Asian Companies Go For Value Added Risk Ventures

In the ambiance of globalization or free markets, Asian companies have now been boldly embarking to enhance their competitiveness by scaling up the value chain in the technology sphere.

Yes, Asians appear to realize that we are transitioning into a post-industrial era or the third wave or the information age more than mainstream would like us to believe.

This telling article from the New York Times, (all bold highlights mine)

``For years, the process remained relatively static: PC makers like Hewlett-Packard and Apple, with well-staffed research labs and design departments, would dream up their next product and then hire a Chinese or Taiwanese fabricator to manufacture the largest number of units at the lowest possible cost."

``But lately, this traditional division of labor has been upended. Many of those Asian companies have moved well beyond manufacturing to seize greater control over the look and feel of tomorrow’s personal computers, smartphones and even Web sites.

``The investment arms of large Taiwanese and Chinese manufacturers have created an investment network in Silicon Valley operating under the radar that pumps money into a variety of chip, software and services companies to gain the latest technology. As a result, some Asian manufacturers have proved more willing than entrenched Silicon Valley venture capitalists to back some risky endeavors.

``“In the past, the manufacturers would sneak around and get inside information on technology by investing in these companies,” said K. Bobby Chao, the managing partner at DFJ DragonFund China, a business that invests in technology companies in China and the United States. “Now, they’re more involved, more visible and charging after more complex maneuvers.”

``As manufacturing of electronics in the United States began moving offshore decades ago, some feared the American economy would suffer. But the American companies, as well as economists and policy makers, said that as long as the high-value jobs like research and design remained in the United States, there was little danger.

``Asian investments in Silicon Valley present some risks for America’s top technology companies, which could lose their connection to top innovations."

The recent crisis, perhaps, may have opened the windows for Asians to make use of their accumulated savings, liberal access to financing, manufacturing and technology experience accrued over the years, revitalized confidence to take on new challenges and importantly a freer market environment, aside from a continually advancing research and development capabilities to advance on their risks ventures.

Again from the New York Times,

``The investments by Asian companies have already started to pay off. At the Consumer Electronics Show this week in Las Vegas, people will see laptops that end sluggish start times and instead boot up instantly and TVs that do not require remotes because they can see the gestures of viewers. These features are a result of strategic investments in technology by Asian manufacturers. One Asian manufacturer turned investor is Quanta, based in Taiwan, which has long been one of the largest manufacturers of laptops and personal computers for major brands like H.P., Acer and Dell.

``To keep those customers coming back, it needs unique product designs and technologies that give it an edge over competitors."

In other words, for Asia to improve its wealth and economic conditions requires capital accumulation or added economic value (or the lengthening of the economic structure) by producers competing to satisfy the needs of the consumers. The article appears to underscore on such a transition.

And it is only under free market environs where producers become sensitive to changes of consumer desires, as Professor Ludwig von Mises explains, ``But it is precisely modern capitalism that is faced with rapid changes in conditions. Changes in technological knowledge and in the demand of the consumers as they occur daily in our time make obsolete many of the plans directing the course of production and raise the question whether or not one should pursue the path started on."

Could Asians Be Assimilating On Western Free Market Ideals?

Asians now comprise as the fastest growing nationalities among foreign students in America.

That's according to the Economist, ``STUDENTS flock to American universities from all over the world. But according to the OECD, a rich-country think-tank, over 40% of the 106,123 foreign students in the country during the 2007-08 academic year came from just three Asian countries: China, India and South Korea. And the 23,779 Chinese students in America far outnumbered those from India and South Korea, which each sent just under 10,000 students to America. But over the period between 1997 and 2008 the number of Indian students grew the fastest. The European presence on American campuses has grown more slowly. But between them, Germany, France and Italy still sent more students to America in 2007-08 than either India or South Korea." (bold emphasis mine)

While the terse article doesn't dwell on the details of which schools Asian students were enrolled at and likewise doesn't tackle with the post graduate life of graduate foreign students (if they remain in the US or have been repatriated ) my guess is that many Asians have been sent mainly to study and assimilate on Western (political, economic, philosophical) ideology, culture and lifestyle.

