Philippine Politics: To Save the Kids, Stop Inflationism, Promote Economic Freedom; Henry Hazlitt’s Cure for Poverty

In the Philippines, election season is upon us or just about a year and a few months away, so populist politics has once again been hugging the headlines. 

So what easier way to boost popular approval to generate future votes than—not only to focus on “poverty”—but to publicly appeal for compassion by fixating on a specific group: poverty on kids. 

Yet most of the proposed solution has been the same since time immemorial; more centralization, bigger government or simply more redistribution: multiplying wealth by dividing it.

So for this election season, it seems that poor kids will serve as instruments of sloganeering for the advancement of political careers of politicians.

Politicians make it sound is as if the private sector has no sense of compassion at all. Hardly the politicians realize that from an economic standpoint, the relief of poverty equates to the well-being of enterprises.

Charity requires no political mandates. 

So why shouldn’t the private sector contribute voluntarily? There are numerous civic groups (such as Rotary, Lions and et.al.) working to help solve social ills by voluntarism. [The two Rotary's which I used to be a member of have active feeding programs mainly on public schools]

The question is what has been an obstacle to private sector solutions?

There has been almost zero zilch nada nein nyet in any mainstream discussion has tackled on how financial repression or government redistribution policies mainly through central bank inflationism has served as a fundamental and structural reason in raising self-poverty ratings that has spurred populist calls for more centralized solution on poverty. 

Add to this the plethora of interventionisms via mandates, regulations, government spending and more all finance by higher taxes. Where will taxes come from? Manna from heaven?

Yet hasn’t it been contradictory to see a swelling of self poverty ratings in the face of G-R-O-W-T-H?

The clueless mainstream calls 'strong' economic growth and soaring self poverty ratings a “paradox”. They apparently have been long blind to comprehend that statistical G-R-O-W-T-H has been occurring to a few ‘concentrated’ bubble sectors, controlled by mostly the elites, whose G-R-O-W-T-H (use of more resources) has occurred from extensive leveraging in the formal banking system and capital markets—coming at the expense of or, all financed by Peso holders (via the use of less resources but pays the cost of higher prices or diminished purchasing power on income or savings).

Yet the same politically connected or influential economic elites contributes to a significant majority to the statistical economic output which mainstream G-R-O-W-T-H which is the reason for the “strong”. 

But statistical growth isn’t real economic growth. That's what the "paradox" has been about.

It is only when this massive redistribution mechanism via invisible subsidies in favor of the government and to these political elites channeled through the banking system diminishes when the burdens of self-poverty eases (as I have previously shown in SWS’s chart last August)

I post below the great libertarian Henry Hazlitt’s proposal for the cure for poverty.  From the Conquest of Poverty (chapter 20: The Cure of Poverty p 229-234; bold and italics mine)

Individual or family poverty results when the "breadwinner" cannot in fact win bread; when he cannot or does not produce enough to support his family or even himself. And there will always be some human beings who will temporarily or permanently lack the ability to provide even for their own self-support. Such is the condition of all of us as young children, of many of us when we fall ill, and of most of us in extreme old age. And such is the permanent condition of some who have been struck by misfortune—the blind, the crippled, the feebleminded. 

Where there are so many causes there can be no all embracing cure. 

It is fashionable to say today that "society" must solve the problem of poverty. But basically each individual—or at least each family—must solve its own problem of poverty. The overwhelming majority of families must produce more than enough for their own support if there is to be any surplus available for the remaining families that cannot or do not provide enough for their own support. Where the majority of families do not provide enough for their own support—where society as a whole does not provide enough for its own support—no "adequate relief system" is even temporarily possible. Hence "society" cannot solve the problem of poverty until the overwhelming majority of families have already solved (and in fact slightly more than solved) the problem of their own poverty.

All this is merely stating in another form the Paradox of Relief referred to in Chapter 18: The richer the community, the less the need for relief, but the more it is able to provide; the poorer the community, the greater the need for relief, but the less it is able to provide. 

And this in turn is merely another way of pointing out that relief, or redistribution of income, voluntary or coerced, is never the true solution of poverty, but at best a makeshift, which may mask the disease and mitigate the pain, but provides no basic cure.

Moreover, government relief tends to prolong and intensify the very disease it seeks to cure. Such relief tends constantly to get out of hand. And even when it is kept within reasonable bounds it tends to reduce the incentives to work and to save both of those who receive it and of those who are forced to pay it. It may be said, in fact, that practically every measure that governments take with the ostensible object of "helping the poor" has the long-run effect of doing the opposite. Economists have again and again been forced to point out that nearly every popular remedy for poverty merely aggravates the problem. I have analyzed in these pages such false remedies as the guaranteed income, the negative income tax, minimum-wage laws, laws to increase the power of the labor unions, opposition to labor-saving machinery, promotion of "spread-the-work" schemes, special subsidies, increased government spending, increased taxation, steeply graduated income taxes, punitive taxes on capital gains, inheritances, and corporations, and outright socialism.

But the possible number of false remedies for poverty is infinite.

Two central fallacies are common to practically all of them. One is that of looking only at the immediate effect of any proposed reform on a selected group of intended beneficiaries and of overlooking the longer and secondary effect of the reform not only on the intended beneficiaries but on everybody.

The other fallacy, akin to this, is to assume that production consists of a fixed amount of goods and services, produced by a fixed amount and quality of capital providing a fixed number of "jobs." This fixed production, it is assumed, goes on more or less automatically, influenced negligibly if at all by the incentives or lack of incentives of specific producers, workers, or consumers. "The problem of production has been solved," we keep hearing, and all that is needed is a fairer "distribution."

