Wednesday, April 13, 2005


I'm going to be talking about money several times - international debts, taxes, deficits and investments just to name some topics that'll happen real soon now. I thought I'd take a moment to reprise something I've said one or two times before on other folks lists.

What is money? Well...

Once upon a time we worked by barter. (Ignoring for the moment that sometimes we worked by force and threat of force - that's important but it's irrelevant to this topic.) We traded the wheel we carved for some mastadon meat. A spear head for some skin ties for our spear. The negotiations might vary and take time, but in the end it was so many of this for so many of those. (You can see this happen if you are near more than one child at the end of a Halloween evening in the US. "I'll trade you three of these candies for three of those." "Nah, but I'll give you two these others for your three." "...")

Gradually, this expanded to three- (or more) way trades. I trade him some apples so he'll give you some milk so you'll give me some bread. This gets awkward, especially if I think four apples are worth a quart of milk AND worth a loaf of bread, but the guy with the bread thinks his bread's worth two quarts of milk. Sure, a three-way negotiation works but the more people the harder it is to get everyone together, much less get them to agree. This situation gets resolved in several ways. There are coops, where one person trades on behalf of several others. There are bazaars, where everyone meets and trades (I trade my apples for the milk, then I take the milk to the baker and trade for the bread I really want). There are habitual arrangements (where we finally worked out a mass trade system and just stick to it as long as we can rather than go through THAT again.) And then there are tokens.

Tokens take the bazaar principle a slight step further. I make a set of tokens for apples - MY apples, and the same for the milk and the bread and so forth. I give you some apples and you give me a quart's worth of milk tokens, which I then take to the baker and exchange for bread. The tokens have several advantages over the bazaar. For one, I don't have to worry about what I've got spoiling before I get to the next person. For another and huge benefit, I can trade in futures. I get apples for a couple of months during the year, but I need bread and milk all year long. I can trade tokens for 10 months and redeem them all after harvest.

But it's still a pain carrying milk and bread (and egg and honey and cloth and ...) tokens about, keeping track of them. What if we make a sort of uber-token? Hello, money. A 'token' of money represents a nominal fixed value of my time and talents in services or goods.

A critical issue of money is that it needs to be of relatively fixed quantity. If there are only 1,000 'tokens' in existance in my county, I might feel comfortable giving a bushel of apples for a token. If someone suddenly brings in 9,000 tokens without me being aware of it, I can get really and truly burned by having to give up a thousand tokens worth of apples - a thousand bushels - while others modify on what's available. Now coincidentally, the need of the token to be relatively restricted makes it tend to have some value in and of itself, and that leads to the confusion.

The token's inherent worth is not its tradeable worth. As money, the most important issue is the trust we have that the token is worth roughly the same quantity and quality of labor for all of us.

That's worth restating, in te process restating the thrust of this whole message.

"Money" is a representative token of the fruits of our labor that we TRUST to be at least nominally equal for us all In the process, and to simplify the multipart negotiatsion above, we work with the assumption that the token has a reasonably constant level of representation - it's not worth one apple today, ten apples next week, and half an apple a week after that. If the trust breaks down - if I cannot trust the value of the token to be at least nominally equal over time and distance - the almost inevitable result is to change tokens for something else. Something else may be other tokens, or it may result in a shift back to multi-level barter.

As I said there are many articles I'll be spinning off this point or for which this assumption is a ground, but I'm going to go immediately to one in particular. That's the inevitable refutation to the above point which argues that the best token is not one that is (as close to possible) irreplicable, but rather which has a solid intrinsic worth in and of itself. I'm speaking, of course, of the folk who'll say the best money is Gold and/or Silver.

I used to have a longwinded response. Instead I'll stick to two data points to show its inconsistency.

Point one. Getting paid your weight in gold used to allow you to live in luxury for the rest of your life. I presently weigh in the vicinity of 200 US pounds (av). That's 2,916 2/3 Troy ounces. Give me my weight in gold and at the current ~US$425 per ounce you've given me ~US$1,239,583 and change. That's a lot for a low income like me, but luxury for the rest of my life? Ha. I can reasonably expect to live another 30 years. Without the aid of interest that's US$41,319 and change per year. With interest and careful investing I might be able to push it to half again that amount, but more likely it'd be best to round it to $50,000 per year. That's certainly comfortable income, above the poverty line (not quite by half), but assuming inflation doesn't get me it's NOT going to be a luxurious wealth. Heck, if I'm trying to buy a residence in California it's going to suck off more than half just for that - assuming I don't want a palace but merely a nicer house than 'average'.