And perhaps this could be one reason why there has been some interests on Ayn Rand's Atlas Shrugged in terms of growth in web searches and book sales in India.

According to Reason.com ``Apparently, Indians perform the second most Google searches for Dame Ayn after folks in the U.S., and Ayn Rand's book have sold 50,000 copies there since 2005, about the same sales are enjoyed by John Grisham." As you would observe, Indians have been the fastest growing Asian group during the last 10 years.

Although correlation may not be causation, and 50k copies of Atlas Shrugged is definitely infinitesimal compared to India's over 1 billion in population, our point is that Asians could gradually be adapting more of free trade ideals than their US peers.


According to dlc.org, global governments imposed 155 temporary tariffs at the pinnacle of the crisis in 2008. This is way below the annual average of 189 (from 2000-2008). Nevertheless most of the tariffs have been initiated by the US.

Hence global protectionists sentiment, in spite of the recent crisis and the proddings of Western progressives, appears contained.

As Thomas Jefferson wrote, “Whenever the people are well-informed, they can be trusted with their own government.”

Could Asians be learning more of the Jeffersonian way?

Free Market's Product: Evolution of Cell Phones

One of the wonders of market driven technological innovation is to have a rapidly progressing evolution of mobile phones or cell phones.

The article from webdesignerdepot.com shows in pictures how this has been transforming. We quote an excerpt,

``Cell phones have evolved immensely since 1983, both in design and function.

``From the Motorola DynaTAC, that power symbol that Michael Douglas wielded so forcefully in the movie “Wall Street”, to the iPhone 3G, which can take a picture, play a video, or run one of the thousands applications available from the Apple Store.

``There are thousands of models of cell phones that have hit the streets between 1983 and now.

``We’ve picked a few of the more popular and unusual ones to take you through the history of this device that most of us consider a part of our everyday lives.

See the pictures or read the rest of article here.

(Hat tip: Professor Mark Perry)

Has The Crisis Been Mainly A Sin Of Free Markets? President George Bush's 2002 Speech As Evidence

Has today's crisis been a sin committed by the Free Market?

This speech "REMARKS BY THE PRESIDENT ON HOMEOWNERSHIP" from ex-President George Bush at the Department of Housing and Urban Development Washington, D.C.June 18, 2002, should serve as evidence for the guiding policy of the US aimed at boosting its housing program (all bold highlights mine)...

``But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country.

``One of the things that we've got to do is to address problems straight on and deal with them in a way that helps us meet goals. And so I want to talk about a couple of goals and -- one goal and a problem.

``The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.

``We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. Five-and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it's going to mean we're going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.

``And so I want to, one, encourage you to do everything you can to work in a realistic, smart way to get this done. I repeat, we're here for a reason. And part of the reason is to make this dream extend everywhere.

``I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector.

``And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy.

``We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year -- 40,000 families a year -- will be able to realize the dream we want them to be able to realize, and that's owning their own home.

``The second barrier to ownership is the lack of affordable housing. There are neighborhoods in America where you just can't find a house that's affordable to purchase, and we need to deal with that problem. The best way to do so, I think, is to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America.

``The third problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. There's too many pitfalls. So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership.

``It is essential that we make it easier for people to buy a home, not harder. And in order to do so, we've got to educate folks. Some of us take homeownership for granted, but there are people -- obviously, the home purchase is a significant, significant decision by our fellow Americans. We've got people who have newly arrived to our country, don't know the customs. We've got people in certain neighborhoods that just aren't really sure what it means to buy a home. And it seems like to us that it makes sense to have a outreach program, an education program that explains the whys and wherefores of buying a house, to make it easier for people to not only understand the legal implications and ramifications, but to make it easier to understand how to get a good loan.

``There's some people out there that can fall prey to unscrupulous lenders, and we have an obligation to educate and to use our resource base to help people understand how to purchase a home and what -- where the good opportunities might exist for home purchasing.

``Finally, we want to make sure the Section 8 homeownership program is fully implemented. This is a program that provides vouchers for first-time home buyers which they can use for down payments and/or mortgage payments.

