Military Keynesianism: Keynes Prescribed War to Solve US Unemployment Problem in 1939

For vulgar Keynesians, the essence of economics is all about spending...even if it leads to widespread death and destruction.

In 1939, John Maynard Keynes prescribed war as solution to the Great Depression.

Writes the prolific Carmen Elena Dorobăț at the Mises Blog:

On the eve of World War II, Keynes delivered the following chilling address on the BBC, talking about the "great experiment" of curing unemployment through war expenditure:

Two years later to the day, in a lecture delivered shortly after his arrival in the U.S., Mises described how the great experiment really looked like:

We are witnesses to the most frightful and phenomenal occurrence in human history: the decay of Western civilization. London, one of the centers of this civilization... is almost completely destroyed. The buildings of the Parliament of Westminster are in ruins; the House of Commons holds its assemblies in the catacombs. [...] The theater of war is spreading, and the day seems not distant when peace will have lost its last refuge. It is a moral and material collapse without precedent.

Quote of the Day: The Entire Case for Keynesianism is Based on this Slogan

The Keynesians have no equivalent of this slogan: "There is no such thing as a free lunch." This is a powerful slogan. So is this one: "You can't get something for nothing." So is this one: "If it sounds too good to be true, it probably is." So is this one: "Honesty is the best policy." But, above all others, we have this one: "Thou shalt not steal."

The Keynesians have this slogan: "I'm from the government, and I'm here to help you." The entire case for Keynesianism is based on this slogan.

This is why it pays to defend freedom. Even when the overwhelming majority of voters do not want to hear the arguments, we should keep making them. We should keep pointing out that there will be horrendous negative repercussions for violations of the principle of voluntary exchange. We don't get a hearing, except during crises. I have good news. There will be plenty of crises in which we will get a hearing.

This excerpt is from Austrian economist Gary North from his (recommended  read) article "Have Hope: Our Opponents Are Economic Imbeciles"

Quote of the Day: The Keynesian Crank

In the early 20th century, John Maynard Keynes came up with a new idea about economics. The politicians loved it; Keynes explained how they could meddle in private affairs on a grand scale, and, of course, make things better.

Keynes argued that a government could take the edge off a business recession by making more credit available when money got tight, and by spending itself to make up for the lack of spending on the part of consumers and businessmen. Keynes suggested, whimsically, hiding bottles of cash all around town, where boys might find them, spend the money, and revive the economy.

The new idea caught on. Soon economists were advising all major governments about how to implement the new “ism.” It did not seem to bother anyone that the new system was a fraud. Where would this new money come from? And what made anyone think that the economists’ judgment of whether it made sense to spend or save was better than any individual’s?

All the Keynesians had done was to substitute their own guesses for the private, personal, economic opinions of millions of ordinary citizens. They had resorted to what Franz Oppenheimer called “political means,” instead of allowing normal “economic means” to take their own course.

The economists wanted what everyone else wants: power, prestige, women (except for Keynes himself, who preferred men). And there are only two ways to get what you want in life. There are honest means, and dishonest ones.

There are economic means, and there are political means. There is persuasion and there is force. There are civilized ways and barbaric ones.

The economist is a harmless crank as long as he is just peeping through the window, but when he undertakes to get people to do what he wants–either by offering them money that is not his own, by defrauding them with artificially low interest rates, or by printing up money that is not backed by something of real value such as gold–he has crossed over to the dark side. He has moved to political means to get what he wants. He has become a jackass.

Keynesian “improvements” were applied in the 1920s — when then Fed governor Ben Strong decided to give the economy a little “coup de whiskey” — and later in the 1930s when the stock market was recovering from the hangover.

The results were predictably disastrous. And along came other economists with their own bad ideas. Rare was the man, such as Robert Lucas or Murray Rothbard, who pointed out that you could not really improve economic results with political means.

If a national assembly could make people rich simply by passing laws, we would all be billionaires, because assemblies have passed a multitude of laws and seem capable of enacting any piece of legislation brought before them. If laws could make people wealthy, some assembly somewhere would have found the magic edicts — simply by chance.

Instead of making them richer, each law makes them a little poorer. Every time political means are used they interfere with the private, civilized economic arrangements that actually get people what they want.

