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Wednesday, December 25, 2002

The Worst of 2002

Every call you make, every song you take...........we'll be watching you. I've already blogged the NYT story on Big Brother's new tools together with my own opinions on the topic (Here) but today the party is growing.Google News is currently flagging 13 items in the 'and related' category. It's is relatively unusual to find specialist journalists so uniformly in agreement about something, so without further comment I reproduce extracts from a representative selection. Come on John, let's get close up and personal, I think I need to be surveilled.

What was the worst technology product of the year? There are so many deserving choices, mostly related to clumsy efforts by media companies and their lawyers to restrict the public's enjoyment of digital movies and music. But in terms of potential impact on our lives, the Worst of 2002 award goes to TIA, the Total Information Awareness program, spawned by the Defense Advanced Research Projects Agency (DARPA) Information Awareness Office. TIA is exploring the feasibility of developing a national surveillance system intended to identify potential terrorists and criminals through "data mining" of the public and private electronic records of every citizen.

Every telephone call you make, every credit card transaction, all your e-mail and instant messages, all your medical records, your magazine subscriptions, your police record, driver's license records, gun purchases, travel records, banking records--all would be fed into a hopper and sifted by the TIA spy software. Another facet of the DARPA project calls for the study of a nationwide biometric "Human ID at a Distance" program that could track and identify individuals not just in the electronic world but also in the physical world by using facial recognition and other technologies now in development.
Source: Fortune

First it was Echelon, the super-secret global eavesdropping program run by the U.S. National Security Agency (NSA), and then Carnivore, the super-secret Internet-snooping program run by the U.S. Federal Bureau of Investigation. Now we have a new piece of privacy busting to contend with in the form of the Total Information Awareness program, or TIA. Based on the limited information released to date, the goal of the TIA program is to compile and search through thousands of public and private data sources, located in this country and possibly elsewhere. These data sources include commercial databases, such as ones used to record your purchases at places such as bookstores, video shops, grocery stores and Internet malls.

The TIA program would also trawl through the endless public data sources including driving records, tax filings, visa and passport use, calls for police assistance and more. TIA would have access to records listing all your phone calls, all e-mails sent and received (including the content), and all Web sites you have visited. Companies are also collecting boatloads of information about where you go as well. Sporting venues, airports, not to mention small and large shops, are all recording your whereabouts on video. Police departments have even started using advanced software to analyze some of this video to determine who appears in the picture. The "Fast Pass" electronic devices installed on vehicles and used to gain access to toll bridges and highways are currently monitored and recorded in urban locations far away from these structures (to analyze traffic patterns). And don't forget that the new generation of mobile phones all transmit location information that is stored in yet another database.

That is an awful lot of information about any one particular person. What does the government intend to do with all this information? The Electronic Frontier Foundation (www.eff.org) quotes U.S. Undersecretary of Defense Pete Aldridge as having publicly stated that the TIA program will involve "discovery of connections between transactions--such as passports; visas; work permits; driver's license; credit card; airline tickets; rental cars; gun purchases; chemical purchases--and events--such as arrest or suspicious activities and so forth." The single page Web site describing the TIA program (www.darpa.mil/iao/TIASystems.htm) expands on this description somewhat by saying that, among other things, the system will focus on developing "novel methods for populating the database from existing sources, create innovative new sources, and invent new algorithms for mining, combining, and refining information for subsequent inclusion into the database; and, [create] revolutionary new models, algorithms, methods, tools, and techniques for analyzing and correlating information in the database to derive actionable intelligence."
Source: Daily Yomiuri (Japan)

Growing controversy around the US Defense Department's shadowy Total Information Awareness project may be the cause of the steady decrease in the project's virtual presence Call it the incredibly shrinking government Web site. As controversy grows over the Defense Department's shadowy Total Information Awareness (TIA) project, the project's virtual presence is steadily decreasing. First, biographical information about the TIA project leaders, including retired Admiral John Poindexter, disappeared from the Defense Department's site last month. A mirror that one activist created from Google's cache shows the deleted information included four resumes listing past work experience but no addresses or contact information.