``So this is an ambitious start here at the federal level. And, again, I repeat, you all need to help us every way you can. But the private sector needs to help, too. They need to help, too. Of course, it's in their interest. If you're a realtor, it's in your interest that somebody be interested in buying a home. If you're a homebuilder, it's in your interest that somebody be interested in buying a home.

``And so, therefore, I've called -- yesterday, I called upon the private sector to help us and help the home buyers. We need more capital in the private markets for first-time, low-income buyers. And I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. They've used their influence to create that much capital available for the type of home buyer we're talking about here. It's in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.

``There's a lot of faith-based programs that want to be involved with educating people about how to buy a home. And we're going to have an active outreach from HUD.

``And so this ambitious goal is going to be met. I believe it will be, just so long as we keep focused, and remember that security at home is -- economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security. It's also a part of making sure that this country fulfills its great hope and vision."

My comment:

Essentially what President Bush wanted, President Bush got, but at a tremendous costs-a bubble and a subsequent bust which transitioned into a global financial meltdown.

Alternatively, this also means that the recent bubble had been policy induced and was not a function free markets but of government manipulated markets.

Remember, interventionism and inflationary policies distorts the capital structure of an economy.

As Ludwig von Mises wrote in Human Action The Crisis of Interventionism, ``An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself."

Self Regulation In Child Pornography

Many have claimed that the recent crisis highlighted the failure of market's self regulation.

In contrast, we assert that markets have merely responded to the incentives brought about by the policies imposed by the regulators.

For instance in the tightly regulated banking industry, loose monetary policies and other administrative policies that encouraged moral hazard severely distorted the industry's incentives in managing its resources, which subsequently ballooned their risk appetites by taking on more leverage by circumventing regulations and erecting a "shadow" system.

And this has been compounded by authorities who were "caught sleeping at the wheel" or who were in collusion to "game" the system or what is known as the "regulatory capture".

For industries, such as the internet service, which have been less subjected to incentive skewing regulations, the self policing mechanism appears to be taking on some good effect: for instance applied to the crusade against child pornography.

According to the Economist, ``SELF-REGULATION by internet authorities and internet service providers (ISPs) may be having some effect in combatting the worst kinds of online crime. Last year there were 10% fewer websites hosting indecent images of children than in 2007, according to the Internet Watch Foundation (IWF), which deals with criminal internet content reported in Britain. Although a worrying 1,530 sites were in operation globally, this is somewhat lower than the peak of almost 2,000 in 2006, perhaps because of more effective co-operation from ISPs and better data sharing with international authorities. The IWF notes that domains are often moved around every few days, making it much harder to block them."

To quote Jeffrey Tucker in Learning from Web Commerce, ``The key feature of most internet commerce is that government is at arm's length. If the rest of the economy were permitted to work in the same way, all of the blessings of innovation, service, self-regulation, and consumer sovereignty would be everywhere, and not just on computer screens."

Beer, Consumer Choice and Free Society: The American Model

A striking quote for Beer- "Beer is proof that God loves us and wants us to be happy"-Benjamin Franklin

Video from Reason TV,

Quoted from Reason TV

``In 1920, the National Prohibition Act destroyed the beer industry in the United States, putting some 1,500 breweries out of business. When the "noble experiment" was repealed in 1933, beer lovers rejoiced, and the beer industry staggered back to its feet. The industry had lost much of its diversity, however, and the emergence of national brands in the 1950s and 1960s led to industry consolidation and fewer choices for American beer drinkers. By 1980, there were less than 50 breweries in the U.S.

``By the 1980s, American beer had an international reputation as weak and watery as a case of Hamm's. Most breweries only produced American-style lagers, a light and inexpensive style of beer typically made with rice or corn adjuncts in addition to barley, hops, yeast and water.

``What American beer lovers didn’t know at the time was that a revolution was imminent. In 1979, a clerical error in the 21st Amendment was corrected, and for the first time in nearly 50 years it became legal to brew small batches of beer at home. Home brewers who had little interest in cutting costs or making beer with mass appeal began brewing big, flavorful beers in a wide range of styles. Many of these home brewers decided to turn their passion into small businesses, and microbreweries began popping up all over the country.