This is from Bill Bonner of the Agora Publishing at the Forbes  (hat tip Mises Blog)

Video: F. A. Hayek on J.M Keynes: Keynes Knew Very Little of Economics, Economics was just a sideline to him

In the following interview, the great Austrian economist Friedrich August von Hayek makes his comments on mainstream economic deity, John Maynard Keynes' knowledge of economics. Hayek has been a personal friend and an intellectual rival of JMK. 

F. A Hayek opens with a strong criticism of Keynes who he says "knew very little of economics"(0:10), except that Keynes concentrated (or tunneled on) "Marshallian economics". 

Hayek further says that despite being one of the most intelligent thinkers he has ever known "economics was just a sideline for him" (2:28). Hayek said that Keynes wanted "to recreate the subject".

Hayek further noted that Keynes "knew very little of 19th century economic history" (0:22) whose understanding had been guided by "aethestic appeal" although paradoxically Keynes "hated the 19th century".

Hayek also noted that Keynes was never interested in the theory of capital (4:28), was "very shaky on the theory of international trade" (4:32) although Keynes was "well informed on  contemporary monetary theory but even there did not know such things are Henry Thornton or Wicksell" (4:37) and Keynes only read French where the "whole German literature was in accessible to him" (4:48)

Interesting.

(hat tip Mark Thornton Mises Blog)

Thomas Sowell on the Yellen’s Keynesianism

Thomas Sowell addresses the prospective Keynesian economic policies from incoming Fed chief Janet Yellen.

Writes Mr. Sowell at the Townhall.com

Ms. Yellen asks: "Do policy-makers have the knowledge and ability to improve macroeconomic outcomes rather than making matters worse?" And she answers: "Yes."

The former economics professor is certainly asking the right questions -- and giving the wrong answers.

Her first question, whether free market economies can achieve full employment without government intervention, is a purely factual question that can be answered from history. For the first 150 years of the United States, there was no policy of federal intervention when the economy turned down.

No depression during all that time was as catastrophic as the Great Depression of the 1930s, when both the Federal Reserve System and Presidents Herbert Hoover and Franklin D. Roosevelt intervened in the economy on a massive and unprecedented scale.

Despite the myth that it was the stock market crash of 1929 that caused the double-digit unemployment of the 1930s, unemployment never reached double digits in any of the 12 months that followed the 1929 stock market crash.

Unemployment peaked at 9 percent in December 1929 and was back down to 6.3 percent by June 1930, when the first major federal intervention took place under Herbert Hoover. The unemployment decline then reversed, rising to hit double digits six months later. As Hoover and then FDR continued to intervene, double-digit unemployment persisted throughout the remainder of the 1930s.

Conversely, when President Warren G. Harding faced an annual unemployment rate of 11.7 percent in 1921, he did absolutely nothing, except for cutting government spending.

Keynesian economists would say that this was exactly the wrong thing to do. History, however, says that unemployment the following year went down to 6.7 percent -- and, in the year after that, 2.4 percent.

Under Calvin Coolidge, the ultimate in non-interventionist government, the annual unemployment rate got down to 1.8 percent. How does the track record of Keynesian intervention compare to that?

So expect more bubbles, a build up of systemic fragility from a pileup of debt and more Wall Street friendly policies such as implicit guarantees and (explicit) bailouts at the expense of main street.

E-Vat 15%: Possible Consequence from Current Quasi Boom Policies

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. John Maynard Keynes, The General Theory of Employment, Interest and Money[1]

Quasi Boom Policies Drives Risk ON Today

Today’s bubble dynamics has essentially been drawn from Keynesian policy paradigm of establishing permanently quasi booms.

This has become the global central banker’s creed in managing the monetary state of affairs of their respective economies channeled through zero bound interest rates (ZIRP) and quantitative easing (balance sheet expansions)

The Philippine counterpart, particularly the Bangko Sentral ng Pilipinas (BSP), particularly has acted along in conformity with the de facto global central banking standard.

Debt financed consumption activities have been anchored on permanent quasi boom policies.

Policies promoting quasi booms effectively prioritizes the short term.

