Quote of the Day: Liberalism is No religion, No World View, No Party of Special Interests

Liberalism is no religion, no world view, no party of special interests. It is no religion because it demands neither faith nor devotion, because there is nothing mystical about it, and because it has no dogmas. It is no world view because it does not try to explain the cosmos and because it says nothing and does not seek to say anything about the meaning and purpose of human existence. It is no party of special interests because it does not provide or seek to provide any special advantage whatsoever to any individual or any group. It is something entirely different. It is an ideology, a doctrine of the mutual relationship among the members of society and, at the same time, the application of this doctrine to the conduct of men in actual society. It promises nothing that exceeds what can be accomplished in society and through society. It seeks to give men only one thing, the peaceful, undisturbed development of material well-being for all, in order thereby to shield them from the external causes of pain and suffering as far as it lies within the power of social institutions to do so at all. To diminish suffering, to increase happiness: that is its aim.

No sect and no political party has believed that it could afford to forgo advancing its cause by appealing to men's senses. Rhetorical bombast, music and song resound, banners wave, flowers and colors serve as symbols, and the leaders seek to attach their followers to their own person. Liberalism has nothing to do with all this. It has no party flower and no party color, no party song and no party idols, no symbols and no slogans. It has the substance and the arguments. These must lead it to victory.

This is from the great Austrian Economist Ludwig von Mises, excerpted from Liberalism: In the Classical Tradition, published at the Mises Institute Wire

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 Government Can Not Only Evoke Fear But Also Superstitious Reverence

The government can not only evoke fear in its victims; it can also evoke a sort of superstitious reverence. It is thus both an army and a church, and with sharp weapons in both hands it is virtually irresistible. Its personnel, true enough, may be changed, and so may the external forms of the fraud it practises, but its inner nature is immutable.

This quote is from page 182 of H.L. Mencken’s essay “On Government,” as reprinted in the 1996 Johns Hopkins University Press collection of some of Mencken’s essays, Prejudices: A Selection

tip of the hat to Cafe Hayek

Collectivism's Creed: The Revolt Against Biological Reality

Escape mechanism is defined by Merriam Webster as a way of behaving or thinking that is used to avoid unpleasant facts or problems

Applied to the world of politics, popular solutions to every known social ill have almost always been framed by the establishment in the context of some sort of utopian requisite conditions.

Think for example corruption, the idea of ‘good governance’ has always been associated with angelic or immaculate virtues that should be espoused by the political leader/s. But when shortcomings or the unfulfillment of expectations emerge, culpability will mostly be blamed on the leader’s individualistic flaws. Legal and or political institutional barriers and or knowledge limitations and or even incentives of political leaders (as human being) operating under the current political economic system itself will hardly ever been questioned.

Hence, the never ending circus of personality based politics; sell "change" by changing leaders.

Yet this penchant to solve society’s imperfections really represents the nirvana fallacy or perfect solution fallacy—the informal fallacy of comparing actual things with unrealistic, idealized alternatives.

And because popular politics signifies the politics of the economically uniformed, it’s easier to connect with the populace’s grievances by matching utopianism as remedy

Thus the escape mechanism-Nirvana fallacy approach serving as the foundations of the creed of collectivism 

At the Mises Blog Ryan McMaken explains:

From Egalitarianism as a Revolt Against Nature and Other Essays by Murray Rothbard: 

“The egalitarian revolt against biological reality, as significant as it is, is only a subset of a deeper revolt: against the ontological structure of reality itself, against the “very organization of nature”; against the universe as such. At the heart of the egalitarian left is the pathological belief that there is no structure of reality; that all the world is a tabula rasa that can be changed at any moment in any desired direction by the mere exercise of human will—in short, that reality can be instantly transformed by the mere wish or whim of human beings. Surely this sort of infantile thinking is at the heart of Herbert Marcuse’s passionate call for the comprehensive negation of the existing structure of reality and for its transformation into what he divines to be its true potential.

Nowhere is the Left Wing attack on ontological reality more apparent than in the Utopian dreams of what the future socialist society will look like. In the socialist future of Charles Fourier, according to Ludwig von Mises:

“all harmful beasts will have disappeared, and in their places will be animals which will assist man in his labors—or even do his work for him. An antibeaver will see to the fishing; an antiwhale will move sailing ships in a calm; an antihippopotamus will tow the river boats. Instead of the lion there will be an antilion, a steed of wonderful swiftness, upon whose back the rider will sit as comfortably as in a well-sprung carriage. “It will be a pleasure to live in a world with such servants.”

Furthermore, according to Fourier, the very oceans would contain lemonade rather than salt water.

