Tuesday, July 31, 2007

Did ya' hear the one about the budget deficit?

When I was a little boy (when I was just a boy)
And the Devil would call my name (when I was just a boy)
I'd say "Now who do, (who-oo)
Who do you think you're fooling?" (when I was just a boy)
Paul Simon - Loves me like a rock

As a card carrying member of the "reality based" community I don't believe that one can transform a turd into a rose by calling it such. The only thing, in my view, which would flow from a successful (i.e. getting everyone to refer to turds as roses) propaganda effort is the loss of meaning of the word "rose."

Or as Shakespeare put it in Romeo and Juliet;

What's in a name? that which we call a rose
By any other name would smell as sweet;

Equally, a turd called a rose, would smell as nasty.

Yet, it seems government officials don't read much Shakespeare, (or notice the different smells which roses and turds emit) for they think, by having the word "inflation" refer to other things than it used, different effects will flow from rising prices, or by having the phrase "budget deficit" refer to different things, different effects will flow from its rise.

I'll bet that any time you find yourself listening to a Republican vs. Democratic pundits' debate (boy do I miss SNL's Point-CounterPoint....Jane you...) on the deficit you'll hear two whoppers; 1) that Bush inherited a large surplus from Clinton 2) that Bush is halving the deficit this year.

Let's see if the left mouth knows what the right hand has been counting, to stretch a cliche, and go to the US Treasury's Debt to the Penny site.

Year Debt Deficit
1996 5224
1997 5413 189
1998 5526 113
1999 5656 130
2000 5674 18
2001 5807 133
2002 6228 421
2003 6783 555
2004 7379 596
2005 7933 554
2006 8507 574
2007 *8919 *412
*Debt and deficit as of Jul 27, 2007

As you can see, there was no surplus during the Clinton years, every fiscal year ended in deficit (albeit a quite small one in 2000) and there is no way that the deficit in 2007 will be half what it was in 2004, even if he says it is so.

It strikes me as quite comical to read this in the FT but a few weeks ago: Issuing a mid-year update of the budget outlook, the White House estimated that the deficit would drop to $205bn (€149bn, £101bn) by the end of September, lower than the previous projection of $244bn made in February and then to see Henry Paulson going to Congress hat in hand this week to ask that the Debt limit be raised again, especially when one considers that it was last raised in Mar 2006 by US$781B.

Obviously deficits ain't what they used to be. The FT can report a "deficit" of $205B expected by the end of the fiscal year in September, meanwhile the Treasury site tells us that the change in the debt over the year (what used to be a deficit) is already $412B.

By the way, don't step in the dog rose over there.

Monday, July 30, 2007

DJIA vs. Gold: The virtue of a long term view

One of the themes I noted while perusing investment boards this weekend was the following: the Dow will collapse, Oil will collapse and Gold will collapse, it's all going to crash.

Ah, the perils of extrapolating a few days worth of data.

I wonder who made the rule that Gold always rallies when the Dow falls? In a world of undefined or elastic worth money, everything is correlated because all prices tend to rise. The issue of concern is by how much.

More to the point for Gold's investors, a strong correlation between Gold's price and those of US equity indices does not necessarily mean that Gold will fall if the Dow collapses. Let's look to financial history for an example.

As the above graph shows, there were times during Gold's last big advance period in the 70s that Gold and the Dow were correlated and times when they were not.

One lesson I draw from that period is that over time, during correlated periods, Gold's beta relative to the Dow rose during periods of equity market rallies and fell during periods of equity market declines. Over time, liquidity aimed at supporting the markets and general business conditions tended, more and more, to flow into Gold.

Additionally, and perhaps quite relevant to the current situation, the '74 decline, coincident with Nixon's ouster from office, was a period when an initially positive correlation between the Dow and Gold turned negative as the Dow decline extended.

How closely the future follows this past remains to be seen, but at least I hope to have shown that leaping to conclusions based on a few days worth of data can be hazardous to your trading profits.