Whether through democratic politics, economics or in the markets, narrowing people’s time orientation and value scales has adverse impact on the society, as Austrian economist Hans Hermann Hoppe writes[2],

Democracy has achieved what Keynes only dreamt of: the "euthanasia of the rentier class." Keynes's statement that "in the long run we are all dead" accurately expresses the democratic spirit of our times: present-oriented hedonism. Although it is perverse not to think beyond one's own life, such thinking has become typical. Instead of ennobling the proletarians, democracy has proletarianized the elites and has systematically perverted the thinking and judgment of the masses.

And booming stock market and property sectors have likewise been expressions of policy induced changes that gives a premium to the short term.

The consumption/investment ratio or consumer/savings preferences by the marketplace have been altered to reflect on the preference for price titles of capital goods caused by expansion of bank credit. In other words, investments have focused on capital and producer’s goods at the expense of the consumer industry. People have been made to believe that rising prices extrapolates to real growth, when this has been a mirage prompted for by Potemkin effect from credit expansion.

These rush to capital intensive sectors mostly via the property boom has become evident worldwide and especially pronounced in countries least affected by the previous crisis.

For instance, Canada[3] and Australia[4], now reckoned as alternative foreign reserve currencies[5] even prior to the anointment of the IMF, has been nurturing their own domestic bubbles.

Asia has likewise been manifesting symptoms of bubbles. Hong Kong even has a bizarre parking lot bubble[6]. Add to this the mushrooming of grandiose signature buildings in China and major ASEAN nations which have usually highlighted the Skyscraper curse[7].

Even the US has been currently experiencing a seeming renascence or reflation of the property sector[8]

Going to the stock markets, among the ASEAN majors, the Philippine benchmark the Phisix has essentially surpassed Thailand’s SET with three consecutive weekly gains totaling 6.39% since November 16^th.

Such succession of weekly gains means that the Phisix has carved out back-to-back record highs. Year-to-date returns on the Phisix commanded a lofty 32.53% as of Friday’s close.

Despite the huge gains, in Asia, the Phisix trails Pakistan’s Karachi 100 which has skyrocketed to an incredible return of 48.12% and Laos (Laos Securities) with an impressive 33.24% advance.

One would also note that global equity markets have generally been surfing on a bullish wave over the same period.

And among the majors, only the China’s Shanghai index has remained as the odd man out. Nevertheless, this week’s spectacular 4.12% gains have pruned down a big segment of this year’s losses. 

Given the recent record liquidity injections by the People’s Bank of China (PBoC) which coincided with the latest leadership changes[9], and improving signs of credit growth, perhaps from stealth stimulus[10] coursed through State Owned Enterprises (SoE), accelerating signs of improvements on infrastructure investments[11] (see above), and with retail investors almost abandoning the stock market[12] out of depression, China’s reflationary policies may yet spark new bubbles in both the stock market and the property sectors.

The “success” of Chinese government thrust to reflate its bubble will depend on the availability of real savings derived from the productive agents or the wealth generators (business and commercial enterprises). For as long as productive activities thrives in spite of the redistributive and wealth consuming activities by her government, or for as long as there will be resources that can be reallocated, such bubbles may last.

Recovering prices of industrial metals also seem to underpin and or portend for China’s stock market recovery.

A reflation of China’s asset bubbles will likely be supportive of the recent gains attained by ASEAN bourses.

Moreover for the moment, the inflationary boom, as revealed by the rising tide phenomenon, which has become the dominant force, with China likely being part of the cast simply reinforces the RISK ON environment.

As I have repeatedly been pounding on the table, the direction of global asset prices, including the Philippines are in the palm of the hands of central bankers.

The same dynamic be seen within the Philippine market. The rising tide seems to be lifting all boats. Even the politically persecuted sectors[13], whom have been this year’s laggards, specifically the mining-oil and the service industries, have likewise posted (less than impressive) advances this week.

The fresh milestone highs of the Phisix have emerged in the backdrop of immensely improving confidence levels.

Of the 287 issues listed[14] on the Philippine Stock Exchange, about 71% are now being traded. Average number of issues traded daily (left) have been nearing the highest level since the 1^st quarter of 2012.

The same applies to the average daily trades (right) which could signal new participants and or more churning of trades by existing ones.

Increasing peso volume backed by the average number of daily trades and the average number of issues traded daily have been suggestive growing and broadening of risk appetite.

Yield chasing dynamic continues to fuel today’s advances.

I believe that should an interim correction emerge from an overheated Phisix occur, then rotation dynamic will reinforce the current inflationary boom.

