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Mark's Market Blog

11-27-10: North Korea v. The World

By Mark Lawrence

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It was Thanksgiving week, so the markets were only open three and a half days. Trading was very light - everyone was on vacation this week. One cannot take market results very seriously in a week like this. The markets dropped precipitously on news that North Korea launched an attack on a South Korean island, then mostly recovered the next day when it was remembered that no one wants a war. Bernanke continues to spend money with the express intention of moving the markets upwards. Never fight the Fed.

S&P 500 June 2 2010 to November 19 2010

Ireland is slowly coming around to taking a bailout. In their new budget, they will increase the standard rate of their VAT from 21% to 22% in 2013, then to 23% in 2014. When you hear about the US introducing a 5% VAT, keep these numbers in mind.

North Korea showed off their newest nuclear reactor to a US inspector. He reported thousands of gleaming working centrifuges, and a nuclear control room that looked astonishingly modern and functional. If no progress can be made on disarming the North (I see no hope for this) then eventually Japan will be forced to become nuclear, starting a four way arms race with North Korea, China and Taiwan. Not pretty.

North Korea launched about 50 missiles at a South Korean island, killing four and forcing the evacuation of hundreds. North Korea seems to be offering to have a war to protest joint US-S.Korea military exercises in the area. It's estimated that N.Korea's dug-in cannons would reduce Seoul to rubble and kill hundreds of thousands in the first four to six hours of such a war. Such a war would be very one-sided: they cannot stand up long against the US Air Force and Korean army. But the first day of the war sees the almost complete loss of Seoul. South Korea wants no war. China also wants no war, as there would be a highly undesirable increase in US military presence on their borders, and hundreds of thousands of unwanted refugees crossing into China. Due to the huge disparity in economics between the North and South, unlike Germany where reunification took about a decade, this would all but crush the South's economy for a couple decades, not counting losing Seoul. Obama sent another aircraft carrier into the area, implicitly threatening to reduce the North's 11 buildings to rubble the very next day after they reduce Seoul to rubble. North Korea presents a serious problem to everyone, and it's very hard to see a sensible solution.

California's employment numbers are back to where they were in about 2003. California's budget remains about 25% higher than the 2003 budget. This is an improvement on the 2007 budget, which was about 50% higher than 2003. Increase spending 50% in four years, how could any reasonable person think that might lead to trouble? California is about to experience a Greek style mini-death spiral. Raising taxes is a non-starter, already companies are leaving the state. Cutting police, prison guard and teachers pensions is probably illegal in most cases. Laying off police is poor economics: in the current environment, they're all pulling overtime writing tickets and making a lot of money. Of course, in the long run these guys retire at age 50 and bankrupt us, but this year they're paying their way. Laying off teachers is poor politics. It's pretty easy to see what's next: lots of layoffs of government employees, cuts in medi-cal and welfare. In other words, to save money we lay off people making $100,000 per year who pay income taxes, and we cut payments to doctors and hospitals while leaving them forced by law to treat anyone who shows up in the emergency room. This will not end well.

California Employment, 2000 to 2010

California's budget, 2000 to 2010

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