Time for 15 euro nations to throw in their cards

The cost of saving Europe is getting too high, and considering the direction the Eurocrats’ philosophy is taking, it’s better just to walk away.

One warning sign was the vehement opposition to the proles ever having a say in how their country or their continent is run.   Never mind that the Greek right wing had half the debt hidden with accounting trickery and derivatives so the public never had a say or notice that the debt was being run up that high.   They should just be stuck with the debt because the elites that want to enslave them say so.  That is the right wing thinking.

Personally, I emphatically agree with the “doctorine of odious debt” and strongly believe that it should be international law.   If somebody like a dictator runs up a huge tab without a mandate, I don’t accept that that there is any moral or ethical basis why the public should be bound by that evil collusion.

It needs to be held to situations where it is appropriate, and the banks colluding with a prior Greek government to run up a tab with no mandate, off the books, is well across the line.

Now another angle is that S & P is being condemned for threatening to downgrade even Germany and France.

S & P, Moody’s and Fitch should be condemned for not having already downgraded Germany and France.

These ratings agencies need to decide if they are in the public relations business or the ratings business.   If they are supposed to be publicists generating good buzz for everybody they should go work for Kim Kardashian and leave serious work to somebody else.

The traditional ineptitude of ratings agencies among other things makes market crashes worse as occurred in 2008.

In 2008 some seriously defective instruments that were given AAA ratings suffered serious losses.    Some of these packages of instruments were intentionally designed to fail and the banks selling them were shorting them at the same time.

Ratings should not be a rubber stamp.

But getting back to the recent story, the real news is not the threatened downgrades, but that the politicians and bureaucrats think that ratings agencies shouldn’t tell the truth because it might affect the markets.

God forbid a ray of truth might get through.

At the same time, half the financial press are writing on the impending market disaster while the other half write glowing nonsense about how the markets are certain to rise and we face eternal prosperity.  The direction that the politicians, bureaucrats and media are taking is Orwellian and I don’t like it.   Europe is regressing 80 years and the US is turning into the Republic of Americastan.

I take it the French have thrown veracity on the rubbish heap along with liberty, fraternity and equality.  The Germans have never espoused those values so I can’t accuse them of abandoning anything.

So there you have it.  If you are in favor of truth, justice and democracy you are an enemy of the Reich…er..European Union.   Framed that way, I know which side I’m on.

Footnote suggestion: start turning ratings hard instead of issuing them in inscrutable ways that look more like religion or astrology.

The European Union’s magic numbers were debt no more than 60% of GDP and deficit no more than 3%.   But that level will already cause significant debt stress.

The GDP is not the best figure to use.  As shown in the US, governments face significant resistance to raising taxes.  They also face significant resistance to reducing programs, any programs.  The result is often inertia.  That means that comparing the debt to the government budget is a more appropriate ratio.  The GDP is irrelevant unless the government can access more of it.  And which sounds more ominous, that the debt is 60% of GDP or that it is 240% of the annual budget?

But using GDP comparisons for a moment, as that is all that has been publicly developed, the idea that the 60%/3% should reflect a AAA rating is ridiculous.

The idea that a government is inherently a more reliable debtor is a dangerous misconception.   A government controls its’ own process in a way that no other debtor can.   A government can immunize itself from execution against assets and unceremoniously give you the heave ho.

Giving a government that is badly in debt a AAA rating because it is a government is incorrect.

If I were making the credit ratings I wouldn’t give a government with the 60%/3% debt ratios better than a BBB.

The US present debt and deficit? A BBB-…maybe. For any other country I’d put that in single or double B.

Have hard lines that result in automatic downgrades without debate, analysis or equivocating and it will help straighten things out.   There’s no need for a field that is mostly numbers to be all soft analysis.

Euro chicanery as ominous as any other sign

I’m sure everybody has noticed by now certain patterns that European politicians have used to disguise the lack of progress on their issues.

The mainstay approach of having a meeting, resolving nothing, then departing and declaring victory is getting really thin.

The announcement is followed with no specifics and further meetings are announced to work out the details of the non-deal when in fact the extent of the agreement is “we have agreed to solve the problem” but without any mechanics.

The second line of attack is, we’ve had a meeting, and we’ve decided that somebody else will solve our problem.  China will solve our problem.  Private investors will solve our problem.

