Saturday, July 19, 2014

Quote of the Day: Greed and anxiety concerning SC-72 have been the consistent, unifying thread in Philippines-PRC dispute

As to where this all goes, I envisage a specific scenario. It relates to SC-72, a hydrocarbon exploration block off the coast of the Philippine island of Palawan in a region called Reed or Recto Bank, in a zone that the Philippines claims lies within its 200-nautical mile EEZ, but the PRC also claims.

Amid the resource-related bonanza bullshit that underlies SCS rhetoric, SC-72 might be the real thing, a significant oil and gas find that will provide a major economic boost to the Philippine economy and the government's bottom line. Greed and anxiety concerning SC-72 have been the consistent, unifying thread of Philippine-PRC maritime disputes including the Scarborough Shoal circus.

The Philippine government designated a Philippine controlled company, Forum Energy, owned by Philippine's leading rich guy Manuel Vs Pangilinan (and very close friend of Del Rosario; indeed, Pangilinan was the informal envoy Del Rosario sent to the PRC when his formal diplomacy hit a wall and Aquino turned to Trillanes) to "help assert the Southeast Asian country's sovereign rights over parts of the South China Sea, claimed by the Philippines as the West Philippine Sea."

SC-72 was originally a centerpiece of prospective PRC-Phillipine cooperation and co-development. The main point of contention was Phillipine insistence that the PRC acknowledge SC-72 as lying within the Phillipine EEZ, something that beyond bragging rights would give the Philippine government 100% share of the royalties. In an interesting parallel to the PRC/Vietnam/Paracels situation, Pangilinan declared "his only condition ... was for CNOOC to respect the Philippines' rights over Recto Bank.

When the Philippine concession-holder sent a survey ship into SC-72 in 2011, a PRC vessel played chicken-of-the-sea and nearly rammed it. Nevertheless, the Philippine side has consistently presented SC-72 as a venue for cooperation with the PRC.

I wonder if this is about to change.
This is from US foreign policy and East Asian affairs analyst Peter Lee writing at the Asia Times Online. Mr. Lee also suggests that domestic political grandstanding, double dealing, backstabbing, miscommunications, impulsiveness and US meddling among many factors have driven a wedge in Philippine-PRC relationship. 

Interesting.

As I wrote in 2012,
territorial disputes over supposed resources represents a façade meant to protect the interests of domestic cronies than of the average Filipinos. (Guess who will get the service contracts for resource extractions once the dispute is settled?)

Paper Money: 353 Years of Wanton Destruction of People's Purchasing Power

Sovereign Man's Simon Black on the 353th birthday of paper money and the unlearned lessons from the past:
If you ever find yourself vacationing in the western Pacific, I highly recommend swinging by Yap Island, home of one of the most bizarre forms of money in history.

Over a thousand years ago, natives would mine enormous chunks of limestone and carve them into gigantic circular discs. 

I’m talking REALLY big… a typical disc would be 5 to 10 feet in diameter, over a foot thick, and weigh several tons. 

They called them ‘Rai Stones’, and they were actually used as currency. Curiously, an indiviaul rai would be valued not based on its weight or size, but based on its story. 

If many people had been killed transporting it, or if the stone had once belonged to a famous warrior, the rai would be worth more. So it was a bit of a collectible as well as a form of money. 

Needless to say, the sheer size of these stones meant that they wouldn’t be moved very often. Everyone on the island just sort of knew who owned each rai, like a primative form of Bitcoin’s blockchain. 

The polar opposite of this is the paper money system, something that has its origins in the Han Dynasty over 2,000 years ago. 

It wasn’t quite paper, but the ancient Chinese experimented with leather-skinned money as early as the second century BC. 

The idea died for over a thousand years in favor of (mostly) gold and silver. But it popped up again in the Middle Ages where Chinese merchants used short-term credit notes rather than haul around heavy coins. 

When the Mongols basically took over the entire planet, they adopted this idea, much to the astonishment of their European visitors. Marco Polo writes of this in his diary with total incredulity:

“The Great Kaan causeth the bark of trees, made into something like paper, to pass for money all over his country. . . And nobody, however important he may think himself, dares to refuse them on pain of death.” 

But it wasn’t until 1661 that the first modern paper money was born. 

Johan Wittmacher was a Latvian merchant of Dutch descent who had a burning idea he wanted to try; he just needed a willing country. 

Wittmacher moved to Sweden and tried several times to obtain a banking license. Finally, after promising a 50% profit share to King Charles X Gustav, his license for Stockholms Banco was approved in 1657. 

On July 16, 1661, his bank became the first in history to issue paper banknotes– Kreditivsedlar. 

These Kreditivsedlar solved a huge problem for Wittmacher. All the gold deposits he was holding on behalf of bank customers were primarily short-term. Customers would frequently withdraw coin, so he needed to keep inventory handy. 

On the other hand, he wanted to increase profits by loaning out his customers’ gold. Problem was, most of the loans were longer term. 

Wittmacher’s dilemma was satisfying his customers’ short-term withdrawals while still making long-term loans. The solution was paper. 

When a customer would make a withdrawal, Wittmacher gave them paper notes as claims on the gold he was holding. 

The customer could use the notes to pay for goods and services, and Wittmacher got to keep the gold and make more loans. 

In time, the notes became a popular medium of exchange, accepted everywhere just like gold. People would pass them around as money, only occasionally showing up to the bank to redeem them for gold.

Naturally it didn’t take long for Wittmacher to start committing fraud. Before long he’d issued more notes than he had gold in his vault. And he was making more loans than the bank could afford. 

After only seven years, the bank collapsed. But the idea of paper notes lived on to infect the evolution of money ever since.
Read the rest here 

Aldous Huxley was spot on when he wrote:
That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.

Chart of the Day: Inflation's Income and Substitution Effect on American Consumer Spending

The fundamental dynamic behind price inflation would be a shift in consumer spending pattern. Without corresponding increases in income, consumer price inflation leads to the income and substitution effect.

The income effect from higher prices is to reduce or lower demand.

The substitution effect switches spending to focus on the "needs" rather than on the "wants". 

In short, consumer price inflation reduces disposable income.


As CPI builds, we see the same dynamics unfolding in US consumer spending as exhibited by the chart from Zero Hedge/Goldman Sachs

Friday, July 18, 2014

Quote of the Day: Protectionism

Protectionism is government intimidation unleashed against consumers to oblige them to buy products that they prefer not to buy. Protectionism is force that enriches the politically powerful at the expense of the politically impotent. Protectionism is business people capturing rents from receiving special favors from the state rather earning profits from giving good service to the public. Protectionism is the myth that money belongs not to consumers who earned it peacefully but to suppliers who steal it coercively. Protectionism is the corrupting lie that absurdly and insult​ingly insists that mass flourishing results from monopoly and dearth rather than from competition and abundance. 
This is from Cafe Hayek blogger, Professor and author Donald J. Boudreaux

Tuesday, July 15, 2014

Study: Decriminalized Prostitution Lead to Reduced Rape and Venereal Diseases

The Wall Street Real Times Economic blog refers to a study which sees substantial social benefits from decriminalized prostitution (italics mine)
A loophole in Rhode Island law that effectively decriminalized indoor prostitution in 2003 also led to significant decreases in rape and gonorrhea in the state, according to a new analysis published by the National Bureau of Economic Research.

“The results suggest that decriminalization could have potentially large social benefits for the population at large – not just sex market participants,” wrote economists Scott Cunningham of Baylor University and Manisha Shah of the University of California, Los Angeles, in a working paper issued this month.

Mr. Cunningham and Ms. Shah got an opportunity to study the effects of decriminalized prostitution on crime and public health because Rhode Island lawmakers made a mistake. A 1980 change to state law dealing with street solicitation also deleted the ban on prostitution itself, in effect making the act legal if it took place indoors. The loophole apparently went unnoticed until a 2003 court decision, and remained open until indoor prostitution was banned again in 2009.
The effects:
As you might expect, the economists found that decriminalizing indoor prostitution was a boon to the sex business. “Decriminalization decreased prostitute arrests, increased indoor prostitution advertising and expanded the size of the indoor prostitution market itself,” they wrote.

Rhode Island also saw “a large decrease in rapes” after 2003, while other crimes saw no such trend in the state, they wrote. There also was “a large reduction in gonorrhea incidence post-2003 for women and men,” they wrote.

The economists then used several economic models to track the decriminalization’s effects versus other possible causes. They found “robust evidence across all models that decriminalization caused rape offenses and gonorrhea incidence to decrease.” One model estimated a 31% decrease in per-capita rape offenses and a 39% decrease in per-capita female gonorrhea cases due to the decriminalization of indoor prostitution.
Cited reasons
In the paper, they speculated about several possible reasons for the declines. For instance, they wrote that it’s likely at least some of the decrease in rapes was “due to men substituting away from rape toward prostitution.” And the decrease in gonorrhea jibes with “other empirical evidence showing that prostitutes who work indoors practice safer sex and are less likely to contract and transmit STIs,” they wrote.
The cited reasons are unsatisfactory. Nonetheless all prohibition statutes revolve around people's incentives.

