11th - 16th - 23 - 27th February 2005


Yahoo news quoted Al-Zawahiri, first lieutenant of Al Qaeda as having said on Al Jazeera that real freedom is:
  1. "not the liberty of homosexual marriages and the abuse of women as a commodity to gain clients, win deals or attract tourists," In "The Rights of Man" 1789, Liberty is defined as (Article IV) "Liberty consists in the freedom to do everything which injures no one else; hence the exercise of the natural rights of each man has no limits except those which assure to the other members of the society the enjoyment of the same rights."  I might not approve of those liberties condemned by Al-Zawahiri, but given article IV, I am forced to defend  the rights of others to those liberties.
  2. "not the freedom of Guantanamo and Abu Ghraib" No doubt Al-Zawahiri is complaining of the "torture" allegedly carried out in those locations.  To each his own.  I would any day prefer the torture following US capture (as reported by those freed from Gautanamo) to the torture (to death) that follows Al Qaeda capture, (as shown on the video clips released showing e.g. throats being slashed.)   I actually find it hard to believe that US prisoners were officially tortured.  Torture is known to be an inefficient method of extracting the truth.  I would have expected that US interrogators would have used voice-stress analysis, filmed micro-physiologic responses and performed brain scans during questioning,   Skilled psychologists could then determine with high accuracy the answers to questions put, even if the prisoner said nothing.  I can think of several reasons why they might not want to make their interrogation methodology public.  I believe that any torture committed was strictly an amateur effort by prison guards, driven by misguided vengeance.
  3. "the right to choose its leader, hold him to account, criticize him and isolate him," e.g. freedom to choose leaders like Saddam, freedom of electoral choice like Iran, freedom to hold leaders to account like in Afghanistan & Iraq, freedom to criticize and isolate leaders like those in Qom.
  4. "I do not think that we can achieve reform while we are under American and Jewish occupation."  Maybe not achieve a Sharia state under American or Jewish occupation, but if that is the issue, why do any Muslims care to live in the USA?  Wasn't the old Turkik empire (pre 1900) a Sharia state?  Is that what Al Qaeda really wants?  Taking Turkey as an example, I can understand why Christians & Jews (& many Muslims) might not want to live in a Sharia state.
  5. Reform cannot be achieved "under governments installed by the occupation with forged elections",  is no doubt a reference to occupied Iraq.  Does he think that he can so simply discount the fact that even under threat of death by his organization, sixty percent of the citizens of Iraq voted?  He is also, I note, in an extreme hurry to condemn the election results which have yet to be determined.  Well even if Al Qaida got the other 40% of the vote, they still would not have ruled Iraq.  In a democracy, you abide by the umpire's (people's) decision, and hope that the bastards in power do such a big fuckup that the people dismiss them at the next election.
Al Qaeda lost their war for hearts back in November 2003 when they failed to disavow attacks on fellow Muslims.  Did not the Prophet specifically prohibit such attacks?

Better for Al Qaida to admit your bads and try to make amends. 
It is too late now for impassioned speech about the so called "failure" of elections.


The unfortunate thing for the leaders of Iran and North Korea is that the USA is not just the leading industrial and military power in the world, it is also the leading scientific power in the world. I warned the leaders in Iran a few weeks ago (Bush - v- Iran) that Bush had not yet decided whether to invade.  They apparently listened closely enough to ask their military experts whether they had anything to fear, and their experts apparently told them (much like Saddam's advisers might have told Saddam) that Bush could not mount such an offensive action.

I think they might be in for a nasty surprise.  I believe that the US (perhaps using Israel as a deniable operator) could take out all (meaning > 95%) of Iran's nuclear facilities with no unnecessary loss of life.  Considering recent events, I would suggest that if you are Iranian and live close to a military supply facility, it might be a good idea to move house.  It is unlikely that the USA would attempt to conquer Iran.  Drawing the poison from it's fangs should be sufficient.  I expect that the US government would calculate that the example of the developing democracy in Iraq will strongly influence political development in Iran.