Then, sometime in the last week, the TIA site shrank still more and some links ceased to work. The logo for the TIA project -- a Masonic pyramid eyeballing the globe -- vanished, a highly unusual step for a government agency. So did the TIA's Latin "scientia est potentia" slogan, which means "knowledge is power". A spokeswoman for the Information Awareness Office, which runs the TIA project at the Defense Advanced Research Projects Agency (DARPA), said she had no details on the deletions. The disappearing documents come as the TIA has become a lighting rod for criticism and as online activists have been turning the tables on Poindexter by reposting his personal information and home telephone number as widely as possible. The process started with a column in SF Weekly, a San Francisco alternative newspaper, by Matt Smith. He reported Poindexter's home address and telephone number and recounted a brief telephone conversation he had with Poindexter's wife, Linda. Then John Gilmore, the co-founder of the Electronic Frontier Foundation, replied with a widely read essay that urged a broader effort to surveil Poindexter. "Even if some of the information that people end up revealing or using about such targeted scumbags is incorrect, such a public demonstration would highlight the damaging effects that incorrect database information can have on innocent peoples' lives, when used to target them for harassment without due process of law," Gilmore wrote.
Source: ZDNET

Getting to know John, getting to know all about John. As a form of protest, people are working to provide "Total Information Awareness" of John Poindexter. With the potential of all this personal information about the public being in John Poindexter's hands, some people have decided to protest by putting Poindexter's personal information in the hands of the public. By some accounts, it started with an article in SF Weekly and has since spread across the internet and been covered by numerous media sources including the Associated Press, Wired and The Mercury News.

So far quite a bit of personal information about Poindexter has been gathered. (I'm going to resist the urge to post or link to it here, a simple search on Google should turn it up if you are that interested). John's phone number, social security number, home address, relative's names, neighbor's names and shopping habits are just a few of the items now available online for your inspection. Not enough? How about satellite pictures of his home and office? Maps of how to get there? Tax records?

The protest is continuing and more information will surely be discovered and posted by those who want to show John what it feels like when your personal information isn't personal anymore. Aside from making Poindexter uncomfortable, the protest and its coverage in the media has kept the spotlight on the TIA and the privacy concerns it brings. The glare of that spotlight may be having an effect. The TIA's website seems to be shrinking. Along with the creepy Orwellian logo, the biographical information about the project's leaders, including Poindexter, has been removed.
Source: Morons.org

Activists target Pentagon internet information head. Internet activists have a message for John Poindexter, the head of a controversial Pentagon research project to find terrorists by searching the everyday transactions of Americans: Threaten to invade our privacy, we'll invade yours. They've plastered Poindexter's email address and home phone number on dozens of web sites, forcing him to block all incoming calls. They've posted satellite images of his suburban Washington house and maps showing how to get there. And they've created online forms to collect even more personal data on him.

"If you are a store clerk, study the photos above. Learn this face. If you are a shipping clerk, study this name," reads a site titled The John Poindexter Awareness Office, a play on Poindexter's Information Awareness Office at the Pentagon. "When and if you see Mr Poindexter purchase something, travel somewhere or do, well, anything - send us a tip describing your observations. We will display the information received right here on this Web site." It's all an attempt to turn the tables on Poindexter, who is trying to create a vast database of information, from credit card purchases to medical files, and develop software to search it for signs of terrorist activity. The project, called Total Information Awareness, has outraged civil libertarians since it became widely known in November - and spurred some people to do a little database surfing of their own.
Source: NZOOM (New Zealand)

Many are concerned about the government because of their new spyware, the Big Brother affect. Oddly enough, I'm not concerned because I think the government might be "reading my mail".

There's an old saying that goes something like the master swordsman doesn't fear another master, he fears the amateur.

I feel the same way about Big Brother. I don't consider them to be a threat about what they might intentionally find out about me or my friends/family. I fear what they might "think" they found in a fit of total incompetence................

