Quote of the Day: Liberty is the Solution to Social Problems

It seems to me that this is theoretically right, for whatever the question under discussion -- whether religious, philosophical, political, or economic; whether it concerns prosperity, morality, equality, right, justice, progress, responsibility, cooperation, property, labor, trade, capital, wages, taxes, population, finance, or government -- at whatever point on the scientific horizon I begin my researches, I invariably reach this one conclusion: The solution to the problems of human relationships is to be found in liberty.

From the great Frédéric Bastiat (courtesy of the Bastiat Institute at Facebook)

Remembering Frédéric Bastiat on his 211th Birthday

My path to libertarianism began with the great Claude Frédéric Bastiat’s masterpiece: That Which Is Seen, and That Which Is Not Seen

Thank you Mr. Bastiat. Happy Birthday! (thanks to econolog for the reminder)

Quoting Mr. Bastiat from his classic The State (1848)

The state is the great fiction through which everybody endeavors to live at the expense of everybody else.

The Philippine Financial Markets Shrugs off the Scarborough Shoal Standoff

The financial markets and politicians backed by mainstream media apparently lives in two distinct worlds.

If one goes through the daily barrage of sensationalist headlines, one would have the impression that the Philippines must be in a state of panic. That’s because media has been projecting what seems as intensifying risk of a full blown shooting war over the contested islands, the Scarborough Shoal with China. And all these should have been sending investors scrambling for the exit doors, if not the hills.

But has such alarmism represented reality?

Of course by reality we rely on expressed and demonstrated preferences and not just sentiment. Over the marketplace, people voting with their money have fundamentally treated the recent geopolitical impasse as pragmatically nonevents.

The Phisix has been little change for the week but importantly trades at FRESH record high levels.

Meanwhile the local currency the Philippine Peso posted its SIXTH CONSECUTIVE weekly gains and has been approaching February’s high, whereas local bonds ADVANCED for the week, amidst the geopolitical bedlam[1]

Contrived Risks and Real Risks

There’s a world of difference between real risk and that of a pseudo, or may I suggest concocted, geopolitical risk.

Media has slyly been luring the gullible public into oversimplified “emotionally framed” explanations based on flimsy correlations which blatantly overlooks the behind-the-scenes causal factors[2]. Emotionalism thus opens the door for politicians to prey on the public by manipulating them through the foisting of repressive policies that benefits them at the expense of the taxpayers and importantly of our liberties. The recent call for nationalism via “unanimity” by a national political figure is just an example[3].

Politicians use fear or what the great libertarian H. L. Mencken calls as endless series of imaginary hobgoblins as standard instruments of social controls meant to advance their agenda or self-interests through the political machinery.

Aside from possible factors for the standoff, such as the smoke and mirrors tactic probably employed by China to divert the world from witnessing the brewing internal political schism[4] and or the promotion of sales for the benefit of the military industrial complex, it could also be that the call for “unanimity” may be associated with the domestic impeachment trial of a key figure of the judiciary where “rallying around the president” would extrapolate to the immediate closure of the case in the favor of the administration.

In doing so, the incumbent administration will be able control three branches of government and impose at will any measures that suits their political goals with hardly any opposition, all done under the sloganeering or propaganda of anti-corruption.

Yet the brinkmanship geopolitics in Asia, has not been limited to the controversial territorial claims in Scarborough and Spratlys, as well as Japan claimed Senkaku Islands[5]. Recent events includes the recent widely condemned missile test by North Korea, as well as, missile tests of former archrivals India and Pakistan[6]

Yet market’s responses to these events have disparate.

Pakistan’s Karachi index (KSE:100 orange) trades at the highest levels since 2009 and seems on the way to knock on the doors of the 2007 highs, whereas India’s BSE (SENSEX green) has struggled since peaking late February.

In short, the recent missile tests by both countries hardly influenced financial markets for the two South Asian giants.

The reason for this has been due to substantially improving trade relations[7] that has dramatically eased political tensions between them.

This validates the great free trader Claude Frédéric Bastiat[8] prediction centuries ago.

if goods don t cross borders, armies will

North Korea as the Real Geopolitical Risk

The North Korea-South Korea tiff cannot be seen in the same light.

Since the North Korea’s announcement of a missile test last March 16^th, South Korea’s KOSPI has been struggling. (chart from stockcharts.com)

The South Korean currency, the won, has also wobbled in the face of Nokor’s actions. (chart from yahoo.com)

Nokor’s largely embarrassing failed missile launch[9] last April 13^th has not deterred the new regime under Kim Jong Un from threatening to do another nuclear blasting test[10]

The fundamental difference from the abovementioned instances, including the unfortunate Scarborough-Spratlys affair, has been the near absence or the lack of trade linkages of Nokor which has not fostered social cooperation or goodwill with other nations.

