Friday, September 30, 2011

Will IMF’s bailout of Euro Reach $ 3.5 trillion?

From the Daily Mail,

Christine Lagarde, the managing director of the IMF, said the current war chest of around £250billion ‘pales in comparison with the potential financing needs of vulnerable countries’ and needs to be expanded to deal with ‘worst-case scenarios’.

Sources in Washington said the IMF’s pot of cash could be expanded to £2.6trillion although officials in London said that figure looked ‘incredibly high’.

Mrs Lagarde’s warning came as U.S. President Barack Obama said the debt crisis in Europe was ‘scaring the world’ and that eurozone leaders were not dealing with the issue quickly enough.

And a top Bank of England economist urged leaders around the world to stop the world plunging back into recession. ‘It’s doing something rather than just saying something that counts,’ said Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee charged with setting UK interest rates.

Danger: U.S. President Barack Obama said the debt crisis in Europe was 'scaring the world'

Britain is liable for 4.5 per cent of IMF funding – meaning it would have to contribute around £115billion to an enlarged bailout fund, or £4,600 per household.

It is conceivable that figure may turn out to be slightly lower because Britain’s share is falling as rapidly growing economies such as China contribute more.

Britain has already handed over £12.5billion in emergency loans to Greece, Ireland and Portugal to help prop up the euro.

The staggering rescue package proposed by the IMF signify that the rest of the world will be included. This would be led by the United States which reinforces their backdoor participation (aside from the monetary channels).


( IMF)

And the proposed bailout implies of the inclusion of ASEAN and the Philippines with 3.94% voting share.


IMF: IMF Executive Directors and Voting Power

Yet such humongous bailout scheme, if it does become a reality, would adversely impact global economic growth as resources are shifted from productive use towards saving the skins of Euro bankers and the political class. Filipinos will pay for this with higher taxes or inflation.

Moreover, there are no guarantees that shock and awe bailout tactics will work over the medium term or the long term. Just look at what has been happening to the US, whose economy continues to flag despite the trillions of dollars expended by the US Federal Reserve and the US government.

Also, by funneling large amounts of resources to current rescue programs, the world would have depleted or drained their resources should another crisis arise anytime.

Lastly, the use of scare tactics to secure political deals, seem to be acknowledged by politicians. Except that for some, they pretend to fight them, when they in truth—they have impliedly been promoting them.

Ben Bernanke: Falling Markets will Justify QE 3.0

From Ben Bernanke’s public appearance last night [source: Reuters] (bold highlights added)

Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.

In his first public remarks since the Fed launched a fresh measure aimed at keeping down long-term borrowing costs, Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anemic.

"It is something that we're going to be watching very carefully," Bernanke said in response to questions from the audience at a forum sponsored by the Cleveland Fed.

"If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation," Bernanke said.

My deciphering or translation of the above: ‘Despite the vocal protestations of my critics, a continuous decline of markets should validate my imposition of QE 3.0, which will absolve my position.’

The above statements serve as more evidence that Mr. Bernanke’s current policy actions appear to be constrained by politics. Global markets have already substantially fallen, with MSCI All- Country World Index of 45 nations breaking into the bear market territory last week, yet Chairman Bernanke’s favorite instrument has been in absentia.

Additionally, these statements can be construed as more indications that markets are being used as negotiation leverage or manipulated for political goals.

Could Mr. Bernanke, then, be wishing for the markets to endure further strains?

Has Germany and Ireland been printing their own Currencies?

I have seen some unconfirmed reports or rumors where EU member states as Ireland and Germany have been re-issuing their native currencies prior to joining the EU, particularly the Irish pound and the German deutschmark


Ireland's central bank reportedly is printing Ireland's old currency in case the country leaves the eurozone. At least that's the rumor circulating in Dublin, notes Alan McQuaid, chief economist at Bloxham stockbrokers in that city.

McQuaid, writing a guest commentary for The Guardian, says he's not sure if the rumor is true. But he does hope Ireland has contingency plans in case the euro disintegrates.

Then again, given the record of European leaders, a lack of backup plan wouldn’t be surprising.
As Greece struggles to remain solvent, the European monetary union is scrambling to stop the debt crisis from spreading. If the crisis does spread, Ireland might be next in line.

Some pundits say Ireland should drop the euro.

Being master of your own destiny does have appeal, McQuaid admits. If it returned to the punt, Ireland could boost exports by devaluing the currency and reduce its debt burden.

Also, a known political insider Philippa Malmgren, special assistant to Special Assistant to the President for Economic Policy on the National Economic Council for ex-President Bush and was also a member of the President's Working Group on Financial Markets, aka, the Plunge Protection Team, at Sweden's largest business paper, Dagens Industri says that she expects Germans to return to the Deutschemark and have already ordered its re-issuance (hat tip: Bob Wenzel)

Germany refuses more emergency loans and prepares the reintroduction of the D-mark. They have already ordered the new currency and excites the printers to rush. It says the U.S. economy Doctor Philippa Malmgren.

"My impression is that the German Government sent us a number of signals that, from their perspective there is no other solution (than to leave the euro)," writes Philippa Malmgren, formerly an advisor to former U.S. President George W. Bush and global strategy director the banking giant UBS in his blog.

