22 September 2007


The recent (and predicted on this blog) problems with the world finance system (ascribed by many to sub-prime mortgages) has caused instability in the banking system. One instance was the Northern Rock incident, where British Taxpayers saved the bacon of shareholders of the bank, and reimbursed the funds of the depositors. Martin Wolf has explained the sorry tale in several blogs. the UK such insurance covers only 100 per cent of the first £2,000 and 90 per cent of the next £33,000. Worse, in the case of an insolvency, depositors take their place at the back of a lengthy queue. British deposit insurance does not prevent runs from banks in trouble. It guarantees they will happen. The run was quite rational.

The solution to the problem that caused the Northern Rock bailout and like problems that are currently managed by deposit insurance is for government to expand M0 to include electronic "on demand" money.

Economists define different types of money. The government issues M0 money, which is coin and banknotes. Money M1 is banknotes and coin (M0) plus "on demand" accounts, which are deposits in cheque or cash demand accounts. Definitions of M0, M1, M2 and M3 can be found in wikipedia.

To achieve the desired expansion of M0 the government would need to create personal electronic cash accounts for every citizen taxpayer and provide online and ATM access to those accounts. It would not be necessary to unwind or destroy any existing bank structures.

The government could form a new department within the reserve bank or the taxation department or even DSS that would issue every citizen/taxpayer with a free electronic cash account. All government transfer payments could then be made into and from that account. Money owned by a citizen could be deposited in absolute safety into that account. Electronic transfers could be made to and from that account.

The account could even pay interest. The DSS (Department of Social Security) "deems" any capital held by recipients of a pension to earn a minimum interest rate. The reserve bank sets the rate at which it borrows money from banks. It is suggested that the interest rate paid on government accounts should be either the "deeming" rate currently used by social security, or the reserve bank borrowing rate.

With such a system in place, there is no reason for governments to provide a deposit guarantee to bank savings accounts. If savers wish to have their money held safely at low interest, they could place the money at no risk in a government cash account. If they wanted to earn higher interest than provided, then they should be aware that the price of that greater income is the risk of loss.

13 September 2007


During my formative years I confidently felt, something like Voltaire's Pangloss, that I lived in the best of all existing political systems.

Since then the Internet and information explosion have eventuated, and I am no longer so confident.

Let's start with defining concepts.

Liberalism and Democracy are totally different dimensions in government, each having a range of values between extremes.

Liberalism as a form of government maximizes the liberty of citizens. It's extreme opposite might be described as a state where "anything not specifically permitted by law is forbidden".

Democracy ranges from the Greek ideal, nowadays known as "direct democracy" to it's opposite, which is dictatorship, defined here as a system of government wherein an elite has the power to rule by decree, that power unfettered by the people governed.

A liberal country is a country that does not restrict (either by social or political instruments) it's people's actions according to the formula that "if your actions or words are not directly infringing the liberties and rights of another, then it is permissible".

Of course some of those rights need definitions on their own. For instance the clothes that a person wears or does not wear should not be subject to the approval of others. Whether a person chooses to use recreational drugs should not be an issue, excepting where there are safety issues, such as drinking and driving..

Dictatorship is a system of governing people wherein an elite has the power to rule by decree, and that power is not subject to the direct temporal control of the people so ruled.

Democracy is a system where the people have the power to legislate directly, either by creating or removing legislation without the intervention of agents having a power of veto or decree. The people must also have the power to dismiss any government on short notice. Unrestricted access to uncensored information about political matters (budget details, public service accounts etc) is an important element of democracy.

A representative democracy is partway between a dictatorship and a democracy. Rulers (presidents) or Representatives are democratically elected, at which point they become like an absolute monarch or an oligarchy of dictators who can rule by decree fettered only by a constitution and instrumentalities set up under that constitution. This system is unstable, in that there is a problem restricting the powers of the dictator. For instance, in Australia the representatives choose the high court, which interprets the constitution. By stacking the high court and the position of governor general, it should be possible for a power clique to avoid important constitutional safeguards. However another player is Queen Elizabeth II, who could appoint herself governor and rule by decree.  I am less familiar with the US system, but suspect that Presidential Directives can suspend the constitution (as for instance, the US constitutional requirement that all paper money issued shall be convertible into gold appears to have been suspended by a Presidential directive.)
Some real world examples might better illustrate my definitions.

Liberal state with undemocratic dictatorship. Hong Kong under British rule was a near perfect example of a people who had liberty, but were governed by a dictator.

Liberal state with representative democracy. Most of the technically advanced, wealthy nations have this form of government. The USA, India and most of Western Europe and Japan are examples of mostly liberal dictatorships that are mostly democratically elected. Once that dictating elite is elected, the citizens have no recourse or control until the next scheduled election.

Liberal democracy. These are quite rare. California and some other US states are examples of a liberal democracy within the strictures of a dictatorial union (the USA). The citizens of California have demonstrated that they can create their own legislation, "propositions" and also that they can dismiss a government (Grey exchanged for Schwartzenegger) at a time of their own choosing. Other examples of liberal democracy are Switzerland and Iceland.

Traditionally a "free press" was an essential element of  representative or direct democracy. However that situation has been abused in the past by the manipulation of public opinion by a small moneyed or political elite, who exert that control over the press by their employment practices. For instance, do not bother to apply for a journalist's position with the (Australian) ABC or the BBC if you are a conservative. Liberal journalists need not apply for employment in Russia or Saudi Arabia or the Wall Street Journal. Democracy nowadays requires cheap, uncensored access by most voters to the world wide web.