Similarly absurd fantasies are at the root of the Marxian utopia of communism. Freed from the supposed confines of specialization and the division of labor (the heart of any production above the most primitive level and hence of any civilized society), each person in the communist utopia would fully develop all of his powers in every direction.17 As Engels wrote in his Anti-Dühring, communism would give “each individual the opportunity to develop and exercise all his faculties, physical and mental, in all directions.” And Lenin looked forward in 1920 to the “abolition of the division of labor among people . . . the education, schooling, and training of people with an all-around development and an all-around training, people able to do everything. Communism is marching and must march toward this goal, and will reach it.”

In his trenchant critique of the communist vision, Alexander Gray charges:

“That each individual should have the opportunity of developing all his faculties, physical and mental, in all directions, is a dream which will cheer the vision only of the simpleminded, oblivious of the restrictions imposed by the narrow limits of human life. For life is a series of acts of choice, and each choice is at the same time a renunciation.

“Even the inhabitant of Engels’s future fairyland will have to decide sooner or later whether he wishes to be Archbishop of Canterbury or First Sea Lord, whether he should seek to excel as a violinist or as a pugilist, whether he should elect to know all about Chinese literature or about the hidden pages in the life of a mackerel.

Of course one way to try to resolve this dilemma is to fantasize that the New Communist Man of the future will be a superman, superhuman in his abilities to transcend nature. William Godwin thought that, once private property was abolished, man would become immortal. The Marxist theoretician Karl Kautsky asserted that in the future communist society, “a new type of man will arise . . . a superman . . . an exalted man.” And Leon Trotsky prophesied that under communism:

“man will become incomparably stronger, wiser, finer. His body more harmonious, his movements more rhythmical, his voice more musical. . . . The human average will rise to the level of an Aristotle, a Goethe, a Marx. Above these other heights new peaks will arise.

Quote of the Day: The fastest road to bankruptcy in foreign exchange was an economics degree

Thirty years ago economists believed that “purchasing power parity” determined the “long term” currency rate between countries. And economists who became traders kept blowing up by selling the “expensive” currency and buying the “cheap” one. And, if anything, the opposite held: Currencies that were expensive kept getting more expensive. So it became known that the fastest road to bankruptcy in foreign exchange was an economics degree. More analytically, saying “the long term” without attaching a period to it (six months, six years, six hundred years, etc.) is meaningless. The duration is more relevant than the idea that currencies “converge.”

This from Nassim Nicolas Taleb, who along with Mark Spitznagel discuss "inequality, free markets and crashes" at the NationalReview.com

Quote of the Day: Success in all endeavors is requires absence of specific qualities

Success in all endeavors is requires absence of specific qualities. 1) To succeed in crime requires absence of empathy, 2) To succeed in banking you need absence of shame at hiding risks, 3) To succeed in school requires absence of common sense, 4) To succeed in economics requires absence of understanding of probability, risk, or 2nd order effects and about anything, 5) To succeed in journalism requires inability to think about matters that have an infinitesimal small chance of being relevant next January, ...6) But to succeed in life requires a total inability to do anything that makes you uncomfortable when you look at yourself in the mirror.

This is from mathematician, philosopher, author and my favorite iconoclast Nassim Nicolas Taleb from his collection of Aphorisms, Maxims & Heuristics.

Let me add my two cents. I will piece together, like a jigsaw puzzle, anecdotally of what I think as interrelation from these variables.

#2 or the "absence of shame at hiding risks" would seem as not only relevant or applicable to much of the banking sector but generally (but with a few exceptions) to other financial market participants as well, including both sellside and buyside institutions. Think Wall Street (and their equivalents worldwide).

#4 I believe represents the essence of the mainstream “economics”. Shout enough statistics and or economic models (technical/econometric gobbledygook) for one to be reckoned as practicing “economics” by the uninformed public (who has little understanding of economics) overwhelmed by mathematical abstractions. Never mind if the practitioner/s have been entirely blind to the "risks" from "2nd order effects". 

Of course #4 is related or tied to #2; in the context that # 4 (the ideological foundation for the absence of risks) serves as justification for the actions of #2 (blatant hiding of risks). 

Think of "mania" or the frantic bidding up of asset prices regardless of risks of ballooning debt underlying such bidding binge, where "euphoria" has mostly been premised on statistical growth stories or from the prospects of more central bank support.

