Agricultural Boom Fuels Farmland Protectionism

Agricultural protectionism rears its ugly head again.

As prices of food continue to surge, a farmland boom in the US and elsewhere has been taking place. And some governments along with participating private sectors have been adding to the demand pressures for international farmlands.

Unfortunately, xenophobia and anti-market sentiments have prompted some nations to impose restrictions on agriculture land ownership.

The New York Times reports, (bold highlights mine)

Even as Brazil, Argentina and other nations move to impose limits on farmland purchases by foreigners, the Chinese are seeking to more directly control production themselves, taking their nation’s fervor for agricultural self-sufficiency overseas.

A World Bank study last year said that volatile food prices had brought a “rising tide” of large-scale farmland purchases in developing nations, and that China was among a small group of countries making most of the purchases.

Foreigners own an estimated 11 percent of productive land in Argentina, according to the Argentine Agriculture Federation. In Brazil, one government study estimated that foreigners owned land equivalent to about 20 percent of São Paulo State.

International investors have criticized the restrictions. At least $15 billion in farming and forestry projects in Brazil have been suspended since the government’s limits, according to Agroconsult, a Brazilian agricultural consultancy.

“The tightening of land purchases by foreigners is really a step backwards into a Jurassic mentality of counterproductive nationalism,” said Charles Tang, president of the Brazil-China Chamber of Commerce, saying that American farmers had bought sizable plots in Brazil in recent years, with little uproar.

Responding to the criticism, Brazil’s agriculture minister said this month that Brazil might start leasing farmland to foreigners, given the barriers to ownership.

China itself does not allow private ownership of farmland, and it cautioned local governments against granting large-scale or long-term leases to companies in a 2001 directive. China also bans foreign companies from buying mines and oil fields.

Agriculture has been the least globalized sector owing to regulatory and sundry political hurdles.

Proof of this is that global agricultural tariffs has substantially been higher than non-agricultural products.

So trade restrictions has impelled other private and public entities (such as international governments) to try to circumvent national trade restrictions by acquiring land or by providing financing to domestic food producers in return for the assurance of access to future production. [charts from Amber Waves, US Department of Agriculture]

From my end, aside from imbalances erected by local regulations and political privileges (e.g. subsidies), rising prices are likewise consequences of inflationism. This means that the upward trend in food prices and subsequently the demand for farmlands have been either artificially inflated or possibly reflects on a monetary malaise as seen through a “flight to real values”.

Besides, as we have predicted, this boom will continue to deepen as government introduce more market distorting measures.

So far, the global campaign to secure food supplies have been coursed through cooperative channels via trade and investments, in spite of current emergent signs of protectionism.

Otherwise, we should keep in mind that the close door policies will only lead to mutually undesirable consequences.

As the great Frederic Bastiat (1801-1850) warned,

If goods don’t cross borders, armies will

World Bank: Freedom and Liberty As Recipe To Prosperity!

The World Bank seems to have experienced an epiphany.

A recent research paper arrives at the conclusion that the formula to social prosperity are through Economic Freedom and Civil Liberties! [my earlier post here shows that economic freedom precedes civil liberties]

What makes this unusual is that the World Bank is a multilateral government agency. This means that the economics of classical liberalism and the politics of libertarianism has been gaining supporters even among government insiders.

Another way to see this is that some bureaucrats and politicians could be seeing the light of the delusions and failures of central planning.

Writes Jean-Pierre Chauffour (bold emphasis mine) [hat tip: Don Boudreaux]

Freedom and entitlement are largely two different paradigms to think about the fundamentals of economic development. Depending on the balance between free choices and more coerced decisions, individual opportunities to learn, own, work, save, invest, trade, protect, and so forth could vary greatly across countries and over time. The empirical findings in this paper suggest that fundamental freedoms are paramount to explain long term economic growth. For a given set of exogenous conditions, countries that favor free choice—economic freedom and civil and political liberties—over entitlement rights are likely to growth faster and achieve many of the distinctive proximate characteristics of success identified by the Growth Commission (2008): leadership and governance; engagement with the global economy; high rates of investment and savings; mobile resources, especially labor; and inclusiveness to share the benefits of globalization, provide access to the underserved, and deal with issues of gender inclusiveness. In contrast, pursuing entitlement rights through greater state coercion may be deceptive and even self-defeating in the long run.

Amen!

US Federal Reserve’s Pandora’s Box Reveal of More Crony Bailouts

Unknown to most, the politics of redistribution will always benefit certain vested interest groups.

The US Federal Reserve’s actions during the 2008 Lehman crisis should serve as worthy examples.

From the Bloomberg,

Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.

“This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”

Until brought to light by the public, politicians tend to look the other way.

Again from the same Bloomberg article, (bold highlights mine)

Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law.

“I wasn’t aware of this program until now,” said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.

Conflict of interest is an innate constituency of political distribution.

For instance, Rep Barney Frank admitted that he got his ex-lover a job at the Fannie Mae. So denials like the above should be viewed distrustfully.

