Thursday, January 31, 2013

Video: Iceland's President: Let Banks Go Bankrupt

In the following video, Mr. Olafur Ragnar Grimsson Iceland’s president calls for banks to go bankrupt. (hat tip Mises Blog)

Interesting quips:

On the worship of the banking sector:
1:24 Why do you consider banks to be the holy churches of the modern economy?
On crony capitalism 
1:37 The theory that you have to bailout banks is the theory about bankers enjoying their own profit of success and let the ordinary people be the failure...
On how political redistribution from bailouts impacts the real economy
2:31 If you want your economy to be competitive in the innovative sector of the 21th century, a strong financial sector that takes the talent from these sectors, even a successful financial sector is in fact bad news, if you want your economy to be competitive in the areas which really are the 21st century areas Innovation Technology IT 
While virtues of bankruptcy is something to extol, I think Iceland bubble experience is unique, considering her rather small 300,000+ population. 

A smaller population could mean that vested interest groups may have lesser political influence, or perhaps, are easier to deal with compared to the more complex and hugely populated social democratic welfare states as Europe, Japan or the US where power blocs have been deeply entrenched and have significant following in the populace. 

But yes, let the banks fail.


US Economic Growth Turns Negative Amidst US Stock Market and Property Boom

Have stock markets been about earnings or economic growth? 

Yesterday the US posted negative statistical economic growth

This from Bloomberg,
The economy in the U.S. unexpectedly came to a standstill in the fourth quarter as the biggest plunge in defense spending in 40 years swamped gains for consumers and businesses.

Gross domestic product dropped at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and a smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.
Well a decline in government spending while statistically negative should be good news for the real economy. That’s because money not spent by government can be saved or productively used by the private sector.

But given the insatiable spending habits of the US government this is likely to be temporary.

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Yesterday’s technical decline shows how anemic US statistical growth has been (chart from tradingeconomics)

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This is the annualized economic growth rate for the US. (tradingeconomics.com)

Now for US companies beating earnings estimates...

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The above chart from Bespoke Invest

Consensus expectations of strong earnings has been on a declining trend since 2006, this seems detached from the recent blitz in the US stock market.

Yet I previously explained how central bank actions can artificially boost earnings and how credit booms can mask statistical growth

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The US is experiencing a resurgent real estate sector despite the sluggish economy, courtesy of the Ben Benanke’s QE infinity. (charts from Northern Trust). Money creation has to flow somewhere, and they seem channeled to the asset markets.

Rising property prices, which should spillover to rental prices, will likely increase statistical inflation. This puts to risks the current boom which could prompt the FED, whom in rabid fear of deflation, will likely resort to more inflationism in order to continue to suppress interest rates. And monetary expansion could feed through to the housing and housing bubble and or even consumer price inflation. The US asset economy has become greatly dependent on the Fed's doping policies. This means the US Federal Reserve has been trapped.

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Yet, aside from the property sector and the spreading asset boom (via hedge funds, junk bonds, CDOs, etc…), stock market benchmarked by the S&P 500 has been attempting to carve new record highs (bigcharts.com)

Markets (and even the real economy) have essentially been distorted by monetary policies such that they don’t operate on conventional wisdom. Even the economic profession have been at a loss with their dysfunctional models.

Wednesday, January 30, 2013

French Labor Minister: France is “Totally Bankrupt”

ECB’s Mario Draghi in self congratulatory mode recently said that worst days of the Euro may have diminished
 
From Bloomberg,
We can begin 2013 on a more confident note, precisely because significant progress was made during 2012,” Draghi said in a speech in Frankfurt late yesterday. “The darkest clouds over the euro area subsided. Europe’s leaders recognized that monetary union needs to be complemented by a financial union, a fiscal union, a genuine economic union and eventually a deeper political union.”
Well, if French politics should serve as an anchor, today may represent the proverbial calm before the storm 

Senior French politicians have been forced to defend the state of the country’s economy after Labor Minister Michel Sapin set off a storm of controversy by claiming France was “totally bankrupt”.

Sapin made the remarks in a radio interview on Jan. 27 after he was asked about Former Prime Minister Francois Fillon comment in September 2007 that France was a “bankrupt state.” Sapin responded, “But it’s a totally bankrupt state,” adding “that’s the reason we have to put deficit- reductions programs in place.”

