Has the Fed’s Taper Talk induced foreign selling, swap and bilateral currency deals?

Has the Fed’s tapering inspired a foreign sell off in US assets and for countries to increase swaps and bilateral currency deals?

From Bloomberg:

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said…

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.

Based on updated TIC data (prior to June are unrevised), the Japanese (both investors and the government) have aggressively been buying USTs since Abenomics (must be signs of capital flight for private sector). 

However, the debt ceiling standoff has reportedly prompted for a net selling of USTs in early October.

On the other hand, China has posted a sustained decline in UST holdings since April.

Various Asian countries have undertaken ex-US dollar deals.

From Wall Street Journal Blog

On Tuesday, China and Singapore announced they would introduce direct trading between their currencies. Beijing also said it would allow Singapore-based investors to take yuan funds raised in the city-state and invest them in mainland securities markets.

Singapore follows in the footsteps of London – which gained so-called RQFII status last week – and Hong Kong. The move, designed to promote use of the yuan and broaden the investor base in China’s markets, builds on other measures taken recently that aim to reduce Asia’s dependence on the U.S. dollar.

Earlier this month China signed a 100 billion yuan ($16.4 billion) swap deal with Indonesia. It has existing pacts with Australia, South Korea and a number of European countries.

South Korea this month signed currency-swap agreements with Indonesia, Malaysia and the United Arab Emirates worth around $20 billion. Officials say they’re considering more such deals, in addition to existing pacts with China and Japan.

Swap agreements – in which central banks pledge to provide each other with currency, usually on a short-term basis – often are enacted during periods of financial turmoil, but more recently have taken on a greater role in trade and diplomacy.

The arrangements are small compared to use of the dollar for international transactions, which accounted for foreign-exchange turnover of around $4.65 trillion a day, or 87% of the global total, according to triennial survey conducted by the Bank for International Settlements in April.

Still, the swap deals help insulate Asian currencies a bit from the whims of speculative investors, and make it more likely their movements will reflect trade needs or economic fundamentals. China and South Korea got off relatively lightly during the market turmoil this summer, but some of those they’ve signed swap deals with — such as Indonesia — were hit hard as investors fled emerging markets.

It is true that currency swaps or bilateral domestic currency trades have been small, nonetheless such deals means that many Asian governments have been gradually redirecting or decreasing their exposures on the US dollar. As Chinese philosopher Laozi once said, a journey to a thousand miles begins with a single step.

China and Thailand have even undertaken a project to build a railway connection between the two countries, where Thailand will for pay for her share in the cost of railway construction via barter, particularly rice and rubber.

Also currency swaps are not a free pass or license for bubbles. They serve as possible cushion from currency based tail events. Mismanagement by governments will result to market crashes or crisis regardless of swaps.

And speculators don’t just drive markets up or down according to “whims”, but through perceived profit opportunities mainly based on changing expectations of fundamental conditions of specific political economies.

In other words, meltdowns don’t happen because of confidence alone, but because of perceived (rightly or wrongly) dramatic negative or adverse changes in fundamentals that incites an abrupt loss of confidence of market participants whose actions are ventilated on the markets via a stampede or panic.

All these foreign selling of US assets, swaps and bilateral trade or barter deals have been evident in the continued fall of the US dollar.

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Money Abhors a Vacuum: Alternative Digital Based Barter-Currency System Emerge in Greece

Money and trade abhors a vacuum and a replacement will always emerge at the margins.

From BBC.com

In lean economic times, alternative financial systems are sprouting up around the world. And now they come with a digital twist.

"The Greek state is completely absent," says Katarina with a deep chuckle. We are standing across from each other inside a sweltering building on the outskirts of the Greek city of Volos, about 200 miles north of Athens on the Mediterranean. Both Katarina and her daughter, who stands beside her, have been unemployed for months. They are at this makeshift market to sell their array of homemade jams, pickled vegetables and liqueurs, which are spread out on the table between us.

But this isn't a typical market. In fact, there isn't a euro in sight. Katarina is part of a network of more than 500 people in Volos who are taking financial matters into their own hands as part of an alternative local currency, known here by its Greek acronym TEM. "In the network, people can trade their goods and services," says Christos Papaioannou, one of the network's founders. "If I do a service for you, then you owe me a favour. And I can use that favour to get some service from someone else. So, we don't have to exchange directly, I can get it from some third person."

To be clear, there is no actual currency or scrip exchanged. Credits are tracked via an open-source community banking software system called Cyclos. Katarina, for example, banks her credits from selling jam to buy staple foods such as eggs and fresh vegetables that are offered through the network.

The barter idea is catching on in a number of cities in Greece during these lean economic times, returning communities to a centuries old system but with a digital twist. And it's not just in Greece. The global economic downturn has created renewed interest worldwide in alternative economic models.