Part of the Fed’s recent bailouts included wives of Wall Street bigwigs and Libya’s Gaddafi.

And this is one of the many reasons why we should End the Fed and consider the denationalization of money.

Two Ways to Interpret Gold’s Acceptance as Collateral to the Global Financial Community

Prices influence people’s behaviour.

The persistent trend of rising gold prices seems to have been changing the psychology of the public to the point of compelling mainstream financial institutions to accept gold as an asset.

Writes the Mineweb, (bold emphasis mine)

Gold is indeed a form of money as many believe and the latest agreement by the European Parliament's Committee on Economic and Monetary Affairs to allow central counterparties to accept gold as collateral is further recognition of the yellow metal's growing relevance as a high quality liquid asset.

In a press release today, the World Gold Council's Natalie Dempster, is quoted as saying "It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of gold make it an ideal form of high quality liquid collateral.

"We now look forward to the European Parliament and Council of the European Union upholding the inclusion of gold in the next stage of negotiations around EMIR which will now take place after the July plenary vote. The ratification would mark a significant step forward in redefining what constitutes a highly liquid asset under the Capital Requirements IV Directive, due in the coming month, from the European Commission."

The acceptance of gold by the previously reluctant financial community has been growing apace. As the WGC points out, market demand for gold to be used as a high quality liquid asset and as collateral has been building for some time. In late 2010, ICE Clear Europe, a leading European derivatives clearing house, became the first clearing house in Europe to accept gold as collateral. In February 2011, JP Morgan became the first bank to accept gold bullion as collateral via its tri-party collateral management arm.

Exchanges across the world, such as Chicago Mercantile Exchange, are now accepting gold as collateral for certain trades and London-based clearing house LCH Clearnet has said that it also plans to start accepting gold as collateral later this year, subject to regulatory approval.

There are two sides to interpret this development.

First is the good news. Gold as collateral could be construed as transition to integrate gold as part of the future reforms to the current fiat (legal tender based) paper money system. Hence the “remonetisation” label.

The second may be bad news. When we see regulators massively expand their role in the marketplace, coursed through various interventions, we know that this isn’t gold-standard friendly.

Yes gold may be included as collateral, but only as an asset that may help abet the credit expansion process.

The highly protected cartelized banking system would serve as natural political opposition to a gold standard because a gold standard would put tethers to bank credit inflation.

So it’s best to view this collateral issue with a tinge of suspicion. Like the Trojan Horse strategy employed by the Greeks in the Trojan War mythology, this could even be used as a way to confiscate people’s savings through ownership of gold.

Nevertheless one thing is clear, rising prices of gold has been changing the role it plays in the international financial community.

Updated Ranking of Global Credit Default Risks

Consistent with my earlier post, FT’s James Mackintosh: US Credit Risk Greater Than Indonesia, Bespoke Invest has updated tables of the 5-year Credit Default Swaps (CDS) reflecting on default risks of 60 countries.

On a year-to-date basis, Greece has the highest default risk while the US has seen a hefty nearly 20% increase.

Major ASEAN nations have also seen an uptick in default risks with Thailand registering as the worst performer.

Meanwhile major European economies posted most of the improvements over the same period.

But it’s a different view when seen from the ranking in terms of CDS prices.

The biggest improvements seen among European nations have been as consequence to the previous actions, where the nations affected by the PIIGS crisis have led to a contagion as seen with the prior price surges.

And almost along the lines of Newton’s second law of motion, where for every action there is an equal and opposite reaction, the previous steep increases has prompted for equally substantial declines.

What this seems to suggest is that the Greece crisis appears to be isolated for now.

And Europe's performance can be measured relative to the major ASEAN economies. While CDS prices of the ASEAN contemporaries did suffer some deterioration, in the context of prices, ASEAN CDS remains below the levels compared to the prices of nations affected by the PIIGS crisis.

So the above only reveals of the degree of price volatility or the rapid changes in the market’s perception of credit risks.

As Bespoke notes,

The countries that investors believe are least at risk of default are currently Norway, Sweden, Finland, and Denmark. The US used to be the least at risk of default, but CDS prices here have ticked up 20% so far in 2011. US default risk is still low relative to the rest of the world, but any tick higher is something we don't want to see.

Credit rankings can shift swiftly and meaningfully. All these depend on the policies adapted.

So far, the practice to inflate debt has subdued default risk concerns on some the major economies as the US. However, the law of the late economist Herb Stein should apply “If something cannot go on forever, it will stop”.

A Crack-up Boom in Belarus

Belarus appear on the verge of experiencing hyperinflation.

Reports the Bloomberg, [bold emphasis mine]

Belarus is headed for an economic “meltdown” and the ruble will need to depreciate another 51 percent, VTB Capital said, as locals lay siege to shops and protest price increases after the central bank devalued the currency.

The Belarusian central bank let the managed ruble weaken by 36 percent versus the dollar on May 24 as demand for dollars and euros from importers and households threatened to derail an economy already laboring under a current-account deficit equal to 16 percent of gross domestic product. Russia and other former Soviet partners last week agreed to give Belarus a $3 billion loan and urged President Aleksandr Lukashenko’s government to sell $7.5 billion of assets to replenish the state’s coffers.