The minister immediately took back the statement, saying he was being “ironic.”
This rereverberates with the recent public relations faux pas by Japan's finance minister who likewise stirred a tempest by asking old people to "hurry up and die"

More signs of the growing fractures in the entropic welfare state.

Video: Hayek on the Importance of Price Signals

In the following video, the great Austrian economist Friedrich von Hayek clarifies on some of the popular misconceptions on the free market by explaining the significance of price signals...(hat tip Bob Wenzel)


Remembering H.L. Mencken

Yesterday was the 57th death anniversary of the great libertarian and one of the prolific writers of his time Henry Louis “HL” Mencken.(hat tip Mises blog)

In memory of Mr. Mencken, this stirring quote from his book Minority Report : H.L. Mencken's Notebooks (1956)
Moral certainty is always a sign of cultural inferiority. The more uncivilized the man, the surer he is that he knows precisely what is right and what is wrong. All human progress, even in morals, has been the work of men who have doubted the current moral values, not of men who have whooped them up and tried to enforce them. The truly civilized man is always skeptical and tolerant, in this field as in all others. His culture is based on "I am not too sure."

Quote of the Day: Standing Up Against Prevailing Beliefs

Would you rather be an honorable person perceived to be a fraudster, or a fraudster mistaken for an honorable person? The answer can help you understand why otherwise good people do devious things to avoid standing up against prevailing beliefs.
This is from Black Swan author Nassim Nicolas Taleb at Facebook

Tuesday, January 29, 2013

Overciminalization from Environmental Laws

In the US, the rapid escalation of arbitrary environmental regulations has been prompting for growing accounts of needless political persecutions.

The growing web of laws that can land unwitting violators in jail is commonly referred to as "overcriminalization." These are not laws prohibiting fundamentally wrong behavior like murder or rape. Critics say these laws create offenses that violators often don't realize are illegal until it's too late.

Punishment can range from a few hundred dollars in fees to lengthy prison terms. Some say the extraordinary expansion of the criminal code on federal, state and local levels leaves the public exposed to abuse at the hands of officials.

'You take away the incentive for somebody to do something bit by bit by bit. It’s like peeling the layers off an onion. You can only peel so much and then you don’t have any onion left'- FIshing boat Capt. Terrell Gould

When it comes to environmental laws, the states getting hit the hardest are the five that border the Gulf of Mexico -- Texas, Louisiana, Mississippi, Alabama and Florida. Among them, nearly 1,000 laws criminalizing activities along the coast have been put on the books, Texas Public Policy Foundation analyst Vikrant Reddy said. 

While there is no concrete figure, there are an estimated 300,000-400,000 environmental laws, statutes and mandates believed to be in circulation nationally. Many can land a person in prison, regardless of whether another person, plant or animal is harmed.
Gosh 300-400K laws! 

More steps towards the scenario forewarned by the great F. A. Hayek in his classic book, the Road to Serfdom, here is a snippet (p.86).
By giving the government unlimited powers the most arbitrary rule can be made legal: and in this way a democracy may set up the most complete despotism imaginable.

Central Banks Sees Bitcoins as Threat

Anything that emerges from the markets that poses as a threat to the power of central authorities will be harassed via regulations. This seems to be the coming fate of the fast growing decentralized P2P Currency or Bitcoins. Here is my previous post on bitcoins

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From Bloomberg’s chart of the day,
An increase in the value of bitcoin, the world’s largest online currency, may fuel concerns that virtual money could undermine the role of central banks.

The CHART OF THE DAY shows that bitcoin has more than doubled in the past 12 months, strengthening to $16.37 from $5.88, according to data from Mt. Gox, the world’s largest bitcoin exchange. The money, issued by a decentralized network of computers, has recovered after falling to $2.14 in November 2011 from a high of $29.58 five months earlier.

Greater demand for virtual currencies could have a negative impact on the reputation of central banks, according to a report published by the European Central Bank in October last year. Since the report was released, bitcoin has risen more than 55 percent against the dollar and use of the currency has surged.

Bitpay Inc., a bitcoin payment processing company that recently raised $510,000 in an investment round, this month announced that the number of companies using its services has increased almost 50 percent to more than 2,000 since November, when blog management firm WordPress.com said it would accept the digital currency.

