Friday, May 20, 2011

Borrow and hope

I can’t do it.

At a time when the NZ govt has never been more in debt, I can’t bring myself to write about a Finance Minister delivering a Budget based on nothing but borrow and hope—on the hope that something will come along to pull the economy out of its depression (“The economy will improve!” – “How?” – “Somehow!”), and on a plan to continue spending billions more than they’ve got for as long as they can old office.

I can’t even get angry at the incredible irresponsibility of it. Just depressed that you lot keep voting for the scum who keep digging this hole deeper every year.

So feel free to talk about it amongst yourselves in the comments.

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Thursday, May 19, 2011

‘Perigo!’ show tonight: Peter Leitch

PERIGO!-Lietch-L

Our all-time favourite Knight,  The Mad Butcher, believes fairy tales come true and tells the most inquisitive fairy of them all why he wears so many rings, how he once thought rings grew on trees; why he believes in Key but not Brash, and how he's determined to skewer the Big C.

All without drawing breath.

A not-to-be-missed encounter between salt-of-the-earth and head-in-the-clouds. An improbable but enchanting finale to this first series of Perigo!

PERIGO!  Tonight at 7.30 on Stratos – Freeview 21 & Sky 89

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Who am I? [updated]

I have been a politician of one sort or another since I was elected to the Birkenhead Borough Council back in 1977 .

I first entered Parliament as a protégé of Rob Muldoon, and was hand-picked by him to take over his popular Sunday afternoon radio show when he retired.

As Minister of Police I amalgamated traffic officers and police, at a stroke turning jackbooted moustachioed morons into policemen and policemen into glorified revenue collectors. And in a knee jerk reaction to a tragedy, rather than correct the problems within my portfolio that allowed the tragedy to occur, I put huge expense and inconvenience on law-abiding firearms owners—who were never ever the problem.

In my first term as Mayor of Auckland I promoted a motorway through Remuera, attacked Asian immigrants, and generally made myself so unpopular I made the dishwater-wet bran-flake Dick Hubbard electable.

In my second term,  I ran on a platform of keeping rates down and then proceeded to raise them every year I was there. I promised to keep spending in check, but instead my council spent like a drunken sailor on a Singapore shore leave while borrowing heavily to keep the party going. In fact, under my stewardship my council borrowed more than any other council in the country.

I finished this term so unpopular I managed to make the insane self-abuser Len Brown electable, and left ratepayers in debt to the tune of nearly one billion dollars.

I am now the ACT Party candidate for the party’s flagship seat in Parliament, running a platform promoting fiscal responsibility and opposing this government’s unsustainable spending and borrowing.

(Clearly, someone is desperate for my money.)

Who am I?

(Answer below.)

Click here to read more ... >>

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NOT PJ: One Mississippi, No Mississippi

_BernardDarntonThis week Bernard Darnton sails down the Mississippi on a raft of bad news.

Nature’s relentless might is on show again, this time in the Mississippi River basin. The river’s catchment is vast - nearly half of the United States - and the water’s all shown up at once. Whether you count in metric or imperial units, there is a cubic shitload of water coming down that river.

The situation is so unusual that it makes an introductory ethics class sound realistic. An out-of-control railcar carrying 80 billion tonnes of water is careering towards New Orleans, population 1.2 million. If you could push a fat man onto the track and divert the railcar to Morgan City, population 12,000, would you do it?

In the ethics class three quarters of the class say it’s wrong to throw fat people at railcars and one quarter say it’s wrong to let the railcar crash into a million people when you could prevent it. Then they argue for the rest of the class about “normative ethics,” “consequentialist ethics,” and so on. Nobody, fat or otherwise, actually dies.

If you’re in charge of the Morganza Spillway however, where the Army Corps of Engineers keeps 125 caged railcar-diverting fatties, the choice of whose homes to destroy is real. And they’ve decided that Billy Bunter is going to take one for the team.