Transactions conducted illegally will not only mean exchange in services but importantly conducting exchange while avoiding detection from authorities. This implies the following:

First, the illegitimacy of such transactions engender an in imbalance in the relationship between prostitutes and their respective clients. Such imbalance has the potential to motivate some clients to abuse prostitutes. For instance, a client, for one reason or another, may threaten to snitch on the prostitute to the authorities, so the client's unilateral power over the politically repressed prostitute may serve as a trigger for rape and violence.

Thus, decriminalizing prostitution which implies the leveling of legal position between prostitutes and their clients, extrapolates to the balancing of the trade equation for both parties and so the reduced rape and violence.

Of course it is possible too for the substitution effect as cited above where prostitutes serve as an outlet to some client's sexual urges. But I think of this as a lesser or secondary factor.

Second, because of the illegitimacy of transaction which will likely be conducted in haste, there will be little concerns over repeat business or the quality of service. This entails lesser incentive by prostitutes to have regular checkups. Thus prohibitions against prostitution leads to higher rates of sexually transmitted disease (STD).

Besides, having to go medical specialists for routine monitoring may risks the latter to become informants for the authorities.

Alternatively, decriminalization of prostitution will do away with the political aspects. Prostitutes will most likely focus on repeat business by keeping themselves and their customers satisfied. Thus reduced incidences of STDs.

Example of Speculation Gone Wild: CYNK Technology

Here is an example of central bank induced speculation gone wild.

From Daily Reckoning’s Peter Coyne on “How to Make 35,966% in 56 Days” (link unavailable) [bold mine]
You would've had to buy about 17,000 shares of a company on the Pink Sheets called CYNK Technology for $1,000. You could've done that when it was trading for just 6 cents on May 15.

Then, prophetically, on July 10 -- you would've sold your shares when the stock was trading at $21.64, turning your original $1,000 into $359,600.

After that, you could've gone and bought your brand-new Bentley coupe (or whatever) and still have had more than $100,000 to play around with. Not too shabby…
image

Of course, hindsight is 50/50.

In reality, on May 15, you wouldn't have been able to distinguish a share of CYNK from a used tissue or crumpled candy bar wrapper. Yet in the past three weeks, the Belize-based penny stock has rallied higher than Apple rallied over all 34 years of its life as a public company.

What does CYNK do to justify it?

Something unclear dealing with social media -- a website called Infobiz. No matter, popular delusion and the madness of crowds brought the company's market cap to $4 billion.

Now all that's left is for Facebook to buy it up for two or three times that.
Now the kicker…
After all, CYNK is the ideal growth acquisition.

It has no revenue… no physical location… and no working phone numbers. It doesn't even have employees. Potential for growth doesn't get much better than that. And for $4 billion?

Anyways, even if you were foolish and lucky enough to buy shares ahead of their herculean run-up… you'd have to time your exit perfectly too.
$4 billion for nothing, Yikes!!!!

The US government steps in...
For example, if you have held until just one day after its peak on July 10 -- you wouldn't have been able to sell your shares, because the SEC suspended trading on Friday.

Why?

Because something -- and no one really knows what yet -- appears out of the ordinary to the SEC. Some people say it's a pump-and-dump scam… others say it's simply a short squeeze.

We don't know which it is… because we're too busy cracking up.
This hasn't just been a one issue affair.  The small cap Russell 2000 with trailing PERs at 78.06 (July 11 2014) is an example of widespread speculation madness.
 
This exhibits that by the temporary elimination or deferral of risks via the magical spell from central bank put, market participants have been transformed into mindless, market zombies going for one way trade gambits.

And this also shows how central bank hocus focus has mangled price discovery where in the frantic chase for yield, traditional "fundamentals" have become like dinosaurs--fossils. 

Such are symptoms of how central banks have essentially destroyed the essence of capital markets in order to put up a Potemkin economy.

No bubble?

Quote of the Day: Differentiating Self Interest from Greed

Charles de Montesquieu (1689-1755) was the first major figure during the Enlightenment to maintain that commercial activity restrains greed and other passions. In his classic work, The Spirit of the Laws (1748), Montesquieu expressed the novel view that the business of moneymaking serves as a countervailing bridle against the violent passions of war and abusive political power. “Commerce cures destructive prejudices,” he declared. “It polishes and softens barbarous mores . . . . The natural effect of commerce is to lead to peace.” Commerce improves society: “The spirit of commerce brings with it the spirit of frugality, of economy, of moderation, of work, of wisdom, of tranquility, of order, and of regularity.”

Adam Smith (1723-90) held similar views. He wrote eloquently of the public benefits of pursuing one’s private self-interest, but he was no apologist for unbridled greed. Smith disapproved of private gain if it meant defrauding or deceiving someone in business. To quote Smith: “But man has almost constant occasion for the help of his brethren . . . . He will be more likely to prevail if he can interest their self-love in his favour . . . . Give me that which I want, and you shall have this which you want, is the meaning of every such offer.” In other words, all legitimate exchanges must benefit both the buyer and the seller, not one at the expense of the other. Smith’s model of natural liberty reflects this essential attribute: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.”

Smith favored enlightened self-interest and even self-restraint. Indeed, he firmly believed that a free commercial society moderated the passions and prevented a descent into a Hobbesian jungle, a theme echoing Montesquieu. He taught that commerce encourages people to defer gratification and to become educated, industrious, and self-disciplined. It is the fear of losing customers “which retrains his frauds and corrects his negligence.’

Finally, Smith supported social institutions—the competitive marketplace, religious communities, and the law—to foster self-control, self-discipline, and benevolence.

In sum, no system can eliminate greed, fraud, or violence. Socialism and communitarian organizations promise paradise, but seldom deliver. Oddly enough, it may be a freely competitive capitalist economy that can best foster self-discipline and control of the passions.
This is from economist and author Mark Skousen from a 2000 article published at the Freeman

Monday, July 14, 2014

IMF Declares Bulgarian Banks Safe Two Weeks before Bank Runs

This serves as a classic example of the establishment’s “kiss of death”

About two weeks ago, two major Bulgarian banks suffered a classic bank run where the European Commission bailed out the banking system with a €1.7bn emergency credit line.

The fun part has been that the IMF gave Bulgaria’s banking system a clean bill of health two weeks prior the crisis.

Earlier this summer, IMF bureaucrats went to Sofia, Bulgaria to study the country’s economic progress.

And roughly a month ago, they released an official report which stated, among other things, that Bulgarian banks are “stable and liquid.”

Talk about epic timing. Because less than two weeks later, Bulgaria’s banking system was in the throes of a full-blown crisis.

There was a run on two of the nation’s largest banks—several hundred million dollars had been withdrawn in a matter of hours.

And the Bulgarian central bank had to step in and take over both of them or risk a collapse in the entire system.
From 'Stable and liquid' into a banking crisis.

The same mainstream article seems to have been aware of perils of the fractional reserve banking system
This is the modern miracle of fractional reserve banking. When you make a deposit, your bank only holds a tiny percentage of that cash.

The rest of it gets loaned out or invested in securities that pay a much higher rate of return than the pitiful amount you receive in interest.

Needless to say, the less money banks hold in reserve, the more money they’re able to invest… and the more profit they make.

This puts their incentives and our incentives at odds. Because as depositors, it’s better for us if the bank holds most (if not all) of our funds.

In typical form, though, governments stepped in to settle this dispute. And a century ago, they sided with the banks.

Because of this, it’s perfectly legal for banks to hold a tiny percentage of customer deposits. So now, anytime there’s the slightest spook (as happened in Bulgaria), it creates a panic.
‘Slightest spook” which “creates panic” has been implicitly attributed to either depositor’s irrationality or sabotage.

But such hasn’t really been the case with Bulgaria’s bank runs. 

For instance, the license to operate of Bulgaria’s fourth largest bank, the Corporate Commercial Bank, has just been revoked by the Bulgaria’s central bank, Bulgaria’s National bank. This has reportedly been due to the deficits or “‘hole’ in the bank” amounting to 3.5 billion leva as the majority stockholder Tsvetan Vassilev has allegedly been “draining his own bank”, according to a report from The Sofia Globe

In short, what “spooked” depositors had fundamental basis. The report also says that the Corporate Commercial Bank will be allowed to collapse. This means that the affected bank had more than just liquidity issues, it has a solvency problem. Depositors sensed this and the bank run ensued.

Yet the same fundamental basis has apparently been ignored or overlooked by the IMF. 

As you can see, mechanical quant or math model based analysis will hardly ever capture human activities operating behind scenes.