“I think the ECB obviously is concerned, and it’s not reputational,” said Steve Hanke, a professor at Johns Hopkins University in Baltimore who helped to establish new currency regimes in countries such as Argentina and Bulgaria. “I think it’s a competitive threat. Maybe virtual currencies will be so convenient that they will pose a threat because of their ease of use.”
If more people will migrate to the use bitcoins, then central bank’s power to influence the economy will likely be diminished, so I expect not only a direct assault on bitcoin by regulations, other means of control will indirectly be coursed through social media via censorship.

Shopping Mall Bubble: The Quibble Over Statistics

I recently pointed out of the important distinction between theory and statistics
while statistics may assist in providing empirical evidence, they must be used with caution. Statistics should not be used to derive for causation and theory, instead economics which is an a priori science, should serve as groundwork for sound analysis.
Thus, in arguing the case of the risks of a Philippine bubble in shopping malls, which I have premised from basic economic theory, specifically the “if then” proposition about the risks of supply surpassing demand (which may lead to an oversupply), my use of statistics functioned either to validate or falsify the premises. 

In short, I did not rely on statistics to make my case.

Of course, I further proposed that the artificially low interest may have aggravated on such imbalances. With the possibility that the supply side may be overestimating demand or falling into economic miscalculation, credit may be further used to aggravate such imbalances. If so, then this would highlight the business (bubble) cycle in motion which means systemic risk could be building. I am talking here about systemic credit and not company specific debt. I previously raised BSP’s account of over 20% credit growth in November for both retail and the property sector.

My explanation revolved around examining the 3 ways people to consume; productivity growth (which is the sound or sustainable way) and or by the running down of savings stock and or through acquiring debt (the latter two are unsustainable).

While I mentioned the relative conditions of shopping mall around the world, notice that I didn’t focus on them. That’s because like individuals, I understand that every economy is distinct or has unique traits. For instance, the richest countries or the biggest recipients of remittances, either in nominal or as share of the economy, does not share the same character of the Filipino shoppers.

So I focused on the potential sources of growth: productivity growth (which is the sound or sustainable way), the running down of stock of savings and or through debt (the latter two are unsustainable).

Thus my methodology came about examining potential productivity through the formal economy, remittances and the informal economy and comparing them with the consumption benchmark provided by the NSCB.

But make no mistake, I don’t see NSCB’s data as sacrosanct. As I have pointed out, I believe that informal economy has been meaningfully understated, yet despite their strength they seem hardly convincing to fill in the void from demand and supply of shopping malls. 

And I would point out that the reason mall developers have what I call as 10% baseline (at least) is because of the current strong performances.

But the problem is NOT today, rather the problem is the sustainability of today’s action, remember “if then” proposition, which could be manifested in the future via a debt crisis through the shopping mall-property bubble.

Shouting out statistics of mall revenues of the recent past does diminish the fundamental premise. As the Wall Street axiom goes, past performance does not guarantee future results.

Nevertheless here are some charts from NSCB (thanks to a blog commenter)

GROSS NATIONAL INCOME AND GROSS DOMESTIC PRODUCT BY EXPENDITURE SHARES (at constant 1ST QUARTER 1998 TO 4TH QUARTER 2010, AT CONSTANT PRICES

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It turns out that CAGR from 1981 until 2011 was at 3.56%

On the spreadsheet, the NSCB has a growth rate table (annualized but per quarter) based on the above data

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From the Scattergraph, it would appear that the normal distribution for Household Final Consumption Expenditure (HFCE) is at the range of 2-6% with all (above or below) others signifying fat tails.

Going through another NSCB link (again provided by the same commentator) which shows the NSCB’s Gross National Income and Gross Domestic Product by Expenditure Shares--1st Qtr 2008 - 3rd Qtr 2012 (in million PhP) from 2008-2011, we find that the CAGR for Household Final Consumption Expenditure (HFCE) for a four-year (2008-2011) compounding period was at 5.75% (current) and 2.97% (constant)

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We don’t really have to rely on NSCB data to measure consumption.

Theory says we just need to just look at statistical economic growth. The underlying reasoning is that the rate of economic growth should more or less reflect on consumption levels.

Yet if consumption grows beyond economic growth then it is likely that such growth would be unsustainable, as mentioned above, as demand may be funded by a drawdown in savings or through debt.

