The Gap Trap?

"[F]or the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier."




So reports Mark Whitehouse in the WSJ: U.S. Foreign Debt Shows Its Teeth As Rates Climb (You need a ticket to read.) Here'r a few more outtakes:

The gap is still small within the context of the $13 trillion American economy. And the trend could reverse if U.S. interest rates decline. But economists say America's emergence as a net payer illustrates an important point: In years to come, a growing share of whatever prosperity the nation achieves probably will be sent abroad in the form of debt-service payments. That means Americans will have to work harder to maintain the same living standards -- or cut back sharply to pay down the debt.

Since the end of 2001, when the current economic expansion began, the nation's consumption, investment and other outlays have exceeded income by a cumulative $2.9 trillion -- the largest gap on record. That current-account deficit contributes directly to the nation's total foreign debt, the value of all the U.S. stocks, bonds, real estate, businesses and other assets owned by non-U.S. residents. As of the end of 2005, total U.S. foreign debt stood at $13.6 trillion -- or about $119,000 per household. Net foreign debt, which excluded the $11.1 trillion value of U.S.-owned foreign assets, was $2.5 trillion.

Exactly how the U.S. has managed to load on so much debt without seeing its net payments rise remains something of a mystery. Even in the second quarter, the U.S., in effect, was paying only a 0.4% annualized interest rate on its net debt. "It's still quite a good deal," says Pierre-Olivier Gourinchas, an economics professor at the University of California, Berkeley.

In a recent paper, Harvard economists Ricardo Hausmann and Federico Sturzenegger went so far as to suggest that the U.S. might not be a net debtor at all. Instead, they surmised, the U.S. might actually have income-producing assets abroad, such as know-how transferred to foreign subsidiaries, that have evaded measurement -- assets they call "dark matter," after a similarly elusive quarry in physics.

Long-term rates remain low, but the Federal Reserve has raised short-term rates to 5.25% from a low of 1% in June 2004. As a result, payments on U.S. government debt, much of which is short-term, have risen. In the second quarter, for example, the government's debt payments to foreigners rose 10% to $36 billion, accounting for most of the change in the balance of income.

Putting some numbers on it

Derivative danger

The derivatives market has soared, reaching nearly $300 trillion in value. Considering the total value of the stock and bond markets combined amounts to only $65 trillion, it's worth wondering how so much extra value can be squeezed out of instruments that are essentially fake.

The capital market is hedged now more than ever. The notional value of derivatives has almost tripled overt the last five years, growing from $98 trillion in 2000 to $270 trillion in 2005, according to Wall Street research firm TowerGroup. This year derivatives are on path to grow even more.

And I wouldn't expect that growth to stop anytime soon because what is driving it is Wall Street profits. "Wall Street has made record profits from derivatives and structured products in the first three quarters of 2006," according to a TowerGroup report. "U.S. brokerage firms will generate $33.2 billion from derivatives-related revenue in 2006 as the rapidly growing market catches up with the cash market."

According to the Structured Products Association, about $50 billion worth of structured products annually flows into the U.S., with between 20% to 25% growth projections this year even though "many U.S. retail investors aren't aware of what a 'structured product' is."

With the global numbers and values already enormous, adding U.S. pension funds, more institutions and a retail investment audience to the hundreds of trillions of capital the derivatives market attracts could further shift the scale in favor of them more than any other financial instrument or asset class.
Yet, it wouldn't take all that much to create a domino effect of market mishap. And there is no net.

The Securities Investor Protection Corporation, which insures brokerage accounts in the event of a brokerage-firm failure, recently announced its reserves. It has about $1.38 billion. That may sound like a lot. Compared with half a quadrillion, it's a pittance.

Scary but true.

"They" say that a 1987 type crash can't happen again because what "caused" that one was so-called portfolio insurance which just exaggerated the plunge.

So, what's a hedge fund???

Full of sound and fury

Idomeneo
From Wikipedia, the free encyclopedia

Idomeneo, re di Creta ossia Ilia e Idamante (usually referred to simply as Idomeneo) is an Italian opera by Wolfgang Amadeus Mozart. The libretto was adapted by Giambattista Varesco from a French text by Antoine Danchet, which had been set to music by André Campra in 1712. Mozart and Varesco were commissioned in 1780 by Karl Theodor, Elector of Bavaria for a court carnival.

It was first performed at the Cuvilliés Theatre of the Residence in Munich on January 29, 1781. Written when he was 24, Idomeneo was Mozart's first mature opera seria, and with it he demonstrated his mastery of orchestral color, accompanied recitatives, and melodic line. In certain aspects (e.g. the choirs), however, this opera is still an experimental drama, resulting more in a sequence of sets than in a well developed plot. Mozart also had to fight with the mediocre author of the libretto, the court chaplain Varesco, making large cuts and changes, even down to specific words and vowels disliked by the singers (too many "i"s in "rinvigorir").

Today Idomeneo is part of the standard operatic repertoire. There are several recordings of it), and it is regularly performed.

The plot

Act I

Island of Crete. Ilia, daughter of King Priam, loves Prince Idamante, son of Idomeneo, but she hesitates to acknowledge her love. Idamante frees the Trojan prisoners. He tells Ilia, who is rejecting his love, that it is not his fault that their fathers were enemies. Trojans and Cretans together welcome the return of peace, but Elettra, jealous of Ilia, does not approve of Idamante's clemency toward the enemy prisoners. Arbace, the king's confidant, brings news that Idomeneo has been lost at sea while returning to Crete. Elettra, fearing that Ilia, a Trojan, soon will be Queen of Crete, feels the furies of Hades tormenting her.

On a deserted seashore, after the shipwreck, Idomeneo recalls the vow he made to Neptune -- to sacrifice, if he arrived safe, the first living creature he meets on shore. Idamante approaches him, but because the two have not seen each other for a long time, recognition is difficult. When Idomeneo realizes the youth is his own child, he orders Idamante never to seek him out again. Grief-stricken by his father's rejection, Idamante runs off. Cretan troops disembarking from Idomeneo's ship are met by their wives, and all praise Neptune.

Act II

At the king's palace, Idomeneo seeks counsel from Arbace, who says another victim could be sacrificed if Idamante were sent into exile. Idomeneo orders his son to escort Elettra to her home, Argos. Idomeneo's kind words to Ilia move her to declare that since she has lost everything, he will be her father and Crete her country. As she leaves, Idomeneo realizes that sending Idamante into exile has cost Ilia her happiness as well as his own. Elettra welcomes the idea of going to Argos with Idamante.

At the port of Sidon, Idomeneo bids his son farewell and urges him to learn the art of ruling while he is away. Before the ship can sail, however, a storm breaks out, and a sea serpent appears. Recognizing it as a messenger from Neptune, the king offers himself as atonement for having violated his vow to the god.

Act III

In the royal garden, Ilia asks the breezes to carry her love to Idamante, who appears, explaining that he must go to fight the serpent. When he says he may as well die as suffer the torments of his rejected love, Ilia confesses her love. They are surprised by Elettra and Idomeneo. When Idamante asks his father why he sends him away, Idomeneo can only reply that the youth must leave. Ilia asks for consolation from Elettra, who is preoccupied with revenge. Arbace comes with news that the people, led by the High Priest of Neptune, are clamoring for Idomeneo. The High Priest tells the king of the destruction caused by Neptune's monster, urging Idomeneo to reveal the name of the person whose sacrifice is demanded by the god. When the king confesses that his own son is the victim, the populace is horrified.

Outside the temple, the king and High Priest join with Neptune's priests in prayer that the god may be appeased. Arbace brings news that Idamante has killed the monster. As Idomeneo fears new reprisals from Neptune, Idamante enters in sacrificial robes, saying he understands his father's torment and is ready to die. After an agonizing farewell, Idomeneo is about to sacrifice his son when Ilia intervenes, offering her own life instead. The Voice of Neptune is heard. Idomeneo must yield the throne to Ilia and Idamante. Everyone is relieved except Elettra, who longs for her own death. Idomeneo presents Idamante and his bride as the new rulers. The people call upon the god of love and marriage to bless the royal pair and bring peace.

Mozart Opera Dropped Due to Terror Threat

The Deutsche Oper in Berlin announced Monday "with great regret" that it had scratched Hans Neuenfels' version of the Mozart opera "Idomeneo" from the program this season because certain scenes presented an "incalculable security risk" for the theater.

Neuenfels, who describes surrealist artist Max Ernst as his "spiritual father," is already known for his provocative work. His "Idomeneo" already stirred up hefty protests when it premiered in 2003.