False flag fires and other snares for idealists

A forest ranger has confessed to starting a huge and fast-growing fire in the Canary Islands, saying his job contract was about to run out and he wanted to keep working, the civil guard said yesterday. Ranger admits starting blaze

The article linked above relates the tale of a man falling into a crude solipsism- the view that the self is the only thing that exists. The world, for the solipsist, is but a stage on which he alone acts,
and the people that inhabit it are but play things- pawns to be manipulated by the chess master himself.

Assuming that the views of the non-solipsists are correct, i.e. that the material world does exist and is peopled by a great many others like ourselves who also have wants, needs and desires, the solipsists among us pose a great danger, as the above story makes clear.

There are other variations on this theme of existents vs. non-existents which fall outside the definition of solipsism but which are equally dangerous for those deemed to be non-existents, like tribalism.

Tribalism, in its more radical variations, extends the definition of existent to the other members of the tribe but no further. Within that meme, persons not of the tribe are but pawns to be used, manipulated and expended when not useful. You're either with us or against us.

In my view, one of the assumed altruistic aims of globalization is the elimination of tribalism- all men created equal. It seems to me a noble cause, ironically one of the means by which globalization is currently being implemented is through an appeal to tribalism. Those who resist globalization are not considered part of the real tribe, which may explain part of the difficulty in the progress thereof.

But, I digress.

The aim of this post is to warn naive idealists that false flag operations- actions whose true cause is obscured, have been a feature of our history since we had history.

  • Some fire rangers will start fires to ensure their continued employment
  • Some policemen will break into houses to ensure their continued employment
  • Some financial leaders will "crash" markets, either directly or through feigned inattention to alter the public mind's sentiment towards desired legislation
  • Some political leaders will, either directly or through feigned inattention, allow their own country to be attacked to engender a sensibility in the public mind favorable to aggressive military action, or minimally to engender support for those leaders
  • Somewhat less egregiously, leaders might be unconnected to an act but choose, instead of finding the truth of the matter, to cast blame where it will do them the most good.

On a related side note, all humans exhibit this trait to greater or lesser degrees from time to time. The story of the Boy who cried Wolf and my 6 year old son blaming the neighbor for the spilled milk are examples. It is when this trait is exhibited by those with power that real trouble ensues.

Identifying these false flag operations, unless one happens to be privy to the conspiracy, is usually more difficult than the case above, particularly when there is no direct link, but simply blame mis-cast.

Moreover, once one opens one's mind to such actions, a Pandora's box of sorts may be opened- all actions become suspicious. It is not a pleasant state of mind.

In modern history, debate still rages as to the ultimate causes of: 1) the attack on Pearl Harbor- did FDR know the Japanese were going to attack?, 2) the Reichstag Fire- did Hitler's Nazis set it themselves? 3) the Gulf of Tonkin incident- did the Vietnamese really fire missiles at US ships, and numerous other incidents up to the present day.

Sadly, getting to the truth of the matter is quite difficult in these instances.

Fortunately, or so I believe, those who employ such tactics and their aims are often consumed in the process. Perpetuating the deception misdirects resources which would be better spent on other endeavors and the bigger the deception the more resources its perpetuation consumes.

This, however, is not much consolation for those adversely affected, but such is life on planet earth.

The moral of the tale is that sometimes things are not what they first appear to be. Awareness of this, it seems to me, is one of the primary aims of education. As Aristotle wrote, it is the mark of an educated mind to be able to entertain an idea without accepting it. Given that all of man's actions before our birth, and most of man's actions during our lives, fall outside our direct experience, entertaining working hypotheses rather than accepting this or that as true seems a safer bet to me.

Perhaps Descartes put it best when he wrote;
If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things.

Saturday, July 21, 2007

Developing world having "second thoughts" about globalization


"Globalisation did what it was supposed to do - what it said on the tin if you like - and what it did was, we told developing countries if you integrated, if you do trade liberalisation, you let in foreign capital, you tie into global markets, it's going to make you richer, it's going to make you bigger and more successful economies.

"That's exactly what it's done, but the economies in the rich world are turning around and thinking, 'well, we sort of knew it was going to do this, but we didn't know it was going to do this quite so successfully - and wait a minute, this is having some unforseen implications that maybe we're not that comfortable with'."