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(chart from tradingeconomics.com)

No matter one's bias, Philippine economic growth has hardly grown above 10%

From the GDP per capita perspective


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The Gross Domestic Product per capita in Philippines was last recorded at 1410.78 US dollars in 2011. The GDP per Capita in Philippines is equivalent to 11 percent of the world's average. GDP per capita in Philippines is reported by the World Bank. Historically, from 1960 until 2011, Philippines GDP per capita averaged 919.2 USD reaching an all time high of 1410.8 USD in December of 2011 and a record low of 611.9 USD in December of 1960. The GDP per capita is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total population. This page includes a chart with historical data for Philippines GDP per capita.
For a compounding period of 51 years from December 1960 to December 2011 CAGR has been at 1.645%
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GDP per capita PPP

The Gross Domestic Product per capita in Philippines was last recorded at 4139.92 US dollars in 2011, when adjusted by purchasing power parity (PPP). The GDP per Capita, in Philippines, when adjusted by Purchasing Power Parity is equivalent to 19 percent of the world's average. GDP per capita PPP in Philippines is reported by the World Bank. Historically, from 1980 until 2011, Philippines GDP per capita PPP averaged 2313.8 USD reaching an all time high of 4139.9 USD in December of 2011 and a record low of 1349.7 USD in December of 1980. The GDP per capita PPP is obtained by dividing the country’s gross domestic product, adjusted by purchasing power parity, by the total population. This page includes a chart with historical data for Philippines GDP per capita PPP.
For a compounding period of 30 years, from December 1980 to December 2011 CAGR has been at 3.8066%

I am not here to convince anyone, rather I am expressing my opinion about the risks to the economy and to my investments from current developments.

Yet cherry picking statistical data, proof of assertions or declaration of faith will hardly wish away economic laws.

Monday, January 28, 2013

Video: Milton Friedman on The Social Costs of Middle Class Welfare

In the following video, the late illustrious Nobel Prize winner Milton Friedman eloquently deals with effects of middle class policies of higher education and social security which he shows as coming at the expense of the poor. (hat tip Prof Peter Boettke)

Notable quotes

(4:10) Social security is the case, as you may know, one of the most extreme case of misleading advertising that I know of. It is not social, and it is not security. What it is a combination of a bad tax and a bad relief program. A bad distributive program. It is sold as if individuals who pay social security taxes are paying for their own benefits that they are going to get later on. That’s the language in which social security administration sells it. That’s extremely misleading. What’s happening is that people today are paying taxes on their wages, people today are receiving payments from the government. The relations in which mr. X pays and the benefits for which he is entitled is very very small

(7:52) Taken as a whole, it’s a marvelous illustration of the tendency for legislation enacted for helping the poor, to turn out the way in which middle income people help themselves

Singapore’s Gradualist Descent to the Welfare State 2: The Rise of “Consultative Government”

Last year I wrote about how the impact of inflationism in Singapore may prompt her to gradually embrace into the welfare state model
Crises emanating from busting bubbles have been frequently used to justify social controls…

Once the ball gets rolling for the feedback loop of tax increase-government welfare spending then Singapore eventually ends up with the same plagues that has brought about the current string of crises, particularly loss of economic freedom, reduced competitiveness and productivity, lower standard of living, a culture of dependency and irresponsibility and of less charity and unsustainable debt conditions. The outcome from politically instituted parasitical relationship would not merely be a financial or economic crisis but social upheavals as well.
It appears that the results of the recent election have partly validated my outlook.

From the Bloomberg,
Singapore’s ruling People’s Action Party lost a by-election with the widest margin in almost three decades, signalling Prime Minister Lee Hsien Loong may struggle to claw back support as the cost of living climbs.

The Workers’ Party’s Lee Li Lian, a 34-year-old sales trainer, won 54.5 percent of votes in the four-way race in the northeastern Punggol East district over the weekend, a 10.8 percentage point lead over the ruling party’s candidate. That’s the most for a district held by the PAP since the 1984 general elections, according to data from the Elections Department.

Record-high housing and transport costs, public discontent over an influx of foreigners and infrastructure strains are weakening approval for the only party that has ruled Singapore since independence in 1965. Its policies, which have helped forge Southeast Asia’s only advanced economy, are now being questioned by voters, many of whom are looking for a government that is less authoritative and more consultative.
I say partly because this is just one development. It remains to be seen if such political trend will intensify.

