Do Americans Buy Stuffs They Don’t Need?

One of the most outrageous obsessions by the mainstream is to substitute statistics for human action then apply political correctness when interpreting them.

This Wall Street Journal Blog should be an example (bold highlights mine)

As it turns out, quite a lot. A non-scientific study of Commerce Department data suggests that in February, U.S. consumers spent an annualized $1.2 trillion on non-essential stuff including pleasure boats, jewelry, booze, gambling and candy. That’s 11.2% of total consumer spending, up from 9.3% a decade earlier and only 4% in 1959, adjusted for inflation. In February, spending on non-essential stuff was up an inflation-adjusted 3.3% from a year earlier, compared to 2.4% for essential stuff such as food, housing and medicine.

To be sure, different people can have different ideas of what should be considered essential. Still, the estimate is probably low. It doesn’t, for example, account for the added cost of certain luxury items such as superfast cars and big houses.

Interestingly, people who spend more on luxuries have experienced less inflation. As of February, the weighted average price of non-essential goods and services was up only 0.2% from a year earlier and 82% from January 1959, according to the Commerce Department. By contrast, the cost of all consumer goods was up 1.6% from a year earlier and 520% from January 1959.

The sheer volume of non-essential spending offers fodder for various conclusions. For one, it could be seen as evidence of the triumph of modern capitalism in raising living standards. We enjoy so much leisure and consume so much extra stuff that even a deep depression wouldn’t – in aggregate — cut into the basics.

Alternately, it could be read as a sign that U.S. economic growth relies too heavily on stimulating demand for stuff people don’t really need, to the detriment of public goods such as health and education. By that logic, a consumption tax – like the value-added taxes common throughout Europe—could go a long way toward restoring balance.

It’s absurd to say that we buy stuff which we don’t need.

While the author does say “different people can have different ideas of what should be considered essential”, he seems confused on why people engage in trade at all.

Moreover, saying that Americans "buy stuffs they don’t need" translates to an ethical issue with political undertones: the author seems to suggest that Americans have wrong priorities or have distorted set of choices! Of course the implication is that only the government (and the author) knows what are the stuffs which people truly needs, thus his justification for a consumption tax! (Put up a strawman then knock them down!)

Although the author attempts to neutralize the political flavor of his article by adding an escape clause: that the stats signify as “evidence of the triumph of modern capitalism in raising living standards”.

People buy to express their demonstrated preference. Yet such preference gets screened from a set of given ordinal alternatives (e.g., 1st, 2nd, 3rd, etc..) from which the individual makes a choice or a decision. And that choice (buying) constitutes part of human action.

As Professor Ludwig von Mises explained, (bold highlights mine)

Action is an attempt to substitute a more satisfactory state of affairs for a less satisfactory one. We call such a willfully induced alteration an exchange. A less desirable condition is bartered for a more desirable. What gratifies less is abandoned in order to attain something that pleases more. That which is abandoned is called the price paid for the attainment of the end sought. The value of the price paid is called costs. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at.

If I buy beer (1^st order) at this moment at the cost of my other alternatives: a steak (2^nd order) or a chocolate (3^rd order), does my choice for beer represent stuff I don’t need?

The instance that I made a sacrifice (steak and chocolate) to make a choice (beer) makes my decision part of my act to fill a personal unease or a “need”.

It may not be your need, but it is mine. My actions reflect on my preference to solve my need.

The fact that beer is produced and sold implies that it is an economically valuable product (estimated at $325 billion industry for the world for 2008). Many people “needs” it and would pay (hard earned or otherwise) money for it.

The difference lies in the values ascribed to it by different consumers.

Some see beer as a way to socialize, or a way to get entertained or to get promoted or to close deals or as stress relief or a part of the ancillary rituals for other social activities or for many other reasons as health.

Some may not like beer at all!

The point is people consume or don’t consume beer for different reasons. As an economic good, beer is just part of the ordinal alternatives for people to choose from, aside from chocolate or steak or other goods or services.

Suggesting that beer isn’t a stuff we need, as a beer consumer, severely underappreciates the way we live as humans.

Abraham Maslow proposed that human needs come in the form of a pyramid. He breaks them down into 5, namely physiological, safety, social (love and belonging), esteem and self-actualization.

As the Wikipedia explains, (bold highlight mine)

Maslow's hierarchy of needs is often portrayed in the shape of a pyramid, with the largest and most fundamental levels of needs at the bottom, and the need for self-actualization at the top.

The most fundamental and basic four layers of the pyramid contain what Maslow called "deficiency needs" or "d-needs": esteem , friendship and love, security, and physical needs. With the exception of the most fundamental (physiological) needs, if these "deficiency needs" are not met, the body gives no physical indication but the individual feels anxious and tense. Maslow's theory suggests that the most basic level of needs must be met before the individual will strongly desire (or focus motivation upon) the secondary or higher level needs. Maslow also coined the term Metamotivation to describe the motivation of people who go beyond the scope of the basic needs and strive for constant betterment Metamotivated people are driven by B-needs (Being Needs), instead of deficiency needs (D-Needs).

From my example, my choice for a beer may not signify a physiological (basic need), yet they could reflect on my other deficiency needs (emotion or esteem or social needs).

In other words, B (being)-needs may not be D (deficiency)-needs but they still represent as human ‘intangible’ NEEDS.

Bottom line:

Statistics, which accounts for mainstream’s obsessions, fails to incorporate the intangible or non-material aspects of human nature.

It is, thus, misleading to make the impression that by reducing people’s activities to quantitative equations, or to dollar and cents, patterned after physical sciences, governments can manage society efficiently.

As the great Friedrich von Hayek admonished, in his Nobel lecture “the Pretence of Knowledge” (bold highlights mine)

While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

Lastly the notion that people don’t know of their priorities seems plain silly and downright sanctimonious.

Besides, governments compose of people too which makes the whole quantitative statistical exercise as self-contradictory.

Why “Buy Philippines” Will Make Filipinos Poorer

``Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.”-Murray N. Rothbard, Neo-Mercantilism

If there is anything in life that I am so appreciative of, it is to have acquired the opportunity to self-learn the ways of classical liberalism in order to avoid from getting duped by glib talking politicians and their academic cohorts that populate the mainstream.