North Korea is a problem requiring a different strategy.  Kim Jong Il is of the class described by Machiavelli as a dictator who maintains his position in government by fear & military power, (like Saddam).  The classic methodology to "solve" such a problem is by erasing the leader.  I do not know what magic technology is or soon will be available to US planners, but, considering the Presidents apparent preference for direct action, I would recommend that Kim Jong Il's strategy for avoiding erasure not be a reliance on North Korean armies seeking revenge, nor on his Chinese friend's horror at such underhand tactics.  If the USA starts moving troops out of S. Korea, I would strongly recommend that Kim find out what the USA wants, and provide it forthwith.  By doing that he might retain some of the
trappings of his megalomaniac fantasies.  I do not however rule out the (above) suggested Iranian option.

Journalists from Japan have the belief that the Chinese expect that the two Koreas will eventually unite, and they report that South Korea has already calculated that the cheapest way to make unification is by an orderly transfer of the powers of government.  The Chinese (Kissinger & Mettenich would have approved) are not employing the obvious tactic of threatening Kim's energy imports (they are playing good cop to the US bad cop).  If their strategy does not facilitate a stepdown by Kim (probably the incentive would be a lifetime amnesty in a luxury refuge inside China, a bit like the deal Idi Amin got with Saudi Arabia.) then I expect the hard option threatened by the USA (described above) would become viable.

So what is in it for the Chinese?  They have their own internal problems, the greatest of which is persuading their population that a triannual election of leaders is not a viable system of government.  I would expect that they might request of South Korea that, (in order to persuade the North to unite peacefully), they should change their constitution THUS and SO, which would have the ultimate effect (not immediately obvious) of turning unified Korea into an electorally unresponsive dictatorship.  (Most western politicians would applaud, because the suggested changes would be of the kind that most of them would like for themselves, e.g. Parliamentary terms of ten years, controls on the press, etc.)


"The emperor has no clothes" was always a favorite fairytale.  I did not expect to have the opportunity in this lifetime to play the child.

OK, why is everyone (even the interest rate market) saying that interest rates are due to rise in the near term?  Even according to classical economics, the only things that might make that likely are that (1) the USA lifted interest rates recently, and we like to follow the USA, and (2) possibly that the Australian economy seems to be growing too quickly, and raising interest rates might temper that boom.

So what is the case against?  Again, in classical terms, (1) our dollar is at an all time high (well, compared to the last few years) against the US dollar, (2) there is still a shitload of money being pumped into the economy by the (15% = 9%+6%) superannuation levy, giving us an enforced "savings rate" that must be near the top of the class in historical terms, and (3) many noises made in the daily broadsheets would seem to be implying that our business leaders believe that our economy is cresting out of the boom.  Combine that with the busted housing real estate sector and most economists would (in normal circumstances) make out a good case for an interest rate fall.

On this site I have in the past propounded the theory that capitalism is broken.  As recently as the last issue I was recounting the difficulties that even the shrewdest investors were having in finding a good return.  Capitalism's failure has been brought about by the explosive growth in communications resulting from the dissemination of computers and the internet.  Instances of this destruction can be found in the retail industry, where internet sales requiring only low cost warehouses have acquired a significant and still growing share of the market, the telecommunications industry, where all communications will eventually become IP packets, and all telecommunication modes (local, long distance, fax, internet, possibly even TV) will be carried free along a single rented (or owned) broadband line connected to the internet.  Timed minutes are a thing of the past.

The common thread is that less capital is required to install the new technology, and it is cheaper to run.  Hence there are fewer investment opportunities for the owners of capital, and the returns are lower.

Another factor is that there are no new enterprises in which to invest.  (This is because new enterprises tend to be small, to not be capital intensive, but do require labor having a high level of skill.)  That is why real estate and stock prices are rising, even though the (absolute) returns from these investments are static (the rate of return is consequently falling).  There is too much money chasing too few investments.  Another by-product of this failure of investment opportunities will be a declining government tax base.  The last great untapped source of government income is land.  I expect that land taxes will begin to escalate rapidly as income taxes fall, producing a rather unpleasant squeeze on property investments.

