of the gunship claim, since gunships are expensive to obtain and maintain. For the price of one gunship, which I estimate at ballpark $20mln, you can equip 5,000 soldiers with $150/pop AK-47's, and pay them $100/month for 3 years, with enough left for ammunition. There is no need to substitute capital for labor when labor is this cheap, and many fewer than 5,000 soldiers can wipe out an unarmed village without firing a single shot - machetes and fire do just fine.

I re-iterate my call for weapons drops in Zimbabwe, plus potentially a bounty on a few leaders (instead of the hilarious travel restrictions against them in place).

Euro(pe) Burning

Ambrose Evans-Pritchard has an blood-chilling article.

The Euro is the cause for a lot of pain in Europe. To have a single currency makes some sense when you have a relatively homogeneous economy, with high mobility of capital (check) and labor (NO check). Even then, central bank fine-tuning of macroeconomic parameters has failed spectacularly historically, but it is at least defensible theoretically. Europe, however, despite the wishful thinking of its leaders, is not a country. Its populace speaks numerous languages, has vastly differing cultures, and is thus mostly immobile - how often do you see a Maltese living and working in the Netherlands? The US adopted its constitution in 1787, and a lasting central bank only in 1913. The first attempt - First Bank of the United States - was aborted in 1811, the second - in 1836. From 1862 till 1913, there were SEVERAL national banks. And even when the Federal Reserve in its modern form was created, it was far from non-controversial - Milton Friedman did blame it for the Great Depression, and Ben Bernanke did agree. Europe, however, has a central bank without even having a constitution. How about a single central bank for Guatemala and Papua-New Guinea?

While I am not terribly bullish on the US dollar, I cannot help but be very bearish on the Euro. A short ETF (such as DRR) may not be the best instrument for this, sadly, since it sells the Euro against a broad basket of other currencies, but should be good enough because of the leverage it provides, and because it is hard to think of a good long pair anyway. The Swiss frank comes to mind, but Switzerland is in the heart of Europe, and thus economically very much linked with the European economy, and also under increasing pressure to align its laws and policies with the Euro-diktat.

Destruction in Gaza

An AP article on the "damage" to infrastructure in Gaza by IDF's operation. Quote: "Israel's fierce assault on Gaza's Hamas rulers has destroyed at least $1.4 billion worth of buildings, roads, pipes, power lines and other infrastructure in already impoverished territory, Palestinian surveyors estimate."

At least $1.4 billion worth to whom? Would any informed and willing buyer pay that much for infrastructure that is used as a launching pad for missile and mortar fire against the most formidable military in the Middle East (except Turkey's, if one wants to consider it part of the region)? One has to assume they mean "It will cost $1.4 billion to rebuild it for Arab and European governments, who are the only economic agents dumb enough to pony up for such an exercise in futility." You could build a road or a pipeline on a military test site, and it will cost you $X, but it is absurd to claim that it is worth $X - after the next test it is likely to be worth close to nothing. Simply put, the $1.4 billion number does not include a significant Hamas risk discount, and that discount should (but will not) be included in the decisions whether to (re)build.

Two counter-intuitive, but plausible corollaries:

1) If (unlikely) Israel's operation were to eliminate Hamas from Gaza, or even credibly render it impotent for a prolonged period of time, the increase in value from the reduced Hamas risk discount on remaining Gazan infrastructure would more than offset the loss of some of it - i.e. the bombing would have made Palestinians as a whole better off.
2) The fair market value of a good is what a willing and informed buyer would pay for it. I would surmise that the average Gazan resident would pay to get out of Gaza, even if in the process he or she were to relinquish any claims to property left behind. Thus, if you ignore loonies who would rather die than abandon Palestine and the fight (for both nationalist and religious reasons), and thus assign infinite value to staying, the fair market value of Gaza plus Hamas is negative.

California's Muerte Anunciada

One of those stories that leave a lot unsaid.

Quote: The number of people leaving California for another state outstripped the number moving in from another state during the year ending on July 1, 2008. California lost a net total of 144,000 people during that period — more than any other state, according to census estimates. That is about equal to the population of Syracuse, N.Y. ... California's loss is extremely small in a state of 38 million. (emphasis mine) And, in fact, the state's population continues to increase overall because of births and immigration, legal and illegal. But it is the fourth consecutive year that more residents decamped from California for other states than arrived here from within the U.S.

Ahem, maybe so, but the only 4 years ago, a $6.7 bln deficit was considered "deceptively difficult challenge" there, and now they are talking about $41.6 bln. Cutting spending just does not happen over there, taxes are already the highest in the US, and businesses are running for the border because of regulatory overkill.

Furthermore, when a state or country begins to lose people because of high taxes, the first "refugees" tend to be the wealthiest and the most mobile - because they stand to lose the most, and can move with the least amount of disruption to their lives and careers. Those same "refugees" contribute disproportionately more taxes - as California is discovering now (to wit, California charges a 1% additional tax on incomes over $1 mln - with the proceeds used for... mental health services; maybe they need to charge 2%, given the number of mental cases in their government ). Those with AGI over $200,000 accounted for 4% of filers, and 65% of personal income taxes paid, as of 2006 - approximately 582,000 thousand taxpayers. Thus, even though the 144,000 people who left California are a tiny portion of the population, they are very likely about 58,000 (assuming 2.5 persons per household - grown-up children, couples filing separately, etc.) households, and (again, my guess) disproportionately in the $200,000 AGI group. If only half are indeed in that group, then California lost in one single year almost 5% of those filers, and thus over 3% of its personal income tax revenue. I have thrown in a lot of assumptions, but they do not appear very unreasonable, and I am aiming for a ballpark number anyway.

How unreasonable is it to expect that this flight will not only continue, but also accelerate, especially as taxes are further raised to make up for revenue lost? You decide. If you want to invest conservatively for retirement in the relatively near future, short California bonds and buy just about any other bonds you can think of - okay, not New York or New Jersey, maybe. Socialism failed everywhere else, it'll fail in California too - and California cannot print money, only bonds.