That’s because the usual “do-goodism” that inhabits media, the primary source of information by the public, accounts for great sound bites and seemingly “feel good” causes unwittingly comes with nasty side effects unseen by the public.

In other words, promises of free lunches in a world of scarcity are not only oxymoronic, but also unrealistic.

In the words of the fabulous Frederic Bastiat[1], ``Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.”

Social ‘public spirit’ themes to enhance the supposed weal of society dominate the airwaves, especially amplified during political seasons, as aspiring politicians conjure up striking catchphrases and alluring slogans to attract votes.

And one political theme that recently emerged exhorts Overseas Foreign Workers (OFW) or today’s du jour “heroes” to BUY PHILIPPINES or buy Philippine made products.

The connection made is thoroughly simple: when OFWs, which are presumed as the sector responsible for “saving” the Philippine economy, buy Philippine made products, the ramifications would include more investments at home, which should result to more jobs and more prosperity. Nice huh?

We’d argue that this premise is arrantly fallacious.

No Man Is An Island

Perhaps many are familiar with the famous abridged John Donne aphorism of “No man is an island”. The fundamental significance of this phrase is that people depend on other people in order to survive.

So why do people depend on other people? The simplistic answer is that because we can NEVER be self sufficient. Therefore we need other people to provide us the things, goods or services. In economics, this is called as the division of labor. If I’m a shoemaker and would like to have fish for my meal, I’d have to go to Pedro, the fisherman, and offer to exchange my pair of shoes for his catch. The other term for the conduct of exchange arising out of the division of labor is simply called trade.

Once Pedro and I consummate the trade, our perceived needs for the moment would have been fulfilled. And thus, trade satisfies us. In other words, because no man is an island, trade, and not the state, is the essence of all societies. State depends on taxation which accrues trade.

And trade, in contrast to what politicians say, knows of no political boundaries. The more people are allowed to the trade the better off a society is. Remember the goal of trade is to achieve satisfaction from the angst of scarcity.

In places where such activities are politically restricted, trades are conducted underground via blackmarkets, or what is known as the “informal” economy. And in nations where trade are restricted, the common characteristics are large incidences of shortages, poverty, hunger or economic deprivation.

So how does this apply to OFWs and BUY Philippines?

If the goal of trade is to satisfy a need, then the nationality of the seller or provider should be among the least of the priorities.

Think of it, would it be practical for OFWs to buy Filipino products if the latter are priced very much dearly or are very much inferior in quality relative to the foreign competitors, simply for the sake of being Filipino?

The most likely is answer is no. Why? Because this defeats the objective of trade, which is to achieve satisfaction of a perceive need or want based on the pecking order of needs of people.

Some OFWs may indeed acquire goods or services out of altruism on some occasions. But similar to donations to charitable institutions, such socially accommodative actions can’t be treated as a staple, because the underlying incentive isn’t to get fed or be clothed but for esteem purposes.

In the hierarchy of people’s needs, according to Abraham Maslow[2], self actualization through identity and purpose are subordinate to physiological and safety needs.

Hence, the call for OFWs to buy Philippine goods simply means sacrificing basic fulfilment for the esteem needs of politicians is also tantamount to subsidizing incompetent or non-competitive ‘zombie’ Filipino suppliers.

In other words, OFWs will be unduly be rewarding local sectors that can’t compete to satisfy consumers (regardless of nationality) but only thrive from the appeal to emotions/nationalism.

Yet, this isn’t a recipe for progress, but a formula for political redistribution through coercive policies (which the Philippines did try in the 1950s).

In addition, charity as the priority for conducting trade is not only unsustainable; it is a fantasy, except in the chimera of ‘socialists’.

That’s because in reality, there is simply no free lunch.

Jollibee’s Success Secret: Serving Filipino Consumers

Buy Filipino is a misguided approach to prosperity. Satisfying the consumer is.

A fantastic example of this should be Jollibee Foods Corporation (JFC).

Jollibee is one of the largest publicly listed companies in the Philippines and is a member component of the elite benchmark of the largest companies in the country called as the Phisix in the Philippine Stock Exchange.

From its a humble entrepreneurial beginning in 1975 as a lowly ice cream parlor in 1975 until it was incorporated in 1978[3], JFC’s rise to prominence has been phenomenally rapid. The domestic company trumped all its foreign competitors, grew at nearly an exponential rate and now captures some 65%[4] of the domestic hamburger market.

JFC has now expanded beyond its traditional lines in the Philippines and is likewise expanding beyond its conventional market; the company has been acquiring Asian contemporaries!

In 2007, the company’s website says, JFC operates more than 1,600 stores in the Philippines and 9 other countries with 8 brands: Jollibee, Chowking, Greenwich, Red Ribbon, Yonghe King, Delifrance, Chun Shui Tang and it’s latest addition Manong Pepe[5].

And along with Jollibee’s business success comes with many recognition, such as the top Philippine company according to Wall Street Journal’s Asia 200 awards[6] (see Figure 1)

Figure 1: Wall Street Journal’s Asia 200 2009 vote

So what has been the secret formula of JFC’s success? Appeal to Nationalism?

Unfortunately not.

A Businessweek article in 1996[7] highlights the typical impression of Filipino consumers on Jollibee’s burgeoning business, ``It's a typical Sunday at the Jollibee fast-food restaurant in Manila's bustling Megamall: The tables are packed, kids are scurrying to and from the playland, and a giant orange-and-yellow bumblebee character is dancing for a birthday party of giggling toddlers. The children say they prefer the spicy-sweet flavors of the local chain's hamburgers and spaghetti over the more bland taste of the fare at McDonald's, whose nearby outlet is quiet. "The Filipino tongue is more accustomed to Jollibee," says 21-year-old student Dave Sevilla, who brought his 7-year-old nephew and 9-year-old cousin. "The burger is juicier." (bold underscore mine)

And here is what Jollibee’s website has to say[8] about their corporate strategy, ``THE WORLD IS GLOBAL, BUT ITS TASTES ARE LOCAL. People adapt foreign foods but change them to their tastes. This is natural. Taste preference along with those of aroma, texture, and presentation evolved over hundreds of years, influenced mainly by the kinds of plant and animal food that grow in their geography. Local preferences are hard to change.” (bold underscore mine, all caps theirs)

So we learn that the Filipino consumers have been warmly reciprocating the way Jollibee has been integrating its products to fit into the Filipinos’ palate and to the Filipino lifestyle.