Amen to that. I heard the swordsman comment phrased a little less elegantly: "Evil has to sleep at night. Stupidity is 24/7." At least Big Brother as depicted in Orwell's 1984 was competent - it was staffed by dedicated bellyfeeling Party members who were capable of doing a pretty good job of hunting down and exterminating those who presented a threat to the Party, while leaving the proles alone. A Big Brother staffed by the cluel^H^H^H^H^H fucknoz^H^H^H^H^H^H^H twit^H^H^H^H individuals presently working at INS, or even your local DMV, scares me far more than the one in 1984. But compared to either of those alternatives, I'll take a Big Brother staffed by NSA and CIA any day. Heck, I'll even give the FBI a shot at joining in and redeem itself.

Short of spending trillions to achieve the 1984 total security state, the way you achieve the optimum balance between freedom and security is that you have your police force be just a little bit stupid, and just a little bit slow. We got hit on 9/11 because we went for very slow and very stupid. Bureaucratic stonewalling (no information sharing between FBI, CIA, and NSA) was part of it, as were politically-motivated fuckups like diverting FBI resources away from the Islamokazi whackjob terrorist threat to investigate the domestic militia whackjob terrorist threat. As for stupidity, it doesn't get much dumber than giving visa confirmations to the 9/11 hijackers six months after all hell broke loose - only the INS could pull something like that. And only in the INS could Ashcroft himself not fire those responsible. IMNSHO, the proposed Big Brother composed of our intelligence agencies (NSA, CIA, post-9/11 FBI design goal) has the potential to achieve the right degree of stupidity and slowness for the job -- and I don't mean that as an insult. Any stupider and slower (pre-9/11 FBI, current INS), and we'd have another 9/11. Any smarter and faster (Stasi, KGB, Gestapo), and it'd be 1984.
Source: Slashdot.org

Tuesday, December 24, 2002

Protesting is Good for You

It's official. Something I always new in my bones, that getting things out in the open, doing something, is much better than bottling things up inside. Now, in a new study, psychologists at the University of Sussex found that people who get involved in campaigns, strikes and political demonstrations experience an improvement in psychological well-being that can help them overcome stress, pain, anxiety and depression. I am not one for participating in protest movements myself, but perhaps the important thing is that in your work, in your family life or wherever, you actually feel you have some measure of control, of influence, that you matter. Be that as it may I will always remember the scene in Eastwood's 'Black Hunter, White Heart' where the Houston/Eastwood character takes a severe beating from a younger, fitter white African racist: 'sometimes' says Eastwood, 'you just wouldn't feel right inside if you didn't do something'. Perhaps recent science would tell us that this is something to do with reducing cortisol and raising serotinin and HDL cholesterol but its nice to know sometimes that the things you feel to be good actually are. Could this be just one more plus for low-cost, preventive, alternative medicine.

"The take-home message from this research therefore might be that people should get more involved in campaigns, struggles and social movements, not only in the wider interest of social change but also for their own personal good."

The results emerged from in-depth interviews with nearly 40 activists from a variety of backgrounds. Between them, they had more than 160 experiences of collective action involving groups of demonstrators protesting against a range of issues. These included fox-hunting, environmental damage and industrial matters. Volunteers were asked to describe what it was about taking part in such collective action that made them feel so good. "Many published activist accounts refer to feelings of encouragement and confidence emerging from experiences of collective action," said Drury. "But it is not always clear how and why such empowerment occurs, so we aimed to explain what factors within a collective action event contribute to such feelings."
Source: Yahoo News

On the Dark Side of the Net

Recent efforts by the Pentagon and other US security agencies to put in place a system known as total information surveillance has brought to light one interesting detail: most of the technology needed to make this 'dream' a reality is already in place, and it is in place because we 'the people' have willingly embraced the technical prerequisites which lay the basis for such an all inclusive surveillance system. In other words we have, informationally speaking, dug our own graves. Thirty years ago you needed a whole army of spies and cloak-and-dagger security officers to keep track on what were relatively small groups of disaffected citizens. Today, using the same technology that makes possible Amazon-style peer referenced recommendations, it is a pretty simple task to discover who is interested in what.

