Jim's Blog

Somali pirates attacked the Maersk Alabama on Wednesday for the second time in seven months and were “thwarted by private guards”.

It appears that “thwarted” actually means “killed”, which is the only effectual way to “thwart” pirates.

This will have the effect that pirates will cease to attack ships flying the American flag, which a considerably better result than I expected with Obama in charge. This action by captain Rochford of the Maersk was of course completely legal under international law of the sea, US law, and two thousand years of ancient customary law, not to mention the primary law of natural law: The natural right of self defense.  If, however, the captain had told us plainly what happened, there would likely have been “human rights” charges in some subsequent port of call.

The latest official cpi is 0.3% rise for the month of October, which, annualized, is 3.6% – higher than is desirable, high enough to cause moderate damage to investment and employment,but not high enough to be a serious problem.

Actual inflation, in my doubtless biased judgment,  is probably around seven percent, high enough to be a serious problem, high enough significantly damage investment and cause substantial unemployment.

The government continues to hold real interest rates negative for privileged and well connected borrowers, which procedure usually foreshadows severe inflation and economic collapse.  What we have seen before, many times in many countries, is a vicious cycle where as doom sets in, the well connected buy up cheap assets with cheaply borrowed money, incurring debts that rapid inflation will reduce to zero.  By so doing, the well connected create an ever greater pro inflation insider lobby group:  Positive feedback  leading to ever greater fiscal irresponsibility, resulting in ever greater inflation.

The vicious cycle is in progress, but has not yet reached the point of being irreversible.  The government could easily raise interest rates to fund its deficit spending by irresponsible borrowing instead of irresponsible money issue. There is a great deal of ruin in a nation.  On the other hand, a trillion dollar deficit is a great deal of ruin.

As the government continues with its low interest policy, insider interest in continued low interest rates and high inflation will become ever stronger, making it ever harder to change the policy from inflation to borrowing.

My guess is that there is still plenty of time to change course – from irresponsible money issue leading to hyper inflation soon, to irresponsible borrowing leading to hyper inflation later – but if there is no change of course before 2012, changing course after 2012 will be difficult.   The closer we get to the brink, the harder it is politically to turn around before hyperinflation.

Unemployment is soaring – yet supposedly total production has increased.

Normally a big rise in productivity leads immediately and directly to a big rise in prosperity.  Are you feeling prosperous?

Another common cause of statistics showing a big rise in productivity is, as in Argentina, the government lying to itself and the public about inflation.

Another common cause of statistics showing a big rise in productivity is government spending.  The problem is that in calculating GDP, government expenditures are valued at cost.  Thus for a private individual to raise GDP,  he has to find a way to make more money, whereas for the government to raise GDP, it merely has to find a way to spend more money.

To illustrate the problem, let us imagine a little kingdom, where all production is valued in sacks of wheat, and sacks of wheat are used as money.  The peasants produce in actual sacks, plus chickens and goats valued in sacks at the market exchange rate. The kingdom has one thousand peasants, each of whom produce two hundred sacks of wheat a year, one lord, and ten lord’s retainers.  Each peasant pays the lord a tax of twenty sacks, so we value the work done by the lord and his retainers at twenty thousand sacks.  So even though the peasants only produce two hundred thousand sacks of wheat, the kingdom’s GDP is somehow two hundred and twenty thousand sacks.

The Lord decides to stimulate the economy of the kingdom, by hiring two hundred and fifty peasants at one thousand sacks per year to dig holes, and another  two hundred and fifty peasants at two thousand sacks per year to fill the holes in.  He raises taxes on all peasants to pay for this, from ten percent of production to ninety percent of production.   Despite this tax rise, the remaining peasants not digging holes or filling them in continue to produce two hundred sacks a year.  So now that we only have five hundred peasants left doing anything useful, so you might suspect that GDP has now fallen from twenty thousand sacks of wheat, to ten thousand sacks of wheat, but no, this is not the way to get a Nobel prize in economics.

Since the holes are valued at cost, and filling them in also valued at cost, and since the peasants working in the Lord sector are well paid, better paid than ordinary peasants, though not quite as well paid as the lord and his retainers, and since the Lord and his retainers also took a modest pay rise for arranging all this prosperity, total value produced, total GDP is now a whopping eight hundred and fifty thousand sacks of wheat, a fourfold rise in GDP.

One of the Lord’s retainers is an economist, who gets a Nobel prize for explaining that the Lord has done such a good job.

Several recent Nobel prizes in economics have been as hilarious as the Nobel peace prize given to Yasser Arafat.

David Henderson observed an interesting paper telling us that Fannie and Freddie have very little risk.  Nobel Prize winner Joseph E. Stiglitz, and eminent economists Jonathan M. Orszag and Peter R. Orszag assured us that everything was just lovely. Don’t pay any attention to strange crazies like Peter J. Wallison who was at approximately the same date telling us that Fannie and Freddie were doomed and were going to take down the financial system with them.

If you tell the Cathedral what it wants to hear, you get honors and wealth. If you say what it does not want to hear, you are a crank, and will be reviled and ignored.  Theocracy in action.

Big lizards boasts that his prediction came in first – that on October 29 he wrote “Evidence is mounting (a favorite liberal-stream media word) that far from making a ‘blunder’, Sarah Palin had her finger on the crystal ball”

But on October 27 I wrote “Sarah Palin in charge”

Me me me me. Me first.