``Today, although mainstream beers still dominate the market, more than 14,00 breweries in the U.S. produce more styles of beer than anywhere else in the world, and American beers routinely dominate international beer competitions.

``So the next time you’re at your favorite brewpub, hold your glass up high and celebrate the American beer revolution."

Lesson: Industry liberalization promotes competition, which provides consumers with the best choices at the most reasonable prices, and societal satisfaction.

Unfortunately for the Philippines, the microbrewery industry is still at an infancy...I only know of two.

Hat Tip Mark Perry

Video: Milton Friedman on Greed

From the Heritage Blog,

Some excerpts from Friedman's terse but awesomely crisp rejoinder on capitalism's "greed"...

``The world runs on individuals pursuing their selfish interest. The great achievements of civilization have not come from government bureaus."

``In the only cases in which the masses have escaped from the kind of grinding poverty you are talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you wanna know where the masses are worst off is the kind of the society that departs from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold the candle to the productive activities that are unleashed via free enterprise."

``And what does reward virtue? You think the communist commissar rewards virtue? Do you think a Hitler rewards virtue? Do you think, excuse me…if you’ll pardon me, American presidents reward virtue? Do they choose their appointees from the basis of the virtues of the people appointed or on the basis of political clout? Is it really true that political self interest is nobler somehow than economic self-interest?"

Web based Auction Markets: Virginity for Tuition

The sex trade is supposedly the oldest profession in the world. Nonetheless, today’s technology is giving the trade a facelift.

The web space has introduced a semblance of an auction market to those willing to offer their services. Not only that, services for niche market-virgins.

Excerpts of the new trade from the Telegraph…

``A student who is auctioning her virginity to pay for a masters degree in Family and Marriage therapy has seen bidding hit £2.5million ($3.7m)…

``Last September, when her auction came to light, she had received bids up to £162,000 ($243,000) but since then interest in her has rocketed.”…

``She said: "I get some men who are obviously looking for a girlfriend but I try and make it clear that this is a one-night-only offer…

``"I think me and the person I do it with will both profit greatly from the deal."…

$3.7 million for a ONE NIGHT STAND with a virgin! Wow. You can bet on a new market trend to emerge from this. And maybe this may expand to include other niches, especially with today's financial crisis. As an old saw goes, necessity is the mother of innovation.

Will Previous Crisis Serve As Deserving Guidepost For Today’s Crisis?

At a social affair, last night, an acquaintance brought up the issue of how long this crisis could possibly last. [As usual this analyst stammered.]

Fortunately a study by Harvard’s Ken Rogoff and Carmen Reinhart over previous episodes of financial/banking, real estate crisis should give some clue. (Hat tip: John Maudlin)

Although it is best to be reminded that in reading history, things are always obvious after the fact. And that conditions that have led to the crisis may be “deterministic” to quote Nassim Taleb, whose conditions which have led to such may not be always be identified or observed.

So for those groping for an answer, here are some points or bullets from the Rogoff-Reinhart study (all quotes and charts from Rogoff-Reinhart study:

On the real estate bust:

-The cumulative decline in real housing prices from peak to trough averages 35.5 percent.

-The most severe real housing price declines were experienced by Finland, the Philippines, Colombia and Hong Kong. Their crashes were 50 to 60 percent, measured from peak to trough.

-The housing price decline experienced by the United States to date during the current episode (almost 28 percent according to the Case–Shiller index) is already more than twice that registered in the U.S. during the Great Depression

-Notably, the duration of housing price declines is quite long-lived, averaging roughly six years (with Japan 17 years!)

On the Effect to Equities:

-the equity price declines that accompany banking crises are far steeper than are housing price declines, if somewhat shorter lived.

-The average historical decline in equity prices is 55.9 percent, with the downturn phase of the cycle lasting 3.4 years

See below…On Unemployment:

-On average, unemployment rises for almost five years, with an increase in the unemployment rate of about 7 percentage points. While none of the postwar episodes rivals the rise in unemployment of over 20 percentage points experienced by the United States during the Great Depression, the employment consequences of financial crises are nevertheless strikingly large in many cases.