"I think that people are becoming increasingly aware, over the past few years, that financial systems aren't sustainable. And that boom and bust is always going to be with us, despite politicians continually telling us they are going to work to remove [them]," says Ken Banks, who recently launched a project called Means of Exchange. The idea behind the project, says Banks, is to create a "toolbox" of web-based and mobile apps that will make it easier for people to engage in things like bartering, swapping and alternative currencies.

This has clearly been the free market alternative; spontaneous order, no taxes and strictly competition based.

Yet the emergence of digital bartering and currency alternatives are likely the future trend

As Professor Gary North rightly points out,

This is going to spread. It will appear whenever governments and banks break down. When this happens, production will scape the tax collector’s nets. The tax collector cannot track everything. He cannot brig charges against everyone. The more people who get away with unreported income, the more difficult it will be for governments to avoid contraction.

The future will have smaller, weaker governments.

Video: Dr Marc Faber Optimisitic When Greece Exits, Sees Global Recession Very Soon

Interesting insights from Dr. Marc Faber's interview with the CNBC (hat tip Zero Hedge). Below are my notes:

-Germany will issue Eurobonds. Quality of euro will diminish

-Euro is oversold, potential to rebound along with stock market for the short term

-People are focusing excessively on Euro while ignoring the rest like India and China

[my comment: very true.]

-Danger level—any outright default by any countries. Better to take losses now than to wait for the risk of “gigantic systemic failure”

-Market will be relieved if Greece exited the Eurozone. There would be some clarity. It wouldn’t be good for bank and financial shares. The markets are oversold and on exit of Greece, I think markets would rally

[my comment:

Indeed. People hardly realize that the banking system is NOT the economy as mainstream pundits would have it.

While a banking meltdown may impact business activities over the short term (like 2008), the world does NOT operate on a vacuum, people will continue to trade and resort to other means of obtaining credit, e.g. consumer financing companies filled the niche of Japan's immobilized banking system as alternative sources of credit during post-bubble bust, in 2008 trades have been conducted through barter and through bilateral financing deals, during the recent Euro crisis, in Italy the mafia has stepped up the void as a major creditor

This will especially be true, if reforms would allow for greater economic freedom, which would allow parties to fill in the void. For instance, Walmart's application for bank license was turned down from opposition by big banks, unions and etc...]

-More and more stocks are breaking down around the world. He says that this means many economies are likely to weaken. We might see “some asset deflation”

[my comment: Dr. Faber seems to be vacillating from an oversold rebound to asset deflation.]

-We could have a global recession starting sometime in the fourth quarter of this year or early 2013—100% certainty

-Hold cash US dollars and some gold.

-Although gold prices may breakdown below the low on December 29 2011 of 1,522.

[my comment: the risks seems to be tilted towards a meaningful downdraft alright, which may signal some asset deflation or even global recession, but we can't rule out the possibility that political authorities, particularly of central bankers, may confront these with even more aggressive money printing measures, which again may defer interim trends.

Nonetheless, current environment highlights the state of uncertainty we are in]

Ron Paul: Europe’s Bailout Threatens the US Dollar

Congressman Ron Paul shows us why paper money is about to meet its cataclysmic destiny: Voltaire’s curse. (bold highlights mine)

The global economic situation is becoming more dire every day. Approximately half of all US banks have significant exposure to the debt crisis in Europe. Much more dangerous for the US taxpayer is the dollar's status as reserve currency for the world, and the US Federal Reserve's status as the lender of last resort. As we've learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble. Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb. Greece is set to be the first domino to fall in the string of European economies at risk. Rather than learning from Greece's terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks. Greece is technically small enough to bail out. Italy is not. Germany is not. France is not. It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks. Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent. Will the Fed be held responsible if the Euro brings the US dollar down with it?

The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world. This is untrue. Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone. Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable. Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks. In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them. Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other. No banker, no politician can stop that by destroying one medium of exchange. People will find or create another medium of exchange.

Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected. Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes. The losses should be limited and liquidated, rather than perpetuated and rewarded. This is the only way we can recover.

Government debt is often considered rock solid because it is backed by a government's ability to forcibly extract interest payments out of the public. The public is increasingly unwilling to be bilked to make bankers whole. The riots and the violence in Greece should tell us something about the sustainability of this system.

If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.

Evidence where Greece has been seguing into a barter society (real news reporter)

As the Greek economy succumbs to the debt crisis and individual Greeks are made poorer each day through austerity measures and job cuts, many have begun resorting to traditional bartering as a way to make ends meet and at the same time increase their involvement with neighbors and their general community…

As we’ve suggested on previous occasions, when a country goes through a monetary crisis, depression or recession, traditional methods of income disappear, sometimes overnight. As a result, those who are aware that the paradigm has or is shifting and are willing to accept their new reality will prosper.

Greece, referred to by many as the canary in the coal mine of the ever-worsening global economic crisis, is a perfect example of how communities will respond during monetary, fiscal and political chaos. Use their example to your benefit, because similar circumstances will take place in the U.S. and other industrialized Western nations in due time.