The validity of these reports are unclear.

Nevertheless, when markets are usually exhibiting signs of depression as this, they could signal a bounce or an important inflection point.

Otherwise if these reports are true, then a realization of Euro’s disintegration would likely mean intensely turbulent times for the financial markets—as the “newly” independent European central banks would likely embark on saving their respective national banking system by printing tsunami of money to counter waves of deflationary defaults.

In this case, we should expect even more massive gyrations both on the upside and downside that could make hearts palpitate rapidly.

Fasten your seat-belts.

Thursday, September 29, 2011

Global Wealth Convergence

Economist Timothy Taylor writes, (bold emphasis mine)

It is possible that although inequality within many countries is rising, global inequality is actually falling. After all, a number of countries with lower levels of per capita income, like China and India, have been experiencing rapid growth. Perhaps from a global viewpoint, the gap between high and low incomes is diminishing even though within countries, that gap has been rising.

What looks more like Aristotle’s the “whole is greater than the sum of its parts” is what I call as the global wealth convergence dynamic


Mr. Taylor quotes an IMF study suggesting that China and India has been key factors that have been led to this,

What is the evidence on global inequality? Branko Milanovic offers a useful figure, where inequality is measured by the Gini coefficient. For those not familiar with this term, the quick intuition is that it is a measure of inequality where 0 represents complete equality of income and 100 represents complete inequality (one person has all the resources). Here is a figure showing Gini coefficients for relatively equal Sweden, the less equal U.S. economy, the still-less-equal Brazilian economy, and the world economy.

Milanovic writes: "Global inequality seems to have declined from its high plateau of about 70 Gini points in 1990–2005 to about 67–68 points today. This is still much higher than inequality in any single country, and much higher than global inequality was 50 or 100 years ago. But the likely downward kink in 2008—it is probably too early to speak of a slide—is an extremely welcome sign. If sustained (and much will depend on China’s future rate of growth), this would be the first decline in global inequality since the mid-19th century and the Industrial Revolution.

One could thus regard the Industrial Revolution as a “Big Bang” that set some countries on a path to higher income, and left others at very low income levels. But as the two giants—India and China—move far above their past income levels, the mean income of the world increases and global inequality begins to decline."

My intuition is that globalization has functioned as one of the most critical variable contributing to the global wealth convergence.


China and India’s merchandise trade has ballooned from 10% in 1976 to over 50% and 30% respectively even after the 2008 crisis. That’s because trade is a mutually beneficial action which leads to prosperity.

From Ludwig von Mises, (Nation, State and Economy p.165)

Economic history is the development of the division of labor. It starts with the self-contained household economy of the family, which is self-sufficient, which itself produces everything that it uses or consumes. The individual households are not economically differentiated. Each one serves only itself. No economic contact, no exchange of economic goods, occurs.

Recognition that work performed under the division of labor is more productive than work performed without the division of labor puts an end to the isolation of the individual economies. The trade principle, exchange, links the individual proprietors together. From a concern of individuals, the economy becomes a social matter. The division of labor advances step by step. First limited to only a narrow sphere, it extends itself more and more. The age of liberalism brought the greatest advances of this sort.

Commemorating the 130th Birthday of Ludwig von Mises

Today is the 130th birthday of one of my inspiration and role model: the great Ludwig Heinrich Edler von Mises


Asia’s Demographic Inequality

Demography isn’t destiny, so argues the Economist, (bold emphasis added)

INVESTORS are often lured to countries like India and Vietnam by their demographic promise—by their fast-growing population of workers and consumers. Likewise, investors in China often worry that it “will grow old before it grows rich”. Demographics are not destiny, but they are a noteworthy determinant of economic potential. Youngsters and retirees do not work, which harms growth directly. And because these dependants make a claim on a country’s income without adding to it, they also depress savings, thereby slowing the accumulation of capital and the growth of productivity. In its latest Asian Development Outlook, the Asian Development Bank calculates the contribution of Asia’s youthful demographics to its economic success over the past decade. The bank also projects the impact of a greying population on Asia’s growth from now until 2030.


I concur that demographics represent only part of destiny. The economic destiny of every nation depends on the extent where people are allowed to accumulate and use capital efficiently (via economic freedom and free trade).

The Fallacy of Luddite Economics

We are told that by this Wall Street Journal article that business spending on machines than labor is bad news for the US economy. (bold emphasis added)

The man-vs-machine situation, however, presents a huge negative to the outlook. In an economy based on consumer spending, the lack of jobs and income growth means consumers can’t spend.

Businesses’ preference for equipment — while understandable from a cost perspective — is also a big reason why policymakers are stymied to find ways to ignite job creation.

Indeed, the Federal Reserve‘s pursuit of low interest rates only widens the cost gap. That’s because it cheapens the borrowing costs for capital projects while doing little to hold down payroll expenses.


The reasons cited why businesses spending have been substantially tilted towards machinery have rightly been attributed to political factors:

Aside from the Fed’s policies, again from the same article, (bold added)

You can’t fault companies for investing in new machinery rather than hiring new workers. As two news reports detail, labor costs are rising, a function of both private and public pressures.