Point two. In 1905 a 5 year veteran policeman in Wichita, KS, was paid the princely sum of $60 per month, with which he provided a very good roof overhead and food on the table and a few odds and ends for himself, his wife, and two children. (datapoint - this is my wife's great grandfather and some info we stumbled upon while doing genealogy. He's solidly middle class with this income - buying a house on a plot of land within city limits.) Had he received his pay in silver bullion, he'd have been receiving approximately 92 (91.6 at $0.655 per) ounces each month. Today, Silver is selling at $7 to $7.25 per ounce, or about 11 times what it did then. The 5 year veteran policeman would be expected to make ends meet - using silver - on $660 per month. There are nations in which that's more than enough money. Those nations would most likely not have been paying $60 per month a century ago, though. For USians, the amount is less than a third of the "poverty level". Heck, renting a two bedroom apartment in the seedy part of town of Wichita would eat up 2/3 (at least) of the wage, even before such luxuries as heat, water, and electricity were provided.

Now to be fair, if he'd taken it in gold instead he'd have been receiving 3 ounces of gold. (The price was fixed at that time at $20.67 per ounce and wouldn't make the WWI jump to $35 per ounce for another 29 years.) He could not buy a house on ~$1275 a month, but since he had two children he could get enough welfare and poverty assistance to pay rent and utilities and put some food on the table. He'd only be earning about 2/3 what we consider today's poverty line to be. Gold's done better than silver, but it still won't buy as much as it used to buy.

When a libertarian insists that gold is a solid standard, I like to ask if they'd consider two ounces of gold a month an above average wage. It was, less than a century ago. Heck, at the nominal 16 silver to one gold of two centuries ago (later reduced) that means they'd be getting 32 ounces of silver if they'd prefer. Every month - oh what luxury.

Monday, April 11, 2005


Late to the party again, and woefully unread, I still have to rant about filibusters.

I keep seeing these highly read liberal blogs saying, "Maybe we ought to kill the filibuster. After all, then the great changes WE want could be made." The phrase that keeps coming to mind is pennywise and pound foolish.

It is harder to revoke legislation than to pass it even with the hurdles that include the filibuster. Every hurdle that hinders the passage of desparately needed legislation (desparately needed, on review, by a small but vocal majority, who may or may not be right in the end) is a hurdle that also hinders the passage of ugly legislation meant to repay the narrow partisan interests of the bad guys. (Perhaps obviously, I find the need to remark on one man's terrorist and another's freedom fighter comes to mind.)

I really believe that the truly important legislation will be passed despite the hurdles, though it may take more time. I for one am willing to accept the extra time and sweat as a protection against the narrow interests and short sightedness of others.

Kill the filibuster? Heck no, let's require a supermajority on every bill. And do away with 'consent clauses' as well - let's make the houses read every bill aloud on the floor without a "we accept it as read" agreement. And on, and on, and on...

Saturday, April 09, 2005

On Passports

(wow - two posts in one day. I must be becoming a real blogger or something...)

I have been trying to come to grips with how I really feel about this new rule about passports. That is, the rule that within the year Canadians and Mexicans crossing the border will require passports, and that by the end of 2008 EVERYONE (including US citizens) will need their passports to enter. Oops, I need to add that this also includes the Carribean islands.

On the one hand, it's about time I guess. On the other hand, I can recall the big todo (positive, that is) about our relatively open borders, especially the one with Canada. And then there is/was the discussion of the cost of closing the border effectively against illicit bordercrossings.

Two thoughts come to mind. The first is that our legislative body is packed with idiots. Not necessarily due to the border tightening, but the idiotic expectation that they'll be able to delay any need for US citizens crossing to get passports. Tit for Tat is obvious, and if we're going to require our neighbors to have passports to enter, then they're going to reciprocate. By the end of 2008 it'll be a moot point - any outbound citizen will have had to have had one to have crossed the border for (by then) two years already.

The second is that whether they intended to or not (and some did), they've effectively gutted NAFTA. For that matter, a LOT of North American organizations are going to be severely hampered by this. No more "just a driver's license" crossings. Passport, verify passport, stamp passport with temporary entry visa...

I'd like to digress briefly to point out one of the reasons the whole issue of illegal aliens bothers me. I not only watched "Born in East LA" (imdb link here), one of my best friends in High School (in Colorado) experienced it. Third generation US citizen, travelling in Texas over the summer before taking his slot to the Air Force Academy. Fortunately, he was able to call his family and THEY took care of it, but it means he didn't (and doesn't) laugh at the movie when he sees it. I'll probably post another time on how I'd deal with the immigration issue, but I'll say up front that not only is there an easy solution but I don't think there's an absolutely good solution either.