Mr Thirlwell says both the US and Europe are becoming worried about their dwindling power base in favour of China and India.

read the whole article here:

Developing world having "second thoughts" about globalization

Thursday, July 19, 2007

Whew...(wipes sweat from forehead)...it isn't terrorism

There is no reason to believe whatsoever that this is anything other than a failure of our infrastructure. NY Mayor Bloomberg

Yesterday, at around 6:00PM local time, an underground steam pipe exploded in Manhattan's east side, right near Grand Central Station. Officials, like Mayor Bloomberg, were quick to point out that the explosion was not caused by terrorists.

That's a load off our collective minds. Isn't it?

It isn't for me.

Why do the terrorists need to come over and blow us up when our infrastructure is rotting around our ears.

And how silly it seems to me to take comfort, as Mayor Bloomberg wishes you to do, that the explosion you hear in the distance, or the dam that burst flooding your property, or the extra distance you need to drive to go around a failing bridge, is not the result of terrorists but instead an effect of our failure to direct a portion of the huge investment flows that come to America towards rebuilding our infrastructure.

This isn't due to lack of knowledge. Almost 10 years ago, the American Society of Civil Engineers assessed the nation's infrastructure with a letter grade of "D" one above failing. In 2001, they lowered the grade to "D+" and opined that the problems could be fixed at a cost of US$1.3T.

"The solutions to these problems involve more than money, but as with most things in life, you get what you pay for. America has been seriously under-investing in its infrastructure for decades and this report card reflects that," said ASCE President Robert W. Bein.

So, kowing what we knew in 2001, the national leadership decided to.....(drumroll please)....invade a few countries. The United States has spent about half of the US$1.3T cost estimate for an infrastructure upgrade blowing stuff (and people) up on the other side of the world.

Brad Setser at RGEMonitor recently blogged about China missing its opportunity to let the Yuan rise while domestic demand was so strong.

In the aftermath of 9/11 the world opened its heart and wallet to the United States.

I think we missed an opportunity as well.

Tuesday, July 17, 2007

Outsourcing the big decisions, like war finance

My greatest fear is that this Republican loss will be seen by our adversaries as a great victory. In the past year, U.S. resolve has been tested, and sadly we have not always risen to the occasion. We could be facing a replay of the end game in Vietnam, when insurgent leftists in the Democratic party brought about the defunding of military assistance for South Vietnam, and the North Vietnamese invaded and defeated our trusting ally. James S. Robbins

One of the great myths, or so I believe, about the Vietnam War, specifically the ending thereof, is that the Democrats pulled the plug on war funding. It's a myth which gains traction due to the faith that the powerful are always in control of their own destiny. Only we could stop us.

But, as I will argue, this notion doesn't ring too true to me.

We didn't stop us, we were forced, in part, to end the war because our foreign financiers were no longer willing to pay for it.

Decades before French Fries were renamed Freedom Fries in DC, the French, under De Gaulle, who knew a thing or two about the perils of fighting to keep colonial possessions, and even a bit about Indo-China (after all, we took over "management," if you will, of Vietnam from them) decided to stop accepting our paper and demanded Gold, instead. Eventually, this led to the collapse of the London Gold Pool and a few years later, Nixon's decision to close the gold window in 1971.

The resulting repricing of US debt left us with no other option but to end a war we were in no position to finance internally.

And thus outsourcing, on a grand scale, began in this country, right about the time our trade balance began to shift negative. I guess these silly economic abstractions like trade imbalances do have consequences.

With that in mind, I've been watching, what seems to me to be some political theater in Washington on the issue of ending the war. The Democrats can pull all the stunts they wish but I don't believe they can defund the war on terror. No, like more and more decisions in this sharecropper society (to borrow from Warren Buffett) we call the United States, we'll outsource this decision as well.

Our Congress won't defund this war, our financiers will do it.

Eventually, the rest of the world will tire of taking our paper for goods and then when faced with the decision to truly go it alone, to pay for the war internally, we will call it a day.

What might be the catalyst for such an event? What would cause our financiers, who have willingly accepted our negative real yield paper for years, to stop accepting it?

Perhaps an attack on Iran might be that catalyst.

Perhaps an attack on Iran, which, according to the Guardian, is now a very live option, or even just the threat of an attack might get the Chinese, who have been expanding economic ties with Iran, to rethink the terms of trade.