-when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. While there are well-known data issues in comparing unemployment rates across countries, the relatively poor performance in advanced countries suggests the possibility that greater (downward) wage flexibility in emerging markets may help cushion employment during periods of severe economic distress.

-The gaps in the social safety net in emerging market economies, when compared to industrial ones, presumably also make workers more anxious to avoid becoming unemployed.

On GDP:

-The average magnitude of the decline, at 9.3 percent, is stunning.

-post– World War II period, the declines in real GDP are smaller for advanced economies than for emerging market economies. A probable explanation for the more severe contractions in emerging market economies is that they are prone to abrupt reversals in the availability of foreign credit. When foreign capital comes to a “sudden stop,” to use the phrase coined by Guillermo Calvo, Alejandro Izquierdo, and Rudy Loo-Kung (2006), economic activity heads into a tailspin.

-Compared to unemployment, the cycle from peak to trough in GDP is much shorter, only two years.

-the recessions surrounding financial crises have to be considered unusually long compared to normal recessions that typically last less than a year.

On debt buildup

-same buildup in government debt has been a defining characteristic of the aftermath of banking crises for over a century. We look at percentage increase in debt, rather than debt-to-GDP, because sometimes steep output drops would complicate interpretation of debt–GDP ratios.

-the characteristic huge buildups in government debt are driven mainly by sharp falloffs in tax revenue and, in many cases, big surges in government spending to fight the recession.

-The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.

Their conclusion:

``An examination of the aftermath of severe financial crises shows deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

``How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime. Some central banks have already shown an aggressiveness to act that was notably absent in the 1930s, or in the latter-day Japanese experience. On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors. A few years back many people would have said that improvements in financial engineering had done much to tame the business cycle and limit the risk of financial contagion.

``Since the onset of the current crisis, asset prices have tumbled in the United States and elsewhere along the tracks lain down by historical precedent. The analysis of the post-crisis outcomes in this paper for unemployment, output and government debt provide sobering benchmark numbers for how the crisis will continue to unfold. Indeed, these historical comparisons were based on episodes that, with the notable exception of the Great Depression in the United States, were individual or regional in nature. The global nature of the crisis will make it far more difficult for many countries to grow their way out through higher exports, or to smooth the consumption effects through foreign borrowing. In such circumstances, the recent lull in sovereign defaults is likely to come to an end. As Reinhart and Rogoff (2008b) highlight, defaults in emerging market economies tend to rise sharply when many countries are simultaneously experiencing domestic banking crises.”

Our observations:

-present crisis in the US isn’t just about a real estate crisis but a combination of both real estate and banking crisis since the real estate industry depended on Wall Street to fuel its bubble. This risks extending the duration of the economic slump! The previous averaged about 6 years (Rogoff-Reinhart) where today the US housing bust is only 3 years old!

-the US centric crisis hasn’t been just about real estate bubble bust and bank recapitalization issues but also about falling tax revenues and state deficits and importantly household balance sheet impairments. So it is going to be difficult to make precise assessment using past data.

-for the Philippines today, the decline of 56% squares with “the average historical decline in equity prices is 55.9 percent”. But since we did not suffer from a banking crisis but got unduly affected by the chain process of global forcible selling, “the downturn phase of the cycle lasting 3.4 years” has got to be lower.

-Rogoff-Reinhart: “the declines in real GDP are smaller for advanced economies than for emerging market economies. A probable explanation for the more severe contractions in emerging market economies is that they are prone to abrupt reversals in the availability of foreign credit.”

Previous crisis lumped as one was either “regional or individual” as rightly noted by the authors. Today’s crisis is global (also rightly pointed out). But the important difference is where the crisis emanated from.

Although the apparent fallout dynamics identified by the Rogoff-Reinhart study had been present in today’s crisis even when the epicenter had been in the US, it is because present dynamics has yet been exhibiting the privilege of the US dollar as the world' currency reserve.