My own feeling is the question of whether this is sinister or not depends on how we react to this new reality. Blackmail, for example, can never have been easier as you track all those 'unusual' sites that a wife/husband or boss might be interested in. Alternately, our openness about what we really find acceptable can change, and thus there is nothing to blackmail about. Fifty years ago one of the most gifted mathematical minds of the twentieth century - Alan Turing - was driven to suicide by the criminalisation of his homosexuality. Today an adolescent in the US can take his school director to court to assert his right to take his gay partner to the annual prom dance. Or again, the Nazi bureaucratic machine collected one of the most systematic archives of detailed information of the pre-computer era. But when it came down to the massacreing of millions of innocent people all this information played no important role whatsoever, recourse to an item on a dingy card file was no protection from or source of incrimination. The Nazis with their crude and brutal objective had no use for such a honed down apparatus, they needed a much blunter instrument. Result: these archives have only served as an incredible source of detailed information for those historians who would try and understand how the Nazi society actually functioned.

One final point. The danger of seeing all this sophistocated gadgetry as a protection against terrorism is that you commit an error of principle. It's like trying to play chess under the assumption that you opponent has a null strategy. Obviously the technology balance between government and terrorism is not a symmetric one. Terrorists work in the shadows, this means that they are far more likely to adopt strategies which are relatively low-tech, and when they do resort to more high-tech activities to do so in a way which makes their activity hard to locate in the mass of oterwise innocuous fata collected. At the same time, our societies, based as they are on an enormous digital divide will continue to include huge masses of social space where face to face contact is the primary one, and about which hardly a minimal information trace will ever exist. Here lies the main trap and the main danger for the system of total information surveillance.

Because of the inroads the Internet and other digital network technologies have made into everyday life over the last decade, it is increasingly possible to amass Big Brother-like surveillance powers through Little Brother means. The basic components include everyday digital technologies like e-mail, online shopping and travel booking, A.T.M. systems, cellphone networks, electronic toll-collection systems and credit-card payment terminals. In essence, the Pentagon's main job would be to spin strands of software technology that would weave these sources of data into a vast electronic dragnet. Technologists say the types of computerized data sifting and pattern matching that might flag suspicious activities to government agencies and coordinate their surveillance are not much different from programs already in use by private companies. Such programs spot unusual credit card activity, for example, or let people at multiple locations collaborate on a project.

The civilian population, in other words, has willingly embraced the technical prerequisites for a national surveillance system that Pentagon planners are calling Total Information Awareness. The development has a certain historical resonance because it was the Pentagon's research agency that in the 1960's financed the technology that led directly to the modern Internet. Now the same agency — the Defense Advanced Research Projects Agency, or Darpa — is relying on commercial technology that has evolved from the network it pioneered.The first generation of the Internet — called the Arpanet — consisted of electronic mail and file transfer software that connected people to people. The second generation connected people to databases and other information via the World Wide Web. Now a new generation of software connects computers directly to computers. And that is the key to the Total Information Awareness project, which is overseen by John M. Poindexter, the former national security adviser under President Ronald Reagan. Dr. Poindexter was convicted in 1990 of a felony for his role in the Iran-contra affair, but that conviction was overturned by a federal appeals court because he had been granted immunity for his testimony before Congress about the case.
Source: New York Times

Delhi to Get its First Metro

Maybe this doesn't sound like any big deal, but I think it's an important and interesting sign of the times, and of how things are changing. The metro programme will be built in stages, and today prime minister Atal Behari Vajpayee will open an initial 8.3km stretch of track connecting east Delhi with the north of the city. The entire first phase of 62km should be finished by next spring, and the complete 250km network will be completed by 2010.The state-of-the-art rail system will cost a total of £1.4bn to build and aims to revolutionise transport infrastructure for Delhi's 14m-plus people. The project has been in the pipeline since the 1970s, but building only began in 1998 under the control of the Delhi Metro Rail Corporation, which has overseen consulting and construction work by private contractors including companies from Europe, the US and Japan, while loan financing has been obtained from, guess where, Japanese banks.