As Ludwig von Mises wrote about the pre-eminence of consumers[9], ``The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm.” (bold highlights mine)

In short, Jollibee is simply being rewarded, through profits which partly serves to fuel the company’s expansion programs, which incidentally also contributes to the nation’s economic growth, in the service of the needs of the Filipino consumers.

Jollibee, hence, exemplifies the Mises model of a consumer oriented enterprise!

Importantly, Jollibee adds to social service by providing satisfaction through continuous improvements and innovations on their products and services to adapt to changing times, which is why Filipino consumers keep going back to them. JFC uses its spare funds to also engage in community services[10].

As you can see trade is not only mutual beneficial but allows for the company to engage in voluntary charity or philanthropic causes.

So in sharp contrast to the contemptuous insinuations of socialists, Jollibee does not ‘suck the money’ out of Filipino, because Filipinos are NOT unthinking individuals hardwired to mechanistically buy Jollibee products. They patronize JFC because they perceive direct benefit from it!

If there is anything that people are forced to pay for, it is the many lousy, redundant and unneeded services provided for by the state, which incidentally most of the services the marketplace can actually provide for.

Yet many of these so-called public goods services cause structural inefficiencies, imbalances in the political economy and immeasurably increase the costs of doing business. And at best, the supposed benefits are mostly indirect!

The Failure of Protectionism: Import Substitution Policies

What politicians tell the public are mostly the silly melodramatic things people like to hear.

Because these politicians live in a world of free lunches, where taxpayers pay for their boondoggles, they hardly ever speak of the alternatives or the hidden costs embedded within their noble goals. They are like the Satan’s snake offering Eve (yes us) the forbidden apple in the Garden of Eden.

The next thing these self-righteous propagandists will do is to enact legislations that would force the public to buy “local”.

And a possible mixture of policies would be in the form of higher import tariffs, selective financing or access to credit (state loans), tax breaks, foreign exchange allocations that are directed to political “organic” ends and other indirect ways to limit imports (licensing, monopolies etc..), all of which may redound to the closing of doors to trade, from which the repercussions would be economically adversarial.

And by restricting trade the lists of evils are innumerable:

-access to more goods will be limited, i.e. substandard quality and more expensive,

-rising cost of available goods,

-limitations of capital goods and capital flows

-investment will be LIMITED and NOT ENHANCED as investment opportunities will be politically distributed-politically connected will be rewarded,

-the lack of investment would mean higher unemployment and greater security risks,

-more dependence on government means higher fiscal costs which leads higher taxes or more inflation and the overvaluation of the domestic currency,

-less competitiveness,

-more economic inefficiencies,

-more bureaucratic corruption,

-dearth of innovation,

-declining productivity and etc...

As said earlier, the Philippines tried quasi “buy Philippines” policies via the Import Substitution Industrialization (ISI), aimed to promoted domestic industries in the 1950s.

According to Philip Gerson from an IMF working paper[11], (bold highlights mine)

``For many years, the Philippines pursued an industrial policy that encouraged import substitution rather than promoting exports. Until tariff reforms were introduced in 1991, trade policies heavily penalized the primary and agricultural sectors and benefited the manufacturing sector. In addition, the overvaluation of the Philippine peso during several periods between the 1950s and the 1980s contributed to declines in the prices of exports in peso terms and diverted resources away from agriculture and toward import-substituting manufacturing. In addition, incomes in the agricultural sector were depressed by heavy regulation. Beginning in the 1970s, price controls were imposed on rice and other products, and the importation of wheat and soybeans was monopolized. The government introduced controls on the production, marketing, and processing of coconuts and created a price stabilization fund, while fertilizer and pesticide imports were controlled through licensing requirements.

``Overvaluation of the peso, tariff policies, and heavy government regulation discouraged investment in agriculture, with a disastrous effect on productivity. For example, during 1982–85, productivity in the coconut sector—which had long been the country's most important agricultural industry in terms of export earnings and employment—averaged 1.0 metric ton per hectare, exactly the same as during 1962–66. Low agricultural productivity remains a drag on growth, partly because some agricultural tariffs have been maintained at the maximum level permitted by World Trade Organization (WTO) agreements, even though tariffs were dramatically lowered in almost all other sectors during the early and mid-1990s. While real GDP growth has averaged 5 percent annually since 1994, growth in the agriculture, fishing, and forestry sectors has averaged less than half this rate.”

As one would note, errant policies begot another. Interventionism led to more interventionism with even more disastrous results.

The redistribution of economic benefits from to one sector at the expense of the rest led to the massive imbalances cited above (high costs, lost productivity etc...), which prompted for price controls. Yet, in spite of the government support, the local manufacturing sector did not evolve to become globally competitive enterprises. That’s because they had been shielded from competition and therefore lacked the incentives of dynamism due to political cover or dependence.

The worst impact was not only to hurt the Filipino consumers, but the Philippine economy overall suffered from a lag in economic development.

And as for the beneficiaries, according to Joe Studwell[12], In the short-term ISI produced respectable growth rates in the region. But it was all too easily manipulated by a tycoon class that was raised on trading. Every effort to plan industrial development was another arbitrage opportunity for the politically well-connected. Usually, the procedure was for a tycoon to obtain the necessary license, bring in a foreign partner to provide a manufacturing process that was reduced to kit assembly (with most parts and components imported), and then to hide behind tariffs barriers selling goods that were unsaleable internationally. The results was profits, but minimal progress in constructing a sustainable domestic manufacturing base.”

As you can see, policy advocates of Buy Philippines are not only exposed for being “short term oriented”, but could be either untrue to their constituents, having ulterior motives to promote some sectors at the expense of the rest of society, by manipulating the gullible or are plain economically uninformed, refusing to learn from both local and international experiences.

The Racist Risks From Buy Philippines

While contemporary politicians and advocates of “Buy Philippines” do not specifically dwell on racism, group labeling can also lead to unforeseen catastrophic consequences. That’s because an escalation of political zealotry can lead to the risks of tagging patrons of non-Filipino goods as “anti-Filipino”.

In the realm of politics, black propaganda is a conventional instrument for promoting political goals.