Yet “consultative government” signifies nothing more than a fa├žade based on the appeal to the majority (social democracy) to justify the use of force to attain redistribution goals

As the 4th President of the US and founder of the US Constitution James Madison in a letter to John Monroe wrote; (bold mine)
There is no maxim, in my opinion, which is more liable to be misapplied, and which, therefore, more needs elucidation, than the current, that the interest of the majority is the political standard of right and wrong. Taking the word “interest” as synonymous with “ultimate happiness,” in which sense it is qualified with every necessary moral ingredient, the proposition is no doubt true. But taking it in the popular sense, as referring to immediate augmentation of property and wealth, nothing can be more false. In the latter sense it would be the interest of the majority in every community to despoil & enslave the minority of individuals; and in a federal community to make a similar sacrifice of the minority of the component States.
And more signs of Singapore’s slippery slope to the welfare state. From the same article….
The prime minister said after the Jan. 26 poll that by- elections tend to be tougher for the ruling party, and he will continue to focus on policies for the longer term that may take more time to yield results.

Last year, his administration cut ministerial pay, sped up construction of homes and made permanent a program to provide cash and medical funds for the elderly and low-income households. This month, it said it will give priority housing to families with children and provide greater childcare subsidies…

The island’s population has jumped by more than 1.1 million to 5.3 million since mid-2004, driving up property prices and stoking social tension as the government used immigration to make up for a low birth rate. Lee, who has led the country since 2004, has also raised foreign-worker levies and salary thresholds to slow the inflow of non-Singaporeans.
Inflationism or the global bubble cycles will continue to bamboozle or mislead the public to the populist welfare trap which will only exacerbate the current political settings in Singapore and elsewhere.

Yet the gist of the problem hasn’t been free market inequality and or immigration, which has falsely been attributed to, but rather central bank policies designed to promote the interests of the banking-political class cabal through financial repression—which includes negative real rates regime and balance sheet expansions.

And the next step for Singapore will likely be a gradualist transition towards a deeper welfare state that will be accompanied by more regulations, more restrictions of civil liberties, higher taxes, protectionism, cronyism and invasion of privacy which eventually leads to more social strains

From the behavioral perspective, I’ll borrow from Italian Statesman and Political Philosopher Niccolo Machiavelli’s observation on why the welfare state deludes the majority or the concensus.
For the great majority of mankind are satisfied with appearances, as though they were realities, and are often more influenced by the things that seem than by those that are.
Sad to see one of my ideal place lose its free market or economic freedom luster.

Global Financial Market Boom: Will This Time Be Different?

Global stock markets continue to sizzle.

The US stock markets, which accounts for as the largest in the world based on market capitalization[1], and the de facto leader of global equity markets have broken into 5-years highs and is less than 3% in nominal terms and about 14% away in inflation adjusted terms from the ALL time highs reached in October of 1997[2].
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The chart above reveals of the blistering run by the US S&P (SPX).

More than that, the above shows how tightly correlated stock markets have been. Figures may differ on statistical correlation, but the trend undulations of the above benchmarks of the European Stox 50 (STOX 50) Asia-ex-Japan (P2DOW) and the Philippine Phisix (PSE), exhibits of essentially similar trends. Specifically, since the European Central Bank and the US Federal Reserve unveiled back-to-back the Long Term Refinancing Operation[3] (December 2011) and Operation Twist[4] (September 2011), these benchmarks traversed on a generally similar route with nearly the same movements.

The point is although there may be significant variances in the degree of returns, any interpretation of the local market as operating in an independent path (decoupling) would be patently misguided. The global inflationary boom, incited by policies of central banks of major economies has been entwined or tightly linked with domestic forces.

In other words, the speculative orgy on asset prices abroad, not limited to equities as discussed last week[5], has equally been influencing regional, as well as, the domestic version of a brewing mania. In the case of the Philippines, booming stocks, bonds and Peso and in the real economy, the inflating property-shopping mall bubble.

This is why I am inclined to think that in the current episode of the frenetic global yield chasing, the Phisix may be prone to a blow-off melt-up phase. This is strictly in the condition that the Risk ON-low interest environment prevails throughout the year.

A melt up phase means that the 10k Phisix may be reached sooner than later. The negative aspect is that such melt up phase would be accompanied by an acceleration of the systemic bubble in the real economy.