In the epilogue, Idomeneo, the king of Crete, comes on stage comes on stage with a bloody sack in his hand. He then pulls the heads of Poseidon, Jesus, Buddha and Mohammed out of the sack and places them triumphantly on four chairs.

Neuenfels said he could understand the decision of the theater directors, but added they shouldn't let themselves be intimidated, the Berliner Morgenpost reported Tuesday.

The Sturm und Drang opera, set in the capital of Crete just after the Trojan War, addresses human resistance to making sacrifices to the gods.

"To avoid endangering the public and its employees, the Deutsche Oper in Berlin has decided to refrain from showing "Idomeneo" in November," the opera house said.

As early as July, security officials had warned of the security risk associated with the opera. A risk analysis was prepared, which formed the basis of the opera house's decision to cancel "Idomeneo."

"We have advised that a performance could result in disturbances," said police spokesman Bernhard Schodrowski, adding that the theater decided on its own to cut the opera. Police emphasized that no concrete threats are known at this time.

Berlin Opera Pulled Over Muhammad Scene

BERLIN - A leading opera house called off a production of Mozart's "Idomeneo" that features the severed head of the Prophet Muhammad, setting off a furious debate Tuesday over Islam, freedom of speech and the role of art.

The furor is the latest in Europe over religious sensitivities _ following cartoons of the prophet first published in a Danish newspaper and recent remarks by Pope Benedict XVI decrying holy war.

After its premiere in 2003, the production by Hans Neuenfels drew widespread criticism over a scene in which King Idomeneo presents the severed heads not only of the Greek god of the sea, Poseidon, but also of Muhammad, Jesus and Buddha.

The severed heads are an addition by director Neuenfels to the 225-year-old opera, which was last performed by the company in March 2004.

Outraged politicians called the decision to pull the production "crazy" and "a fatal signal" of caving into extremism. Response from Germany's Islamic community was mixed, with some praising the decision and others calling on Muslims to accept the role of provocation in art.

The leader of Germany's Islamic Council welcomed the move, saying a depiction of Muhammad with a severed head "could certainly offend Muslims."

But in an interview with German radio, Ali Kizilkaya added: "I think it is horrible that one has to be afraid ... That is not the right way to open dialogue."

The leader of Germany's Turkish community said it was time Muslims accepted freedom of expression in art.

"This is about art, not about politics," Kenan Kolat told Bavarian Radio. "We should not make art dependent on religion _ then we are back in the Middle Ages."

Neuenfels has insisted his staging not be altered, saying the scene where the king presents the severed heads represents his protest against "any form of organized religion or its founders."

"We know the consequences of the conflict over the (Muhammad) caricatures," Deutsche Oper said in a statement. "We believe that needs to be taken very seriously and hope for your support."

It is not only Muslims who have been offended by depictions of religion in art.

Last month Madonna sparked criticism from some Roman Catholics in Germany for a show that staged a mock crucifixion. Mel Gibson's 2004 movie, "The Passion of Christ" met with disapproval from some Catholics and some Jews. In 2004, a Birmingham, England, theater canceled its run of "Behzti" after a violent protest by members of the Sikh community.

Still, many in normally open and tolerant Berlin, which has become a home for cutting edge and often contentious artistic productions, cautioned against compromising on issues of freedom of speech and art.

"Our ideas about openness, tolerance and freedom must be lived on the offensive. Voluntary self-limitation gives those who fight against our values a confirmation in advance that we will not stand behind them," said Mayor Klaus Wowereit.

Bernd Neumann, the federal government's top cultural official, said that "problems cannot be solved by keeping silent."

"When the concern over possible protests leads to self-censorship, then the democratic culture of free speech becomes endangered."

German minister assails alleged overreaction by Muslims to provocations

WASHINGTON German Interior Minister Wolfgang Schaeuble decried on Tuesday what he said was the tendency of some Muslim radicals to act in a "crazy" manner with minimal provocation.

Schaeuble, who is here on an official visit, also took sides with Pope Benedict XVI in the conflict with some Muslims that arose after a speech he gave two weeks ago at Regensburg University in Germany .

"I will never accept that it isn't allowed for the pope or anyone else to make such a speech," Schaeuble told reporters at a breakfast news conference.

In the same vein, he defended the right of Danish newspapers to print cartoons that many Muslims found offensive and generated protests in many countries.

"I will not accept that there will be violence because people don't like some pictures in newspapers," Schaeuble said.

He also said some non-Muslims go too far in attempting to accommodate Muslim sensitivities.

As an example, he cited a recent decision by a leading opera house in Germany to cancel a production of Mozart's "Idomeneo" after Berlin security officials warned of an "incalculable risk" because of scenes dealing with Islam, as well as other religions.

By showing too much deference to Muslims on such matters, he said, the non-Muslim world "will not succeed in convincing people" that free speech and tolerance "are better than fundamentalism."

He acknowledged that it is not easy to deal with a situation in which some Muslims react disproportionately to what he considered to be minor offenses.

"It's a difficult situation with some Muslims. They tend to use anything to become crazy. I can't accept that," he said.

Opera on the Prophet called off

German critics saw the controversial opera as a radical attack on religion and religious wars.

Video shows beheading of American hostage

AWB: The story, and denials, continued

Now that the Courts have determined that the AWB cannot hide behind many documents AWB wanted to keep secret, the shear duplicity implied by prior testimony becomes incredulous. For background, start with this, AWB: The story so far.

Bribe exposed in released AWB notes

THE Howard Government's man in post-invasion Iraq allegedly admitted to bribing Saddam Hussein to secure contracts for AWB, the Cole inquiry has been told.
The alleged admission from former AWB chairman Trevor Flugge contradicts his sworn evidence earlier this year that he knew nothing of $300 million in bribes the monopoly wheat exporter paid the Iraqis.

The claim is a further embarrassment to the Government, which paid Mr Flugge $1 million to help stamp out corruption in the war-torn country after the fall of Saddam in 2003.

It was contained in hundreds of documents AWB had tried to suppress, finally released yesterday after a lengthy court battle.

The documents show Mr Flugge, AWB's chairman from 1995 to 2002, met lawyer Chris Quennell two years ago to discuss US complaints about AWB's Iraqi dealings.

Mr Quennell's notes show Mr Flugge admitted to paying the Saddam-controlled Iraqi Grain Board, breaching UN sanctions.

Jim Cooper, AWB's in-house lawyer who sat in on the Flugge-Quennell meeting, returned to the witness box yesterday to discuss his recollection - or otherwise - of events.

"If he actually said that, I don't recall that he did," Mr Cooper said.

"My strong impression was (there was) little useful information from Trevor Flugge."

When he appeared at the inquiry in February, Mr Flugge denied that AWB had knowingly funnelled the kickbacks to Saddam through the trucking company - which was 51 per cent owned by the Iraqi Government - or otherwise.

The newly-released documents also show AWB received legal advice three years ago that its payments to Iraq may be illegal.

The 2003 advice from law firm Blake Dawson Waldron said there was no indication the trucking fees were for genuine transport services in Iraq.

It also said AWB would have committed an offence if the money was paid to influence the Iraqi government.

Asked about his interpretation of the advice, Mr Cooper said: "I never felt we had a clear understanding of the facts. "I personally (felt) we never got to the bottom of the facts on the (UN) oil-for-food matter."

Cole inquiry finds farrago of AWB deceptions

AWB's legal advice was laid bare to the Cole inquiry yesterday, a week after the company lost a Federal Court battle to avoid handing over more than 350 documents. The commission found a farrago of untruths, manipulations and misjudgements that destroyed any surviving shreds of the company's claims to innocence.

Among the documents was legal advice provided to the company's top lawyer, Jim Cooper, by law firm Blake Dawson Waldron in August 2003 that AWB's payment of trucking fees in Iraq may have breached numerous Australian laws as well as United Nations sanctions.

"It is possible that AWB and/or certain of its employees have committed breaches of the Criminal Code Act (and) … Crimes Act. It is possible that AWB's conduct has resulted in a contravention by Australia of UN resolution 986," the newly released advice reads.

It notes there is no evidence that "trucking fees" paid to front company Alia were used to transport wheat and describes the money as a bribe for the Iraqi regime. All of this was known by AWB executives more than two years before they pleaded innocence at the Cole inquiry.

The inquiry was also transported back into the AWB legal bunker of early 2005, when the company was in damage control during the United Nations Volcker inquiry. In a "brainstorming session", top company executives, including then managing director Andrew Lindberg, mapped out AWB's "shortcomings" — a list that became public yesterday.

Mr Cooper, who took notes of the meeting on a whiteboard, said the extraordinary list did not record admissions by the senior management but "worst-case scenario" guesses of what the UN report might find.