But this seems to be changing, for the new year, a news report says that China is offering its neighbors to trade directly in their currency,

from BBC, ``China has said it is to allow some trade with its neighbours to be settled with its currency, the yuan. The pilot scheme was announced in a package of measures designed to help exporters hit by the global downturn…Officials did not say when the trial scheme would start. When it does, the yuan could be used to settle trade between parts of eastern China (Guangdong and the Yangtze River delta) and the territories of Hong Kong and Macau, and between south-west China (Guangxi and Yunnan) and the Asean group of countries (Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam).”

In short, “abrupt reversals in the availability of foreign credit” could happen on a different context. As the common Wall Street precept says, ``Past performance may not guarantee future outcome."

-Very interesting commentary from Rogoff-Reinhart: ``The gaps in the social safety net in emerging market economies, when compared to industrial ones, presumably also make workers more anxious to avoid becoming unemployed.”

Could the welfare “mentality” of developed economies have contributed to the unemployment predicament, compared to “gap filled” or “less safety nets” in emerging markets? Or put differently, has free markets contributed to better employment recovery for EM during the past crisis?

Here we are reminded of Ludwig von Mises in Human Action, ``The policies advocated by the welfare school remove the incentive to saving on the part of private citizens. On the one hand, the measures directed toward a curtailment of big incomes and fortunes seriously reduce or destroy entirely the wealthier peoples power to save. On the other hand, the sums which people with moderate incomes previously contributed to capital accumulation are manipulated in such a way as to channel them into the lines of consumption.”

-Rogoff-Reinhart: “The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.”

We can see now why Mr. Rogoff had been calling for inflating the value of debts away (see Kenneth Rogoff: Inflate Our Debts Away!). He believes that bailout costs would have a “minor” impact on the economy going forward, but his conclusions were premised upon comparisons made during the past crisis when they had been “individual or regional” in nature, whereas today’s crisis is global.

Thus, it is a wonder just how valid his thesis will be.

Panics: Die of Exhaustion Or From Policy Overdose?

``Word to the wise - don't accept advice or analysis about this crisis from anyone who failed to anticipate it in the first place! The people warning about Depression now are the same reckless jackasses who told investors that stocks were cheap and “resilient” at the highs.”- John P. Hussman, Ph.D. Four Magic Words: "We Are Providing Capital"

Let me offer a non-sequitur argument: Because we could be destined for doom, we might as well bet on hope.

In other words, with so much of the prevailing gloom in the atmosphere this could, by in itself, possibly signify an end to the panic.

As Morgan Stanley’s Stephen Roach eloquently articulated in the International Herald Tribune (hightlight mine), ``The most important thing about financial panics is that they are all temporary. They either die of exhaustion or are overwhelmed by the heavy artillery of government policies.”

True enough, as we have always pointed out, doom or boom or market extremes have simply been accounted psychological phases of the market cycles.

Nevertheless, Mr. Roach uses the Professor Charles Kindleberger’s “revulsion stage” as a paragon for the possible panic endgame.

Professor Charles Kindleberger in Manias Panics, and Crashes A History of Financial Crisis identifies the phase as [p.15] ``Revulsion and discredit may go so far as to lead to panic (or as the Germans put it, Torschlusspanik, “door-shut-panic”) with people overcrowding to get through the door before it slams shut. The panic feeds on itself, as did speculation, until one or more of the three things happen: (1) prices fall so low that people are tempted to move back into less liquid assets: (2) trade is cut off by setting limits on price declines, shutting down exchanges or otherwise closing trading, or (3) a lender of last resort succeeds in convincing the market that money will be made available in sufficient volume to meet demand for cash.” (highlight mine)

While low prices and lender of last resort could likely be more pragmatic solutions, it is doubtful if the cutting of trades or closing exchanges will succeed in limiting the panic phase. As the recent examples of Indonesia and Russia manifested, temporary suspensions of bourse activities have not deterred the onslaught of a rampaging bear.

It would be more suitable for the markets to discover the price clearing levels required to set a floor than to applying stop gap solutions that only delays the imminent or worsens the scenario. Price controls rarely work especially over the long term and could lead to extreme volatility.