What is disheartening about all this is that the popular ideology on all these matters shows no advance—and if anything even a retrogression—compared with what it was more than a hundred years ago. In the middle of the nineteenth century the English economist Nassau Senior was writing in his journal:

"It requires a long train of reasoning to show that the capital on which the miracles of civilization depend is the slow and painful creation of the economy and enterprise of the few, and of the industry of the many, and is destroyed, or driven away, or prevented from arising, by any causes which diminish or render insecure the profits of the capitalist, or deaden the activity of the laborer; and that the State, by relieving idleness, improvidence, or misconduct from the punishment, and depriving abstinence and foresight of the reward, which have been provided for them by nature, may indeed destroy wealth, but most certainly will aggravate poverty."

Man throughout history has been searching for the cure for poverty, and all that time the cure has been before his eyes.

Fortunately, as far at least as it applied to their actions as individuals, the majority of men instinctively recognized it—which was why they survived. That individual cure was Work and Saving. In terms of social organization, there evolved spontaneously from this, as a result of no one's conscious planning, a system of division of labor, freedom of exchange, and economic cooperation, the outlines of which hardly became apparent to our forebears until two centuries ago. That system is now known either as Free Enterprise or as Capitalism, according as men wish to honor or disparage it.

It is this system that has lifted mankind out of mass poverty.

It is this system that in the last century, in the last generation, even in the last decade, has acceleratively been changing the face of the world, and has provided the masses of mankind with amenities that even kings did not possess or imagine a few generations ago.

Because of individual misfortune and individual weaknesses, there will always be some individual poverty and even "pockets" of poverty. But in the more prosperous Western countries today, capitalism has already reduced these to a merely residual problem, which will become increasingly easy to manage, and of constantly diminishing importance, if society continues to abide in the main by capitalist principles. Capitalism in the advanced countries has already, it bears repeating, conquered mass poverty, as that was known throughout human history and almost everywhere, until a change began to be noticeable sometime about the middle of the eighteenth century. 

Capitalism will continue to eliminate mass poverty in more and more places and to an increasingly marked extent if it is merely permitted to do so.

In the chapter "Why Socialism Doesn't Work," I explained by contrast how capitalism performs its miracles. It turns out the tens of thousands of diverse commodities and services in the proportions in which they are socially most wanted, and it solves this incredibly complex problem through the institutions of private property, the free market, and the existence of money—through the interrelations of supply and demand, costs and prices, profits and losses. And, of course, through the force of competition. Competition will tend constantly to bring about the most economical and efficient method of production possible with existing technology—and then it will start devising a still more efficient technology. It will reduce the cost of existing production, it will improve products, it will invent or discover wholly new products, as individual producers try to think what product consumers would buy if it existed. 

Those who are least successful in this competition will lose their original capital and be forced out of the field; those who are most successful will acquire through profits more capital to increase their production still further. So capitalist production tends constantly to be drawn into the hands of those who have shown that they can best meet the wants of the consumers.

Perhaps the most frequent complaint about capitalism is that it distributes its rewards "unequally." But this really describes one of the system's chief virtues. Though mere luck always plays a role with each of us, the increasing tendency under capitalism is that penalties are imposed roughly in proportion to error and neglect and rewards granted roughly in proportion to effort, ability, and foresight. It is precisely this system of graduated rewards and penalties, in which each tends to receive in proportion to the market value he helps to produce, that incites each of us constantly to put forth his greatest effort to maximize the value of his own production and thus (whether intentionally or not) help to maximize that of the whole community.

If capitalism worked as the socialists think an economic system ought to work, and provided a constant equality of living conditions for all, regardless of whether a man was able or not, resourceful or not, diligent or not, thrifty or not, if capitalism put no premium on resourcefulness and effort and no penalty on idleness or vice, it would produce only an equality of destitution.

Another incidental effect of the inequality of incomes inseparable from a market economy has been to increase the funds devoted to saving and investment much beyond what they would have been if the same total social income had been spread evenly. The enormous and accelerative economic progress in the last century and a half was made possible by the investment of the rich—first in the railroads, and then in scores of heavy industries requiring large amounts of capital. The inequality of incomes, however much some of us may deplore it on other grounds, has led to a much faster increase in the total output and wealth of all than would otherwise have taken place.

Those who truly want to help the poor will not spend their days in organizing protest marches or relief riots, or even in repeated protestations of sympathy. Nor will their charity consist merely in giving money to the poor to be spent for immediate consumption needs. Rather will they themselves live modestly in relation to their income, save, and constantly invest their savings in sound existing or new enterprises, so creating abundance for all, and incidentally creating not only more jobs but better-paying ones. 

The irony is that the very miracles brought about in our age by the capitalist system have given rise to expectations that keep running ahead even of the accelerating progress, and so have led to an incredibly shortsighted impatience that threatens to destroy the very system that has made the expectations possible.

If that destruction is to be prevented, education in the true causes of economic improvement must be intensified beyond anything yet attempted.

The cure for poverty is for the government to STOP COERCIVE REDISTRIBUTION via financial and economic repression. The obverse side is to PROMOTE SOUND MONEY and ECONOMIC FREEDOM. But none of this economic reality will generate votes.

Quote of the Day: The Merit of Gold

It is the outstanding merit of gold as the monetary standard that it makes the supply and the purchasing power of the monetary unit independent of government, of office holders, of political parties, and of pressure groups. The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice. It is precisely the merit of the gold standard, finally, that it puts a limit on credit expansion.

This is from the late great libertarian Austrian economist, philosopher, journalist Henry Hazlitt in his book THE INFLATION CRISIS, AND HOW TO RESOLVE IT p.173

ECB-China Stimulus: Has the Risk ON Environment Returned?