First, employers face a jump in health insurance costs. The Kaiser Family Foundation reported a 9% average increase in the premiums paid by employers this year. The average yearly cost to cover a family hit a record $15,073, up sharply from $13,770 in 2010.

Second, companies must deal with higher taxes to replenish state unemployment-benefit coffers. According to Wednesday’s Wall Street Journal, employers will get hit by higher tax bills as many states have to pay back Washington for benefit money borrowed during the recession.

So while politics has been a factor, this misses out the more important factor: Investments in machines are about added productivity and a higher standard of living, which eventually brings about more jobs.

The great Henry Hazlitt demolishes this myth in the must read classic Economics in One Lesson p.41-42. Here is an excerpt: [bold emphasis added, italics original]

it is a misconception to think of the function or result of machines as primarily one of creating jobs. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is no trick to employ everybody, even (or especially) in the most primitive economy. Full employment—very full employment; long, weary, back-breaking employment—is characteristic of precisely the nations that are most retarded industrially. Where full employment already exists, new machines, inventions, and discoveries cannot—until there has been time for an increase in population—bring more employment. They are likely to bring more unemployment (but this time I am speaking of voluntary and not involuntary unemployment) because people can now afford to work fewer hours, while children and the overaged no longer need to work.

What machines do, to repeat, is to bring an increase in production and an increase in the standard of living. They may do this in either of two ways. They do it by making goods cheaper for consumers (as in our illustration of the overcoats), or they do it by increasing wages because they increase the productivity of the workers. In other words, they either increase money wages or, by reducing prices, they increase the goods and services that the same money wages will buy. Sometimes they do both. What actually happens will depend in large part upon the monetary policy pursued in a country. But in any case, machines, inventions, and discoveries increase real wages.

By the article’s main premises—where consumption drives the economy and where machines signify a threat to consumption—then we must conclude that the medieval era or even the stone age would be a much wealthier and ideal society than today.

US Equity Markets: More Signs of Tidal Flows

Anyone who argues that stock market valuations have been about contemporary fundamentals should see this.


The market breadth of the US S&P 500 has increasingly been either about floating or sinking ships from tidal flows.

This great observation from Bespoke Invest, (chart above from Bespoke)

We consider 'all or nothing' days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400. With today's A/D reading of -470, there have now been 42 'all or nothing' days for the S&P 500. At this rate, 2011 is now on pace to see 57 all or nothing days, which would eclipse the record high reading we saw back in 2008.

The most shocking development of late is how common 'all or nothing days' have become. Up until a few years ago, these types of days were pretty rare, but in the 42 trading days since the start of August, more than half of them (22) have been 'all or nothing'.

This exhibits how US and global equity markets have been massively distorted by sundry government interventions, such that intense ebbs and flows into the marketplace are increasingly manifestations of internal boom bust cycles at work.

So sharp market volatility on both directions should be expected or has become the 'new normal'. This makes stock markets seem more like a gamble, since steep gyrations encourage short term actions rather than long term investments. Yet the above dynamic basically tilts the benefits to those whom are proximate or personally close to policymakers at the expense of the public.

Again, such skewness is courtesy of the politicization of the financial markets by political stewards led by Mr. Bernanke et. al.

Web Wars: Internet Activists battle against Web Censorship

From the Chronicle (, [bold emphasis mine]

Computer networks proved their organizing power during the recent uprisings in the Middle East, in which Facebook pages amplified street protests that toppled dictators. But those same networks showed their weaknesses as well, such as when the Egyptian government walled off most of its citizens from the Internet in an attempt to silence protesters.

That has led scholars and activists increasingly to consider the Internet's wiring as a disputed political frontier.

For example, one weekend each month, a small group of computer programmers gathers at a residence here to build a homemade Internet—named Project Byzantium—that could go online if parts of the current global Internet becomes blocked by a repressive government.

Using an approach called a "mesh network," the system would set up an informal wireless network connecting users with other nearby computers, which in turn would pass along the signals. The mesh network could tie back into the Internet if one of the users found a way to plug into an unblocked route. The developers recently tested an early version of their software at George Washington University (though without the official involvement of campus officials).

The leader of the effort, who goes by the alias TheDoctor but who would not give his name, out of concern that his employer would object to the project, says he fears that some day repressive measures could be put into place in the United States.

He is not the only one with such apprehensions. Next month The­Doctor will join hundreds of like-minded high-tech activists and entrepreneurs in New York at an unusual conference called the Contact Summit. One of the participants is Eben Moglen, a professor at Columbia Law School who has built an encryption device and worries about a recent attempt by Wisconsin politicians to search a professor's e-mail. The summit's goal is not just to talk about the projects, but also to connect with potential financial backers, recruit programmers, and brainstorm approaches to building parallel Internets and social networks.

The meeting is a sign of the growing momentum of what is called the "free-network movement," whose leaders are pushing to rewire online networks to make it harder for a government or corporation to exert what some worry is undue control or surveillance. Another key concern is that the Internet has not lived up to its social potential to connect people, and instead has become overrun by marketing and promotion efforts by large corporations.

