The plunge protection team for the next crisis - emailed to subscribers
Tue, 28 Nov 2006

The plunge protection team...
What a phrase. I like it. Too early yet though, but when the crunch comes, it will make interesting viewing,

other interesting articles are linked from there also.

You don't see much published about Ricardo and his law, but here was something last year:,,1656658,00.html

I have found an understanding of the law of rent immensely useful for forecasting economic behaviour. How the rent of land manifests determines how society grows, the shape of the economy, even the health of its citizens. It is the absolute fundamental law of economics, yet not one single economic think tank, let alone university, discusses it these days in any way.

Macquarie Bank understands it though, it is why they are launching yet another private equity bid, this time for Qantas (they already own most of the airports). Though I think greed will catch up with them soon. Packer knows it too, for his casino licenses.

[Hard to see govt changing its mind on the license for qan, tho if there is one private organization very close to govt it would be Macquarie. Perhaps they know something we don't ? Including an inducement for management greed in the offer they have certainly done their homework.]

In this regard, I attach for you a small cutting from the Financial Times, October 4, 2006. Notice what Mr Xie was best known for; warnings of a potential bubble in the Shanghai property market - angering Chinese officials. Firms like Morgan Stanley have a big interest in this market, they do not want to be angering authorities. It means you and I simply can never be told the real story, hence we need always to form our own judgements by correctly reading "the tape", as well as listening to those others who give a sometimes alternative view of markets based on better knowledge - like Ricardo's Law.

The talk on China last Friday was excellent, but raised more questions than it answered. I have asked if John would repeat it to us as a group sometime in the new year, stay tuned.

It truly is all about the rent:

For those that don't recognize it, here is the continuing saga: After the fall of the Berlin Wall, Boris Yeltsin, advised by the World Bank and other privateers, sold off all of Russia's prime real estate and commodity companies to private interests. Ownership of the property rights is no doubt better in private hands than government, what happens to the rental value is the question.

As was done with other Russian-owned commodities firms, Yukos was founded by Russian presidential decree in November of 1992 to house several other state owned, in this case, oil producers, the name coming from the main producing firms Yuganskneftgaz and Kuibyshevnefteorgsintez. No wonder they changed the name.

By 1994 though, the Russian government, desperately in need of cash to survive one crisis after the other under Yeltsin, chose to transfer ownership of most of the larger commodities companies to a few businessmen in exchange for cash loans. By paying $309 million, Mikhail Khodorovsky took a 78% stake in Yukos, the oil company, giving him not only the rights, quite properly, to drill for oil, but to collect improperly also, the value of the ground rent that goes with it.

Khodorovsky, a former young communist league leader, did not have to go far to raise the finance, merely asking his own bank, Menatep, for a 'loan'. (Gorbachev had licensed a few private banks shortly before his country collapsed in 1991 or so.) This was in 1995. One year later, Khodorovsky took almost complete control with a further $160 million 'investment'. I say 'investment' because it is not really known how ultimate control was gained in the mirky climate of those days.

1998 saw tough years as Russia defaulted on its $40 billion worth of bonds, and Yukos employees went unpaid for months and months as the price of oil fell below $9 a barrel. (The Kondratieff wave commodity price low.) The company recovered with the oil price however. By 2001, with a few management reforms and better accounting in place, Yukos was suddenly worth an estimated $12 billion.

In May of 2003, Yukos announced a merger with Sibneft, another oil and gas company, controlled by Roman Abramovich. The combined entity does not get off the ground however, as the Kremlin, now controlled by former KGB staffer, Vladamir Putin, levies fines for unpaid taxes. Khodorovsky is arrested in October of 2003 and charged with fraud. Putin has decided he wants some of the rent - and with it control of the country - back. Putin seeks to reassure Yukos, and indeed all foreign investors in Russia that he does not intend to bankrupt Yukos, but this is of course exactly what he goes ahead and does. Yukos senior staff flee Russia and take refuge mostly in either London or Tel Aviv. Some go on to buy English premier league football clubs, so their money must have gone out ahead of them.

After paying up fines, fees and taxes back to the Kremlin, (Kremlin claims reached almost $28 billion) the remains of Yukos is acquired eventually at auction (in contrived circumstances) by Rosneft. Rosneft, with the assistance of the Russian government, goes on to list this year on the UK stock exchange in a ten billion dollar IPO that has recently valued the company, with the old Yukos oil rights, at $80 billion and counting. Credit created to finance government granted licenses, at the bottom of which lies the (permitted to capitalize) rent.

Had Yeltsin followed the advice of some better qualified specialists, notably Fred Harrison and others who were there at the time, and simply put in place the correct methods to collect the annual rental value, all of the above could never have occurred. As I said, its about the rent.

Ricardo's Law, I urge you to study it. A little knowledge can be a dangerous thing...

Star Economist

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