A couple of observations seem in order here. Firstly if I am right, and the growth curve for the Indian economy just goes up-and-up, then this type of project with a relatively low initial cost due to India's low current price level, can yield pretty good long-run returns as living standards rise and the value of India's currency and capital stock goes up accordingly. Secondly, the productivity implications are mind boggling. Apparently crossing Delhi now takes anything from an hour upwards, while jumping the metro will involve only a 15 minute ride. Secondly all those rickshaw drivers being freed to work in more productive and less onerous activities would also work wonders for productivity. The key problem is one of job creation, and the transition from being a misery-wage to a low-wage economy. For it is the 'misery' wage situation which perpetuates all those otherwise menial and demeaning activities as performed by the multitute of pan, cigarette and milk 'wallas'. To make this transition what India needs is a steady flow of outside investment, and that, by the look of things, is what they are about to receive.

India's capital is in gridlock. Three-wheeler rickshaws, smoke-belching buses, herds of cows, leper carts and 4m cars have brought Delhi's roads near to standstill.Today, all that could begin to change when prime minister Atal Behari Vajpayee gives Delhi's commuters a long overdue present: its first metro. "It's a 50-50 split on cost between the state and the central governments, with Japanese loans to finance some building," said Delhi's chief minister Sheila Dikshit from her office overlooking the Delhi skyline. "The metro will have a terrific impact on alleviating congestion."

Metro tickets will cost between four and seven rupees (5p and 9p), making it affordable to many commuters. The network hopes to have 2.2m passengers a day by 2005. Passengers will be able to start boarding the first stretch from this month after the premier's inauguration. Ms Dikshit and the metro officials insist the network will not be hit by Delhi's chronic power shortages. "We'll have a dedicated power supply for the metro," she said. As well as taking power from five sources, the metro will have its own electricity generator.Publicity campaigns have been launched to teach Delhites how to cope with the new technology for services such as ticketing. A recent Delhi transport trade fair had a model ofthe metro coach alongside short films showing the Indian public how to usethe network and adopt the proper metro etiquette. Attempts to sit on the roof of the train will be discouraged, with offenders facing the threat of a jail sentence. The traditional Indian pastime of chewing and spitting red betulnut juice at the nearest available surface will also be strictly prohibited on the shiny new network.
Source: Financial Times

Monday, December 23, 2002

Paid Content in the Internet?

As one year draws to a close, and we all start to ask ourselves what the next one may have in store for us, the big temptation is to look around and start speculating. And that, of course, is just what the Economist does this week. Topic of the day: the future of internet content.

Of course this one has been around since the early days of dial-up, but it has reached new highs in the aftermath of the advertising slump. Since the big dot-com bust it seems to me that there has been relatively little serious analysis of where things stand, and where they are likely to go. The most rational assumption would seem to be that while initial expectations were horrendously exaggerated, current pessimism is simply the reverse side of the same coin. If we have an economic system that is prone to give itself over to crazy speculation from time to time, and if the aftermath to the crazy speculation is a credit drag which produces either low growth or outright slump, then the blame is hard to lay at the door of the internet itself. The internet was merely a vehicle for something else. And now that the dust is settling we can see more reasonably were the real trend line is. Thanksgiving weekend, for example, Amazon posted a year-on-year 60%+ growth in sales, not bad in a low growth environment. And as for broadband access, well only 15 million US households have it, but it is spreading at a rate of 50% per annum, so do the math and you'll see that before long that number is going to be a lot bigger. The advertising slump cannot be expected to last forever, and as more broadband users spend less time playing at coach potatoe, then the advertisers will have to follow the eyeballs. Paid content? Well there is space for it, and it will undoubtedly grow. But there is an important rider, it will have to justify itself. (Blogger pro is, for example, something which it goes without saying is worth paying for).

From the individual perspective there is virtually infinite content available, so any paid content will have to justify itself according to a quite strong test. I remember when Brad de Long sent out a cheer on behalf of all of us when the encyclopaedia Britannica went free on-line. Well I have a confesion to make, it's been longer than I can remember since I last consulted the BE. This is because the internet itself is an encyclopaedia, the biggest that has ever been built. (And if the internet is an encyclopaedia then Google has to be the index page). So selling knowledge-based content is going to be hard.

