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Reader Commentaries   (October 14, 2007)

Iraq Withdrawal, Hedging the Dollar, Costs of Hedging, Housing Insanity, Taxes, free Grateful Dead music, September 11, oil and WW2, insurance, global warming, torture and more!

For more stimulating ideas, please visit the Of Two Minds blog.

Michael Goodfellow

(Written in response to fabius Maximus's essay Beyond Insurgency: An End to Our War in Iraq)

I'm not sure that partition works in practice. The Sunni groups will want to regain control of the country, and the Shia naturally fear this. If it were just a matter of Kurds in the north, Sunni in the west and Shia in the south, perhaps you could draw boundary lines that made sense. Unfortunately, it doesn't sound that simple. Baghdad and some of the other major cities are split between groups. The Kurds are the only ones with a discrete area of the country that can be defended, but their southern border is disputed (there are oil rich areas they claim but which are mixed regions.)

A lot of reports make the Kurds out to be the success story of the region, and our model for what we want. I hadn't read much about their actual economy though (amazingly, reporters don't seem to think this matters!) I read something recently that characterized the Kurdish area as being divided between a couple of strong ruling factions, based on tribal groups, and that government was the main employer of the region. Most of the revenue was coming from oil leasing rights. I don't know that even that situation is stable, since if the rest of Iraq degenerates into civil war, it's unlikely the Kurds could hold on to Mosul or Kirkuk. It's also unlikely that oil companies would pay much for rights to oil in a region where things are so unsettled.

Even if groups were willing to separate, dividing up oil revenues and oil producing regions is going to be a problem. Apparently, even the electrical grid is collapsing, as regions detach from the national grid and supply power only to their own people. I can't believe that any group is going to give up rights to oil in its region.

I also don't think anything like a peaceful withdrawal of U.S. forces is possible. The day we announce we have a fixed date for leaving, all the cooperation we've been getting there will disappear. If we aren't sticking around, we have no clout, and cannot protect the people who have been working with us. I expect they will stop sharing information on terrorists, start hording weapons, ammo and supplies, and probably start looting the various U.S. installations. The middle class will become even more desperate to leave. I read one report already that has the U.S. forces complaining about Iraqi police stealing gasoline from their own police stations. If that's what's happening now, when the U.S. is seen as a source of money and protection, I can't believe it will get better when we're on our way out.

The only scenarios that make sense to me are either 1) we babysit that place for another 10 years at horrible cost, with continual reports of violence breaking out, or 2) by some miracle, an Iraqi government forms and formally requests we leave, and keeps order long enough for us to do so. That would save face, although it would be such a bizarre turn of events I'd really be surprised. Some faction, probably Iranian-backed Shia, would have to win decisively and control the government for awhile before that could happen.

I still think the most likely bet is that the economy goes sour here, forcing budget cutbacks at minimum, cutting the size of the force there. "Exhaustion" of the military and demand by large parts of the public for a pullout are also big factors. I just don't think we are going to stick it out. When we do pull out or even draw down forces significantly, it could be anything from embarrassing to a disaster. I have no idea how that will play out.
Zeus Y.:

Interesting tutorial on hedge funds. This works well for commodities that have an "essential" quality and use to them like crude oil does for producing energy. However, what if you applied hedging to something that has symbolic value or “use” value/quality. I’m thinking about the U.S. dollar. How could you hedge on the U.S. dollar without using those dollars to buy euros or euro-bonds for instance, making the dollar’s problem worse.

The condition is an interesting one, you have credit markets tightening here making the dollar more “expensive” [or at least scarcer in terms of availability, which drives up “acquisition costs” (i.e. loan percentages, etc.)] just like that oil in the example, but then you have an eroding “use” quality (unlike oil, whose “use” value is going up as demand goes up and “peak oil” restrictions onset). With the U.S. dollar you have a tightening of supply, and an erosion of quality and value (because of the debt and machinations, and in some case outright fraud behind it), that leads to a lack of demand and a consequent drop in the value of the dollar in comparison to the euro and other currencies.

You have the dollar getting more expensive but being worth less. Wow. That’s interesting. That’s kind of an inversion of micro and macro economic principles. Usually when something drops in price (you can buy more dollars with fewer euros), this is seen as a buy opportunity, but now there is the serious prospect (do to all the revealed smoke and mirrors) that it will decline further because it does not have any productive backing, leading people to avoide it. I know there is some “buffering” effect by the exchange advantage of vacationing in the U.S. with euros, and the supposed trade advantage of suppressing your currency’s value, but that doesn’t appear to do the trick either, especially given the fact that we have become a financier nation, producing little of actual value (manufactured products, etc.). Where is our collateral? How do we get out of this pickle? Do we start liquidating our national parks to sell them to foreign investors?