Here is what I wrote last week[1],

Mounting expectations and deepening dependence from central banking opiate, which has been clashing with the unfolding economic reality, will prompt for more price volatility on both directions. The Bank of America posits that QE 3.0 has been substantially priced in.

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

The ECB and China’s government eventually relented to the market’s expectations

“Unlimited government bond buying” bazooka program[2] launched by the European Central Bank (ECB), last Thursday, spurred one of the best one-day rally for many global stock markets for the year.

China also announced of a modest infrastructure spending stimulus to the tune of the 1 trillion yuan or US 157 billion[3] last Friday. China’s rescue program seems to have been timed or coordinated with the ECB’s action.

China’s package looks “modest” because the earmarked amount for fiscal spending projects accounts for only a little over a quarter of the $586 billion stimulus implemented in 2008-2009.

Nonetheless the combined stimulus by the ECB and China nudged an astounding reprisal by the browbeaten bulls: the Shanghai index soared by 3.7% on Friday!

The steroid boosted activities of China’s Shanghai index exhibited the same theme for most of the major equity benchmarks for the week.

The weekly advances concealed the real activities.

Much of the global equity markets were marginally changed when both announcements provoked end of the week spikes. Only Malaysia among the majors lost ground.

Deepening Gulf Between Market Prices and Economic Events

This week’s remarkable rally reveals of two important insights.

ONE. Financial market has been responding to interventions rather than to actions in the real world.

Increasing detachment has characterized the actions in the financial markets relative to real economic activities.

Industrial production in the Eurozone[4] (see left window) have generally been cascading throughout 2012, however European stocks, particularly the German DAX, French CAC, and Italy’s iShares MSCI and Spain’s IBEX has been ascendant since May (see right window).

Year to date, the DAX has been an up by an outstanding 22.31%, the CAC 40 11.37% and Italy’s iShares MSCI 6%. Spain’s Ibex has trimmed losses to only 8%.

Economic performance and stock prices have been going in opposite directions.

Well this has not been limited to the Eurozone.

Divergences can be seen from accounts of declining GDP or economic growth for the G-7, the Eurozone and the US, although the OECD projects that America may defy the global momentum for the rest of the year.

The OECD projection according to the Economist[5],

The global economy has weakened since the spring and the OECD predicts that in the next quarter the GDP of the G7 group of richest countries will grow by just 0.3% (at an annual rate), down from an already anaemic 0.9% in the second quarter. America provides a rare bright spot, but the three biggest economies in the euro zone, Germany, France and Italy, are set to shrink by 1% in Q3, worse even than their 0.3% contraction in Q2. Indeed, figures released on the same day by Eurostat show that GDP growth in the 17 euro-zone countries fell from zero in the first quarter to -0.2% in the second, and from zero to -0.1% in the 27-country European Union.

I don’t share the OECD’s sanguine expectations on the US. The US will, like her global contemporaries, be hobbled by contagion linkages, political bickering and an internal slowdown.

Come to think of it, the OECD expects Germany to fall into a recession by the end of the year[6]. But the German equity benchmark, the DAX, seems to negate all the troubles ahead and seems approaching April 2011 highs. One of them is wrong, so which is which?

In addition, global trade (light blue line, lower window from the Economist chart) has been drifting in conjunction with global manufacturing activities (Purchasing manager’s index based on new export orders, dark orange line) to the downside. Yet except for the Shanghai index which has been slightly down, aside from Japan’s Nikkei and Malaysia’s KLCI, which has lagged, all other major indices have posted superior double digit year to date returns.

Importantly, the deterioration in global trade and global manufacturing activities has not just been a decline in the trend of growth, instead current data suggests that both indicators have exhibited signs of contraction. About 80% of global manufacturing activities have reportedly been in contraction[7].

So once again stock markets live in a different reality from the economic picture.

We go next to US corporate profits.

Corporate profits seem to have also diverged from the upside price momentum of US major equity prices.

Based on the following profit measures, 1) S&P 500 Earnings Per Share, 2) After-Tax Net Income 3) Pre-Tax Profits by Source, 4) Financial Corporate Profits and 5) Profits from Abroad, Dr Ed Yardeni chief of prominent research firm Yardeni Research, weighs on the profit segment based on an empirical analysis and makes the following conclusions.

In enumerated order, Dr Yardeni[8] says that profits has 1) “lost its upward momentum”, 2) have been “running out of steam”, 3) “have stalled in a zigzag fashion”, 4) “looking especially toppy” and 5) “weakest growth rate since Q3-2009” which implies of “a decline twice as much for overseas profits”.

Mr. Yardeni’s seemingly drab undertone comes prior to Thursday’s ECB-China fueled boom. The point here is that sustained upside price increases for US stocks will push valuations into overpriced territory.

Domestic data hasn’t been that promising too.

Last week’s US jobs data came worse than expected but apparently have been either ignored by the US markets because ECB’s action may have drowned out such negative news or could have been interpreted as the du jour “bad news is good news”.

The job data on the surface showed mediocre signs of improvement. But this came amidst a decline in the labor force. The labor force participation rate (63.5%) dropped to lowest level since May 1979, according to Northern Trust[9] (left window).

Compounding on this, notes the Wall Street Journal Blog[10], is that for June there had been fewer jobs created, manufacturing shed 15,000 jobs which essentially reflected on the ongoing downturn, and fewer people are working.

Many talking heads see this unimpressive and lacklustre economic performance as rationalization for the FED to pursue further easing measures during their FOMC meeting by next week.

From a fundamental standpoint, surging US markets suggest either that 1) moves by central banks (particularly the ECB which will likely be complimented by the FED for political reasons*) will dramatically reverse the dynamics of all of the above concerns, in order for the global equity markets to justify on their current price levels, or 2) the price-fundamental disconnect will only amplify risks for a violent “reversion to the mean”.

