Thursday, March 31, 2011

Should The Philippines Wage War With China Over The Executions Of The Drug Mules?

“It is just that the Philippines is less powerful than China in warfare” remarked a neighbor in the allusion that the Philippines is powerless to impose her will over its larger and far powerful Asian contemporary following yesterday’s execution of the 3 drug mules.

Stunned by this comment I retorted, “Do you honestly believe that the Philippines should go to war with China for them?”

Such unwarranted emotional interpretation of events appears to be the offshoot of the quality of reasoning peddled by mainstream media which the vulnerable public could have misinterpreted.

From the

Three Filipinos convicted of drug smuggling were executed in China Wednesday, triggering condemnation in the Catholic Philippines and despair for family members who shared their final moments...

The executions came after repeated pleas by the Philippine government for their sentences to be commuted were turned down, and ended vigils in the country where supporters of the trio had prayed for a miracle.

There are many issues encompassing this case which makes it complex.

One it is the issue of drug trafficking.

Two it is the issue of death penalty.

The populist sentiment seems mostly aligned with the position taken by the influential Catholic church which hasn’t been about the legitimacy of DOMESTIC death penalty laws but death penalty as a moral principle.

From the same article,

Amnesty International as well as the influential Roman Catholic church swiftly condemned the executions.

"We strongly condemn the executions of the three Filipinos," Agence France-Presse quoted Amnesty's Philippine representative Aurora Parong.

"The Philippines should have taken a stronger action, and it is now its moral duty to lead a campaign against death penalty in Asia."

Amnesty International says China is the world's biggest executioner, with thousands of convicts killed every year. The Philippines has abolished the death penalty.

I wholeheartedly agree that death penalty should be abolished. But this is largely a non-sequitur. As you can see from the above article, the Philippines had been suggested to take “stronger action”? But how?

The populist perspective fundamentally ignores the fact that this issue is PRIMARILY about China’s DOMESTIC policies and NOT of ours.

It is the issue of FOREIGN POLITICAL relations.

If the US hasn’t been able to successfully compel China to alter her exchange rate policies (to resolve so called global imbalances) or on other contentious geopolitical issues as the UN environment saving program called the Kyoto Protocol, how the heck can we expect that the Philippines implement “stronger action” on China to save the felons-turned-victims?

As an aside, I don’t have the full knowledge of the circumstances behind this case for me to pass any judgments. I can only deduce from what I read or hear. So I am neutral on this.

So aside from geopolitical relations, the other very important issue is the FALSE impression that the Philippine political leadership can do something at all. This is an example of the religion of politics-the errant belief that government CAN and HAS to do SOMETHING.

Where the local political leadership can hardly control or manage domestic political issues, like the Congressional impeachment of the Ombudsman Merceditas Gutierrez or for many other matters, how can we expect the Philippine government to WANGLE her interests over China? Wage war as my neighbor implied?

The fact is that territorial borders IMPOSE a limit on the sphere of political power influence of the Philippine government.

This also means that the political priorities of the Chinese government will determine the fate of the Filipino drug mules and NOT the Philippine government (as had been the case).

The most we can do is to perhaps appeal—which is what the government did! But this serves no more than as photo OP and as advertisement mileage for politicians.

But in the realization that the Chinese government has been the largest practitioner of the death penalty, mostly applied to their own citizens, Filipinos shouldn’t expect much even from the government’s appeal.


As the Economist reported (bold emphasis added)

CHINA executes more of its own citizens than any other country, and more than all others in the world combined. “Thousands” of Chinese were executed in 2009 according to Amnesty International's annual study, which states that an exact number is impossible to determine because information on the death penalty is regarded as a state secret. But this gruesome record may yet change. The National People's Congress is reported to be reducing the number of offences that are punishable by execution. Among the crimes that currently carry the death penalty are bribing an official and stealing historical relics

Fatalities from China’s death penalty have even been far larger than the composite deaths of the whole world!!!

I’d like to add that there are reportedly some 125 cases of Filipinos scheduled to be executed elsewhere in the world where 85 are allegedly drug related cases, so why pick on China?

I am not a defender of the incumbent administration. But the essential point over this controversy is that the mainstream and the gullible public don’t seem to realize that this is a foreign policy issue, subject to the whims of China’s political leadership regarding the implementation of local rules on our supposedly erring immigrants or OFWs. This is also the issue of China's political and legal system.

This isn’t an issue of nationalist schism.

Importantly, this unfortunate event exposes on the grand delusion that the government CAN do something WHEN they can’t.

Filipinos abroad should realize that they are subject to political risk environment of their host countries that are vastly different than here, and must learn to safeguard their interest than rely on the government.

All the drivel from politicians about more spending to augment legal services for OFWs represent as mere ‘feel-good-vote-buying’ postures. Remember we don’t share the same legal process, institutions or framework with China, thus any assumption for more legal spending would likely only translate to waste.

Finally, when I asked the above question to the media indoctrinated youth, he simply turned around and walked away.

UPDATE: (I forgot to include this)

What happens if the Philippine government does successfully negotiate the mitigation of the sentences of the accused? Would this not serve as moral hazard that could encourage more drug related trades?