Given recent history, which demonstrated that the current administration has no intention of honoring contracts signed by rogue regimes, like Saddam's Iraq, with whom the Chinese and Russians had economic ties, I can't see why the rest of the world would continue financing our empire's expansion as our gains will be their losses.

So if you're interested in finding out when the current wars will be defunded, don't watch Washington. Watch Beijing or Moscow. Having already accepted the outsourcing of customer service call centers to India, it shouldn't be too hard to imagine that we would outsource Congress' responsibilities as well.

As the saying goes, he who has the gold makes the rules, and as GATA's work has shown, we don't have the gold any more, just pieces of paper masquerading as such.

Monday, July 16, 2007

in an upside down world, I propose the anti-GATA solution

As many readers are aware, I have been a supporter of GATA, the Gold Anti-Trust Action Committee for years. Their research suggesting collusion among money center banks to suppress the price of Gold, and calls for the world's monetary authorities to come clean on the amounts of Gold they currently hold, and have swapped out, seemed a reasonable response to nefarious activities.

In a world where reason and empirical evidence were held in high esteem GATA's work would have elicited the correct response.

But, it seems to me, the world is currently upside down, or as Justin Raimondo of Anti-War.com puts it, this is a bizarro world. In a bizarro world, reasonable actions elicit unreasonable responses.

So, let's get un-reasonable.

I propose the formation of anti-GATA.

This group will, instead of trying to shed light on the price collusion of money center banks, and forestall further dishoarding of Gold by western monetary authorities, argue for more Gold sales, at a faster pace, argue against accurate accounting of western CB gold hoards (after all, if we're going to sell it all, who cares how much we have now) and argue for the swapping of non-interest bearing Gold for interest bearing securities to act as reserves for western Central Banks.

Anti-GATA-ites will swear that Gold is a barbarous relic, well suited for jewelry for the vain, but poorly suited to act as the foundation of sound monetary systems. Government issued bonds, which, unlike Gold, have proven to be subject to defaults, are a much better choice to act as reserves. That way, when we finally decide to admit inflation is a problem, and thus need to aggressively raise rates, the value of the reserve base of the world's major currencies will shrink dramatically.

We will recruit an anti-Ron Paul (perhaps Dick Cheney might be interested in the job) who, instead of reminding Greenspan of his "Gold and Economic Freedom" essay and questioning Fed Chairmen about Fed sales of Gold, will aggressively ask the Fed Chairman at his semi-annual testimony, why we still have any Gold. This anti-Ron Paul will rise twice a year and demand that we crush the Gold market as we crush those who stand between us and our oil profits. Because, you see, you are either with us or against us.

To garner support among the shadow lovers in Washington we will propose that the current secrecy surrounding official gold operation should continue and be augmented. All proceeds from Gold sales can be used to fund CIA black-ops, the coming War with Iran and secure, extradition-proof palaces in places like Paraguay.. We will focus on reports that terrorists sometimes use gold to finance operations to argue for destruction of the Gold market with this motto- drive Gold down to $200, defund the terrorists and prove Robert Prechter correct!

Enough fooling around, I say. Let's kick this gold selling process into high gear and get this party started.

Thursday, July 12, 2007

The Goldman Sachs letter- an omen?

Be careful what you ask for, you might get it.

There are times, like this morning, when the air is crisp, the sky is clear and I can see the Catskill mountains in all their glory, that I feel extremely blessed to have escaped the financial industry.

I could, I remind myself, be on a New Jersey Transit train en route to Manhattan, or on some 14 hour flight between London and Singapore, or just sitting in my office watching prices tic up and down with rapt fascination, oblivious to the outside world. Instead, I'm sipping coffee, breathing the clean air and enjoying the relative quiet of rural life.

There are times when other stimuli evoke the same sense of being extremely blessed to have escaped the financial industry- such as reading the Goldman Sachs letter.

In a musing from earlier this week I compared economics and finance to religion. Both industries, if you will, (by industry I mean the financial component of religious institutions, such as the sellers of offerings at the Temple of Artemis in Ephesus, one of the Seven Wonders of the Ancient World) thrive when faith in returns are high.