* as stated last week, Mr. Bernanke will seek to retain his tenure by propping up the markets to support President Obama’s re-election

The great disconnect is in reality signs of contortions from inflationism.

As the great American economist, philosopher and journalist Henry Hazlitt once wrote[11]

Because inflation leads inevitably to distortions in the interest rate, because during it nobody knows what future prices, costs, or price-cost relations are likely to be, it inevitably distorts and unbalances the structure of production. It gives rise to multitudinous illusions. Because the nominal interest rate, though it rises, does not rise enough, funds are more heavily borrowed than before; uneconomic ventures are encouraged; corporations making high nominal profits invest abnormal sums in expansion of plant. Many regard this, when it is happening, as a happy byproduct of inflation. But when the inflation is over much of this investment is found to have been misdirected—to have been malinvestment, sheer waste. And when the inflation is over, also, there is found to be, because of this previous misdirection of investment, a real and sometimes intense capital shortage.

The second implication from the current rally is that whatever one has conventionally learned from investing has been rendered irrelevant, if not obsolete, by sustained manipulation of prices of financial markets for political reasons.

That political reason has been to effect price controls in the financial markets by burning shorts in order to save the current political order.

Fund manager and Credit Bubble Bulletin (CBB) analyst Doug Noland is spot on with the dynamics behind the current developments[12]

With the financial world fixated on Draghi, Bernanke and endless QE, global markets now wildly diverge from economic fundamentals. Many are content to celebrate, holding firm to the view that financial conditions tend to lead economic activity. Markets discount the future, of course. And, traditionally, an easing of monetary policy would loosen Credit and financial conditions - spurring lending, spending, investing and stronger economic activity.

Importantly, traditional rules and analysis no longer apply. Monetary policy has been locked in super ultra-loose mode now entering an unprecedented fifth year.

This serves as further proof that earnings, economic growth or chart patterns have become subordinate to the actions of central bankers and government authorities in determining stock price movements

ECB’s Actions Enhances Stagflation Risks, Bernanke Next?

Part of the newly announced ECB program includes the replacement of Securities Markets Programme (SMP) with new Outright Monetary Transactions programme (OMT) which is conditional to the EFSF/ESM facility, the ECB also removed the senior status on its purchases and importantly “the easing of collateral rules, namely suspension of the minimum rating threshold for countries with an OMT or an EU-IMF programme. Thus, government bonds (and government guaranteed bonds) no longer face the risk of not becoming eligible collateral (unless countries do not deliver on reforms of course). This should remove an important risk for banks buying government bonds” according to Danske Research[13].

Optimism derived from the tinkering with so called self-made regulations shares the same myopic political idea that edicts have the power to eliminate risks and overpower economic reality.

There are many aspects to deal with covering the ECB’s latest announcement.

These include among the many

-the willingness of crisis stricken nations to sacrifice their sovereignty to the supervising troika (EU, ECB and the IMF) by applying for the EFSF/ESM facility in order for the ECB mechanism to be triggered,

-the political support from the average Germans for the sustained wealth transfer mechanism to the PIGS. Germany’s Constitutional Court will decide on the ESM court case by next week amidst political street protests[14] and

-if these measures will ever work at all.

I think what really matters now will be undeclared objectives by the ECB for such measures. Despite the conditionality to allegedly “sterilize” such interventions, the ECB will have limited means to do so.

First, the ECB will have to sell assets to offset its direct bond purchases. Indirect purchases can also be made through the commercial banking system financed by the ECB.

This means that for the ECB to conduct sterilization, only non-crisis tainted (PIIGS) assets presently held or owned by the ECB will be available for sale, or that the ECB has to shrink its loans to banks collateralized by non-PIGS bonds[15]

Since non PIIGS assets are limited, once used up, the ECB will likely be engaged in unsterilized actions.

Next, if these will be sterilized by fixed term deposits or weekly deposit tenders[16], which function as another form of reserves, the build up of reserves at the ECB will only amplify the debt pyramiding dynamic of the cartelized tripartite political system comprising the banking system, central bank and the government/welfare state through cross financing (banks finance government, the government capitalizes and provides monopoly legal tender status to central banks, central banks backstops the banks and provides financing indirectly to governments through banks (bond buying).

By having to artificially reduce interest rates, governments of the PIIGS will likely defer on making the required reforms and continue with their spending binges, thus, exacerbating the current conditions.

Importantly, the easing of collateral rules may have opened the floodgates for the feedback loop of mechanism of massive debt issuance and ECB buybacks since “banks under the programme”, according to Austrian economist Bob Wenzel who quotes another expert [17], will be able “to use the self-issued government guaranteed debt as collateral”

The point is that the recent price action of commodities seems to have “seen through” the legerdemain over so-called “sterilization”, and have moved significantly up nearly across the board. Such actions appear to be signaling the resurgence of an inflationary boom.

Gold will probably test the 1,800 level by the yearend, oil (WTIC), copper and the broad based commodity benchmark the Reuters CRB (CCI) index have turned materially to the upside.

I hardly believe that this will be the same prolonged Risk ON environment as before. With unlimited or open ended options (US Federal Reserve has already been taking this in consideration), central bankers have been increasingly signaling urgency and desperation.

Yet there are very important differences from today’s implementation of easing programs compared to the past: interventions are being done amidst elevated commodity price levels.

And if commodity price inflation will spillover to the real economy, such euphoria will likely be short term. This will likely be seen first in emerging markets such as the Philippines.

Current environment, for me, seems like very fragile and precarious.