Read New York Times’ coverage of the emerging Greek barter economy here

As one would note in the above table from Danske Bank, Greece’s welfare state and heavy regulatory regime has resulted to the stifling of entrepreneurship and the overdependence of bank-financed government which has resulted to this crisis. Greece ranks at the bottom of ease of doing business list.

The new reality of Greece's collapsing welfare state has been changing this dynamic, as people shift activities towards trade in the informal or underground economy.

Yet this serves as proof that inflationism (to save the bankers and the political class) isn’t the solution. Neither is mainstream's favorite proposed panacea: political or fiscal union. The answer lies in unleashing economic freedom.

Emerging Local Currencies In The US Disproves The 'Liquidity Trap'

Deflation exponents tell us that deleveraging from overindebtedness will restrict demand for credit and cause a fall in consumption which leads to falling prices.

Further they allege that monetary policies will be ineffective to arrest this phenomenon which leads to a Keynesian "liquidity trap".

We say this is garbage.

Why? Empirical proof from the emergence of local currencies, which reportedly numbers nearly 100, is a manifestation that there hasn't been a fall in demand for goods or services or consumption.

This from Fox News, (all bold highlights mine)

``Today, there are close to 100 types of local currencies operating in the United States.

``While some currencies are true to their name and are backed by federal dollars, others are simply a record of hours worked by contributing “time bank” members. “Whenever you have a shortage of money, people look to invent their own medium of exchange,” said David Boyle, fellow of the New Economics Foundation and Author of "Money Matters."

``The earliest local payment system on record began in the 1930’s, which isn't surprising; historically, local currencies have been most popular during times of economic crisis, and the U.S. then was in the midst of the Great Depression."

``Today, the Community Exchange hours system has 450 members, though similar systems work with just 50 or more members. When one member does something for another, they get credit for the amount of time spent helping. Each member’s time is worth the same, whether they’re giving tax advice or cooking dinner.

``Because there is no set standard for what a local currency should be, many times the grassroots effort to start a program doesn’t gain the momentum it needs. The average success rate for local currency is around 20%, according to a study done by Professor Ed Collom at the University of Southern Maine, which looked at 82 such currencies.

So local currencies operate like an improved version of the barter system but is limited to the locality.

More from MSNBC, (all bold highlights mine)

``In most cases, these communities are simply looking to boost local commerce. The currency has to be spent in town, obviously, because it's worthless anywhere else. But a growing distrust of the U.S. dollar is also at work.

``When the Treasury prints billions to bail out banks and automakers, people look for alternatives. These folks may look nutty now, goes the quip, but wait till the dollar goes the way of the Argentine peso. Then you'll be exchanging a wheelbarrow of cash for a bay buck, local currency boosters say...

``At central Vermont's Onion River Exchange, services recently offered included basics such as haircuts but mostly oddities like puppet shows, trips to the dump and left-handed knitting. Among the service requests were a call for rawhide goat skins and a plea from someone named Pam, who "flushed a hair-catch thingy down the toilet and needs help getting it out."

Here's a list of community local currencies in the US.

So "shortage of money", "a growing distrust of the U.S. dollar" and "boost local commerce" hardly are signs of falling consumption, instead they reflect on the malaise plaguing the banking system.

GMU's Charles Rowley argues on the absurdity of the liquidity trap (hat tip: Cafe Hayek) [bold emphasis mine, italics his]

``The concept of the liquidity trap, as outlined by Keynes, and developed by his early disciples, is one aspect of the theory of liquidity preference. Liquidity preference is a theory of the demand for money. Individuals have a certain transactions and a certain precautionary preference for holding money over bonds, because of money’s property of liquidity. They have a speculative preference for holding money over bonds when their expectations are that interest rates are likely to rise, bringing down upon the holders of bonds significant reductions in the value of their bond portfolios.

``If this speculative fear is sufficiently high, the demand for money becomes infinite. In such circumstances, the monetary authority cannot lower interest rates on bonds by selling money in exchange for bonds on the open market. If this liquidity trap occurs under conditions of recession, the monetary authorities cannot stimulate the demand for investment by lowering bond rates of interest. In such circumstances, increasing government expenditures appears to be an attractive mechanism for returning the economy to full employment equilibrium. As Keynes emphasized, he knew of no such situation ever having occurred in the real world."

So has there been an extraordinary demand for money?

Again from Mr. Rowley,

``There is no evidence whatsoever that the demand for investment at current interest rates (incidentally Treasury notes with more than three years to maturity are nearer to 4 per cent than to zero in nominal terms, Mr. Krugman) is inadequate to move the economy to full employment equilibrium.

``Evidence suggests that small firms are desperate for loans from the banks at current interest rates, but cannot obtain them because the big banks will not lend. The big banks will not lend, not because they are are short of high-powered money (Bad Ben Bernanke has drenched the economy in high-powered money), but because their balance sheets are rock-bottom rotten and they are trying to use Bernanke money to bring their financial ratios back from insanely low levels."