“A ‘91-style meltdown is almost inevitable,’’ said Alexei Moiseev, chief economist at VTB Capital, the investment-banking arm of Russia’s second-largest lender, referring to the country’s economic slump after the collapse of the Soviet Union. ‘‘Rapid privatization is the only way that can help avert complete disaster.”

From Zero Hedge

As always political goals such such as the desire to maintain hold on power by incumbent political leaders abetted by inflationist and socialist policies have contributed to this.

Again from the same Bloomberg article, [bold highlights mine]

Lukashenko reintroduced controls on prices and the currency and re-nationalized some companies and infrastructure after coming to power in July, 1994, on a platform of “market socialism.” The nation’s economy returned to growth in 1996, according to World Bank data.

At the Minsk Refrigerator Plant Co. shop in the capital today, about 20 people queued in drizzling rain to use their rubles to buy fridges. While the shop didn’t open on the day of the devaluation, most of the models in the store already had ‘Sold Out’ stickers on their doors.

“I came on Saturday and it was a nightmare, the store was stormed by people who wanted to spend their rubles because of rumors about the devaluation,” said Nikolay, a 74-year-old pensioner who declined to provide his last name. His entire savings of 6 million rubles now buy one fridge compared with three before the devaluation, he said.

The ruble traded at 5,019.75 per dollar at banks and currency kiosks around the country today, according to the median mid-price of six banks compiled by Bloomberg from the lenders’ websites. That’s 1.8 percent weaker than the official rate.

The devaluation lifted the local price of automobile fuels as much as 24 percent, according to Belneftekhim, an industry group for the country’s oil sector. Last night, about 50 people protested the price increase in the car park of a Minsk hypermarket.

“I can’t describe how I feel without using obscenities, this is all our government’s fault,” said Sergey, a 32-year old attending the protest who works for a computer importer. “The whole world tells them, guys, you have economic problems, you should do something, and all they did was live off getting more and more loans.”

Both the IMF and the EBRD have blamed Lukashenko’s spending before last year’s presidential election for much of the economy’s woes. Lending was increased by 38 percent last year and public-sector salaries rose by about 50 percent, the Washington-based IMF said in a March 9 report.

Belarus got a $3.5 billion bailout loan from the IMF during the global credit crisis and the country has more than $2 billion of ruble and dollar debt outstanding. Foreign-currency reserves hit a 1 1/2-year low in March...

The price of children’s diapers has “gone completely insane” in Minsk, said Natalia, a 24-year-old mother also queuing outside the refrigerator store. “I used to buy a pack for 69,000 rubles, now they cost 140,000,” or almost half the 343,260-ruble monthly child benefit paid by the government, she said.

“We have become paupers,” said Tatiana, a 70-year-old woman in the line who also declined to give her last name. “We have been squeezed into a corner by this devaluation.”

Belarus’ skyrocketing inflation from Danske Bank

The previous bailout of the IMF has introduced the moral hazard factor which seems to have compounded this process.

Yet the unfolding episode in Belarus seems like a good example of the phase of the inflation process known to the Austrian school as the crack-up boom

From Ludwig von Mises,

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them.

Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them

McKinsey Quarterly on the Deepening of the Information Age

In a recent study by McKinsey Quarterly Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity, they find a dramatic surge in the influence of the internet on commerce and the global economy.

Their findings as follows (including charts):

-The Internet accounts for 3.4 percent of overall GDP in the 13 nations studied. More than half of that impact arises from private consumption, primarily online purchases and advertising. An additional 29 percent flows from investments by private-sector companies in servers, software, and communications equipment. The Internet economy, now larger than that of Spain, surpasses global industry sectors such as agriculture and energy.

-The Internet is a critical element of economic progress, pushing a significant portion of economic growth. Both our macroeconomic approach and our statistical approach show that in the mature countries we studied, the Internet accounted for 10 percent of GDP over the 15-year period from 1995 to 2009, and its influence is expanding. Over the last five years of that period, its contribution to GDP growth in these countries doubled, to 21 percent. If we look at the 13 countries in our scope, the Internet contributed 7 percent of growth from 1995 to 2009 and 11 percent from 2004 to 2009. In the global Net's growing ecosystem of suppliers, US companies play leading roles in key sectors. China and India rank among the fast-growing players in the Internet's global supply chain.

-Most of the economic value the Internet creates falls outside of the technology sector: companies in more traditional industries capture 75 percent of the benefits. The Internet is also a catalyst for generating jobs. Among 4,800 small and midsize enterprises surveyed, it created 2.6 of them for each lost to technology-related efficiencies.

Read the complete study here

Bottom line:

The web’s dramatic usage explosion is being reflected on the global economy. Real time connectivity has translated to vastly expanding economic value added and to immense productivity growth.

Increasing specialization could be part of the current dislocations that has led to lofty unemployment levels.