Right now, the control structures designed to contain the Mississippi are more stretched than this railcar-crashing-into-fat-man analogy. The last time an analogy was this stretched was during the flood of 1973, when the Old River Control Structure was compared to King Canute trying to hold back the tide by getting every lard-arse and chubby-cheeks in Humberside to line up along the beach. It was feared then that a torrent of ridiculous wordplay could completely undermine understanding and change the course of writing forever.

The Old River Control Structure, a set of gates that control the distribution of river water, and the Morganza Spillway are not just floodgates, there to divert water after heavy rain. Their real purpose is to keep the Mississippi flowing down its existing channel, even though it would rather jump its banks and take a shorter, steeper route to the ocean.

CaptureOver millennia, the Mississippi has whipped around like a fire hose, with its delta moving across from the Florida panhandle almost to Mexico and back again as old channels silt up and new channels are eroded. The river no longer has any desire to follow the current channel through to New Orleans and is fighting to switch course to the west, down the Atchafalaya River and into the Gulf of Mexico.

Without the control structures the area wouldn’t just flood, the river would change its course permanently as it scoured its new path to the sea. If the Old River Control Structure was to fail - something that almost happened in 1973 - it would make the chaos of Hurricane Katrina look like a perfectly scripted tour of a clockwork factory.

If the Atchafalaya captured the Mississippi and the lower river ran dry the effects would be staggering. The Port of South Louisiana extends for 90 km along the river’s banks and handles the imports and exports for 33 states - over 200 million tonnes of cargo a year. The river banks are home to any number of oil refineries that need fresh water to operate. If the river became un-navigable the cost would start at $300 million a day.

Battling the Mississippi seems like an impossible task. The engineers are fighting geography, gravity, and statistics. One day the 500- or thousand-year flood will come. In the long run it’s bound to happen. And in the long run it would probably make more sense to let the river follow its natural inclination and let industry relocate along the new water course. But it’s just never the right day to pull the pin on millions of livelihoods and billions of dollars worth of infrastructure.

The current flood is bigger than the flood of 1973 but the control structures are in better shape and have been extended to spread the load so they will probably hold. Tune in next week to discover whether the Old River Control Structure is a remarkable feat of engineering and a testament to human ingenuity and grit in the implacable face of nature—or if it was a vast, expensive and futile government boondoggle, doomed to failure when pitted against irresistible forces.

Bernard Darnton sails down a river of metaphor every Thursday here at NOT PC.

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Wednesday, May 18, 2011

Kinetower, by Kinetura

If you like your tall buildings to come with everything that open and shuts … then this one’s for you.

The Kinetower is Kinetura's concept for a building whose façade elements responds to the sunlight or for the user inside.

Kinetura is design team of Barbara van Biervliet and Xaveer Claerhout established 2006.  See more at their website  or read their interview with KineticArchitecture.Net here.

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GUEST POST: Ben Bernanke. Idiot?

Guest post by Vedran Vuk from Casey Research.

We've often called Ben Bernanke an idiot, dumb, ignorant, and a whole other variety of adjectives to demean his intelligence and understanding of the economy. Though these words are convenient ways to label a nemesis, they are completely inaccurate.

Ben Bernanke is an extremely intelligent man. Few morons can graduate from the MIT Ph.D. economics program. Perhaps some graduates are dishonest or idiot savants, but in sheer brain power, they are on the far right tail of the IQ distribution.

_bernanke-helicopterHowever, what Bernanke lacks is not intelligence - it is a much more basic human characteristic: humility. The Fed chairman's intelligence has deluded him in to believing the economy can be centrally planned through complex equations and statistics. This isn't his failing alone. Many highly intelligent people, especially in physics, chemistry, and mathematics, lack the same humility when it comes to social issues. Researchers in these fields solve extremely complex systems, and as a result, become deluded in to thinking economic problems can be solved in the same way.