Back to the original subject, though... This requirement that we all need passports to leave or enter the country is going to have a nasty impact on states both north and south, an impact I don't think the folk in charge really anticipated. Or if they did, they certainly weren't up front with those expectations.

Strategy, or The consequences of replacing Iran's government by force

I find I've written on several other people's places but not here on my own blog. Oops, let's get this fixed.

I have seen several places speak of the possibility of US military action against Iran. Most concentrate on the military capability of the respective forces. A few note the distance involved for US logistics. One or two times there's a remark on the disapproval the rest of the world might have for such an action. In all, there apears to be little practical reason for the US NOT to invade.

I'd like to point out the sure and certain practical reasons, or at least some of the reasons. More accurately, they're the highly likely costs to the US of which any plan should account before action is taken. And they all cascade from a single subject - oil.

Let me start with background. A couple of weeks ago, the IEA made a preliminary notice (reported by several newspapers) that the margin for petroleum demand vs cupply capacity is very tight. The official notice is due out this month and when it's out I'll try to remember to add the link. In the meantime, allegedly the IEA is warning that a drop of as little as 2 million barrels per day will require oil importing nations to go to emergency measures. In other words, while supply capacity is increasing, demand is climbing just as fast. How tight is the margin? So tight that the various forecasters aren't arguing whether the price per barrel (and at the gas pumps) will go up, but rather how high they'll go and how long the high prices will last. Goldman Sachs is on the high side expecting prices to peak vicinity US$105 per barrel in late 2007. Folk like Louis Navellier, on the other hand, expect the peak to be a 'mere' $US65 or so over the next 6 months. The majority, to include the US government's EIA (not the international IEA) appear to expect the price to get nearer US$75-80 with the peak nearer Goldman Sachs's 2 years. Since that's the majority opinion I'll run with it: tight margins for about two years till various long-term supply increasers get online. That's the background.

Iran is producing pretty close to its estimated sustainable capacity of 3.9 million barrels per day - about twice the 'crash' margin of the IEA. An invasion would almost certainly mean a shutdown of that production for at least a month while control changes hands - assuming progress was as swift as it was in nearby Iraq. Any increased difficulty - say, because the Iranian army is better trained and led and significantly larger than Iraq's, or because the distance from landing zones to Tehran is twice what it is to Baghdad, or because the land to traverse is mountainous instead of a river valley - is certain to make the time of shutdown longer than that suffered by Iraq - which was itself much longer than the month duration of the invasion itself.

So, an invasion of Iran automatically triggers a worldwide oil shortage. First point of "so what", of course, is that the US imports no oil from Iran.

The counter "so what" is that everyone who presently imports from Iran is now both willing to pay MORE for it from other sources, AND is facing an immediate crash of their economies due to US action. Simplistically, the US will have attacked them if/when they invade Iran. "So?" again is the cry - why should we care about either of these?

Direct effect is that the oil the invasion force needs doubles in price. Add a quarter to half again the price of Iraq's invasion just for that distance and difficulty. Increase again due to the distance our tanks and aircraft and so forth have to travel. In other words, assuming the Iranians collapse as easily as the Iraqi forces did, we're looking at pretty close to twice the dollar cost due to the oil bill.

The second direct effect is the cost of oil in the United States civilian sector. Remember, other nations are bidding higher for the oil we're bidding for, which means everyone pays a lot more for gas at the pump. A lot more meaning at least half again what we're paying prior to the event, and reasonably more than double. Add to this the simple fact that some places just won't get as much as they want or need. Gas rationing is a given.

Two indirect effects result. The first is in the US, and is based on what happened the last time we had to ration gas. Stagflation, it was called. Depression with a stagnant and declining production while inflation spiked through the roof.

The second is the rest of the world, and one nation in particular. China, you see, is Iran's primary petroleum customer. About 15% of China's imported oil comes from Iran. A shutdown of Iran's oil production has an extraordinary and inevitable effect on China's economy.

Now, China happens to be the second largest holder of US bonds in the world. Most of the experts think that the biggest reason China won't dump those bonds - with a resulting crash of the US economy - is the corresponding crash in China's economy. That's probably good reasoning, but collapses if the US starts it. Stop 15% of China's oil imports and what reason does China have NOT to retaliate?

It is possible that Iran would collapse as swiftly as Iraq did were the US to invade. Personally, I doubt it'd be as swift, but taken in isolation it would be as certain. The problem is that it cannot be taken in isolation. Like it or not, the world would be intimately involved in such an invasion. And if the US's actions have an immediate and direct negative impact on the rest of the world, what reason would they have not to return the favor?