Yet those who see the world in terms of the industrial age will get things so awfully wrong.

As Alvin Toffler writes in the Revolutionary Wealth (p.12),

The developments in capital tools for knowledge expansion are like a rocket in a fueling stage, preparing to launch us toward the next phase of wealth creation. That next phase will spread the new wealth system more widely across the world.

A revolution is under way. And the challenge arising with it will challenge everything we thought we knew about wealth.

Graphic: Knowledge Problem

Here is Jessica’s Hagy’s graphic version of what seems to be F. A. Hayek’s Knowledge Problem.

Ms. Hagy calls it There’s no such thing as a know-it-all.

FT’s James Mackintosh: US Credit Risk Greater Than Indonesia

US credit risk is now greater than Indonesia. James Mackintosh at the Financial Times writes, (bold highlights mine)

It sounds dotty to suggest the US is at imminent risk of default. A country that has rarely been able to borrow so cheaply, that issues debt in its own currency and has just demonstrated that it can print as much money as it likes need never miss a coupon payment.

Yet in the past fortnight traders have come to the conclusion that America might breach its own constitutional clause that its debt “shall not be questioned”. According to Markit, the cost of one-year US credit default swaps, which insure against default, almost tripled in six trading days.

According to this – far from perfect – measure, the US is now more likely to default than Indonesia or Slovenia in the next 12 months.

Well the US has already been engaged in a policy to default on her liabilities indirectly.

Paying creditors with currency that has lesser purchasing power than when the debt had been contracted represents as (hidden) default. The nominal amount of the contract remains the same, but the currency's buying power has substantially been reduced.

And such policy has been channeled through what is known as Quantitative Easing or money printing (inflationism).

As Murray Rothbard wrote,

Inflation, then, is an underhanded and terribly destructive way of indirectly repudiating the "public debt"; destructive because it ruins the currency unit, which individuals and businesses depend upon for calculating all their economic decisions.

War on the Internet: G-8 Mulls Regulation of the Web

As earlier predicted, global politicians who see their turfs dramatically being eroded by the rapidly expanding flow of decentralized information, enabled and facilitated by the web, will declare an open war against the cyberspace.

The New York Times reports,

Leaders of the Group of 8 industrialized countries are set to issue a provocative call for stronger Internet regulation, a cause championed by the host of the meeting, President Nicolas Sarkozy of France, but fiercely opposed by some Internet companies and free-speech groups.

The G-8 leaders will urge the adoption of measures to protect children from online predators, to strengthen privacy rights and to crack down on digital copyright piracy, according to two people who have seen drafts of a communiqué the G-8 will issue at the end of a meeting this week in Deauville, France. At the same time, the document is expected to include a pledge to maintain openness and to support entrepreneurial, rather than government-led, development of the Internet.

This balancing act was reflected Tuesday in a speech by Mr. Sarkozy, who convened a special gathering of the global digerati in Paris on the eve of the G-8 meeting. Calling the rise of the Internet a “revolution,” Mr. Sarkozy compared its impact to that of two previous transforming episodes in global history: the age of exploration and the industrial revolution.

The Internet revolution “doesn’t have a flag, it doesn’t have a slogan, it belongs to everyone,” he said, citing the recent uprisings in the Arab world as examples of its positive effects.

These actions represent “resistance to change”, whereby politicians will try to enforce information control or censorship in the way the industrial age used to operate.

The horizontal flow of information threatens the institutional centralized frameworks built upon the industrial age economy.

As I earlier wrote,

Political and economic ideology latched on a vertical top-bottom flow of power will be on a collision course with horizontal real time flow of democratized knowledge.

This would likely result to less applicability of ideologies based on centralization, which could substantially erode its support base and shift political capital to decentralized structure of political governance that would conform with the horizontal structure of information flows.

People will know more therefore control from the top will be less an appealing idea.

But again these attempts to regulate the web are likely to fail.

Nevertheless the war on the internet accounts as part of the adjustment process away from the command and control structure of the industrial ages with the knowledge revolution taking place beyond the reach of politicians. Besides, technological advances will work around regulations.

As visionary Alvin Toffler writes (Revolutionary Wealth p.40)

As change accelerates still further, institutional crisis will not be limited to the United States. Every country in the twenty-first-century world economy—including China, India, Japan and the E.U. nations—will need to invest new style institutions and adjust the balance between synchronization and de-synchronization. Some countries may find it more difficult than the United States, whose culture, at least, smiles on change-makers.

Tariffs on Furniture Trade: Example of Mercantilist Policy Failure

In the eyes of mercantilists, the world operates in a fixed pie where trade is reduced to a zero sum game—one benefits at the expense of the other.

Because it is a zero sum game, for mercantilists, trade has to be controlled to favor the locals.

And one of the conventional route for this is via protective tariffs.

The Washington Post gives an account of how recent tariffs imposed on the furniture trade with China, has resulted not to the benefits of Americans, but to politically affiliated lobbyists.