#5 (or the focus on the sensational rather than to the relevant) could most likely be part of the design to promote the interests of the entrenched political-economic order. When people see or tunnel at the sensational at the expense of the relevant then they are most likely to become complacent or dismissive of "risks". For instance, the mainstream have been oriented to see property booms as equivalent to economic growth, while disregarding the 2nd order effects of soaring property prices to the economy (via dramatic changes in relative price levels) and to politics (benefits the asset holders at the expense of to the non-asset holders that becomes part of the issue underlying the inequality controversy).

#2, #4 and #5 are linked in the sense that these sectors most likely constitute the central bank-banking-government cartel. 

Moreover, #3 is connected to #5 in that this represents the indoctrination process. The absence of common sense (and critical thinking) makes #5 (mainstream journalism) credible and reliable sources of information. And this applies, as well as, to the extent of ideas promoted by #2, #4 and #5 that becomes popular knowledge or mainstream dogma.

And finally, when a vast majority of the population becomes agreeable or complacent to #2, #4 and #5, then #1 appears easy to be implemented. This via social policies of financial repression (where inflationism is part of) which entails the (direct and indirect) redistribution of resources from society to the political class helped by their allies #2, #4 and #5 (also #3), who are also beneficiaries, in the "absence of empathy" transfers.  

And when a crisis occurs #5 blame such economic-financial malaise on "greed" from capitalism. But #2 and #4 gets a bailout from the government and or from the central bank, deepening further the financial repression policies.

#6 now depends on where you stand. 

So when Mr. Taleb in another quote (117th) from the same source says "there is this prevailing illusion that debt is a renewable source", then such illusion signifies a product of the 5 "absence of specific qualities" ingredients of "success".

Quote of the Day: Defense of Liberty Must Emphasize on Principle versus Expediency

What must be developed is a case for freedom that starts with a better demonstration and defense of the nature of man in the world and what is necessary for his survival and improvement. In an age in which religion has lost it hold and appeal for many, such a defense of freedom must have its basis in reason, logic and objective reality.

Central to such a new defense of liberty must be its emphasis on principle versus expediency; that freedom is a tightly woven tapestry of principles that when compromised “at the margin” between individual liberty and political paternalism has the risk of incremental loses of freedom that cumulatively run the danger of an unplanned but no less serious “road to serfdom.”

As Friedrich Hayek argued, minor or marginal “exceptions” to advance seemingly “good causes” through government regulation, redistribution, or planning, always threaten to become a slippery slope:

“The preservation of a free system is so difficult precisely because it requires a constant rejection of measures which appear to be required to secure particular results, on no stronger grounds than that they conflict with a general rule [of non-government intervention], and frequently without our knowing what will be the costs of not observing the rule in the particular instance. A successful defense of freedom must therefore be dogmatic and make no concessions to expediency, even where it is not possible to show that, besides the known beneficial effects, some particular harmful result would also follow from its infringement. Freedom will prevail only if it is accepted as a general principle whose application to particular instances requires no justification. It is thus a misunderstanding to blame classical liberalism for having been too doctrinaire. Its defect was not that it adhered too stubbornly to principles, but rather that it lacked principles sufficiently definite to provide clear guidance . . .

“People will not refrain from those restrictions on individual liberty that appear to them the simplest and most direct remedy of a recognized evil, if there does not prevail a strong belief in definite principles. The loss of such belief and the preference for expediency is no part the result of the fact that we no longer have any principles that can be rationally defended.”

As Hayek argued on another occasion, if the cause of liberty is to prevail once again, it is necessary for friends of freedom to not be afraid of being radical in their case for classical liberalism – even “utopian” in a right meaning of the term. To once more make it a shining and attractive ideal to imagine a world of free men who are no longer slaves to others, whether they be monarchs or majorities.

It would be a world of sovereign individuals who respect each other, who treat each other with dignity and who view each other as an end in himself, rather than one of those pawns to be moved and sacrificed on that chessboard of society to serve the ends of another who presumes to impose coercive control over his fellow human beings.

This is an excerpt from a speech by American libertarian author and Northwood University economics professor Dr. Richard Ebeling published at the Northwood Blog (hat tip Bob Wenzel)

Paul Krugman's "capitulation" on Obamacare

Economic Policy Journal’s Chris Rossini showcases on the transitional capitulation by the popular economist Paul Krugman on Obamacare (hat tip Bob Murphy). 

From the EPJ: (bold original)

As an update to a previous post, I'm proud to announce that Truth and Paul Krugman have crashed into one another. It's in regards to Healthcare.gov, but hey, when worlds collide, it's only right to recognize it.

So let's look at the timeline (my emphasis):

Oct. 1 - "The glitches will get fixed."
Oct. 14th - "Obviously they messed up the programming big time, which is kind of a shock.But this will get fixed..."
Nov. 6 - "If the bugs in healthcare.gov get fixed..."