And without understanding the socio dynamics operating behind the numbers, pure number crunching will lead statisticians astray. This is because financial ratios or economic statistics can just be fabricated to look robust. Also since statistical models have been designed to incorporate certain variables, this tends to leave out other relevant factors, when everything in this world is interconnected.

Importantly, since numbers represent history, it would be patently misguided to simplistically extrapolate the past into the future. This should be emphasized considering that the world operates in a complex dimension.

And it is not just the IMF, Sovereign Man’s Simon Black writes,
In the case of Bulgaria, the EU Commission soothingly announced that “the Bulgarian banking system is well-capitalized and has high levels of liquidity compared to its peers in other member states.”

Whoa whoa wait a minute.

Are these geniuses really saying that the country experiencing a bank run due to its LACK of liquidity is MORE liquid than the rest of Europe??

Yes, that is exactly what they’re saying.

So it begs the question– if Bulgarian banks with their “high levels of liquidity” can suffer such shocks, what can happen to other European banks which are worse off?

I think the lesson here is clear: The people in charge of regulating the system and making these proclamations about bank safety are totally CLUELESS.

clip_image002

And the lesson from the miscalculation of Bulgaria’s case can likewise be seen in the risk asset markets around the world, including the Philippines.

In the US, record stocks have been construed by the mainstream as headed for "infinity and beyond" even when the consensus projections of the economic performance have repeatedly been downscaled over the past 4 years. The 2014 projections has shown to be the deepest (see chart above).

In short, while the consensus continues to predict the economic performance with consistent brazen inaccuracy, the record breaking stock markets streak means that the gullible public continues to believe in the "growth" story peddled by Wall Street.

As Contra Corner’s David Stockman wryly observed
There is nothing more predictable than the bevy of Wall Street economists who come charging out of the blocks early each year proclaiming that money printing by the Fed will finally work its magic, and that real GDP growth will hit “escape velocity”. But this year the markdowns have come fast and furious. After the disaster of Q1 and the limp data reported for Q2 to-date, the revised consensus outlook for 2014 at 1.7% is already below the tepid actual results of the last three years. So much for the year when “screaming” growth was certain to happen.
Such kind of outlook has been common in a manic phase.

In a post mortem analysis of pre Lehman crisis bubble deniers, Doug Noland of the Credit Bubble Bulletin at the PrudentBear.com refers to this piece by popular mainstream economist Ben Stein at the New York Times in August 12, 2007 (bold mine, italics original)
The job of an economist, among many other duties, is to put things into perspective. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets. First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the subprime mortgage world… Here is the first instance in which proportion tells us that something is out of whack: The total mortgage market in the United States is roughly $10.4 trillion. Of that, a little over 13%, or about $1.35 trillion, is subprime — certainly a large sum. Of this, nearly 14% is delinquent, meaning late in payment or in foreclosure. Of this amount, about 5% is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about $33 billion to $34 billion… The total wealth of the United States is about $70 trillion. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The bond market is even larger… This economy is extremely strong. Profits are superb. The world economy is exploding with growth. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. But for now, the sell-off seems extreme, not to say nutty. Some smart, brave people will make a fortune buying in these days, and then we’ll all wonder what the scare was about.”
The above is a splendid example of statistical analysis clothed in economic wardrobe that hardly covers substantial investigation of the entwined dynamics of credit, money, prices and capital. In short, economic reasoning has been muddled with statistical reading predicated on data mining.

Secondly, fixation on the past numbers has led to the gross underestimation of risks. This has primarily been due to the misappraisal of the proportionality of risks that basically omitted the potentials of a contagion. Again numbers (or models) hardly ever captures the dimension of human response in the face of a meltdown.

This means that like the IMF, the EU Commission and conventional analysis, shouting and obsessing over statistics or historical numbers produces incorrigible myopia or hopeless cluelessness.

Ironically instead of the sell-off being “extreme” and “nutty”, from an ex-post perspective, the above article turns out to be a comic riffraff, a paragon of contorted perception of reality, mania ‘this time is different’ blindness, and importantly, a principal reason why one should not trust mainstream economists or experts.

As post Keynesian monetarist Joan Robinson rightly pointed out “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

Sunday, July 13, 2014

Guest Post: Wendy McElroy on the Power of the Powerless

One of my favorite anarchist, Wendy McElroy writes a stirring and inspirational piece on how to live the truth and reclaim individual freedom.

Thanks to Janice Matthews and the Daily Bell for the permission to republish. (bold mine, italics original)
In the sixth century BC, the Chinese philosopher Lao Tzu identified the world's biggest problem. Individuals viewed themselves as powerless. The burden of impotence made them resent others and fear life, which, in turn, led them to seek power through controlling others. The quest was not an expression of authority, but one of aggression. Lao Tzu rooted most of social problems in the individual's sense of paralysis.

The extraordinary power of the individual can be declared in many ways.

The Power of Living in Truth

In 1978, a 42-year-old Czech playwright named Vaclav Havel (1936-2011) made an observation similar to that of Lao Tzu. He wrote what became one of the most influential essays in the Cold War era: The Power of the Powerless. It was published in samizdat form; that is, it was reproduced by hand and distributed from individual to individual to avoid censorship.

The Power of the Powerless was written in the wake of the "Prague Spring" (1968) during which Czechoslovakia liberalized freedom of speech and freedom of travel. The Soviet Union responded with brutal force that crushed the flicker of liberty. Havel was targeted for his prominent role in the reach for Czech independence. Arrested and imprisoned, he achieved an epiphany: the most powerful weapon against guns was the truth. The Power of the Powerless was a blistering attack on the communist regime. It was also a call for individuals to understand their own power not merely when they dissent but also when they comply with a system that is a lie. 

Havel illustrated the impact of compliance – denying the truth – by pointing to "the manager of a fruit-and-vegetable shop" who places a "Workers of the world, unite!" poster among his onions and carrots. He does so because not placing it would make him appear disloyal to the regime. "He does it because these things must be done if one is to get along in life." Thus, the grocer and others who obey without question "must live within a lie. They need not accept the lie. It is enough for them to have accepted their life with it and in it. For by this very fact, individuals confirm the system, fulfill the system, make the system, are the system." The strength of communism or any oppressive regime rests upon the obedience of individuals.

Havel argued that individuals have "within themselves the power to remedy their own powerlessness" simply by living the truth. If the grocer realized that the slogan was actually saying, "I am afraid and therefore unquestioningly obedient," he would be ashamed to display it. By realizing the meaning of their actions, people are led toward "living in truth," which is the source of freedom. The truth need not be screamed from a rooftop; it can be manifested in small daily acts through which the individual reclaims his own power, such as the 'act' of not posting a sign. The individual must defy unreality and refuse to be complicit in a delusion. Havel observed, "The principle here is that the center of power is identical with the center of truth."

Havel concluded by asking, "the real question is whether the brighter future is really always so distant. What if, on the contrary, it has been here for a long time already, and only our own blindness and weakness has prevented us from seeing it around us and within us, and kept us from developing it?"

The Difference One Individual Can Make

Chiune Sugihara expressed another way in which an individual can express his own power. Sugihara exercised what is called "positional power." That's the impact a person possesses due to his position in an organization.

During World War II, Sugihara (1900-1986) served as Vice-Consul at the Japanese Consulate in Lithuania. Japan and Germany were allies. The Japanese government issued visas only to those who had gone through an immigration process and had sufficient funds. Few Jews qualified, especially since the Japanese Foreign Ministry required everyone who received a visa to be cleared for a third destination that ensured they would leave Japan.

Against orders from his superiors and against German interests, Sugihara acted on his own initiative. In July 1940, he began to grant ten-day visas that sidestepped the requirement of a third destination by listing one of two obscure venues that did not require their own visas for entry. He negotiated with officials in the Soviet Union to allow Jews to travel through their territory at five times the normal price of a ticket on the Trans-Siberian Railway. He reportedly spent 18 to 20 hours a day arranging visas; his wife assisted him with the paperwork. For 29 days, Sugihara issued the documents that meant life. In September 1940, when the Japanese Consulate was closed and Sugihara was forced to leave, he reportedly threw blank sheets of paper with the consulate seal and his signature out of a train window to a gathered crowd of people still appealing for visas. He gave the consul stamp itself to a refugee who used it to save more Jews.

Estimates on the number of visas issued by Sugihara vary but 6,000 is the most common number. Since families often traveled on a visa granted to a "head of household," the number of lives saved is even more difficult to assess. The Simon Wiesenthal Center believes that about 40,000 descendants of the refugees he saved owe their existence to him.

In 1985, the state of Israel rewarded Sugihara with the title of Righteous Among Nations. The title honors those who risked their lives to save Jews from the Holocaust.

What is Necessary to Assume Your Power

Sugihara claimed his power by acting on his conscience rather than on orders. When asked why he risked so much to help strangers, Sugihara responded: "They were human beings and they needed help. I'm glad I found the strength to make the decision to give it to them. I may have to disobey my government, but if I don't I would be disobeying God." That was the truth within Sugihara.