That is not a plan, it is a hope for “deus ex machina”.

This form of salvation reminds me a lot of the old Aesop fable about mice who are being terrorized by a local cat.  So the mice have a meeting and they decide that the solution to the problem is that they will put a bell on the cat.   The reaction to this is quite favorable, until an old and wise mouse speaks up and says, the plan is fine, but who is to bell the cat?

In other words, a plan that can’t be implemented due to an insurmountable hurdle is as good as no plan at all.

China is predictably not interested and there is little incentive for them to get involved.  The lack of any attempt by Europe to take a serious run at its’ problems on its own makes it foolhardy to fund them.  They’ll just go through any money contributed and then when it is about to run out, start having meetings again to figure out what to do.  Giving money to Europe right now is about as constructive as putting your money in a pile and setting it on fire.

As for the private investors solution, that fizzled for predictable reasons.  There is little interest in European bonds now as it is.  The leverage plan is rather silly, because it insures only 20-30% of the value of bonds.  The statement that makes is in some ways worse than no insurance.  Invest in Europe and we guarantee you will get one fifth of your money back ! Woo hoo, sign me up.

The whole issue is that private investors are losing faith in government debt.  The theory that you will fix the problem by attracting back private investors is strained at best.

Trying to force banks to take on more government debt by increasing tier 1 capital requirements is dirty pool and there is a bit of a conflict of interest in the decision.  The irony is that the whole thrust of the problem is that tier 1 capital is arbitrarily defined and attributes a reliability to government debt that is without foundation.

Other dubious plans have come up.   An utterly bizarre plan from Germany involves putting together currency reserves to increase investor confidence.

So Germany alone would need to save 500 billion Euros under that proposal.

If there isn’t actual currency set aside, it’s just an accounting gimmick.

If currency is raised to set aside with bonds, then you increase the debt.

If you do set physical currency aside as a guarantee, you will decrease the liquidity in the system unless you print more Euros.   That will tend to cause deflation and stagnate markets.  Deflation will increase the value of existing debts.

If the idea is to print money to set aside as a guarantee, so that there isn’t a liquidity crisis, why not just simply print money without turning this into a dog and pony show.

So I am divided as to whether this latest from Germany is supposed to make no sense or whether it is supposed to be counterproductive.

The latest from Europe generally is, the ECB lends money to the IMF and then the IMF lends it out to Italy or Spain as the case may be.

Is John Cleese making European policy?

If Europe and the ECB can’t bail out Italy and Spain now, how does it assist to loan money through the IMF?  If they are providing the funds, how does adding a step with the IMF in the middle change anything?

If the idea is that the IMF is a better credit risk, then you have the ultimate issue that, if the debtor country stiffs the IMF, will it be Europe or the IMF that gets stuck with the tab?

That really is the issue.  If the IMF doesn’t have the money to loan, and the ECB doesn’t have the money to loan, how does this work? If the IMF and the ECB could fix the problem with their resources together, why not have the ECB put in some money and the IMF put in some money separately rather than taking weird roundabout steps?

If the money isn’t there for a bailout, it isn’t there.

There is an old expression about pulling oneself up by one’s bootstraps which would be appropriate, but it is a bit dated.

Here’s a more contemporary allegory: bees lifting a laptop:

http://www.youtube.com/watch?v=3AxIOtSjXyA

Mythbusters proves that bees can’t lift a laptop using basic principles of physics.

The basic myth of bees lifting a laptop has the same structure as supply-side and other right wing economics however.   It is possible with some sleight of hand to create the appearance that it can work but that isn’t enough to deliver.

It’s hard not to wince hearing some of the plans being floated in Europe these days.   When a “plan” is obvious balderdash, it has a prejudicial effect worse than having no plan.  A bunch of confusing bafflegab may reassure slow people but to those of us with IQs over 100 it looks incredibly desperate, like not only is there no plan but you’ve given up and are prepared to say things that are incoherent rather than say nothing at all if you need to stall for time.

Merkel and Sarkozy are the pioneers of the planless plan, where the real plan is to game the media to keep up market and consumer confidence without doing anything.   It’s too bad that Merkel is taking the lead in this, because she leads Germany and Germany has money to spare.   Sarkozy is at least ten times as smart as Merkel and far better at public relations.

