P-Noy’s Entourage is a Showcase of the Philippine Political Economy

“As a society, culturally we get what we celebrate”, that’s how prolific Forbes nanotech analyst-writer Josh Wolfe describes the importance of role models in shaping society.

Who we celebrate essentially reflects on our actions. For instance, if we worship politicians and celebrities, we tend to follow their actions. Our time orientation would narrow to match with theirs.

And having a short term time preference means we value today more than the future, thus we would be predisposed to indulge in gambling, hedonistic (high risk but self gratifying) activities and political actions that would dovetail with such values.

However, if we see entrepreneurs or scientists as our role models then we are likely to value the future more than today. We would learn of the essence of savings, capital accumulation and trade.

What has this got to do with P-Noy’s trip to China? A lot.

President Aquino’s entourage simply is a showcase of how the Philippine political economy works.

From today’s Inquirer

Underlining the trade and investment slant of his state visit to China, President Benigno Aquino III arrived here with a 270-strong business delegation, including the Philippines’ top industry leaders.

It is the biggest business contingent of Mr. Aquino’s foreign trips.

And for what stated reason? Newswires say this is meant to secure $60 billion worth of investments.

According to Bloomberg,

The Philippines may secure as much as $60 billion in Chinese investments under a five-year plan to be signed during Aquino’s stay, Christine Ortega, assistant secretary for foreign affairs, told reporters in Manila on Aug. 24. This trip alone may bring $7 billion in commitments, Trade Undersecretary Cristino Panlilio told reporters in Beijing yesterday…

Aquino is counting on investments to boost economic growth that slowed for a fourth straight quarter. Gross domestic product increased 3.4 percent in the three months through June from a year earlier, from a revised 4.6 percent in the first quarter, the National Statistical Coordination Board said today.

Lagging Investments

Net foreign direct investment in the Philippines fell 13 percent to $1.7 billion in 2010 from a year earlier, the central bank said in March. Between 1970 to 2009, the country lured $32.3 billion in FDI, compared with $104.1 billion for Thailand, according to United Nations data.

Higher returns on investments will come from resources “that have been untapped for such a long time,” Aquino said in an Aug. 18 interview, citing plans to explore for energy in the South China Sea. Two of 15 blocks put out for tender in June are in waters China claims.

The Philippines plans to boost hydrocarbon reserves by 40 percent in the next two decades. Mineral fuels accounted for 17 percent of total monthly imports on average last year, from 11 percent in 2000, data compiled by Bloomberg show.

“We want to resolve the conflicting claims so that we can have our own gas,” Aquino said Aug. 29. “Once we have our own, we will not be affected by events in other parts of the world.”

First of all it isn’t true that the Philippines have little access to $60 billion worth of funds for investment.

In fact, the Philippines has a disproportion of savings to investment as shown below.

National savings alone is almost enough to bankroll these required investments (charts above and below from ADB)

Yet this doesn’t even count other domestic assets which can be used as collateral or as alternative sources for funding.

The Philippine Equity markets had a market cap of $202 billion as of the last trading day of 2010.

Foreigners hold around 20% of the market cap; even assuming 50% foreign ownership that’s still $100 billion worth of potential collateral.

And we also have the corporate bond markets (4.1% of GDP) and vast property assets which because of the lack of secured property rights, around 67% of rural residents in the Philippines live in housing that is considered as ‘dead capital’ which is worth about $133 billion Peruvian economist Hernando de Soto estimated in 2001 in his book, the Mystery of Capital

In other words, many of the big shot investors who went with P-Noy do not see sufficient returns on their investments, hence have been reluctant to deploy their savings on local investments.

They instead went with the President to supposedly seek out “partners” to 'spread the risks'.

On the other hand, these business honchos will likely use this opportunity to invest overseas!

Why then the lack of domestic investments?

Aside from the lack or insufficient protection of property rights, a very important hurdle to investments is simply the inhospitable environment for investors.

As the table above shows, the Philippine economy has been strangled or choked by politics.

So bringing in a high powered presidential entourage won’t help unless there would be dramatic structural reforms on our political institutions that would encourage profitable investments.

Most of the deals that would be obtained from this trip will likely be political privileges or concessions (most possibly backed by implicit guarantees from the Philippine government).

This brings us to the significance of role models.

Essentially, P-Noy sees big business as the main way to entice investments or reinvigorate the economy, hence this star-studded retinue (could this be a junket??)

Why leave out the public, when I would presuppose that much of the investable savings are held by them? Is it because that, as his political supporters, this would serve as the ripe opportunity to be rewarded (with state induced deals)?

Or is this authorative show of force simply been about showmanship? (Public choice theory is right again showing how politicians are attracted to symbolisms to promote their self interests)

Bottom line: P-Noy’s China trip reveals of the essence of the Philippine political economy; economic opportunities allocated or provided for by the state.

In short, state or crony capitalism.

Asians are World’s Top Blog Readers

That’s according to Comscore.com

Global analysis of the Blog category revealed that Japan led all markets in blog engagement, with the average visitor in Japan spending more than an hour (62.6 minutes) visiting blogs in June. South Korea ranked second with an average of 49.6 minutes on blog sites, followed by Poland at 47.7 minutes.