This faith might be in eternal salvation, such as the Catholic Church sold in the form of Indulgences to finance, inter alia, the Renaissance rebuilding of Rome, or it might be a comfy retirement in the material plane, free from worry over procuring necessities.

Of the two, the tougher sell over the long term, is a comfy retirement. After all, it is only after death that one would discover whether the indulgence was worth the paper on which it was printed, and upon making the discovery, to whom would you complain.

A comfy retirement is something that needs to be delivered within the buyer's life, and therein lies the risk for those who have raised this faith.

I don't know who wrote the letter to Goldman. It might be a disgruntled employee or a terrorist. Given Goldman's stock price, I doubt it's a griping shareholder, but, to me, the letter is a reminder of the thin veneer of civilization that covers all men and the perilous tight rope on which the financial industry balances.

Never before in US history has such a large segment of the population bet so much of a slice of their income in the markets. The financial industry has been nothing short of superb in raising the hopes and dreams of many. Starting in the next decade, it will become time to deliver and large scale failure has severe risks, both to those who promised the returns, as the Goldman letter should remind, and to all who make use of the great virtues of sound intermediation.

The more I think about it, the more I think we in the US wasted a tremendous opportunity to reinvest in our infrastructure to better prepare for a world wherein even if Peak Oil is not true, at least we know we will be importing more than we produce. It will be a real tragedy if we finally come to the view that we need to reinvest, right at the time when faith in the financial industry, which is crucial to capital formation and mobility, ebbs.

The financial industry has fought hard to recover credibility from the Great Depression, to cast off the shackles, as they saw it, of government oversight, to become, as Tom Wolfe put it, Master's of the Universe.

They have succeeded.

Be careful what you ask for, you might get it.

Tuesday, July 10, 2007

and on that note


*The intellectual is looking for the right questions to ask; the pseudo is giving what he claims to be the right answers.

*The intellectual is evidently motivated by a disinterested love of truth; the pseudo is interested in being right, or being thought to be right, whether he is or not.

*The intellectual is willing to admit that what he does not know is far greater than what he knows; the pseudo claims to know as much as can be known about the subject under consideration.

*The intellectual states as good a case for his adversary as can be made out; the pseudo sets up a straw man and beats it to death for the sake of seeming superior.

*The intellectual is deeply and constantly aware of the limitations of human reason; the pseudo makes a deity of reason and tries to force it into realms it cannot penetrate.

*The intellectual seeks light from whatever source, realizing that ideas are no respecters of persons and turn up in the most unexpected places from the most improbable people; the pseudo accepts ideas, when he does, only from experts and specialists and certified authorities.

*The intellectual advances an hypothesis that he hopes may be true; the pseudo propounds a dogma that he insists is true.

*The intellectual recognizes that opposites are not always contradictory, and may indeed reinforce each other; the pseudo paints a picture in black and white, right or wrong, leaving no room for a contrary viewpoint.

*The intellectual knows there are no final answers to human questions; the pseudo makes each tentative and provisional answer sound like a finality.

*The intellectual is courageous in opposing majority opinion, even when it jeopardizes his position; the pseudo slavishly follows "the most reliable authorities" in his field sneering at heresies.

*The intellectual never talks down to his audience, but tries to be as clear as possible; the pseudo talks above his audience to mystify and impress them.

Monday, July 09, 2007

Will "economics" go the way of "religion"?

Aristotle has kicked me, as foals do their mothers when they are born. Plato

A few millennia ago a teenager gained admittance to one of the leading schools of his era. His name was Aristotle, his teacher was Plato and the school was the Academy in Athens.

As is often the case when views are transmitted from the older generation to the younger, the student looked to poke holes in the views of the master. As the opening quote relates, Plato thought his student was acting as infants do, without awareness of the effect of their actions.

Although there are many disagreements between these two giants of Philosophy the one on which this essay will focus is in epistemology- the study of what is means to know something.

For Plato, (crudely stated in exaggerated form for purpose of discussion) knowledge was found in the ideal forms and applied to the material world. Tables were tables because of their resemblance to the ideal table.