Well, the reported shortages of money that has spurred the emergence of local community currencies seem to validate or corroborate this perspective. Moreover, inflationism could be another factor why people have indeed been looking for alternatives.

What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis

``The most popular method of deprecating capitalism is to make it responsible for every condition which is considered unsatisfactory. Tuberculosis and, until a few years ago, syphilis, were called diseases of capitalism. The destitution of scores of millions in countries like India, which did not adopt capitalism, is blamed on capitalism. It is a sad fact that people become debilitated in old age and finally die. But this happens not only to salesmen but also to employers, and it was no less tragic in the precapitalistic ages than it is under capitalism. Prostitution, dipsomania, and drug addiction are all called capitalist vices. Ludwig von Mises Economic Teaching at the Universities

Lessons from Nassim Taleb

There are two important things I’ve learned from my favorite iconoclast Nassim Taleb, the chief proponent of the Black Swan Theory.

One is that he cautions the public to indulge in the study of markets or economies centered upon highly flawed but popular econometric models which are nothing but algorithms designed to operate on sterilized environments similar to classroom or laboratory conditions.

Since these computer models unrealistically operate on the assumption that every factor can be anticipated, examined and evaluated, risks are therefore assumed to be under control. Yet, the complex nature of our world can lead to manifold variables which can’t be read, evaluated or anticipated. The impact of which is known as randomness or the BLACK SWAN, a low probability but HIGH impact event, and is the nemesis of these ‘quant’ models. For instance the humongous losses in today’s financial crisis have been be partially blamed on the failure of quant models to anticipate risks from statistical fat tails.

Second, the other lesson taught by our unorthodox savant is to avoid getting trapped with cognitive biases such as projecting past connections and outcomes into the future.

The Sanctity of Delusion

Today we are told that the world is going to the sewer.

That is because the US, which has functioned as the only major ‘aggregate demand’ of the world, can’t live up to its role as it is undergoing a deep recession. In corollary, these experts further assert that the world won’t be able won’t replace the US as the provider of demand because of its sheer size. In other words, past performance guarantees tomorrow’s outcome.

Based on their economic premise, where supply exists only as a function of demand, then with today’s imploding private sector credit bubble, which has deeply dented the demand equation, must be replaced and absorbed by the government. Therefore, the government’s role MUST be to create artificial demand by printing up as much money in order to sustain the bursting bubble structure.

Tersely said, from the private sector, the credit bubble now is being reconfigured to one known as a government credit bubble. And this seems to be what we are seeing all around the world. From nationalization, “bad bank” or other means of government interventions, the idea is to transfer the leverage and the attendant losses to the government.

The same logic says that if Bernard Madoff was a fraud, and had operated on an unsustainable platform which didn’t last, the government’s insistence of operating on the same an unsustainable platform, but charged to the taxpayers and meant for the “good of the citizenry”, MUST SUCCEED. The difference was that Madoff was a felon, while governments sustaining bubbles for chimerical prosperity, are deemed as legitimate and for a good cause.

Unfortunately for Madoff, he was an individual and not privileged to conduct the same scheme which is equally being thrown to the public by governments. But the underlying principle of both Madoff and the governments is the same: to get something from nothing!

In other words, you resolve the problem of drug addiction by providing more drugs. If you are Madoff you get charged with drug pushing. But if you are the government, you receive plaudits for a fighting for a good cause.

In a reality check, unsustainable trends which can’t last, won’t! NO amount of the printing press nostrums will make illusions a reality.

Reality has finally landed in Zimbabwe. The Mugabe-Gono government finally capitulated to the marketplace realities by allowing the depressed African economy to trade in foreign currencies which in effect jettisoned the local currency, the Zimbabwe dollar. This also means the Mugabe-Gono government will fall soon. And in the same vein, all nationalizations or government guarantees are only as good as the real capital standing behind these.

Does the words of Karl Marx in Das Kapita in 1867…``Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism"…ring a bell?

Fairy Tales Cures and Self Righteousness

Yet popular opinion believes in fairytale cures.

To call for market forces to rectify the situation, one risks being labeled as insane, inhuman or bloodless.

Nevertheless just look at level of desperation policymakers are into so as to consider ridiculous ideas to restore an unsustainable structure of economic growth:

-In déjà vu to the hog reduction program of the Great Depression of the 1930s, US policy makers are considering to boosts car sales via a program known as "cash for clunkers". (CNNmoney) Yes, the US government plans to buy and junk old cars so as to motivate its populace to buy new ones. If the policy gets enacted, this is going to be a waste of productive resources.

-Moreover, they are considering “to renegotiate mortgages it owns that might otherwise enter foreclosure” (Washington Post) or allow “bankruptcy judges to modify the mortgages of troubled homeowners” (Washington Post) all at the expense of the property rights of American people.

To add, not content with plans to impose tons of regulations on the national level, the statists have been contemplating on to expand impositions abroad. Signs of protectionism, which had greatly contributed to the Great Depression of the 1929, are surfacing in the political arena. At the confirmation hearing, Treasury Secretary Tim Geither unleashed what he “believes that China is manipulating its currency” (Wall Street Journal). In addition, the stimulus bill which was recently passed by Congress contained a “Buy America” rider (Washington Post).