Nonetheless, with the successive coordinated barrage of heavy systemic stimulus by global central banks, possibly attempting to err on the side of a policy overkill, we might as well hope that 1) these efforts could somehow jumpstart parts of the global markets and or economies that have not been tainted by the US credit bubble dynamics or 2) that market levels could be low enough to attract distressed asset buyers which could provide the necessary support to the present levels.

While it likely true that the credit system in the US and parts of Europe have been severely impaired and will unlikely restore the Ponzi dynamics to its previous levels that has driven the massive buildup of such bubble, the most the US can afford is probably to buy enough time for the world economies to recover and pick up on its slack and hope that they can the recovery would be strong enough to lift the US out of the rut.

Divergences of Policy Approaches: Asia’s Market Oriented Response

One thing that has yet kept the world out of pangs of the 1930s global depression is that global economies have remained opened and that actions of policymakers have been constructively collaborative instead of protectionist.

Put differently, the world has been using most of its combined resources to deal with such a systemic problem. While such grand collaborative efforts may lead to the risks of huge inflation in the future, the scale of cooperation should likely diminish the menace of “deflationary meltdown”.

So while the US and Europe have closed ranks and concertedly used governments to assume the multifarious roles of “lenders of last resort”, “market makers of last resort”, “guarantors of last resort” or “investors of last resort” to shield its financial system from a downright collapse, Asia’s approach has been mostly “market-oriented”.

Some of the recent developments:

1) Taiwan removed foreign ownership restrictions or opened its doors to the global marketplace (Businessweek) encouraging overseas companies to list, aside from attracting potential foreign investors (particularly China’s resident investors) to participate in Taiwan’s financial markets.

2) Taiwan slashed estate and gift taxes from 50% to 10% (Taipei Times)

3) The Indian response: From the Economist ``On October 6th the Securities and Exchange Board of India removed its year-old restrictions on participatory notes (offshore derivative instruments that allow unregistered foreign investors to invest in Indian stockmarkets). The next day, external commercial borrowing rules were liberalised to include the mining, exploration and refining sectors in the definition of infrastructure. That raised the cap on overseas borrowing for companies in these sectors from US$50m to US$500m—although there may be little international money to borrow.” (highlight mine)

4) To cushion the effects of a global growth slowdown, China’s leaders are presently deliberating to allow its rural farmers to sell or trade state owned land rights and possibly also extending the tenure of land rights ownership from 30 to 70 years.

According to the New York Times, ``The new policy, which is being discussed this weekend by Communist Party leaders and could be announced within days, would be the biggest economic reform in many years and would mark another significant departure from the system of collective ownership and state control that China built after the 1949 revolution….Chinese leaders are alarmed by the prospect of a deep recession in leading export markets at a time when their own economy, after a long streak of double-digit growth, is slowing. Officials are eager to stoke new consumer activity at home, and one potentially enormous but barely tapped source of demand is the peasant population, which has been largely excluded from the raging growth in cities.”

So what could be the potential impact for such a major reforms to China’s rural population? See figure 4.Figure 4: Matthews Asia: China’s Rural and Urban Incomes

According to Matthews Asia, ``This reform is timely as a growing wealth disparity between China’s rich and poor is becoming a concern. China’s rural economy, despite representing over half of China’s population, has lagged behind urban economic development. The agriculture sector currently accounts for less than 12% of the nation’s GDP compared to 25% two decades ago. The top 10% of wealthy individuals command more than 40% of total private assets in the country. The impact of this reform is likely to benefit both the agricultural sector and rural areas by increasing agricultural investment and rural consumption. Enhanced rural standards of living should also help improve farm productivity and yields, important aspects for China to continue its self-sufficiency in grain production.” (highlight mine)

In other words, we shouldn’t underestimate the reforms undertaken by Asian governments out to achieve productivity advantages by tapping into market oriented policies while their western counterparts are presently burdened with restoring credit flows and in the future paying for the cost of such rescue missions.

Inflation As The Next Crisis?

So while the risks are real that the US banking sector could collapse and ripple to the world as global depression, the lessons from Professor Kindleberger shows that panics either exhaust itself to death or will likely get overwhelmed by an overdose of inflationary policies.