The WaPo reports, (hat tip Mark Perry) [highlights mine]

The United States and China have exchanged accusations of dumping for years and imposed tit-for-tat duties. All along, though, China has generally come out on top: Its trade surplus with the United States rose to $273 billion in 2010, according to U.S. Census Bureau figures, more than three times the level of a decade earlier.

The trade concerns have led to growing calls for tougher action from Washington to stem the tide and protect U.S. jobs. But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million...

“This whole saga is a perfect example of good intentions gone completely haywire,” said Keith Koenig, president of City Furniture, a big Florida-based retailer and critic of the tariffs. Like many retailers, he relies on imported goods, which are cheaper than those made in America.

The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. Their work includes haggling each year over private “settlement” payments that Chinese manufacturers denounce as a “protection racket.”

This whole saga is a perfect example of a longstanding myth debunked since the 18^th century.

First of all, people buy and sell voluntarily because they see fulfillment from such activity. And no territorial boundary changes such dynamics.

Next, mercantilism signifies a form of mental heuristics, only justified by the use of mathematical models, which essentially ignores human action.

Mercantilist see people as behaving like robots or automatons especially in the lens of statistical aggregates.

They omit the fact the people will work their way around absurd policies. And that’s why economic theories which support these policies are exploded as the above.

This is especially amplified in today's deepening of globalization trend as more avenues are made available to circumvent nonsensical policies.

As Ludwig von Mises wrote,

All that a tariff can achieve is to divert production from those locations in which the output per unit of input is higher to locations in which it is lower. It does not increase production; it curtails it.

Lastly mercantilism sells to either economic ignoramuses or to ideological zealots which sees the state as an omni-virtuous entity.

The latter hardly realizes that the state is composed of acting humans, who also operates on the premise of self-interests.

The key difference is that these entities use the power of gun (coercion) to exploit the masses from which to attain their personal goals.

The followers of mercantilism also hardly realize that they serve as pawns to unscrupulous political masters and the crony clients, who benefit from politically unequal policies in the name of the upholding the public’s weal.

Mercantilism is like a superstition which simply refuses to go away.

Should Doomsayers Be Censored?

It had been a calculation error says the California preacher, thus doomsday will be reset on October 21. Booooo!

Reports the Yahoo, (bold highlights mine)

A California preacher who foretold of the world's end only to see the appointed day pass with no extraordinarily cataclysmic event has revised his apocalyptic prophecy, saying he was off by five months and the Earth actually will be obliterated on Oct. 21.

Harold Camping, who predicted that 200 million Christians would be taken to heaven Saturday before catastrophe struck the planet, apologized Monday evening for not having the dates "worked out as accurately as I could have."

He spoke to the media at the Oakland headquarters of his Family Radio International, which spent millions of dollars_ some of it from donations made by followers — on more than 5,000 billboards and 20 RVs plastered with the Judgment Day message.

It was not the first time Camping was forced to explain when his prediction didn't come to pass. The 89-year-old retired civil engineer also prophesied the Apocalypse would come in 1994, but said later that didn't happen then because of a mathematical error.

Not only has the events proven him wrong, but the preacher even admits to it: econometrics has failed him as I predicted. Yet he continues to apply the same methodology.

But I hear some people clamor that government has to “act” on Mr. Camping’s doom mongering.

Should the US government apply censorship on Mr. Camping?

Does it mean that we should rely on his poor track record to use force against what we may perceive as wrong predictions or ideas we don’t agree with?

But what if he will be correct and October will indeed account for as doomsday? Remember Aesop’s famed fable, The Boy who cried Wolf?

I am not saying that I agree with or believe in him. I think his overdependence on math camouflaged by religious creeds will continue to lead his predictions astray. But I could be wrong.

But there are two important points here:

-he is selling an idea of what he purportedly believes in and

-two we don’t know the future.

On the issue of selling ideas, marketing guru Seth Godin has a terrific commentary on the possible lessons gleaned from the recent apocalyptic prophesy.

Mr. Godin writes, (italics original)

Sell a story that some people want to believe. In fact, sell a story they already believe…

Not everyone wants to believe in the end of the world, but some people (fortunately, just a few) really do. To reach them, you don't need much of a hard sell at all.

In other words, many of those who listen to Mr. Camping’s prophesies could be people who already believed in them or that Mr. Camping merely personifies the belief of an extant segment of captive audiences. That's why he gets donations.

If Mr. Camping’s followers represent as zealots of doom, can we legislate away beliefs or faiths? Are we supposed to prevent the expression of ideas that doesn’t mesh with ours?

Besides, who should decide whose ideas are accurate anyway, the President? If governments have been shown as unable to sufficiently resolve social problems, then why should we expect them to know the substance of information which signifies relevance for us and what are not? Have you ever heard of propaganda or indoctrination-false information deliberately spread as truths for political ends?

This shows of the assumptions that government have superior knowledge accounts for as fatal conceit-the fallacious presumption of omniscience.

As US playwright and Nobel awardee Eugene Gladstone O'Neill said,

Censorship of anything, at any time, in any place, on whatever pretense, has always been and will always be the last resort of the boob and the bigot

Second is the issue of uncertainty.