Unfortunately for them, society is vastly more complex than a controlled lab experiment; the economy is pure chaos with millions of forces shaping it.

Scientists and mathematicians often falsely believe the world is just another equation to solve. Usually the smarter the individual, the more they believe in man's capacity to plan and shape the world (even Einstein had communist tendencies). If we get the equation right, we can take the economy to some perfect equilibrium.

Yes, human beings are highly intelligent. We can build skyscrapers, fly planes, cure diseases, and even explore outer space. With these accomplishments achieved, why not centrally plan society through mathematics and the scientific method as well? Unfortunately for us, it just doesn't work that way. The economy is a far too complex system. Several equations cannot capture the simultaneous reactions of six billion people around the world to a million different economic events.

Society doesn't need smarter central planners. We don’t need any at all.

QUOTE OF THE DAY: “The difference between rich and poor is more than it should be.”

“ I do believe that the difference between rich and poor … is more than it should be. ‘Should be’
by what standard? By the standard of the free market. In a free market the difference would be
reduced, not because the rich become poorer but because the poor would get richer.
    “
I believe what hampers and distorts the distribution of wealth and salaries … is government.
    “Government policies damage the poor—particularly the ambitious poor, the entrepreneurial poor, the smart poor—much more than they damage the middle class or the wealthy.”
              - Yaron Brook, from the Q&A of his talk ‘In Defense of Finance’ [6:35]

In Defense of Finance (part 2 of 2). Dr. Brook ends by exposing the deepest source of hostility toward the financial industry: the widespread hatred of the profit motive.

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GUEST POST: Watt a Genius

The first guest post here from our newly-minted (ir)regular columnist who we’ve dubbed, for reasons that will become apparent over subsequent weeks, InsideTheWall.

The release of the Atlas Shrugged: Part 1 movie found me reading the perfect accompanying book.

zpage006Called Great Inventors & Their Inventions, the first biographical account is of James Watt, the man who turned Newcomen's early attempts at a steam engine (at the time known as the Fire Engine) into a working, reliable and powerful engine that we all heard about in school.

Not only does the story tell of the money he spent and borrowed, the extraordinary graft, the years of trials and failures–it also tells a story of applied genius, of one man against the mob (a story which of course we didn't hear in school) and how he overcame all the hurdles to achieve eventual recognition and success, bringing a new thing into existence that transformed men’s lives.

So here's a long story short. The story began with him designing his engine simply to pump water out of mines. But he quickly saw there were hundreds more applications for it—particularly in mills  grinding corn and wheat which at that time were powered by either wind or water, making them either unreliable or unable to be located away from a water course.

The working people of these mills didn’t see the increased production of cheaper food that he saw however; they saw only a danger to their incomes, and began to protest at the installation of Watt’s new engines, often quite violently. Not for them the labour-saving utility of such a powerful and never-get-tired contraption, one that would eventually make everyone richer.

“It seems [wrote Watt at the time] these people are determined to be masters of us. To put a stop to fire-engine mills, because they come in competition with water mills, would be as absurd as to put a stop to canals, because they interfere with those who carry things by wagon. The argument that men are deprived of a work would put a stop to the use of all machines whereby labour is saved. Carry out this argument, and we must do away with water mills themselves, and go back again to grinding corn by hand labour.”

zpage021So strong were the feelings against Watt's machine that when he and his business partner built a sixty thousand dollar (do your own conversion into pounds and add inflation) working mill of their own it was deliberately burnt to the ground.

But all was not lost, the working mill lasted long enough that it created interest from industrialists from Britain to France, from Italy to America. The Luddites lost! Watt won. And so did we.

So successful did his engine prove to be that opposition changed from destroying his products to stealing them. Unscrupulous mine owners refused to pay for the machines that had raised their production. And perfidious competitors stole and used his patents unpaid, and attempted to have his ownership of them stripped—asking Parliament to do down the very man who had given them their chance at (unearned) piles of money.