Merkel and her bank friends are so awful that they make me feel sorry for Berlusconi.  Italy was in good shape and then there was a massive misleading press blitz about Italy’s finances and then ECB halved it’s support for Italy’s bonds in order to push Berlusconi out of power so that he could be replaced by an ECB/ Goldman Sachs puppet.

It is a supreme irony that with all of Berlusconi’s unethical connections and activities and more legitimate reasons to remove him than you can count on your fingers, that when he was finally removed from office, he was removed by foreign powers and bankers because he was a patriot who refused to sell out his country.

The tactics used against Italy suggest to me that those who would consolidate Europe now do not have the appropriate motives and it must not happen.

Europe has had years to work on the debt problem and they haven’t come up with a single good idea.  Germany vetos any suggestion that would solve the problems (e.g. print money).

The plan for Greece is doomed to failure for a variety of reasons, not least of which is that the yields on Greece’s bonds are over 30%.

If Greece’s full debt was unsustainable at 7% yields, can half of Greece’s debt be sustainable at 30% yields?  Do the math.  No way.  Greece is going to burn out and soon.

Greece should be allowed to default…because they are going to default.  Anything that anybody has to say on the subject is moot.

What needs to be the focus is, when is Greece going to default.

The unpopular answer for the politicians should be, as soon as possible and it should be carefully planned so the logistics can be worked out.

If more bailout funds are given to Greece, they will be spent.

Greece should be allowed to default, but the flip side of that is that the bailout funds would need to be given to Greece’s creditors to keep them afloat.

Wait, and the bailout funds will have been spent and we will be in the same mess but with fewer resources to address it.  Unfortunately politicians are averse to taking any immediate action that is unpopular, even if it is necessary and the cost/benefit is there.

 

 

Buffett’s point on gold is sound

Warren Buffett has always stayed away from gold, and the reasons make sense.   You dig it up, move it somewhere else and then bury it again in some expensive bunker and pay a lot of money to guard it, while the gold does not produce anything.  Various reserve banks stock up on gold bars as do certain funds that bet on the value of gold.

Gold is becoming too expensive for people to continue to support the price with jewellery sales and it is not as useful as other substances for industry.   If you want a cheap electrical conductor you go with copper.  If you want a high end electrical conductor you go with platinum.   At the present prices I would be skeptical that it would be economical to use it for tooth fillings.

According to Wikipedia, gold is used (I presume historically) 50% for jewellery, 40% for investment and 10% by industry.   I expect that with excessive pricing investment is greatly increasing as a factor as it becomes uneconomical to use it for other purposes.  When gold approaches the price of platinum, why not just use platinum? And if you can’t afford that, you go to silver- which appears to be rapidly increasing in importance in the jewellery trade as gold becomes to pricey.

The problem with gold as investment is that, as Buffett has noted, it doesn’t produce anything while it eats up resources.

What that means is that, gold as an investment is always a bubble.   Gold consumes but it doesn’t create.  If you start with a stack of gold bars in a vault backing a fund, in five years you will still have just the gold bars in the vault, but you will have five years of management fees for the fund, costs of security, insurance, transaction costs for trades, etc.

That doesn’t mean that you can’t make money on it.  As long as you can find a punter that will pay more for your gold or your shares than you pay for it, you will make money.

What it does mean is that the “gold as investment” market is always going to be a net loss.  The costs of maintaining the gold hoard are going to come from somewhere- that net loss is going to eventually translate into a net loss for the investors as a group.   However you move the shells in the gigantic shell game of the gold market someone is going to be stuck with those costs in a net loss.  You cannot rely on classic bubble thinking that the price must continually rise until gold is worth more than the entire universe.   It is like a market sized game of musical chairs where when the music stops, the people that get out in time make a killing and everybody else gets screwed.

It is great for people with some money and savvy to hyper-concentrate wealth but like all market bubbles it has the same basic structure as a pyramid or ponzi scheme where when the last round of people have nobody with more money that is willing to buy them out, they get stuck.