Instead, Nokor’s despotic communist government’s survival has long been dependent on the ‘blackmail diplomacy’ in securing foreign aid. Yet uncertainty shrouds on the direction of Nokor’s foreign policy under the new leadership which appears as being manifested on the markets.

The good news is that so far there has been no sign of panic. This means South Korea’s consolidating markets could be digesting or has been in the process of assessing the political and security risks from Nokor’s new regime.

Otherwise if the worst option does occur, where posturing turns into armed confrontation the ensuing violence will spillover the world markets. But again Nokor has been more of a paper tiger than a real military power considering their dire economic status. A war is likely to cause the Kim regime to disintegrate under its own weight as famished and ill equipped soldiers are likely to defect to the South or a coup will force down the leadership.

The Free Trade Factor and Geopolitical Linkages

The same premise tells us why domestic politicians and media live in a different world from the citizenry. And this is why I hardly touch on mainstream news, except when scouring for the facts. I avoid from reading “opinions”, especially from so-called experts. That’s because mainstream’s opinions blindly represents the interests of the establishment[11].

China ballooning trade with ASEAN, which includes the Philippines[12], represents a very important deterrent from aggression.

As the great Professor Ludwig von Mises wrote in his magnum opus[13],

Man curbs his innate instinct of aggression in order to cooperate with other human beings. The more he wants to improve his material well-being, the more he must expand the system of the division of labor. Concomitantly he must more and more restrict the sphere in which he resorts to military action. The emergence of the international division of labor requires the total abolition of war.

So aside from her thrust to use the yuan as region’s foreign currency reserve as evidenced by the push for wider Free trade zone (including the ASEAN China Free Trade Agreement which began operations in 2010[14]) hardly squares with the bellicosity that has been publicly portrayed.

Free Trade agreements in Asia has exploded since China’s Deng Xiaoping opened China to the world bannered by the famous catchphrase “To get rich is glorious” (which according to some has been misattributed to him)[15]

Claude Barfield of the American Enterprise Institute points out that[16]

In 1975 there was one free trade agreement in the region but in 2011, there are now currently 245 free trade agreements that have been proposed, under negotiation or concluded.

Besides it is naïve to see events in the lens of a single prism.

An outbreak of military conflagration will likely draw in various major players that could lead to a world war, an event which hardly any party would like to indulge in (despite the politicians arrogant rhetoric), considering the today’s age of NUCLEAR and DRONE warfare, standing armies have been rendered obsolete, and mutually assured destruction[17] will likely be the outcome.

So aside from some missile tests by Asian countries, recently Vietnam hosted a joint naval exercise with US[18] while on the other hand China and Russia also recently completed naval war games[19]. While these may look like a show of force for both parties, they could also just be pantomimes.

Yet for me all these seem like watching a movie that gives you the vicarious effect, especially from the 3D vantage point. However when the closing or end credit appears or when the curtains fall, we come to realize that this has been just a movie.

So far the financial markets seem to be exposing on the exaggerations of the so called gunboat diplomacy, or perhaps too much of yield chasing activities may have clouded people’s incentives that has led them to underestimate such a risk.

While I believe the yield chasing factor has functioned as a substantial contributor to the current state of markets domestically and internationally, I also think that the local market has rightly been discounting the territorial claims issue for reasons cited above.

So unless politicians here or abroad totally losses their sanity, the issue over territorial claims will eventually fade from the limelight.

So be leery of politicians calling for patriotism or nationalism, that’s because as English author Samuel Johnson famously warned on the evening of April 7, 1775[20]

Patriotism is the last refuge of a scoundrel.

---

[1] Bloomberg.com Philippine Peso Completes Sixth Weekly Gain on Growth Outlook, April 27, 2012

[2] See The Scarborough Shoal Standoff Has Not Been About Oil April 16, 2012

[3] See Scarborough Shoal Dispute: The Politics of Nationalism April 28, 2012

[4] See China’s Political System Reeks of Legal Plunder, April 20 2012

[5] See From Scarborough Shoal to Senkaku Islands April 19, 2012

[6] Globalspin.blogs.time.com Will Pakistan and India’s Back-to-Back Missile Tests Spoil the Mood?, April 25, 2012

[7] Thehindubusinessline.com Pak may be allowed to invest in India February 16, 2012