The Transmission Mechanism of Quasi Booms; the Bangladesh Episode

I have been pointing out[15] that the reason for the outperformance of the Phisix has been due to the easing policies embraced by the BSP, which has been the most aggressive in Asia. 

This aggressive policy easing comes in the face of the steep Philippine yield curve, which still has been the steepest in Asia (chart from ADB[16]).

And with the BSP manipulating the short end of the curve, banks have been motivated to profit from the curve through fractional reserve banking based maturity mismatches or the maturity transformation[17] or simply “borrow short term, lend long term”

Manipulation of the yield curve represents an effective subsidy to highly protected banking industry. Banks have been the main financiers of the ongoing boom in the property sector. This effectively chimes with the Austrian business cycle. Investors mistakenly sees the abundance of savings in driving down interest rates which allows them to undertake formerly unfeasible projects. Hardly do they realize that there has not been sufficient savings and resources to back this up. And artificially suppressed interest rates, which have been products of central banking manipulations, are unsustainable.

Think of it. If a local currency domestic time deposit today yields about 2% or less depending on the size of the deposits per year, and if loan rates are about 15% per annum where the stock market returns 30% over the same period today, would the public not be tempted to plough into stock market by shifting their time deposits, and or if not, even borrow from the banks to reach for yields?

That’s exactly the temptation brought about by quasi boom-negative real rates policies. People will be seduced to the yield aspects, while ignoring the risk accompanying participation in the stock market (basically the same mechanics for those who fall for Ponzi schemes[18]).

And most likely as the yield curve flattens, banks will compete feverishly to serve consumer financing demand by lowering the quality of lending standards and or by issuing new products that arbitrages on existing regulation (I am thinking the shadow banking system). That’s how current monetary policies subliminally influence people’s incentives and economic calculation

The country’s banking industry recently reported a double digit rise in income growth rate during the first three quarters of the year[19]. While much of this has been attributed to increased demand for financial non-interest services, such could be seen as testament to the blossoming credit bubble.

The outperformance of the banking and property sector has been reflected on the year to date gains in the domestic stock market.

As I predicted 2 years back[20]

Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.

And the business cycle will be left unheard of until perhaps the realization of a bust.

Remember just recently the incumbent administration bragged about the huge jump in construction industry as the “best property boom in two decades”[21] which incidentally cushioned the decline of the export sector to deliver a surprise third quarter 7.1% economic growth.

The administration even had the audacity to label such statistical outperformance as “Aquinomics”, when all these have accounted no more than the frontloading of consumption via the Keynesian permanent quasi boom formula of debt based spending.

But media has kept reticent in saying that the surge in construction activities has been financed by a credit boom or “lending to the real estate sector hit an all-time high” last June[22].

Domestic credit provided by the banking sector as of 2011 according to the World Bank via tradingeconomics.com[23] has steadily been rising since 2003. In 2011, bank credit as a share of GDP has accounted for 51.84% of the GDP. This must be a lot higher today.

Current growth trends have popped above the long term average. The implication is that growth credit has begun to surpass the growth in the real GDP. Credit expansion now drives the statistical economy.

One would notice that growth in bank credit can leapfrog, similar to the 1992-1998 window which culminated with the Asian crisis[24]. In 1997 or at the precipice of the boom, bank credit accounted for 84.47% of the GDP.

The economic crisis during the terminal phase of the Marcos regime[25] led to a contraction of bank credit which had been reversed during pre-Asian crisis Japanese money driven boom.

By the way, a déjà vu of a Japan driven Phisix-ASEAN bubble in response to the Japan’s government’s policies must not be discounted[26]

Unfortunately, despite announcements of domestic regulators of the supposed potency of their ability to control credit flow, unless they possess the supernatural privilege of omniscience, such money flows emanating from credit expansion can hardly be determined with technocratic precision.

The great Austrian professor Ludwig von Mises admonished[27],

Discrimination in lending is no substitute for checks placed on credit expansion, the only means that could really prevent a rise in stock exchange quotations and an expansion of investment in fixed capital. The mode in which the additional amount of credit finds its way into the loan market is only of secondary importance. What matters is that there is an inflow of newly created credit. If the banks grand more credits to the farmers, the farmers are in a position to repay loans received from other sources and to pay cash for their purchases. If they grant more credits to business as circulating capital, they free funds which were previously tied up for this use. In any case they create an abundance of disposable money for which its owners try to find the most profitable investment. Very promptly these funds find outlets in the stock exchange or in fixed investment. The notion that it is possible to pursue a credit expansion without making stock prices rise and fixed investment expand is absurd.

