Posted by on May 6, 2015

“Finish the Job”

I recently attended a real estate conference in Barcelona.  As is often the case, the conference included a presentation by a politician, in this case Lord George Robertson, a Labour Party politician from Scotland and a former UK Defence Secretary and Secretary General of NATO.  Inclusion of a politician is generally intended to “round out” these conferences and broaden the perspectives of the participants.  I usually just find that it confirms my worst fears about our so-called leaders.[1]  This “wee Scotsman” – about 5’6” with a tail wind – proved to be no exception.

Like most politicians, Lord Robertson had a few good anecdotes.  My favourite was a story about Boris Yeltsin, the amiable drunk who was President of Russia during the Russian financial crisis of 1997-1998 and who gave political birth to Vladimir Putin.  In the middle of the crisis, Yeltsin was asked by a reporter to describe the economic situation of Russia in one word.  His response was: “Good”.  The perplexed reporter then asked Yeltsin to describe the economic situation in two words.  Yeltsin responded: “Not good”.   Despite his addled brain, Yeltsin had a grasp of economics about on par for a politician.

Had Robertson stayed with the stand-up routine, he would have sung sufficiently for his supper.  But he also felt the need to demonstrate his policy “chops”.  In this area, he said some things that were far less amusing.  This included a pronouncement that, in justification of the war in Afghanistan, “if we didn’t go to Afghanistan, then Afghanistan was going to come to us”, as if we have accomplished anything in that benighted country that enhances the security of the West.  Or that we couldn’t have saved ourselves a lot of money, and all of the lives, if we hadn’t focussed our efforts on homeland security instead of foreign intervention.[2]

Even worse were his comments that the abject failures in Iraq, Afghanistan and Libya were because we “didn’t finish the job. “  When asked what he meant by this during the Q&A session, Robertson referred to Bosnia as an example of where NATO had “finished the job,” presumably of nation building.  I am pretty sure that Robertson was channelling the singer Thomas Dolby when he said this because he clearly intended to blind us with science.  Unfortunately for him, there was someone in the audience who had briefly considered investing in Bosnia and therefore knew a little something about this country.  Me.

Here is what “finishing the job” looks like to the former head of the world’s largest military alliance:

  • Bosnia (or, Bosnia and Herzegovina, as it is officially known) has a population of 3.8 million, with an unemployment rate of 44%, following a record low of 39% in May 2008.  The ranks of the unemployed include about 60% of the young population, two-thirds of whom claimed in a recent survey that they want to leave the country.
  • These meagre economic accomplishments have been largely the result of vast foreign aid, greater, on a per capita and inflation-adjusted basis, than what was delivered under the Marshall Plan.  However, it is unclear how much of this has actually reached the Bosnian population:  Bosnia routinely ranks in the lower half of countries in the world, and at the very bottom in Europe, in the corruption index published by Transparency International.
  • The structure of the government in Bosnia makes most computer chips look simple; the Guardian newspaper in England asks rhetorically if it isn’t the most complicated government system in the world.  (Answer: yes.) This structure assures that nothing gets done and maximizes the opportunities for corruption.
  • Bosnia has over 12 political parties, most of them based on ethnicity or religion.  Weak and unstable coalition governments, frequent and inconclusive elections, and political gridlock result.  The Republika Srpska, an enclave of Orthodox Christian Serbs, periodically acts up, most recently in connection with the creation of an independent Kosovo.
  • NATO intervened with 60,000 troops in 1995, a force that stayed there, in dwindling numbers, until 2004, when it was replaced by a EU contingent that remains there until this very day.  If we adjust the 60,000 troops for population size, this is about 25% greater than the maximum deployment in Vietnam.

Yes, it is true that the Bosnians are no longer shooting each other – at least, not for the moment.  But is there anyone outside of the upper echelons of policymaking who actually believes that the vast efforts in Bosnia have produced anything but a powder keg waiting for a match?  Or is there anyone who believes that a similar effort was realistic or desirable for the 33 million Iraqis, the 6 million Libyans and the 31 million Afghans?  After all, the equivalent maximum troop deployment, adjusting for population size, would have been over 1,100,000 troops.  Is this really the quality of thought that underlies the decisions of our senior policy makers?