It was the truth Havel believed every human being should live. Anyone who did so is profoundly free because he has "shattered the world of appearances.... He has demonstrated that living a lie is living a lie. He has broken through the exalted facade of the system and exposed the real, base foundations of power. He has said that the emperor is naked. And because the emperor is in fact naked, something extremely dangerous has happened: by his action, the greengrocer has addressed the world. He has enabled everyone to peer behind the curtain. He has shown everyone that it is possible to live within the truth."

Anyone who dissents by living the the truth is a fundamental threat to the state because a lie cannot coexist with what is true. Anyone who dissents and claims his own power denies the state "in principle and threatens it in its entirety." That is why speaking out against the state is "suppressed more severely than anything else."

What is required to live the truth? First, an individual must realize that truth does not come from outside as an ideology or from other people; it exists within as a realization that comes from experience, reason, and a sense of humanity. Second, freedom rests on a recognition of the inextinguishable dignity of every individual. Third, it requires courage. Each person must stand up and claim their own power even if it is expressed in seemingly small ways. Because there is no such thing as a small step toward freedom. The first step, however small, is the one that matters most .
A journey of a thousand miles begins with a single step--Lao Tzu

Quote of the Day: Dealing with Delusions

Unfortunately, no matter how hard we try, most of our perceptions of people will be misguided a significant percentage of the time. It’s one thing to be off target occasionally, but quite another to be consistently wrong. That’s because the foundational principle of all other success principles is having an accurate perception of reality. Which means that great achievements are virtually impossible if one’s perception of reality is perpetually faulty.

The best antidote to this potentially fatal condition is to pay more attention to what people say than to what they appear to be. In other words, don’t be taken in by credentials, demeanor, or reputation. Hey, you can’t get much better credentials than being emperor of Rome, and just about everyone got misled by Caligula.

Likewise, just because someone doesn’t have great credentials doesn’t mean he doesn’t possess skills or wisdom. Some of the best insights I’ve heard over the years have come from “no name” people.

There is no magic way to sort out worthwhile information from junk. The truth of the matter is that it’s up to you to weigh the content of people’s words and make good decisions about them. And to do that, you have to be vigilant about not becoming mesmerized by superficial appearances or credentials.

In the words of Buddha, “Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.” It’s something to ponder as you go about trying to deal with the delusions that are being offered up by politicians, media talking heads, and so-called experts on a daily basis.
This is from libertarian and self development author Robert Ringer at his website

DSL Outage: Even a Tinge of Competition is a Better Alternative

There is another principal way to spot whether an industry has been competitive or has been plagued by politics.

Market competition essentially emphasize on the satisfaction of consumers PERIOD. 

As the great Austrian economist Ludwig von Mises explained:
The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy.
The race to win the votes (expressed as money sales) of consumers comes through many channels, such as pricing, product/service quality, distribution, accessibility, after sales services or more…. 

In other words, the market economy is about the pampering of consumers, where competition plays a very important role in arriving at such goals.

In the context of my current predicament where I had limited access to broadband services over the entire week, when an industry leader who reportedly commands 70% share of market, blatantly neglects and disregards the concerns of their affected consumers, which leave the latter groping in the dark as to when such disruptions will end—supposedly due to “network maintenance” or transition pangs from “system migration”, and where the service provider hardly offers a meaningful feedback on the status of restoration process or at least propose alternatives to the ease the burdens of consumers from such troubles, such attitude exudes not only overweening contempt on consumers but also manifest on the malady of deficiency of competitive forces in motion. 

By the way, this has not just been about me. Current troubles supposedly involve about 10-20% of subscribers according to one of their service agents. The industry leader perhaps think that household internet access may have been only about access to popular media networking sites, so they can just go about ignoring consumer’s concerns.

Here is a public figure virulently castigating the industry leader over at social media due to exceedingly “slow internet access”

True there may be existing competitors, but if the supposed competitors deal with consumers in the same manner but whose difference lies in the degree of (lesser) apathy, which means consumers have been seen as a secondary priority then such is a manifestation of a heavily politicized industry. As a side note, feedback from some friends suggests that the alternative major competitor seem to share the same outlook as with industry leader.

Nonetheless still even a tinge of competition is important. One week of internet inaccessibility has prompted me to end a 10 year relationship and to experiment with a fledging competitor.

So competition provides the window of choice between having access or having totally NO access to the internet.

P.S. Due to DSL outage there will be no stock market commentary this week

Wednesday, July 09, 2014

DSL Outage: Blogging Hiatus

Dear Readers,

My DSL has been dysfunctional for the third day due to DSL or broadband outage. The PLDT service center tells me this has been due first to "network maintenance operations" and then they presently say this has been about "system migration". And I am part of the unfortunate 10% of subscribers whose broadband access has been affected. Worst, they cannot commit on the time frame for restoration. So until then, there will hardly be any posting.

Thanks for your patronage

Yours in Liberty

Benson

Sunday, July 06, 2014

Phisix Breaks 6,900 as Inflation Risk Becomes a HOT Political Issue!

The record of governmental attempts to control wages and prices is clear. Such efforts have been made in one form or another periodically in almost all times and all places since the very beginning of organized society. In all times and in all places they have just as invariably failed to achieve their announced purposes. Time after time an historian has laconically concluded, “…the plan to control rising prices failed utterly." Or, "... the laws were soon repealed since no one paid any attention to them." Robert L Schuettinger and Eamonn F. Butler, FORTY CENTURIES OF WAGE AND PRICE CONTROLS: How Not To Fight Inflation p.147 Heritage Foundation

In this issue: 

Phisix Breaks 6,900 as Inflation Risk Becomes a HOT Political Issue!

-Media’s Conditions the Public on Coming Price Controls
-The Dangers of Price Controls
-Emancipate the Pricing System from Politics
-More of Media’s Bait and Switch
-WHY The Establishment’s Aggregate Demand Policy Denial?
-Beneficiaries of Inflationism Will Always Defend the Status Quo
-Philippine Banking Loans Explode Higher as Liquidity Drops!
-BIS to BSP: Raise Interest Rates!; On the 6,900 Phisix Breakout

Phisix Breaks 6,900 as Inflation Risk Becomes a HOT Political Issue!

First, a deafening code of silence. Next, a visible shift in gears: plausible deniability.

Domestic price inflation has finally hit mainstream headlines! Not only once but thrice this week as shown on a leading newspaper.

This posits that inflation risks have emerged to become a key socio-political concern. And this uncovers one fundamental reason behind the Philippine central bank or the Bangko Sentral ng Pilipinas’ (BSP) move to cram four policy measures in less than months.

And as I rightly raised, If inflation and financial stability risks have indeed been operating within the ambit of the BSP’s policy parameters as so promulgated, then WHY has the BSP shoehorned (four) macro prudential measures in less than three months???[1]

Media’s Conditions the Public on Coming Price Controls

Yet media’s response has been to mechanically deny its perils. And as always, culpability has been imputed to “supply shocks”, particularly logistical gridlock, hoarding and price manipulation.

At the week’s start, “Manila’s truck ban” as well as by a supposed “tightening of customs and transport regulations”[2] has been pinpointed as forces primarily responsible for the substantial price increase in agricultural products.

Truck bans, which limit transportation to certain hours, only divert schedules for shipments. Since truck operators and business establishments will reschedule to conform to the permitted time, the impact from fresh political mandates would likely be apparent only at the onset of newly imposed mandates and thus would hardly have lasting effects. Though, of course, such mandates would imply higher costs of shipments, which are likely to be passed on to consumers on a one-time basis, to suggest that this would have material influence to a succession of substantial price increases would be a dubious, if not a preposterous proposition.

And yet how could a “Manila truck ban” affect NATIONAL prices? Have all sources of agricultural products been centrally sourced and networked from the country’s capital?

As a side note, in India, the second largest producer of onions in the world, onion prices has been sky bound with wholesale prices spiraling 80% this week alone! Has this been due to Manila Truck Ban too? How about the escalating prices of “onions, garlic and chicken meat and eggs” in Indonesia? As a reminder the Indonesian government raised interest rates 5 times from 5.75% to 7.5% in 2013.

How about the Malaysia government’s imposition of price controls spanning 18 agricultural products due price pressures? Have all these been due to “Manila truck ban”?

My point is not only to expose on the post hoc fallacy of media’s claim, but to likewise demonstrate of the accelerating risks of price inflation that has reared its ugly head in Asia.

The inflation Godzilla has been unleashed here and abroad, so it will take dramatic measures, which runs opposite to current conditions, to contain them.

But because the establishment has been hooked to old boom time conditions, they will resort to everything else from political public relations (PR) campaign, policy gimmickry and various social controls such as price and wages controls, trade controls, financial controls, travel and mobility controls, etc… just to be able to defer from attending to the real cause: credit expansion brought about by manipulated interest rates.