At the heart of the movement is the idea that seemingly mundane technical specifications of Internet routers and social-networking software platforms have powerful political implications. In virtual realms, programmers essentially set the laws of physics, or at least the rules of interaction, for their cyberspaces. If it sometimes seems that media pundits treat Facebook's Mark Zuckerberg or Apple's Steve Jobs as gods, that's because in a sense they are—sitting on Mount Olympus with the power to hurl digital thunderbolts with a worldwide impact on people.

This simply shows how technology facilitated markets will work around regulators as the latter will try to bring back the industrial age by imposing vertical flow of information.

Also this exhibits how 20th century top-down political organizations will furiously struggle to resist the snowballing 'bottom-up' forces fueled by the internet revolution.

Ben Bernanke Wants You to Beg For More Stimulus

From (bold emphasis mine)

The nation's weak labor market was "a national crisis" that required attention from the White House and Congress, Federal Reserve Chairman Ben Bernanke said Wednesday. "We've had close to 10% unemployment now for a number of years, and of the people who are unemployed, about 45% have been unemployed for six months or more. This is unheard of," Bernanke said in a question-and-answer session following a speech in Cleveland. He called for policies "that could help them find work, train for work and retain their skills." Bernanke also urged policy makers to consider "strong housing policies to help the housing market recover." Better housing policies would "clearly be very useful," and would allow the low mortgage rates stemming from easy Fed policy to have more effect and help the economy recover.

Ben Bernanke, as well as the US government, has been applying ‘strong policies’ even prior to this crisis which has essentially led to the current bubble bust conditions… through cheap credit, tax policies which skewed financing towards borrowing than equity, administrative policies via mortgage subsidies which encouraged speculation and bank capital regulation which rewarded securitization that spawned the shadow banking system

Additionally, the policy response to the current crisis has been for the Fed to buy $600 billion worth of mortgage securities in QE 1.0

The current Operation Twist has also partly been designed for this. Yet this innovative measure, will likely be another futile exercise, and at worst, with possible unintended effects.

Bloomberg’s chart of the day commentary,


The Federal Reserve’s effort to reduce borrowing costs is unlikely to help the housing market enough to bolster the economy, according to Andrew Milligan, Standard Life Investments Ltd.’s head of global strategy.

“Mortgage refinancing remains little different” from last year even though the Fed’s plan to buy longer-term debt and sell shorter-term securities sent rates on home loans to record lows, Milligan wrote two days ago in a report.

The CHART OF THE DAY compares the Mortgage Bankers Association Refinancing Index with the average rate on 30-year refinancings, as compiled by The index’s reading for the week ended Sept. 16 was about the same as last November, while the 30-year rate dropped to 4.10 percent this month, the lowest in eight years of data and down from last year’s 4.75 percent average.

Fannie Mae and Freddie Mac are doing too little to aid refinancings, according to Edinburgh-based Milligan. The mortgage-finance firms have operated under U.S. conservatorship for the past three years after loan defaults pushed them close to collapse. The lack of support is among “structural impediments to the housing market” that will limit the effectiveness of the Fed’s so-called Operation Twist, he wrote.

It’s not really about doing “too little” but rather after having done soooo sooo much with hardly any impact means that these policies have not met their targets (policy failure) and are not neutral too.

On the contrary, these policies may have lasting negative consequences.

As Professor Steve Horwitz observes (bold emphasis)

if we look at the loanable funds market, we might get a handle on the situation. If this program is designed to increase investment by driving down rates, it's not going to work if that demand for loanable funds curve is highly inelastic. Borrowers are just not going respond to the lower interest rate if they have major concerns about the future

In other words, we shouldn't be twisting yield curves to increase the quantity of loanable funds demanded, we should be adopting a better policy regime so that the demand for loanable funds increases.

And ‘concerns about the future’ are likely to have been exactly prompted by these political interventions that has only heightened “regime uncertainty” or as per Professor Robert Higgs,

widespread inability to form confident expectations about future private property rights in all of their dimensions

Bottom line: All the measures thrown have only forestalled the necessary adjustments in the marketplace. The market’s function of discoordination and coordination has been obstructed by increasing concerns over future private property rights via various interventionist policies.

And this also reveals how the law of economics (or price controls) can’t be rescinded by political policies. And measures designed to mitigate effects of prior bubble policies, represent as band aid solutions that only defers on the day reckoning. Notice that when political intervention has been withheld, exactly the same set of problems resurfaces.

However for Mr. Bernanke, who seem to have been hobbled by mounting political opposition, appear to be using the markets as leverage. He would have you beg for more short term patches ["a national crisis" that required attention from the White House and Congress] before giving it to you. Fear signifies as the best tool to justify political intervention.

Wednesday, September 28, 2011

German Minister Calls Tim Geithner’s Bailout Plan ‘Stupid’

From Telegraph’s Ambrose Evans Pritchard, (bold highlights mine)

German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.

"I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said.

Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world".

"It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," he said.

The comments risk irritating the White House. US Treasury Secretary Tim Geithner has been a key driver of plans to give the EFSF enough firepower to shore up Italy and Spain, fearing a drift into "cascading default, bank runs and catastrophic risk" without dramatic action.