Basically all we have to watch for in the interim are the actions in the credit markets. So far we have seen some marginal signs of improvement, but not material enough to declare an outright recovery, see figure 5

Figure 5: Bloomberg: Overnight Libor (left), and TED spread (right)

Yes, markets almost always tend to overshoot, especially when driven to the extreme ends by psychology spasms, but ultimately credit flows are likely to determine the transitional shifts.

If credit markets do recover, market concerns will likely move from threats of a systemic meltdown brought about by “institutional or silent bank runs” to one of the economic impact emanating from the recent crisis.

Besides, the policymakers are likely to keep up with such aggressive pressures to reinflate the system and possibly engage the present crisis with a zero bound interest rate policy which basically adds more firepower to its various arsenals to combat deflation.

It isn’t that we agree to such today’s policy actions but it is what they have been doing and what they will probably do more under present operating conditions. This means that if they succeed in reinflating the system the next crisis would likely be oil at $200!

Figure 7: iTulip: Inflation Is The Menace

According to Eric Janzen of iTulip ``Since the international gold standard was abrogated by the US in 1971, ushering in the second era of floating exchange rates in 100 years – the last one ended badly as well – no deflation has occurred. Japan's experience with "deflation" would not show up on this graph because in no year since 1990 has deflation in Japan exceeded 2%.

“We continue to expect that the actions of central banks to halt deflation will, as usual, in the long run work too well.”

So hang on tight as the next few weeks will possibly determine if our doomsday emerges (and I thought they said that the scientific experiment of the Large Hardon Collider risks a true to life Armageddon) or if the impact from the inflationary overdrive of the collective powers of global central banks materializes.

The Origin of Money and Today's Mackarel and Animal Farm Currencies

Contrary to common perception money originated not from governments but from free markets,

According to Murray N. Rothbard in What Has Government Done to Our Money?, `` Now just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media--in almost all exchanges--and these are called money.”

What ideal place to demonstrate this than in the ultimate government controlled living place-Prison Facilities!

In the US, a Californian prison where the US dollar has been banned to circulate within its premises, inmates have elected by implicit virtue of the above dynamics as their alternative currency of choice-cans of Mackarels!

Wall Street Journal

This interesting article from Wall Street Journal (emphasis mine),

``When Larry Levine helped prepare divorce papers for a client a few years ago, he got paid in mackerel. Once the case ended, he says, "I had a stack of macks."

``Mr. Levine and his client were prisoners in California's Lompoc Federal Correctional Complex. Like other federal inmates around the country, they found a can of mackerel -- the "mack" in prison lingo -- was the standard currency.

``"It's the coin of the realm," says Mark Bailey, who paid Mr. Levine in fish. Mr. Bailey was serving a two-year tax-fraud sentence in connection with a chain of strip clubs he owned. Mr. Levine was serving a nine-year term for drug dealing. Mr. Levine says he used his macks to get his beard trimmed, his clothes pressed and his shoes shined by other prisoners. "A haircut is two macks," he says, as an expected tip for inmates who work in the prison barber shop.

``There's been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That's when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard.

``Prisoners need a proxy for the dollar because they're not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries. After the smokes disappeared, inmates turned to other items on the commissary menu to use as currency.”

Oh well, this is definitely a lot better than for society to utterly eschew government’s mandated legal tender similar to that in Zimbabwe where its 531 BILLION PERCENT hyperinflation (Voanews.com) rate has virtually ravaged or evaporated the purchasing power of its currency, enough for the people to reject it and find an alternative...

Courtesy of Zimbabwean

From “The Zimbabwean” Thomas Ncube, 58, who also lives in Dongamuzi, told IRIN he had exchanged all his goats and had nothing left to barter with. "The people who are selling maize are refusing cash, saying the Zimbabwean dollar loses value fast and they only exchange the grain with livestock, and most villagers have become poor from exchanging their livestock for grain." (highlight mine).

Welcome to the Barter economy!

Lesson: When governments take away or devalue money, people will always find an alternative.