As I suggested to Lord Robertson, instead of “finishing the job”, maybe it is time for NATO to consider an alternative strategy.  Like never starting it in the first place.

Almonds and Other California Nuts

If you want to see what happens when politicians ignore basic rules of economics, look no further than California’s water crisis.

The UK’s Daily Mail newspaper has recently run an article entitled “How the great almond health fad has turned California into a dustbowl.”  Here are some of the mind-boggling statistics:

  • California supplies 84% of the world’s almond production, using over a million acres of land to do so, much of it arid.
  • Almond growing consumes over 1 trillion gallons of water each year, 20% more than all of the indoor water usage of the 39 million Californians.
  • Most amazing of all, it has been calculated that it takes 1.1 gallons of water to produce each almond, or a total of about 23 gallons of water to produce a single glass of almond milk.

With these statistics in mind and with over two-thirds of California being classified in “extreme drought”, how has Democratic Governor Jerry Brown responded?  He has ordered cities and towns to cut their water usage by at least 25%, a target which they have attempted to reach by encouraging shorter showers – and why not showering with a friend? – and bans on watering lawns and filling swimming pools.   Farmers, who apparently have a more effective lobby than pool boys, have been exempted from any water restrictions.  A recent government survey finds that 77% of them intend to plant more trees.

Just when you think that this most liberal of states and its quadruple-elected “Governor Moonbeam” cannot be any more misguided, something like this comes along and they surprise you to the upside.  The water crisis is a simple case of ignoring economic laws – in this case, something that is traditionally referred to as “the tragedy of the commons”.  California has clearly been undercharging for water for years, especially in the case of farmers, who actually pay lower rates.  Instead of learning the correct lesson and raising prices until water reduction targets are met, Governor Brown and other officials are in the process of compounding the problem by rulemaking that will certainly produce injustices, inefficiencies, corruption and evasion – just as it has already created political favouritism.[3]  As I have commented before, all attempts to produce rational resource use that do not employ the price mechanism are doomed to failure.

But the most disheartening thing about all of this is that the liberal media and voters will come to exactly the wrong conclusion from this episode.  In fact, the author of the Daily Mail article predictably makes this mistake, attributing the problem to the “stench of greed”.  Once again, the private sector will be blamed for moronic government policies that subvert its functioning, and the proposed solution for incompetent government will be more of the same.

Just-in-Time Krugman

I recently warned that left-wingers would be taking credit for health care savings that have little to do with the spirit of Obamacare and a lot more to do with the injection of some much-needed market discipline into this sphere.  Right on cue, here comes Paul Krugman doing a victory lap and also complaining, with no apparent irony, about the failure of the Right to admit past forecasting failures.  (As for Krugman’s willingness to fess up, I direct you to a series of articles written by Niall Ferguson.)

It must be nice for the Left when they can spend years promoting policies that produce monstrosities and then take credit for “reforms” that make them mildly less dysfunctional.

Financial Repression and the Coming Reckoning

In the category of “Disasters Waiting to Happen,” we are starting to see the results of a recurring cycle of asset bubbles and crashes, followed by “financial repression,” on retirement planning.  The Financial Times has recently run an article on an IMF warning about German insurance companies that have issued policies with guaranteed rates of return unobtainable in a financially repressed world.  The IMF fears that these companies, with a collective EUR 900 billion of assets, could pose systemic risks.

I have also seen charts that the labour force participation rate for US citizens 55 years or older has increased by more than a third since the early 1990s, clearly due to unexpectedly low retirement income.  The figures for retirement savings and the tendency of the boomer generation to hold a retirement party before the mortgage-burning one are horrifying.

Meanwhile, the headline in a recent edition of the English tabloid Daily Express, right next to a very comely photo of Sandra Bullock, is “Pension Shock for Millions – Disaster after annuity rates hit record low.”  When financial news hits the cover of the Daily Express, you know that it’s big.

Folks, this is going to get ugly.