Stocks Under a Stagflationary Environment

As I pointed out in the past, imposing inflationary measures under the current environment heightens the risks of stagflation.

Signs of stagflation have also been transmitted not only to gains in commodity prices but also on global mining stocks.

I would further add that if the US Federal Reserve joins the ECB next week, then the current short term RISK ON momentum may persist, but advances will likely be skewed towards commodities.

Eventually I expect a structural departure between mining and resource with the general trend once the stagflation dynamic becomes entrenched.

Resource companies have the potential to surf the stagflation tide, while others will be restrained by consumer price controls, realignment of economic activities towards consumer staples and higher input costs that will crimp on profits.

Mr. Hazlitt on why the stock market in general faces downside risks during high inflation-stagflation regimes[18].

The causes of these disappointing results have been somewhat complex. Let us recall once more that in any inflation, individual prices and costs never go up at a uniform rate but at widely different relative rates and times. Cost-price relationships become discoordinated. Individual firms find it increasingly difficult to know or guess what their own future costs or future selling prices are going to be, and what will be the ratio between them. During an inflation demand shifts quickly from one product to another. This makes it increasingly difficult to plan production ahead, or to estimate future profit margins. In the later stages of an inflation, wage rates are more certain to go up than individual prices. Even if aggregate profits increase in monetary terms, the range of deviation and dispersion is much greater as between different firms. The investor faces increasing uncertainty. This always tends to lower stock prices.

Because the future of the business is increasingly uncertain, corporations become more reluctant to pay out dividends. If, as in many cases, profits are particularly high in money terms, if inventories and plant and equipment are constantly rising in price, more and more plant managers conclude that the best use of their current profits is to plow them back immediately into expansion of the business. This seems especially the most profitable thing to do in a hyperinflation. It then seems foolish to declare dividends when, by the time the stockholders receive them, they may be worth much less than they were when declared

Bottom line: Bubbles: Illusions of Progress

Financial markets have become materially detached from the unfolding real events. Markets are suggesting not only of recovery, but of a strong upside momentum in terms of economic recovery, whereas present global economic trends have been increasingly portentous of the risks of a global recession. If current diametric positions will remain, such growing divergences may accelerate a buildup on the risks of sharp downside volatility.

Such distortions seem to have become embedded into the market’s psyche. An upside market has now become an entitlement as impressed upon to the public through inflationist policies.

Yet current policies as noted above have been rewarding the bulls while punishing the bears (particularly the shorts). Policies have been designed to wrench economic reality with hope (some call it “hopium” or concatenation of hope and opium or addictive hope) that inflationism will work even if history has shown that it hasn’t.

And not only has such inflationist policies been promoting the “orgy of speculation”, this has been intensely obscuring price signals and economic coordination while giving the public illusion of progress.

As a side note, I recall last week when I presented signs of “portfolio pumping” in the domestic stock exchange, I read a remark somewhere that there should be a congressional investigation on this. Oh puhleez (to borrow Mr. Bob Wenzel’s expression), spare the market from further politicization. It has been bad enough that markets are already being directly and indirectly manipulated and assaulted for political reasons through various policies hardly understood public.

By adding more political interferences, eventually we all get what we deserve real hard.

---

[1] See Phisix: Why The Correction Cycle Is Not Over Yet September 2, 2012

[2] See ECB’s Mario Draghi Unleashes “Unlimited Bond Buying” Bazooka, Fed’s Ben Bernanke Next? September 7, 2012

[3] See China Joins Stimulus Bandwagon via Massive Infrastructure Spending September 7, 2012

[4] Weekly Focus ECB back as fire fighter and it works, Danske Research, September 7, 2012

[5] Graphic Detail The European effect Economist.com Blog September 6, 2012

[6] Speigel Online OECD Predicts Recession for Largest EU Economy September 6, 2012

[7] See 80% of World Manufacturing Activities Contracting, September 4, 2012

[8] Ed Yardeni Profits Dr. Ed’s Blog September 4, 2012

[9] Asha Bangalore August Employment Data Contain Ample Evidence to Justify QE3, Northern Trust, September 7, 2012

[10] Wall Street Journal Blog Five Key Takeaways From Jobs Report September 7, 2012

[11] Henry Hazlitt The Inflation Crisis, And How To Resolve It, p.125 Mises.org

[12] Doug Noland Diverging Like It's 1929, September 7, 2012 Credit Bubble Bulletin Prudent Bear.com

[13] Danske Research ECB meeting: ECB is now waiting for Spain, September 6, 2012

[14] Reuters.com Hundreds of Germans protest against euro rescue steps September 8, 2012

[15] Lawrence H. White How much dodgy debt will the ECB buy?, September 7, 2012 Freebanking.org

[16] The Tell, Euro gets boost from ECB sterilization speculation Marketwatch.com September 6, 2012

[17] Robert Wenzel The Magic Tricks of Mario Draghi Economic Policy Journal September 8, 2012

[18] Henry Hazlitt op cit p.146

Bank of England Study: QE Benefited the Elites

The Bank of England study on The Distributional Effects of Asset Purchases notes of the implications of Quantitative Easing (QE) on Savers

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Inflation is political. Inflation redistributes wealth from society to politically favored groups or the political elites, and thus, promotes wealth inequality.

In this case, inflation through QE has been aimed at supporting asset prices, which essentially accounts for the Bernanke doctrine.

The morality of inflation as the great Henry Hazlitt wrote, (The Inflation Crisis and How to Solve it p.41)

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals

Libertarian Legacies of Henry Hazlitt and Leonard Read…

…in the account of Professor Gary North at the lewrockwell.com

Henry Hazlitt…

Like so many people who came to an understanding of the free market in the 1950s and 1960s, Henry Hazlitt was an influential figure. He had been an influential figure for at least 30 years. He is most famous for his book, Economics in One Lesson, which he wrote in 1946. But he was a New York Times columnist at the time he wrote that book. H. L. Mencken once said that Hazlitt was the only economist who knew how to write.