All these actions seem to agitate for a mutually devastating global trade war.

And why would authorities engage in such potentially calamitous actions? We understand 3 possible things: economic ignorance, messianic complexity or plain political rhetoric.

Realities say that the US doesn’t produce enough, that’s why it incurs trade deficit. And a trade war would mean massive catastrophic shortages. Think oil. The US imports 60% of its oil requirements (CNNmoney). If world trade shuts, the economic implication would be a collapse in the US economy with a geopolitical implication of a possible World War 3.

And also considering that the US is the largest debtor nation in the world, it wouldn’t be far where a trade war would also extrapolate to an equally internecine debt default. And what’s to stop these interventionists fools from inciting a war economy or the misguided belief that only war, after everything else fails, can stimulate the economy?

Now we turn the tables and wonder who is insane, inhuman or bloodless? Does provoking a trade war which has dire consequences similar or worst in scale than the Great Depression a humane and charitable option? How altruistic is it, if the world goes into war out of the desire to stimulate the economy? How does hyperinflation as in the case of Zimbabwe lead to progress? How charitable can it be to live a world of self delusion?

Does the 2008 Global Trade and Production Collapse Signify Posttraumatic Stress Disorder?

If a bubble structure can be characterized by unrestrained credit creation, speculative excess seen in asset inflation and unparalleled concentration of financial wealth and power, then in as much as the massive wage or income disparities or “Shameful bonuses” in Wall Street relative to the average Americans had been a function of a bubble structure, the world’s production-supply chain structure have also been partly been built around the same bubble environment.

And today’s bursting bubble which has prompted for “demand destruction” has been met by more “supply destruction”.

Yet what seems to be remarkable has been the sharp collapse in global production and trade.

Figure 3: IMF World Economic Outlook: Collapse of Global Industrial Production and Merchandise Trade

The chart IMF’s World Economic Outlook demonstrates the seeming peculiarity of the last quarter’s world trade and production activities.

If you are to compare with the dot.com days or the previous bubble bust and its ensuing recession, you’d notice that the same trends went into a steady decline over a period of time (years). But this hasn’t been the case last year. The outright collapse in just ONE MONTH by both economic variables suggests that world suddenly stopped doing anything and merely watched in shock and awe!

And why would the world do that? The obvious answer is the shock emanating from the near meltdown of the US banking system subsequent to the Lehman debacle. This has been prompted for by the institutional bank run in the US banking system as discussed in last October’s Has The Global Banking Stress Been a Manifestation of Declining Confidence In The Paper Money System?

So contrary to mainstream views which ANCHORS upon this collapse as their basis for prediction, we suggest instead that this could be a function of a Posttraumatic stress disorder (PTSD) where according to Wikipedia.org, ``is an anxiety disorder that can develop after exposure to one or more terrifying events that threatened or caused grave physical harm.”

As an example, the 9/11 terrorist attack on the World Trade Center was graphically captured in living color by media. The repeated airing of the deplorable terrorist event heightened the fear of air travel which thereby caused a shift or substitution in some of the public’s traveling patterns.

And the shift emanating from the fear, resulted to more casualties from the higher risk land transportation.

According to a study The Impact of 9/11 on Driving Fatalities: The Other Lives Lost to Terrorism by Garrick Blalock, Vrinda Kadiyali, Daniel H. Simon, ``We find that driving fatalities increased significantly following the terrorist attacks of September 11, 2001, an event which prompted many travelers to substitute less-safe surface transportation for safer air transportation. After controlling for time trends, weather, road conditions, and other factors, we attribute an increase of 242 driving fatalities per month to additional road travel undertaken in response to 9/11. In total, our results suggest that about 1,200 driving deaths are attributable to the effect of 9/11. We also provide evidence that is consistent with the 9/11 effect on driving fatalities weakening over time as drivers return to flying. Our results show that the public response to terrorist threats can create unintended consequences that rival the attacks themselves in severity.”

Why is this so? According to Trevor Butterworth, ``Because fear strengthens memory, catastrophes such as earthquakes, plane crashes, and terrorist incidents completely capture our attention. As a result, we overestimate the odds of dreadful but infrequent events and underestimate how risky ordinary events are. The drama and excitement of improbable events make them appear to be more common.”

So given Mr. Butterworth’s tread, could we be “overestimating the odds of dreadful but infrequent events and underestimating how risky ordinary events are”?

Evidences of PTSD

Some evidences show we are.

One, global barter trade has been picking up. [see Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?]

According to the Financial Times, ``Officials estimated that they ranged from $5m for smaller contracts to more than $500m for the biggest.” It could be more. There have been accounts of barter since this episode has unraveled.

And the reported cause? ``Failure to secure trade financing as bank lending has dried up.”