As legendary investor Doug Casey in an interview says[13], ``Groupthink is not a problem of acknowledging the existence of groups, including human groups; it's treating individuals as though they were the group, or as though they necessarily hold all the traits that define the group.” (bold emphasis added)

In short, in groupthink, role of individualism is seen non-existent, a reductio ad absurdum.

In groupthink, political zealots don’t see that non-Filipino enterprises can be mostly foreign franchises owned by Filipinos or foreign companies with Filipino partners. Where implied boycotts or policies imposed tend not only to hurt these local investors, but also workers employed in these firms aside from the local enterprises supplying these entities, the foregone tax revenues and the lost technology and capital transfers from the politicization and polarization of trade.

In groupthink, political fanatics forget that consumers have the RIGHT to choose and spend on what they think should fulfill them. Buyers are simply voters who vote with their wallets based on perceived individual interests and not in the collective sense. The stakeholdings for consumers are direct unlike in elections where individual stakes are more perceived than real (sorry to be a spoiler, but your vote won’t affect the outcome of elections- 1% of voting population is about 500,000 votes- and neither will your vote affect the policies of the next set of next leaders).

In groupthink, the politically blind see only one direction from their choice of action. They fail to see that if I slap you, then you are mostly likely to respond with similar or more drastic actions. Xenophobic policies incite political brinkmanship and antagonism. And to paraphrase Frederic Bastiat, “when goods don’t cross borders, then armies will”

Therefore in groupthink, rational thinking is jettisoned for sensationalism. What people won’t rationally do alone they will do based on the comfort of crowds, e.g. Fraternity melees.

What lessons can we glean from “groupthink” policies?

Our neighbour Malaysia is no stranger to groupthink policies.

Malaysia in 1971, as a result of Sino-Malay racist riots which culminated in the May 13^th incident which resulted to hundreds if not thousands of casualties, prompted for her government to adopt “aggressive affirmative action policies, such as the New Economic Policy (NEP)[14]” The NEP was aimed at achieving a 30% share of equity in the GDP for the ethnic Bumpitera class.

The new policies empowered ethnic Malays (known as Bumiputras, literally “sons of the soil”) which accounted for some 60 percent of the population, with economic opportunities dominated by ethnic Chinese. This meant that “Bumiputras have been given, among other privileges, priority for government contracts, increased access to capital, opportunities to buy assets that are privatized, and other subsidies.[15]”

The result was according to Wikipedia.org[16], ``These policies have succeeded in creating a significant urban Malay middle class. They have been less effective in eradicating poverty among rural communities. Some analysts have noted a backlash of resentment from excluded groups, in particular the sizable Indigenous Non-Muslim Malays Orang Asli, Chinese and Indian Malaysian minorities.”

Yet according to Joe Studwell[17], After twenty year term envisaged at the outset of the NEP expired in 1990, the Malay share of corporate equity in Malaysia had increased from almost nothing to around one-fifth, but the Chinese share had also doubled from one-fifth to two-fifths. This reflected the fact that the tycoon fraternity was doing better than ever; the NEP had not ended the deals between the ethnically separate political and economic elites.

Wikipedia.org also quotes former Prime Minister Tun Dr. Mahathir Mohammad criticism on the extreme reliance of Bumiputras on their privileges:

"We have tried to tell them if you depend on subsidies, you are going to be very weak. But they don’t seem to understand. We tell them if you use crutches, you will not be able to stand up. Throw away the crutches, stand up straight because you still have the capacity.”

In other words, Bumpitera policies failed in its objective to achieve a more balanced distribution as intended in spite of the privileges due to the implications from dependency.

Figure 2: Heritage Foundation: Economic Freedom Malaysia and The Philippines

Nevertheless Malaysia’s recent successes have been more about her willingness to embrace economic freedom (left window) relative to the Philippines (right window) as measured by the Heritage Foundation[18], which apparently has overshadowed the setbacks from NEP.

In spite of the Asian crisis which led to lesser economic freedom for both economies, Malaysia has been showing vital recovery (part of this by dismantling the vestiges of the Bumpitera policies) while the Philippines remains nearly stagnant.

To add, Malaysia in 2009 ranked 59^th relative to the Philippines at 109^th in the rankings of economic freedom, and the former has been traditionally “freer” relative to the world average even prior to the 1997 Asian crisis.

Importantly, I’d like to point out that the fundamental difference in the nationalist policies of Malaysia’s Bumiputera with that of the genre of “Buy Local” policies is that Malaysia dealt with policies concerning intra-racist distribution rather than xenophobia.

And of course Malaysia is the “benign” example of intra-racism nationalist policies relative to extreme counterparts as Zimbabwe, South Africa or Nazi Germany or even the 1994 Rwanda genocide.

As for xenophobic trade policies, the best example in the extreme case would be the US Smoot-Hawley Tariffs act[19], that resulted to severely worsened the recession in the 1930s which morphed to a decade long Great Depression.

Hence it would be sheer insanity or foolishness to believe or preach that implied antagonism as an economic or trade policy would result to prosperity knowing that “no man is an island”. In math, the operation required to have more is addition and not subtraction. Beggar thy neighbour policies, as protectionism or racism, epitomizes subtraction.

More Political Nonsense: Invest Philippines and Teach Locals To Save

The same logic should apply to investing.

People should invest based on the merits of the perceived risk-reward tradeoffs as seen through the profit and loss guidance system and not because of the folly of being a Filipino who must “Invest Philippines”.

As Murray Rothbard explained[20], Every entrepreneur, therefore, invests in a process because he expects to make a profit, i.e., because he believes that the mar­ket has underpriced and undercapitalized the factors in relation to their future rents. If his belief is justified, he makes a profit. If his belief is unjustified, and the market, for example, has really overpriced the factors, he will suffer losses.

Any OFW or anyone who plunks their money based on nationalism deserves to lose their equity as this would be reckless and devoid of market or even mundane realities.

Might as well just donate that money to the Philippine government to enhance one’s self esteem (ensure to have photo op with the a key official!) or contribute this money to private charity institutions compared to getting suckered by the political-economic class who would remorselessly use people’s capital to secure economic rents.

Nevertheless it is also wantonly misplaced to even suggest that locals ought to be taught by their OFW principals on how to save.

Figure 3: Asian Development Bank: Philippine Savings and Investment

I don’t know why many people come to even accept this poppycock as a grain of truth from a political moralizer.