AND NOW .... Drumroll please!

Nov. 20 - "But the future of the reform depends not on policy per se but on whether the IT issues can be fixed well enough soon enough, a subject on which I have zero expertise."

There we go...Krugman has no clue. He had no business saying that anything would work. It took almost 2 months, but he got there.

Krugman’s changing view in the context of the Kubler Ross grief cycle.

This also serves as a wonderful example of today’s quote of the day.

Quotes from Peter Drucker’s The Sickness of Government

The late management guru Peter Drucker bewailed the public’s dependence on government from a practical standpoint in a chapter called the Sickness of Government in his 1969 book The Age of Discontinuity

Tip of the hat to Cato’s Chris Edwards. Mr. Edward’s blog post is the source of the following quotes which I cross checked with Mr. Drucker’s essay (bold mine)

Government surely has never been more prominent than today. The most despotic government of 1900 would not have dared probe into the private affairs of its citizens as income tax collectors now do routinely in the freest society. Even the tsar’s secret police did not go in for the security investigations we now take for granted.” p.3

…

For seventy years or so – from the 1890’s to the 1960’s – mankind, especially in the developed countries, was hypnotized by government. We were in love with it and saw no limits to its abilities, or to its good intentions. p.4

…

This belief has been, in effect, only one facet of a much more general illusion from which the educated and the intellectuals in particular have suffered: that by turning tasks over to government, conflict and decision would be made to go away. Once the “wicked private interests” had been eliminated, a decision as to the right course of action would be rational and automatic. There would be neither selfishness nor political passion. Belief in government was thus largely a romantic escape from politics and from responsibility.” p.5

…

The greatest factor in the disenchantment with government is that government has not performed. The record over these last thirty or forty years has been dismal. Government has proven itself capable of doing only two things with great effectiveness. It can wage war. And it can inflate the currency.” p.7 (I would add spending and borrowing too—benson)

…

The best we get from government in the welfare state is competent mediocrity. More often we do not even get that; we get incompetence such as we would not tolerate in an insurance company. In every country, there are big areas of government administration where there is no performance whatever – only costs. p.7

…

Modern government has become ungovernable. There is no government today that can still claim control of its bureaucracy and of its various agencies. Government agencies are all becoming autonomous, ends in themselves, and directed by their own desire for power, their own narrow vision rather than by national policy. p.8

…

We are very good at creating administrative agencies. But no sooner are they called into being than they become ends in themselves, acquire their own constituency as well as a “vested right” to grants from the treasury, continuing support by the taxpayer, and immunity to political direction. No sooner, in other words, are they born than they defy public will and public policy. p.9

…

Nothing in history, for instance, can compare in futility with those prize activities of the American government, its welfare policies and its farm policies. Both policies are largely responsible for the disease that they are supposed to cure. p.13

Quote of the Day: The Sanctity of US Government Debts

The notion that the US government won’t default on its debt is simply historically inaccurate.

As recently as 1979 in the midst of another debt-ceiling debacle, the government failed to pay on $120 million in Treasuries according to stated terms, resulting in a class-action lawsuit Barton vs. United States.

And in 1934, FDR unilaterally abrogated the repayment terms for Liberty Bonds that were supposed to have been paid back in gold… or at least gold-backed currency.

Roosevelt refused to repay the bonds in gold, then devalued the dollar by as much as 40%, paying back bondholders in worthless paper.

But probably the most ignorant economic postulate is that the debt doesn’t matter because ‘we owe it to ourselves…’

It is accurate that only a third of the official US debt is owed to foreigners. The rest is owed to intragovernmental agencies like the Social Security Trust Fund, or to the US Federal Reserve.

But I’m mystified at how people find this comforting.

The US government fails to collect enough tax revenue to meet its mandatory entitlement spending and interest on the debt. In other words, they have to borrow more money just to be able to pay interest on what they already owe.

At some point, the music is going to stop and one of these major stakeholders will be left without a chair.

If they default on foreigners, it would destroy the foundation of the global financial system and shut the US government out of international debt markets.

But if they default on the Federal Reserve, then it would create an unprecedented currency crisis that the United States hasn’t seen since the Confederate Dollar collapsed in 1864.

If they default on the Social Security Trust Fund, then everyone in the Land of the Free who currently receives a public pension is going to get screwed.

It’s astounding that people think this doesn’t matter, as if we could just ‘default on ourselves’ and everything will be OK.