Over here in Europe I have noticed that some newspapers - El Pais in Spain, Franfurter Allgemein in Germany for example - are now trying to charge for access to the majority of articles. This policy seems doomed right now. Faced with phenomena like Google News and the plethora of compare-and-contrast information that is so readily available it is hard to see who is going to pay for the same information as is on offer free elswhere, and if it's opinion you're after, well you need look no farther than the web log world. What seems to be happening is that too many of these decisions are being taken by people with too little knowledge and understanding of what is actually happening in the internet. And there is an additional danger, the habitual use of the internet in non English-speaking countries is already below that in the English-speaking world, and the evidence seems to suggest that in the non English-speaking world the policies of restrictive access are only likely to get worse. Put another way, if this continues instead of seeing the benefits of positive feedback many of these commercial initiiatives are only like to generate a lot of the negative variety.

The internet then is not the South Sea bubble, and it is not a bunch of Dutch tulips. It is real, it is here and it is growing. Which brings us back to the first problem. How to make money out of it?

This being the Internet, things are now poised to change again, with the spread of high-speed, always-on, broadband connections. Broadband boosts all business models, as users “do more of everything”, according to eMarketer. It may even revive growth in online advertising sales. “Rich media” adverts, which contain fancy graphics and sound, tend to be more interesting to consumers than plain banner advertising. More importantly, broadband may capture more broadcast-television ad revenues than dial-up modems have done, says Jeffrey Cole of the University of California in Los Angeles. People seem to like nipping away from the television set to use their always-on broadband connections during commercial breaks, says Mr Cole. Advertisers may cotton on and start exploring ways of advertising to this fast-growing lost audience again.

None of this is likely to mean that Internet firms will deliver on the absurd claims of the late 1990s. But it does suggest that there are profits to be made by selling consumers content and services—as well as physical goods—online. A year ago, even this modest claim would have sounded as implausible as a visit down the chimney from Santa Claus.
Source: The Economist

Sunday, December 22, 2002

Housing. Bubble, What Bubble?

The United Kingdom is a country which has often been blessed in terms of its human resources. The most recent example is that of Mervyn King who has recently been appointed to the post of Governor at the Bank of England. A comparison with the work of a roughly equivalent intellect – Otmar Issing say – at the ECB would show that there was, as the Spanish say, ‘ni color’. Meanwhile the Washington Post today makes a comparison with the Fed’s own Alan Greenspan, a comparison from which our dear Mervyn emerges almost smelling of roses.The issue in question is whether to treat the current escalation in house prices as a bubble, and whether, if the former proposition is well founded, it should be well-and-truly pricked. King’s observations come from a recent speech delivered at the LSE (and which can be found here).

Among the more interesting of the points which King makes about the current UK bubble (in the US the question may be more debateable, but in the UK there is a bubble!), relates to the relative expected evolution of capital values and the debt repayment schedule. In his speech King identifies two regimes: a high-interest, high-inflation regime, and a low-interest, low inflation one. These two regimes have very different underlying structural properties in terms of capital values and debt repayments. In the case of the high interest regime, the initial cost is high, but the burden progressively reduces as inflation eats into the capital value and nominal salaries are adjusted upwards. In the second regime however the entry cost may seem relatively low while the burden of repaying the debt changes little (or even rises in the case of deflation).

Now behavioural economics has been in the news recently with the Kahneman (alias Tversky) Nobel. One of the strong arguments in favour of this way of analysing economic decision taking is its emphasis on the use of ready-made rule-of-thumb criteria for decision taking (this has come into popular parlance through the notion of common sense). This notion of the rule-of-thumb is derived essentially from the work of evolutionary psychologists like Cosmides and Tooby (as popularised by MIT’s Stephen Pinker in books like ‘How the Brain Works’ and ‘Blank Slate’) The point about these rules is that they normally work (and this is why we have a positive appreciation of common sense) since they have been positively selected through an evolutionary process. Now logically normally doesn’t mean always. There are cases where such rules may break down, and I have a feeling King has just identified one such case.