The danger for Germany is that America will lose patience, with unpredictable consequences. The US Federal Reserve is currently propping up the European banking system in a variety of ways, including dollar swaps.

Continuing political schisms will add to concerns over liquidity conditions and will likely continue to pressure financial markets whom have been mainly dependent on steroids. It will take bailout policies with a scale of "shock and awe" to reflate financial markets which implies coordinated actions.

Quote of the Day: Keynesian Cultism

Keynesianism is one big fallacy, and a cult fallacy at that. It violates the Law of Cause and Effect by declaring that effect really is cause. And it wants us to assume that work is nothing more than a transmission mechanism for money, and it does not matter what government pays people to do, just as long as it provides money so that they can spend it and make us prosperous.

This isn't economics. It is nonsense.

This is from Professor William L. Anderson.

I’d add intellectual fraud to Professor Anderson’s description, as Keynesianism is used by zealots to promote the religion of government or socialism.

Tuesday, September 27, 2011

The US Federal Reserve Moves towards Social Media Censorship

I have been saying that signaling channel is a policy tool used by central banks to manage the public’s ‘inflation expectations’ or price levels of exchange rates. This tool seems to be prominently used since the post Lehman collapse.

I have associated the repeated assaults on the commodity markets as part of this tactical move to project subdued inflation in order to justify more inflationism.

And managing the market’s mindset seems to be on a slippery slope that will perhaps entail escalating information control or censorship on the web.

The Economic Collapse Blog writes,

The Federal Reserve wants to know what you are saying about it. In fact, the Federal Reserve has announced plans to identify "key bloggers" and to monitor "billions of conversations" about the Fed on Facebook, Twitter, forums and blogs. This is yet another sign that the alternative media is having a dramatic impact. As first reported on Zero Hedge, the Federal Reserve Bank of New York has issued a "Request for Proposal" to suppliers who may be interested in participating in the development of a "Sentiment Analysis And Social Media Monitoring Solution". In other words, the Federal Reserve wants to develop a highly sophisticated system that will gather everything that you and I say about the Federal Reserve on the Internet and that will analyze what our feelings about the Fed are. Obviously, any "positive" feelings about the Fed would not be a problem. What they really want to do is to gather information on everyone that views the Federal Reserve negatively. It is unclear how they plan to use this information once they have it, but considering how many alternative media sources have been shut down lately, this is obviously a very troubling sign.

You can read this "Request for Proposal" right here.

Read more here.

Monetary central planners think that they can repeal the laws of economics by applying Orwellian approach in communications management.

More signs of an increasingly desperate US Federal Reserve.

Ron Paul: UN Membership No Guarantee of Sovereignty Recognition

Ron Paul’s take on Palestinian Authority's application for UN membership (bold emphasis added)

I have reservations about the Palestinian drive for UN recognition. Personally I wish the United States would de-recognize the United Nations. As most readers already know, in every Congress I introduce legislation to end our membership in that organization. The UN is a threat to our sovereignty-- and as we are the main source of its income, it is a threat to our economic well-being. Increasingly over the past several years, we see the United Nations providing political and legal cover for the military aspirations of interventionists rather than serving as an international forum to preserve peace. Neoconservatives in the US have grown to love the United Nations as they co-opt the organization under the guise of endless "reform." Under the sovereignty-destroying doctrine of "Responsibility to Protect," adopted at the 2005 World Summit, the UN takes it upon itself to intervene in internal conflicts of its member states whenever it believes that human rights are being violated. Thus under "Responsibility to Protect," the UN provides the green light for a kind of global no-knock raid on any sovereign country.

If asked, I would personally counsel the Palestinians to avoid the United Nations. UN membership and participation is no guarantee that sovereignty will be respected. We see what happens to UN members such as Iraq and Libya when those countries' leaders fall out of favor with US administrations: under US and allied pressure a fig leaf resolution is adopted in the UN to facilitate devastating military intervention. When the UN gave NATO the green light to bomb Libya there was no genocide taking place. It was a purely preventative war. The result? Thousands dead, a destroyed country, and extremely dubious new leaders.

Read the rest here

The UN has been a tool for global political-economic elites to advance their interests around the world.

Monday, September 26, 2011

Classical Liberalism: Towards A Less Violent World

Steve Pinker at the Wall Street Journal brings us a good news: there has been a declining trend of violence worldwide.


Mr. Pinker writes,

Believe it or not, the world of the past was much worse. Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species.

The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

Mr. Pinker attributes the “six major declines of violence” as the process of pacification, civilizing process, the Humanitarian Revolution, the Long Peace, the New Peace and the cascade of "rights revolutions.

He further notes that 3 peacemakers are responsible for the deepening trend towards greater peace.

1. the pacificist state

2. commerce

3. cosmopolitanism or the expansion of people's parochial little worlds through literacy, mobility, education, science, history, journalism and mass media.

In my earlier posts, I showed Hans Rosling in two videos explaining how people have become remarkably wealthier over the past 200 years, through the division of labor (how washing machine enhanced out lives).

Today, I quoted Matt Ridley saying that the successful evolution of the homo sapiens came from trade.