Yet, again, through sheer repetition, this has become the truth. It’s sacrosanct. And to challenge the truth is tantamount to blasphemy. Anyone who does challenge it is ridiculed and branded a lunatic.

Such close-mindedness is dangerous, especially in economics. People’s lives and livelihoods depend on an objective understanding of the facts, not this altered reality.

This from Sovereign Man’s Simon Black

Quote of the Day: You cannot change people’s minds who choose to ignore reality

Right now there’s an obvious trend in the West. Government insolvency is rapidly pushing those societies down the path of tyranny– drone assassinations, digital spying, pointless wars, confiscation of bank balances, capital controls, and the criminalization of everything from raw milk to collecting rain water.

The world has been here so many times before throughout history. And the trend seems so clear. Yet only a handful of people get it. Most people don’t want to hear about it. And they certainly don’t want to believe it.

You may have experienced this first hand if you’ve ever tried to talk to friends and neighbors about the fallacies of fiat currency. 

They’ll probably ignore you. And they’ll probably ridicule you. They’ll accuse you of wearing a tin-foil hat and having lost your mind.

But as the trend continues, we’ll continue seeing a further deterioration in both economic fundamentals and civil liberties. And it will become apparent to everyone. 

More stories will break about rampant corruption and gross surveillance. Drones will become a regular part of law enforcement. US debt will pass $20 trillion. They’ll nationalize a portion of pension funds and IRA savings.

They’ll eventually pass a law connecting tax delinquency to passport registration. Social security benefits will be scaled back. They’ll authorize themselves an Internet kill switch… and use it. A national sales tax will be unrolled, and ancillary taxes on things like mobile phone useage and air transport will go through the roof.

Civil asset forfeiture will rise dramatically, and people will have their entire life’s savings caught up in a bureaucratic death trap with no hope of due process. A budding currency crisis will substantially erode people’s standard of living.

And when it does finally become apparent to everyone, they’ll bombard you with questions about what to do… and they’ll celebrate your wisdom for having seen it coming. 

An old Zen aphorism wisely states “you cannot fill a cup that is already full.” In other words, you cannot change people’s minds who choose to ignore reality.

(bold original)

This is from the prolific Simon Black from the Sovereign Man.

The choice to ignore reality is a symptom of denial. Denials represent fashionable trends which extrapolate to populist talking points on social gatherings or social status signaling. Denials can also imply deeply held political convictions. Denials may also account for indoctrination, crowd psychology and the lack of critical thinking.

However, denial will eventually be faced with harsh and punitive reality, where loss, anguish and despondence will eventually rule.

Super Abenomics: Japan’s Nikkei Crashes on Rioting Japanese Government Bonds

Just a few days ago, I posted the Economist magazine’s seeming worship of “Abenomics” which featured PM Shinzo Azi as a Superhero.

Sometimes magazine covers can be useful indicators of extreme sentiments or the bandwagon effect via the stages of mania or depression or of crowded trades. Occasionally they serve as key harbingers to major inflection points.

I am not sure if today’s JGB incident represents a major reversal that should usher in a risk off condition, but I am sure that this serves as my alarm bell.

Well, a riot in Japan’s Governments Bonds has sent the Yen in a spike and simultaneously a crash in her stock markets. The Nikkei dived by 7.3%!

First the upheaval in the JGBs.

From the Bloomberg:

Japanese government bonds fell, with 10-year rates touching 1 percent for the first time in a year, on speculation the Federal Reserve will curb stimulus and the Bank of Japan will tolerate an increase in yields.

Japan’s five-year note rate matched the highest in two years after Fed Chairman Ben S. Bernanke said yesterday the central bank may trim bond purchases if policy makers see indications of sustained economic growth. The BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

The reality is that this has little to do with Ben Bernanke’s latest statement but has everything do with the much touted elixir called “Abenomics”. 

The Bloomberg chart of JGB’s 10 year yield has been climbing since the BoJ’s Kuroda announcement to double her monetary base last April. In other words, the yields has remained lofty even when Japan’s government has tried to calm her down by buying them. 

Today the BoJ bought a record number of yields in an attempt to assuage the markets, from another Bloomberg article:

The Bank of Japan injected 2 trillion yen ($19.4 billion) into the financial system today to stem volatility, as benchmark JGB yields swayed the most since the day after the central bank announced unprecedented bond buying.

The following table form Bloomberg, shows of the surge across the spectrum of the yields of Japan’s bonds, in a month’s period. This comes with the exception the 2 year yield.