Hazlitt never went to college. He wrote his first book, Thinking as a Science, when he was 20 years old. That was the same year that he went to work for the Wall Street Journal. That was in 1915. To say that Hazlitt had a long writing career does not begin to convey just how long it was. His final article was published in 1988. He died in 1993 at the age of 98.

I did not meet him until I went to work for the Foundation for Economic Education in 1971. But I had been reading his materials ever since the late 1950s. I was a latecomer in this process. It is safe to say that anyone who called himself a libertarian in 1960 had been influenced, directly or indirectly, by Hazlitt. I suspect that this is still true.

Hazlitt was one of the early American promoters of the writings of Ludwig von Mises. He was convinced in the late 1930s that Mises was right, and that the New Deal was wrong. He wrote a positive review of Mises's book, Socialism, for the New York Times Book Review in 1938. This book had been published in South Africa in 1936, although it had been available in German since 1922. I think it is safe to call him an early adopter. He understood the magnitude of what Mises had been teaching long before most American economists had read Mises's books.

Hazlitt's critique of John Maynard Keynes, published in 1959, The Failure of the 'New Economics,' is a comprehensive and thoroughly readable critique of Keynes's General Theory. It was ignored by the academic profession, possibly because it was so thorough in its criticisms, but probably because Hazlitt was noted as a financial journalist, not as a professor of economics somewhere. He did not have the right credentials, so the academic community ignored him. I don't think this bothered him in the slightest.

He was always enthusiastic. He was always extremely lively. In this sense, he reminded me of Murray Rothbard and Burt Blumert, the co-founder of the Center for Libertarian Studies. I never saw him dejected in any way.

I suppose my best recollection of him was late in his life, when he was in a retirement home. At his age, there were not many men in the home. He remarked, twinkle in his eye, that a lot of the ladies in the home made a fuss over him. Then, coming to his senses, he added, "but don't tell Frances." Frances was Mrs. Hazlitt. He was altogether a sensible man.

Again, the lesson is clear: stick to your knitting, and stick to your guns.

Leonard E. Read…

If anyone deserves the title of the founder of libertarianism, it is Read. He was a born promoter. He was the head of the Chamber of Commerce in Los Angeles in the 1930s. He had never gone to college. He was an effective speaker, and in later years, he proved to be an effective writer. He was never a back-slapper, but he was never confrontational, either.

His story of how he was converted to a free market position made an impression on me. He had gone to see the head of the Pacific Gas and Electric Company, William Mullendore. He went there, as he said, "to straighten out this fellow." By the time he had spent a couple hours being taught the principles of voluntarism, he realized that the worldview which he had held when he walked in the door was wrong.

From that day on, he was not really in alignment with the Chamber of Commerce. The chamber was always ready to promote government intervention in favor of business. From that fateful meeting onward, Leonard Read was not.

A decade later, he turned down a job heading the International Chamber of Commerce, which would have paid him $100,000 a year, which in 1946 was a fortune. Instead, he started the Foundation for Economic Education. He had contacts with rich men because of his time spent in the Chamber, but he always attempted to establish a broad-based support for the organization. FEE was not a rich men's plaything. In 1956, he launched the magazine which served as the major source of recruiting for the libertarian movement for the next 20 years: The Freeman. William F Buckley had wanted to buy it, but Read owned the name, and a year after Buckley started National Review, FEE started publishing The Freeman.

While Read was not a trained economist, he had a very clear understanding of how free markets operate. He wrote an article which I regard as the finest statement of the principle of the division of labor that has ever been written. It is called "I, Pencil." It is the story of how nobody knows how to make a pencil. A simple pencil is such a complex device that it takes coordination and cooperation beyond anyone's ability to comprehend in order to produce a simple pencil.

This insight has persuaded an untold number of people of the power and creativity of the free market. What was also creative about the article is that he wrote it as a narrative given by a pencil. He listed his own name only with these introductory words: "as told to."

He also wrote a classic little book, which is unfortunately out of print, Elements of Libertarian Leadership. He wrote many other books, and numerous collections of essays. He never stopped writing, almost until the day he died at the age of 84.

Here is the same lesson: stick to your knitting, and stick to your guns. He turned down a lot of money in 1946 to do this.

Both libertarians were not trained economists; Hazlitt even “never went to college”, yet both came out with classic economic books and articles. Bottom line: economics can be self-learned. Try the Mises Institute

Henry Hazlitt on the Task of Libertarians

The great late Henry Hazlitt, in an article at the Mises Institute today, tells Libertarians to work on TWO fundamental aspects in preaching liberty. (dedicated to my Filipino libertarians and Casey Phyle friends, as well as, passive libertarian audiences or visitors)

One is to specialize or apply liberty in our respective field of expertise… (bold emphasis mine)

We libertarians have our work cut out for us.