Dictatorship with restricted liberty. China and Saudi Arabia are examples.

Representative democracy with restricted liberty. A good example is Iran or Zimbabwe. According to reports, those nations have restricted liberties, however they do have regular elections with an actual opposition.
Democracy with restricted liberty. Venezuela, where it is possible for the people to initiate removal of an unwanted government at a time of their own choosing, meets our definition of democracy. The move by President Chavez to abandon regular elections is troubling, however it could be argued that since the people have a process that can bring on an election, a regular schedule of elections is unnecessary. However information access in Venezuela appears to be restricted by economic and political factors.

11 September 2007



The APEC meeting was here for the last week. The parade was rained on when some ABC journalists drove up in hire cars with Canadian flags flying. Apparently APEC security was not well organized because (reportedly much to the journalist's surprise) they sailed through two checkpoints unchallenged, and were eventually caught because they began to get frightened by the security breach they were creating, and turned around before the third checkpoint (just in front of Bush's Hotel) and put up their hands.

The question is, why didn't those security guys (with $165million) have an operations room that tracks all of the delegates? Why haven't they given each delegate some sort of rfid tag? (based e.g. on the mobile phone network). The security people were caught with their pants down.

1) They should have stopped them at the first checkpoint.
2) Alternatively, (if they didn't want to slow down what appeared to be a legitimate delegate) they could have called the delegation's movement in to operations. Operations would have advised that the Canadian delegate was elsewhere. Then they could have stopped them at the second checkpoint.

Lets face it, the guys running APEC Sydney security are utter morons. They had $160 million, what did they do with it?


Premier of Queensland Beatty resigned this week. I must admit that my first thought was that Rudd was ridding the Labour machine of a potential political embarassment.

A short history lesson for the benefit of non-Australian readers - we have two layers of government in Australia, which came about historically. Originally Australia was six colonies, each colony managed it's own affairs and the governor ruled (at the will of the crown) by decree. When the people of these states (and the Northern Territory) decided that they wanted to federate, the state politicians (naturally) did not want to relinquish any power. So we have a state constitution that (from memory) more or less reads like the governor's orders, "the parliament of NSW has the power to enact laws for the peace and benefit of the people of NSW". The Australian constitution is a more comprehensive document. It sets out the rules by which the Federal government is to operate, and any powers not therein prescribed were called the "reserve powers" and were owned by the states.

Notice… Only 2 levels of government. The States decided for political reasons to create local government councils. Despite being elected, and having the power to enact laws, those councils are instrumentalities of the state. And the states in general interfere in the business of those councils at will.

A few months ago and just after being elected, (as written on last June) Premier Beatty decided to dissolve and reconstitute the local government regions. He even instituted personal penalties against anybody who decided to challenge the legislation.

There was a huge public outcry, to no avail. PM Howard called Beatty on that one, and offered to fund a vote on whether the changes should be made.

Like Bracks in Victoria, this was another head rolling for the benefit of Federal Labour. Bracks stood up against John Howard, but he was outmaneuvered. Rather than admit the error he resigned. Now it was Beatty's turn.


Circa 2002 the NSW government started issuing it's own carbon abatement certificates to companies (forestry, energy efficiency companies, power companies) that saved carbon dioxide. Those certificates could then be sold to power companies and other carbon polluters who had to meet mandatory targets.

Some economists suggest that taxes are the optimum method for controlling the production of price sensitive goods, while permits are the optimum method for controlling price insensitive goods.

At inception of the scheme, those certificates were valued at around $11 per tonne. Since John Howard's announcement of a federal scheme due in 2012, the price of those certificates has fallen to $6 per tonne, and the companies selling carbon abatement certificates are laying off staff.

A more elegant solution (suggested by Caltex see "The Australian" July 14th 2007) is to tax all carbon dioxide production. Perhaps rebates should be available in place of those "abatement certificates" to those who "fix" carbon dioxide. In this way power companies and other big producers would seek to optimize the cost of producing power by reducing the carbon cost per KWH produced, and consumers would seek to minimize their power bills by purchasing more energy efficient equipment.

Anthracite (black coal) is about 95% carbon by weight, and burning one Kg produces about 30 MJ of energy. Assuming a 38% efficiency power station, that is 0.38 * 30,000,000 / 3600 / 1000 = 3.2 KWH

Burning one Kg anthracite produces 0.95 * 44 / 12 = 3.5 Kg of Carbon Dioxide.

So each 1000 KWH produced generated in an anthracite power station produces about 1.1 tons of carbon dioxide.

If the carbon dioxide tax was set at $10 per ton, then each KWH purchased would increase in cost by 1.1 cents.

Brown coal produces less energy for the same carbon tax, so would be less competitive.
Labour party shadow minister Peter Garret has suggested that it should be legislated that all new hot water systems should either be gas or employ a heat pump. Those methods produce around three or four times as much heat per ton of carbon dioxide. That idea has merit.

An argument against a general carbon tax might be that it would not be revenue neutral. That is not really a problem. Any surplus government revenue (tax - rebates) should be returned equally to the people by way of a bonus.

Admittedly, such a tax would increase production costs for those goods that were energy intensive in their manufacture (aluminium). However other goods would become cheaper, as the rebate would be anti-inflationary.

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