As for the western rationalization that gold is the safe bet in bad times, that is little more than a convention that works for some people because others will believe it too.  It is based on market psychology and herd mentality rather than market fundamentals.   In order to make money in that kind of “safe” transaction you still have to have somebody buy you out at a premium higher than the cost of your investment and the cost of maintaining it.  And for the person you sell to, to make money, that person in turn has to sell to somebody else for a cost greater than the cost of investment and the cost of maintaining it.

What really happens in bad economic times?  People have less money for jewellery.  Industry will be using fewer processes that require gold.  For the market to go up when less people will buy gold to use it for something doesn’t make a lot of sense.

What do you need in lean economic times?  I figure Buffett’s bet on Kraft makes enormous sense.   When times get tough more people will be getting cheaper food, and one way or another people are going to need to eat.

Gold as an investment is little more than a legal ponzi scheme.   It is completely irresponsible for people like Glenn Beck to be promoting it.

Gold is also one of the areas where I fundamentally disagree with Ron Paul.   Gold as a standard does nothing more than transfer wealth.  If the government were to buy a lot of gold it would drive up the gold market, assisting mostly rich investors.  The public will have spent money on something that will do nothing to assist the country in any of its’ real problems in any way, the gold will have the cost of storage, and that money will end up supporting private investors.  Unless the government keeps demand up by continually buying gold, which would be an ongoing subsidy of investors by keeping the price artificially high, the market will then contract, and the government will have gold that it is paying tax dollars to protect which is worth less.

Further, a number of countries divested themselves of their gold reserves at the low point in the market.   Various governments allowed their gold reserves to be looted at the bottom of the market, at firesale below market prices, sometimes without proper bidding.

There is a huge danger of keeping valuables around in the care of governments as when they decide to divest themselves of assets through privatization or other means, they generally sell the most valuable assets at rock bottom prices.

I don’t see how the government buying high, paying to store, and then selling gold low again at some point in the future can possibly be any good to anybody but for connected private investors who will receive unearned profits.

As for the argument that gold backing helps currencies…how does that work?  If the idea is that you can’t renege on debt if you currency is “backed” by gold, how is that going to work?  If the government reneges on debt anyways, I think the position is identical.

There is also I think a misunderstanding of how inflation works.  A lot of it is to do with supply and demand, including of money, and if say the demand for copper goes up and the supply doesn’t then the price of copper will likely rise regardless of how much gold is “backing” the currency, because it is irrelevent.

Why isn’t having food that can be grown, oil that can be harvested, minerals that can be mined and trees that can be cut more than enough backing for a currency?

In any event we aren’t set up so that anybody can show up at Fort Knox requesting that their dollars be converted to gold, and for security and other reasons such an arrangement would not be desirable.

The “Dog chasing a car” award, 2010

http://technolog.msnbc.msn.com/_news/2010/08/27/4984351-paul-allen-sues-apple-google-almost-everybody-else-over-patents

Doesn’t a billionaire have anything better to do than pursue what look like questionable claims?  While I suppose that I am theoretically open to the possibility that his patent company is hard done by, I have to wonder if it is instead one of the companies in the emerging “patent troll” industry.   That Paul Allen would be a technical illiterate who was unaware that online realtors have been linking to each other and has been unaware of the evolution in search engines, would seem to me to be a stretch.

Perhaps somebody should copyright the word “the”.  If it were allowed, just think of all the money they could make.  Or how about the idea of a blog?  Should the first blog writer be allowed to sue every later blog writer for the concept of a blog? Should the first screenplay writer be able to sue anybody that wrote another screenplay, however unrelated?

There may also be issues of parallel evolution.  Just as there are cases of parallel evolution in nature, where different paths lead to similar species that are not related, the internal logic of how to write simple programming is likely to be the same for many users.  They don’t necessarily have to break somebody else’s code if the general path to do something is obvious.   They should also not have to break everybody else’s programming code to be certain that they haven’t accidentally come up with something too similar to somebody else.

If you locked a bunch of programmers in separate rooms and asked them to write a program that would show a man running across the screen, then compared the programs, probably 95% + of the code they would come up with would be near identical, without either plagiarism or psychic powers, because it would be driven by the internal logic of the demand and the system.

Of course what may be routine for programmers may seem ingeniously complicated to non-programmers and may create a bias towards the upholding of technology patents on a lower threshold.