[8] The Freeman.org Claude Frédéric Bastiat

[9] See See North Korea’s Failed Missile Launch Reflects on Dire Economic Status, April 14, 2012

[10] Bloomberg.com North Korea Poised to Rattle Region With Nuclear Blast April 27, 2012

[11] See The Toxicity of Mainstream News March 13, 2012

[12] networkideas.org China, India and Asia: The Anatomy of an Economic Relationship (Draft Copy) 2009

[13] von Mises Ludwig 4. The Futility of War XXXIV. THE ECONOMICS OF WAR Human Action

[14] Wikipedia.org ASEAN–China Free Trade Area

[15] Wikipedia.org Deng Xiaoping

[16] Barfield Claude TAIWAN AND EAST ASIAN REGIONALISM American Enterprise Institute, November 10, 2011

[17] Wikipedia.org Mutual assured destruction

[18] Telegraph.co.uk Vietnam begins naval exercises with the US, April 23, 2012

[19] Abs-cbennews.com China, Russia end naval exercises, April 27, 2012

[20] Wikipedia.org The Patriot Samuel Johnson's political views

China’s Political System Reeks of Legal Plunder

Internal political schism in China, highlighted by recent rumors of a coup attempt, may have been one of the main factors that has incited China’s political authorities to dabble with the latest gunboat diplomacy with her neighbors. The unfolding controversy over disputed territorial claims at Scarborough Shoal and the Senkaku Islands has most likely been meant to divert or distract the public’s attention from real political issues developing in China.

Yet the tensions being manifested in China’s political system has been exposing on the festering rottenness of the perversion of the legal system, which the great Frédéric Bastiat warned centuries ago, directed at repression and plunder of the resources of the population for personal benefit of politicians and their favored allies. He called this “legal plunder”.

Sovereign Man’s Tim Staersmose gives us a terse but splendid narrative of the political events brewing at China

I’m convinced that history will one day show that corrupt Communist party officials, in cahoots with shady developers and construction moguls, systematically plundered the Chinese economy, getting rich off the hard work and savings of the average person.

It’s been happening on an unimaginable scale… and the fuse for the whole rotten mess to explode may have just been lit with this Bo Xilai scandal. To review, briefly:

- Bo Xilai, the former mayor of China’s largest city of Chongqing, was once one of the rising stars of the Communist party and being groomed for a top spot in the Politburo.

- Wang Lijun was his police chief and right hand man.

- Together, Bo and Wang waged a high profile campaign to stamp out organized crime in the region, jailing and even executing supposed underworld bosses and corrupt businessmen.

(As it appears now, they may have simply been eliminating their competition.)

- The two had an apparent falling out, allegedly over evidence that Bo’s wife was involved in the death of British expat Neil Heywood.

- Heywood had been a longtime confidant of the Bo family. His death late last year was originally ruled as a heart attack, however there is now so much conflicting evidence that many are suggesting Heywood was going to come forward with extensive records of Bo’s shady business dealings.

- After being stripped of his rank by Bo, Wang went to both the US consulate and British High Commission seeking asylum in exchange for information about Bo’s impropriety. He was politely rejected.

- Bo has now been relieved of his powers amid a flurry of evidence and allegations that he and Wang siphoned off hundreds of millions of dollars from Chongqing’s economic boom and secreted the funds out of the country.

- Meanwhile Bo’s wife is under arrest for suspicion of murdering Mr. Heywood. Mr. Wang is also in the custody of Chinese authorities.

- Bo’s son, a lavish partier who attends $90,000/year graduate school and drives around campus in European supercars, is hiding out in the United States.

The top echelons of the communist party are now working overtime to snuff out the scandal lest their own financial dealings and personal dirty linen be aired in public.

But, they’re fighting an uphill battle. The rapid spread in China of micro-blogging services (like Twitter) mean that the party’s censors have a real battle on their hands.

Again the wonders of technological advances in today’s deepening information age has been facilitating the divulgence of the reeking corruption operating behind China’s “communist party system” which in reality is no more than state (crony-fascist) capitalism.

As Frédéric Bastiat wrote in must read classic The Law,

The delusion of the day is to enrich all classes at the expense of each other; it is to generalize plunder under pretense of organizing it. Now, legal plunder may be exercised in an infinite multitude of ways. Hence come an infinite multitude of plans for organization; tariffs, protection, perquisites, gratuities, encouragements, progressive taxation, free public education, right to work, right to profit, right to wages, right to assistance, right to instruments of labor, gratuity of credit, etc., etc. And it is all these plans, taken as a whole, with what they have in common, legal plunder, that takes the name of socialism.