[Trevor Flugge] will have some explaining to do after notes detailing a conference call he participated in were tendered yesterday. Taken by lawyer Chris Quennell, they quote Mr Flugge reeling off a note-perfect explanation of the shady system used to funnel money to Iraq.

The commission heard that Blake Dawson Waldron also advised AWB that its plans to recoup an $8 million debt owed to BHP-linked company Tigris Petroleum might be in breach of UN sanctions.

Emails show the advice was received by AWB's chief lawyer, Mr Cooper, who passed it on to senior managers but recommended that the deal proceed anyway. Mr Cooper told the inquiry yesterday that the recommendation was a mistake made in the email and did not reflect his true advice.

Some of the biggest names in the legal fraternity — including Robert Richter, QC, and Richard Tracey, QC, now a Federal Court judge — were also drawn into the fray. The inquiry was told that Mr Lindberg had obtained legal opinions from the two top barristers before approving the Tigris deal.

Mr Richter advised the company that although the AWB staff who drew up the deal to recoup money for Tigris might be found to have committed misleading conduct, they would not be likely to be found guilty of an offence under Australian law. His advice appears at odds with that given by Blake Dawson Waldron.

Earlier, the inquiry heard that in-house lawyer Jessica Lyons gave advice about another AWB Iraq deal — the plan to compensate Iraq for a wheat shipment tainted by iron filings, described the deal as "dodgy".

AWB lawyer quizzed about secret documents

An AWB in house lawyer has been reduced to tears at the resumption of public hearings of the Cole inquiry in Sydney.

Witness Jessica Lyons has been quizzed about two previously secret documents released to the inquiry by the Federal Court.

The documents from January 2003 show exchanges between Blake Dawson and Waldren's solicitor Hazel Brassington and Ms Lyons.

They discuss changes to the freight arrangements of two wheat contracts for the Iraqi Grains Board.

When senior counsel assisting John Agius asked Ms Lyons who authorised the change, she told the inquiry she believed it was AWB marketing executive Chris Whitwell.

Earlier, Mr Whitwell and former AWB employee Michael Long made an application to keep secret, names of two legal advice documents, claiming their publication would prejudice them and affect the conduct of any possible future jury trial.

AWB DENIES MISLEADING UN

One of AWB's in-house lawyers has denied devising a scheme that would allow the wheat exporter to make an illicit $US2 million payment to Saddam Hussein's regime.

The head of the inquiry into the kickbacks scandal, Terence Cole, QC, accused AWB lawyer Jessica Lyons of suggesting ways AWB could get around United Nations sanctions which banned any payments to the Iraqi government.

Newly released documents shown to the inquiry show how Ms Lyons provided AWB sales and marketing executive Chris Whitwell with legal advice about how to make the payment in January 2003.

AWB had agreed to pay the money to the Iraqi Grain Board (IGB), which had accused AWB in 2002 of sending a shipment of wheat contaminated with iron filings.

AWB never ended up paying the money, which the Iraqis wanted funnelled through a Jordanian based trucking firm part-owned by Saddam's regime, because of the US-led invasion of Iraq in March 2003.

However, just three months before the invasion, Mr Whitwell asked Ms Lyons for advice about whether any compensation could be paid for the iron filings claim.

Ms Lyons emailed him on January 24, 2003, noting that UN resolutions expressly forbade any payments to Saddam's government.

However, she set out three suggestions about how the payments could possibly be made.

Ms Lyons suggested the payments could be made in instalments, made to a company other than the IGB and based outside Iraq, and be recorded as being part of a settlement between the Iraqis and AWB over the contaminated wheat shipment from 2002.

"If we ensure that the above requirements are met then I consider it will be at least arguable that we are not 'making funds or financial resources available' to the Iraqi government," Ms Lyons wrote.

Commissioner Cole today suggested to Ms Lyons that she was providing advice on how AWB could get around UN sanctions.

"Not to put too sharp a point on it, you have said in first few paragraphs (of the email) we can't pay money to Iraq and then said here's a way of getting around the sanctions," he said.

But Ms Lyons said what she wrote was a "legalistic interpretation" of how legitimate payments could be made.

"At the time I genuinely considered that payment to the transport company could be made that would not fall foul of the UN sanctions," she told the inquiry.

Ms Lyons denied suggestions by counsel assisting the inquiry John Agius, SC, that she had put her ethics as a lawyer aside and succumbed to pressure to come up with a scheme so AWB could get around UN sanctions and still make the payments.

"There was certainly an overwhelming commercial imperative to make this payment ... I think there was a commercial imperative to make the payment but I absolutely don't believe I would have been proposing something that would have been a breach of the sanctions.

"But I did have concerns about this advice after having provided it."

Robert Hill denies shady AWB deal

FORMER defence minister Robert Hill has denied knowing anything about AWB's illicit payments to Saddam Hussein's regime.

The former senator, who was recently appointed Australian ambassador to the United Nations, today became the latest government official to provide a statement to the inquiry into the $290 million AWB kickbacks scandal.

Lawyers for the inquiry had asked Mr Hill about his association with British businessman and former BHP executive Norman Davidson Kelly.

Vaile denies bolting from AWB report

Deputy Prime Minister Mark Vaile has denied he is switching from the trade portfolio to escape parliamentary scrutiny of the AWB bribery scandal.

Mr Vaile has swapped portfolios with Transport Minister Warren Truss to concentrate on leading the Nationals ahead of next year's election.

Labor says Mr Vaile's decision to offload trade effectively puts him in a "witness protection program" to shield him from the expected fallout from the AWB inquiry.

But Mr Vaile, who was forced to give evidence to the Cole inquiry earlier this year, insists he has nothing to hide.

The Opposition argues Mr Vaile will be able to dodge questions in parliament about his government's handling of Australia's biggest trade scandal.

Under parliamentary guidelines, ministers cannot be made to answer questions in parliament about portfolios they no longer hold.

SHOCK and AWB

Oh, deer....

Amongst the other beauty and wonder of the California coastal area between Big Sur and Salinas is the wildlife. The people have done an almost impossible job in fostering the re-emergence of wild turkeys, coyotes, big cats and deer. Visiting rellies along the valley between Salinas and Monterrey a couple of years ago I was staggered to see herds of deer lounging in home yards, as nonchalant as roos in Canberra. And huge turkeys gobbling around, even roosting on rooftops.

So how does this Bambi bucolic turn of nature repay the humans who fostered it? By sabotaging Popeye.

The truth about the E. coli outbreak

Anatomy of a "super-cycle" top

Guambat had for so long pounded the table on the manic rise (not the rise itself, just the mania of it) for so long, that he didn't bother posting the breaking of the CRB index uptrend. He did, though, send an email showing the chart and the "braking" of the trend to a few friends a week or so ago.

One of them, Mort, returned the favour by pointing Guambat to a thorough study of the matter, a couple of days ago. Today, Captain Kirk's On The Ticker points to the same study.

So, in the interest of spreading the word, which is what this blog does mostly, Guambat presents the following graph and encourages your own review of the source:


What`s Behind the Meltdown in the Commodity Markets? By Gary Dorsch

See, Super cycle and dot.commodity boom

Not a chance

Gambling, quite obviously, involves chance; you pays your money, you takes your chances. The chance element means you can win or you can lose. There is the widespread belief that when you gamble there are winners and losers, any winners are sometimes losers and vice versa.

But in the organised world of gambling, particular when gambling with gaming machines, the only losers are the players. Against a gaming machine, you may win from time to time, but over time you will only lose. There is no element of chance.

This is because the machines are controlled by computers and the computers are set by the owners of the machines to make sure they keep more money than they pay out. They fix the odds so there is no chance they will lose.

It is a common belief that the odds on a machine have something to do with the number of each kind of symbol on each reel, but in modern slot machines this is no longer the case. Modern slot machines are computerized, so that the odds are whatever they are programmed to be.

Slot machines are typically programmed to pay out as winnings between 82 to 98 percent of the money that is wagered by players. This is known as the "theoretical payout percentage". The minimum theoretical payout percentage varies among jurisdictions and is typically established by law or regulation. For example, the minimum payout percentage in Nevada is 75 percent and in New Jersey is 83 percent. The winning patterns on slot machines, the amounts they pay, and the frequency at which they appear are carefully selected to yield a certain percentage of the cost of play to the "house" (the operator of the slot machine), while returning the rest to the player during play. Slot machine

Thus, whilst at an individual level you may get lucky enough to keep more than you bet, at a societal level, the community at large is a bunch of losers.