In order to indicate further the dimensions of this work, it is not merely the organized bureaucracy that the libertarian has to answer; it is the individual private zealots. A day never passes without some ardent reformer or group of reformers suggesting some new government intervention, some new statist scheme to fill some alleged "need" or relieve some alleged distress. They accompany their scheme by elaborate statistics that supposedly prove the need or the distress that they want the taxpayers to relieve. So it comes about that the reputed "experts" on relief, unemployment insurance, Social Security, Medicare, subsidized housing, foreign aid, and the like are precisely the people who are advocating more relief, unemployment insurance, Social Security, Medicare, subsidized housing, foreign aid, and all the rest…

We libertarians cannot content ourselves merely with repeating pious generalities about liberty, free enterprise, and limited government. To assert and repeat these general principles is absolutely necessary, of course, either as prologue or conclusion. But if we hope to be individually or collectively effective, we must individually master a great deal of detailed knowledge, and make ourselves specialists in one or two lines, so that we can show how our libertarian principles apply in special fields, and so that we can convincingly dispute the proponents of statist schemes for public housing, farm subsidies, increased relief, bigger Social Security benefits, bigger Medicare, guaranteed incomes, bigger government spending, bigger taxation, especially more progressive income taxation, higher tariffs or import quotas, restrictions or penalties on foreign investment and foreign travel, price controls, wage controls, rent controls, interest rate controls, more laws for so-called consumer protection, and still tighter regulations and restrictions on business everywhere.

This means, among other things, that libertarians must form and maintain organizations not only to promote their broad principles — as do, for example, the Foundation for Economic Education at Irvington-on-Hudson, New York, the American Institute for Economic Research at Great Barrington, Massachusetts, and the American Economic Foundation in New York City — but to promote these principles in special fields. I am thinking, for example, of such excellent existing specialized organizations as the Citizens Foreign Aid Committee, the Economists' National Committee on Monetary Policy, the Tax Foundation, and so on.

…which should include or cover law and politics.

But, of course, liberty cannot be enlarged or preserved unless its necessity is understood in many other fields — and most notably in law and in politics.

We have to ask, for example, whether liberty, economic progress, and political stability can be preserved if we continue to allow the people on relief — the people who are mainly or solely supported by the government and who live at the expense of the taxpayers — to exercise the franchise. The great liberals of the 19th and early 20th centuries, including John Stuart Mill and A.V. Dicey, expressed the most serious misgivings on this point.

Second is to focus on inflation, as all interventionism starts and ends with inflationism… (italics original, bold mine)

This issue has the inherent advantage that it can be made clear and simple because fundamentally it is clear and simple. All inflation is government made. All inflation is the result of increasing the quantity of money and credit; and the cure is simply to halt the increase.

If libertarians lose on the inflation issue, they are threatened with the loss of every other issue. If libertarians could win the inflation issue, they could come close to winning everything else. If they could succeed in halting the increase in the quantity of money, it would be because they could halt the chronic deficits that force this increase. If they could halt these chronic deficits, it would be because they had halted the rapid increase in welfare spending and all the socialistic schemes that are dependent on welfare spending. If they could halt the constant increase in spending, they could halt the constant increase in government power.

Well this blog is has both contents. The truth will set us free.

Could Gold Prices be Signaling a Reprieve in Selloffs or a Bottom?

Over at the commodity markets, gold’s and silver’s recent bounce could yet signal a reprieve to the market’s selloff.

On the one hand, this bounce could signify a reaction to extremely oversold levels but may not be indicative of a bottom yet.

On the other hand, if gold and silver have found a bottom then they could likely be signaling the coming tsunami of inflationism, where the tendency is that gold leads other assets in a recovery, perhaps like 2008.

Also, the recent bounce came amidst Greek polls exhibiting improvements of the standings of pro-austerity camp, perhaps indicative of reduced odds of a Greece exit. A victory by pro-bailout camp government would allow the ECB to orchestrate the same operations that it has been conducting at the start of the year.

For most of the past 3 years prices of gold and the US S&P 500 have been correlated but with a time lag. Since March an anomalous divergence occurred, the S&P rose as the gold fell. For most of the past two weeks both gold and the S&P fumbled which seem to have closed the divergence gap.

But over the two days gold rose as stocks fell. Such anomaly will be resolved soon.

Again, gold cannot be seen as a standalone commodity and should be seen in the context of both the general commodity sphere and of other financial assets.

Focusing on gold alone misses the point that gold represents one of the contemporary assets that competes for an investor’s money. Such that changes in the gold prices would likewise affect prices of other relative assets.

Prices are all interconnected, the great Henry Hazlitt explained[1]

No single price, therefore, can be considered an isolated object in itself. It is interrelated with all other prices. It is precisely through these interrelationships that society is able to solve the immensely difficult and always changing problem of how to allocate production among thousands of different commodities and services so that each may be supplied as nearly as possible in relation to the comparative urgency of the need or desire for it.

To fixate only on gold without examining the actions of other assets would risk the misreading of the gold and other asset markets.

Let me further add that a Greece exit or a collapse of the Euro doesn’t automatically mean higher gold prices. This entirely depends on the actions of central banks.

Since gold is not yet money today, based on the incumbent legal tender laws, it would be totally absurd to argue that under today’s fiat money system—where financial contracts have been underwritten on paper currencies mostly denominated in US dollars or the foreign currency alternatives, European euro, British pound, Swiss franc, Japanese yen or even China’s renminbi—all debt liquidations, be it ‘calling in of loans’ or ‘margin calls’ will be consummated in paper money currency and not in gold.

This means that a genuine debt deflation would translate to greater demand for cash balance (based on Irving Fisher’s account of debt deflation[2]) which means more demand for the US dollar and other currencies of ex-euro trade counterparties.

And that’s what has been happening lately to the marketplace, the US dollar (USD) and US Treasuries 10 year prices (UST) has risen opposite to falling gold prices and other financial assets.

This means part of the global system has been enduring stresses from debt liquidations, which again bolsters the relative effects of money and boom bust cycles.

As pointed out before[3], it would be mistake to equate the 1930 eras (gold bullion standard) or the 1940 eras (Bretton Woods standard) with today’s digital and fiat money system. That would be reading trees for forest when gold was officially money then.