For Aristotle (also crudely stated) the arrow of causation ran the other way. The material world was real and the world of thought was filled thereby. The 4 legged piece of wood which holds my computer is a table and other things like it are also tables.

As one might surmise given the differences between the two approaches, Aristotle, the observer, was much more a scientist than Plato. Dogs did whatever dogs did and swine likewise. To observe a thing is to know a thing.

Over the intervening centuries western thought has taken its direction from both views, first leaning Platonic and then Aristotelian and then back again to start the cycle anew.

I see merit in both approaches depending on the goal. If you are trying to learn what swine do you should observe them. If, however, you are trying to learn what a "religious" man, a "reasonable" man, or, say a "conservative" man should do than Plato's approach seems a better path.

This is so, it seems to me, because reason, religion, conservatism, or justice are far more difficult to point to and study than is a table.

Plato's approach assumes that material world manifestations will be but dim reflections of the ideal. From that perspective, Christianity (or Islam) is not necessarily besmirched because a so called Christian (or Muslim) does something horrible.

For Plato, whose awareness was awoken, in large part, when he watched his mentor Socrates first sentenced to death and then (no commutation here) executed, the idea that Justice was not sullied by the acts of those considered by many, just, was crucial. His Republic explores this theme in great detail.

Currently it seems to me that Aristotelianism is the preferred mode of thought in these matters.

Christopher Hitchens' and Richard Dawkin's recently published polemics on religion both use the Aristotelian perspective to prove their points- not without justification. Popular religious leaders proclaim themselves Christians, Muslims or Hindus. Thus, as one might do when studying swine, observations of the actions of those proclaiming to be Christians, Muslims or Hindus informs the empirically minded of the content of those faiths. Under that head the Crusades becomes a Christian endeavor (the blowback from which resulted in Suleiman battering the walls of Vienna) while the attack on the World Trade center becomes a Muslim endeavor.

Religion, under this head, poisons everything, to borrow from Mr. Hitchens.

And the semantic confusion doesn't stop there.

President Bush proclaims himself a political conservative. Therefore, under the Aristotelian head, all his actions are considered to be conservative. Platonists take a different view, as this essay from Jim Lobe relates.

Economists, who have usurped the place of religious leaders in modern society, are also classed in this manner. The tenets of Keynesianism, Monetarism or Austrianism are discerned by observation of those wearing their denominational labels. If Mises wrote it, it must be Austrian. If Stephen Roach wrote it, and he wears an "I believe in Keynes" t-shirt, it must be Keynesian. More broadly, at least to the general public, if an economist urges a policy it is considered economically sound, and therefore, good.

This is so because "economics" and "finance" is given high regard by many. Some complain about their experiences with bankers or brokers but in general the industry, and by Aristotelian extension, the tenets thereof are thought to be the path to the good.

But what if economists lead the world astray?

7 centuries ago, when Catholicism was held in the same regard as economics is now, the Black Death swept through Europe killing millions. Adding insult to injury, the plague kept reappearing and people kept dying.

It wasn't long before people began to question the virtues of Catholicism, after all hadn't they been led to their fate by good Catholics?

The great schism of Christianity soon followed and the long slow decline of religion as moral guide began in the West.

Economics, which used to fall under the head of Catholic morality (for example the search for the just price for a thing) was now considered in its own right.

But economics is not immune to the perils of being the moral guide. Should peak oil theory prove true, global warming lead to a significant rise in sea levels or even another plague begin to prey on mankind, those held in high regard and their theories may lose their attraction- the glamour may fade.

Alternatively, and with greater risk for "economics", the global economy might seize up, trade might decline precipitously and people will have some justification for turning away from the discipline.

Or, (hopefully) we might begin a shift back to Platonism and realize that "justice" is not necessarily what the judge dispenses but an ideal which man can only imperfectly manifest. We might realize that Christianity (or Buddhism, Islam or Hinduism) is not necessarily what Jerry Falwell preached but an ideal which man can only imperfectly manifest. We might realize that sound economics is not necessarily what Greenspan or Bernanke proposed but an ideal which man can only imperfectly manifest.

Of course, a shift to Platonism would be greatly assisted if the leaders of the discipline in question didn't insist on cloaking themselves in the mantle of purity and infallibility, which, in my view, was the great mistake of the Popes.