"We are in the state of the old Roman [wrote Watt] who was found guilty of raising better crops than his neighbours, and was ordered to bring before the assembly of the people his instruments of husbandry, and tell them of his arts. He complied, and when he had done, said, 'These, O Romans, are the instruments of our art, but I cannot bring into the forum the labours, the sweats, the watchings, the anxieties, the cares which produce the crops.' So everyone sees the reward which we may yet probably receive from our labours; but few consider the price we have paid for that reward, which is by no means certain."

Eventually, however, the great man received the justice, and the honours, he deserved. And here, to show the esteem in which his country finally held him, is the inscription from the monument dedicated to him in Westminster Abbey:

small“Not to perpetuate a name which must endure while the peaceful arts flourish, but to shew that mankind have learned to know those who best deserve their gratitude. The King, His Ministers, and many of the Nobles and Commoners of the Realm raised this monument to JAMES WATT who, directing the force of an original Genius, early exercised in philosophic research, to the improvement of the Steam Engine, enlarged the resources of his Country, increased the power of Man, and rose to an eminent place among the most illustrious followers of science and the real benefactors of the World.

Can you imagine any businessman having this said of him now?

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DOWN TO THE DOCTOR’S: Child Abusers of the Mind Confronted On Steps Of Parliament

_McGRathLibertarianz leader Dr Richard McGrath offers inoculation against the nonsense appearing in recent stories and headlines

This week:  Child Molesters of the Mind Confronted On Steps Of Parliament.

  • NZ HERALD: “School Hikoi Arrives At Parliament The merging of six state schools in Kawerau into three is cause for a protest involving school children and teachers, met by a group of MPs..

THE PROBLEM: Central government wants to close two primary schools and one intermediate school in Kawerau. The principal of the intermediate school claims the community and their local council want to keep the intermediate school
open.
    There were two telling passages in this news article:
    First, a quote from the principal: You've got decile 1 kids sitting here. We clothe them, we feed them, we look after them.”
   
Second: School principal Daryl Aim told Mr McClay there were two distinct New Zealands: one was symbolised by the kids at the protest, the other by the line of private school students were passed by the protest, resplendent in their "beautiful blazers."
   
In my book, it is the responsibility of parents - not schools - to feed and adequately clothe children. And it is sad but not surprising that the principal of a state school sees “two distinct New Zealands”; unfortunately the government persists in funding politically correct one-size-fits-all schools that are destined to fail parents and children. The “other” New Zealand is the one that these very children from Kawerau could enjoy if the government could just get out of the way. 

THE SOLUTION: Listen to the parents, teachers and local council in Kawerau.
    Let them keep open every school in the area if that is their wish.
    Give the parents of all children in the area vouchers for education costs, starting in term three of this year, and issue shares in ownership of each school.
    Give parents one block of shares for each child they have at a particular school. When a child leaves school, the parents may retain their shares or sell them on to incoming parents or anyone else. The shareholders can elect a board and chief executive. They can demand a return on their investment.
    Fees may be charged to attend a school. The curriculum is driven by parents and the local community. Local businesses are allowed to sponsor uniforms, courses, meals and anything else they like—in return for a tax credit.
    Separate school from state in this way (or any other way), and there will be no further need for marches to Wellington—which are a massive waste of time in any case as politicians never listen to what taxpayers have to say anyway.
    In short, get the child molesters from Molesworth Street out of the education industry.

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Tuesday, May 17, 2011

QUOTE OF THE DAY: On bureaucrats

“'Bureaucrats: they are dead at 30 and buried at 60.
They are like custard pies; you can't nail them to a wall.”
            - Frank Lloyd Wright

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Climate agit-prop in the Listeria

LIST14MAY11_LA visitor to New Zealand responds to the Listeria magazine’s lurid climate porn appearing as a cover story in a recent issue. Feel free to help the response go viral.