Furthermore, given the tight correlation of world markets, this implies that the Phisix is sensitive to contagion risks that may be transmitted via downside volatilities from anywhere around the world.

And given that bubbles are being nurtured almost everywhere we can’t discount that the source of the next crisis may arise from the region or from the country itself.

And like individuals every economy is distinct. Thus the elasticity or the tolerance level for economic imbalances will be dissimilar. No one can really say where the proverbial pin will be and when it will strike. Nonetheless for now we should simply take advantage of the boom while it lasts, but at the same time keeping vigil over the risks of a reversal.

And another thing, even the big guys appear to be jumping into the “great rotation” theme such as DoubleLine Capital LP, Loomis Sayles & Co and PIMCO[6] where investors now are seeing equities as providing returns than bonds thus the shift.

Will This Time Be Different?

Many, if not, the consensus here and abroad, have been seduced by the “outcome bias”. They see rising prices, popular media touting economic “upswing” supposedly based on sound economic growth and peer pressure as having reinforced their beliefs that “THIS TIME IS DIFFERENT”. They forget that these four words are loaded, and signify as the four dangerous words of investing[7] according to the late legendary investor Sir John Templeton

Yet how much of the domestic growth have emanated from natural market forces? How much have been influenced by monetary factors? No one can say. Everyone seems to assume that a debt-driven present oriented consumption economy can last forever.

I would add that on my radar screen list of 83 international bourses, only 10 are in the red. This suggests that a vast majority of equity benchmarks have been buoyed by a collective and collaborative policy of credit easing. 

Yet the gains of 2013 have not been inconsequential. I would estimate that the average returns in 2013 for those in the upside, in the range 4-5% year-to-date.

If stock markets have been a depiction of economic growth, then why the need for collective and collaborative easing from central banks?

What is the relevance of economic performance with stock market growth?

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I have used Venezuela’s 2012 mind boggling 300% stock market returns[8] as an example, now I refer to Greece

Since the advent of 2013, Greece has been one of the outstanding performers, where the Athens Index has been up 12.56% as of Friday’s close. Such fantastic returns add to the extraordinary gains at the close of 2012, where the Greece benchmark returned at almost the same level of the Phisix, up 32.47% and 32.95% respectively.

But look at the economy of Greece. Based on mainstream statistics, the stock market and the economy has been starkly moving in the opposite direction; a parallel universe.

And we are not talking here of a one-off event but 4-year intensifying slump versus a 7 month rally in the Greek Athens index.

If stock markets theoretically should represent future earnings stream, then the rally of the 7 month rally should highlight a meaningful of recovery. Yet even from a statistical viewpoint, there seems hardly any sign of this. Why? 

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So what also explains the need for the escalating central bank interventions, whom have cumulatively and synchronically been intensifying expansion of their balance sheet expansions, if indeed economies have been vigorously growing?

Yet how much real economic growth have such policies accomplished? The Zero Hedge[9] estimates that over the past 5 years where central bank assets grew by 17% annualized, an equivalent of only 1% of GDP growth had been attained over the same period.

Are we thus seeing diminishing returns which could be why central banks have become more aggressive?

The Bangko Sentral ng Pilipinas (BSP) has likewise been engaged in the same actions but at a much reduced scale[10] than her developed economy peers. In developed and emerging Asia, the BSP had been the most aggressive in cutting interest rates in 2012.

The general idea promoted by the consensus has been that all these actions would have immaterial impact or backlash to the economy. But what of the future?

Yet ironically, central banks have begun to signal a pushback from what seems as growing overdependence on them and from potentially becoming the scapegoat of politicians.

Proof?

From Bloomberg[11], (bold mine)
The central bankers who saved the world economy are now being told they risk hurting it.

Even as the International Monetary Fund cuts its global growth outlook, a flood of stimulus is running into criticism at the World Economic Forum’s annual meeting in Davos. Among the concerns: so-called quantitative easing is fanning complacency among governments and households, fueling the risk of a race to devalue currencies and leading to asset bubbles.

Central banks can buy time, but they cannot fix issues long-term,” former Bundesbank President Axel Weber, now chairman of UBS AG, said in the Swiss ski resort yesterday. “There’s a perception that they are the only game in town.”
Also, central bankers have been signaling anxiety from any potential repercussions from their current actions.