Japan was also among the top markets for Blog category penetration with 80.5 percent of its online population visiting blogs in June. Taiwan ranked highest globally with 85.5 percent of its online population visiting blogs, followed by Brazil (85.2 percent reach), South Korea (84.9 percent reach) and Turkey (81.9 percent reach).

There could be many interpretations from the above survey.

For one it shows of the deepening extent of web based information acquisition most possibly at the expense of traditional media.

Another, the breadth of readership has been globalized and has not been limited to developed economies.

Next, more and more people are learning to appreciate blogs as one of the principal web based sources of information.

From a marketing point of view, the above represents as high growth markets which any enterprising bloggers could capitalize on.

Lastly, the above dynamics can be seen as increasing manifestations of the democratization of information and knowledge, or of the intensification of the information or knowledge revolution.

As the great Friedrich von Hayek once wrote,

The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

The knowledge revolution should serve as catalysts to the development of transformational ideas that could promote innovation via the ‘Bourgeois revaluation’ or heightened appreciation of the benefits of free market or laissez faire capitalism.

The knowledge revolution and increased social connectivity should also deepen specialization (division of labor) and encourage more voluntary trade and commerce.

And importantly, attune greater number of people towards more decentralized path or way of social interactions, which alternatively means to wean away from the vertical flow (e.g. mass education, mass media) or structures (e.g. centralized bureaucracies, mass production) or lifestyles (e.g. 9-5 work schedules, mass cultures) derived from the industrial age template.

These material changes are hardly appreciated by the public but will persist as the world evolves.

UPDATE: My blog's readership departs from the comscore survey, where most of my readers come from Northern America, UK and the Philippines, as one would observe from the lower right column of this blog. My experience may be shared by many local bloggers too.

Nonetheless my comments above have been mostly premised on the comscore survey.

Third Week for ECB’s QE: 6.7 billion Euros

Last week accounted for the third week where the European Central Bank’s (ECB) Quantitative Easing (QE) has been in action.

This from Reuters, (bold emphasis mine)

The ECB said on Monday it had more than halved its bond purchases to 6.7 billion euros last week. The central bank had bought a record 22 billion euros in the week to Aug. 12, when it intervened in the bond market after 19 weeks of inactivity.

Continued support from the central bank remains crucial to prop up investors' confidence in the short-term, analysts and traders said, amid uncertainties over a second bailout package for Greece.

Adding to markets' jitters, Italy is struggling to agree changes to a 45.5 billion euro austerity package the government hastily approved this month in return for the ECB's help and which is making its way through parliament.

"Italy needs to convince the market it can make it without help from the ECB," Cazzulani said.

This follows the previous two weeks of €22 billion and €14.3 billion of bond buying where ECB’s debt monetization facility has now reached €120.3 billion, according to Zero Hedge.

The above news account only exhibits that global financial markets have been artificially propped up by actions of major global central banks, in the hope that markets will be assuaged by the political tokenism applied by crisis affected governments in reforming their system.

The fact is that there hardly has been any meaningful free market reforms or reforms aimed to improve on the real economy. Resources are, in this process, merely being rechanneled or transferred from the welfare state to the banking system.

The underlying goal has been to preserve the banking system, which has over the years bankrolled the welfare state, through government bonds. And the welfare state-banking system relationship has been backed, regulated and implicitly guaranteed by the central banks.

Professor Gary North aptly writes,

Governments always announce and defend by monopolistic violence their legal sovereignty over money. They say that they will control the terms of exchange. All monetary standards are based on government promises and IOUs called government bonds. These contracts are always broken by governments.

Contracts are being broken consistently as governments’ inflate in order to uphold the current welfare based political system.

A system that depends on inflation is never sustainable.

Apples to Oranges: The Gold-Stock Market Spread

[Note: I am operating from a borrowed computer]

Stocks are cheap when seen from gold, that’s according to some experts.

From Bloomberg’s chart of the day,

The CHART OF THE DAY shows the price spread between the SPDR Gold Trust, an exchange-traded fund that tracks bullion, and the SPDR Dow Jones Industrial Average ETF, a fund which mimics the performance of the 30 stocks in the index. The premium widened by the most since the fund for the precious metal was started in November 2004.

Gold surged to an all-time high above $1,900 an ounce last week, pushing the value of bullion to $9.1 trillion based on cumulative supply, or about 2.75 times the market capitalization of companies in the Dow index, said John Wadle, head of regional banks research at the Hong Kong unit of Mirae Asset. Companies in the U.S. equities gauge have an average dividend yield of 2.7 percent and trade at 11.3 times estimated earnings as of Aug. 25, according to data compiled by Bloomberg.

“Gold is now a bubble compared with U.S. blue-chip stocks,” Wadle said in an e-mail in response to questions from Bloomberg. U.S. equities are “massively undervalued” based on future dividend yields of more than 3 percent, compared with no investment yields and storage costs associated with gold, he said in a report. Billionaire George Soros cut his holdings in the SPDR Gold Trust this year as prices rallied, while Paulson & Co., the hedge fund run by John Paulson, remained the largest holder, according to regulatory filings this month.

