We need casinos, or thank you Bernie for showing us the error of our ways

Pols of all stripes, and the odd economist, rail against our 'casino' markets. In fact if our markets did not resemble casinos we may not have markets at all. Here is why:

1) Counting the skim taken by the finance industry as compensation, commissions and crookedness one finds the economic notion of no transaction costs laughable and one would laugh if one were not crying.
2) I estimate the long run skim at over 3%, which means that the return on equities drops from the around 6% of various academic studies to around 3% - hardly worth the trouble and time to reinvent the Consol.
3) Luckily, skewness comes to our rescue - we can count on the good old human gambling instinct to be beguiled by better odds than slot machines, with the same possibility of a huge return if one spots a Google in time.
5) Skewness also allows various excesses to be written off in one big bath and expunged from track records under the 'vintage' theory - i.e PE funds investing in 2000 all did terribly; that we lost only 15% makes us rock stars.
4) Poor people play the lottery; rich people play the stock market. And the online form is legal in the US with losses tax deductible and gains sheltered.
5) The Houses of Goldman, Morgan (at least the odd avatar) etc. always win.
6) Academic studies all run on sized portolios; I have never seen one that corrects for the denominator - you know that old bank trick - keep growing the denominator so the percentage of bad loans looks tiny. What if all markets are really one big Ponzi scheme that rely on inter temporal trust insured by inflation? Ouch.

Red or black, anyone?

Idiot Economists or is it Economist Idiots

Ah, the joy of being an economist who deals in frictionless markets, no transaction costs, immediate adjustments to supply and demand etc.

The dismal lot have twigged that either China must engineer a massive increase in domestic demand or must shrink its manufacturing capacity. Alas, it can only be the latter, and not because of the normally cited reason of Chinese cussedness. It will be because the demand in the west for running shoes, sundry toys and the rest of that generally low value added rubbish has been destroyed.

The Chinese probably want to consume more health care, education, entertainment, maybe even household goods - but toys and running shoes and bras? And factories are not frictionless - they cannot switch overnight from stuffed toys to cosmetics. Capital required to switch them is not mobile (at least not any more). Time is definitely not mobile - even barefoot doctors take time to learn.

It will be pain all round, then, and that pain will be transmitted through lower exchange rates, protectionism etc.

So the idea of the Chinese building lots more roads, ports and so on is not as daft as mainstream economists make it sound. The roads etc. may lead to nowhere, but a coolie on the road gang is no different really than a coolie on a toy line, and paying him/her is a good idea to make sure that consumption does not drop further.

In the meantime all us non friction free folk are wondering how the hell to cope with the brown stuff hitting the fan.

War and all that

The last time we did the eyeball to eyeball thing with the Paki’s at Kargil we lost a lot of our soldiers - as did the Pakistani's. Pakistan apparently lost between 2,700 and 4,000 soldiers and we lost about the same number.

Operation Parakrama, the 2001 nonsense where our soldiers, and theirs, hung around the border burning money fortunately did not cost many lives, but certainly helped to crater our economy.

At the moment Pakistan's army is nicely bottled up by its own people in the tribal regions and all indications are that they are losing more people every month than they did in the Kargil conflict. That is probably true - remember they are fighting the very wallahs who created havoc in Mumbai. I have it on so-so authority that P general’s are exulting that a mere 10 Muslims killed 200 Hindus. Actually, they killed 40 Muslims, about 140 Hindus and assorted foreigners whose religion was not of mention in the papers. Given even the Muslim to Muslim odds in favour of the militants, I would not want to be in the P Army’s shoes.

Remember, Mumbai lost 200 people in an epochal event. In the same period Karachi lost 100 to a bog standard series of Sunni-Shia riots. On the 4^th of December we increased airport security. On the same day they lost 10 people to bombers, with 50 more injured, 10 of those critically.

Not much of a society - their shia-sunni nonsense and other religious warfare costs thousands of lives a year.

And not much of an economy either. Many, many wealthy Indians who fear a decline of the dollar are wondering where to put their dough; most consider the rupee at 50 to be a mid term bargain. I do not think that any Pakistani thinks of repatriating money to Pakistan. They are buying houses in Dubai and London, not salivating over the prospect of a fall in Mumbai real estate so they can buy the flat they missed in the last downturn.

One thing that we can do is to push proof of Pakistan’s complicity, if we indeed have it, and if it is not nonsense the way most of our government’s claims are nonsense. Pakistan’s refusal to act, for it will refuse to act, will be an excuse to pursue Pakistan’s expulsion from every diplomatic and trade forum imaginable. It will not succeed but it may create enough pain to tip their pathetic economy over the edge. Bread riots in the streets of Lahore have a way of occupying the minds of rulers to the exclusion of terrorism.

The best revenge for us is to let Pakistan stew in its own juice and lose more lives, but exclusively Pakistani ones. That is exactly what they are afraid of, which is why they are constantly threatening the US with having the Pak army leave the tribal areas and face off against India. The reason is that they do not have the stomach to face the sorts of fighters who saw off the Russians, the Brits and countless others before them. Or even the swine that created carnage in Mumbai.

It will give satisfaction to charge to the border, bomb the odd base, and sink the odd boat.

But it will cost a lot of lives and a lot of money. Save the lives and some of the money. Beefing up and modernising our security apparatus will cost a lot less than a war.

Instead, all our papers should carry on their front pages a running tally of the cost of internal terrorism to Pakistan in lives lost. No one does this at the moment but imagine the horror of knowing that you have lost between 10 and 100 people a day. That adds up to between 4,000 and 40,000 people per year and may make even the complacent Pakistani leadership wake up. They do not tell their people anything. Perhaps our free press should do the job for them and help to destabilize their monstrous society. Perhaps we can have a running clock at CST.

Better also to fix our current corrupt and rotten-to-the core police force (the bravery of their lower echelons notwithstanding). This will take decades of work unless something new is unleashed. A simple suggestion is to set up an entirely separate police apparatus from the current one, and insulate it from corruption and, therefore, politicians. If that can be done the new force will make the old one modernize, much as private (but Indian) banks made the government banks a whole lot better.

A better security environment may well increase GDP - a positive outcome no war can deliver.

For now the whole thing is best left in the hands of those that started it - let the yanks drone-bomb Pak based terrorists to bits, and stand behind the Pak army with bayonets, forcing it into the mouths of mullahs in Waziristan. Our job should be to gather proof and present it to the world, while threatening to bomb, so that the Yankees are forced to get on with their job.

The army will win, and in the process curtail its own religious, anti-Indian wing; or it will lose and the mullahs will win. But Megaton Mullahs will bring with them a very different level of action from the rest of the world, including from India, which ought to keep its powder dry for that very big event.

Our neighbour is a cesspit - far better to piss into it from a distance, and well upwind.