It is bad enough for us to expect our government to patently interfere with many aspects of our lives. But it is even worst to believe that our government has to intervene into the lives of people who lives beyond our borders.

Tuesday, March 29, 2011

The US Energy Consumption Story: Americans Are Better Off Today

The US Energy Information Administration (EIA) reports, (emphasis mine)

While most home appliances have become more efficient over the past 30 years, the average U.S. household uses many more consumer electronics —in particular, personal computers, televisions and related devices, according to data released today by the U.S. Energy Information Administration (EIA) in the latest update to its Residential Energy Consumption Survey.



EIA on Household Devices

US households have increasingly been using more luxury items and convenience related devices than in the past.

Appliances and Electronic devices accounted for 31% of energy use in 2005 than in 1978 where energy use accounted for 17%. Moreover, air conditioning and water heating likewise reveal of the same story where energy use has materially increased today (8% for aircon and 20% for water heating), than in the past (3% and 14%).


EIA on Energy Intensity

And since energy intensity has been materially declining, this translates to even more intensive use of these devises.

This also is a great example of the Jevon’s paradox at work, which according to is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.

clip_image004 on Jevon’s Paradox

Bottom line: Compared to the views of the permabears, gains from increased fuel efficiency and technological progress (brought about by capitalism) highlight the fact that American living standards have vastly improved over the past years, despite the stagflation, recessions and financial crisis.

Earth Hour And Reality

Bjorn Lomborg writes, (bold highlights mine)

When we switch off the electricity, many of us turn to candlelight. This seems natural and environmentally friendly, but unfortunately candles are almost 100 times less efficient than incandescent light bulbs, and more than 300 times less efficient than fluorescent lights. Using one candle for each extinguished bulb cancels the CO2 reduction; two candles emit more CO2.

That’s basically the law of unintended consequence at work. Populist political ‘feel good’ actions tend to defeat the noble intentions which it tries to achieve in the first place.

The economic implications is that:

First, we get inefficient and more costly ‘alternative’ energy (this reduces people’s purchasing power—thus we become POORER). Making us poor saves the environment (duh!).

Second, atavistic lifestyles poses more environmental hazards than the current one.

As a Latin proverb goes, Aegrescit medendo or the cure is worse than the disease...

Euro: Geopolitics Over Economics

Austrian economist Dr. Antony Mueller writes, (bold highlights mine)

“the fact that the euro is more a political than an economic project. Even more: the euro is an instrument to (re)gain geopolitical power for the Europeans. In other words: the euro is an imperial tool. In this respect bad economics is a given. The euro does have moral hazard effects...Yet the main point is that the euro project itself is hazardous game. Bad economics would no longer matter if the gamble will succeed. Current losses would be recouped a thousandfold just if oil were traded in euros or partly in euros. As of now it is already a fact that no far-reaching decision concerning the international monetary order can be taken against the will of the leaders of the eurozone. On a net basis, and even with the costs of the current sovereign debt crisis included, the euro has been beneficial for the whole region and beyond.”


Global foreign currency reserve from wikipedia

The time consistency dilemma of money that has been engineered for geopolitical incentives has limits. True, the euro has been gaining market share at the expense of the US dollar in terms of foreign currency reserves but the gains will always be relative.

Yet any political environment that thrives under bad economics will have interim benefits but eventually suffer from the recoil of the imbalances borne out of such bad policies. The euro or the yen or the yuan or the Philippine peso will not escape this basic economic laws at work. There is no free lunch.

To add, the perspective of politics over economics has been the path dependent policy approach employed by current crop of policymakers globally. In other words, interpreting actions by policymakers to address economic problems may not entirely be valid. Economics may just be a front or a cover for other ulterior political motivations that drives the decision making process of the political authorities as the Euro.

To quote economist Thomas Sowell,

Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do-- and nothing is more unpredictable.

The Religion of Politics

Most people see the state as a “be-all and the end-all” or signifying both the ‘means’ and the ‘end’ of our existence. That’s why the flow of communications—reporting, reasoning, narratives, conversations and etc.—mostly revolve around the basic premise where the state has been deified as our messiah.

Libertarian Frank Chodorov exposes the myth of this mentality...(bold emphasis mine)

The weakness of the State lies in the fact that it is but an aggregate of humans; its strength derives from the general ignorance of this truism. From earliest times the covering up of this vulnerability has engaged the ingenuity of the politician; all manner of argument has been adduced to give the State a suprahuman character, and rituals without end have been invented to give this fiction the verisimilitude of reality. The divinity with which the king found it necessary to endow himself has been taken over by a mythical 51 percent of the electorate, who in turn ordain those who rule over them. To aid the process of canonization, the personages in whom power resides have set themselves apart by such artifices as high-sounding titles, distinctive apparel, and hierarchical insignia. Language and behavior mannerisms — called protocol — emphasize their separateness. Nevertheless, the fact of mortality cannot be denied, and the continuity of political power is manufactured by means of awe-inspiring symbols, such as flags, thrones, monuments, seals, and ribbons; these things do not die. By way of litanies a soul is breathed into this golden calf and political philosophy anoints it a "metaphysical person."

