24 November 2010


The North Korean artillery fire into South Korean territory is clearly an act of war. Four people were killed and significant damage was sustained. This is being attributed to internal North Korean machinations as the dictatorship changes hands, but an explanation is not an excuse. North Korea has embarked on a continued path of aggression for years without paying any price. The response so far has been inadequate, particularly from China, which continues to prop up this criminal state, allegedly for fear that refugees would flood into China.

There are 28,500 American troops stationed in South Korea and currently in harm’s way. We have had this burden since the end of the Korean war, which clearly has not really ended. Apart from a show of overwhelming military force, we must be prepared for the possibility that these incidents may escalate, entirely due to the insanity reining in North Korea.

I believe there is a solution to this otherwise intractable problem, and that solution involves a deal with China. One of the reasons China continues to prevent the North Korean regime from collapsing is that it would result in a state containing US forces right on China’s border. This is understandably unacceptable to the Chinese, and pointless for the US if the Korean peninsula is reunited under South Korea. We should offer the Chinese a guarantee that we will remove our forces from Korea if they will pull the plug on North Korea. There is then far less reason to prop up the regime, and it is a win-win all around. The Chinese don’t lose face, we are relieved of the burden of interminably stationing troops in Korea, and the North Korean regime would be history. This has to happen before they get a nuclear weapon, which they are on the verge of doing, with terrible consequences for proliferation around the world. Mopping up and reuniting with the north would then be South Korea’s problem, and that country is wealthy enough to take on that burden.

22 November 2010


Core inflation is based upon the core consumer price index, which excludes energy and food. The Federal Reserve can feel justified in printing $600 billion because the core index is so low, having risen only 0.6% in October, the lowest rate on record. Energy and food prices are considered to be too “volatile” to include in the index, which removes it from reality. The problem with this is that to anyone living in the real world food and energy prices are rising, and judging by increasing farm and commodity prices will rise a lot more in the future. Real people in the real world spend a substantial portion of their income on food and energy. If these prices are rising the true cost of living is rising as well and people have less to spend on other things.

If the same gallon of gasoline that cost $2.75 a few months ago now runs as high as $3.25 that is price inflation. If a basket of groceries has increased in price while incomes are stagnant, it costs significantly more. If things that people spend a substantial portion of their income on are not included in the price index, how accurate is it? It is obvious that our monetary policy is being predicated upon false assumptions. The true rate of inflation is clearly higher than the “official” estimate. In anticipation of this we should adjust our behaviors accordingly.

13 November 2010


Who could ever have imagined that the US would take a position to the left of the rest of the world on economic affairs, even to the left of China and Brazil? But this is what has occurred on the President’s Asia trip, culminating in the G20 summit, which has largely been a failure. The “world” wanted Obama, and has him now, but the US is now coming across like a weak sister, rather than the world’s leading economic power. We have the improbable situation of the Chinese lecturing the US on free markets, and the Germans on currency stability. Unfortunately they are right.

The President attended these meetings already weakened by the election results, and further diminished by failure to gain agreement on a single objective. No one should want the President of the United States to be weak vis a vis the rest of the world, but that is where we are now, and we can only pray that no major international crisis erupts over the next two years, considering the hand we have been dealt. From its apex in recent years American power is now at its nadir.

The position the government has taken makes us look ridiculous and hypocritical. How can we possibly expect complaints about currency manipulation to be taken seriously when we ourselves are printing money to inflate the economy and weaken the currency? How should the rest of the world react to the world’s reserve currency being manipulated for political ends, while they are stuck holding trillions of dollars? We are the ones introducing instability into the world economy rather than stable predictability. It is no wonder that all of the administration’s proposals were rebuffed by the G20, with foreign governments uniformly taking the more conservative position. This is a major embarrassment. Never has the US been so diminished. It reinforces the notion that American power peaked with the Bush administration, and now is on an inexorable decline. We have an administration that actually wants to push this process along, while remaining clueless about international as well as domestic problems.

But there is nothing inevitable about American decline. It is the result of destructive fiscal and monetary policies that are taking us in the wrong direction. This can still be rectified by very strong budgetary restraint with an eye towards reducing our debt burden, and an end to funny money policies that are certain to induce inflation. Prices of commodities are already increasing steeply and higher prices for consumers are a virtual certainty. We need a government that will be committed to price stability, a strong dollar, and maintaining America’s pre-eminence in the world. That can’t happen fast enough.

11 November 2010


Last week’s elections already seem remote although there are still some unresolved contests. Results show there are not really red states and blue states, as the outcomes were nationalized. Even here in New York despite weakness at the top of the ticket, at least five house seats changed hands, with one pending, and Republicans recaptured the state senate, putting them back in the game. The oddity is California, once the trend-setter for the country, now the exception and in inexorable decline due to government excess. Even there, after spending $140 million Meg Whitman should have been elected, but was undone by a sleazy lawyer parading an illegal housekeeper who was paid $23 per hour complaining about her employer.

Notwithstanding the results the administration is in denial, attributing defeat to a “communications failure” rather than policy rejection. As polls have indicated, this was not a vote for Republicans, but a vote against the Democratic congress. Republicans now have to prove themselves by sticking to principle. But even with a majority of governorships, state legislatures, and the house, the possibility of reversing course is limited. It is unlikely that this President is going to moderate given his attitude, which means we can look forward to two years of gridlock. Gridlock at least puts the brakes on moving in the wrong direction, but won’t do much to resolve long-term problems.

But this administration is not out of options, given its ideological extremism. My guess is that it will try to do an end run around the states and congress by attempting to rule by fiat- that is to say Executive Orders, that vastly expand the powers of the Presidency and pre-empt the congress. We have already seen a bold power-grab by the EPA in its claim to regulate carbon as a threat to the environment, which covers just about everything. The administration could attempt to expand bureaucratic power comparably in other areas simply by issuing decrees. The congress and the states will have their hands full simply in resisting these efforts, most of which will wind up in the courts. With an administration hell bent on getting its way despite public opinion, and a congress likely to be resistant, not much of substance is likely to be resolved until after the 2012 elections. Meanwhile we will have to muddle through the uncertainty and an economy that is unlikely to strengthen much as a result.