From:
Rupert Wyndham [mailto: xxxxx.xxxx]
Sent: Saturday, 14 May 2011
To: letters@listerner.co.nz
Subject: Attn. Editor
Dear Ms. Stirling
    I am a visitor to New Zealand, and only yesterday had sight of your 14 May edition of the New Zealand Listener with its entertainingly fanciful lead story, accompanied by appropriately lurid
graphics.
    Since this is a topic which raises much controversy, let me try and see if I can encapsulate in a few lines what it is that you would wish you readers to believe.
    You propose, it would seem, that marginal increases in the concentrations of what is no more than a trace gas, amounting in total not to 10% of the earth's atmosphere, not even to 5% - nay, not even to 1%. can bring about cataclysmic changes in global climate.
    So, what exactly is the percentage concentration of CO2 in the atmosphere? Why, to be sure, it
is a gasping, asphyxiating 1/27th part of a single percentage point.
    But even that's not the complete picture, is it? After all, as someone (such as you) who has addressed the data for herself will know, even human induced climate change proselytisers acknowledge that, by itself, the radiative potential of CO2 (vanishingly small anyway) fails to account for the "scenarios" promoted by them and by unquestioning and compliant organs of the media - such, indeed, as The New Zealand Listener.
    So, to get over this this little inconvenience, what should be done? Why, to be sure, invoke another critical life affirming compound (dihydrogen oxide) to provide a "positive forcing", thereby adding to the so-called greenhouse effect. Regrettably, the very scientists (well, anyway, let's call them that for the sake of convenience) can't actually tell you whether the forcing resulting from atmospheric water vapour is positive (so allegedly bringing warming) or negative (so allegedly bringing the opposite).
     Clouds, for example, have a cooling effect. Have these 'climate scientists' with their rinky dinky computers ever managed to incorporate them in their so-named General Circulation Models? Answer - the heck they have!
    And neither still is that the whole story, is it? For, while CO2 might have some modest radiative potential, that potential is governed by a relationship to concentration that is logarithmic not linear. In
simple layman's terms, the more you shove in, increasingly less do you get out.
    In other words, the system is self limiting - well, well, fancy that!
    So, to you, let me pose a multi-part question. Even at first sight, does this seem plausible? Possible? Or, is it, perhaps, just stark barking?
    Finally, let's pause briefly on your Gotham City phantasmagoric cover photo. This, from its appearance, could quite easily be a fictional montage designed, of course, to promote a propagandist scaremongering
agenda to an ill informed public. In any event, and as far as New Zealand is concerned, as a journalistic professional dealing with a matter of major public importance, you personally should be fully aware that the Flinders University, Adelaide, trans-Pacific tidal buoy project, after ten years of careful monitoring, was wound up a year or two ago after failing to find evidence of any increase whatsoever in rates of sea level rise. These data have since been confirmed by satellite readings - much disliked by AGW propagandists, since
they usually undermine the party line. Neither are such contra-indicative findings confined to the S. Pacific. If, in the face of such scientific findings, you have published your story, then you are guilty of lying. If you
were unaware of such data, you are guilty of professional negligence, and I speak as a one time journalist myself in publications somewhat more elevated (or, at any rate, more globally celebrated) than the New Zealand Listener.
    Actually, let's be candid. Your piece is not journalism at all, is it? It is mere agit-prop. In essence, as between what you have published (and, I suspect, publish routinely) and what your counterparts disseminated in Nazi Germany and Soviet Russia, Maoist China any difference is negligible.
    Rupert Wyndham

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John Boy must have blown *all* the candles out this time [updated]

Deeply in debt and desperate to keep his government out of the PIIGS sty, in a pre-Budget briefing John Key says

“the Budget will forecast strong wage growth and strong employment growth over the next couple of years, well outstripping inflation.” [Emphasis mine.]

He says “predictions” forecast “positive growth.” Yes he does.