This means quasi boom policies may incite money flows into the stock market and or to the property sector and or both and or other capital intensive industries. 

No one knows exactly where these monies will flow into.

This has been the case of Bangladesh in 2011.

Prior to the politically tumultuous stock market crash[28], the stock market absorbed much of the credit expansion from the banking system. Loans had been diverted away from intended uses, which fueled to the antecedent stock market boom. Bangladesh’s Dhaka became one of the best performing bourses in the world in 2010[29].

However, Bangladesh officials apparently realized of the danger from pursuing easy money policies and decided to sacrifice the boom by tightening credit. This impelled for the crash.

Since the peak in November 2010, Bangladesh’s Dhaka 100 has been about 50% lower. (see above chart from Bloomberg)

Fortunately, the underdeveloped Bangladesh’s stock market’s capitalization represents only 21.6% of the GDP as of 2011 (this should be lower today) as the crash hardly made a dent to her economy.

It’s a different story for the ASEAN majors whose market capitalization plays a big role in the economy: as of 2011 Indonesia accounted for 46.11% of GDP, Malaysia 141.8%, the Philippines 73.6% and Thailand 77.7% according to World Bank[30]. And the aforementioned ratios should be much larger today, given the huge gains

The point is once consumption-savings preferences will revert to their former proportions, and where the shortages of savings and real resources would have been revealed and that prices of goods and labor would have been bided up too high, all of these will be ventilated through higher interest rates, where the ensuing bust will account for the necessary adjustments for the massive build-up of malinvestments during the preceding boom.

A bursting credit bubble for ASEAN, whom has begun to interlock equity markets via cross listings, will have far more catastrophic effect than one experienced by Bangladesh. Moreover, Asia’s intra-region trade links has been growing overtime now accounting for more than 50%[31]. This amplifies the contagion risks.

Real Bubble Bust: The Path to E-VAT 15%

In the Philippines, today’s quasi boom policies which are being manifested through the property and the stock market boom and which has been spurred by credit expansion will likely be compounded by consumer debt and aggressive government spending programs.

Consumers will be tempted to live beyond their means. They are likely to expand consumption activities through consumer credit facilities through credit cards, housing loans, car loans and etc…

All these imply that debt based activities from the private sector—via speculation on capital intensive misdirected investment projects and via consumer credit—along with government spending will translate to stiff competition for resources which will put pressure on interest rates.

The likelihood is that given the low savings rate about 19-23% of GDP, where the Philippines has the lowest savings in the region[32] (partly due to limited access to the formal banking system), trade balance could turn into deficit as OFW remittances and export receipts would fail to cover for the debt based consumption activities.

It would seem as déjà vu of the Asian crisis as trade deficits continue to widen but so far thanks to record remittances[33] and globalization such deficits has been amply covered.

Record forex currency reserves would begin to deplete as these would likely be used to bridge finance on such gaps.

And if the BSP makes good of the threat to impose more reverse capital controls[34], to control influx of foreign money, interest rates will zoom higher to reflect on the scarcity of savings and of real resources. This would prick the credit bubble and send the Phisix and the Peso on a tailspin.

Let me add that the IMF’s recent endorsement of reverse capital controls[35] could be seen as partly advocating selective protectionism, and partly could be part of the central bank cabal to place an international dragnet to keep capital flows from nations imposing intense financial repression from fleeing.

The New York Times[36] recently gave a clue noting that “the Internal Revenue Service is asking foreign financial institutions and tax agencies to join the cause”. I just cannot help but think that this has been part of the encirclement strategy or pincer movement[37] employed by increasingly desperate politicians to thwart capital mobility with the help and collaboration of other central banks in order to seize private sector resources to finance the unsustainable profligacy of politicians and bureaucrats.

And since the prolonging of the domestic boom requires foreign capital or that trade deficits would need to be offset by capital accounts[38] or increasing foreign claims on local assets, either the BSP loosens up or keeps an eye closed on foreign money flows. Most of which will likely come from hot money inflows seeking refuge from inflationism and financial repression.