If the Central Bankers of the world start issuing proclamations of their infallibility along with threats and sentences of excommunication (or as we would put it, being cut off from the world's financial system, as has already happened to a few nations recently) then watch out.

Under the empirical head, human nature is to be brutal and thuggish. Under the Platonic head, we can dream that there are higher motivations which might guide us if we would but listen.

I pray for the latter as the former is the path to a dark age.

And few want that.

Sunday, July 08, 2007

Can the death sentence of Bretton Woods II be commuted?

God, give us grace to accept with serenity the things that cannot be changed, courage to change the things that should be changed, and the wisdom to distinguish the one from the other. Reinhold Niebuhr

One of the perils of self-righteousness is the increasing inability to distinguish the things that can be changed from those that can't. The more self-righteous one becomes the more malleable the world seems.

The above thought popped into my head upon reading the news of Mr. Libby's commuted sentence for perjury and obstruction of justice. This isn't to argue that President Bush acted outside his authority in this matter, rather it was the ham-handed manner of the commutation, announced hours after Mr. Libby's request to remain free on bail while his appeals were heard, was denied.

Who knew Monopoly "Get out of Jail Free" cards weren't fictitious?

More people than your author thought this reeked of a deal struck months before- that Mr. Libby need fear no jail time.

Again, I'm not arguing against the President's Constitutionally guaranteed pardon power, but the manner of its use- suggestive of a mindset which thinks laws are for others.

There are, however, as the legend of King Canute relates, some laws even an absolute monarch cannot change. The tides will rise and fall as they will, regardless of who orders them to stop. The earth will rotate on its axis, giving us night and day as it does, regardless of what any person on this planet orders. And economic resources must be allocated reasonably efficiently to produce the necessities of life from the current context or human life will become increasingly difficult.

Governments can certainly ensure that stock indices, whose presence has become ubiquitous on most news channels, will keep rising month after month and year after year, but only at the cost of making those indices useless as measures of national economic well-being (if such were ever the case).

These days I wonder more and more if the primary function of capital markets- to allocate scarce capital amongst competing needs- has been forgotten.

VP Cheney's quip that "Reagan proved that deficits don't matter" comes to mind.

He's wrong. They do, as he and many others are, I believe, soon to learn.

More and more often I read of the need for economic officials to ensure "financial stability"- a phrase which apparently means that equity indices must always rise, and that cascading defaults must be avoided.

But what, I wonder, if capital has been misallocated on a radical scale? In that event, the goal of "financial stability" runs counter to the primary function of the capital markets and the risk rises that procuring the necessities of life will become increasingly difficult for an increasing share of the population.

How, you might be wondering, could capital be misallocated on a radical scale? One way (there are many) is for capital to be allocated based on an erroneous view of the future.

For instance, capital could be allocated based on the assumption that energy costs would forever be cheap. As energy costs rose the misallocation would become increasingly obvious. Life, regardless of the King Canutes decreeing economic nirvana, would become harder.

And so it is.

The global financial system, it seems to me, has increasingly become a means for perpetuating the status quo, despite the fact that the status quo only worked under the (now clearly false) assumption of cheap energy. The global financial system, in my view, as currently managed, no longer seeks to allocate scarce resources amongst competing needs, but instead seeks to promote the illusion that capital is not scarce.

According to the FT, I'm not the only one who thinks something is awry in global finance.
Russian President Vladimir Putin recently said the world needed to create a new international financial architecture to replace an existing model that had become “archaic, undemocratic and unwieldy.

Nouriel Roubini and Brad Setser at the always informative RGEMonitor have also updated their views on the expected end of Bretton Woods II.

One improvement I would make to the current system is the removal of the illusion that capital is not scarce by making money "hard" again- call it a prescription of monetary viagra.

"Here we go again," I can almost hear the fiat money faithful sighing, "another nut calling for a return to the use of the barbarous relic, Gold, as a monetary standard."