The implication is that recipients of remittances are a bunch of free spending nitwits! What bravado! If this is not an insult to the intelligence of the Filipino, I don’t know what this is.

Far from reality, the problem isn’t about savings, even if the Philippines have one of the lowest savings rate in Asia.

This according to the Asian Development Bank[21], (bold highlights mine)

``Higher private investment, too, would play a more significant role in upgrading infrastructure and, more generally, the productive capacity of the economy. Saving is not the main constraint, since national saving has steadily risen, bolstered by remittances.

“Rather, sluggish private investment reflects infrastructure deficiencies, particularly in power and transport, and weaknesses in governance and the policy climate. According to the World Economic Forum, the global competitiveness ranking of the Philippines in 2009/10 fell to 87 (out of 133 countries) from 71 (out of 134) in 2008/09, putting it below India, Indonesia, and Viet Nam, among others. The report cited corruption, inefficient bureaucracy, policy instability, and inadequate infrastructure as the main reasons for the low ranking.”

As we earlier said investments is a function of returns. The ‘sluggishness’ of investment means that the returns have not been attractive enough to convince local or international capitalists to fill in the infrastructure deficiencies or that returns have not met what we call as the “hurdle rate”-minimum acceptable returns. Not perhaps unless you are associated with the political class.

And the reasons cited by the World Economic Forum for the paucity of competitiveness constitute as symptoms and NOT the source of the problems. In short, ADB’s congenial words are euphemisms for collective government failure.

The fundamental shortcoming of the Philippines is our overdependence on politicians and politics for economic development, much like Waiting for Godot.

We have been blighted by the lack of economic freedom, bloated bureaucracy, high taxes, the onus of regulatory compliance, the lack of respect for property rights, deficiency in contract enforcement, a maze of complex and incomprehensible laws, politicization of industries, protectionist laws or legal barriers to more competition, politicization of the justice and legal system and public institutions, regulatory capture by the political-economic class, regulatory arbitrage (e.g. legalized smuggling) based on political connections, state instituted cartels and monopolies and many other political obstacles (permits, labor regulation, starting or closing business, registering property and etc.).

All these has translated to high transactions costs, high input and overhead costs (including corruption costs-estimated at $ 3 billion per year[22]), which all add up to a high cost of doing business-the Philippines is ranked 144^th out of 183 countries in World Bank’s Doing Business 2010[23].

And worst we have a public caught ambling between hopes of immediate deliverance from the delusion of an omniscient and virtuous state with that of grinding reality based on the limitations of state authorities with regards to the knowledge over the individual, human relations, incentives guiding people’s actions, as well as their own personal motivations (as officials are human beings too!), and importantly, the supremacy of basic economic laws over politics.

Although we have many aspiring political leaders rambling about political correctness which are all majestically flawed in logic, they only make good electoral themes, hopefully not for real policies.

At the end of the day, to paraphrase US President Abraham Lincoln, “Politicians can fool almost all the people some of the time, and some of the people all the time, but economic reality ensures that you cannot fool all the people all the time."

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[1] Bastiat, Frederic That Which is Seen, and That Which is Not Seen, 1850

[2] Wikipedia.org, Maslow’s Hierarchy Of Needs

[3] Jollibee Food Corporation, About us-milestone history

[4] Hub Pages, Jollibee Vs McDonalds - Filipino burger kings fight against global giant

[5] Jollibee Food Corporation, Investor Relations

[6] Wall Street Journal, Jollibee Captures Top Spot in Philippines

[7] Businessweek, HAPPY MEALS FOR A McDONALD'S RIVAL (int'l edition) July 1996

[8] Jollibee Food Corporation, Investor Relations

[9] Ludwig von Mises, The Sovereignty of the Consumers

[10] Jollibee Foods Corporation, About us, Community

[11] Gerson, Philip Poverty and Economic Policy in the Philippines, IMF Finance and Development

[12] Studwell, Joe, Asian Godfathers Money and Power in Hong Kong and Southeast Asia p.37

[13] Casey Doug, Doug Casey on Race, lewrockwell.com

[14] Wikipedia.org, May 13 incident

[15] Johnson, Simon; Kochhar, Kalpana; Mitton, Todd and Tamirisa, Natalia, Malaysian Capital Controls: Macroeconomics and Institutions, IMF Working Paper

[16] Wikipedia.org, Bumiputera (Malaysia)

[17] Studwell, Joe; Ibid, p.27

[18] Heritage Foundation, 2010 Index of Economic Freedom

[19] US State Department, Smoot-Hawley Tariff

“The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports...

“The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the "beggar-thy-neighbor" policies (policies designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.

[20] Rothbard, Murray N. Man, Economy and the State Chapter 8—Production: Entrepreneurship and Change

[21] Asian Development Bank, Outlook 2010 p.239

[22] Spero news, Philippines: Corruption and waste in Philippines election

[23] World Bank, Reforming Through Difficult Times, Doing Business 2010

5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects

``The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.”- Christopher Wood, Is the U.S. Economy Turning Japanese?

In this issue:

5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects

The Cost of Self Esteem

5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects

1. Reflation Trade Has Been A Crowded Trade

2. No Trend Goes In A Straight Line

3. Markets Have Been Liquidity Driven

4. Tightening Trial Balloons Responsible For Recent Shakeup

5. Nothing But A Head Fake Signaling

In a recent commentary marketing guru Seth Godin asked ‘Why do people celebrate Halloween?’

His answer, ``Because everyone else does….Most of what we believe is not a result of direct experience (ever seen an electron?) but is rather part of our collection of truth because everyone (or at least the people we respect) around us seems to believe it as well.” (bold highlights mine)

Let me add, for many, there is that need to be seen as conforming to traditions (social status), aside from the need to use such opportunities for networking.

Mr. Godin concludes that “social constructs” drive people to behave in traditional ways. In behavioral finance or economics, such traditionalism represents as the “comfort of the crowds” or the Bandwagon Effect or the Herding instinct.

In other words, it isn’t much about rationality vis-à-vis irrationality or evidence against theory but social impulses predicated on assumed experiences that motivates people’s actions to observe traditions.

The Cost of Self Esteem

In the marketplace, mainstream behavior represents the same dynamics-traditionalism, where the underlying assumption is that the consensus mindset applies as the self-evident truth, regardless of proofs.