The simple rule of thumb for the future is that this year is going to look something like last year, or, the next five years should look like the last five years (actually stochastically speaking the first statement seems sounder, while from the rule of thumb perspective the second SEEMS sounder) and this is where the mismatch may arise. Central bankers tend to see it differently. They tend to assume that the next twenty years will not resemble the last twenty in the area of inflation because they will be applying a policy of inflation targeting or something like it. Good economists may also have well founded intuitions that the next twenty will be different from the last. But the young person trying to decide on a flat or house may not have recourse to such ideas. This is where the rule of thumb sends things badly awry. For what is more reasonable than to think that with interest rates coming down, and the same monthly payment getting apparently more capital action, to target constant monthly payments rather than square metres. Of course this doesn’t get the extra capital action sought after since the housing stock cannot be expanded rapidly in the way the flow of mortgage funds can (‘sticky’ I think is the word here), and the value of the existing stock adjusts upwards accordingly.

The real problem arises since initial repayments under the inflationary regime tend to consume a rather large part of the current income stream, but this is accepted since with time the proportion of current income consumed reduces. However, as has been observed above, in a disinflationary or outright deflationary environment this doesn’t happen and the proportion remains relatively constant (or even grows if in a given moment interest rates have to rise). This has knock-on effects for other areas of consumption as the money to fund it does not become available. Bottom line: a complete mess. Solution, the normal one as advocated by Keynes, stoke-up a bit of inflation to sweat off some of the debt. But the world of Keynes was then, and this is now. In front of Keynes were years of young generations progressively entering the labour market. The problem was how to create enough employment for an ever expanding working population, our problem is how to persuade more working age women to go to work and to persuade men of 58 not to retire early. We are facing generations to come in declining numbers.

The political dynamics of this are rather complicated. The much longed for inflation would, as we know, devalue both debt and savings. But with ageing populations the losers can outnumber the winners. One further lag should now become of interest to economists, that between immigrant arriving and immigrant voting. Roughly ten years is my back-of-the-envelope guess. This is relevant since immigrants tend to have neither debts nor assets, live on a stream of income basis, and are likely to be inflation/deflation neutral. Without the immigrant vote the ageing savers can dominate the electoral process. I still cannot really claim to understand the subtleties which like behind the dynamics of the Japanese political system, but could the age structure of their population just possibly have something to do with their reluctance to adopt inflation boosting strategies to fight deflation?

A New Bubble
Even as the debate over the stock market bubble continues, another is just beginning, this one over house prices. Nationally, house prices were growing at the annual rate of about 8 percent through much of 2001, while in some metropolitan areas, such as Washington, the average annual percentage increases were as high as the mid-teens. Such increases were two and three times those in household income, leading some analysts to argue that investors who had once poured their savings into the stock market had now decided they could get better, or at least more secure, returns by investing in new and bigger homes. Lending support to that notion were the Fed's own figures on household wealth, which show an acceleration in the growth of mortgage debt beginning in 2001. By the end of 2001, mortgage debt burden as a percentage of disposable household income had reached its highest level in more than 20 years.

A number of critics, including Ed Yardeni, an economist and chief investment strategist at Prudential Securities, blame the Fed for helping to create and fuel what they characterize as a housing bubble. Keeping interest rates at their lowest level in decades, they argue, had the effect of pushing house prices even higher while encouraging households to allow their debt to grow faster than their incomes or their wealth. But Fed officials have repeatedly declared that there is no housing bubble worthy of the name. "We've looked at the bubble question and concluded it's most unlikely," Greenspan testified at a congressional hearing in July, noting that the housing market by that time had already begun to cool. "We see no evidence of it." Indeed, rather than expressing concern about the increase in mortgage debt levels, Greenspan and his colleagues have applauded the boom in mortgage refinancings that allowed millions of homeowners to "cash out" on some of the equity value of their homes. Consumers have used much of that money to continue spending on new cars, furniture and other goods right through the recession, Fed officials argue, helping to smooth out the business cycle and make it one of the mildest in memory.

By contrast, Mervyn King, the new governor of the Bank of England, used a speech last month to warn that the British economy had become overly reliant on consumer spending propped up by increases in housing values that reached nearly 30 percent in the past year. "Even the optimistic Mr. Micawber would realize that this cannot continue indefinitely," King said, referring to Charles Dickens's character in "David Copperfield." But King went on to acknowledge that he wasn't sure whether the central bank should try to prick the bubble before it burst, or give it a chance to deflate on its own.
Source: Washington Post