All of us speculate about the future, that’s because we don’t know exactly how things will turnout. That’s why markets are there. And that’s why money exists. And that’s why people use mathematics, such as statistics, in the perpetual attempt to “smooth out” risks and uncertainties.

True, some issues are more predictable than the others, but again that’s why markets exist—to allocate resources according to one’s perception of time variant needs (satisfying one’s unease, e.g. some people see the need of believing in doomsdays).

As Professor Art Carden writes

People with strong beliefs should be willing to put their money where their mouths are. The late Julian Simon was a master of this. Superior knowledge and insight can be turned into profitable opportunities. My personal property no longer has value to me after the Rapture, but it might have value to someone else. If I knew the precise date of the end of the world, I would sell everything in the months leading up to it and use the resources to spread the word, as some of Camping’s followers have apparently done.

If I were pretty sure the Rapture might happen sometime over the next 40 years, I should be able to make a deal with someone who disagrees but who would be willing to pay me now in exchange for title to my property after the Rapture. I could then use the resources to spread my message. I got no takers on my offer of $1000 for all of one apparently Camping-affiliated group’s earthly belongings I made after I first learned about the claim that Judgment Day would happen on 5/21/2011.

Harold Camping isn’t the only discredited doomsday prophet among us. As I’ve followed this, I’ve wondered what percentage of the people who laugh at Camping and his misled followers nonetheless nod sagely, furrow their brows, and reach for their checkbooks whenever professional doomsayers in the environmental movement like Lester Brown and Paul Ehrlich warn of overpopulation, the end of oil, and the end of prosperity in spite of track records littered with doomsday predictions that failed to come true.

Indeed, beliefs can be parlayed into profit opportunities. We can profit from someone else’s mistakes, so why apply censorship?

This is like investing the stock market where wrong analysis or flawed theories or inaccurate information can lead to losses. So given the logic of advocates of censorship should we effectively ban losers (applied not only to stockmarkets but to all markets)? Or should we also apply censorship on newsletters fund managers and analysts whose prediction of the markets have been inaccurate?

What people say and do are frequently detached. Did global economic activities stop prior to May 21^st in anticipation of the rapture? Did you sell or give away your assets because of this?

If not, then the obviously you were not affected, because you didn’t believe, you were a skeptic. This is called demonstrated preference. Because the world didn’t fall into a stasis, most people around the world simply ignored such cataclysmic prophesy.

Only media likes to drum up on sensational issues because they profit from them. Fear draws attention. Yet shooting the messenger won’t eradicate the message. So censorship would signify as a fool’s errand.

At the end of the day, the issue of Judgment day will be one decided by your and my personal disposition and not by the government. Unless you honestly believe that governments can stop doomsday [har har har].

Finally, it would be an issue of legal fraudulence if modern day Cassandras engage in purposeful misrepresentation or deception to profit from prophesies of Armageddon.

But that would mean personal issues of those who felt affected or victimized, whose recourse should be channeled through the courts of law.

I close this anti-censorship ‘freedom of speech’ rant with this prominent quote which has been frequently (mis) attributed to Voltaire (but according to Wikipedia is from Evelyn Beatrice Hall who wrote “under the pseudonym of Stephen G Tallentyre in The Friends of Voltaire (1906), as a summation of Voltaire's beliefs on freedom of thought and expression)

I disapprove of what you say, but I will defend to the death your right to say it.

Mainstream Calls For More Quantitative Easing

As financial markets reveal some signs of exhaustion or possibly indications that the stimulative effects of inflationism could be waning, I see more calls for renewing or expanding existing Quantitative Easing (QE) programs.

From Oxford Analytica on the US(researchrecap.com)

The US Federal Reserve is underachieving both planks of its mandate to maximise employment consistent with price stability. The former amounts to an unemployment rate consistent with non-inflationary growth. The price-stability mandate translates into an informal 2% inflation target.

Although the Fed no longer tracks higher-level measures of the broadest conception of the supply of ‘money’ in the economy, private-sector and academic gauges of such notions indicate a collapse. This means that QE3 is positive for sustaining US and global equities valuations, because it maintains a channel of liquidity that otherwise would begin draining from the economy. This also makes it positive for global commodity prices, either sustaining their already lofty valuations or at least cushioning the extent of any broad downward correction.

From Moody’s on Japan (researchrecap.com)

Another uncertainty overshadowing Japan’s fiscal outlook is the extent to which the government will share the burden of Tokyo Electric Power’s rising earthquake-related liabilities. The Bank of Japan, for the time being, has refrained from further augmenting its post-quake liquidity and asset-purchase program. Should the rebound in Japan’s economy be weaker than forecast or delayed entirely, additional actions by both the Ministry of Finance and Bank of Japan may be needed.

In my view, all these signify part of the central bank policy called ‘signaling channel’ which are meant to manage inflation expectations. Remember central banks also work their policies through the private sector networks which they are allied with.