Full “faith and credit” sure doesn’t seem to have much to it given how poorly we’ve (okay, the Bush administration in our name has) treated the rest of the world. In the end isn’t it interesting that our “collateral” is really built upon how the rest of the world likes and respects us and is willing to lend us money even though we are like that crazy, but charming uncle, who ain’t going to be paying it back? And now that uncle has gotten a little mean and arrogant. What do we have now?
James C.:

I agree that hedging can, at times, work out well. But while it may reduce volatility in the short term, in the aggregate it actually raises costs due to the premium of the option contracts. It is the same story as in health insurance, or subprime loans. Spreading the risk only means that someone else is absorbing the costs that rightfully belong to me and we are both paying a fee (premium on the options contract or health insurance) for that privilege. Therefore, in the aggregate, it raises the cost for everyone.

Let's say Southwest wanted to hedge fuel prices today, with cash oil trading at $80. Which way do they bet? That oil is going to $100 or $50? And how much out of the money do they want to place their bet. Suppose they spend $3/barrel per contract to protect themselves from oil going higher and a year from now oil is at $60. What affect does this have on their bottom line?

It is always dangerous to look at only success when making decisions. This is the whole Wall Street marketing scheme, figure out a way to present the numbers in a positive fashion.
Zeus Y.:

My, but we do seem to have such a technology around avoiding responsibility in this country don't we. In a land where the gloves are off in terms of plundering by the wealthy the assets of this country, in which every market has become an open invitation to corporate raider mentality (externalize risk, internalize profit, damn the social consequences), in which the formula for success for middle class focus was to act in tune with the unregulated wealthy, we now have an entire people believing there is only an "upside". When the downside presents itself, we have an entire country determined to legislate or hide it away.

Why are those 850 sq. ft. shacks in northern Oakland, CA still being listed at 500K? Because this belief is so strong and so pervasive and our confidence so engrained that reality must follow myth, that we simply "decide" reality will be what we want it to be. Remembering the famous line from the Ron Suskind article in the NYT by the contemptuous neocon crony (paraphrased), "While you (liberals) study reality; we create reality." Ooops, that's not the reality we wanted to create. We were dead certain we were making a "permanent Republican majority." We were dead certain that money would always be cheap and the housing prices would always ride. C'mon created reality, do what you were created to do!

You know, maybe its just me, but I don't like particularly studying reality or "creating reality". I like "participating" in reality. I like saving for a house, providing a good moral basis for our future child, being morally and fiscally and socially responsible. These are some of the best qualities and experiences in life. Why did we, as a nation, ever listen to those who would try to convince us that the "good life" meant no responsibility, no consequence, and essentially no value. I think a crash back to real value would be welcome if it comes because it would be a form of salvation. It would hopefully (if not overwhelmed by panic) do as it did in the Depression, help us realize that our real value is in caring for one another and not in trying to selfishly get rich quick and screw over other people.

You have a great blog btw. On the subject of taxes...approximately 1 yr ago Newsweek looked at the percentage of total taxes corporations paid versus what individuals paid since the 1940's. They used numbers from the treasury dept. I recall the numbers something like this: in the 1940's corporations paid approx 60% of the total tax and individuals the balance. Over the decades since, corporations now pay approx 20% of the total tax and individuals the balance! I can't believe the article did not start a revolution in the country.
Johnn K.:

I know I'm pissing in the wind, a hurricane force wind, but taxes both made our republic and will end up destroying it.

The root cause of the American Revolution was taxes, specifically the power to tax without representation. If the English Parliament allowed representatives from the colonies to travel to England to partake in discussion & voting on taxes, we'd all be having a nice afternoon tea.

Now, because the tax code is so screwed up, thanks to competing opposing interests, we're screwed as a nation.

When people can vote themselves privileges without costs or responsibilities, they will, time after time, do just that. It's a case of the mob majority voting against the minority. The ones who do not pay, or pay very little, get to vote against those who pay the taxes.

You might argue that the founders of the U.S. were, by and large, wealthy, white landholders. And you'd be correct. But they were also stakeholders interested in how the country was run.