The central bank of central bankers, the Bank for International Settlements headed by Jaime Caruana recently said in a TV interview that “world was reaching the point where the damage from central banks' printing money could outweigh the benefits”[12] 

He further beckoned that politicians should deal with the real economic reforms "There is always a risk of overburdening central banks. There is perhaps excessive pressure when we discuss about growth; probably the attention should be focusing on productivity, competitiveness, labour market participation. There is a bit too much focus on central banks”.

And echoing former Bundesbank Axel Weber in the above, the role of central banks has supposedly been to provide window for addressing real issues, "Central bank measures such as cutting interest rates could only buy time for governments to take action on structural economic reform”.

Instead, the current policies have been incentivizing moral hazard “sometimes low rates provide incentives that time is not used so wisely", which essentially means that politicians have used central bankers to kick the can down the road.

Does all of the above serve as evidence of sound economic growth? What happens if central bankers decide to put meat on their words?

Or have people become deeply addicted to the inflationism as predicted by the Austrian school of economics?

As the great Professor Ludwig von Mises warned[13],
Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.
While I have little doubts that central banks will continue to pursue current policies despite subtle agitations against politicians, which should push the markets higher in 2013, it may not be central banks at all who will take the proverbial punchbowl away, but economic imbalances brought about by today’s deepening speculative mania.

The Risks from Thailand’s Credit Bubble

I have posted yesterday on my blog[14] what I sense as a vulnerable spot in Thailand’s economy: credit growth has been expanding far beyond the economy’s capacity to pay. 

Thai’s average credit growth from the private sector has been at 7.94% and from the government at 15% (based on external debt) compared to Thai’s statistical economic growth average at 3.6%. Loan growth from both sectors has recently been accelerating.

Importantly, while Thai’s external debt to GDP ratio remains far below the 1997 levels, their increasing reliance on short term debt now accounts for about 54% of total external debt which has virtually surpassed the 1997 levels at 45%!

And one of the symptoms from ‘economic overheating’ has been a surge in minimum wages—89% in 2012!

Now my question is with all the credit boom, where has the money been flowing into? One could be in the stock market, the Stock Exchange of Thailand beat the Phisix by a narrow margin 35.76% and 32.96% respectively. Next is could be a property bubble.

Thai’s financial assets and the economy has not only been bolstered by domestic credit but by portfolio flows into bonds and equities, as well as, burgeoning Foreign Direct Investments all of which has, so far, managed to offset their deficits in international trade balance data.

This only reveals that Thai’s economy seems highly susceptible to a sharp upside pendulum swing on interest rates that can be triggered by a “sudden stop”[15] in capital flows (most likely from regional or global contagion) or from an intrinsic implosion.

And it is important to note that measuring debt levels relative to statistical GDP can misinform analysts.

Most of the systemic debt accrued from both the private ‘formal’ sector and the government can be accurately measured from the outstanding issuance on the bond markets and from loans by the banking system.

On the other hand, GDP, which are accounting constructs based on estimates, can be bolstered by pumping up the system with money which raises relative price levels (thus economic growth), and from government expenditures.

In short a credit boom can mask a debt problem.

So when a bust arrives, the numerator which is fixed— as debts are based on contracts unless restructured or defaulted upon—will rapidly outweigh the shrinking denominator (GDP), which will initially adjust to reflect on the drop in the economic activities.

The result will be a higher level of debt to GDP ratio as the economy retrenches. This is likely to be further exacerbated by bailouts and other interventions to “save” the economy or when private debt will be transferred to the government.

Deceptive Economic Growth Statistics

Speaking of statistical duplicity, there are three ways to arrive at the GDP[16]: expenditure, income and production. The popularly used is the expenditure approach[17] popularly seen via the equation: 
GDP (Y) = Consumption (C) + Investment (I) + Government Spending (G) and Net Exports (X-M)
As shown above, the equation has a bias for Government Spending which it sees as positive for the economy, regardless of how government spends the money, hence the plus operation (+) and the bias of exports over imports (X-M) which has been used by mercantilists as an excuse to support the “balance of trade” fallacy (the latter I won’t be dealing here)

So in dealing with the first premise, we find it common for mainstream experts to proffer that government helps the economy even if they just build pyramids or dig up holes and fill them.