In short, liberalism has been the primary force responsible for bringing about civilization, wider access to information and knowledge, increasing wealth, vastly improved quality of life and charity, all of which has led to lesser appetite for violence.

In the words of the great Ludwig von Mises, (emphasis added)

Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another. Because the division of labor requires undisturbed peace, liberalism aims at the establishment of a system of government that is likely to preserve peace, viz., democracy.

Does Growing Signs of People Power Upheavals in China Presage a ‘China Spring’?

Popular unrest or increasing signs of a ‘China Spring’ appears to be proliferating in China.

From the Wall Street Journal, (bold emphasis mine)

China's massive economic-stimulus program has supported near double-digit growth, but also stoked inflation, piled up debt and fueled another unwelcome development: social unrest.

In 2010, China was rocked by 180,000 protests, riots and other mass incidents—more than four times the tally from a decade earlier. That figure, reported by Sun Liping, a professor at Tsinghua University, rather than official sources, doesn't tell the whole story on the turmoil in what is now the world's second-largest economy.

But what is clear is that the level of social tension and number of protests against the government is rising. That is a sensitive subject as the ruling Communist Party prepares to mark the 62nd anniversary of the founding of the People's Republic of China on Oct. 1.

Earlier I made this observation

China’s top-down political system and her attempt to bottom-up the economic system looks rife for a head-on collision course.

And it’s just a matter of time.

Like in the recent “Arab Spring” populists revolts, consumer price inflation has partly fuelled the unrest.


Again from the same Wall Street Journal article (bold emphasis mine)

Rising prices might not figure as a direct trigger of unrest, but inflation remains a key source of discontent. In an annual survey of social attitudes published by the Chinese Academy of Social Sciences, inflation shot to the top of the list of problems in 2010, up from fifth place in 2009.

There is a reason for that move up the ranks. A sweeping monetary stimulus in 2009 and 2010—with the banks issuing 17.5 trillion yuan ($2.7 trillion) in new loans—translated into higher levels of inflation, reflected largely in food prices. In 2011, the problem has become more severe. The latest data show food prices rose 13.4% year-to-year in August. Prices for pork, China's favorite meat, rose 52.3% to a record level. The urban poor, who spend a large share of their income on food, are hardest hit by food costs.

But what truly has been provoking such restiveness has been China’s strong arm or repressive and inflationist policies combined with cronyism.

If inflation provides the powder keg, the spark that ignites social unrest is likely to come from land grabs. A decade long real-estate boom has made land a valuable commodity. Weak legal protections for property rights and alliances between government officials and developers mean that land often is seized without adequate compensation for residents…

That number could climb. China's local governments have spent the past three years amassing debt—10.7 trillion yuan according to a June estimate by the National Audit Office. Concerns are mounting about whether local governments can repay that debt. This month, local media reported that 85% of local-government borrowers in Liaoning, a province in North East China, didn't have sufficient revenue to make interest payments.

Why did the banks make so many loans to projects with little hope of repayment? One word: land. According to the National Audit Office, 2.5 trillion yuan of loans to local government—23% of the total—depend on sales of land for repayment. Some analysts say the real percentage is much higher.

In 2010, China's local government raised 2.9 trillion yuan in revenue from land sales. Repaying debts will mean selling almost the same amount of land over again. If town halls want to continue paying for hospitals, schools, and other services, the implication is a massive increase in land sales. Even worse, as local governments bring more land to market to pay their debts, excess supply pushes prices down, and the area of land that has to be sold increases.

While China’s current economic boom may have forestalled what may have been a major political revolution, signs are on the wall where continuing policies will likely widen the cracks or amplify political strains until the foundation to China’s bubble economy implodes.

As I earlier wrote,

The desire to uphold the Keynesian unemployment goals will backfire and result to China's version of today's MENA political crisis.

Political instability are corollary to boom bust cycles.

US Derivative Time Bomb: Five Banks Account for 96% Of The $250 Trillion Exposure

From Zero Hedge (bold emphasis mine)

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.


At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely."

True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?


...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.


Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

Such immense risk exposure by ‘Too Big to Fail’ (TBTF) US banks entail that political actions or policy making will likely be directed towards the prevention of a massive deflationary banking sector collapse from a derivatives meltdown.

And problems at the Eurozone could just be the pin that could ‘pop the bubble’.

This implies greater likelihood of persistent bailout policies which mostly will be coursed through inflationism. It’s an “inflate or die” for politically privileged TBTF banks in the US or in the Eurozone.

Again political leaders appear to be using the financial markets as leverage to negotiate for the passage of such policies.


From today’s Bloomberg article, (bold emphasis mine)

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the IMF failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.”

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed “so we can in fact let a state go insolvent” if it can’t pay its bills, she said.

Policy makers can make the EFSF more “efficient” by leveraging it without involving the ECB, German Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013.

Bank of Canada Governor Mark Carney estimated 1 trillion euros ($1.3 trillion) may have to be deployed while U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time that Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

Policymakers have been intensifying their jawboning or mind conditioning of the public of the exigencies of more bailouts.

They will come. But, perhaps, only after the markets endure more pain.