And it is on that basis that his government plans to use this week’s  Budget to set “a credible path back to surplus.” A “forecast.” Some “predictions.” By the same folk with failed crystal balls who didn’t see the global financial crisis coming, who said bailouts and deposit insurance would work, who every year since 2008 have been saying that recovery is just around the corner, and who this year have been talking up a worldwide recovery that still refuses to happen.

In other words, it plans to hack a path back to surplus based on wishful thinking about the future, some money saved by some magical Welfare for Working Families changes that will (by some magic) benefit most and hurt some not a lot, and by a magical public service initiative that will involve telling the public service in a very loud voice to spend a lot less money.*

Clearly, a lot rests on that wishful thinking. And the loud voice.

Here’s a cartoon from 1933** featuring the then Prime Minister and Finance Minister. Perhaps someone should pin it up on this  Prime Minister’s wall.

* Thanks to  Lyndon Hood for the quips. He does good quip.
** Cartoon from the 1935 ‘Farming First’ magazine shows then NZ Prime Minister Forbes and his Finance Minister Gordon Coates.

UPDATE [10:17am]: Slightly edited, and links added.

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Why Progress Needs Ideas

Guest post by Kris Sayce

Why Progress Needs Ideas

Last week we wrote there was something troubling us.  Let’s see if we can explain…

You can barely open a newspaper or read a financial report without someone claiming China is set to take over from the US as the world’s economic powerhouse.

We’re not so sure.

The way we see it, much of what China’s achieved in the past 30 years is down to cost cutting.  In other words, China has made things cheaper and faster than any other economy.

It has built massive factories and assembly lines to churn out billions of units of products.  According to The World Bank, China:

  • Manufactures 40% of all microwave ovens sold in Europe
  • Manufactures 70% or the world’s metal cigarette lighters
  • Makes more than 50% of the world’s cameras
  • And 25% of the world’s televisions

Yet, just like a business, there’s only so much you can achieve through cost cutting.

A business that only cuts costs tells you it’s short on ideas for increasing revenue.

And that’s the kicker.  Where are China’s ideas?  Where’s the innovation?  Where’s something new and revolutionary?

Click here to read more ... >>

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Monday, May 16, 2011

ECONOMICS FOR REAL PEOPLE: Global Financial Crisis

UoA-GFC

Tomorrow evening our friends at the Auckland Uni Economics Group tackle a subject that should interest everyone: the Global Financial Crisis—an event of such so importance it’s already become capitalised. This, from their mail-out about tomorrow night:

At this Tuesday night’s meeting we will begin looking at what is often termed the global financial crisis. It is not surprising that the ‘bust’ resulted in many asking what caused the downturn. But …

  • … are the true culprits being identified and placed under the spotlight?
  • Or are innocent parties are being blamed?
  • Will stimulus, quantitative easing, bailouts and too-big-to-fail get us out of The Great Recession?
  • Or will they only make things worse?

These are crucial questions—for what is currently being decided will affect every single one of us for many years to come.

data=XCVihWRtq4WsaAaVG7VezksrTNzDcIEE_YWd04ht9zkDZSpIOEWoVOQcm6ijrNG-RJHfajJgcjB4DR3sumbBl1J9R-Uy_B7Qm4inb8sLook forward to seeing you soon.
U0A Economics Group

DATE: Tuesday 17 May
TIME: 6pm
ROOM: University of Auckland Business School,
Owen G Glenn Building, Room 219 (Level 2) [Map here]

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Smith to campers: “Go, Move, Shift” [updated]

“Freedom camping” has just been made less free. Or, by Thursday, will be—with new powers given to the wielders of council clip boards to harass, fine and prosecute people doing nothing more than enjoying the great outdoors in a mobile home.

The ill-named “Freedom Camping Bill” will be introduced by ministers Kate Wilkinson and Nick Smith (a woman who oversees the deportation of hard-working immigrants, and an authoritarian with a tongue so forked he could hug a tree with it) to reduce the freedom of all campers in order to meliorate the problems caused by just a few.