This represents apples to oranges comparison.

First of all, the stock market essentially operates from the premise of risk relative to rewards or returns from expected streams of future business revenues. There is no revenue stream or cash flow for gold.

Second, current policies maintained by governments have been to serially inflate bubbles. The main effect has been continued volatility in the stock markets.

Meanwhile price actions of gold have been manifesting the chronic malady from the cumulative effects of such political actions.

Third, there has hardly been a bubble in gold prices. The bubble is in paper money, government bonds and the tripartite 20^th century designed political institutions functioning on the cartelized system of the welfare-warfare state, the central banks and the politically privileged banking system.

Fourth, gold prices have been more correlated with actions of the stock market, than used as a measure against it.

As I recently wrote,

Gold prices seems as in a cyclical downturn, that's because of sharply OVERBOUGHT conditions. On the other hand, global stock markets has been on a bounce largely due to OVERSOLD conditions (backed by expectations of added steroids).

The correlations of Gold and equity markets has been predominantly positive, where gold prices has risen in the backdrop of rising equity markets, except for the past quarter (sorry I am operating in an internet cafe, that's why I can't attach charts to give evidence).

That evidence can be seen in the above chart, where the flow of gold prices has essentially mirrored the actions of the S&P 500 (see blue lline) for the past 3 years. Such correlation can even be seen in the Philippine Phisix below.

It is only during the last quarter where such correlations (see red ellipse) has broken down.

True, correlations between assets perpetually changes as people’s actions respond to changes in the environment and to changes in the incentives that underpins their actions.

But the point here is it would seem unworthy to compare gold (what can be seen as money) with conventional risk assets as stocks or bonds and infer recommendations based on flimsy grounds.

Fox News Interview: Ron Paul Explains the Austrian School of Economics

At this Fox interview, Presidential candidate Ron Paul deals with the coming elections, the Fema, US Foreign policy and the Austrian School of economics (hat tip Bob Wenzel)

The Twilight Age of the Aircraft Carriers

Even the course of conventional-traditional warfare will be adapting to the ever changing realities. Vastly technology-enhanced anti-ship ballistic missile will render aircraft carriers obsolete

Writes Eric Margolis,

Batteries of DF-21D’s based safely inland may keep the US Navy far off China’s coasts, isolate Taiwan, and threaten US bases in Japan, Okinawa and Guam. In fact, the mere existence of the DF-21D’s and their deployment in sizeable numbers may be enough to keep US carriers at least 2,000 km from China’s coasts, thus beyond the useful range of the carrier’s strike aircraft…

But anti-ship missiles are lethal to carriers. Layered anti-ship missile defense can stop small number of attacking missiles. But if enough high-speed missiles are fired, and from different directions, at least one or two will permeate carrier and escort defenses.

Just one missile, filled with explosives and fuel, hitting a carrier will cause massive damage and fires that will put the great capitol ship out of action. I have joined numerous naval warfare simulations: in almost every case, some anti-ship missiles fired by enemy aircraft and subs inevitably leaked through layered defenses and hit the carriers. Each carrier and its escorts costs over $25 billion (not including its aircraft). They simply cannot be risked against relatively inexpensive Chinese missiles.

Officially, the US Navy denies claims its beloved carriers are increasingly vulnerable. The Navy’s brass is dominated by former naval aviators, just as the pre-war US Navy was run by battleship admirals. There is huge institutional bias against abandoning big attack carriers, just as there is bitter Navy and Air Force opposition to abandoning manned fighter aircraft and relying on drones.

Which makes all the more amazing an article in the May 2011 issue of the US Naval Institute Proceedings (for which I’ve written) by two Pentagon strategists urging an immediate end to building aircraft carriers, “Proceedings” is the voice of the US naval establishment.

For this heresy to be printed is a bombshell. But a needed one. It’s time the US Navy face facts and plan for the obsolescence of its attack carriers. There will still be a role for smaller carriers carrying drones and helicopters, but in wartime, the days of the mighty flattop that won the epic WWII victories at Midway and the Marianas are over.

Aircraft carriers signify as artifacts of the industrial age warfare. The information age (Third Wave) will radically change even the methods of engagement of military conflicts.

Global Central Bankers Call For Fiscal Expansion

Central bankers don’t want to take the entire burden of reflating their respective economies.

From Bloomberg, (bold emphasis mine)

Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going.

Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists, sponsored by the Kansas City Fed.

The call to arms ended a month in which the Fed and the ECB raced to shield their economies from fiscal tightening and strengthen a world economy that is losing momentum…

Warning of a “dangerous new phase” for the world economy, International Monetary Fund Managing Director Christine Lagarde told the forum that risks have been aggravated by “a growing sense that policy makers do not have the conviction, or simply are not willing, to take the decisions that are needed.”

‘Twin Perils’

“Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery,” said Lagarde, who took the helm of the IMF in July.