For instance, interventionists or inflationists or the left predominantly use industrial era metrics to justify government interventionism in a world evolving around the “information age” whose platform is principally structured upon the twin forces of globalization and competition inspired technological revolution.

By postulating that today’s economic landscape as dissimilar compared with the configurations of the past, they argue that markets have been failing and thereby justify more intervention by the government via inflation (fiscal deficits, centralization, price controls, devaluation and so forth…) or increased regulation.

Moreover, the same line of thinking pervades the mainstream mindset when traditionalist fundamental models appear to be ‘foisted upon’ the public in the hypothesis that markets have been operating under “normal” or basic law of scarcity conditions, when the reality is that governments have been the markets!

For instance, some has sternly argued that can’t consumer price inflation can’t occur when unemployment is high. Yet, Iceland seems to be a real life example debunking such unrealistic model [see Iceland's Devaluation Toll: McDonald's].

In other words, the conventional approach have been to read and interpret the market or the global economy as operating under assumed models with historically similar dynamics, when the reality is ‘this time is different’ or that we are operating under uncharted territory.

Mr. Doug Noland in his Credit Bubble Bulletin hits the nail on the head in arguing that today’s economic environment is starkly different from any previous conditions we have ever seen, ``the unfolding reflation will be altogether different than previous reflations. The old were primarily driven by Fed-induced expansions of U.S. mortgage finance and Wall Street Credit. Our mortgage industry, housing and securitization markets, and Bubble economy were at the epicenter of global reflationary dynamics. The new reflation is fueled by synchronized fiscal and monetary stimulus across the globe. China, Asia and the emerging markets/economies have supplanted the U.S. at the epicenter. U.S. housing is completely out of the mix. Those fixated on old reflationary dynamics look today at tepid U.S. housing markets, mortgage loan growth, consumer spending, and employment trends and see ongoing deflationary pressures. The Fed is wedded to the old and is positioned poorly to respond to new reflationary dynamics. A stable dollar used to work to restrain global finance – hence global inflationary forces. The breakdown in the dollar’s stabilizing role has unleashed altered inflationary dynamics – forces that the Federal Reserve disregards.” (bold emphasis mine)

So why is it difficult to change peoples’ thinking even when presented by strong evidences?

Based on social constructs, Professor Arnold Kling of EconoLog argues that change comes at the cost of “acknowledging a loss of status” or “loss of group identity”.

This implies that self esteem derived from social linkages account for as one of the basic human needs, which can be seen in the order of values as framed by Maslow’s hierarchy of needs (see figure 1)

Figure 1: Wikipedia.org: Maslow’s Hierarchy Of Needs

According to Wikipedia.org ``Maslow's hierarchy of needs is predetermined in order of importance. It is often depicted as a pyramid consisting of five levels: the lowest level is associated with physiological needs, while the uppermost level is associated with self-actualization needs, particularly those related to identity and purpose.”

In short, one of the major costs or barrier or resistance to change dynamics of changing people’s thinking is self esteem. Professor Kling suggests, ``On political issues, I think that it is harder to change the mind of someone who is highly educated than someone who is not. The highly-educated person is more likely to have his sense of status and identity tied up in his political beliefs. He is more likely to have a made a larger investment in finding facts and theories that confirm his beliefs.”

This applies not only to politics but likewise to other aspects such as economic or social dimensions.

So what has this got to do with today’s market actions or more particularly today’s market slump?

A whole lot.

The “desperately seeking normal” camp or those “fixated on old reflationary dynamics” as distinguished by analyst Doug Noland, has interpreted the recent plunge in global markets as a semblance of vindication of the “ongoing deflationary pressures”.

Where they have been mostly wrong throughout the recent episode, fleeting market signals that appear to validate their supposition may otherwise be construed as “even a broken clock is right twice a day”.

5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects

We see five factors why today’s market slump isn’t the scenario from which the desperately seeking normal camp expects.

1. Reflation Trade Has Been A Crowded Trade

There is a limit on how much a rubber band’s elasticity can be stretched before it snaps or the breakage of the so called “cross links”. The degree of elasticity depends on the basic dimensions and the quality composition of the rubber band.

Applied to the markets, there is also a limit on how markets can be manipulated or a maximum elasticity on how markets can accommodate extreme sentiment. This applies even across varying time dimensions, which means that even as fundamental imbalances of inflation are being built globally over the long term, strains from one sided or popular trades can be vented to reflect on an interim “breakage of cross links” or snap backs. Hence, long term or secular trends will always be spliced with intermittent countertrends.

In the context of the US dollar Index, which have been the foundation of today’s reflation dynamic, the recent rebound amidst the hefty decline in global markets epitomizes the interim crowded traded snap back (see figure 2).

Figure 2: US dollar Commitment of Traders and US dollar Index

The chart from futures.tradingcharts.com demonstrates on the crowded trade phenomenon where non-commercial positions (banks, hedge funds, or large speculators) have overwhelmingly shorted the US dollar, as shown by the blue vertical lines. Commercial positions (red lines) are the end users (as importers or exporters) who apply currency hedges.

In the most recent past, each time US dollar short contracts reached the -19,200 level, the US dollar “recoiled” (June and August). Today, large speculator short contracts have vastly broken below said levels. And this signifies the crowded trade.

Alternatively this means that as the US dollar rebounded, carry trades based on the US dollar may have all been closed which oppositely results to the steep drop in so-called risks assets.

2. No Trend Goes In A Straight Line

When we say long term or secular trends will always be spliced with intermittent countertrends it simply means that markets don’t move in a linear fashion.

In other words, there is a distinction between secular trends and countertrends or a difference between the short-term and the long term.

Confusing one for the other could risk a disastrous portfolio.

Today’s massive asset speculations have resulted to overextended markets as in the case of the US (see figure 3)

Figure 3: Chartoftheday: Extraordinary Bear Market Rally

Chartoftheday.com sees an exceptional episode in today market action by the Dow Jones Industrials from whose chart ``illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As today's chart illustrates, the duration and magnitude of the current Dow rally (hollow blue dot labeled you are here) is greater than any that occurred during the 1929-1932 bear market.”

It is quite obvious that the referenced site is biased towards the “old reflation model” with their view predicated on a bear market rally, and perchance, expects the US markets as in a path towards the Great Depression levels.