You can see such dynamic at work in populist themes such as Earth Hour, anthropogenic global warming, global imbalances and other national sensational issues such as corruption et. al.

For every social problem, the reductio ad absurdum or what I call the three monkey solution approach has always been for government

1) to tax or to regulate someone else (definitely never the proposer),

2) to change the people (what I call personality based politics or a system of musical chairs) and

3) to throw money at the problem (which is why paper money exists).

Hardly anyone infers on the issue that the state itself or the laws from which the state has founded its existence could be the source of imbalances. And in saying so, this would be tantamount to blasphemy. The price for truth is ostracism when it should be the other way around as Mr. Chodorov argues.

Yet George Washington told us why the state should not be seen as our messiah...

Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master.

Monday, March 28, 2011

Video: How Video Will Reinvent Education

I've been saying that the third wave (or the information age) will bring about massive structural changes in how we do things.

Salman Khan in his talk at the TED explains how video will 'humanize' the classroom [via P2P tutoring collaboration etc..] which should reduce the one-size-fits all programs from which the current system operates on.

Great stuff (hat tip: Arnold Kling)

Crony Capitalism: Japan’s Nuclear Industry

Japan’s nuclear industry has been a product of crony capitalism.

Writes Shikha Dalmia, (hat tip: Matt Ridley) [all bold highlights mine]

But nuclear appeals to Japan’s mercantilist rulers, who, since the mid-’60s, have regarded the country’s lack of indigenous energy resources as a major strategic vulnerability that must be corrected at all cost. They have committed themselves to increasing Japan’s energy independence ratio from the current 35 percent to 70 percent by 2030. “We can no longer rely on the market to secure energy,” declared Koji Omi, chairman of the Liberal Democratic Party’s Energy Security Committee, a few years ago. “We should put much more emphasis on energy as our nation’s strategy.”

Such thinking has prompted Japanese lawmakers to push nuclear more aggressively than street vendors hawking broken Mao watches in Tiananmen Square. From 1990 to 2000, nuclear’s share of Japan’s energy mix has gone from 9 percent to 32 percent.

To get there, Japan has poured lavish subsidies into nuclear, starting with research. Around 65 percent of Japan’s energy research budget goes toward nuclear — the highest of any country — with the industry spending $250 million, well below 10 percent of what the government spends. Even France, which gets 80 percent of its energy from nuclear, spends three-and-half times less than Japan.

Beyond research, the government offers the nuclear energy industry loans that are a full percentage point below commercial levels. And for four decades, Japan has taxed the utility bills of electricity consumers, distributing the proceeds to communities willing to house nuclear plants. In essence, nuclear’s competitors are being forced to act against their own interest to bribe local communities to accept a risk against the communities' interest.

But the mother of all subsidies is the liability cap that nuclear enjoys. In the event of an accident, the industry is on the hook for only $1.2 billion in damages, with the government covering everything beyond that. Japan’s cap is generous even by American standards, which require the industry to cover $12.6 billion before Uncle Sam kicks in. (Nuclear proponents in the U.S. argue that this liability cap is necessary given our insane tort awards. However, the fact that even countries without such awards have to offer a liability cap suggests that nuclear technology is not yet considered safe enough to be viable.)

The liability cap effectively privatizes the profits of nuclear and socializes the risk. It uses taxpayer money to diminish the industry’s concern with safety — which government regulations can’t restore. In 2008, Tokyo actually started offering bigger subsidies to communities that agreed to fewer inspections. The problem of regulatory capture is particularly endemic in Japan given that regulators seek industry jobs upon retirement, and hence often cozy up to companies they are supposed to oversee.

When politics become the masters instead of the consumers, it is of no doubt why safety has been compromised.

Social Inequality: The Anatomy of Plutocracy

One of the most popular misimpressions or smear campaign tactics directed against free markets or laissez faire capitalism is that such a system promotes a political order known as plutocracy-or the rule of the wealthy.

This idea either lacks the comprehensive understanding of capitalism or simply operates on the premises of deliberate equivocation (propaganda).

The Consumer Reigns In A Laissez Faire System

In the laissez faire political economic order, it is the consumer that ALWAYS reigns supreme.

Consumers ultimately determine who to reward (by profits) and who to punish (by losses). Thus, the wealthy are those entrepreneurs who manage to continually satisfy the ever dynamic desires of consumers.

As the great Ludwig von Mises wrote, (bold highlights mine)

In the capitalistic society, men become rich — directly as the producer of consumers' goods, or indirectly as the producer of raw materials and semiproduced factors of production — by serving consumers in large numbers. This means that men who become rich in the capitalistic society are serving the people. The capitalistic market economy is a democracy in which every penny constitutes a vote. The wealth of the successful businessman is the result of a consumer plebiscite. Wealth, once acquired, can be preserved only by those who keep on earning it anew by satisfying the wishes of consumers.

In addition, market dominance is neither guaranteed nor in a state of permanence because consumer desires always changes.