Bernanke told the conference that the U.S. central bank still has a “range of tools” it could use to help the economy if needed, although he stopped short of signaling that the Fed would embark on a third round of government bond buying.

Central bankers essentially want global governments to reengage in expansionary fiscal actions or the euphemism for increasing government spending.

Regardless of whether this has proven to be effective or not, for policymakers what has been more important is the MEANS (borrow, tax and or inflate to spend) to attain an END (recovery).

Monumental amounts of money (or resources) have been thrown into the system since 2008 (or in about 3 years), yet the economic recovery of crisis-afflicted nations has continued to stagger.

This only shows that for policymakers, only the short term impact matters.

Never mind if most of these stimulus programs would end up in waste. Wasted resources represent consumed capital which is an obstacle to a real recovery.

Never mind if these measures would only be funnelled to the pockets of vested interest groups such as the politically privileged banking sector or the military industrial complex. The political redistribution of resources would only translate to the furtherance of political, wealth and social inequalities which many mistakenly blame on laissez faire capitalism, when in truth it has been crony or state capitalism, particularly the cartelized system of welfare-warfare government-central banking-banking system and the preservation of which, that has been responsible for the current mess.

Never mind if higher taxes would be another important consequence from such actions. Yet high taxes would serve as another vital impediment to genuine recovery overtime.

Never mind that in combination with central bank activities these activities would cause a surge in consumer prices that would not only hamper economic recovery but also stoke geopolitical and domestic destabilization since inflationism distorts economic calculation and impairs the division of labor.

The world has been continually living off from steroids provided for by the governments. These are symptoms of a rapidly degenerating system.

Ayn Rand said it best,

When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.

Such charades won’t last.

The Broken Window Fallacy as seen from my Damaged Computer

If there is anything I can share with you this week, it is the practical economic lessons from the broken window fallacy as seen from my continuing anguish with my damaged computer.

For now, there are two possible alternatives to my computer dilemma: hope that the repair turns out fine and done soonest, or that I may be forced to acquire a new one.

Over the past few days, the activities of my post computer crash life has revolved around

plying back and forth to the repair center by use of cabs,

getting limited access to the web from several internet café

taking meals outside in support of the above

For people who see destruction as a way of prosperity, they would focus on the money I would be spending on the repair center (if repaired) or the retail outfit and the computer manufacturer (if replacement) and the ancillary costs of these activities—taxi fare, computer rental fees and meals from vendors--as helping the economy.

However they would ignore or downplay the impact of my losses.

For me, money spent for either repair or replacement and all of the additional costs would have been money meant to buy a pair of new shoes or a new tablet.

This means that instead of my normal computer AND a new pair of shoes, or my normal computer AND a new tablet, at the end of the day, I would only have a ‘normal’ computer. Or the opportunity cost from my actions to repair or replace the existing damaged computer is a pair of shoes or a tablet. Instead of TWO goods I end up with one. So there is NO value added from the repair or the replacement.

In addition, as I await the verdict of the computer service center, my output has been vastly reduced. I can only make 1 post on my blog, where I usually make an average of 3 per day, and importantly, I wouldn’t be sending any weekend reports to my clients. So productivity has likewise been affected.

[Aside, my savings has allowed me to consider the two options, if I had no savings I would be at a total loss.]

I also have not been on track with what’s been happening on the global financial markets, as I told my principals that I would be ‘trading blind’. Such dislocation has brought me a great deal of distress. You see, the web has altered my way of living such that I have been become greatly dependent on it. This brings about the adverse mental aspects from such displacement or losses.

While these may represent as my personal issues, when amplified as natural or manmade disasters you would notice that destruction doesn’t lead to prosperity. While some economic agents may indeed prosper from such misfortune, the overall the damage would be greater than the peripheral benefits.

Statistics cannot articulate the mental and emotional strains and real productivity and purchasing power losses from the economics of destruction. Be leery of anyone who tells you so.

War on Drugs Failure: Alabang Boys Acquittal

Notice: This is horrible for me, the long weekend means an extended limited access to the web. Worse, I fear that my data could have been lost.

Here is an example of the futility of the War on Drugs

From the Inquirer.net

A “glaring blunder” in the handling of evidence has led to the acquittal of two of the so-called “Alabang Boys” arrested in 2008 for the alleged possession and sale of 60 “ecstasy” tablets.

“That (breach) in the chain of custody of evidence became a fatal flaw,” Justice Secretary Leila de Lima said Friday after a Muntinlupa Regional Trial Court judge dismissed the charges against Richard Brodett and Jorge Joseph, citing the prosecution’s failure to prove guilt beyond reasonable doubt.

Here we see how government enforces a law but fails to successfully prosecute out of sheer incompetence. One can argue that this may be deliberate or not.

Another, this also shows how the war on drugs is nothing more than a tool for politicization or the law is used for political ends.

Next, the above exhibits the arbitrary or selective application of the law as the well-off can get off the hook or the system can be gamed. One can call this political inequality.

To add, government's action represents unwarranted coercion. The failure to prosecute means civil liberties of the accused have been trampled.