And given that gold has long been branded a “barbaric relic” and has practically been taken off the consciousness of the general public in Western nations, gold has hardly been appreciated as money, perhaps until a disaster happens.

It has only been recently and due to sustained gains of gold prices where gold’s importance has begun to percolate into the American public[4].

Yet the Americans see gold more of an investment than as money

But of course, this is different with many Asians who still values gold as money. For example, many Vietnam banks are even paying gold owners fee for storage[5] in defiance of government edict.

Gold’s rise would be premised from central banking inflationism designed to protect the certain political interests, which today have represented the banking institutions and the Federal and national governments.

As proof, the latest quasi bank run in Greece, which I pointed out above, has reportedly been due to concerns over devaluation of the drachma, should Greece exit from the EU and NOT from deflation.

While I remain long term bullish gold, short term I remain neutral and would like see further improvements in gold’s price trend and subsequently the relative trends of other “risk ON” assets.

---

[1] Hazlitt Henry How Should Prices Be Determined? , May 18, 2012

[2] Wikipedia.org Fisher's formulation, Debt Deflation

[3] See Gold Unlikely A Deflation Hedge June 28, 2012

[4] Gallup.com Gold Still Americans' Top Pick Among Long-Term Investments, April 27, 2012

[5] See Vietnam Banks Pay Gold Owners for Storage, April 12, 2012

Quote of the Day: Troubles of Mild inflation

The Wall Street Journal’s Notable & Quotable section presented the great Henry Hazlitt’s excerpt on the “troubles of even a mild inflation”.

Here is the complete quote from Hazlitt’s must read classic Economics in One Lesson (p.150-51) [bold emphasis mine]

So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run it brings disastrous consequences to the whole community. Even a relatively mild inflation distorts the structure of production. It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment—whether in the form of machines, factories, or office buildings—cannot yield an adequate return and loses the greater part of its value.

Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression. It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces will have got out of hand. You cannot make an argument for a 25 percent advance in prices by inflation without someone’s contending that the argument is twice as good for an advance of 50 percent, and someone else’s adding that it is four times as good for an advance of 100 percent. The political pressure groups that have benefited from the inflation will insist upon its continuance.

It is impossible, moreover, to control the value of money under inflation. For, as we have seen, the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 percent increase in the quantity of money will mean a 50 percent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money.

This only goes to show why policies of inflationism has hardly been about economics, but mostly about advancing the interests of some politically favored groups. Such that once embarked upon, like narcotic addiction, inflationism becomes hard to stop as this would reverse the gains made from the early infusions.

Importantly, the consequent economic and financial system built around such policies becomes entirely dependent, not only on the sustenance, but on accelerated inflationism.

Mr. Hazlitt’s warning seems in full motion as central banks persistently ramps on their balance sheets.

chart from Cumber.com

And like narcotics addition, the long term outcome would not be pleasant.

War on Gold: India’s Government Mulls Restraint on Gold Imports

The proverbial shot across the bow against gold holdings by India’s citizenry, has been fired by the Indian government.

Reports the Mineweb.com,

India's top policy advisory body, the Prime Minister's Economic Advisory Council headed by C Rangarajan, has urged government to discourage gold imports into the country and rather channel savings into formal financial instruments.

The Council made the recommendation in its review of the economy that the government discourage gold purchases and instead provide incentives for investment in financial assets because gold accentuates the current account deficit and hence, import of the yellow metal is unsustainable…

Massive gold imports have rung alarm bells with Indian economists, investment bankers and analysts stating that India's fascination with gold could be a reason why growth appears to be flagging. The gold import bill is expected to touch $100 billion by 2015-16, industry body Assocham (Associated Chambers of Commerce and Industry) has said. "Calculated on the basis of CAGR of period 2010-11 over 1999-2000, the gold import bill could total $100 billion soon. At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit," said Assocham secretary general D S Rawat.

What in reality has been unsustainable isn’t the average Indian’s fixation with gold, but rather the government’s insatiable spending habits.

chart from tradingeconomics.com

India’s fiscal balance has deteriorated sharply since 2008.

chart from tradingeconomics.com

And growing consumption activities, substantially out of government spending, has been reflected on the India’s trade and current account balance through ballooning deficits.

Besides, expansion in government activities essentially crowds out the private sector. This essentially reduces productive opportunities.

The great Murray N. Rothbard explains that fiscal deficits,

whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden…to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits

Yet the political agents abetted by mainstream experts wants the average Indians to shift their savings to financial assets which in reality are meant to finance more of government’s profligacy.

from tradingeconomics.com

The Indian government has last year embarked on monetary tightening policies where interest rates had been raised 13 times…

from tradingeconomics.com

…this has has led to a temporary drop in consumer price inflation, but whose long term trend remains up…

…and the tightening has likewise prompted for a decline in her stock market.

However, whatever discipline India’s government wanted to demonstrate appears to have been fleeting. India’s government recently announced the reversal of tightening policies, which has been instrumental to the vigorous rally of India’s stock market.

At the end of the day, a stirring revelation can be gleaned from gold prices based on India’s rupee over the long term

chart from goldprice.org

Aside from the cultural and traditional affinity with gold, the average Indians appears to have been hedging against government’s inflationism.

The rupee’s purchasing power against gold has fallen off the cliff, or seen conversely, gold prices in rupee terms have skyrocketed!

As the distinguished Henry Hazlitt wrote,

The next inflation hedge we have to consider is the purchase of gold. This seems to many the best hedge of all. They remember that in the great German inflation those Germans who consistently bought gold whenever and to the extent they could, and held it until the inflation ended, came out with at least their principal intact. From a strictly economic point of view, buying gold in a major inflation and holding it probably presents the least risk of capital loss of any investment or speculation.