Unfortunately, using the basic metrics of the monetary standards alone, where the Great Depression was anchored to gold while today operates on a pure paper ‘US dollar’ standard, comparing the Great Depression with today would fundamentally be immaterial.

Nevertheless today’s significant correction amidst the vastly overstretched or overbought market denotes of a “normal” corrective phase of market dynamics.

While we haven’t bullish with the US markets, we can’t also be equally bearish for the simple reason that we see the US government as supporting their asset markets as a priority over the other areas of concern. As 2008 meltdown has shown, the survivability of the US dollar standard depends on the Federal Reserve’s key agents, the US banking system.

This is a fundamental variable that can’t seem to be comprehended by the consensus.

3. Markets Have Been Liquidity Driven

As earlier noted, another outstanding fallacy utilized by the old reflation model or desperately seeking normal camp is to extrapolate conditions of the yesteryears through traditional metrics to project a preferred or biased scenario.

For instance we noted that the humongous profits reaped by ‘Too Big To Fail banks’ have been fundamentally derived from trading [as previously discussed in What Global Financial Markets Seem To Be Telling Us]

This seems to have confounded mainstream analysts like MSN’s Jim Jubak who recently wrote, ``What's really disturbing to me, however, is that the model is relatively new, even at Goldman Sachs, and current financial policy is pushing Goldman and JPMorgan Chase to even more extreme versions of the "bank as trader" model.” (bold emphasis mine)

But of course, the “bank as trader” represents as the du jour model.

That’s because the only significant alternative way to rehabilitate the US banking system’s balance sheet is to profit from trading. The industry has been hobbled by balance sheet impairments from the recent bubble bust and this has reduced their incentives to engage in the traditional model of lending.

And the only way to consistently profit from trading is to have an environment that will be conducive to this. And the only way to attain this is to create it. Hence, the US government has engaged in a decisive, massive, monumental and unprecedented scale of operations. The US government, according to Bloomberg, ``has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg. That’s a 9.4 percent decline since March 31, when Bloomberg last calculated the total at $12.8 trillion.” (bold highlight mine)

And this is why too the world appears to likewise adopt a seemingly complementary set of policies too.

This refusal to acknowledge the massive influence of government in today’s market system, results to this deep confusion between conventional models and evolving market realities.

Yet the ‘Bank As Trader’ model has been underpinned by the following sequence:

1. Taxpayers provide the Too Big To Fail banks with liquidity, loans, guarantees and equity.

2. Financial conditions has been stage managed by the US Federal Reserve via zero interest rate, quantitative easing, expansion of loan books of Fannie Mae, Freddie Mac and the FHLB, and through various programs where the US government acts as market maker (such as Term Discount Window Program, Term Auction Facility, Primary Dealer Credit Facility, Transitional Credit Extensions, Term Securities Lending Facility, ABCP Money Market Fund Liquidity Facility, Commercial Paper Funding Facility, Money Market Investing Funding Facility, Term Asset-Backed Securities Loan Facility, and Term Securities Lending Facility Options Program.)

3. Investment banks, hence, profit immensely from the spread generated by these manipulated markets.

4. The resultant handsome profits generated from these arbitrage opportunities prompts companies to deploy huge employee bonuses which prompts for an uproar from politicians and media over the ‘evils of greed’.

Incidentally, this brouhaha over greed is obviously a myopic distraction in the sense that pay and profits simply signify as symptoms of the main disease.

The underlying fundamental malaise is that the ‘bank as trader model’ has been a product of the collusion between the banking system and the US government to inflate the economy to the benefit of the elite bankers!

Nevertheless, the ‘Bank As Trader Model’ appear to synthesize with the overall the fundamental strategy employed by the US Federal Reserve to revitalize its banking system.

How?

1. By manipulating the mortgage markets and US treasury markets with the explicit goal of lowering interest rates, in order to ease the pressures on property values and to mitigate the losses in the balance sheets of the banking system,

2. By working to steepen the yield curve, which allows for conducive and favorable trading spreads for banks to profit and to enhance maturity transformation aimed at bolstering lending, and

3. By providing the implicit guarantees on ‘Too Big To Fail’ banks or financial institutions, this essentially encourages the revival of the ‘animal spirits’ by fueling a run in the stock markets. As we have noted in Investment Is Now A Gamble On Politics, 5 financial stocks otherwise known as the Phoenix stocks accounted for most of the trading volume last September.

In short, the recovery of the US banking and financial system has basically been entirely dependent on government actions via inflation.

One cannot simply read today’s markets without addressing the policy recourse or anticipating the prospective actions of the US government.

Figure 4: Liquidity Prompted Markets Equals Highly Correlated Trade

And the impact to the global marketplace has been the same dynamics: a high correlation of market activities.

The inverse correlation of US dollar vis-à-vis ‘risk’ asset markets (commodities and stocks) seems like a déjà vu. This should be music to the ears of the ‘desperately looking for normal’ camp.

However, this isn’t about traditional fundamental model, but about liquidity.

A rising US dollar signifies global liquidity contraction, as leverage in parts of the global financial system could have forcibly been unwinded. Moreover a spike in the VIX or volatility sentiment appears to be chiming with the underlying theme.

In addition, given the synchronous market actions brought about by a seeming reversal in liquidity dynamics, then the impact should be reflected on Asia over the coming sessions due to the recent strong correlation (Figure 5)

Figure 5: Money Week Asia: High Correlation Liquidity Driven Trade

According to Chris Sholto Heaton of Money Week Asia, ``the markets are generally highly correlated in terms of direction, with an R-squared value of 0.94 (the maximum is one, implying perfect correlation). In short, when Wall Street rises, Asia rises; and when Wall Street falls, Asia falls.”

In other words, Asian Markets may indeed fall from a US dollar rally over the interim. But this should be a short-term countertrend or a buying opportunity more than a secular trend as liquidity dynamics favor Asia and emerging markets/

4. Tightening Trial Balloons Responsible For Recent Shakeup

High profile and prolific investment strategist of CLSA, Mr. Christopher Woods in a recent opinion column at the Wall Street Journal basically echoed my observation, Mr. Woods wrote, ``The reality of an increasingly command-driven economy in America means that government policy is likely to become the key determinant of where investors should place their money.”