This goes to show that noble intentions can't square with reality or that the applied cure is worse than the disease.

Blogging Hiatus

Dear Readers,

My computer's operating system crashed. And the repair center says that it might or could take a few days to restore to the factory default conditions. So I will have limited access to the web. This means my blog posts will either be limited, or I will be in a recess.

Thank you for your patronage and understanding

Benson

Gold Prices Dive on Cyclical Profit Taking

Gold prices fell sharply last night as stock markets rose.

This is how the mainstream sees it; from the Associated Press.

Gold prices plunged 5.6 percent Wednesday as investors grew more confident about the global economy.

Gold dropped $104 to finish at $1,757.30 an ounce. It was the steepest percentage drop since March 2008. Gold is still up 24 percent for the year.

After markets closed Wednesday, exchange operator CME Group said it was raising its collateral requirements for gold trading. Earlier Wednesday China also required traders to set aside more collateral when borrowing money to buy gold.

Investors have been buying gold because of concerns about economic weakness in the United States and Europe as well as a stretch of severe volatility in financial markets that began in early August.

This is mere rationalization of the current events. Gold steep decline hasn't been about 'confidence', as these confidence has been artificially boosted.

As I earlier explained

Gold’s recent phenomenal rise has been parabolic! Gold has essentially skyrocketed by $1,050+ in less than TWO weeks! Gold prices jumped by 6% this week. The vertiginous ascent means gold prices may be susceptible to a sharp downside action (similar to Silver early this year) from profit takers.

In short, Newton's third law of motion applies "To every action there is always an equal and opposite reaction"

Gold prices seems as in a cyclical downturn, that's because of sharply OVERBOUGHT conditions. On the other hand, global stock markets has been on a bounce largely due to OVERSOLD conditions (backed by expectations of added steroids).

The correlations of Gold and equity markets has been predominantly positive, where gold prices has risen in the backdrop of rising equity markets, except for the past quarter (sorry I am operating in an internet cafe, that's why I can't attach charts to give evidence).

Gold prices will continue to rise over the long term as the welfare-warfare state will continue to inflate in order to meet political goals which has mostly been directed towards the preservation of the current political order.

My Prayer to the Lord on Krugman’s Wish for More Destruction

[IMPORTANT UPDATE: The Krugman google+ quote below is an admitted forgery. Although Mr. Krugman could have said this in different ways. Forgery isn't justifiable.]

The Nobel Laureate Paul Krugman posted at the google+

People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage

Dear Lord,

In reading the above, I became distraught when I realized that people of high stature would actually wish or even impliedly invoke harm, damage or loss on other people for the sake of statistics.

In case You should grant Mr. Krugman and his followers their wishes, I do pray that You would not include them in that specter of greater destruction.

That’s because if you did, they will be spending for repairs, hospitalization expenses, reconstruction and etc…, money which they would have spent for other useful and more desirable things than on contingents.

Although they could be helping out the economy as they claim this would, it would be better that they be left unscathed, so that they can keep on telling half truths which the world so badly needs.

I pray too that Mr. Krugman and his followers would not suffer from the losses of lives and injuries associated with the accompanying devastation.

Because if You allowed this to happen, I would suppose that Mr. Krugman and company will also suffer from the misery, trauma and tragedy of the losses of family members, relatives close friends, colleagues and or associates.

Also they might even endure the agony of medical recuperation and therapy if they have been wounded. And if this is so, they will have to consume their savings unless they are adequately covered by insurance. Again they would be diverting money to spending on emergency than on attaining more convenience during 'normal' times.

And under the period of rehabilitation they may not be able to spread their negative knowledge to their disciples and to the gullible.

And they may not be also paid by their respective employers if their treatment will be prolonged or if they become permanently handicapped.

As I understand, the economy is about interacting human beings, where losses of lives and physical impairment translates to the reduction of human capital. And losses of human life, I understand essentially reduces, and not adds to, real economic growth.

If You so decide to take away all our lives and leave only Mr. Krugman and his followers alive, there won't be much to spend on because there will hardly be anyone left to produce to serve the needs of these hallowed survivalists. And countless green pieces of paper won't do anything too.

Most importantly I pray that Mr. Krugman and his followers will be forgiven for their misanthropic desires and dogmatic superciliousness.

And that such forgiveness be extended to me for my aghast response over what seems for me as a demented opinion.

Thanks for listening,

Benson

The Coming Global Debt Default Binge: Moody’s Downgrades Japan

The global debt default binge is in process with credit rating downgrades signifying as the initial symptoms.

US credit rating agency Moody’s today downgraded Japan.

From Bloomberg, (bold emphasis mine)

Japan’s debt rating was lowered by Moody’s Investors Service, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in the world’s largest public debt burden.

Moody’s cut the grade one step to Aa3, with a stable outlook, it said in a statement today. Rebuilding costs from the March 11 earthquake and tsunami, along with continuing efforts to contain the Fukushima nuclear crisis, may make it hard for officials to meet their borrowing target this year, it said.