Marc Faber: Asia to Benefit from Imploding Welfare States of the West

Dr. Marc Faber has been an indirect mentor of mine. It has been through his writings which has led me to learn of Austrian Economics, the major pillar of my analytical methodology.

Nevertheless, recently he says that imploding welfare states of the West should be positive for Asia.

The Asian Investor quotes Dr. Faber, (bold emphasis mine)

“Asia should send a thank-you letter to [Federal Reserve chairman Ben] Bernanke” for stimulus policies that have been an “utter failure” for the US but beneficial to Asia.

"We had, essentially, a bank failure in 2008 and the financial system in the Western world went bankrupt. Then it was bailed out by governments and the banks have learned nothing. “

Government intervention in private finance will have a damaging effect to the US and European economies over the long run, he predicts. “In 2008, the financial sector [went] bust, and in the future, the [Western] governments will go bust.”

In contrast, “the Asian banks are in a good shape”, says Faber. “Asia reacted well in the 1997-1998 crisis. A period of deleveraging followed. Businessmen became conservative. They paid down debts and the banks became very cautious in terms of their lending.”

As a result, he has more confidence in Asian banks than their Western counterparts. “I would deposit money with a Thai bank, no problem. They will pay me back. They don’t know what derivatives [are], because the derivatives salesmen never get through the traffic in Bangkok,” he quipped.

“I would rather stick to emerging economies than Europe and the US.”

For as long as Asia resists the siren song of the welfare based political economy and shun protectionism, the policy divergences between the West and the East should imply for a wealth convergence, where Asia’s potential higher returns on investments emanating from the declining relative trend of interference from the region’s governments should attract more of the savings from the West.

The above would compliment domestic growth dynamics for as long as Asian governments continue to ease on economic restrictions or regulations.

This also implies that the current contagion based financial market meltdown in Asia—mainly transmitted from the boom bust cycle policies of Western governments which have been aimed at the preservation of the unsustainable state of incumbent political institutions—is likely a temporary event.

And given the right conditions (not yet today) would present as ‘buy’.

Quote of the Day: Trade Made Us Superior

Fantastic quote from the prolific Matt Ridley (bold emphasis mine)

There was no sudden change in brain size 200,000 years ago. We Africansall human beings are descended chiefly from people who lived exclusively in Africa until about 65,000 years ago—had slightly smaller brains than Neanderthals, yet once outside Africa we rapidly displaced them (bar acquiring 2.5% of our genes from them along the way).

And the reason we won the war against the Neanderthals, if war it was, is staring us in the face, though it remains almost completely unrecognized among anthropologists: We exchanged. At one site in the Caucasus there are Neanderthal and modern remains within a few miles of each other, both from around 30,000 years ago. The Neanderthal tools are all made from local materials. The moderns' tools are made from chert and jasper, some of which originated many miles away. That means trade.

Evidence from recent Australian artifacts shows that long-distance movement of objects is a telltale sign of trade, not migration. We Africans have been doing this since at least 120,000 years ago. That's the date of beads made from marine shells found a hundred miles inland in Algeria. Trade is 10 times as old as agriculture.

At first it was a peculiarity of us Africans. It gave us the edge over Neanderthals in their own continent and their own climate, because good ideas can spread through trade. New weapons, new foods, new crafts, new ornaments, new tools. Suddenly you are no longer relying on the inventiveness of your own tribe or the capacity of your own territory. You are drawing upon ideas that occurred to anybody anywhere anytime within your trading network…

That is what trade does. It creates a collective innovating brain as big as the trade network itself. When you cut people off from exchange networks, their innovation rate collapses. Tasmanians, isolated by rising sea levels about 10,000 years ago, not only failed to share in the advances that came after that time—the boomerang, for example—but actually went backwards in terms of technical virtuosity. The anthropologist Joe Henrich of the University of British Columbia argues that in a small island population, good ideas died faster than they could be replaced. Tierra del Fuego's natives, on a similarly inhospitable and small land, but connected by trading canoes across the much narrower Magellan strait, suffered no such technological regress. They had access to a collective brain the size of South America.

Sunday, September 25, 2011

Today is My 'Lazy' Day

Today is a special day for me. It's gonna be my lazy day--No reading, no writing or blogging after this.

Bruno Mars best expresses what I desire to do on my special lazy day.

Saturday, September 24, 2011

War on Precious Metals: Has the Eurozone been Gradually Restricting Individual Gold Purchases?

Yes says Marc Slavo of SHTF Plan

A couple of weeks ago our report that some Austrian banks had begun restricting the sale of gold and silver to 15,000 Euro (~$20,000 USD) reportedly because of money laundering issues was met with disbelief by many readers of financial news and information web sites. As we mentioned in that commentary, it is our view that governments, namely in Western nations, are making it more difficult for individuals to make gold purchases, as well as to do so anonymously.

It looks like this trend of restricting the peoples’ ability to acquire assets of real monetary value is expanding. If a recent report from France is accurate, and based on the French governments official web site it looks like it is, then as of September 1, 2011, anyone attempting to sell or purchase ferrous or non-ferrous metals, which includes gold and silver, will be required to pay for their purchase via a credit card or bank wire transfer if it exceeds 450€ (~ $600 USD):

“Here is the applicable French law via and translated into English by Google Translate:

“Article L112-6
Amended by Law n ° 2011-900 of July 29, 2011 – art. 51 (V)

“I. Can be made in cash payment of a debt greater than an amount fixed by decree, taking into account the place of tax residence of the debtor and the professional purpose of the operation or not.