"Guilty as charged," I retort. "
The thing is, as I look at the news of the world I don't see many signs that man has forsaken barbarism. Wars, instigated by the supposedly advanced cultures of the world, rage in Iraq and Afghanistan and are threatened in Iran. Meanwhile, the cold war between the US and Russia, the end of which was hailed as the provider of a "peace dividend" (which was spent on, ironicly enough, more war) seems to be heating up. Coincidentally, credit derivative portfolios are "blowing up" at an increasing pace. In a barbaric world where trust between nations is falling, not rising, the barbarous relic, Gold seems a safe bet."

"But why, " they might respond, "has the world managed to survive so well without a Gold standard for decades?"

While I dispute the contention that the world has "survived well" since the early 70s- it seems to me that the top tier has done quite well while the rest languished- I think a more pertinent argument is that the economic context has changed.

That is, I think the risks of "elastic" money, to borrow from the amendment that created the Federal Reserve, are most severe when underlying economic contexts change. So long as natural resources were, in US$ terms, cheaply obtained, increased productivity, a by-product of doing the same things over and over again in the same economic context, masked a fair bit of capital misallocation, like paying entertainers millions while paying educators thousands.

The 80s and 90s were decades of relatively cheap natural resources.

Increasingly, however, natural resources, in US$ terms, are not cheaply obtained. The economic context is changing and capital needs to be re-allocated in a manner that reflects this. As James Howard Kunstler argues both persuasively and humorously, one aspect of current capital allocation that needs to change radically is investment in energy expensive suburbia.

When Levittown, NY, the paradigmatic postwar American suburb, and, it seems worth noting, intellectual incubator of Bill O'Reilly, was being built, crude oil cost about $2.50 per barrel while average hourly earnings were 1.50- a ratio of 1.6 hours of labor per barrel. Currently, crude oil costs $72 while average hourly earnings are 17.3- a ratio of 4.2 hours of labor per barrel.

If oil prices rise to $100 in the next year or two, barring the emergence of radical "share the wealth" altruism on the part of the economic elite, which might lift average hourly earnings, the ratio will be well over 5 hours of labor per barrel.

A tripling (or more) of the labor cost of the sine qua non of suburbia, petroleum, not to mention the higher costs of other items that are increasingly excluded from government measures of "inflation" seems to me a radical change in economic context- a change that exposes capital misallocation.

However, until just recently, the US financial system was considered to be operating efficiently as suburban house prices in, among other places, Nassau County, which includes Levittown, were rising. While oil prices trebled from 1997 to 2007, Nassau and Suffolk County (NY) home prices rose by 50%. Efficient allocation of capital? I think not.

Of course, the capital that was, at least in my view, misallocated in, inter alia, US housing has increasingly come not from domestic sources, but foreign. And if the Iraq War proves anything, it proves that the fiat power of the US government extends only tenuously across our border. It is becoming increasingly difficult for the US government to force others to accept the current status quo perpetuating financial system as they increasingly feel that the status quo needs to change.

With Russia calling for a new global financial architecture while China's need for a system that allocates capital efficiently increases dramatically as it rides the dragon of its unleashed peasants dreaming of middle class status, US government efforts to commute the sentence of no-standard Bretton Woods II, the misshapen offspring of gold exchange standard, Bretton Woods will, in my view, prove as effective as King Canute's orders for the tide to retreat.

The debacle in Iraq exposes the US as a dishonest broker in international affairs and dishonest brokers lead people to seek elsewhere for their intermediation needs. Moreover, politicians, ever eager to blame the woes of the world on others, should be able to lay the blame for the coming economic dislocations on the War policies of President Bush. As you can see, the rats are already leaving that sinking ship.

Selling Gold, massaging statistics and injecting liquidity to ensure "financial stability" will not commute the death sentence of Bretton Woods II. Rather, I believe, these policies will obscure the death behind a facade of health, until, to wax Kunstlerian, the stench of its rotting corpse penetrates suburban SUVs.

Hell, we might discover, hath no fury like a Soccer Mom scorned.

So, what should one do to prepare for the imposition of this death sentence?

I say, buy Gold and other precious metals.

They have, throughout history, been both the means of wealth preservation during periods of transition from one economic paradigm to another and the concrete in the foundation of new monetary systems, whose managers will be eager to prove that the new currency is "as good as gold."