Of course the other terms for managing inflation expectation are mind control (psychology) or propaganda (politics) or psy war (military). Such addiction to inflationism will eventually end in tears.

As the great Ludwig von Mises wrote,

People still believe, however, that destroying the value of the monetary unit is something that does not hurt the masses. But it does hurt the masses. And it hurts them first. There is no better way to bring about a tremendous revolution than to destroy the savings of the masses that are invested in savings deposits, insurance policies, and so on.

Vietnam Stock Market Plunges on Monetary Tightening

If major ASEAN markets have been resilient (except for the past 2 days). Vietnam’s benchmark has been cratering.

Chart from Bloomberg

The Financial Times Blog notes

Stock markets rarely move in straight lines but nervous Vietnamese investors have done their best to buck that trend of late, with shares falling for nine sessions in a row amid worries about the economic outlook.

The benchmark VN Index closed down 3.6 per cent at 402.59 points on Tuesday.

Shares on the 11-year-old Ho Chi Minh Stock Exchange have now lost 16.7 per cent since May 11, as falls have precipitated a series of margin calls

Traders said investors were worried about inflation, which accelerated to 19.8 per cent year-on-year in May according to figures released on Tuesday, and the possible impact on businesses of high interest rates, part of the government’s plan to stabilise the fast-growing but shaky Vietnamese economy.

While media says that the likely cause has been about inflation, I think it is the opposite: a prospective tightening.

Given the way Vietnam’s government has been overspending…

Ballooning Budget deficit

surging Money supply

One can see why inflation has been surging.

Charts above from tradingeconomics.com (money supply, budget deficit and inflation)

And because the Vietnamese government wants to slough inflation, it has been raising rates and putting credit growth caps on the banking system especially on foreign banks.

From the Bloomberg,

The State Bank of Vietnam on May 17 boosted the repurchase rate to 15 percent from 14 percent, the second increase this month and its sixth this year to curb inflation, which is at 28- month high. The central bank has more than doubled the rate since early November as a widening trade deficit forced four currency devaluations in 15 months and threatened growth.

As a side note: The link between the Vietnam’s interest rates and currency devaluations isn’t from likely from trade deficits, but from government spending and expansionary credit.

And the ceiling on Vietnam’s government credit growth.

Reports the thanhniennews.com

The State Bank of Vietnam has banned foreign bank branches from setting credit growth targets of higher than 20 percent, persisting with a tight monetary policy to fight inflation.

According to a statement dated Friday, the central bank said most foreign branches in Vietnam have planned to keep credit growth below 20 percent and tried to cut back on lending to non-production sector. Some banks, however, have not moved to reduce their lending operations.

As a result, the central bank has ordered all foreign bank branches to control their lending, especially for real estate and stock market transactions. “The State Bank of Vietnam will not accept any plans by foreign financial institutions and bank branches to have credit expand by more than 20 percent this year,” the statement said.

Vietnam’s dramatic flattening of the yield curve doesn’t seem to manifest concerns of inflation (asianbondsonline.org), instead the yield curve could be signaling a slowdown in economic growth as consequence to policy based tightening.

Bottom line: stock markets are remarkably sensitive to the inflationary dynamics more than the conventional notion of ‘micro fundamentals’.

Scenarios of A Greece Default

Andrew Lilico writing in the UK’s Telegraph draws up a litany of possible scenarios of a Greece default.

He writes,

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:

- Every bank in Greece will instantly go insolvent.

- The Greek government will nationalise every bank in Greece.

- The Greek government will forbid withdrawals from Greek banks.

- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

Read the rest here

I share Austrian economics Professor Dr. Antony Mueller’s opinion, that these exactly serve as main reasons why Greece would likely avoid a default.

It’s more than just economics as the Greek or PIIGS crisis would mostly account for politics.

As the Economist wrote last April (bold emphasis mine)

THE announcement on April 6th that Portugal will become the third euro-area country to receive a bail-out was not well received in Germany. As the largest euro-area country, it is contributing 20% or €52 billion ($75 billion) to the bail-out funds of the three profligate countries, mostly via the euro area's European Financial Stability Facility. This is dwarfed however, by Germany's banks' exposure to the three countries, which totals €230 billion. Only around 12% of this is sovereign or public debt, but a sovereign default could easily lead to a slew of domestic bank and corporate defaults too, to which the country is far more exposed. America is also footing a cool €14 billion via the IMF's contribution to the bail-out. But it too seems to have got good value for money—its banks have a total of €144 billion in exposure to the three countries.

And as earlier said, today’s monetary architecture makes for an intricate web of entwined cartel and patron-client relationships among central banks, governments and the banking system.

Unless we see a systemic crisis unravel, any resolution will likely be molded around these political relationships. Expect more inflationism to be used.

Financial Repression Drives The Bond Markets

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude. In the Press and Encyclopaedias, in Schools and Universities, everywhere Error holds sway, feeling happy and comfortable in the knowledge of having Majority on its side. -Goethe

One of the most bizarre ironies which can be observed from the mainstream is the selective use of market signals for analysis.