Recently I warned[3] that “inflationism have always been a part of the grand scheme of manifold interventions imposed on society”, noting that the political trends in the Philippines might head in the direction of Argentina. Well signs of the Argentina political paradigm have been in place. 

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And as predicted, with food inflation now a media sensation, politicians have increasingly been urging for tighter price controls!

Grandstanding politicians have already embarked on a populist witch-hunt. They have already condemned faceless ‘greedy’ traders for hoarding and price manipulations, specifically for imported garlic where prices has allegedly zoomed to Php 300 from Php 17 based on an undisclosed timeframe[4]. The acceleration in garlic inflation intensified this year as shown above.

In the case of rice, we have been told that farm gate prices and market prices have widely deviated due to “hoarding”[5]

Yet media never asks, what’s the authentic cause for such pricing imbalances to exist? Has such been due to the absence of competition? Why has rice distribution been a quasi-monopoly? What has enabled the absence of competition and or the monopolistic distribution structure of the rice industry? Hasn’t the National Food Authority been a big factor in the maintaining the populist politics of rice protectionism bannered as “self sufficiency”?

As I previously noted[6], In case you haven’t you noticed, on the surface, despite instituted political controls, rice prices have partly been adjusting to reflect on market conditions. But the symptoms of dislocations from the miscellany of political interventions (demand and supply side) have been surfacing via increased supply side strains compounded with the growing financial pressures on the government.

The same applies for food imports, what has been the cause for the limitations of imports?

Haven’t the critical areas—where the inflation rage has become a populist sensation—been covered by the Price Act (REPUBLIC ACT NO. 7581)[7] which means that these items have been monitored, regulated or under selective price controls by the government? What happened to earlier government controls??

Yet the initial failure of government controls should lead to more government controls??? Failure is to be REWARDED???

Since as I earlier noted that “market price flexibility has been taken off the table” due to price controls, doesn’t this also entail that supply side factors will also be impeded?

Aren’t we just simply witnessing the unintended consequences of the political actions of the past now haunting us?

The Dangers of Price Controls

The establishment would like to make the public believe that consumers have little or no brains, therefore limited choices, for them to fall prey to the predations of price schemers. And the “noble” and “just” politicians will deliver us from the clutches of oppression.

Such a storyline may have popular appeal or sound heroic that would make for a great feed for the showbiz industry, but this is not the way things work in the real world of scarcity.

But what can politicians really do? Politicians live, breathe and eat based on taxpayer money. Also whatever they spend on depends on taxes, debt or inflation which again represents the yoke of taxpayers and currency holders.

They can legislate or impose decrees or a deluge of controls, where they can use institutional coercion to shake down, incarcerate or eliminate suspected felons, but there is one important thing they can’t do: They can’t produce the required goods or politicians have not been conceived to do production.

And even more important is the natural limits for the actions of politicians. In short, politicians cannot overwhelm or override the fundamental law of economics.

Politicians can certainly do a King Canute (King Gnut was said to have commanded “the tides of the sea to go back" just to show to his fawning courtiers the limits of his powers), but they can’t solve economic problems overtime with merely short term populist actions that comes with nasty long term consequences.

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Here is a basic economic Price (vertical) –Quantity (horizontal) chart of price ceilings. The natural market price is represented by Pe. However, the government decrees the price as illegal and instead be placed at Pc. This causes the natural balance between demand and supply Q2 to shift.

Because of artificially low prices, quantity demanded will grow (see Q4). Simultaneously, the restriction profits or income on suppliers will lead to a decline in quantity supplied (see Q1). The variance between Q1 and Q4 or the economic consequence is what is known as SHORTAGES.

So when government imposes price controls there will be shortages. And because price controls leads to shortages, the ramification will be higher implied prices which will be visible on the black markets.

Since the initial actions didn’t work, they will lead to a serial chain of expanding controls to many other items. As I have pointed out above, the failure of previous price controls have prompted politicians to demand MORE price controls. And the result will be the same, more shortages from diminished supply which will be expressed as higher prices via black markets.

There will be a feedback loop between populist controls on the one hand, and shortages and implied price inflation on the other that springs from politically induced distortions in the supply side conditions. Interventions deepen. And if sustained, such will be manifested via massive reduction in stocks of goods for sale which may be seen through empty grocery shelves to even snake line public rationing of goods ala Venezuela.

And because expanding price controls means diminishing supplies, government will act to fill in the gap or cover deficits in such goods. Thus government subsidies will translate to bigger government budgets, higher taxes and even more money printing.

But instead of the banking system doing the printing as today, the burden will transfer to the government via monetization of deficits. This extrapolates to even more imbalances in the economic system.

All these again will be manifested via a weaker peso and higher interest rates

Current activities represent more signs of intensifying stagflation as I have been predicting. Let us see how such dynamics will impact the Filipino consumers. [Yeah more signs of sustainable boom eh?]

Yet price controls begets more price controls which eventually means controls covering other aspects of social activities.

As the great Austrian economist Ludwig von Mises warned[8]:
Thus the government is forced to go further and further, fixing step by step the prices of all consumers' goods and of all factors of production both human, i.e., labor, and material and to order every entrepreneur and every worker to continue work at these prices and wages. No branch of industry can be omitted from this all-round fixing of prices and wages and from this obligation to produce those quantities which the government wants to see produced. If some branches were to be left free out of regard for the fact that they produce only goods qualified as non-vital or even as luxuries, capital and labor would tend to flow into them and the result would be a drop in the supply of those goods, the prices of which government has fixed precisely because it considers them as indispensable for the satisfaction of the needs of the masses.

But when this state of all-round control of business is attained, there can no longer be any question of a market economy. No longer do the citizens by their buying and abstention from buying determine what should be produced and how. The power to decide these matters has devolved upon the government. This is no longer capitalism; it is all-round planning by the government, it is socialism.
Yes government can by fiat command people to produce.

But forcing the public to produce “supply” would translate to a transformation to a command and control economy similar to North Korea, USSR, or Mao’s China or its variant the subcontracting to the private sector of a command and control economy similar to fascist regimes as Nazi Germany or Italy’s Mussolini. As history reveals, command control political economies are bound for doom.

So while socialism isn’t inevitable, as this would depend on the sustainability of current political trends, nonetheless the widespread use of price controls that may expand to cover many other controls is a path towards such direction. This is clearly the case of Argentina and Venezuela.

So there is a huge gap between populist imagery and political economic reality.

Emancipate the Pricing System from Politics

Politicians and media hardly ever tell you that if garlic, rice or other food inflation has indeed been a supply problem, all that needs to be done is to open or liberalize entry of supplies and allow market forces via competition to find its “equilibrium” or natural pricing levels. Price distortions from so-called supply shocks or even from manipulations will thus be temporary. Manipulators will be burned. Greed will be disciplined by sheer market forces. In short, the price mechanism will determine the allocation of resources.

Unfortunately depoliticization or liberalization would encompass the undermining of interests of politically entrenched or connected groups—something which all (present and past) administrations have refrained from dealing with.

But since the ‘invisible hand’ would signify a spontaneous collaboration between consumers, traders, producers and financiers then the resolution of supply dilemma will have no visible heroes from which the public has been hardwired to see and lavish praises on.

Politics without romance is not just about public choice, but also about how markets work. So for the gullible public, who has been oriented to see the visible, allowing markets to function would represent an underdog or long shot bet.

As one can see, the current supply constrains accounts for a structural political-institutional symptom that has plagued the domestic agricultural industry primarily due to over politicization. As I recently pointed out again, “the self-inflicted obstacles in the industry also expose on the depth of sensitivity or vulnerability of the domestic food supply chain to exogenous factors[9]”. 

And media’s classical conditioning of placing the burden of price inflation to private sector’s supposed ‘greed’ alarmingly ushers the way for the coming onslaught or manifold interventions in the economy as enumerated above.

Notice too as I mentioned earlier, that since food inflation has not been a Philippine dynamic alone, this implies that politicians and media have trumped up excuses to justify the forthcoming interventions.

As a side note, there will always be unscrupulous people in any society, but competition which allows for consumer’s choice plays an important role in purging them. In addition, unethical behavior, as I pointed out last week, will only multiply if they are rewarded[10]. The important thing is to identify the sources of incentives from these shady practices. 

Finally, notice as well that just when media and the politicians have jumped the gun on ‘greedy’ traders, the Bangko Sentral ng Pilipinas released a June inflation report which shows a tempering of official inflation figures to 4.4%[11]. 

The inflation report reveals that while food inflation continued to rise, non-food items led by electricity oil and gas, recreation and restaurants offset the price pressures in agricultural products.

Two observations from this.