The first Japan downgrade by Moody’s since 2002 reflects deteriorating credit quality across developed nations from Italy to the U.S., which lost its AAA status at Standard & Poor’s this month. While the move adds to the challenges of the next Japanese prime minister, scheduled to be picked next week, the impact on bond yields may be limited by what Moody’s described as domestic investors’ preference for government debt.

The rerating has also been felt in the CDS markets…

The cost of insuring corporate and sovereign bonds in Japan against default increased, according to traders of credit- default swaps. The Markit iTraxx Japan index rose 7 basis points to 153 basis points as of 12:09 p.m. in Tokyo, on course for its highest level since June 10, 2010, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market…

Today’s rating move brings Japan to the same level as China, showing the diverging paths of Asia’s two biggest economies. China replaced Japan as the world’s No. 2 last year and Moody’s has a positive outlook on its ranking

But debt acquisition won’t be curtailed despite the downgrade…

Moody’s said today’s decision was “prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.”

Japan’s public debt is projected to reach 219 percent of gross domestic product next year even before accounting for borrowing to fund reconstruction after the March 11 earthquake, according to the Organization for Economic Cooperation and Development.

The government has amassed a debt of 943.8 trillion yen, according to the Finance Ministry, after two decades of fiscal spending to energize an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. The yen’s advance to a post World War II high this year also threatens exports, a main driver of the nation’s economic growth…

The government has pledged to raise the sales tax to 10 percent by the middle of the decade, a rate that would still be below the IMF’s recommendations. The additional revenue is intended to pay for social welfare for the aging population.

Japan’s government plans total spending of 19 trillion yen over five years to rebuild after the magnitude-9 temblor and tsunami that devastated the northeast coast of Japan and triggered the worst nuclear crisis since Chernobyl.

Politicians won’t learn until forced upon by economic realities.

So the initial preemptive response to the anticipated downgrade has been to inflate the system using the recent triple whammy calamity as pretext.

Finally, it certainly is not true that current developments recognized as “fiscal austerity” have been about getting off the welfare state-big government-deficit spending path.

What has been happening instead is the political process where massive amount of resources are being transferred from the welfare state to the banking sector.

Global political leaders are hopeful that by rescuing the politically privileged interconnected banks, they can bring 'normalcy' back to the 20th century designed politically entwined institutions of the welfare state-banking system-central banking system.

Proof?

Just look how the Japanese government (and other developed governments) addresses their dilemma—mostly by raising taxes!

As the illustrious Milton Friedman once said,

In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with. That’s what history tells us. So my view has always been: cut taxes on any occasion, for any reason, in any way, that’s politically feasible. That’s the only way to keep down the size of government.

So tax increases equates to the preservation of the welfare state or big government.

Unfortunately, the system has already been foundering from under its own weight. And importantly, politicians apparently blase to these risks, continue to impose measures that would only increase the system's fragility. What is unsustainable won't last.

Sensing Steroids, US Equity Markets Sharply Rebounds

Last night the US equity markets made a substantial move

Here’s how the mainstream sees it. This from Bloomberg, (bold emphasis)

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up from the cheapest valuations since 2009, as weaker-than-estimated economic data reinforced optimism the Federal Reserve will act to spur growth.

Monsanto Co. (MON), Chevron Corp. (CVX) and Microsoft Corp. (MSFT) added at least 3 percent, pacing gains in companies most-tied to the economy. The Morgan Stanley Cyclical Index rose 2.9 percent, breaking a five-day losing streak. Sprint Nextel Corp. (S) jumped 10 percent, the most since May 2010, after the Wall Street Journal said it will start selling Apple Inc.’s iPhone. Financial shares reversed losses after the Federal Deposit Insurance Corp.’s list of “problem” banks shrank for the first time since 2006.

I have talked about this earlier here

This only shows that current behavior of stock markets

-has hardly been driven by earnings but by politics,

-have been artificially boosted

-reacts like Pavlov’s Dogs, and

-importantly like addicts, has totally become dependent on steroids.

Never mind if recent reports say that stimulus money ends up going to the coffers of the rent-seekers, as graph of the bailout money by the US Federal Reserve in 2008 shows

From Bloomberg interactive

The important thing is to have the Fed print money to pacify Wall Street insiders, who constitute part of the cartelized incumbent political system.

Profit from folly.

Graphic: Distribution Share of World Market Cap

…of select countries.

Below is another deck of wonderful and telling charts from Bespoke Invest

Basically, the above charts say that the % share of developed economy equity markets has been declining overtime as Asian and emerging markets have been increasing.

What we are seeing is simply a deepening of the convergence trend and a rebalancing of roles which previously had been dominated by the former.

Of course there are many factors driving this, one of the principal factor would be globalization. But the point is: market dynamics, which essentially is about acting humans, has been about constant changes.

Here Comes the British Nannies

Step aside Filipina domestic helpers, here comes the British Nannies.

This looks like a reversal of roles, as emerging market elites have commenced on hiring Western household help.

From the Business Insider,

Lucky London nannies are earning insanely high salaries thanks to an influx of wealthy Russians, Chinese and Indians, who want their children to learn English from a native, according to The Times of London.