Importantly, the highly competitive nature of markets impels entrepreneurs to attain excellence by exploiting windows of entrepreneurial opportunities.

As Professor Israel M. Kirzner writes, (bold highlights mine, italics Prof Kirzner)

What makes possible the entrepreneurially driven process of equilibration is active market competition. It is only the possibility of unrestricted entrepreneurial entry which permits more alert entrepreneurs to deploy their superior vision of the future in order to correct the misallocations of resources reflected in the false prices which characterize disequilibrium. It is the continual threat of such entry which tends to keep incumbent entrepreneurs alert and on their toes.

A good example of such process can be seen from how Apple, the technology behemoth company, has attained its present dominance.


Apple’s Sphere of Influence From

Apple’s success wasn’t granted by fiat orders from political leaders but from its numerous attempts to satisfy consumer demands via competition derived innovative consumer friendly technology devices.


The above is an example of one of the many failed Apple products (chart and the rest of the story from Minyanville). In other words, Apple’s recent string of successes came at the cost of her previous failed experiences or experiments.

I have recently noted on how Mattel, makers of the famous Barbie dolls, has closed shop in China for failing to adapt to local tastes and how Philippine conglomerate Jollibee has captured the largest market share in the Philippine fast food industry by toppling US based counterpart McDonald’s by ingenously configuring her products to the palate of Filipino consumers.

The point is—the political economic order of the rule of the wealthy (plutocracy) would NOT sustainably persist or would unlikely occur under a pure laissez faire system.

State And Crony Capitalism Equals Plutocracy

The apologists for statism, who see Plutocracy as the main source for inequality, hardly realize that for the wealthy to politically sustain its dominance means to adapt ANTI-COMPETITIVE measures by co-opting with the political leaders.

Writes Art Carden (bold highlights mine)

Bourgeois riches come from customer service. Aristocratic riches are expropriated. Aristocracy rests on intrinsic value whereas capitalism rests on the exchange of value for value.

Libertarian William Graham Sumner wrote, (bold highlights mine)

[M]ilitarism, expansion and imperialism will all favor plutocracy. In the first place, war and expansion will favor jobbery, both in the dependencies and at home. In the second place, they will take away the attention of the people from what the plutocrats are doing. In the third place, they will cause large expenditures of the people's money, the return for which will not go into the treasury, but into the hands of a few schemers. In the fourth place, they will call for a large public debt and taxes, and these things especially tend to make men unequal, because any social burdens bear more heavily on the weak than on the strong, and so make the weak weaker and the strong stronger. ("Conquest of the United States by Spain.")

And it has not been different here in Southeast Asia, Joe Studwell writes, (as I earlier quoted here)

Centralized governments that under-regulate competition (in the sense of failing to ensure its presence) and over-regulate market access (through restrictive licensing and non-competitive tendering) guarantee that merchant capitalists-or asset trader, to use a more pejorative term-will rise to the top by arbitraging economic inefficiencies created by politicians. The trend is reinforced in South-east Asia by the widespread presence of what could be called as ‘manipulated democracy’, either in the guise of predetermined winner democracy (Singapore, Malaysia, Suharto’s Indonesia) or else in the scenario where business interest gain so close a control of the political system that they are unaffected by the changes of government that do occur (as in Thailand and the Philippines). In both instances politicians spend huge sums to maintain a grip on power that has some semblance of legitimacy. This can only be financed by through direct political ownership of big business or more usually, contributions from nominally independent big business that is beholden to politicians. Whichever, the mechanism creates a not entirely unhappy dependence of elites between politicians and tycoons.”

If Confucius once said that ‘give the man a fish you feed him for the day, teach him to fish and you feed him the rest of his life’.

From a political standpoint, libertarians and classical liberals advocates on the method that teaches the man how to fish, so as to make him productive to the society.

Whereas for statists, who along with politicians, will naively insist on feeding the man for the day (moment), by picking on someone else's pocket, supported by a legalized coercive framework that are enabled or facilitated by a politically constructed paper money system, which from the account of the entire history of man’s attempt to produce political nirvana has always failed.

Yet such accounts for exactly the Anatomy of Plutocracy.

Any political economic order which depends on political privileges or distribution of resources—endowments, protectionism, subsidies, bailouts, behest loans, economic concessions et. al. represents NOT a laissez faire system but a political system known as STATE CAPITALISM or CORPORATISM or CRONY CAPITALISM. The important difference is that consumers in a laissez faire system represents as real power, whereas politicians signify as the most powerful agents in the state capitalist order.

In today’s setting, the cooptation of the banking cartel-military industrial complex-green industrial-government labor union-welfare state-central banking system (in the US or elsewhere) are representative of PLUTOCRACY IN ACTION!

As the great Milton Friedman said in this lecture,

A society that aims for equality before liberty will end up with neither equality nor liberty. And a society that aims first for liberty, will not end up with equality but will end up with a closer approach to equality.

Bottom line: Statism or government interventionism, which enables or sustains a political economic order of plutocracy, is what engenders social inequality. The more societies politically organize herself towards attaining social equality, the more inequality gets amplified.