A conventional mantra is that because actions in the bond markets have been benign, therefore experts say that inflation risks have not been apparent. Others argue that actions in the bond markets signal deflation instead of inflation.

On the one hand, these mainstream experts and their acolytes don’t trust the markets. They see markets as inherently unstable thus always opine for some form of government intervention. They believe that through mathematical equations, governments can simply adjust economic conditions similar to a thermostat of an air conditioner.

On the other hand, in justifying the selective use of market prices for government intervention, they specifically see bond markets as conveying the actual state of affairs of the credit markets. In other words, they see the bond markets as being “efficiently” priced.

The Policy of Permanent Quasi Booms

It is pretty much naive to suggest that bond markets accurately represent price signals that exhibits the actual time preferential balance of savings and loans.

First of all bond markets operate under government’s guiding dogma meant to promote the permanence of quasi boom.

From John Maynard Keynes,

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.

Hence by actively intervening in the marketplace by forcing down interest rates implies that bond markets have already been significantly distorted which has led to serial boom bust cycles.

Further proof of the Fed’s Zero Bound interest rate policy from a Federal Reserve Paper authored by Ben Bernake, Vincent Reinhart and Brian Sack

Central banks usually implement monetary policy by setting the short-term nominal interest rate, such as the federal funds rate in the United States. However, the success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound on interest rates. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely instead on “non-standard” policy alternatives...

In this paper, we apply the tools of modern empirical finance to the recent experiences of the United States and Japan to provide evidence on the potential effectiveness of various nonstandard policies. Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes: (1) using communications policies to shape public expectations about the future course of interest rates; (2) increasing the size of the central bank’s balance sheet, or “quantitative easing”; and (3) changing the composition of the central bank’s balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate. We describe how these policies might work and discuss relevant existing evidence.

This paper was done in 2004. Apparently the Bernanke led US Federal Reserve has put this study into action.

This means that aside from Zero bound interest rate policies; activist policymaking today includes the expansion of the balance sheet of the US Federal Reserve.

And this operating precept appears to have been exported to the US major trading partners.

Chart from Danske Bank

Financial Repression As A Driving Force

Second, seen from the distribution of ownership of Federal securities or US treasuries, 80% appear to be owned by governments.

The chart from Wikipedia shows of the expanding share of Federal Reserve and intragovernmental holdings, along with foreign governments which accounted for 28% in 2008. And this chart was prior to the activation of the Quantitative Easing programs.

Adding up the local and state government and state and local government (pensions) the share of government ownership rises above 80%.

The private sector (profit oriented segment) only holds a paltry (less than 20% share) in contrast to (politically motivated) governmental ownership.

In short, who or which entities will do the selling?

While it is true that like the stock markets, prices are set on the margins, there is another factor which attempts to protect treasury ownership from a panic: regulations on the banking system via the BASEL III accord.

According to this Bloomberg article, (bold emphasis mine)

Lenders have an added incentive to buy Treasuries after the Basel Committee on Banking Supervision proposed rules on Oct. 4 that banks increase available capital and improve their measurement and control lending risk.

Banks will have less than five years to comply with the so- called Basel III rules for minimum tier-1 capital ratios and until Jan. 1, 2019, to meet the capital buffer requirements. The Treasury Borrowing Advisory Committee forecast in February that banks may have as much as $1.6 trillion in demand for Treasuries in the next five years based on the evolving rules.

So new regulations will essentially force the private (banking) sectors to buy and own Federal securities, despite of the environment of higher commodity prices, which have been signaling inflation.

Thus the only marked threat of a potential selloff will likely emanate from politically motivated foreign governments.

The key question is what would motivate them to do so? A selloff would only devastate the value of their stash of US dollar reserve holdings.

And to reiterate, even if some foreign entities, like China seems reluctant to acquire US federal securities, the Fed appears to have an open checkbook—which may only be constrained by an explosion of inflation.

The chart from the Cleveland Federal Reserve shows the Fed as huge buyers of US long term treasury and Fed agency debt (yellow) and Mortgage backed Securities (brown)

Hence, anyone who argues from the standpoint of market prices without considering these variables either have been misdiagnosing real events or deluding themselves.

Yet all these constitute what Carmen Reinhart and Kenneth Rogoff calls as “Financial Repression” [This Time Is Different (p. 143)] (bold emphasis mine)

Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payment system. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. Of course, in cases in which the banks are run by the government, the central government simply directs the banks to make loans on it.

Governments frequently can and do make the financial repression tax even larger by maintaining interest rate caps while creating inflation.

These are Harvard guys. But their observations square with the Austrian school’s position of the enmeshed clandestine relationship between central banks, the banking system and the government.

According to Murray N. Rothbard,

The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.

This means that bond markets almost everywhere operate under the same dynamics. That’s until they became unsustainable (such as in Greece).

Bottom line:

Bond markets reflect more on the effects of government policies rather than market price based distributions.

The bond markets have been so distorted by a myriad of deeply embedded government interventions such that they cannot be used as dependable standalone indicators in analyzing the marketplace or the economy.