The starting pay at the elite agency Imperial Nannies is $75,000, typically including room and board in an upscale neighborhood and extraordinary perks like a car, clothes and luxury travel. One Russian family reportedly offered $200,000 to lock down a top nanny.

Of course the work isn't easy. Founder Sarajane Ambrose tells The Times:

“You’re walking into a completely different culture and environment of extraordinary wealth and different family values. Russian families require you to be on call 24 hours a day, 6 days a week. The children are always accompanied by bodyguards. There are cameras everywhere. They have a jet-setting lifestyle, which means you spend a lot of time packing and unpacking. They’re very ambitious for their children and because they dress them in designer clothes, they’re not allowed to get dirty. Russian children don’t wear Gap.”

The above dynamic has been symptomatic of what has been happening in the world today.

Yet this trend could intensify or deepen, if the West-East wealth transfer or wealth convergence persists, which will be magnified by sustained policies of inflationism by the sitting authorities of western nations.

Update on ECB’s QE: Euro 14.3 billion worth of Bonds Monetized Last Week

In saving the banking system, the ECB has “printed” and spent billions again.

From yahoo.com (bold emphasis mine)

The European Central Bank spent euro14.3 billion ($20.6 billion) last week buying government bonds to protect large economies like Spain and Italy from the debt crisis, but market concerns persisted about how long the emergency purchases would contain market turmoil.

The amount of bond purchases disclosed on Monday was short of the previous week's figure of euro22 billion but close to market expectations.

ECB buying of Italian and Spanish bonds on financial markets has driven down borrowing rates that were threatening those two countries with financial ruin. European officials have agreed to give the eurozone's rescue fund the power to take over the purchases -- but national parliaments will not give their approval for that until this fall.

That has left the central bank with the main burden of fighting off market turmoil caused by fears that several of the 17 countries that use the euro have taken on more debt than they can repay.

Market worries are compounded by concerns that any government default could damage Europe's already-shaky banks, which hold large amounts of government bonds.

Last week's purchases ran the bank's total spent in supporting shaky eurozone government bonds to euro110.5 billion since the program was launched in May, 2010. So far the purchases average euro3.6 billion a day; analysts at Royal Bank of Scotland estimated that a rate of euro2.5 billion a day would leave the ECB spending some euro600 billion a year.

The massive bailout of the global banking system has been so obvious such that the mainstream newswires has made these events a commonplace narrative.

Yet where are the populist revolts?

Why Capital Standard Regulations Will Fail

Global regulators have been arguing over the kind of regulations required for crisis prevention.

From Bloomberg,

Capital standards designed to fortify the global financial system are eroding as European officials, beset by a debt crisis, rewrite the regulations and U.S. rulemaking stalls.

The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.

“The game on the ground has changed in Europe and the U.S.,” said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul Hastings Janofsky & Walker LLP in Washington. “The realists in Europe realized that their banks cannot raise the capital they’d need to comply. U.S. banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to.”

The Basel committee revised its capital standards and outlined new rules on liquidity and leverage after the 2008 crisis exposed the vulnerability of the banking system. Credit markets froze following the collapse of Lehman Brothers Holdings Inc., sending the world economy into its first recession since World War II. Basel III was meant to create “a much stronger banking and financial system that is much more resilient to financial crises,” said Mario Draghi, who will take over as president of the European Central Bank in November.

Not Binding

Basel standards aren’t binding, so each country needs to write its own rules putting the agreed-upon principles into effect. The European Commission proposed regulations to parliament last month that would translate Basel III into law. A majority of EU governments also must endorse them. U.S. regulators led by the Federal Reserve have to come up with their own version, though they don’t need legislative approval.

The proposed EU rules, submitted by financial services commissioner Michel Barnier, omitted a ratio designed to improve banks’ cash positions, deferred decision on a rule to limit borrowing, revised capital definitions and extended some compliance dates. In the U.S., regulators are stymied because the 2010 Dodd-Frank Act bars the use in banking rules of credit ratings, which Basel III relies on to determine risk.

First, regulators have been squabbling over proposed elixirs, when in reality they are arguing about treatments to the symptom rather than the disease itself.

All these web of proposed regulations, on top of existing maze, won’t stop the banking financed boom bust cycle. This is because the current central banking based monetary system has been engineered for bubbles.

As the great Murray N. Rothbard wrote

for it is the establishment of central banking that makes long-term bank credit expansion possible, since the expansion of Central Bank notes provides added cash reserves for the entire banking system and permits all the commercial banks to expand their credit together. Central banking works like a cozy compulsory bank cartel to expand the banks' liabilities; and the banks are now able to expand on a larger base of cash in the form of central bank notes as well as gold.

Two, regulators think that the action of bankers can be restrained by virtue of fiat. They are delusional. They forget that as humans, regulator-banker relationship will be subject to various conflict of interests relationships such as the agency problems, time consistency dilemma, regulatory arbitrage and regulatory capture aspects.

In reality, more politicization of the banking-central banking amplifies systemic fragility.