Here, noble intentions and economic reality are separated.

Pornography: How Social Signalling Beats Prohibition Laws

A major reason why pornography can’t be stopped at all by prohibition laws has been poignantly captured by this New York Times article... (all bold highlights mine)

Around the country, law enforcement officials and educators are struggling with how to confront minors who “sext,” an imprecise term that refers to sending sexual photos, videos or texts from one cellphone to another.

But adults face a hard truth. For teenagers, who have ready access to technology and are growing up in a culture that celebrates body flaunting, sexting is laughably easy, unremarkable and even compelling: the primary reason teenagers sext is to look cool and sexy to someone they find attractive.

Indeed, the photos can confer cachet.

“Having a naked picture of your significant other on your cellphone is an advertisement that you’re sexually active to a degree that gives you status,” said Rick Peters, a senior deputy prosecuting attorney for Thurston County, which includes Lacey. “It’s an electronic hickey.”

One: This is not even an issue of commerce but of voluntary exchanges by a niche community where self esteem is at stake.

Two: Some people see pornography as a way to project personal issues-here sexuality in order to command social attention! Yes I know they are minors, but this doesn’t mean they are amoral or can’t distinguish between right and wrong. For them, social acceptance serve as their highest personal priority (value preference) to fulfil.

So what is construed as generally an immoral act is seen by some as a tool to broadcast social status—whereby consensual participants see such as acts as providing social “utility”.

In short, morality is subjective.

Three: This serves as example why it is an act of futility to legislate away exchanges between willing and voluntary suppliers, and eager audiences.

Legislating away self-esteem needs won’t solve this issue.

Four: I would say that perhaps most people are NOT engaged in voluntary exchanges like non-commercial pornography, yet the political imperatives (like the undertone of the article) are directed towards using the fallacy of composition as an instrument towards exercising political censorship.

In short, deviant behaviour of some segments of the society will be used as an excuse to control the public’s flow of information. The implied message is to shoot the messenger (cellphones, web, etc…) when the problem is one of behaviour.

Saturday, March 26, 2011

Misanthropic Earth Hour, Redux

Hardly anyone really realizes that celebrating Earth hour is about glorifying misanthrope-hatred of mankind.

The underlying belief is that man, through free markets, cannot be trusted to be responsible or to account for his wellbeing or for his neighbors.

And thus, safekeeping environments have to be politically mandated. In other words, our behavior must be controlled politically to save the environment (Never mind if we starve to death, the important thing is to save the environment, got it? Yeah what is the environment if we are all dead anyway?)

Here is what I wrote last year….

Many of the locals have reportedly joined the celebration of Earth Hour.

Many have done so because like elections, they are there for "symbolism". It is more about social fad and peer pressure. Most of these participants hardly know of the economic and political implications and the attendant "costs" of what "earth hour" is about, and to whose benefit such policies would bring about.

Think of it, why does everyone seem to protest when prices of energy goes up, when high prices, in the real world, should spur "conservation" or a shift in consuming patterns?

So almost like everything else popular, seductive soundbites make it appear that the solution to environmental predicament is just a matter of allegorical representation or popular appeal, devoid of economic truths.

Nevertheless, we have a great example of earth hour as a permanent policy-North Korea!

According to a 2006 Daily Mail report, (picture above)

``The regime in the north is so short of electricity that the whole country is switched off at 9 p.m. - apart from the capital of Pyongyang where dictator Kim Jong-il and his cohorts live in relative luxury. But even there, lighting is drastically reduced.

``The result, as shown in this picture taken one night earlier this week, is a startling contrast between the blacked-out north and the south, which is ablaze with light, particularly around major cities and the capital, Seoul, in the north-west of the country." (bold highlights mine)

Professor Don Boudreaux makes this fitting comment ``the Dear Leader – like his father before him – works tirelessly to keep his nation’s carbon footprint to a bare minimum; in fact, if you look carefully you can see what is likely his, and only his, office light glimmering in Pyongyang.

``North Koreans show their reverence for mother nature not with a mere Earth Hour but, rather, with an entire “Earth Lifetime.”
Earth Hour, in the mainstream perspective, means bringing back societal order to the medieval eon. It means socialism. Just ask North Korea's Kim.

In short, Earth Hour represents the creed of atavism or the sham of regressing life conditions based on the paradigm of medieval times.

In addition, the Earth Hour meme represents an unwavering faith over computer based models, which has been proven majestically wrong time and again, like Japan’s failure to predict on the earthquake-tsunami-nuclear calamity.

Computer based climate models have been used as justification to grab a substantial pie of taxpayer funded privileges for the benefit of the political class. As well as, a means to expand political power which exerts control over large swathes of industries that shifts economic privileges to politically favored “green” industries (like Al Gore). In short, earth hour promotes crony capitalism and corruption. (Yes we will all be dead except for the politicians, bureaucrats and their cronies who will live this world as their own private Edens)

Remember, (noble) intent and (economic) reality are different.

Earth Hour represents no less than a big time propaganda-hoax, which tragically, many dimwits continue to fall for.