I keep repeating that Abenomics is bound for failure for the simple reason that such policies have been founded on economic inconsistencies and premised on hope on the supposed magic of doing the same thing over and over again and expecting different results:

Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

Next the Japan’s stock market crash has sent almost the entire Asian region in a sea of red as shown by the table above from Bloomberg, both the Nikkei and the Topix were down 7.32% and 6.87% respectively .

Here is the Bloomberg:

Japan’s Topix index tumbled almost 7 percent, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial companies plunged amid rising bond yields. The rout triggered a halt in Nikkei 225 Stock Average futures trading in Osaka.

Consumer lenders lost 11 percent to lead declines among the Topix (TPX)’s 33 industries. Mitsubishi Estate Co., the country’s biggest developer, slid 9.3 percent. Mitsubishi Motor Corp. dropped 14 percent, falling a second day after advancing more than 50 percent in the previous three days. Tokyo Electric Power Co. plunged 13 percent.

And given the stock market’s latest near vertical ascent, the ensuing crash simply accounts as “every action has an equal and opposite reaction”, from the same article:

A measure of share swings surged to its highest in two years. The Topix’s 50-day volatility rose to 28.8, the highest since May 2011, according to data compiled by Bloomberg.

The Topix and Nikkei 225 Stock Average have risen more than 40 percent this year, outperforming all major equity indexes amid unprecedented Bank of Japan easing. The Topix trades at about 1.4 times book value, compared with about 2.5 for the Standard & Poor’s 500 Index and 1.7 for the Stoxx Europe 600 Index.

The coming sessions will be very crucial.

It isn’t the yen or Japan’s stock markets that will be the primary concern rather it is the JGB or Japan’s bond markets that will act as the driving force.

The bond markets has been in a parallel universe or in patent disconnect with the stock markets, where we just saw today the realization of a Wile E Coyote moment.

Previous soaring stock markets amidst unstable bond markets has finally led to a regression to the mean. As today has shown, stock markets are the last to know.

Yet if the BoJ will not be able to tame the bond markets in the coming sessions, despite her intensifying purchases, this increases the risks of a Japan debt crisis, as explained before.

Japan’s debt crisis may come sooner than later.  And today may just be a teaser.

The increasing prospects of a Japan debt crisis could herald a return of a global RISK OFF conditions.

On the other hand, if the BOJ continues to massively inflate; such crisis may metastasize into a currency or a yen crisis or a combo of both.

Everything now will depend on the how Japanese policymakers react and how the global financial markets will respond to them. Remember this isn’t just a Japan affair, but given the immense build up of global bubbles, including the Philippines, all it needs is a trigger for all of them to pop. Japan could play such a role.

Today’s rout in the Japanese financial markets is a taste of the blowback from populist unsustainable inflationist policies.

Thailand’s Credit Bubble: Rising Baht is a Symptom Not the Disease

Thai’s former prime minister adores Abenomics. He claims that a rising currency the Thai baht may spark a crisis.

From Nationalmultimedia.com

Former prime minister Thaksin Shinawatra warned yesterday that a lack of cooperation between the central bank and the Finance Ministry in reining in the strengthening baht could lead to a new financial crisis for Thailand.

Thaksin said the current economic indexes were worrying. "I like looking at different indexes and often get alarmed," he said.

"During the crisis, only the paranoid survived," he added, quoting Andrew Grove, former chief executive of computer-chip maker Intel.

The latest message on his Facebook account (www.facebook.com/thaksinofficial) posted yesterday afternoon said that Japan was able to achieve a GDP growth of 3.5 per cent in the first quarter because the Bank of Japan works directly with the Japanese government. He said Thailand's problem was that the Bank of Thailand was independent, and he accused the central bank of refusing to listen to the government.

"They [the Japanese] have a holistic approach to dealing with their economic problems. Their monetary policy and their fiscal policy are united," Thaksin said.

I have previously pointed out that Thailand has been nursing and blowing a bubble. Here is an update

Thailand’s loans to the private sector has spiked by nearly 40% since 2010 chart from tradingeconomics.com. That’s about 17%+ annual growth in the last 2 years + in a economy that has recently grown by an annual rate of 5.3%

Thailand’s debt to gdp in 2011 was at 132%. Current the explosive growth of loans imply that Thailand’s debt to gdp ratio nears or is at the 1997 highs of 166%.

And since banks has accounted for the gist of lending, domestic credit sourced from the banking sector in 2011 was at 150.78. This should be much larger today, perhaps near or at the 1997 levels of 177%

The credit boom in Thailand has led to swelling trade deficits. This implies that the Thais have been spending more than they have been producing, such that the consumption boom has been financed through credit expansion. This also implies reduced productivity as resources are being squandered on yield chasing and rampant speculative activities.