Nonetheless if political conditions overseas become intolerable, where international savings will seek shelter from overseas, no amount of capital controls can really stop this.

In the case of China, which has stringent capital controls, hot money continues to play a significant role in driving up the boom-bust cycles.

All these suggest once the domestic and regional bubble has been popped, governments will do the same things as they are doing today in crisis afflicted developed nations. They are likely to engage in bailouts of the banking and finance sectors.

And of course, financial repression via forcible transfer of resources which are meant to safeguard the politically privileged enterprises would mean higher taxes for everyone. Haven’t you noticed? We always pay for the mistakes of the political leaders.

That’s why I believe that the consequence from today’s boom will be a 15% E-VAT in the fullness of time.

Currently E-VAT is at 12% which was implemented on September 1, 2005[39]. The Value added Tax was introduced in the Philippines by President Cory Aquino’s Executive Order 273 in July 25, 1987[40]

My impression is that domestic politicians would see the Value Added Taxes as the easiest way to capture taxes on a broader scale. Yet perhaps it may be more than just about collections

As the great libertarian Frank Chodorov pointed out (quoted by Murray Rothbard[41])

It is not the size of the yield, nor the certainty of collection, which gives indirect taxation [read: VAT] preeminence in the state's scheme of appropriation. Its most commendable quality is that of being surreptitious. It is taking, so to speak, while the victim is not looking.

Those who strain themselves to give taxation a moral character are under obligation to explain the state's preoccupation with hiding taxes in the price of goods. (Frank Chodorov, Out of Step, Devin-Adair, 1962, p. 220)

Bottom line: Policies which promotes permanent Quasi booms have real effects of damaging and consuming wealth through perpetual bubble cycles

---

[1] John Maynard Keynes Book VI Short Notes Suggested by the General Theory Chapter 22. Notes on the Trade Cycle John Maynard Keynes The General Theory of Employment, Interest and Money Marxist.org

[2] Hans Hermann Hoppe, Natural Elites, Intellectuals, and the State Mises.org

[3] The Globe and Mail, Canada’s credit bubble a central banker’s dilemma October 21, 2012

[4] The Sydney Herald Is the RBA trying to re-inflate the housing bubble? October 3, 2012

[5] See New Currency Reserves: Australian Dollar, Canadian Dollar and Gold, November 28, 2012

[6] See Hong Kong’s Parking Lot Bubble November 28, 2012

[7] See Does the Skyscrapers Curse Signal a coming Asian Crisis? July 6, 2012

[8] see US Federal Reserve Policies Re-Inflate US Property Bubble October 20, 2012

[9] see On China’s New Leaders November 19, 2012

[10] See Possible Reasons Behind the 2.9% Surge by China’s Shanghai Index December 5, 2012

[11] Danske Bank The Tide is Turning Global Scenarios December 2012

[12] see Lessons from the Sad Experience of China’s Retail Stock Market Investors December 6, 2012

[13] See Inflationary Boom Powers Phisix to Milestone Highs November 26, 2012

[14] Credit Risk Monitor Directory of Public Companies in Philippines crmz.com

[15] See Phisix at 5,600: Emergent Signs of Euphoria? December 3, 2012

[16] Asianbondsonline.org ASIA BOND MONITOR NOVEMBER 2012

[17] Wikipedia.org Maturity transformation, Wikipedia.org Banks Economic Function

[18] See The Symmetry Between Ponzi Scams and Ponzi Financed Global Financial Markets November 19, 2012

[19] Inquirer.net PH banks post double-digit income rise as of Q3 December 7, 2012

[20] see The Upcoming Boom In The Philippine Property Sector September 12, 2010

[21] See The Secret of Aquinomics: Bubble Economic Policies November 29,2012

[22] Oxford Business Group Philippines: Real estate loans rising November 2, 2012

[23] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN PHILIPPINES The Domestic credit provided by banking sector (% of GDP) in Philippines was last reported at 51.84 in 2011, according to a World Bank report published in 2012. Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. The banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.