The fact that governments have traded OUTSIDE the financial system, means demand and supply seems intact for basic necessities for them to conduct trade. The fundamental problem lies within the traditional means of facilitating payment and settlement via the banking system.

Two possible reasons why governments have been undertaking barter, which is a primitive method of trade:

One, the banking system remains dysfunctional despite the heavy interventions by global governments and

Two, there is a growing distrust for the present medium of exchange. The second finds a voice in Russian Prime Minister Vladimir Putin’s speech in Davos, ``Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.”

The next evidence could be seen via the surging Baltic Dry Index see figure 4.

Figure 4: stockcharts.com: Rising Baltic Index=Rising Oil and Copper?

The Baltic Dry index according to the wikipedia.org is ``a number issued daily by the London-based Baltic Exchange. The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

Plainly put, the Baltic Index is the cost of freight to move raw materials or basic commodities. It could be seen as a leading indicator.

So far the Baltic Index has risen by 60%, whereas oil and copper appears to be consolidating or “bottoming” even as the US dollar index has been going up. To recall, during the October-November collapse, the US dollar has inversely accompanied the rapid declines of the Baltic index as with the oil and copper.

The seeming divergence could be added signs of the diminishing influences of debt deflation.

Furthermore, even in the US, there are signs that production and inventory or supply destruction have been catching up with its counterpart demand destruction see figure 5.

Figure 5: Danske Bank: Is the US Manufacturing Sector Beginning to Recover?

These observations from the Danske Team (bold emphasis mine),

``First, prior to the recession the US manufacturing industry ran very lean inventories. Second, the liquidity squeeze from the credit crisis has led to an unusually fast alignment of production to demand fundamentals.

``Consequently, the pace of production is now undershooting the slowdown in demand. Hence, it will merely take stabilisation in demand growth to spark an industrial recovery.

The Danske team suggests that the first signs of recovery will be manifested over the ISM index which may stabilize and recover over the coming 3-6 months. In addition, a recovery in the ISM index will most likely add pressure to long US bond yields and signal stabilization in corporate earnings.

While I don’t necessarily share the optimism of the Danske team, the point is that the recent collapse have meaningfully adjusted both the demand and supply equation possibly enough to generate some market based (and not government instituted) revival.

So from growing world barter activities, buttressed by the rising Baltic Dry index, and a potential run down of inventories and similar downside adjustments in the supply side production could mean a semblance of restoration of global trade.

And if indeed the Danske Team is right about their forecast about the manufacturing recovery in the US, then this could signal a potential trough or nearing close of the US recession.

But then again, as a reminder, the cardinal sins in policymaking that could lead to prolonged bear markets: protectionism (nationalism, high tariffs, capital controls), regulatory overkill (high cost from added bureaucracy), monetary policy mistakes (bubble forming policies as negative real rates), excess taxation or war (political instability). Except for the last threat, the 4 seems likely a clear and present danger.

Will An Easing PTSD Lead To A Resurgent Asia?

Nonetheless, if the US supply side has adjusted to counterbalance the sharp fall in demand, then it is likely that the spate of sharp declines in the economic activities in most of Asia can be construed as the same degree of supply/production side adjustments.

Figure 6: DBS Bank: Asia’s Industrial Production Recovered earlier during the .com recession

Like in 2001, Asia’s heavy exposure to the technology sector hit exporters. Today, the sharp decline in US consumer spending has equally affected Asia’s exports as much as it also affected production. However, the sharp drop late last year could likely be explained by the Posttraumatic stress disorder (PTSD) emanating from the distress in the banking system.

But unlike in 2001, which saw Asia as floundering from the nasty side effects of the Asian Crisis, where there essentially had been no domestic demand, this isn’t the case today. Asia has simply grown bigger and more dynamic and with ample shield from its high savings enough to potentially generate its own demand.

The recent DBS bank outlook says it best, ``Asia now generates almost as much new demand every year as the US- and it is that fresh demand that’s the very definition of global growth. The US is still a key driver and will remain so for a long time. But it is not the driver it used to be.” (bold emphasis mine)

And the Economist seems to agree, ``The question is, might domestic demand now take up some of the slack? There are reasons to think so. Falling commodity prices are boosting consumers’ purchasing power, just as they squeezed it last year. More important is the impact of monetary and fiscal expansion…(bold emphasis mine)

And the Economist sings to be singing a tune similar to ours, ``Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP.” (bold emphasis mine)

In our Will “Divergences” Be A Theme for 2009?, we brought up the Austrian economics explanation that ``market rate of interest means different things to different segments of the structure of production.”

In essence we believe that convergent actions by global central banks will ultimately lead to divergent responses based on the capital and production structure of every economy.

Where the same amount of rain is applied to a desert land, forest land or grass land, the output will obviously be different. And to complement the DBS and Economist outlook, we recently said ``this crisis should serve as Asia’s window of opportunity to amass economic, financial and geopolitical clout amidst its staggering competitors. But this will probably come gradually and develop overtime and possibly be manifested initially in the activities of the marketplace.”