Such has been embodied by the work of John Maynard Keynes, who prescribed[18],
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
So if the government puts $1,000 for people to just dig and fill, from a macro accounting identity, the economy would be equally boosted by $1,000, or $1,000 (Y)= 0 (C) + 0 (I) + $1,000 (G) + 0 (X-M)

This is exactly why the GDP accounting tautology or as a statistical measure for economic growth misleads; statistical abstractions substitutes for economic reasoning, when the real economy is about purposeful human action as represented by the ever dynamic activities in pursuit of survival and progress, through production or provision of services channeled through voluntary exchange with the consumers.

Professor of economics and blogger at the Library of Economics and Liberty Garett Jones recently dealt with the inconsistencies of Government spending as a feature of economic growth[19],
Because GDP counts government salaries as "government expenditures" as soon as the government hires a person.  But the "consumption" and "investment" parts of GDP only count genuine purchases by the private sector
So if a private sector product spends years in the incubator, burning through thousands of person-hours of work and millions of dollars of salary--but never sees the light of day--then the product never shows up in GDP.  But if the government had hired those same workers who worked just as long on a similarly fruitless project, their labor would give a big boost to GDP.

Government hiring creates GDP by definition.  Private hiring only creates GDP if the worker actually creates a product. 

I’d further add that government spending, which represents coercive transfers from productive sectors of society, hardly accounts for value added or productivity growth to the real economy.
For instance, imposing regulations on commerce will stymie business activities, but such opportunity losses will not be accounted for in the said growth statistics. Instead, what will be added will be the spending done by the government in the hiring of people and other costs attendant to or associated with the implementation of such business restrictive regulations.

In short, the opportunity costs, as well as the negative feedback mechanism from interventions (e.g. future higher unemployment or taxes) will hardly be reflected on growth statistics.

Obsessing over growth statistics is a folly, even the principal architect of the GDP, Simon Kuznets, warned against its use to measure welfare[20], in 1934 he wrote[21]
The welfare of a nation can scarcely be inferred from a measurement of national income.
In 1962 Mr, Kuznets reiterated the same point but emphasized on the quality rather than the quantity of growth[22].
Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what.
In addition, official economic statistics are not only inaccurate they can be manipulated with to suit political ends[23]. They do in in both directions where statistics can be boosted for electoral purposes or undermined as means to supplicate for foreign aid.

In short, statistics can be made to lie. The case of Argentina in 2011 has been notorious. Officials persecuted private sector economists for not kowtowing to official numbers in measuring consumer price inflation. Some speculated that the design for such actions has been to finagle Argentina’s bondholders[24]. In other words, Argentina’s government not only manipulated economics, but censored and harassed the economics profession, aside from shaking down both the bond holders and their citizens.

The bottom line is that while statistics may assist in providing empirical evidence, they must be used with caution. Statistics should not be used to derive for causation and theory, instead economics which is an a priori science, should serve as groundwork for sound analysis.

Importantly we should realize what economics is truly about, as the late Professor Austrian economics Percy L. Greaves, Jr eloquently wrote[25],
Economics is not a dry subject. It is not a dismal subject. It is not about statistics. It is about human life. It is about the ideas that motivate human beings. It is about how men act from birth until death. It is about the most important and interesting drama of all — human action.




[2] Bespoke Invest DJIA Highs Actual and Inflation Adjusted, January 25, 2013

[3] Wikipedia.org Long term refinancing operation, European Central Bank

[4] Wikipedia.org Operation Twist History of Federal Open Market Committee actions



[7] Bob Parkman Consider these 'words of wisdom' about investing Sirjohntempleton.org September 20, 2006






[13] Ludwig von Mises, Cyclical Changes in Business Conditions, February 13, 2012 Mises.org

[14] See Thailand’s Credit Bubble, January 26, 2013




[18] Wikipedia.org Book III, The Propensity to Consume The General Theory of Employment, Interest and Money

[19] Garett Jones, Government Hiring: Raising GDP by Definition Econolog January 25, 2013


[21] Key quotes Beyond GDP

[22] Ibid

[23] Morten Jerven Interview with Russ Roberts Jerven on Measuring African Poverty and Progress Econtalk.org, January 7, 2013


[25] Percy L. Greaves, Jr. What Is Economics? August 3, 2011 Mises.org