Now it may be that there is no harm in that, particularly where the "fixed" percentage of return to the machine owners is so small that the endeavor may fairly be characterised as "entertainment". But even here you have to ask if this is a valuable form of entertainment.

In my experience in Sydneytown, I saw wonderful old corner pubs, where people would congregate for an evening's worth of comaraderie and networking, turn into loud, glitz, cold places where the social fabric was torn by zombies. And that was the best part of it. You've all heard of the stories of people leaving kids in cars, becoming addicted to machines, etc. For mine, the gaming machine gamble is not worth the price of the "entertainment".

So, the owners of these machines, who after all have a legal license to take money with no-lose odds, devise these grandios schemes to try to convince us they actually "give something back" to the community. Usually this comes in the form of so-called grants or contributions to social institutions like sporting clubs, hospitals, child care, libraries and the like. But, in the first case, this is just a skim off the top, and in the second, it is a form of dirty money charity.

Then they say the "industry" creates jobs and employment. Mainly, it is an industry to feed itself, and perpetuate the gambling. An honest economic assessment of the situation would include a look at the jobs lost to other endeavours and the opportunity cost to other forms of entertainment and social life.

Where it gets really devious is when the gambling machine industry "hooks" the local government on the gambling machine addiction. This is because the government is on the take with these things, too. They are guaranteed a certain amount of tax revenues from the moneies these machines are programmed to take away from the players.

And the thing gets even more pernicious when the scheme is set up to give the impression that some or all of these taxes are being directed to community welfare, such as hospitals, schools and parks. You'd have to ask, why doesn't the government simply fund these things in the first place rather than set up defacto privitised taxing machines that pay the machine-owning tax collectors an enormous amount of money that is taken from the very community it pretends to be benefiting.

The stories that spawned this particular rant appeared in recent days in the Australian and Guam papers, as below:

You bet: households lose record $18.8b on luxury of gambling

AUSTRALIANS lost a record $18.8 billion gambling last financial year, the equivalent of almost 2 per cent of the national economy.

Households spent more per head on gambling each week ($17.60) than on fuel and maintenance for cars ($17), and almost as much as they spent on clothing ($18.50), unpublished Bureau of Statistics figures analysed by Commsec show.

A separate Bureau of Statistics survey of gambling businesses, released yesterday, said the industry's net takings reached $15.5 billion in 2004-05. That equated to $996 for each adult, up from $901 in 2000-01, when the bureau last surveyed the gambling industry.

Gambling industry takings doubled in the decade to June 2005, the figures showed. Poker and gaming machines in clubs and pubs took $8.7 billion in 2004-05, more than half of all net takings.

Each of the nation's nearly 200,000 poker or gaming machines took an average of $46,300, even after winnings were deducted.

The number of poker and gaming machines increased by more than 80,000 between 1994-95 and 2004-05.

Gambling takings were much higher in NSW than in other states, averaging $1196 per adult, compared with $490 in Western Australia (where there are relatively few poker machines), $725 in South Australia and $853 in Queensland.

Gambling taxes and levies reached $5.63 billion in 2004-05, up from $4.43 billion in 2000-01.

Gambling-related taxes, which go mostly to state governments, grew by an average of 6.2 per cent a year between 2000-01 and 2004-05, the bureau said. Taxes represented 36.4 per cent of the net takings from gambling.

Taxes and levies on poker and gaming machines in clubs, pubs, taverns and bars accounted for 55.5 per cent of all gambling revenue.

There were 76,848 people employed in the provision of gambling services, with about 60 per cent of those working in clubs and pubs, taverns and bars.

Slot proponents pitch jobs

If Guam voters approve of legalizing slot machines at the Guam Greyhound, the racetrack would create "500 or more jobs," the racetrack's owner, John Baldwin, said yesterday.

At a press conference, Baldwin also said the racetrack would start with 200 slot machines, if given voter approval in the Nov. 7 General Election.

Based on those estimates, the racetrack would then be creating more than two jobs for every slot machine unit at the racetrack.

...there also will be franchise restaurants that will help the racetrack reach the jobs target. The franchise names were not publicly disclosed.

Besides jobs directly related to slot machines, there will be other jobs that will be created, Anderson said. If its plans were for a casino, the racetrack might be closer to its jobs goal.

At a possible initial gross gaming revenue of $20 million a year, the racetrack could possibly create 242 jobs, if its slots revenue would rise to the level of casino revenues in the U.S.

The $20 million in possible slots revenue for the racetrack is based on Baldwin's statement yesterday that the racetrack would be able to contribute about $2 million a year for Guam's public education and health care, if slots are allowed at the Tamuning facility.

The initiative to legalize slots at the racetrack proposes a 10 percent annual tax on slots revenue.

The Guam Greyhound has stated it will not operate casino-type gambling, and that it will limit itself to slots.

With the slot machines at the racetrack, Anderson said: "One thing I can guarantee you -- no children will be left in cars."

The racetrack will have a security system that can spot children left unattended in cars, and there also is a plan to provide child care to the young children of racetrack patrons in response to tour operators' input, the Greyhound management stated.

ABOUT THE INITIAVE

• The "Initiative to Revitalize Tourism in Guam and Generate Revenue for Health Care and Public Education by Allowing Slot Machine Gaming" proposes legalizing slot machines at an existing racetrack where a pari-mutuel betting system is in place. The betting system is used at the Guam Greyhound, a dog racetrack.
• It says "the tax would be used to subsidize (1) health care costs, including prescription drugs for Guam residents, (2) education, including improvements to the physical condition of Guam schools, and (3) other programs for the general well-being of the territory."

Anderson envisions arts center in new role

Anderson said the racetrack's plan to build a performing arts center was part of what convinced him to hop aboard Guam Greyhound's campaign for legalizing slot machines, which will be limited to the racetrack.

"He's got a genuine interest in turning this into a performing arts center," Anderson said of John Baldwin, new owner of the Greyhound.

The performing arts project, however, will happen only if the slot-machines proposal becomes a reality, Baldwin said.

Nation gambles $15.5bn a year

The preferred form of gambling is in poker and gaming machines, with takings from the descendants of one-armed bandits now reaching $8.7 billion, or $1 billion more than in 2000-01.

But the big rise in takings worries South Australian No Pokies Independent MP Nick Xenophon.

"These latest figures make a mockery of state governments' so-called harm minimisation efforts," he said.

"They've now been exposed as largely window dressing rather than real reforms."

"The only reform that's taken place over the last few years has been the Victorian government banning smoking, which had an initial impact of 10 or 15 per cent in 2002," he said.

The Salvation Army's coordinator of recovery services for Queensland, NSW and the ACT, Gerard Byrne, said a secondary roll-out of pokie licences in recent years, particularly in pubs, had made them more available to people.

"What we've seen as a result of that is an increase in the people who are reporting, either as their primary dependence problem or secondary dependence problem, problem gambling," he said.

"The vast majority of them report their problem to be electronic gaming machines."

Mr Byrne said the Salvos would like to see a rollback of pokie licences.

Now, Guambat is not opposed to gambling, per se. Hell, Guambat "plays" the futures market, which is a pretty tough gamble. And Guambat had a flutter on every Melbourne Cup over the last 17 years.

More to the point, there are some very nice people involved. Guambat reckons Jon Anderson to be one very decent chappie.

Guambat's point is not to come down hard on gambling. The point must be, however, to carefully weigh the form, extent and consequence of the form of community-supported gambling. The point is that some things are not harmful in particular doses or in particular instances.

Guambat is fond of a tipple or two, and the community condones that. But in excess or in the wrong circumstance, a tipple or two could lead to harm, to Guambat or others, and the community needs to remain mindful of that and establish tight controls to minimise that potential for harm. So, too, with legalised gambling.

Shock, Horror: Pollie admits lieing to get re-elected!

Hungary's prime minister, Ferenc Gyurcsany, refused to step down yesterday, defying rioters whom he condemned for plunging the country into its "longest, darkest night" since the collapse of communism.

Mr Gyurcsany, a former communist youth leader who made a fortune from the privatisations of the 1990s, appealed for calm as journalists surveyed the damage at the smoke-charred TV station.

Mr Gyurcsany enraged opponents by acknowledging on a leaked recording of a party meeting that the government "lied day and night" to win a second term in office, by covering up the scale of the budget deficit and the cutbacks needed to shrink it.

"You can't show me any significant government measure that we can be proud of," he said on the tape, adding that unpopular reforms such as fees for tuition and health care were now unavoidable. "There is not much choice, because we screwed up. Not a little - a lot. No European country has done something as boneheaded as we have."