So to refrain from overestimating the odds of dreadful but infrequent events and underestimate how risky ordinary events are, we revert to the study of Garrick Blalock, Vrinda Kadiyali, Daniel H. Simon who concludes, ``Although we are unable to identify precisely reasons for either the 9/11 effect or its weakening, the existence of the effect is consistent with theoretical models in behavioral economics and psychology of inaccurate assessment of risks by consumers and exaggerated adjustments to risk assessments. The fortunate weakening of the 9/11 effect may be attributable to consumer learning over time in response to environmental changes. For example, the perceived risk of flying may have declined with the absence of any further terrorist incidents since 9/11, or travelers may have become accustomed to the increased inconvenience of flying.”

No we don’t just read past data and project them to the future like most of the experts. Instead, we try to understand that human action, to quote Ludwig von Mises, is a purposeful behavior!

Does Mexico’s Falling Remittance Trend Bode Ill For The Philippines?

Mexico’s remittances suffered its first decline since remittance trends have been recorded. From Bespoke Invest, ``According to Mexico's central bank, remittances during 2008 to Mexico by Mexican workers in the US had their first ever annual decrease since the central bank began tracking these statistics in 1995.”

Courtesy of Bespoke

Why? Possibly because a big chunk of the Mexico’s migrant workers have been exposed to heavily affected industries. According to the Wall Street Journal, ``Mexico's Central Bank in October revealed just 5% of migrants today work on U.S. farms, while 38% are in construction and manufacturing, and another 57% in services.” (bold highlight mine)

Many of the economies in the emerging markets depend on remittances for growth, according anew to the Wall Street Journal, ``In the past two decades, workers in poor countries have grown increasingly dependent on job opportunities in countries experiencing sustained growth -- the U.S. for Latin American and Caribbean migrants; Western Europe for Africans and Eastern Europeans; the Gulf Emirates for Pakistanis and Filipinos…Remittances are the single largest source of national income in many countries. The Inter-American Development Bank reports high levels of dependence in Haiti (26%), Guyana (24%), Jamaica (18.5%) and El Salvador (18%).”

Nonetheless, rate of change on Mexico’s remittances has been on decline for a string of months, again from Bespoke, ``thirteen months where remittances have been negative, nine of them occurred during 2008.”

As for the Philippines, remittance trends continue to manifest robust growth: 14.1% during fourth quarter and 15% in first 11 months (Bloomberg) even as the government projects growth figures to moderate to 6-9% for 2009. We aren't confident with the optimistic forecasts.

Courtesy of DBS

Albeit the rate of growth underpinning the local remittance trends, despite the near nominal record levels, seems to be already tapering off.

While it is safe to lean on the camp that says remittance trends should decline similar to that of Mexico, especially based on the assumption that global economic growth seems likely to materially slow, or at worst, deteriorate sharply, one must be reminded that the composition of labor exports is distinct among emerging market economies, aside from the share of remittance to the national income. This implies that the sensitivity of remittances to the global slowdown could vary among EM economies.

Next, we aren’t fully convinced with the mainstream view that last quarter’s world merchandise trade crash portends of a worsening of the global trade trends. While we agree that world trade will definitely slow, the Lehman inspired October crash could account for as a banking induced credit trade finance “shock”, and may somewhat recover gradually than an outright slump. The evidence of economies resorting to go barter [see Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?] as alternative means of trade suggest of these.

Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?

One possible sign of the accumulating distress from today’s monetary disorder is that trades are being conducted in the form of Barter, as previously discussed in Signs of Transitioning Financial Order? The Emergence of Barter and Bilateral Based Currency Based Trading?

This new development from the Financial Times (bold emphasis mine),

``In a striking example of how the global financial crisis and high food prices have strained the finances of poor and middle-income nations, countries including Russia, Malaysia, Vietnam and Morocco say they have signed or are discussing inter-government and barter deals to import commodities from rice to vegetable oil.

``The revival of these trade practices, used rarely in the last 20 years and usually by nations subject to international embargoes and the old communist bloc, is a result of the countries’ failure to secure trade financing as bank lending has dried up.

``The countries have not disclosed the value of any deals, and some have refused even to confirm their existence. Officials estimated that they ranged from $5m for smaller contracts to more than $500m for the biggest.”

The article mentions barter as ‘rarely’ used trade practice. Barter is actually a primitive form of direct exchange which culminated with the emergence of money.

According to Murray Rothbard in “Money: Its Importance, Origins, and Operations” from the Mystery of Banking,`` Before coinage, there was barter. Goods were produced by those who were good at it, and their surpluses were exchanged for the products of others. Every product had its barter price in terms of all other products, and every person gained by exchanging something he needed less for a product he needed more. The voluntary market economy became a latticework of mutually beneficial exchanges.”

But problems accompanied barter as a means of exchange, namely:

1. Double Coincidence of Wants-difficulty of matching specific wants

2. Indivisibilities-the problem of precise adjustments and exchange of supplies

3. Business calculation-determining profit or losses

Thus adds Mr. Rothbard, ``Barter, therefore, could not possibly manage an advanced or modern industrial economy. Barter could not succeed beyond the needs of a primitive village.”