A large sledge hammer to crack a few irres0ponsible nuts.

But it’s par for the course. The puritans are at the gate, teetolitarians making everything illegal that hasn’t already been made compulsory. You can’t smoke in public; you can’t drink outside; you can’t put up signs outside that the puritans don’t like—or in places the puritans don’t want you to. Bit by bit, law by law, infringement by infringement, the great outdoors and much of our freedom is being shut down by  and who seem of one mind that if there’s any danger of someone, somewhere, enjoying themselves in a way that isn’t mandated then there ought to be a law against it forthwith.

Here’s Christy Moore:

“Go, Move Shift” by Ewen McColl, sung by Christy Moore

“New Zealand has an environmental problem … our environmental problem is freedom campers, and the government has decided to Do Something and eradicate them.
    You can see why: freedom campers are messy, untidy, and occasionally leave their shit lying around for other people to tread in … problems [that] could be solved, by (for example) providing free public facilities, backed by fines for pollution. Instead, they've decided to enable and encourage councils to ban camping, with instant spot fines. You'd almost think they were more interested in pushing people to use private, for profit campgrounds than in solving the actual problem...
    But while this will lead to tidier roadsides and public reserves, it is also a massive attack on the rights of New Zealanders. Its not just foreign tourists who camp in public space; these sorts of camping holidays are a long kiwi tradition. National would outlaw that …”

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Perigo! Show 8: Don Brash, Round Two

Last time he appeared on the Perigo! show with host Lindsay Perigo, Don Brash was on the verge of ousting Rodney Hide, who had single-handedly destroyed the ACT Party, and taking over the party himself in a bloodless coup—putting him front and centre where the ACT Party should have been along: criticising this government for its irresponsible timidity in tackling the biggest financial crisis and the largest govt deficit in this country’s history.

So now that Don Brash is leading the Act Party, where’s he going to lead it to?

As the son of a preacher-man what does he now think about God and the Universe, Gay-Bashing Banks and Rodney?

And how can he preach fiscal responsibility at the same time as pushing the profligate former mayor John Banks forward as ACT’s candidate in their anchor seat of Epsom?

Watch now to find out.

Video from Stratos TV production ‘Perigo!’

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Perigo! Show 7: The ‘Atlas Shrugged’ Special

Here’s the show about which Lindsay Perigo says,

This is it for me. I now don't care if I die tomorrow: I've paid my highest tribute to my highest values.

Watch it now:

Video from Stratos TV production ‘Perigo!’

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GUEST POST: A Counterfactual Look at Inflation [updated]

Guest post by Vedran Vuk of Casey Research.

A Counterfactual Look at Inflation

When I mention central bank-induced inflation [by either the N.Z. Reserve Bank or the U.S. Federal Reserve], I often get the response, "Inflation is really low. You're wrong about ‘The Fed’." And I'm sure many of you have heard the same comments. But this view does not consider the counterfactuals and what-ifs of monetary policy. Ironically, when the Fed wants to defend itself, we're always asked to imagine how much worse the crisis would have been without them. We are never asked to imagine a better scenario without the Fed.

Prior to the creation of the Federal Reserve, deflation was a fairly common occurrence in the business cycle. When a boom builds, inflationary expansion hits the market. After a bubble pops, the economy contracts, often causing deflation. Despite the propaganda, deflation isn't that bad.

One common argument against deflation is falling wages. However, most economists agree that there is some resistance to downward pressure on wages. Have you noticed that wage cuts rarely ever happen in the private sector? Companies either squeeze more effort out of fewer employees or they fire people. Outside the government, furlough days and wage cuts are practically unseen.

Individuals are weird about their pay on the margins. Even a small wage cut will infuriate workers, while a 3% raise to meet inflation will make them very happy -although their purchasing power has remained the same. The disgruntled workforce is usually not worth the savings.