I really see no way out, no way the tax code will ever be simple or fair. Not until there's a major financial collapse and those that are the producers, the movers & shakers, threaten to leave.

To have a free society, everyone must participate & contribute equally. Today that's far from the case and it's getting worse with more and more dependent on government for - you name it. The simplest solution is to have some sort of flat tax, across the board, for everyone to pay an equal percentage into the pot. Yes that includes the uber-Rich and the poverty stricken.


That way, with equal responsibility, most would become more sensitized to how government spent their money.
Bill Murath:

You have been quite on the money as always lately. Your one comment about the Grateful Dead versus Disney. For the people outside the GD trading circle, little do they realize what went into the symbiotic relationship between the band and fans. The Gestalt. Almost everyone involved in trading tapes/cds/torrents etc... releaized what a good thing they had and every effort has always been made to maintain the trust that the music was shared and no one ever realized a profit from the music recorded. It is Anarchy at its finest.

We have always been a self policing group. Back in the day of cassettes it was quite easy since data transfer was slow due to the medium. Once things moved to CD and online sharing things got more complicated but it is amazing to see this all in action. As an example...

Many people have tried to sell GD and Phil shows on E-Bay. Whenever this comes up people will email the bidder that they will gladly freebie all the cds they are bidding on and this music is freely shared and there is no need to pay for it. They/I/We will also contact eBay to report the abuse. And it works!!!!!!! We all see the true value of what is given and through the self interest of the group without any written laws keep everything in check. I just downloaded for free the Red Rocks show from last Saturday. Absolutely ethereal.

Anyway..... There are 4 or 5 versions availabe to download for free. This latest one was from a six Neumann mike mix. The person who put this up probably has 30 to 4o thousand dollars worth of equipment in their taping rig and they do this for the love of it with no chance or intent of profit. They do it because they are into it. Some of the cheaper rigs are probably maybe 5 grand but they all share freely. Just absolutely beautiful. And the www.archive.org stores all sorts of downloads of bands that let their live shows to be freely traded. I guess the bands are total losers for not making money for what they put out but we all can't be quantam finance wizards!
Porter Trials:

Inconvenient Notes From The Top Of The Morning: Could This Really Be The End?

7:28 in the early AM on this day. The day before Pearl Harbor 2K. That’s right, tomorrow is 9/11. Let’s say forget that. We’ll call it September 11. I hate that abbreviated crap. Too many things and cheap words have been tied to that abbreviation for that date that I won’t become a part of by putting this in Neo Print. 6 years later and people are still asking the same questions. The big one:


Well, safer now than before is really the question everyone asks when this day comes around. 6 years after and that’s still an actual question that’s on peoples minds. Just wallowing around in the frontal lobe or congealing somewhere on top of the brain with all the rest of the fluid and dead brain cells left trapped under the skull. We have never been safe. Britain, the French, the Spanish, our own people, the fascist Nazis, then Communists. Jeez, that last one lasted forever didn’t it? Up until Reagan.

But the point that I’m so slowly building this excuse to is that America has never been "safe". But, then again, neither has any other place on this whole planet. That’s the way the world works. So far. Throughout history, no place is safe. Never has been, never will be. No matter what you do, you’ll never be able to say that you’re completely safe anywhere. That doesn’t mean give up, it just means forget about that aspect of what September 11 means to people.

Giving up personal freedom just so you can feel safer on a global scale just means that sooner or later, you’ll feel just as unsafe in your own place. Whether that be country, city, or home. And that, in itself, comes back to the Big Question. How long will it take to feel free from these "terrorists", and how much will you give up in the process, before you ‘re no longer safe here. And, after that, how long until WE become the terrorists.
Mark P.:

I saw the site today (10/6) and had one other thought on Global Warming.

I have heard both sides of the argument. And I think I have one other side noone has mentioned to this date.

I really am not interested in who is right or wrong. I am looking at this pragmatically due to my scientific training.

The whole issue around global warming can be easily boiled down into a scientific experiment. I think everyone can agree that we are in the process of releasing sequestered carbon that had been buried in the ground for millions of years into the atmosphere of our planet.

Currently, we have 2 hypotheses 1) There is no global warming. Which actually means that the release of carbon has no effect on the environment. 2) Global warming is here and we will have to deal with the consequences. Which actually means the release of carbon is having an adverse effect on the environment.

Now, I would like to simplify this experiment to something everyone can grasp.

Lets assume that we have a house that we live inside of all of the time. We can’t go outside and we can’t move.