[24] Wikipedia.org 1997 Asian financial crisis

[25] Country-data.com Philippines External Debt

[26] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012

[27] Ludwig von Mises, 5. Credit Expansion XXXI. CURRENCY AND CREDIT MANIPULATION Human Action Mises.org

[28] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets January 11, 2011

[29] Wikipedia.org Investment 2010-11 market crash Economy of Bangladesh

[30] World Bank Data Market capitalization of listed companies (% of GDP)

[31] Asianbondsonline.org Asian Economic Integration Monitor JULY 2012

[32] Asian Investment Managers Guide Philippines Market Profile

[33] Inquirer.net BSP expects forex reserves to hit new highs December 4, 2012

[34] Philstar.com Capital controls should serve only as measure of last resort – BSP December 5, 2012

[35] See IMF Supports Capital Controls December 5, 2012

[36] New York Times Few Places to Hide as Taxes Trend Higher Worldwide, December 2, 2012

[37] Wikipedia.org Pincer movement

[38] Wikipedia.org Capital account

[39] Wikipedia.org Republic Act 9337

[40] Lawphil.net EXECUTIVE ORDER NO. 273 July 25, 1987 ADOPTING A VALUE-ADDED TAX, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AND FOR OTHER PURPOSES

[41] Murray Rothbard The Value-Added Tax Is Not the Answer Mises.org April 23, 2010

Uh Oh. China’s New Set of Policymakers could be Harvard Trained Keynesians

Wonder why China’s economic policies have transitioned into boom bust cycles? Well that’s because China’s policymakers has increasingly been influenced by the Keynesianism

Now Harvard trained Chinese politicians are vying for power.

From Bloomberg,

Li Yuanchao serves the Chinese Communist Party as head of its organization department. For a few months in 2002 he had a different overseer: Larry Summers.

Li controls the patronage system of the 82 million-member party that this month is unveiling its next generation of leaders, overseeing an apparatus that names cadres to posts in state-owned companies including China Mobile Ltd. (941) and acting as career manager for thousands of rising officials. He took part in an executive training program at Harvard University when former U.S. Treasury Secretary Summers was the school’s president. Li reminded Summers of that when the two met in 2010 in Beijing.

Li is the most prominent graduate of a program that has brought rising Chinese leaders to Harvard’s Cambridge, Massachusetts campus for more than a decade. The initiative underscores the fact that even as the U.S. and China are at odds over issues ranging from the value of the yuan to Syria, top politicians in China are increasingly drawing on their U.S. experiences in setting policy for the world’s second-biggest economy, said Anthony Saich, a professor at Harvard’s Kennedy School of Government who oversees the program.

And further evidence suggests that the relationship of US-China leadership have been joined to hip through the Harvard channel.

This bolsters my postulation that territorial disputes in Southeast Asia seem more of a false flag to shield other political agenda:

Other graduates of the program at the Kennedy School’s Ash Center for Democratic Governance and Innovation include Commerce Minister Chen Deming and Zhao Zhengyong, the governor of Shaanxi province. They get face time with some of Harvard’s most famous professors. In one program, officials attend a series of seminars Saich calls “star turn.”

Want to learn about how a country uses soft power? Joseph Nye, the political scientist who coined the term, holds a seminar on that. What about the U.S. presidency? Roger Porter, who served in three U.S. administrations, including as assistant to the president for economic policy under George H.W. Bush, meets with the students. Economics? Summers will lecture on the U.S. or global economy “or whatever’s on Larry’s mind at any particular time,” Saich said.

Harvard’s Kennedy School has been expanding its offerings to Chinese officials and executives at state-owned enterprises since the first program -- for senior leaders at the vice- minister level -- began in 1998, sponsored by Hong Kong’s New World Development Co. About 150 officials have been through the program since its inception, with 20 each year at most, Saich said.

And one can also guess that cronyism and nepotism could have been part of the Harvard-China leadership program

Harvard also attracts other relatives of China’s top leaders. Chen Xiaodan, the granddaughter of top planning official Chen Yun and daughter of China Development Bank Corp. Chairman Chen Yuan, graduated from the business school with an MBA this year, school records show. Xi Mingze, Xi Jinping’s daughter, is an undergraduate at Harvard College…

And it has dawned on me from this report that Harvard has become the most influential policy think tank on China albeit masquerading as school.