Markets Operate Under The Hayekian Knowledge Framework

Markets, acting on and coordinated by information, are likewise distinct, dispersed and localized.

Winnie Phua of Matthews International Capital Management, LLC writes about the recent closure of the popular Barbie in China, (bold highlights mine)

The sudden closure of the Barbie store left many consumers baffled. The U.S. toy maker has stated that it is reorganizing its China strategy. Others, however, argue that the store is closing because Barbie’s classic western appeal has not caught on in China where girls tend to prefer cute animated characters, such as Hello Kitty, over a womanly life-like doll. Barbie’s price point (US$15 to US$30) has also been criticized as too high, particularly for a toy with limited brand recognition or nostalgic factor for parents who hold the purse strings. Other similar dolls can be purchased online with complete wardrobe sets for as little as US$8.

Mattel’s closure of the store highlights the fact that brand power enjoyed by well-known brands in the West may not always guarantee their success in the East. It also reiterates the importance of localizing products and services when expanding in new markets. Home Depot, the U.S. retailer of home improvement and construction products, for example, entered China in 2006 but has been shuttering stores due to low demand from local residents. The “Do-it-Yourself (DIY)” concept apparently has not resonated well with Chinese consumers as migrant laborers offer easily available and cheap construction needs for many urban residents.

This reminds me of the great Friedrich von Hayek who wrote of the "The Use of Knowledge in Society" (bold highlights mine)

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Bottom line: Today’s marketplace emphasizes on the importance of dispersion, uniqueness or specialization and its localized nature. This means that fundamental corporate marketing strategies must be designed around Hayek’s Knowledge framework.

More On The Krugman Inflation Spiel

In my earlier post where I argued that Paul Krugman appear to be conditioning his readers for a possible reversal in his ‘deflation’ stance, I forgot to put on some charts which Mr. Krugman has referred to.

I would like to reiterate, “Such shell game is happening NOW!”

Krugman says,

So we’re talking about a monetary base that rises 12 percent a month, or about 400 percent a year.

Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.

Let’s do away with the %. Here is the state of the adjusted Monetary Base...


…which apparently is in a VERTICAL spike! (chart from St. Louis Federal Reserve)

Here is the composition of the Fed’s balance sheets...


This from the Wall Street Journal Blog, (bold highlights mine)

Assets on the Fed’s balance sheet expanded to around $2.566 trillion in the latest week from $2.403 trillion at the end of 2010. Nearly all the additions this year have come from new Treasury purchases — some $164 billion in the past three months. The Fed announced earlier last year that it will purchase an additional $600 billion of Treasurys through June in addition to previously announced purchases with money reinvested from its MBS portfolio.

Though the overall size of the balance sheet is continuing to increase, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds nearly $1 trillion in MBS, but now owns more Treasurys — over $1.28 trillion.

And here is the Wall Street Journal on what’s driving inflation expectations.... (bold highlights mine)


Inflation, once believed dead, is showing a pulse. While price increases are unlikely to become rampant, consumers are lifting their inflation expectations, and more businesses are marking up their selling prices to recoup input costs.

Signs of life for inflation come at a time when the Federal Reserve has to weigh the potential impacts from the Japan tragedy and Middle East unrest.

To be sure, Thursday’s data on the consumer price index showed inflation remains well within the Fed’s preferred target of about 2%. Total prices, pushed up by higher food and energy, increased 2.1% over the year ended in February, while core inflation — which ignores food and fuel — was up a milder 1.1%.

Even so, higher commodity costs are starting to influence the outlook.

As earlier pointed out,

True, food prices signify a minor component in the household expenditure pie for developed economies. But that doesn’t mean that rising oil, food and commodity prices won’t spillover to the rest of the economy. Eventually they will!

Regular readers of this blog know that we have been pounding the table on this pathology known as inflationism—since 2008

Such as this

Our point is simple; if authorities today see the continuing defenselessness of the present economic and market conditions against deflationary forces, ultimately the only way to reduce the monstrous debt levels would be to activate the nuclear option or the Zimbabwe model.

And as repeatedly argued, the Zimbabwe model doesn’t need a functioning credit system because it can bypass the commercial system and print away its liabilities by expanding government bureaucracy explicitly designed to attain such political goal.

Or this (2010) and this and this (stages of inflation-2009) or my $200 oil forecast (2009) and many more also here and here

False religion eventually get to be exposed. The Emperor has no clothes.

Symptoms of Crony Capitalism: Soaring US Financial Profits

This is exactly how crony capitalism looks like.

Following massive support from the US government, US financial firms posts huge profits.


From the Wall Street Journal, (bold highlights mine)

During the darkest days of the financial crisis, when Lehman Brothers and Washington Mutual went belly up and the U.S. government had to bail out other institutions, the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data.

Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Wall Street and banking critics have pointed out the finance industry enjoys government supports not given to other companies. That includes the low cost of funds from the Federal Reserve. As a result, critics say, the U.S. economy is overly skewed toward finance.

Aside from the bailouts and behest loans, the Federal Reserve’s QE programs have had a big influence on this swelling of corporate profits.