The expletive-riddled rant prompted immediate street protests and calls for Mr Gyurcsany's resignation when it was aired on Sunday. He has vowed to stay in power, saying he is proud of the leaked speech because it showed his passion for reform. "I spent three minutes on Sunday night thinking about whether I should step down or whether I had a reason to step down, and the conclusion I came to is that absolutely not," he said yesterday. Hungarian leader refuses to bow to rioters

At least you gotta admire the voters for caring enough to riot. Apathy and a sense of powerlessness tantamount to dispair and disenfranchisement are the rule in the more "enlightened" democracies. Is there any accountability to a pollie who sells us a war on non-existant WMD or turns an election on "babies overboard" besides rioting? I'm Hungary to find out.

Leftovers again

Just going back over the Amaranth matter, in the context of the Thai coup. Each of those is a separate but potentially interdependent "finger of instability". The imagery is of a cascading effect as one instability destabilises another and the chaos created feeds on itself. Not saying it will happen, and really don't expect any serious market wide repercussion (but see this), but it is interesting to follow the dynamic.

And on the Amaranth episode, it bears repeating the broader story (or so the story has been told so far, and keeps being told).

Notwithstanding all the sage, calming advice we get (e.g., this) that the markets can deal with the unregulated hedge funds and other derivative trading, and that they are level playing fields (efficient markets), it looks like one "small" ($450 MILLION) hedge player (MoonRock) took the view that natural gas was overcooked and bet prices would fall. It appears a Amaranth ($9B-b-billion) trader was damned and determined to push prices higher and cash out the short side. The immediate effect, for those 2 players, was they both got killed. Too bad, had it coming. But what about the larger market which has actual, real needs and uses for natural gas? They got put through a cement mixer just so those screen jockies with more testosterone than sense could hold a pissing contest.

Guambat had a prior rant about these guys, or guys like them:

In ways I cannot put together in a coherent, scholarly study, I have noticed a distinct change in the character of the equity markets over the last decade. It is becoming dominated by big, lightning quick money. Oh, the Big Boys have always had a major impact, and in that regard there is nothing new. They've always enjoyed their power to push the market this way or that. They've always enjoyed a clubiness that allowed for information to be shared in ways that didn't quite pass the "insider trading" bright lines. But they usually bought stuff to own it, to manage it, to work it, to put it in thieir trophy room.

But these new guys are not just big bullies; they're bold, cold Matrix-like machines. Just listen to CNBC at the number of times they mention how dominant block trading has become. Do you remember the term "hedge fund" being common parlance more than a decade ago? What about "black box" trading?

A black box is not some fatcat in a pin-striped suit and a big cigar. It is a streak of cyberdata, a stateless, motherless virus hellbent to ambush, arbitrage and retreat faster than a ninja. And they are everywhere, in to everything. Their bytes permeate every conceivable market, like a monstrous whale seiving the nutirients and little, bottom-of-the-food-chain investors and small players from the oceans of cash that trade the world's goods. They derive their gains from diverse derivatives of incalculable numbers and varieties, trading the shadows of what used to be a currency or a commodity or a stock or a bond, but now come under the most obtuse and arcane of names that only financial rocket scientists can understand. Their trade is in ideas and concepts and notions and algorithms, not things and companies.

And, importantly, these new guys push around greater wads of money than the old fashioned pin-striped broker because they don't have to use as much (if any) of their own money, and the "products" they deal in control vastly greater amounts of the "real" underlying stuff than that stuff would cost in its own markets.

Fair disclosure: Guambat trades SPI futures on the Australian market for fun and occasional gains, and frequent losses.

Fingers crossed

Time (Thai-m?) will tell whether this little finger of instability is critically long and/or situated. Recall that the "Asian Crisis" market meltdown of a few years back started with a run on the Thai baht and other Thai assets.

A really bad case of gas

"Amaranth LLC, a multibillion-dollar hedge fund, is likely to be down more than $2 billion year-to-date after a fall in volatile natural gas futures last week, underscoring the risks of energy investments in a year that has seen many funds perform poorly." (Need a ticket)

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Amaranth Says Funds Lost 50% This Month on Gas Trades

``We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors,'' Nick Maounis, the 43- year-old founder of the Greenwich, Connecticut-based firm, said in a letter to investors obtained by Bloomberg News. The funds, which had gained 26 percent through August, are down at least 35 percent for the year, or about $4.6 billion.

Amaranth, which made so-called spread trades that try to profit from price discrepancies among futures contracts, is at least the second hedge fund to be hurt by this year's tumble in natural gas. Last month, MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, went bust after natural-gas futures fell 68 percent from their Dec. 13 peak.

``The speed with which leveraged funds can evaporate is mind boggling,'' said Mark Williams, a professor of finance and economics at Boston University specializing in energy markets.

Earlier this month, Amaranth, named for an imaginary flower that never fades, bought a portfolio of gas trades from ABN Amro Holding NV that the Dutch bank took over from MotherRock. ABN Amro had lent MotherRock $60 million, and is still owed money by the fund.

Insight Into Amaranth's Steep Loss
By Bill Feingold

This morning's news about Amaranth Advisors' catastrophic natural gas losses is probably the most shocking thing I've read in my career. Evidently the firm, one of the largest hedge-fund operators around, took a huge bath in natural gas that caused its performance to go from, according to published reports, up almost 30 percent at the end of August to possibly down more than 35 percent year-to-date.
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This would be shocking enough for a small fund, but is particularly astonishing for a huge firm (assets reportedly near $10 billion) and one whose expertise has been in very different areas. One has to assume that a large part of last week's natural-gas losses were triggered by forced Amaranth sales made to meet margin calls.

Nick Maounis, who founded and runs Amaranth, is a convertible-bond guy and a very good one. He got started in the mid-1980s on a small proprietary trading desk and went to Paloma Partners, a dominant hedge-fund family specializing in convertibles, several years later. In 2000 he spun off Amaranth from Paloma and had grown the firm spectacularly up until this remarkable setback. Maounis is known, among other things, for the annual Final-Four party he holds at his Greenwich mansion.

Understanding Risks in Hedge Funds
By Bill Feingold

Most hedge funds (and I cannot prove this, given how opaque the market is, but I do speak from experience) try to generate moderate, steady returns. They seek to do so while having as little correlation as possible to the biggest and most liquid markets (e.g. the S&P 500, Treasury bonds). The theory is that it's extremely easy nowadays to gain exposure to those markets, and the only real service a hedge fund can provide is either to add a lot more return for relatively little incremental risk, or to provide comparable returns to the big liquid markets with substantially less risk. Risk is typically defined as variability in month-over-month or year-over-year returns, which is often referred to as "volatility."

Now, it's certainly true that some hedge funds actively seek greater risk than you find in the S&P 500 or Treasurys, because they think the returns they can generate justify it. Portfolio theory argues that if you can put together a bunch of investments whose returns are uncorrelated with one another, it may not matter if taken individually they are quite risky. It's the classic case of the whole being much better than the sum of the parts.

It's the job of managers of both individual portfolios and managers of multiple portfolios run by a group of managers, to mix risk and return. You mix those two and end up with a finished product with the greatest possible return for a given risk level. Academics refer to the portfolio combinations that should yield the maximum return for each given level of risk as the "efficient frontier." If the average finance professor on CNBC doesn't remind you of John Wayne, don't worry, you're not alone.

Meet Brian Hunter, Head of Amaranth Energy Trading Desk

So who is this Brian Hunter we mentioned in the previous item about the huge losses at Amaranth Advisers? We haven’t been able to track down a picture of him yet but we’ve collected some details on young man who came to head his fund’s energy trading desk at the age of thirty-two.

Earlier this year, Trader Magazine ranked him at 29 in its list of top one hundred traders. He’s said to have made $800 million for the fund in 2005—much of it from the skyrocketing price of natural gas in the wake of hurricane Katrina—and was paid somewhere between $75 and $100 million. When he decided he wanted to leave New York for his native Calgary, Amaranth set up an office there for his team.

Hunter’s role in the losses his fund expects to suffer as it unwinds its natural gas position is not yet known. One source familiar with the market for energy trades told DealBreaker he believed Hunter had made trades this year similar to his winning 2005 bets and got caught out when 2006 produced a much calmer hurricane season and new oil discoveries in the Gulf of Mexico.

Amaranth's Risky Business
By Matthew Goldstein

It appears risk management went out the window at Amaranth, the giant hedge fund that lost $4 billion on a bad bet on natural gas prices.

The six-year-old hedge fund's big gamble that natural gas prices would keep rising paid off for much of the summer. At one point, the Connecticut-based fund was up 20% for the year -- boosting its assets under management at one point to a little over $9 billion.