The primary difference between the negative effects of inflation and deflation are who benefits. With inflation, the giant corporations get the low interest rates first and expand before inflation filters through the economy. The guy living on a fixed income or collecting the same salary suffers the most. With deflation, the companies take the hit, but the workers now have higher purchasing power with their salary. Of course if deflation is too rapid or too prolonged, the company will see a significant drop in revenues leading to fewer workers. And that's where problems can arise. But something like a 3 to 4% deflation for a year or two isn't the end of the world. And an even milder deflation isn't a big reason for concern. During the 1800s - a period of amazing growth for the United States - there were some very long deflationary periods.

With this in mind, the topic of 2 to 3% inflation is only a discussion about the tip of the iceberg. The real question is, "What would the CPI be without the Fed?" It's hard to say for sure, but it probably wouldn't be 2 or 3% inflation. It would rather be something like 5 or 6% deflation. If you look at it through this lens, then the Fed is already inflating at 7 to 9% inflation per year. Furthermore, this means things could get out of hand quickly. If the natural contracting of the economy ends, we could suddenly see a rapid pickup in inflation where these numbers are openly evident.

inflation-cartoonJustin Lahart with the Wall Street Journal wrestles with the definition of ‘inflation’ in his article “Using a Dictionary to Define Inflation Can Spell Trouble.”  Lahart writes that up until 2003, Webster’s defined inflation as printing money.  Since the 2003 edition, Webster’s defines inflation as “a continuing rise in the general price level.”
    Mainstream economists say that only those out-of-step define inflation as increased money creation.  “They were quite far behind the times,” says Harvard economist Greg Mankiw. In his widely used economics textbook, he defines inflation simply as “an increase in the overall level of prices in the economy.”
    Lahart traces the I-word back to 1755 when “The state of being swelled with wind; flatulence,” defined inflation.
     In 1864, Webster’s American Dictionary of the English Language defined inflation as “undue expansion or increase, from over-issue; — said of currency.”
    And so on from there until 2003.
    “This semantic innovation is by no means harmless,” Mises wrote in Planning for Freedom.   Mises points out that it’s impossible to fight an evil that you can’t name.  The public gets lost when a detailed analysis is required and continually referring to this analysis is bothersome, besides being ineffective.  “As you cannot name the policy increasing the quantity of the circulating medium, it goes on luxuriantly,”  Mises wrote.
    However, what is most damaging is that when policy makers fight the consequences of inflation–a rise in prices–they make matters worse, not realizing “the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on another.”
    Mr. Lahart writes that “there has been a shift in American thinking of the purpose of dictionaries: Rather than defining words as some experts thought they should be used, dictionaries have moved toward defining words as people actually use them.”
    So what we have is a generation of people (economists and otherwise) who don’t understand what inflation is.
    When questioned about rising gasoline prices, Fed Chair Ben Bernanke said during the Federal Reserve’s first press conference.

            This is a very adverse development. It accounts for almost all of the inflation. There’s not much
        the Federal Reserve can do about gas prices, per se, without derailing growth entirely.
            The Fed cannot create more oil. What we can do is basically try to keep higher gas prices from
        passing into other prices and wages, and creating a broader inflation that would be harder to
        extinguish. Our view is that gas prices will not continue to rise at the recent pace. That will provide 
        some relief on the inflation front.

Just look it up in Webster’s. The Fed has nothing to do with prices.

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Sunday, May 15, 2011

Sunday Stupidity: On Faith

Faith is not knowledge. It is saying that, for you, knowledge is actually irrelevant:

“’Faith’ designates blind acceptance of a certain ideational content, acceptance induced by feeling in the absence of evidence or proof.”
            - Leonard Peikoff, The Ominous Parallels

With the result:

“The alleged short-cut to knowledge, which is faith, is only a short-circuit destroying the mind.”
            - Ayn Rand, Atlas Shrugged

[Image from the Atheist Revolution blog.

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