Writes Peter Schiff, (bold highlights mine)

But another very large chunk of Treasuries go to "primary dealers," the very large financial institutions that are designated middle men for Treasury bonds. In a late February auction, these dealers took down 46% of the entire $29 billion issue of seven year bonds. While this is hardly remarkable, it is shocking what happened next.

According to analysis that appeared in Zero Hedge, nearly 53% of those bonds were then sold to the Federal Reserve on March 8, under the rubric of the Fed's quantitative easing plan. While it's certainly hard to determine the profits that were made on this two week trade, it's virtually impossible to imagine that the private banks lost money. What's more, knowing that the Fed was sure to make a bid, the profits were made essentially risk free. It's good to be on the government's short list.

So what we essentially have is a redistribution of resources from the real economy to the financial sector.

This is rent-seeking.

The essence of which is, as explained by Alfred Nobel Prize winner Professor James M. Buchanan,

“it extends the idea of the profit motive from the economic sphere to the sphere of collective action. It presupposes that if there is value to be gained through politics, persons will invest resources in efforts to capture this value. It also demonstrates how this investment is wasteful in an aggregate-value sense.

Such is the essence of government interventions or the political distribution of resources via state capitalism. Winners are the politically endowed (concentrated) while losses are distributed throughout the system.

The Inflation Spiel From Paul Krugman

Keynesian high priest (and Nobel awardee) Paul Krugman appears to be conditioning the public of a possible turnaround in his outlook!

He writes,

The Fed could directly finance the government by buying debt, or it could launder the process by having banks buy debt and then sell that debt via open-market operations; either way, the government would in effect be financing itself through creation of base money. So?

Well, the first month’s financing would increase the monetary base by around 12 percent. And in my hypothesized normal environment, you’d expect the overall price level to rise (with some lag, but that’s not crucial) roughly in proportion to the increase in monetary base. And rising prices would, to a first approximation, raise the deficit in proportion.

So we’re talking about a monetary base that rises 12 percent a month, or about 400 percent a year.

Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.

I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

At this point I have to say that I DON’T EXPECT THIS TO HAPPEN — America is a very long way from losing access to bond markets, and in any case we’re still in liquidity trap territory and likely to stay there for a while.

Krugman admits that the Fed can directly “finance the government by buying debt” and indirectly “launder the process by having banks buy debt” which can cause HIGH inflation.

But yet he engages in subtle sophism by saying this won’t happen for as long as the US has access to bond markets—”very long way from losing access to bond markets”.

Obviously losing access to bond markets isn’t the issue, if the Fed continues to buy US debts!

And that’s exactly what the Quantitative Easing (QE) programs are for. And QE represents no more than a shell game. In other words, such shell game is happening NOW!

Here is the statement of the US Federal Reserve announcing QE 2.0 last November (CNN Money)

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The point is as Krugman continues to talk of inflation he prepares the public for that dramatic announcement where he’d probably mimic his idol, “When the facts change, I change my mind. What do you do sir?”

This should represent another MAJOR failure of the macroeconomic paradigm.

Friday, March 25, 2011

Graphic: Rule Of Law

Again from the ever creative mind of Jessica Hagy, a wonderful graphic depiction of social cooperation based on the rule of law. (From Indexed Be Nice; Stop plundering and looting)


Markets In Everything: Booming Sales of Underground Shelters

Markets always find ways to address people's demand for almost anything, such as demand for safety from fear of catastrophe or war.

The video below (from CNN/Mark Slavo) shows of the booming sales for bunker shelter....

The Politics Behind The UN’s No Fly Zone On Libya

The Economist has a dainty interactive graph which spells out on the diversified political incentives (interests) by nations that has participated in enforcing the UN’s No Fly zone

FRANCE and Britain led the diplomatic push for military action against Libya. The Arab League's vote, on March 12th, to call on the United Nations to enforce a no-fly zone was crucial in securing international legitimacy. The Americans were initially hesitant but were eventually won around. So much is familiar to observers of the unfolding Libya story.

Press on the country and the explanation appears.

In my view, the biggest incentive is this…

Default template

Graph also from the Economist

Outside the Arab League, perhaps the strongest incentive to intervene in Libya’s internal strife has been about oil geopolitics.

The other possible reason could be due to the earlier faux pas in foreign policy by some of the major participants.

Celebrating The Declining Influence of Luddism and Blogging

I will be blogging a little lot less over the coming days as two of my children will be having their graduation rites and I will be entertaining my mother who is a resident of Hong Kong and who also came to attend these ceremonies.

Nevertheless here is a quote from Professor Don Boudreaux on the declining influence of Luddism (bold emphasis mine)

This year marks the 200th anniversary of the birth of Luddism. In the early 19th century, many Brits worried that increasing mechanization of the textile industry posed an unfair disadvantage to flesh-and-blood workers. Many of these technology skeptics, known as "Luddites," destroyed machinery in an effort to protect flesh-and-blood workers from the competition of Technologia's workers.

Luddism, thankfully, is today embraced only by a small group of delirious romantics longing for imaginary pastoral bliss.