But what made Amaranth's gamble so disastrous is that it borrowed heavily from its brokers to bet on the spread between natural gas contracts. By one estimate, for every dollar of its own money that Amaranth put down, it used $5 in so-called leverage.

Gambling with borrowed money may not have been the only risky thing Amaranth was doing. There's speculation on Wall Street that the hedge fund, led by Nick Mauonis, may have been trying to corner the market in long contracts on natural gas futures.

Michael Greenberger, a professor at the University of Maryland Law School and former director of the division of trading and markets at the Commodity Futures Trading Commission, says he's heard that Amaranth made many of its trades on the over-the-counter market -- away from the New York Mercantile Exchange, where trades could have been monitored by regulators. Greenberger says the natural gas market has become a pure speculators' market subject to potential manipulation.

He says he wouldn't be surprised if the Amaranth debacle spurs a closer look into the high-risk, speculative trading going in the natural gas market.

"I don't know if Amaranth is going to be the last straw," says Greenberger. "But Amaranth is not going to be the last problem."

Indeed, there's speculation that Amaranth's big move into long contracts on natural gas hastened the demise of MotherRock, a $450 million hedge fund that went bust in July after being overly short on natural gas prices.

Traders say Amaranth's big bet on gas prices going up may have squeezed MotherRock, which was betting on a sharp decline.

Hmmmmm... Dueling hedge funds take out both the longs (Amaranth) and the shorts (MotherRock). Risque business, indeed.

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Price controls

Recall back in the Katrina aftermath that there were fierce debates whether the government should attempt to control prices of scarce resources. One influential school of economic thought holds it as blashpemy that price controls should even be considered because, they say, price competition will assure the best allocation of resources. I called this amoral approach Doodoo Economics.

Now we get arguable evidence of the possibility that the real threat to the allocation of scarce resources was not consumer-led price controls, but producer-led price controls. At least, that's the way Bill Cara "sees it":

A study of energy markets shows manipulation, Mon., Sept. 18, 2006, 6:48 AM

As I interpret the charts in a Merrill Lynch energy study published on Friday Sept. 15, there is collusion between the energy companies and between certain traders of futures markets. As I see it.

The cost of living is going to health

Fruit and vegetables, health services, public transport, child care and even bread have been rising much more quickly than the overall rate of inflation.

During the past decade fruit prices are up 112 per cent, vegetables 70 per cent, health care 50 per cent, public transport 49 per cent and bread 48 per cent. Child care has risen an eye-popping 91 per cent since 1996.

In that time, however, the average increase for all 90 goods and services that make up the official inflation measure - the consumer price index or CPI - has been just 29.6 per cent.

A report, "Let them eat cake - How low-income earners are disavantaged by the consumer price index", claims the disparity in price changes between many essentials, like a loaf of bread, and many non-essentials, like plasma TVs, reveals shortcomings with the CPI.

The CPI is not an accurate guide to the cost of living and underestimates the impact of inflation on low-income families, including many retirees, it says.

"Families who spend relatively more than average on food have experienced a more rapid cost of living rise than suggested by the CPI while the cost of living for those families that spend heavily on new cars and electrical appliances has risen more slowly than indicated by the CPI," the report, commissioned by the Australian Greens, says.

The Greens' leader, Bob Brown, said the report highlighted the need for a new cost of living index to be developed to complement the CPI, which ignores the cost of interest rate payments and the land which houses are built on.

"The CPI has its uses, but the Bureau of Statistics is the first to concede that it is no longer a cost of living index. It is time that the Government funded the bureau to construct a proper cost of living index that includes the costs of mortgage interest, the cost of land, and focuses more on the costs of the essentials that low-income earners rely so heavily upon," he said.

The real CPI: cars cheap, food a luxury


And Barry Ritholtz points to a BusinessWeek story that summarizes, "Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None.":

For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.

But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.

Sure, housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs.

Perhaps most surprising, information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. Despite the splashy success of companies such as Google (GOOG ) and Yahoo! (YHOO ), businesses at the core of the information economy -- software, semiconductors, telecom, and the whole gamut of Web companies -- have lost more than 1.1 million jobs in the past five years. Those businesses employ fewer Americans today than they did in 1998, when the Internet frenzy kicked into high gear.

Meanwhile, hospitaL administrators like Steven Altschuler, president of Children's Hospital of Philadelphia, are on a hiring spree. Altschuler has added the equivalent of 4,000 new full-time jobs since he took over six years ago, almost doubling the hospital's workforce. To put this in perspective, all the nonhealth-care businesses in the Philadelphia area combined added virtually no jobs over the same stretch.

Altschuler plans to add 3,000 more employees over the next five years as the hospital, one of the nation's leading pediatric centers, spends $1.7 billion to expand. Next up is a new 1.2 million-square-foot research facility that will be packed with well-paid scientists and support staff. "Health care is the major engine for the economy of the city of Philadelphia," says Altschuler.

The City of Brotherly Love is hardly alone. Across the country, state and local politicians, desperate for growth, are crafting their economic development strategies around biotech and health care. California will pour $3 billion into stem cell research over the next 10 years, and other areas are on the same path. "Our downtown business leaders and politicians have traditionally considered health care as a cost center, not as an economic engine," says Baiju R. Shah, a former McKinsey & Co. consultant who runs Cleveland's BioEnterprise, a nonprofit founded four years ago to stimulate the local health-care and bioscience industries. "But people are waking up."

What they're waking up to is the true underpinnings of the much vaunted American job machine. The U.S. unemployment rate is 4.7%, compared with 8.2% and 8.9%, respectively, in Germany and France. But the health-care systems of those two countries added very few jobs from 1997 to 2004, according to new data from the Organization for Economic Cooperation & Development, while U.S. hospitals and physician offices never stopped growing. Take away health-care hiring in the U.S., and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher.

Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing.

Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.

Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs.

There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy. One solution would be to make health care less labor-intensive by investing a lot more in information technology. "Low productivity in health is mostly a product of low investment," says Harvard University economist Dale Jorgenson.

The biggest worry is that demand for health care will absorb too much of the workforce and squeeze out other types of jobs. If medical spending rises to 25% of gross domestic product by 2030, as many economists expect, health care's share of jobs could grow to 15% or 16% of the labor market from today's 12%, based on historical patterns.

Such a shift in employment would require health care to be the single biggest creator of jobs in the economy for the foreseeable future. And while the U.S. could in theory afford to spend 25% of GDP on health care, it's hard to imagine a world in which our children have to choose between working for the local hospital or the local health insurer.

But is this shift to health care employment boom just another phase of the economic digestion of the baby boomer generation?

Okinawa Marines fallback to Guam mere precursor for SoKorean troops???

Korea-US: Swan song for an alliance
By Sung-Yoon Lee

South Korean President Roh Moo-hyun's summit with President George W Bush on Thursday is likely to go down in the annals of US-South Korea relations as an epoch-making event, but not quite in the way one might think. It may be the swan song of the US-South Korea alliance.

On its face, Roh's meeting with Bush was a routine, even forgettable exercise in ordinary summit diplomacy. The two men had already enjoyed five cordial if unmemorable meetings since Roh's inauguration in 2003, and neither side issued a press-stopping communique out of the scheduled hour-long conversation followed by an obligatory luncheon.

Nonetheless, Roh's visit may inadvertently prove to be a defining moment for the US-South Korea alliance, presaging its sunset, for beneath the public smiles and handshakes between the two leaders and optimistic-sounding but inscrutable pronouncements, such as seeking a "joint comprehensive approach" to restarting the six-party talks, unmistakably flowed an undercurrent of unfriendly distrust.

The alliance has proved to be one of the most successful and durable in the world. But today Roh wishes to destroy its time-tested dynamics by wresting away from the United States wartime operational control of the two countries' armed forces, the result of which will be the complete and virtually irreversible dismantlement of the US-ROK (Republic of Korea) Combined Forces Command.

This will set the stage, at the cost of broader US interests in Northeast Asia and to the detriment of South Korea's security, for the withdrawal of US troops from Korea. With an inter-Korean summit pageantry of his own in mind, Roh has been offering North Korean leader Kim Jong-il unconditional gifts throughout his presidency: massive shipments of rice, fertilizer, and other blandishments. Now it looks as if Roh is preparing to give the Northern dictator the ultimate gift of evicting US troops from Korean territory.

President Roh believes he has little to lose by insisting on the transfer of wartime operational control, which he pointedly defined recently as the "essence of sovereignty for any nation". A refusal would mean to Roh's supporters and an emotional South Korean public - for whom the Northern threat has become a mere abstraction - reaffirmation of US imperialism and bellicosity, perhaps even "proof" of long-held suspicions that the United States secretly wishes to draw South Korea into a costly war with the North.