``But man is ingenious. He managed to find a way to overcome these obstacles and transcend the limiting system of barter. Trying to overcome the limitations of barter, he arrived, step by step, at one of man's most ingenious, important and productive inventions: money.

So if barter is a primitive way of conducting trade without money, why do nations today embark on such activities? The article says “failure to secure trade financing as bank lending has dried up”. This means the gridlock in the banking sector has impaired the facility of exchange, particularly in the payments and settlements functions.

Thus, temporarily nations have resorted to direct exchange. One must be reminded that most of the problems of credit paralysis have been centered on the US banking industry, which essentially operates as the main conduit for the US dollar standard. This implies that prolonged disutility of credit from the present system could lead nations to adopt an alternative “medium of exchange”.

So aside from the prospects of massive inflation, a persistent dysfunctional banking system could risk jeopardizing the role of the US dollar as international reserve currency.

Signs of Transitioning Financial Order? The Emergence of Barter and Bilateral Based Currency Based Trading?

In our previous blog, The Origin of Money and Today's Mackarel and Animal Farm Currencies, we pointed out how people responded to government’s action of banning money (such as prison community) or for society to lose confidence on the government decreed money (Zimbabwe).

We observed that when people lose confidence on the money government decrees on them or when they are barred from having to use “standard” money, people find alternative ways to select a media of exchange (Mackarel Money for California’s Prison or Barter for Zimbabwe).

And when we see governments similarly begin to use unorthodox means of transaction, we construe such action as emerging signs of diminishing faith in the present monetary standard.

This from yesterday’s news (courtesy of the Financial Times),

``Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.

``The United Nations’ Food and Agriculture Organisation said such government-to-government bartering – a system of trade not used for decades – was likely to become more common as the private sector was finding it hard to access credit for food imports.

``“Government-to-government deals will increase in number,” said Concepción Calpe, a senior economist at the FAO in Rome. “The lack of credit for trade could lead also to a resurgence of barter deals between countries,” she added.

``Officials and traders noted, however, that Iran was not typical because the US-led sanctions against its banks meant the country was facing difficulties financing agricultural trade even before the financial crisis…

``With some developing countries’ official currency reserves facing serious depletion, particularly in Africa and Asia, agricultural officials said countries could barter more to avoid exacerbating their current account difficulties."

Our observation:

True, while Iran’s conditions have been stymied by US sanctions, the fact that both governments CAN yet TRADE with each other with their homegrown resources can be construed as Paper money failing to deliver its role as medium of exchange.

The banking system as key conduit for the present framework seems being bypassed for barter (which accounts for hard currency trading outside the US dollar standard system).

So what we apparently have here is another instance where “full faith in credit” in the present global financial architecture seems being eroded.

Is this an isolated incident? We think not.

Just last September, Brazil and Argentina came across a system which aims to trade goods without using the US dollar.

According to the International Herald Tribune,

``Brazil and Argentina are ready to stop using U.S. dollars to trade goods between them.

``Brazil's president tells the Buenos Aires-based Clarin newspaper that exports and imports between the two nations will be bought and sold in local currency — reals and pesos.

``President Luiz Inacio Lula da Silva did not say when the measure would take effect.

``Silva says the move will boost bilateral trade, which reached $US17.6 billion so far this year through July.”

If you think this is a joke, you can check out this speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil on the Inauguration of the Brazil-Argentina Local Currency System last Oct 2^nd published at the Bank of International Settlements, where I quote (highlight mine),

``With elimination of a third currency in direct transactions among companies, exporters will set their prices in the currency of their own countries. Thus, they will be better able to calculate their margins precisely, since they will no longer be exposed to exchange rate risk.’

Does the concerns over exchange rate risk end here?

Nope, just today we got this news that China and Russia are contemplating a similar medium for payment or settlement.

From Russia Today (Hat Tip: Craig McCarty),

``The growing trade turnover offers both nations the chance to move trade away from dollars and utilising national currencies. In his address to the 3rd Russia-China forum in Moscow, Vladimir Putin stressed that the dollar based financial system was in a state of shock - and said the counterparties should consider using their own currencies.

``Aleksandr Razuvaev, Chief Analyst at Sobinbank says that the major product being traded - oil - can be denominated in Rubles from next year.

``“There is less trust in the dollar and there is an idea to build up regional currencies. It will be the Ruble in the CIS region, and the Yuan in the South Asian region. So there will be demand for Russian currency due to oil exports and for the Yuan due to imports from China. So there will be enough liquidity in both currencies.”

So from a “MICRO” level of Mackarel Prison economy to an “Animal Farm” national Zimbabwean economy, the unconventional means of transactions seems to be growing MACRO, involving more bilateral exchanges using national currencies or by barter.

It seems that we could be witnessing escalating signs of cracks from the present monetary order.