In this house we are currently in the process of running an experiment. Now we don’t know the outcome of the experiment but we have 2 hypotheses on how he experiment will work out. 1) The experiment will work out fine and have to effects, 2) the experiment will have an adverse effect and cause the house to become unlivable.

Now the real question is do you really want to risk continuing the experiment or should you think about trying to slow down or stop the experiment.

Remember we have one earth and no where else to live if we mess this one up.
Harun I.:

Good post as usual. I like the reading list (10/8/07). I too have watched the Ken Burns series. While watching the film I found it supported my assertion today's Mid-East foreign policy is all about oil. During the series it became apparent that the Germans had superior equipment and clothing. Their generals when listened to were tactical geniuses. But they couldn't overcome one thing, energy. Without access to fuel resources all of their superior Tiger and Panzer tanks were just hunks of metal. They could only move as far as their supply lines would let them and when the supply lines ran dry so did any advance.

Conversely the US was awash in oil or energy resources.

Lesson from WW II: energy is a national security issue.

Today the US is as dependent as Germany was in WW II on external sources of energy making it necessary for this super-power to act aggressively to make sure the oil keeps flowing. At the highest levels it is understood that all the technological superiority in the world means little if you don't have the fuel to use it.

This is why the Mid East must be pacified until technology can produce a viable replacement.

This is reprehensible.

Personally, I think pacification will fail.
Mark D.:

don't know if it's the same guy or not, but my dad knows i think Mcgrath. (author of the book referenced in the 10/8/07 post--CHS) if it's the same guy, it was a good book. my dad is against waterboarding. he says it's effective, as is the wet towel over the mouth. he like me, thinks islam was created to correct first inheritance of ishmael over isac, and that's what it's really all about. he's not a believer in parity, as it just makes it easier for the former weak side to win, and the other, us, to lose. brings to mind the cold war. he's for interjection, and trade, when advantageous. he's under no illusions of moral relativism. he's very clear, you are either expanding or retracting. he thinks we're retracting, and is scared for his grand kids. me, i know there's a fight coming, and it's gonna be Weimer and Chamberlain all over again.
Mark A.:

I'm totally with you on the GFIRE take, especially re: insurance. Can't drive a car without insurance, can't own or build a house without insurance, can't open a business without umpteen sorts of insurance. Can't afford health insurance though.

I'm totally convinced that collision insurance drives up the cost of all associated repair services. Liability insurance likely has the same effect on legal rates - the user's never the one actually paying.

The implications for health insurance are uncomfortable though - it seems highly likely that the cost of medical services has been massively inflated over time by the presence of 3rd-party insurance, but all anyone wants these days is more of the same for everyone. Is this wise? (cf. the price of negotiated insurance prices versus self-pay prices; though I think the reverse is true for auto repairs).

Finally, you can't ignore the effect of just-plain-greedy and frivoulous plaintiffs (that's us), and the exaggerated woe and outrage over misfortunes that result in ridiculous awards. And don't even get me started on the state-sponsored extortion that was the tobacco settlement... This is not to say there aren't egregious wrongs committed, but there's also egregious self-pity, greed, and vengefulness.

Re: import/export/GDP etc. I thought that GDP replaced GNP long ago just to take account of the difference between what was produced/sold within the country vs sold by US companies globally, but I may be completely addle-pated, and I'm too lazy too look up the definitions right now. Re: the trade deficit, it would be interesting to see what happens to the import number after subtracting oil (an indispensible monopoly-priced product we cannot produce), and maybe reducing the export figure by Microsoft's sales and Disney license fees.

NOTE: Mark is correct: products made overseas are deducted from U.S. GDP, which attempts to measure domestic goods and services only.

If normal people can turn to torture, per the college student experiments, then should we be trying to extradite 88 year old former guards who were doing what they were told 63 years ago? Particularly from our comfy wingback chairs in the perspective of 2007, when the majority of us have never experienced “total” war? not considering that to disobey an order meant a guaranteed bullet to the head? Should every person in such a system be expected to sacrifice their life in order to disobey an order on principle? And if not, to be convicted of a war crime 70 years later, if they are lucky enough to be alive? I am not excusing the Nazis, but I have always had a problem with this way of judging such people….the leaders yes, but not the underlings…yet even today they are still being sought, those who are alive…my only point is that this is not as black and white as many sanctimonious people would have us believe.

Thank you, readers, for your experiences and informative links.

For more on this subject and a wide array of other topics, please visit my weblog.


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