One, if there has been some accuracy in the official inflation figures, then the decrease in price inflation numbers in restaurants (which carries an amazing 12.03% weight of the total CPI basket) plus recreation (1.93% weight) means bad news for the much ballyhooed Filipinos consumers. This could mean that inflation’s income and substitution effect could already be taking hold or having its effect, as observed from a recent poll conducted by Wall Street Journal[12]. In short, consumer reallocation of spending towards necessities means a retrenchment in ex-necessities or ‘want’ goods or services. 

The other aspect is obvious for the keen and unbiased observers; why would a 4.4% inflation rate spark such political furor? Go figure.

More of Media’s Bait and Switch

Going back to the logistical gridlock induced price inflation, I am not aware of the detailed list of the supposed “tightening of customs and transport regulations”, though I read of increased tariffs imposed on some goods such as imported garlic (40% duties).

However I believe that any “political clampdown on rice smuggling represents only entertainment value and or another publicity shtick” for the simple reason that politicians depend on rice and food smuggling because such “signifies a veiled subsidy to politicians in terms of prolonging their tenure through the attainment of temporary social stability”, aside from the insurance function “against policy calculation errors”.

Yet if TRUE, increased transport regulations or a supposed tightening by customs may indeed partially contribute to price inflation. But this would be on a one time or on an infrequent basis and NOT on a sustained pace. And these are mostly aggravating circumstances or secondary causes rather than the major driver.

The problem is the sustained, if not intensifying, price inflation pressures.

As a side note, the supposed crackdown in smuggling, which translates to more economic repression (e.g. higher tariffs/duties) will lead to more, not less, smuggling. Political barriers which increases the cost of doing business in the formal economy creates arbitrage opportunities in the informal economy which many will be motivated to exploit, especially the politically connected, thus smuggling will persist.

Yet additional political barriers also imply MORE corruption that will go hand in hand with smuggling. Such corruption will most likely be anchored on technicalities or loopholes from arbitrarily determined legal mandates designed to curtail smuggling. This is because as government piles in to impose a dragnet of controls on commercial activities, which restricts supplies in the formal sector and thereby raising prices, such environment provide a widening of the profit window enough to fund or finance under the table transactions. So the more the interventions, the bigger the black market. 

While the supply side has been the focal point of the article, a tinge of the demand side had been raised based on a quote from a prominent chieftain of the industry who reportedly said: “The Philippine economy has been growing at a compounded rate of over 7 percent, which translates to many more trucks for the delivery of goods and more cars because more consumers can afford them. This is a good thing. The problem is there are no additional roads and infrastructure to absorb the increase”

I see severe problems with this assertion. Problematic price increases have hardly been happening during the time when demand was at its peak as seen by 7% statistical growth rate which was logged in at the first semester (or first two quarters) of 2013 plus the last quarter of 2012, but when growth rates have been in a decline.

In short, for such claim to be valid then price pressures should have been more apparent in the first half 2013 rather than the first half 2014. This would seem as a time inconsistent category error.

Yet under a fixed money supply, price increases in one area will be offset by price decreases in another area. This means that price increases will not signify a general phenomenon. But this hasn’t been the case. 

The buildup in consumer price inflation pressures (not restricted to food) has emerged in conjunction with a breathtaking 8% leap in 3 bedroom Makati condo units during the 1Q 2014[13] alongside a whopping 9.15% return on the Philippine equity benchmark, the Phisix. 

Such has apparently been in response to a sustained jump in the growth rate of money supply which clocked in at a turbocharged 30+% during the second semester of 2013 that extended through the 1Q 2014[14]. The impact from money creation operates on a time lag for the simple reason money circulates in the economy unevenly thus affecting prices relatively. 

In other words, the current consumer price inflation signifies a knock on effect from the sustained credit expansion that has been manifested in the incredible growth rate of money supply. 

Because of such credit expansion, price inflation has intensified and spread from financial assets to economic goods.

WHY The Establishment’s Aggregate Demand Policy Denial?

WHY the establishment’s denial? Hasn’t the thrust been to boost spending via aggregate demand policies?

Here’s the smoking gun from the Bangko Sentral ng Pilipinas’ (BSP)[15] inflation report, which underscores the grand pirouette to a bubble economy in 2009[16]: (bold mine)
Maintaining an expansionary policy stance was seen to support market confidence and spending decisions of households and businesses as economic agents were reassured that risks to macro-stability were being addressed decisively…

Given the lower-than-expected GDP growth of 0.4 percent for the first quarter of 2009, the decision to lower policy rates in May was aimed at providing additional boost to spending and investment in the economy and supporting market confidence in an environment of subdued price pressures.
Did you notice, for the BSP “lower policy rates” had been intended as additional boost to spending”? By how? By promoting credit expansion which extrapolates to a frontloading of expenditures! Borrow today and spend! Boost statistical GDP! Borrow today and spend! Boost statistical GDP! Borrow today and spend! Boost statistical GDP!

Forget tomorrow. Forget balance sheet risks.

This real time application of quasi permanent boom policies represents the grand secret formula of the highly touted Philippine economic growth story. 

Yet ironically when inflation becomes an issue the elixir vanishes!

When banks lend through money and deposit creation, these freshly minted money enters the economic stream is either spent or reallocated. So why won’t these “additional boost to spending and investment” not have an impact to prices of assets and goods?

What happens when the supply side fails to anticipate the additional demand generated by new money injections? A segment of the above quote from the taipan has been emblematic of this dilemma “The problem is there are no additional roads and infrastructure to absorb the increase”. 

You see how inflationism can destabilize the economic coordination process through sharp fluctuations in price signals and by interrupting market expectations?

In the food spectrum, supply side severely underestimated demand. But in the asset markets, the supply side has massively been overestimating demand. The end result will be a huge gap or imbalance.

This also exhibits the “crowding effect” where the supply side has been overinvesting in asset markets while having to underinvest in agriculture.

Again by expanding credit, this translates to additional demand via fresh spending power that will be allocated or spent. And because of the abrupt surge in additional demand, the failure of the supply side to anticipate or expect demand changes prompts for a supply shock! Thus, prices rise!

It is the latter reaction that has been seen, read and peddled by the mainstream experts, politicians and bureaucrats to the public as THE cause.

Yet this represents a wonderful example of the cognitive bias called anchoring which reads past performance and extrapolating them into the future, here’s a quote from my favorite iconoclast thinker Nassim Taleb and Mark Blythe[17] (which I have previously excerpted)
As with a crumbling sand pile, it would be foolish to attribute the collapse of a fragile bridge to the last truck that crossed it, and even more foolish to try to predict in advance which truck might bring it down. The system is responsible, not the components
Logistics, hoarding and etc… signify as the last truck that crossed the collapse of the fragile bridge.

Here is what has been ignored by media: In reality, demand side pressures have been the PRIMARY source of current inflationary strains. Yet what have been mistakenly bruited as the source of inflation quagmire—the supply side—has merely been manifestations of the amplified impact of demand side pressures on the embedded constrains in supply side conditions.

Again the BSP’s policy directive: the decision to lower policy rates…was aimed at providing additional boost to spending and investment

So from: “Borrow today and spend! Boost statistical GDP!”

Now to: Deny the untoward effects of Borrow today and spend! Blame the moon and the stars for higher prices!

Thus the plausible deniability embraced by media and officials.

Another curiosity is the claim that “many more trucks for the delivery of goods and more cars because more consumers can afford them. This is a good thing”

To conclude that “more consumers can afford them” begs the question. Yet the tycoon, who echoes mainstream experts, doesn’t even bother to explain what drives consumers to afford more goods? Has productivity been rising significantly to raise real incomes? If so then why the price pressures? Obviously this isn’t what’s been happening.

Or has consumer demand been financed by credit? Or has the spending power by consumers emanated from industries that have massively leveraged their balance sheets?

Sadly, another round of earsplitting silence.

Beneficiaries of Inflationism Will Always Defend the Status Quo

But there is one thing true with the claim “This is a good thing” though.

The comment “This is a good thing” applies strictly to the interests of the billionaire magnate, whose core businesses has been rooted from political “concession rights”[18] from the Philippine government, which initially had been to operate a major container terminal in the Metropolis that eventually expanded throughout the nation. The publicly listed politically endowed cargo firm has reached a very dominant position to even attain quasi-monopoly status in several areas of operations and has even aggressively expanded overseas. The company has also gorged and feasted on BSP’s gift of low interest rates by racking up on debts. 

And it’s definitely a good thing when one’s wealth skyrockets by nearly tripling; from US $1.6 billion in 2011 to US $ 4.5 billion in 2014 to attain 4th wealthiest person in the Philippines (based on Forbes Magazine’s measurements)! 

And why wouldn’t current conditions be relishable or ‘a good thing’ for the taipan, when a lot of the gigantic wealth inflation has been propelled by a frenetic pump in the company’s equity prices which essentially ballooned the billionaire’s equity exposure in his firm to over Php 100 Billion as of March 2014[19] which now would be more than 10% higher. The taipan has even included a major casino in his portfolio. 