A US consent would chalk up a milestone in Roh's oft-proclaimed "self-reliant" foreign and defense policies, with the added bonus of pleasing the North Korean regime by achieving on its behalf one of its oldest and most important policy objectives. Roh could peddle each scenario at home for political gains in the time leading up to the South Korean presidential election in December 2007.

President Roh has proved to be different from his predecessors. During his three and a half years in office, Roh has followed through on his words with actions. True to his rhetoric, "So what if I am anti-US?" or "Yes, my anti-US stance has been good to me," Roh has unflinchingly and systematically aided the enemy of the United States - and incontrovertibly the main enemy of the US Forces in Korea (USFK) - the totalitarian North Korean state that is bent on increasing its arsenal of weapons of mass destruction (WMD).

Roh's offering to the North Korean regime of food, cash and material is financing its buildup of WMD, with which the North in turn threatens the the USFK, whose very purpose is to protect Roh's South Korea from the North. Such a convoluted reality is comprehensible only in the theater of the absurd. In the real world of international politics - especially in light of America's overarching post-September 11, 2001, policy of fighting a "war on terror" and preventing the proliferation of WMD - it is simply an unacceptable situation.

At no other time in the history of the bilateral relationship has a South Korean president with such audacity, and with such success, manipulated for political gains anti-American sentiments at home. It has been proved over the past few years that a direct correlation exists between President Roh's anti-US remarks and a spike in his approval ratings. While resistance or hostility toward the United States was certainly not confined to South Korea under President Roh, that the head of a key ally is directly challenging vital US national interest is certainly a highly unusual development.

To turn a blind eye to the state of the US-ROK alliance in its present last breath is tantamount to musing, "The North Korean nuclear crisis had been formed expressly to test the US-ROK alliance. We should just ignore it and sail on." In other words, it bears no real-life relevance to the crux of the problem, which is that the alliance is predicated on the common threat of North Korea.

President Roh has come to Washington and gone, and the dismantling of the alliance structure will proceed as planned in the near term.

Short on conviviality, solidarity or a meaningfully shared vision for the future, the meeting's sole significance will lie in its marking of the end of an era. Unless the South Korean people are able to persuade Roh to change course abruptly or vote into office in December 2007 a new leader with a far greater appreciation for the alliance and the integrity not to scuttle it for short-term political gain, the meeting on Thursday between Bush and Roh will be remembered as the definitive punctuation mark to a long and once special bilateral relationship.

Dr Sung-Yoon Lee is associate in research at the Korea Institute, Harvard University, and a former professor at the Fletcher School, Tufts University.

The global war on tourism and something else you ought to know to say ahead of the Wall Street pack

For those of you market/economy watchers who have not tuned in to Minyanville, you're missing a good read, e.g.:

As international travel booms, the United States is fast losing market share, the International Herald Tribune reported.

* Since 2000, international travel globally has grown nearly 20 percent; in the United States it has barely budged, the IHT reported.
* Of 808 million international travelers in 2005, only 6.1 percent traveled to the United States, putting us behind France and Spain.
* A June survey found that 77 percent of international travel agents polled said the United States was more difficult to visit than other countries.
* "Flying into Kennedy is like flying into a third world country," Smedes Rose, a travel industry analyst at Calyon Securities in New York, said. "It's pretty awful."
* Look, here's where I draw the line, folks. These namby-pamby complainers can say whatever they want about the strength of our borders, but the fact remains we, as a country, are committed to keeping tourists out of the U.S. and protecting our citizens from any potential future acts of tourism. What is so wrong with that?!

Editor's Note: Sorry, we have to interrupt and stop this nonsense right now.

Editor: Kevin.

* I thought the whole point of Homeland Security was to block tourists from entering in the first place!

Editor: Kevin!

* People, in case you haven't heard, we are engaged in a global war against tourism!

Editor: KEVIN!!!!

What?! What?! I am in the middle of Five Things, what do you want?

Editor: Kevin, it's the global war on terrorism, not tourism. We want to keep terrorists out of the country, not tourists. Homeland security is in charge of fighting terrorism, not tourism. The story is about the decline in tourists to the United States, not terrorists.

Oh. Ok. Well, just change the words around a bit and we're good to go.

And:

* Treasury Secretary Henry M. Paulson Jr. said on Wednesday that Chinese leaders were imperiling their own nation’s future by engaging in policies that Americans and others see as unfair.
* China, you're just hurting yourself, Paulson said.
* After all, there is nothing we, as Americans, would like more than to see China stop this self destructive behavior and rise up to be the gigantic, global powerhouse with a population that dwarfs ours and the natural resources and political might that goes along with leveraging the newfound economic might of more than a billion people into a full-on empire that is capable of challenging any nation that dares pursue political or economic goals that run counter to the further strengthening and maintenance of the empire that we know China can one day be.
* Please China, it hurts us to see you hurt you.
* One day, perhaps when you're the world's greatest superpower, you'll understand this.

From Sep 14th's regular "Five things you need to know" column.

No amnesty for war crimes

Hezbollah accused of war crimes

AMNESTY INTERNATIONAL has accused the Hezbollah militant group of committing war crimes by targeting Israeli citizens with long-range attacks during the 34 day Israel-Lebanon war.

Thousands of Hezbollah rockets were fired across the border into northern Israel, killing 43 Israeli civilians. Hundreds of thousands more fled their homes to find safety further south.

In a report released yesterday, Amnesty accused the Shiite militant group of deliberately failing to distinguish between civilian and military targets, and of wrongfully seeking to justify its barrage by claiming to be retaliating for Israel's attacks on Lebanese civilians.

Amnesty and several other human rights groups have already accused Israel of committing war crimes with an air and artillery bombardment which Amnesty says killed "some 1000" Lebanese civilians. It called on the United Nations Secretary-General, Kofi Annan, to set up an international investigation into the conduct of both sides in the conflict.

"The fact that Israel in its attacks in Lebanon also committed violations of international humanitarian law amounting to war crimes, including indiscriminate and disproportionate attacks, is not an acceptable justification for Hezbollah violating the rules of war, whether as a deterrent or as a means of retaliation or retribution," the report says.

Hezbollah war crimes: Amnesty International cries Uncle
By Jules Crittenden

In utter defiance of the predominant American left, European and United Nations view that Israel engaged in gross war crimes against civilians and freedom fighters in Lebanon, Amnesty International has announced that in its opinion, Hezbollah is guilty of war crimes. Hezbollah purposefully and indiscriminately targeted Israeli civilians.

The AI report notes that despite Hezbollah leader Hassan Nasrallah’s subsequent protestations to the contrary, he stated publicly and repeatedly during the conflict that he was firing his missiles at civilian areas to make Israeli civilians pay for their army’s actions, and with his uncontrolled Katyushas, an indiscriminate weapon, he killed 43 of them.He had advised Israeli Arabs to leave those areas.He had provoked the war with a cross border attack in which some Israeli soldiers were killed and others seized.

Readers will recall that perceived Israeli transgressions were what attracted the most attention and condemnation during the Lebanon conflict, and that those occurences were largely presented as Israel’s fault. It will be interesting to see if AI attempts to sort out how many of those 1,000 were actually Hezbollah guerrillas, and how many cases of "Israeli" attacks on civilian buildings and vehicles -- such as ambulances -- were staged Hezbollah propaganda events, and in some cases, if the dead were actually dead, or play-acting, or being recounted and shuffled around.

The question raised now, when Amnesty International loudly accuses a terrorist non-state organization and holds it to the standards to which it holds nations: Is AI turning over a new leaf?In the past, this organization and others have been disproportionately interested in isolated incidents of U.S. military excess in Iraq and the legality and morality of a well-appointed detention camp for non-state terrorists at Guantanamo Bay, while paying only lip service to the nature of the foe the United States faces. Gangs of terrorists for whom wanton murder of civilians and mutilation of captives, military and civilian, are matters of policy, strategy and tactics.

Does AI now recognize that, if it is going to be taken seriously, and hopes not be to broomed out of the room with its upcoming report on Israeli actions, there is no way it can ignore that blatant and purposeful crimes of Hezbollah?Is this the result of earnest introspection and a sense of proportionality or is it a matter of angling for position and credibility?

But perhaps we can look forward to this kind of evenhandedness becoming a trend. Terrorist organizations, long given a pass as liberation movements for whom all manner of criminal activity is overlooked, will not bear up well under this kind of scrutiny.The ripple effect of this kind of report from so prominent an organization at Amnesty International could be huge, if honest, proportionate examination of criminal activity comes into vogue among those who watch from the sidelines, and view warring parties with moral indifference.They may begin to recognize that in intent, action and at heart, there are parties in this global conflict who are intensely interested in justice and rule of law, and those who are not.