Silicon Valley and My Favourite Ponzi Scheme

I am continuously amazed by how the simply idea of a Ponzi scheme gets reinvented.  Therefore, I was very pleased to see that my favourite example has re-appeared in the silliest place of all, Silicon Valley.  This version has tech companies spending money they have raised from venture capital funds on advertisement with other tech companies.  This inflates revenues for everyone, which allows them to tap the VCs for more dosh.  Rinse and repeat.  Throw in some equity raisings with “dilution protection”, which basically makes the valuation numbers irrelevant, and a valuation bubble in the public markets, and soon we have over 50 startups with valuations greater than $1 billion.  Which is way more than the previous record.

This, too, is going to get ugly.

China Ad Nauseam

I apologize in advance, but I just can’t resist.

China’s benchmark stock index is up about 90% over the last year.  Margin lending is up more than 50% in the last three months; as a percentage of GDP, it equals the highest level ever reached…except for September 1929 in the USA.  Individual investors account for over 90% of equity trading in China.  Sixty percent of the punters on the Chinese stock market have less than a high-school education, including, I would guess, this banana guy.   New trading account openings in China are running at over 1 million a week.   As for the investing talents of the Chinese masses, an estimated $145 billion, equivalent to the entire economic output of the city of Beijing, is illegally gambled each year in China, despite over 50% of the population living in rural areas on an income of less than $700 a year; over 600,000 people are arrested each year for illegal gambling.  If you’re the type of person who slows down to gawk at traffic accidents, then read here and here and here for the gory details.

Meanwhile, a friend has sent me a chart from Bloomberg showing the level of the Shanghai stock exchange going through the roof while the aggregate EBITDA of the companies on the exchange heads through the floor.  (I cannot find a reference to this chart in Bloomberg and including the file I have in this post is beyond my technical abilities, but I am happy to email a copy to anyone who cares.)

This is going to get really ugly.

Roger Barris, London

I Wish That I Had Said That….

“The further a society drifts from truth, the more it will hate those who speak it,” George Orwell

“I’m a celebrity, get me out of here”, an Economist caption under a  photo of Hilary Clinton looking decidedly grumpy as she drinks coffee with some commoners

“…we took a big stick and beat a hornets’ nest…”, Republican Senator Bob Corker referring to the invasion of Iraq, showing a common sense that he will hopefully apply to his chairmanship of the Senate Foreign Relations Committee

“I used to think that “MBA” meant ‘mediocre but arrogant’ but lately I have been visiting dating websites and I have found that it means ’married but available’”, to paraphrase Magnus Lindkvist, a Swedish “futurologist” who also appeared at the Barcelona conference


[1] Another conference featured Dominique Strauss-Kahn, the Socialist Party politician from France who ran the International Monetary Fund until 2012, when he resigned after allegations of sexually assaulting a maid in New York City.  During this closed-session conference, DSK casually stated that he and other politicians systematically lied to a voting public that couldn’t handle the truth.   He is currently awaiting the verdict in a criminal case in France, where is stands accused of pimping after arranging sex parties.  This is almost certainly the least of his offences.

[2] Not to mention that our repeated interventions in these countries have given Islamic terrorists their most effective recruiting and motivating tool, going all the way back to Bin Laden himself.

[3] Anticipating the liberal objection that price increases would hurt the poor, I make the obvious point that any such impact can be easily offset by mailing checks to lower-income persons, funded out of the increased water fees.  It should also be said, however, that we have chosen an economic system that results in inequality because it also promotes economic advancement.  Having made this choice, we cannot then try to offset inequality every time it manifests itself.

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rich cerick
Roger: Marvin Kabatznick, my next door neighbor in New Canaan for nineteen years and a very close friend, took the liberty of forwarding your May, 2015 blog to me as I live in CA and you address our statewide water shortage. Interestingly, and not often observed, Marin County, where I live, is enjoying absolutely chock-full full reservoirs and water levels (which in fact spilled after March’s rains) and no water shortage whatsoever. The reason? Marin built a system of multiple interconnected reservoirs seven or eight decades ago, at substantial cost, which have paid enormous dividends ever since. The ROI has… Read more »

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[…] to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear […]


[…] to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear gas […]


[…] to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear gas […]


[…] to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear […]


[…] to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear gas […]


[…] to Bosnia and Kosovo as the lone alleged success story for this strategy, which is in fact no success at all and where we have recently been treated to Kosovan parliamentary debates featuring tear gas […]


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