Yet amidst the publicized noble intentions, we can’t discount that the implicit desire by regulators for these laws have been to expand control over the marketplace and to protect the interests of certain groups (regulatory favored groups).

Three, as shown above opposing interests leads to conflicting design of regulations.

In a world of complexity, centralization is bound for failure.

Let me add that while many see capital adequacy laws as one way of restraining bubbles, such perspective do not account for the unseen or unintended consequences.

Expanding capital adequacy regulations or laws can have lethal effects on the economy: they destroy money.

As Professor Steve Hanke explains, (bold emphasis mine)

The oracles have erupted in cheers at the increased capital-asset ratios. They assert that more capital has made the banks stronger and safer. While at first glance that might strike one as a reasonable conclusion, it is not the end of the story.

For a bank, its assets (cash, loans and securities) must equal its liabilities (capital, bonds and liabilities which the bank owes to its shareholders and customers). In most countries, the bulk of a bank’s liabilities (roughly 90%) are deposits. Since deposits can be used to make payments, they are “money.” Accordingly, most bank liabilities are money.

To increase their capital-asset ratios, banks can either boost capital or shrink assets. If banks shrink their assets, their deposit liabilities will decline. In consequence, money balances will be destroyed. So, paradoxically, the drive to deleverage banks and to shrink their balance sheets, in the name of making banks safer, destroys money balances. This, in turn, dents company liquidity and asset prices. It also reduces spending relative to where it would have been without higher capital-asset ratios.

The other way to increase a bank’s capital-asset ratio is by raising new capital. This, too, destroys money. When an investor purchases newly-issued bank equity, the investor exchanges funds from a bank deposit for new shares. This reduces deposit liabilities in the banking system and wipes out money.

By pushing banks to increase their capital-asset ratios to allegedly make banks stronger, the oracles have made their economies (and perhaps their banks) weaker.

Prof. Tim Congdon convincingly demonstrates in Central Banking in a Free Society that the ratcheting up of banks’ capital-asset ratios ratchets down the growth in broad measures of the money supply. And, since money dominates, it follows that economic growth will take a hit, if banks are forced to increase their capital-asset ratios.

Professor Hanke goes to show how these regulations have impacted the Eurozone which has resulted to declining money supplies that has led to the recent market turbulence. Read the rest here

To add, adherence to math or algorithm based models has been one of the principal weakness of such regulations, writes Philip Maymin, (bold emphasis mine)

One might think that the ideal regulations would be those that find the right numbers for these portfolios, not too small and not too large—the Goldilocks of risk.

Surprisingly enough, it is not possible. It turns out that no algorithm for calculating the required risk capital for given portfolios results in lower systemic risk.

In Maymin and Maymin (2010), we prove why this is so, both mathematically and empirically. First, the math. Imagine that there are 1,000 securities whose returns are each independently distributed according to the standard bell curve of a normal distribution. Simulate five years of monthly returns for each security, and then calculate the volatility that each one actually realized. Because there are only sixty data points for each security, some securities will appear to have a little higher volatility than they truly do, and some will appear to have a little less. Out of the one thousand securities, how many would you guess exhibit less than 80 percent of their true volatility?

The answer is ten, and we show this with a formula in the paper. If we make the situation more realistic by relaxing the assumption about normality, the problem is exacerbated, and the ten securities with the lowest realized volatilities would deviate even further from their true volatility.

We also show empirically that the securities with historically low volatility tended to have almost twice as much subsequent risk, while those with historically high volatility tended to have almost half as much subsequent risk. For both the riskiest and least risky securities, therefore, historical risk is a statistical illusion.

Here's where the problem of objective regulations comes in. To see it, consider the perspective of a bank deciding what to invest in. It can invest in any of the 1,000 securities, but if it invests in the special ten that exhibit less than 80 percent of their true volatility, it will have to put up one-fifth less capital than otherwise. At least to some extent, those ten securities will be more favored than the others. What's worse, every bank will favor the same ten securities because the objective regulations are the same for everyone.

If those securities continue to rise, then no problem will be apparent. But if they should fall, then, suddenly, all banks will need to liquidate the exact same positions at a time when those positions are falling anyway. This sets the stage for systemic failure. Consider sub-prime mortgages as an illustration. These assets appeared to be historically low-risk and were, therefore, regulatorily favored. Banks invested more in them than they perhaps should have. For a while, as real estate prices continued their ascent, no problems surfaced. But once the market turned, banks began experiencing more losses on their sub-prime mortgage holdings than their regulatorily-mandated risk calculations had planned for. Banks needed to raise capital quickly and began doing two things: selling the sub-prime mortgages, dropping the prices even lower; and selling other assets. Because the banks all acted nearly simultaneously, and all in the same direction, the impact on the markets was both broad and deep, and systemic collapse became a real threat.

Bottom line: whack-a-mole stop-gap regulations meant to preserve the current fragile, broken and unsustainable paper money system founded on the cartelized system of welfare government-central banking-politically privileged "Too big to fail" banks will ultimately fail.

Paper money will return to its intrinsic value-ZERO.