Ah, McCain, you've done it again

Yanks won't get much from the title, but, for their edification, that phrase is as familiar to Aussies as the Ho-ho-ho of the Jolly Green Giant to Americans. But in this particular context, its the gauntlet that Senator John McCain is lowering on his El Presidente bid. And not before time.

McCain, Powell deliver blows to Bush proposal on detainees

President Bush's campaign for tougher legislation on terrorists suffered another blow today when Senate Republicans supported efforts to block his plan to reinterpret Geneva Convention restrictions on the interrogation of prisoners.

By a 15-9 vote, Sen. John Warner (R-Va.), chairman of the Armed Services Committee, and three other Republicans joined Democrats in opposing the change.

The rejection of Bush's plan could create a dramatic clash, particularly among Republicans campaigning for reelection as being strong on security issues, when the full Senate votes next week.

Today's vote came several hours after Colin Powell, the secretary of State in Bush's first term, spelled out his position in a letter to Sen. John McCain of Arizona.

"The world is beginning to doubt the moral basis of our fight against terrorism," Powell said. "To redefine [a portion of the Geneva Convention] would add to those doubts."

More than that, he said, it could lead to the mistreatment of American troops captured in Iraq and elsewhere during the war on terrorism.

Powell's letter came as the Senate Armed Services Committee met in closed session to consider Bush's proposal. Sens. Lindsey Graham (R-S.C.) and Susan Collins (R-Me.) joined Warner and McCain and all the Democrats on the committee in voting against the proposal.

Bush wants the authorization before the trials begin for 14 high-profile terrorists who have been taken to the detention center at Guantanamo Bay, Cuba, from CIA prisons worldwide.

The U.S. Supreme Court has ruled that the military tribunals that were set up for prosecuting terror suspects needed congressional authorization. Bush does not want the new tribunals to be hamstrung by what the administration describes as the vague protections that the Geneva Convention, adopted shortly after World War II, offers to prisoners of war.

On Wednesday, a divided Senate Judiciary Committee muddied the outlook for an issue that Republicans consider key to the midterm elections when it approved widely divergent bills aimed at overhauling domestic eavesdropping laws.

The committee endorsed a White House-backed measure that would give President Bush broad authority for his warrantless wiretapping program. It also approved legislation by Sen. Dianne Feinstein (D-Calif.) that would largely preserve a 1978 law governing domestic spying while making few provisions for new executive powers.

While one lawmaker decried the Senate approach as "totally contradictory," the House Judiciary Committee abruptly canceled a vote on its own version of the surveillance reform law amid signs of dissension among Republicans there.

Showdown Set Between Rice and Powell

The next big showdown here is going to be between two secretaries of state.

It covers the argument between the White House and Republican opponents of its proposal to authorize military trials for captured Al Qaeda leaders. The two sides offered dueling letters setting out the competing arguments: one from Secretary of State Powell, arguing for the dissident senators, and one from Secretary of State Rice, defending President Bush.

On a day when Mr. Bush placed a rare call on Republican House lawmakers on Capitol Hill, Senator McCain, a Republican from Arizona, released a caustic letter from Mr. Powell complaining that the White House bill would fuel doubts from the rest of the world on "the moral basis of our fight against terrorism."

A few hours later, the White House released a similarly pugnacious letter from the former general's successor, Ms. Rice, who wrote that the standards applied to interrogators under the president's bill would be exactly the same as the torture ban sponsored by Mr. McCain in 2005, known as the Detainee Treatment Act.

At issue is Common Article III of the Geneva Conventions, which outlaws "cruel" and "degrading" treatment for captured prisoners of war. Mr. Bush has said the treaty's language is too vague for America's interrogators in the war on terrorism and that it would place them potentially at the mercy of foreign courts, where they could be tried as war criminals.

Rebuff for Bush on terror trials in a Senate test

Powell's statement amounted to a rare public breach with the White House he served, but reflected his strong opposition while in office to the administration's assertions, beginning shortly after the Sept. 11 attacks, that the war against Al Qaeda should not be bound by the Geneva Conventions.

The main dispute between the White House and the Senate Republicans revolves around a provision known as Common Article 3, which prohibits inhumane treatment of combatants seized in wartime. General Michael Hayden, the CIA director, has argued that the article's prohibition against "outrages upon personal dignity" must be clarified so that troops and CIA personnel know what is permissible in the interrogation of terrorism suspects.

But Senators Warner, McCain and Graham say the Bush proposal would send a signal that the United States has abandoned its commitment to human rights, and invite other nations to reinterpret the Geneva Conventions as they see fit, eliminating protections for American troops seized in future conflicts.

The senators also dismissed the letter from the military lawyers, saying they had questions about whether it amounted to an authentic endorsement of the White House proposal. They said they put more weight on extensive public testimony in which the lawyers raised doubts about the Bush plan.

Some military officials briefed on the military lawyers' position also disputed the notion that the lawyers had reversed course. They said the lawyers agreed to sign a letter at a meeting on Wednesday after discussing the language over several hours.

The lawyers would agree only to say that they could not find anything illegal about the specific issue of amending Common Article 3, the defense officials said, but still do not endorse several points in the administration's approach.

The senators say their bill will protect the CIA by refining the war crimes act, which criminalizes violations of Common Article 3, to specifically enumerate what violations constitute war crimes.

"What General Hayden wants us to do is immunize him not from liability but from criticism," McCain said after the vote, "because if one of his techniques is made public and he gets criticized, then he can say, 'Well, Congress told me to do it.' He's trying to protect his reputation at the risk of America's reputation."

The other chief dispute concerns the evidence admitted at trial. The Bush plan would allow hearsay and evidence obtained by coercion if it is considered reliable, while the Senate proposal would exclude any testimony obtained by "cruel inhuman, or degrading treatment."

The White House would bar the suspect from seeing classified evidence shown to the jury weighing his case; the senators say that this amounts to a secret trial, and that the suspect must be allowed to see anything the jury sees. They offered a compromise under which a judge would substitute a declassified summary of the evidence.

The committee vote was 15 to 9, with all Democrats joining the four Republicans. The measure now goes to the Senate floor, where Senators Warner, Graham and McCain believe they have a majority made up of Democrats and as many as a half-dozen other Republicans.

Senator Carl Levin of Michigan, the senior Democrat on the Armed Services Committee, warned the administration against taking on McCain, a former prisoner of war.

"They're trying to reinterpret the Geneva Conventions," Levin said, "but the best expert on that is somebody who has very personal experience with those who violate Geneva, and that's Senator McCain."

The situation in the House is very different, with that chamber on track to approve the measure backed by the White House.

"We'll do what the president wants," said Representative Duncan Hunter of California, the Republican who is chairman of the House Armed Services Committee.

The White House and Republicans on either side of the issue maneuvered furiously for advantage all day.

As the Senate Armed Services Committee met to vote on its alternative to the president's legislation, an anonymous Republican invoked a Senate rule to stop it from meeting, forcing Warner to go to the Senate floor to ask that the hold be lifted. He then praised the Democrats for being "totally cooperative" on the issue, a pointed rebuke to members of his own party who have been pushing the White House view. And he prevailed upon Senator Bill Frist of Tennessee, the Republican leader, to persuade the senator calling for the hold to lift it.

The White House must now decide whether to press its allies in the Senate to amend the bill on the floor, or to step back and wait until the bill passes and the House and Senate work out differences in conference.

The bill may face amendment in any case. Some Democrats object to a provision that would block detainees from challenging their detention in court. More than two dozen retired federal judges sent a letter to Congress arguing that such a provision would lead to unlawful permanent detention, and defy Supreme Court precedent.

Senate Panel Defies Bush on Terror

"I will resist any bill that does not enable this program to go forward with legal clarity," Bush said at the White House.

The president's measure would go further than the Senate package in allowing classified evidence to be withheld from defendants in terror trials, using coerced testimony and protecting CIA and other U.S. interrogators against prosecution for using methods that may violate the Geneva Conventions.

"The world is beginning to doubt the moral basis of our fight against terrorism," Powell, a retired general who is also a former chairman of the Joint Chiefs of Staff, wrote in his letter.

Senate panel defies Bush on terror

Firing back, White House spokesman Tony Snow said Powell was "confused" about the White House plan. Later, Snow said he probably shouldn't have used that word.

"I know that Colin Powell wants to beat the terrorists, too," he said.

Dear Senator McCain, ....