I expect that there will be something akin to an “obvious path” defence available in intellectual property claims, if there isn’t already, to prevent morally stunted people from patenting various arrangements that don’t require great intellectual insight and then “camping” on them to see if anybody comes up with anything similar.   The concepts of patents, copyrights and the like are to  prevent strokes of genius from being appropriated without compensation.  That promotes and protects innovation.

On the other hand there are entire companies these days that are “patents trolls”, who buy up patents with no intention of ever making anything out of them, in the hopes that somebody will independently come up with something sufficiently similar, so that they can sue and get something for nothing.    Patent trolls may have patent the above referenced “obvious paths”, rather than strokes of genius, so as to obstruct innovation pathways.

One case reputed to be a “patent troll” case was the RIMM- Blackberry case.  I don’t know enough about it to reasonably comment on it, but it would be telling if true.

Needless to say the whole “patent troll” concept works to undermine progress and capitalism.

One aspect of the “patent troll”‘s repetoire is that the troll does not strike as the aggrieved victim, issuing cease and desist demands forthwith immediately on a violation.

Most of those who feel geniunely aggrieved of course act immediately.

That however would defeat the patent troll’s central purpose.  The purpose of the patent troll is to use the legal system to take unearned money, to pursue a legal right or an arguable legal right in order to get a free ride at somebody else’s expense.    Especially if the legal and technical issues are complicated enough, who knows what a judge or jury is going to do?   In such situations the only true jury of peers would have to be a jury of senior programmers from companies without a stake in the litigation.

If a patent troll issues a cease and desist demand immediately, the intended mark might cease and desist.  Then the patent troll doesn’t get any money.

The intended mark might also cooperate and change technology so that the argument for damages for a patent infringement is lost.   Then the patent troll doesn’t get any money.

On the other hand, if the patent troll waits for 5-10 years pretending that nothing is amiss and allows the mark to proceed believing there isn’t a problem, then says that somebody’s $25 billion per year business is based on their technology, then it will be incredibly inconvenient to turn systems and hardware upside down to deal with the demand.  There is also a larger pool of money connected with the theoretical violation of the alleged right.   Especially if hardware is issued based on a good faith belief that there is no infringement of another party’s rights, it may be impossible to get away from the alleged infringement until the next product line or in a worst case, the next generation of a product.

While Paul Allen is affiliated with Microsoft and has not gone after Microsoft, it would be in Microsoft’s interests to pursue an intellectual property environment which makes a bit more sense, see for instance http://blogs.barrons.com/techtraderdaily/2010/03/17/virnetx-jumps-wins-10575m-jury-award-vs-microsoft/.

Without saying anything about the merits of the Virnetx case, which I know nothing about, I have to say that the whole process is scary.  If your typical jury is goning to have 9 people without a high school diploma and probably at least 7 functional illiterates, it doesn’t make any sense to have complex issues with that much at stake being decided by such people.   I don’t know that my own technical expertise could be upgraded over the course of a trial to make some kind of responsible decision about these kinds of matters, and I’m no dummy.

Here is the math from a predator’s perspective: it is worth it for a mark to pay you to go away.  If they don’t, look at the litigation math.  The worst case scenario for the troll is having to fully indemnify the mark for all legal fees, which might be a few million dollars.  The best case scenario is billions.   With a potentially random outcome and those numbers, the only reason not to proceed is if you are troubled by, for instance, moral and ethical qualms.

No doubt the lawyers for patent trolls are very adept at milking anti-corporate sentiment and depicting their clients as the victims of mega-corporation bullies although the predator and prey roles may in reality be reversed.

Meanwhile patent offices are reportedly very behind in processing applications.   That can apparently cause problems for businesses that need to get loans, which need patent approval before a bank will approve it, which reduces available jobs because new businesses are on hold.

The economy has enough problems without these issues arising.   Proper regulation of and advancement of techology is important for the future and not something to be left languishing because the details are difficult to follow and it lacks the pizazz of other issues like wars or abortions that more easily  lend themselves to sound bites.   Unconstipate the future and industries advance and gain competitive advantage.

In the meantime the best instrument that I have for sorting out these issues from a distance is a smell test.   That a sophisticated internet businessperson would be oblivious that his 1990′s patents are being violated by almost every online business and he has only realized this in 2010, well, that is awfully hard to swallow.