The former Thai PM sees the Japan’s model as a worthy paradigm to emulate. But the Thai government has already been doing an Abenomics but at a modest rate.

The Thai’s government budget has swung from surpluses to deficits over the last few years, which means government spending has increasingly been outpacing revenues.

And given the rate of increase in spending, the Thai government-debt to gdp has marginally risen the recent years. The subdued effect from rising government expenditures has been due to the bloated denominator from credit driven boom

And where does the Thai government get its funding to finance government’s accelerated spending? Well like the private sector, through debt expansion. 

Thailand’s external debt has DOUBLED at the close of 2012 relative to 2006.

The following chart hasn’t been updated. But it shows that the short term debt segment of the external debt, in 2010 constituted 54% share, which may be higher today.

This ratio has already topped the 1997 levels. And this also means Thailand’s debt profile makes it highly vulnerable to short term interest spikes. 

Slower statistical economic growth have already been whetting the steroid addicted financial markets of another rate cute. This should further aggravate the ongoing credit bubble seen in Thai’s private sector and government.

Like Philippines, policy induced bubbles have led Thailand's stock markets to boom. The SET now fast approaches the 1997 highs.

Bottom line: Former PM Shinawatra has his reasoning backward. The rising baht has not been the disease. Rather the rising baht, like the strong Philippine peso accounts for as symptoms. The disease is that of the manipulated boom financed by a credit bubble, fired up by zero bound rates (as shown by explosive growth in private sector loans) and of the intensifying government outlays (which is being funded by ballooning) external debt.

So if Thailand’s government does an Abenomics, a surge in short term interest rates could trigger a debt crisis

Thailand’s credit bubble seems as in a very much advanced state than the Philippines. And this could become the catalyst for a regional contagion.

Déjà vu 1997?

Graphics: Here Comes Super-Abenomics!

From this week’s cover of the Economist magazine.

The worship of inflationists and the religion of inflationism has reached new heights. Yes we are at the pinnacle of the central banking-inflationism bubble.

As the great Ludwig von Mises once wrote, “The favor of the masses and of the writers and politicians eager for applause goes to inflation.”

Yet all such optimism looks nothing new. The following article from the New York Times in March 1999 showcases an almost similar level of optimism where interventionism has been seen as an elixir to Japan’s economy.

Fourteen years after, yet still the hope for political magic to work.

Abenomics on McDonalds: Higher Prices, Lower Sales

According to the proponents of Abenomics, inflationism will bring about corporate profitability that would lead to economic boom.

In real life, inflationism has brought upon the opposite.

I pointed out earlier that in response to BoJ’s doubling of monetary base, McDonald’s Japan in April has increased prices of their products by as much as 25% for some items.

As expected, the result has been slumping sales.

From the Bloomberg:

Same-store sales at McDonald’s locations in Japan dropped 3.7 percent in April, the 13th straight monthly decline. Comparable, or same-store, sales are an indicator of a company’s growth because they include only older restaurants.

Basic economics: higher prices, lower demand.

Ironically booming global stock markets has also failed to generate strong growth in sales for McDonald’s outside the US.

From the same Bloomberg article:

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, said sales at stores open at least 13 months fell 0.6 percent last month as growth slowed in its Asia-Pacific region.

Analysts estimated a 0.5 percent drop, the average of 11 estimates from Consensus Metrix. Sales at stores in the company’s Asia-Pacific, Middle East and Africa unit fell 2.9 percent, the Oak Brook, Illinois-based company said today in a statement. Analysts projected a 1.4 percent decline.

On the other hand, McDonald’s sales in the US marginally increased as sales in Europe plunged.

However, McDonald’s stock (MCD) continues to power higher. So we have a parallel universe between global stock markets and real commercial activities around the world.

Note that the stagnant McDonald’s global sales comes amidst record low interest rates for the world.

Ironically, India’s franchise holder of McDonalds has also declared coming price increases.

From Reuters (hat tip Zero Hedge)

An Indian franchise operator of McDonalds Corp (MCD.N) may increase prices for the second time this year, responding to rising inflation which, along with an economic slowdown, it expects to temper demand growth for at least the next 7 months.

The company, Hardcastle Restaurants, said on Tuesday it could raise prices by 5-6 percent. That follows a 5 percent hike after the government increased the service tax rate in February.

"There is pressure and it's a tough environment, no doubt. But inflation is at 8-10 percent so we have to hike our prices," said Amit Jatia, vice-chairman of Hardcastle Restaurants, which owns the McDonalds franchise for west and south India.

He said, however, that the company had no intention for now to raise prices.