If the recent hyperactivity of the markets had been based on government policy to reflate the system, then the easiest explanation should be to attribute the recent correction as a reversal of the liquidity flows.

However, what drives such motions? Could it be that monetary inflation hasn’t kept up with present price levels? Or has present price levels been too high for monetary inflation to support?

Or could it be that governments have suddenly rediscovered sound banking, where signs of bubbles may have prompted for active strategies to ‘exit’ from the today’s policy induced liquidity environment?

Aside from Israel and Australia, which had been the early birds in raising interest rates, Brazil followed suit with capital controls to stem foreign inflows, a week earlier.

Late this week, we find an eerie coincidence of central banks in a tightening mode.

Norway was the first European country to raise interest rates Friday, while India ordered its banks to keep more of its cash funds in government bonds, last Thursday.

In addition, four of the world’s biggest central banks signaled the end or the near end of their Quantitative Easing programs.

On Friday, the Bank of Japan announced that ``it will stop buying corporate debt at the end of the year, as central banks around the world phase out emergency measures taken at the height of the financial crisis” (Bloomberg).

Also last Friday, the US Federal announced that it has ``completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs” (Bloomberg).

In addition, likewise on Friday, a former official of the Bank of England announced a prospective downscaling of their own Quantitative Easing program, ``Former Bank of England policy maker Charles Goodhart said the bank may scale back or pause its bond- purchase program next week as officials around the world start to pull back stimulus for their economies.” (Bloomberg).

The European Central Bank wouldn’t be left behind, again on Friday, ``European Central Bank council member Axel Weber signaled the bank may start to withdraw its emergency stimulus measures next year by scaling back its “very long- term” loans to banks.” (Bloomberg)

Articles like this also published last Friday (Financial Times) exacerbated on the uncertainty brought about by the changes in the direction in global central bank policies, ``As the Federal Reserve’s programme of buying mortgage debt edges towards $1,000bn this week, investors are starting to worry about what happens once the central bank starts to slow down and exit from this key plank of its monetary easing policy.”

Of course, Friday had been catastrophic for global equity and commodity markets. And perhaps, the ensuing selling pressure from these agitations may likely spillover to the coming sessions.

However, given the latest round of triumphalism from being able to pivot or manipulate markets higher enough to project an economic recovery, global governments seem to increasingly exude confidence over their actions, so as to embark on an audacious experiment to conjointly orchestrate an apparent end to the quantitative easing programs, in order to keep a rein on asset prices from spiraling higher.

Again this is new stuff for central banking: Concerted policies are seemingly aimed at nipping an asset bubble from its bud!

Nevertheless, this lamentably reflects on the artificial nature of today’s marketplace, as it has been primarily negotiated by global political and bureaucratic authorities.

This week’s violent reaction in the marketplace following the policy signaling ploy by key central bankers seems like trial balloons to test for market reactions.

It is likely that the corresponding events may prove to be knee jerk and temporary as the overall environment remains accommodative. Perhaps, central bankers have been heeding the PIMCO’s Paul McCulley advice when he recently wrote, ``that markets can stray quite far from “fundamentally justified” values, if there is a strong belief in a friendly convention, one with staying power. And right now, that convention is a strong belief in a very friendly Fed for an extended period. Thus, the strongest case for risk assets holding their ground is, ironically, that the big-V doesn’t unfold, because if it were to unfold, it would break the comforting conventional presumption of an extended friendly Fed.”

By trying to prevent a V-shape recovery as Central Bankers appears to have done, Mr. McCulley, banking on behavioral dynamics, suggests that markets can expect more of extended friendly policies from the Fed (and from other global central banks) which should prolong the rise in asset markets.

I wouldn’t share Mr. McCulley’s confidence though. His theory discounts the Ponzi dynamics required to maintain and improve on asset pricing.

What we seems certain is that volatility risks from bi-directional interventionist policies have been reintroduced and could be the dominant theme ahead of us.

However, it is my view that the upside risks as having more weight than the downside over the longer term, because the US government will likely sustain an implied “weak” US dollar policy.

Remember, with the goal to stabilize and promote interests of the banking system, as seen from Bernanke’s doctrines, the US will likely proceed with the devaluation path in order to reduce real liabilities via inflation.

Further, the Fed will likely work on normalizing its credit system by keeping the banking system’s balance sheets afloat with elevated asset prices from which the only recourse is to inflate the asset markets.

In the interim, markets can go anywhere.

5. Nothing But A Head Fake Signaling

In the US, the so-called exit from the Quantitative Easing seems likely a head fake move.

Figure 6: T2 Partners: Woes of Mortgage Markets Still Ahead

With the risks of the next wave of resets from the Alt-A, Prime Mortgages, Commercial Real Estate Mortgages, aside from the Jumbo and HELOC looming larger [as previously discussed in Governments Will Opt For The Inflation Route] (see figure 6), they are likely to exert more pressure on the banking system.

Resets of Alt-A mortgages will crescendo until the end of 2012. And as you can see the subprime is dwarfed by risk exposures from Alt-A, Commercial and the Prime Mortgage.

In addition, commercial mortgages which has a risk exposure of around $1 trillion, is more widely held by US financial institutions.

According to Wall Street Journal, ``In contrast to home loans – the majority of which were made by only 10 or so giant institutions – thousands of small and regional banks loaded up on commercial property debt. As a result, commercial real estate troubles would be even more widespread among the financial system than the housing woes. At the present, more than 3,000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans.” (emphasis added)

So the Fed’s communiqué and the real risks appear to be antithetical. One will be proven wrong very soon.

In addition, the Fed has been actively trying to expand its power which at present is being heard by the US Congress.

Moreover, worries over the politicization of the Fed as a proposed law grants veto power to the Secretary of the Treasury over Section 13(3) emergency action by the Federal Reserve Board of Governors (David Kotok).

In short, there is little indication that the Fed has embraced a tinge of sound banking. Instead, all these could be read as growing signs of the politicization of the monetary policies.

As Murray N. Rothbard in Mystery of Banking wrote, ``When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price. The people will then clamor for the government to issue more money to catch up to the higher price. If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more—thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races.”

At the end of the day, the policy path appears heavily skewed towards more inflation to insure against additional losses and to safeguard against renewed disruption in the banking system.