Ironically such paper wealth inflation has been predicated on fantastic valuations on his flagship as seen by trailing PER of 30++ and PBV of 4++. All these, again, signify as another silver platter handout from the BSP.

Because the returns from savings relative to inflation has been negative due to suppressed interest rates, when the public bids up on his stocks in order to chase returns, then it would even be more of a good thing because not only will his wealth expand through more equity inflation, but the risks from overvaluation will partly be shouldered by the hapless public bearing the ‘old maid’ card. This applies to bond and other secured credit financers too. 

Let me add that in free markets, rewarding company owners with higher equity values based solely on performance would not signify a moral deprivation. But when such rewarding mechanism has been skewed or disfigured by social policies as part of grand redistribution scheme then such would represent the moral decadence.

As a side note, take for instance the US equity markets where the Dow Jones Industrials just set new fresh record highs at over 17,000 last week. Who benefits from these? Writes the CNBC[20] (bold mine): “But the biggest beneficiaries are the top 10 percent of Americans who own some 80 percent of the stocks. And within that group, the largest windfalls have gone to corporate founders or big shareholders of certain stocks—especially in tech and energy.” 

Roughly the same dynamics are being played out in the US, the Philippines and elsewhere

A news banner even screeched of the developing parallel universe or increasing disconnect between stock markets and the real economy in the US; this from Marketwatch.com “Dow Flirts with 17, 000…Why you are still poor as the market hits record highs”. Such report has been indicative of the public’s insouciance to record breaking stocks. 

And the ongoing stock market pump based on the interest rate-yield curve manipulations has partly even been recognized by no less than the FED chair Janet Yellen who in a recent lecture before the IMF noted[21] (bold mine): A review of the empirical evidence suggests that the level of interest rates does influence house prices, leverage, and maturity transformation, but it is also clear that a tighter monetary policy would have been a very blunt tool: Substantially mitigating the emerging financial vulnerabilities through higher interest rates would have had sizable adverse effects in terms of higher unemployment. 

Differently said, I admit there is a problem of alcoholism. But don’t take the alcohol away from the alcoholic, because the withdrawal syndrome would be catastrophic!

But it also is barely a good thing for the average Peso holders who agonizingly endure sustained losses in purchasing power from an invisible wealth transfer mechanism channeled through financial repression policies of negative real rates whose principal beneficiaries have been the patron-client political entities in the context of the government and their favorite economic agents.

Of course, who would want to ruffle the mainstream’s ‘good thing’?

Unfortunately economic reality has begun to reassert itself that will upend the establishment’s ‘this is a good thing’ meme via higher prices in economic goods.

Well this explains media’s tactical bait and switch approach, whose recourse has been to apply “appeal to authority” from a major beneficiary of today’s policies, blame everyone else markets greed and etc…, aggrandize the quack solutions of populist politics, while at the same time blatantly skirting to address the causal link involving credit, money and prices in the shadows of politics.

In the world of politics, economics has been portrayed to exist in a vacuum.

Philippine Banking Loans Explode Higher as Liquidity Drops!

I have been saying that the aside from chronic addiction to the stimulus from financial repression policies of negative real rates, the BSP has been boxed into a corner.

For the establishment, debt has been seen and peddled to the public as just a statistic premised on an extension of economic growth.

They hardly comprehend that aside from the resource aspect from debt acquisition or where debt was spent or used, debt can evolve from a mere compliment to outright dependency. 

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Under the latter phase, debt drives growth rather than debt as a compliment to growth.

I converted the Rahn curve—which reveals of the trade-off between economic growth and size of the government developed by economist Richard Rahn—into a possible diminishing return on debt (credit intensity) curve which exhibits the tradeoff between debt and growth. My point is to show the transition from optimum levels where debt compliments growth to debt dependency engendering low growth or recession risks.

For me boxed into a corner means[22]: Tighten money supply, credit shrinks and so will the economic sectors who breathes in the oxygen of credit that has played a vital role in the sprucing up of the pantomime of the pseudo economic growth boom.

Tolerate more negative real rates, debt accumulation intensifies, price inflation will rise, the peso will fall and such credit inflation will be reflected on interest rates, where the outcome will be market based tightening regardless of the actions of authorities.

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The Bangko Sentral ng Pilipinas just released their banking loan data for May[23] 2014.

May’s data should reflect on the impact from the first reserve requirement[24] which became effective April 4th. Yet the BSP’s tally of the banking system’s loan growth which grew by 19% continues to dazzle! This would mark the highest rate of growth in 17 months (left window)!

In two months or in April-May there has been hardly any reprieve in the domestic banking system’s credit expansion.

I wonder, whatever happened to the supposed $2.7 billion siphoning of liquidity by the BSP?

Additionally this gives more evidence that the BSP may have pulled a rabbit out of the hat trick or a policy ruse on the public by using reserve requirements tool to show that they are acting to address financial stability risks, when in reality under the modern banking system reserves are now supplied by central banks[25].

Did you notice of the seemingly implacable pace of banking sector’s loan growth? This comes at more than twice the statistical economic growth rate where the latter has been in a decline for 3 successive quarters. (right window)

The implication is that credit-to-GDP levels should exhibit a very significant increase.

In a speech last year, the BSP chief cited the credit to GDP at 50.4% as of Q4 2012[26]. Allow me a back of the envelop calculation using current data to establish 2013 debt levels.

The average BSP’s measure of the banking system loan growth in 2013 has been at 13.5%. The average annualized growth per quarter in 2012 has been at 7.225%. So this implies a credit-to-gdp ratio now at around 56.7%. 

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Such level outstrips the 1984 high at 51.59%. This is the same period or in particular in 1983, where the Philippines faced a balance of payment crisis and an eventual inflationary recession in 1984[27] which I previously discussed here[28], chart from Wikipedia.org. Notice high inflation, high interest rates (T-bills). Rings a bell? (I know the bulls will assert we can’t have a balance of payment crisis because of foreign reserves! But shouting foreign reserves! foreign reserves! foreign reserves! are not free passes to bubbles)

Current credit-to-gdp levels have also surpassed the 1996 high at 54.85% and have been just shy away from the 1996 high of 62.22% in 1997. If the pace of current credit growth is sustained through the year at current economic growth levels, the 1997 acme will be easily reached or exceeded by the yearend.

At any rate, the Philippines economy has now reached critical levels—where if the past will rhyme—points to severe economic turbulence ahead.

As I wrote last year[29], While I expect the mania may go on through the year, anytime the Philippines reaches or even surpasses the 1997 debt levels then she will become increasingly fragile or vulnerable to a recession or a crisis that may be triggered internally or externally.

Will this time be different????

And we shall see the effects of the second reserve requirement which became effective in May 30, 2014[30], as well as the Special Deposit Account (SDA) 25 basis points hike which has been “implementable immediately” in the June data.

Let us dwell into the details of May’s banking loan report.

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Banking loans to the utilities or Electricity gas and water sectors has likewise accelerated growing by over 35% (left window). Manufacturing loans has also been strong.

Loans to the bubble sectors (right window) continue to rage with financials and trade picking up tempo. Meanwhile real estate, construction and hotel have partly slowed. Notice that loans to bubble sectors have been 19% and above and still constitutes half of the banking system’s total lending at 50.08% in May but slightly off from 50.31% last March.

All these massive acceleration in loans won’t translate to credit risks in the face of rising inflation?

Additionally such intensive amount of credit, deposit and money growth has interestingly hardly been parlayed into liquidity growth.

In May, official data on money supply growth rates continues to fall which grew by just 28.4%[31] year on year. This represents a break below the fantastic 30% threshold levels seen during the previous 10 months. This looks consistent with my earlier projections where I see money supply growth rate to slump “to anywhere 20-25% (perhaps 22%) and will continue to fall!”[32]

It’s been a curiosity, where has all these fabulous sustained growth in money creation generated through the banking system been channeled to, if they are not circulating in the economy anymore? Has borrowing to generate growth—or diminishing returns of debt (credit intensity)—reached its natural limits? Are borrowings being made today in order to pay back existing debt? Has debt IN debt OUT become the new normal?

And if true, then this means that the illusory ‘boom’ effects from the aggregate demand policies may have started to reverse. 

While the slowing liquidity would be theoretically good for currency holders as the pressures from price inflation should eventually ease, this would mean bad news for asset speculators and the asset inflation based growth model which the statistical economy has been pillared on.

With more borrowings channeled through debt payments, such increases debt burdens, reduce the incentive to expand thereby not only exerting pressure on profit margins but will curb demand as well.

And it will be a double whammy. Since money injection impacts the economy with a time lag, the earlier torrent of30+%% money injections will still exercise price pressures on the economy. So inflation risk will remain amidst emergent debt deflationary pressures on the financial system.