Consumer spending in India has taken a hit in the past three quarters as rising food prices, meager salary increases and the slowest Indian economic growth in a decade hurt buying appetites for clothes, cars and eating out.

Inflationistas can't seem to grasp of the casual relationship between business commercial and entrepreneurial activities with changes in money supply.

 

They don’t see that price instability will not only crimp on the demand side but also reduce the incentives for the supply side to expand. This would account for as the economic calculation problem.

If inflationism is the elixir, then Venezuela and Argentina would now account for the most prosperous economies.

Cato’s Steve Hanke points out that black market rate of the Argentinian Peso now “sits 47.3% below the official exchange rate” which he adds represents “an implied annual inflation rate of 98.3%.” 

Wow Hyperinflation in motion.

The Argentinian Merval index is now seen picking up steam on the intensifying hyperinflation. Soaring stock markets based on hyperinflation could mean a purchasing power of only 3 eggs ala Zimbabwe in 2008.

What are the lessons to be learned from inflationist politics? The advocacy of the religion of inflationism signifies as deflation of intelligence and an inflation of the belief in fantasies and lies.

Abenomics: Japan’s McDonald’s to Raise Prices by 25%

Lo and behold! This is one example of the supposed magic of Abenomics, Japan’s McDonald’s will raise prices of their products by 25% in order to offset losses!

From Bloomberg

McDonald’s Corp. (MCD)’s Japan business will raise some prices by much as 25 percent next month, the fast food chain’s first increase on burgers in the country since 2008.

Hamburger prices will go up to 120 yen from 100 yen and cheeseburgers will rise to to 150 yen from 120 yen in Japan in May, McDonald’s Holdings Co. Japan Ltd. said in a statement today. The hikes are part of the company’s plan to boost profitability, it said.

McDonald’s is raising the prices after the Japanese unit reported a 12 percent drop in operating profit last year. Fewer discounts drove March same-store sales 3.6 percent lower at the local business, the 12th consecutive monthly decline.

Of course basic economics tells us that higher prices leads to lesser demand. Thus a fall in purchasing power should extrapolate to lesser sales in terms of quantity (and also quality) which eventually should put pressure on profits. 

Chart from Yardeni.com

Yet given Bank of Japan’s recourse to inflationism which hasn’t been anything new, as the Japanese government has been doing this since the start of the new millennium, but has only become more aggressive since 2008, McDonald’s has been suffering from poor sales which isn’t supposed to be the case, especially at the onset of expansionary boom. 

The employment of such poilcies embodies precisely the definition of insanity specifically "doing the same thing over and over again but expecting different results."

Inflationism will hardly bring a boost to the economy, why? Because it inhibits economic calculation and the division of labor by distorting market prices.

As the great Murray N. Rothbard explained (bold mine)

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the "cost" of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation--and may even consume capital while presumably increasing their investments.  Similarly, stock holders and real estate holders will acquire capital gains during an inflation that are not really "gains" at all. But they may spend part of these gains without realizing that they are thereby consuming their original capital.

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

This only means that in a highly inflationary environment McDonald’s and other Japanese firms will be compelled to either reduce quality or to continually raise prices in order to survive or even speculate, which is contradictory to bring about ‘competitiveness’.

Yet any elevated accounting figures boosted by higher prices will be exposed when the BoJ desists from pursuing inflationist policies—the boom bust cycle.

Moreover, given that Japanese households are said to be ‘risk averse’ where 56% of their liquid assets are in the form of cash and where liquid ‘cash’ financial wealth accounts for 319% of Japan’s GDP, while only 5.8% have been invested in equities and .08% in foreign assets, one should expect that the massive fall in the purchasing power of the yen, will lead not to more investments, but to yield chasing masked as capital flight.

Former Morgan Stanley analyst now managing director and cofounder of SLJ Macro Partners Stephen Jen quoted by SNBCHF.com 

The first stage is foreign leveraged funds shorting the yen, acting on the rhetoric from the Abe Administration. This stage is coming to an end, to be followed by the second stage: Japanese investors selling yen

We have already seen signs where Japanese firms would rather raise financing from foreigners than to deploy domestic cash to investments.

So it would signify as a grotesquely obtuse idea to blindly believe (yes inflationism isn’t economics but religion based on heuristics) that inflation will save the day for Japan. Doing the same thing over a decade hasn't help, why should it be different this time? Because of the shock and awe?

One can only look at Argentina and Venezuela’s transition from stagflation to hyperinflation to see how disastrous a policy inflation makes.

Abenomics will only hasten Japan's path to a crisis.