“In addition a monthly fixed by decree, the payment of salaries and wages is subject to the prohibition contained in the preceding paragraph and shall be made by check or by transfer to a bank or postal account or account held by a payment institution.

“Any transaction on the retail purchase of ferrous and non ferrous is made by crossed check, bank or postal transfer or by credit card, not the total amount of the transaction may not exceed a ceiling set by decree. Failure to comply with this requirement is punishable by a ticket for the fifth class.

“II.-I Notwithstanding, the costs of the department conceded that exceed the sum of 450 euros must be paid by bank transfer. (bold highlights original-Prudent Investor)

“III.-The preceding provisions shall not apply:

“a) For payments made by persons who are incapable of binding themselves by a check or other payment, as well as those who have no deposit account;

“b) For payments made between individuals not acting for business purposes;

“c) paying the expenses of the state and other public figures.

According to independent reports the law was passed to curb the illegal sale of stolen metals like copper, steel, etc. Given the rampant rise in thefts of these metals from telephone poles, construction sites and businesses here in the United States, we can certainly see this as a reasonable assessment for why the French passed this law.

When governments see their political privileges being eroded as a result of their own policies, the next set of actions would be to destroy any competitive threats on their monopoly franchise of money by restricting the ownership of metals.

I am reminded by the wisdom of the great F. A. Hayek who once wrote in Choice in Currency, (bold emphasis mine)

There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue

…This was observed many times during the great inflations when even the most severe penalties threatened by governments could not prevent people from using other kinds of money; even commodities like cigarettes and bottles of brandy rather than the government money—which clearly meant that the good money was driving out the bad

…But the malpractices of government would show themselves much more rapidly if prices rose only in terms of the money issued by it, and people would soon learn to hold the government responsible for the value of the money in which they were paid. Electronic calculators, which in seconds would give the equivalent of any price in any currency at the current rate, would soon be used everywhere. But, unless the national government all too badly mismanaged the currency it issued, it would probably be continued to be used in everyday retail transactions. What would be affected mostly would be not so much the use of money in daily payments as the willingness to hold different kinds of money. It would mainly be the tendency of all business and capital transactions rapidly to switch to a more reliable standard (and to base calculations and accounting on it) which would keep national monetary policy on the right path.

Legislative restrictions will not prevent people from switching to good money.

The Ugly Head of Protectionism Resurfaces in Brazil

In my view, Brazil’s recent boom has been getting into the heads of their policymakers.

From the Economist, (bold emphasis mine)

ON SEPTEMBER 15th Guido Mantega, Brazil’s finance minister, announced a 30-point increase in the country’s industrial-product tax on cars. The amount was startling, but the purpose familiar. Cars that are mostly made in Brazil, Mexico or the Mercosur trade block will be exempt; only importers will pay. “Brazilian consumption has been appropriated by imports,” he said in announcing the tax.

According to the National Carmakers’ Association, poor infrastructure and pricey credit and labour mean that making cars is 60% more expensive in Brazil than in China. Local manufacturers have long relied on high tariffs. Imports are gaining market share, from 16% of sales in 2009 to 23% this year. The new measure will probably reverse that trend, since it will increase the price of imports by a quarter.

The government has taken small steps to help local firms.

Contrary to the publicly stated goals, Brazil’s politicians will not be helping local firms but politically favored ones or political cronies.

Yet more ugly head of protectionism in Brazil

Again from the same Economist article,

Farmland is being treated as a strategic asset on a par with oil. Last year, spooked by the idea of foreign sovereign-wealth funds and state-owned firms buying up vast tracts, the government resurrected a 1971 law limiting the amount of rural land foreigners can buy. It was revived even though in the 1990s it was deemed incompatible with the new democratic constitution and open economy. The details are under review: foreigners may be allowed to buy a bit more without restriction, and still more if the government thinks it is in the national interest. But there is no timetable for passing a new law. The Brazilian Rural Society estimates that $15 billion of planned foreign agriculture investments are being dropped.

The strength of the new protectionist mood can be gauged by the government’s willingness to tolerate legal uncertainty and collateral damage. It reintroduced the antique land-ownership law despite knowing that its flawed design would almost halt much-needed foreign investment. Since it limits the total share of each district that can be owned by foreigners, many land registries are playing it safe and rejecting all foreign purchasers. Kory Melby, an agricultural consultant, advises foreigners on land purchases in Brazil. He says he has heard from furious sellers whose deals are now “as good as garbage”.

As the great Murray N. Rothbard once wrote,

The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favored high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favored alliances with nobles and with cartelizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries.

Neither did the cartelizing companies need much of a theory to come out in favor of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles, or favored business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles, and monopoly export companies. And who does not want the supply of money in their pockets to rise?

Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist "theory" was a set of rationales designed to uphold or expand particular vested economic interests.

Perhaps, the current market crash may bring about some humbling effects on them.