Malinvestments that grew at the back of money supply growth will be exposed for what it truly is: a Potemkin Village brought about by the money illusion.

BIS to BSP: Raise Interest Rates!; On the 6,900 Phisix Breakout

The BSP remains under political and administrative pressure.

The BSP chief was surprisingly quoted as saying that interest rates are subject to rise because of financial risks.

Here is the shocking quote (bold mine): While underlying economic conditions remain mostly supportive for growth, financial market conditions still pose risks that could weigh on the performance of emerging markets like the Philippines, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said. “There’s still a need to improve and establish a more enduring growth trajectory in the real economies,” Tetangco told reporters Tuesday evening[33].”

Huh? Financial market risk, where? The US, China, Japan, Europe…or anywhere except the Philippines??? He doesn’t specify Why?

Hasn’t it been that the BSP’s instituted aggregate demand policies should have reduced dependence from exogenous forces? Again the BSP chief in 2009 “must boost domestic consumption and end its dependence on exports” via “counter-cyclical support to aggregate demand in the form of expansionary fiscal and monetary policies, along with strong policy actions to ensure financial and corporate sector health could contribute to faster recovery.[34]” Then what’s the worry? 

But we have a magical growth model, so why worry?

Will capital outflows be the trigger to expose on who has been swimming naked when the inflation tide runs out? Has this been his concern? So what happened to “transformational”?

It’s also in this report where I predicted of the coming price controls “Nonetheless given the propensity to attack the symptoms, it is not farfetched that the Executive Branch will join the BSP to impose populist ‘price control’ measures.” 

Yet what enduring growth trajectory?? More central bank pump and the eventual dump? More economic growth based on debt financed asset inflation???

The nice part about political rhetoric has always been the ambiguity that shrouds them. Officials look good with motherhood statements without saying specifics.

The BSP appears to be under strain from the Bank of International Settlements (BIS), the central bank of central bank or an institution which the Inquirer describes as sets the “policies that all monetary regulators must follow”.

And here is the Aha Moment (!) where the BIS appear to have the placed the BSP under tension: “The advice of some of the participants was that central banks should start raising interest rates,” Tetangco said.

Independent central bankers eh? uh uh

The BIS pressure has been applied not only on the BSP but to all other central banks

Sounding like Austrian economists, the BIS has implicitly denounced aggregate demand policies[35], The Bank for International Settlements has warned that “euphoric” financial markets have become detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms. 

See, even the central bank of central banks sees what I have been saying all along! 

Let us read it straight from the Bank of International Settlements[36] (bold italics mine) 
The global economy is struggling to step out of the shadow of the Great Financial Crisis. The legacy of the crisis is pervasive. It is evident in the comparatively high levels of unemployment in crisis-hit economies, even as output growth has regained strength, in the disconnect between extraordinarily buoyant financial markets and weak investment, in the growing dependence of financial markets on central banks, in rising private and public debt, and in the rapidly narrowing policy room for manoeuvre…

These adjustments should acknowledge that the post-crisis balance sheet recession is less amenable to traditional aggregate demand policies and puts a premium on balance sheet repair and structural reforms, that financial booms and busts have become a major threat to macroeconomic stability, and that the only source of lasting prosperity is a stronger supply side, notably higher productivity growth…

There is a need to rely relatively less on traditional aggregate demand stimulus and more on balance sheet repair and structural reforms, especially in crisis-hit economies. Monetary policy, in particular, has been overburdened for too long. After so many years of an exceptional monetary expansion, the risk of normalising too slowly and too late deserves special attention. 

In countries experiencing strong financial booms, the priority is to strengthen defences to face a potential bust. There, too, structural reforms should not be delayed. In the longer term, the main task is to adjust policy frameworks so as to make growth less debt-dependent and to tame the destructive power of the financial cycle. More symmetrical macroeconomic and prudential policies over that cycle would avoid a persistent easing bias that, over time, can entrench instability and exhaust the policy room for manoeuvre. The risks of failing to act should not be underestimated. The global economy may be set on an unsustainable path. And at some point, the current open global trade and financial order could be seriously threatened.
My humble two cents:

Balance sheet disorders have been a consequence of previous aggregate demand policies. Policies to resolve balance sheet problems with more of the same aggregate demand policies, as evident in advanced economies, results to what the BIS calls as the financial cycles (euphemism for bubble cycles).

The Philippines, for instance, has hardly any balance sheet malady during the Great Financial Crisis of 2008, but because of the grand pivot or the imposition of aggregate demand policies in 2009, balance sheet risks have reared its ugly head to become main source of financial instability—expressed not only through soaring debt levels but to massive mispricing of assets and misallocation of resources based on the popular delusion premised on unproductive linear growth trajectory of consumers. 

Next, despite any real reforms the next crisis is inevitable. And this would most likely be even greater than the Great Financial Crisis of 2008, for the same reason: colossal imbalances that have been built on the back of current aggregate demand policies. And the reason it will be greater is that almost every economy has embraced these policies, so bubble popping won’t just be in one or two economies but in many major advanced and developing economies, including ASEAN and the Philippines.

The BIS chides the central banks for short term policies.
As history reminds us, there is little appetite for taking the long-term view. Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms. Or to address balance sheet problems head-on during a bust when seemingly easier policies are on offer. The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end. The road ahead may be a long one. All the more reason, then, to start the journey sooner rather than later
Hallelujah on this. But with the exception of “financial booms that make everyone feel illusively richer”. The only persons who feel illusively richer are the asset holders or mainly the elite. 

My impression is that the BSP will DEFY the BIS. I may be wrong but they will hardly raise rates directly but use all other side ‘macroprudential’ tools (SDA rates, reserve requirements) as decoy to show that they are doing something. But the BSP will likely push inflationism to its limits, as just shown above, until the real economy cracks.

Final note: Oh, bulls widely cheer on the low volume 6,900 breakout by the Phisix amidst intensifying inflation pressures and slowing economic growth.

Don’t you see wonderful times are back again?

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Yet for the last two major tops 1994-1997 (upper) and 2007-2008 (lower), history tells us that following bear market strikes, the Phisix rallies back to the old highs but traps the bulls into a deflationary chasm after.

Will this time be different????

I end this outlook with the magnificent quote from Emrys Partners Hedge, a hedge fund which just shut down and where the quote has been part of the firm’s regulatory filing last May[37].
making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy…While individual company analysis will always be important, the health, or the change in the health, of the financial system is the starting point of all analysis
This comment represents the zeitgeist of the current bubble times.




[2] Inquirer.net Price rise traced to logistics gridlock June 30, 2014



[5] Inquirer.net President urged to control prices July 5, 2014


[7] Department of Trade and Industry The Price Act of July 1992 REPUBLIC ACT NO. 7581 AN ACT PROVIDING PROTECTION TO CONSUMERS BY STABILIZING THE PRICES OF BASIC NECESSITIES AND PRIME COMMODITIES AND BY PRESCRIBING MEASURES AGAINST UNDUE PRICE INCREASES DURING EMERGENCY SITUATIONS AND LIKE OCCASIONS…Price ACT…1. DEPARTMENT OF AGRICULTURE (A) Basic Necessities • rice • corn • cooking oil • fresh, dried fish and other marine products • fresh eggs • fresh pork, beef and poultry meat • fresh milk • fresh vegetables • root crops • sugar

[8] Ludwig von Mises 4. How Price Control Leads to Socialism Middle-of-the-Road Policy Leads to Socialism Mises.org

[9] Loc cit June 9, 2014


[11] Bangko Sentral ng Pilipinas Inflation Edges Lower to 4.4 Percent in June July 4, 2014




[15] Bangko Sentral ng Pilipinas Second Quarter 2009, Inflation Report, p .42


[17] Nassim Nicolas Taleb and Mark Blythe The Black Swan of Cairo May/ June 2011 Foreign Affairs

[18] International Container Terminal Services Annual Report 2013 p.55

[19] Manila Times Razon’s ICTSI holdings breach P100B March 11, 2014


[21] Janet L Yellen: Monetary policy and financial stability Text of the 2014 Michel Camdessus Central Banking Lecture by Ms Janet L Yellen, Chair of the Board of Governors of the Federal Reserve System, International Monetary Fund, Washington DC, 2 July 2014. Bank of International Settlements


[23] Bangko Sentral ng Pilipinas Bank Lending Continues to Grow in May June 30, 2014




[27] Philippine Institute of Development(PIDS) THE BALANCE OF PAYMENTS CRISIS AND THE ECONOMY March April 1985




[31] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Eases Further in May June 30, 2014


[33] Inquirer.net Interest rates on the way up, says BSP July 3, 2014



[36] Bank of International Settlement 84th Annual Report 1 April 2013–31 March 2014, p 20

[37] Wall Street Journal Emrys Partners Hedge Fund Shuts Down July 3, 2014