Hopefully, protectionism will soon go the way of Luddism, freeing us from the superstition that trade with foreigners is less enriching than is trade with fellow citizens.

As people get to realize and adapt more of what represents as a genuine workable way to prosperity via free trade, protectionism grounded on the fantasies of Luddism will hopefully fade away too.

Thursday, March 24, 2011

Video: Understanding The Difference Between Private and Public Enterprises

Dr. Robert Murphy explains the fundamental difference between private businesses and public enterprises.

Falling US Home Sales Points To QE 3.0

The Reuters reports,

Sales of new U.S. homes sank to a record low in February and prices were the weakest since December 2003, showing the housing market slide was deepening.

The Commerce Department said on Wednesday sales of new single-family homes dropped 16.9 percent to a seasonally adjusted 250,000 unit annual rate, the lowest since records began in 1963, after a 301,000-unit pace in January.

The following charts from Northern Trust....



As I earlier wrote

Under enfeebled housing conditions, a failure to continue with the QE amplifies the risks of falling housing prices thereby jeopardizing the fragile state of the US banking system

Looks like Quantitative Easing (QE) 3.0 is underway

Global Equity Markets: China Grabs Second Spot (In Terms Of Market Cap)

In February of this year, China surpassed Japan as the second largest economy in the world.

Recent events have likewise altered China’s ranking in the global equity markets (in terms of market capitalization) where China has snatched the second place from Japan.

The US remains on top as the largest equity market in the world, but has seen a steady decline in terms of market share. Most of this decline has been due to the outperformances of many emerging market bourses.

According to Bespoke Invest, (table and charts from Bespoke)


Japan's stock market declined nearly 20% in the days immediately following the tragic earthquake that hit the country on March 11th. While Japanese equities have bounced back a bit, the fall allowed China to surpass Japan in terms of percentage of world market cap.

...As shown, the US continues to hold onto the number one spot by a wide margin at 30.43%. Japan had the second largest market cap in the world at the start of the year, but China has now surpassed Japan and currently ranks second. China currently makes up 7.38% of world market cap, while Japan makes up 7.05%. The UK ranks fourth at 6.49%, followed by Hong Kong (4.77%), Canada (4.38%), and France (3.59%).

The following charts depict on the long process of how China surpassed Japan...


Basically the divergent performances can be seen as Japan’s stagnation vis-a-vis the Chinese juggernaut.

China’s elevated ranking in the global equity markets has aligned with her economic standing relative to the world--a manifestation of shifting wealth distribution.

Wednesday, March 23, 2011

Rising Inflation Expectations: Why Macro Economists Can’t See It Coming

This is an example why macro-models used by mainstream experts don’t get it.

From the Wall Street Journal Blog (bold emphasis mine)

The Federal Reserve expects higher price pressures to be “transitory.” But other economic players aren’t so sure.

A new survey of finance professionals done by J.P. Morgan shows core inflation expectations are rising around the world.

In the U.S. specifically, the mean response is that core inflation, as measured by the consumer price index excluding food and energy, will be running 1.8% a year from now. That is up from 1.4% when the survey was last done in November and up from February’s actual reading of 1.1%. The survey polled about 750 respondents, with about 40% from North America.

The report notes the recent jump in oil prices and the longer-running increase in commodity prices may be skewing responses. But the report notes core inflation rates have already been rising in the U.S. and the U.K.


Core inflation expectations have long been rising around the world! Don’t these experts see that the REVOLTS in the Middle East have partly been triggered by record food prices??!!!


Chart from Business Insider

Next, price pressures are “transitory”???!!!

The IMF even says that people should get used to high food prices for all other reasons except macroeconomic government policies. The IMF is part of mainstream macro.

From the Bloomberg,

Consumers should get used to paying more for food, after prices rose to a record, because farmers will take years to expand production enough to meet demand and drive down costs, the International Monetary Fund said.

People in developing countries are becoming richer and eating more meat and dairy, meaning more grain for livestock feed and land for grazing animals, Thomas Helbling, an adviser for the IMF’s research department, and economist Shaun Roache wrote in an article. Rising demand for biofuels and bad weather also tightened supply, they said.

“Rising food prices may be here to stay,” Helbling and Roache wrote in the article published in the agency’s Finance & Development magazine. “The main reasons for rising demand for food reflect structural changes in the global economy that will not be reversed.”

True, food prices signify a minor component in the household expenditure pie for developed economies. But that doesn’t mean that rising oil, food and commodity prices won’t spillover to the rest of the economy. Eventually they will!


Chart from Northern Trust

When models try to isolate variables from people’s action (like isolating food and energy from inflation index as shown above-right window), then experts tend to underestimate real social activities, like inflation.

People do not act based on one or two or select variables. Our actions are bundled, as I previously wrote

We cannot isolate one variable from the other. People’s actions are responses to an ever dynamic “bundled” environment shaped by laws, markets, culture, environment, etc...

Bottom line: macroeconomics tends to deal with superficial issues that are bottled up in laboratory environment models rather than lay blame on what truly causes CPI inflation—inflationism (low interest rates and money printing) and interventionism (price controls, subsidies and etc..).