There are 686 full-time students from China enrolled at Harvard for the 2012-2013 academic year, more than from any other foreign country, and almost half of them, 331, are in the Graduate School of Arts and Sciences, according to the Harvard International Office website. The Harvard Kennedy School of Government, where Li and Bo attended, has 32 Chinese students, according to the site.

Harvard’s links to China go back at least to 1879, when Ko Kun-Hua, a Chinese language teacher, was hired, according to the university website. Ko died of pneumonia less than three years after arriving and his books became part of the Harvard Yenching Library, which now has more than 1 million volumes.

The above simply reveals of the pivotal role played by the Harvard connection in shaping China’s domestic and geopolitical policies.

Importantly if Harvard trained policymakers captures the top echelon of China’s state hierarchy, then we should expect more macro "demand management" measures such as stimulus, welfare and military Keynesianism to dominate China's policies. This means boom bust cycles will also commonplace feature in China.

And this also implies that the same political economic formula that has been a drag to the US (debt based consumption system) will likewise be the strategy used on China: a seemingly crafty move by US politicians through the Harvard nexus.

I am reminded by the snarky remark made by the late conservative William F. Buckley Jr. on Harvard:

I am obliged to confess I should sooner live in a society governed by the first two thousand names in the Boston telephone directory than in a society governed by the two thousand faculty members of Harvard University.

Signs of Dancing on the Grave of Keynesianism

Yesterday my quote of the day was about Austrian economist Gary North’s prediction of the twilight of the Keynesian political economy.

Today, Sovereign Man’s Simon Black enumerates of the 8 signs that reveals how the “system is broken”.

Apparently 6 of them represent symptoms of Mr. North’s prophesy.

The 6 signs from Simon Black:

3) Last month, a school district in California sold $164 million worth of bonds at 12.6% interest; this is more than Pakistan, Botswana, and Ecuador pay in the international bond market.

4) Based on the Treasury’s most recent statistics, US government interest payments to China will total at least $26.055 billion this year. The real figure may be much higher given that China has been purchased Treasuries for decades, back when interest rates were much higher. They’re still getting paid on those higher rates today.

Even still, this year’s interest payment to China totals more than ALL the silver that was mined in the world last year.

5) In August 2008, just before the Lehman Brothers collapse, the number of employed persons in the United States was 145.47 million persons. Over the subsequent years, the employment figure dipped to as low as 139.27 million. Today it stands at 142.1 million.

Even if this is considered recovery, to ‘rescue’ those 2.8 million jobs, it took the federal government an additional $6.421 trillion worth of debt ($2.3 million per job), and a $1.9 trillion (203%) expansion of the Federal Reserve balance sheet.

6) Meanwhile, despite trillions of euros in debt and bailouts, the unemployment rate in the eurozone just hit a record high of 11.4%… and a second Spanish bailout is now imminent.

7) Inflation in Zimbabwe (3.63%) is lower than inflation in the UK (3.66%, August 2011-July 2012).

8) Last week, the French government reached a ‘historic’ budget compromise, shooting for a budget deficit that’s ‘only’ 3% of GDP. This is based on an assumption that the economy will grow by 0.8%.

In other words, France’s official public debt (which is already at 91% of GDP) will increase by 2.2% of GDP next year amid flat growth. And this is what these people consider progress.

From Cato’s Dan Mitchell

To add, last month the French government approved of the 75% tax on those earning over one million euros a year — by holding public spending and not cutting government jobs (IBD). So the French class warfare policy essentially kills the proverbial goose that lays the golden eggs.

So by maintaining the unproductive segments of a society who entirely depends on the shrinking the productive sectors, French politicians believe that the Santa Claus Fund will never end and instead would bring about prosperity.

The populist measures undertaken by the French government essentially assures of the diffusion and the intensification of the Euro crisis which most likely serves as the death warrant for the euro.

Events in France will perhaps herald the coming global debt default that will engulf most of developed nations and emerging economies whose economies have been predicated on the Keynesian parasitical relationship welfare-warfare states.

In a world of politics, common sense is uncommon specially backed by obtuse theories moored on the belief of the Philosopher’s stone of turning lead into gold.

As the distinguished Ron Paul recently wrote,

It's because too many politicians believed that a free lunch was possible and a new economic paradigm had arrived. But we've heard that one before — like the philosopher's stone that could turn lead into gold. Prosperity without work is a dream of the ages.