Because capitalism is broken, interest rates must keep falling,
and land taxes must keep rising.

Getting back to interest rates in Australia.  My own cynical assessment is that the reserve bank governor (McFarlain?) is misdirecting the market that interest rates must rise because he does not want to change rates either way, and so has built a case for rates to rise so he does not have to fight pressure to drop rates.

After all, the US Fed has used the talking strategy to manage rates, so perhaps it would work in Australia?

Why should our frugal government want to pay more interest on it's borrowings?  Because that is what raising the interest rate does.

Caveat - Of course McFarlain could, against all economic logic, raise interest rates.  I predict that if he does the result would be such
extreme economic hardship that he would have reverse that move at the next reserve bank meeting.

1st March 2005

In "The Australian" of today a position on increasing interest rates "Better late than later" is taken under the nom de plume Henry Thornton.

Ross Gittins "Macfarlane's secret fear: pay-packet inflation" has already countered (on 26th Feb) most of Henry's assertions, but one unanswered assertion that particularly struck me was Henry's discussion of "Taylor's Rule".

"The (Australian) cash rate = the inflation rate + the real interest rate + 0.5 x (target unemployment - forecast unemployment) + 0.5 x (target inflation - forecast inflation)."

To apply the formula, Henry gives inflation as 2.6%, real interest (?) =3.25% and forward (forecast) inflation as 3%.  The existing cash rate is 5.25%.

The first thing to note about Taylor's Rule is that it contains two forecast figures.  So already the formula requires either input of a guess, or of some other formula.  The next thing to note is that "the real interest rate" is a fiction, which is actually defined in a circular fashion, because it is intuitively defined as:

Real Interest Rate = Cash rate - Inflation rate.

Plugging those values into his formula, Harry obtained an equilibrium cash rate of 2.6% + 3.25% = 5.85%.

I believe that Henry might have made a numerical error when he obtained a rate of 6.25% using forecast inflation of 3%.  The calculation using Taylor's rule (
assuming that target inflation remains unchanged at 2.6%, and unemployment is neutral) is:  2.6% + 3.25% + 0.5*(2.6% - 3%) giving 5.65%, not 6.25% as the cash rate.  To obtain Henry's result  of 6.25% with Taylor's rule above and the given inputs would have needed a target inflation of 3.8%.

Of course I suspect that there must have been some sort of transcription error in Taylor's rule.  It just doesn't make sense as it is written.  Further research on the internet substantiated that suspicion.  The formula can be corrected by inserting a negative sign in front of each instance where "0.5" occurrs.  In that case the correct result from Taylor's rule would be 6.05%

What many people who are not scientists do not realize is that not all "sciences" have equal reliability.  When an engineer designs an aeroplane, he does not plan that it should function as designed in 95% of cases, but in 99.99995% of cases.  Engineering is considered to be a "hard" science because it produces reliable results.  On the other hand, when a psychologist declares a law in Psychology, it is based on a "95% confidence limit".  He does not expect that all persons will function as predicted by the Yerkes-Dodson law, he is happy if 95% of persons do so.  Psychology is known as a "soft" science.

Economics is a soft science, despite what Econometricians might otherwise
imply (wish?).  Taylor's rule is not a rule in a hard science.  It is an hypothesis in a soft science.  Even if Henry had correctly calculated the optimum cash rate, (6.05%) I would not have accepted that Taylor's rule had reliable predictive power.  This is because everything (even the mystical NAIRU) is changing because capitalism is being destroyed.

My cousin crystallized it in two sentences.  He said, "I have performed a complex mathematical analysis of share movements over the last twenty years, and have developed a formula that perfectly predicts all share price movements up to yesterday.  The trouble is it has no predictive power whatsoever for tomorrow."

The soft sciences are in their infancy.  There is an argument that formulae in Economics cannot work, because if they did, then everybody would then use that formula to bet on the stock exchange, thus altering the predicted changes and rendering the relevant formula invalid.