Pretentions to solve social ills via socialist redistributionist policies are simply unsustainable, and the gunboat diplomacy will not excise the truth from unraveling.

UK’s Government Discourages Charity

We are often told that the private sector is instinctively greedy, and thus requires intervention to spread ‘charity’ and ‘compassion’.

Well, in the UK, acts of private sector charity or philanthropy will be penalized.

From Wall Street Journal Wealth Blog,

The U.K.’s new budget has ignited all manner of class warfare. Retirees say it’s a gift to the rich at the expense of the poor. The wealthy say it’s another attack on success and job creators.

But one piece has gone largely unnoticed: the limit on philanthropic giving. The measure would cap the tax relief for wealthy givers at 25% of their annual income, or £50,000, whichever is higher. It takes effect next year.

It’s similar to the Obama proposal, which would limit charitable deductions for high earners to 28% for couples with incomes of $250,000 or more or individuals with income of $200,000. The White House says limiting itemized deductions would shrink the deficit by $584 billion over 10 years.

The U.K. expects its measure (along with caps on business deductions) to result in $490 million in saved revenue.

“Giving shouldn’t mean you pay no tax,” according to the U.K. Treasury.

Yet charities say the plan would put a chill on philanthropic giving just as the U.K. government is trying to create a new culture of giving.

The “new culture of giving” is that the government forcibly takes what you own (by taxation), which in turn discourages acts of private charity (both by administrative limits and again by taxation--what you opt to donate will be taken instead).

And as the norm, governments spend these confiscated resources charitably on their pet projects (to the benefit of cronies and or to vote rich welfare dependents or for photo Op sensational projects).

This is not really new. It has been the nature of governments to undertake lawful plunder of the resources of the citizenry when so deemed politically expedient.

As the great Frédéric Bastiat wrote in The Law published in 1850

When does plunder cease, then? When it becomes more burdensome and more dangerous than labor. It is very evident that the proper aim of law is to oppose the fatal tendency to plunder with the powerful obstacle of collective force; that all its measures should be in favor of property, and against plunder.

But the law is made, generally, by one man, or by one class of men. And as law cannot exist without the sanction and the support of a preponderant force, it must finally place this force in the hands of those who legislate.

This inevitable phenomenon, combined with the fatal tendency that, we have said, exists in the heart of man, explains the almost universal perversion of law. It is easy to conceive that, instead of being a check upon injustice, it becomes its most invincible instrument.

It is easy to conceive that, according to the power of the legislator, it destroys for its own profit, and in different degrees amongst the rest of the community, personal independence by slavery, liberty by oppression, and property by plunder.

It is in the nature of men to rise against the injustice of which they are the victims. When, therefore, plunder is organized by law, for the profit of those who perpetrate it, all the plundered classes tend, either by peaceful or revolutionary means, to enter in some way into the manufacturing of laws. These classes, according to the degree of enlightenment at which they have arrived, may propose to themselves two very different ends, when they thus attempt the attainment of their political rights; either they may wish to put an end to lawful plunder, or they may desire to take part in it.

By preventing the private sector from engaging in philanthropic activities and by coercively taking their resources by law, who’s greedy now?

Inequality: Chinese Politicians Wealthier than US Peers

Wall Street activists and the left should look at this, wealth of politicians in China and the US have been ballooning

Reports the Bloomberg,

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.

The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption…

The wealth gap between legislatures holds with statistically comparable samples. The richest 2 percent of the NPC -- 60 people -- had an average wealth of $1.44 billion per person. The richest 2 percent of Congress -- 11 members -- had an average wealth of $323 million.

The U.S. figures come from a downloadable database on the website of the Washington-based Center for Responsive Politics. The U.S. figures are inflated because the database includes members of Congress who were retired or defeated in the 2010 elections as well as their replacements.

The wealth of members of Congress did increase at a higher rate than that of their Chinese peers in the most recent disclosures as U.S. equity markets outperformed China’s. The average wealth of the richest 2 percent of Congress rose 22 percent in 2010 from 2009. The Standard and Poor’s 500 Index rose 12.8 percent in 2010.

Funny how the news above attempts to paint the wealth of politicians as mostly derivative of conventional economic means.

In reality a significant portion of the wealth of politicians account for as economic and financial benefits from political inequality: the greater the political power over society, the more access to what Bastiat would call as “lawful plunder”.

From the great Frédéric Bastiat in The Law

Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.

Woe to the nation when this latter purpose prevails among the mass victims of lawful plunder when they, in turn, seize the power to make laws! Until that happens, the few practice lawful plunder upon the many, a common practice where the right to participate in the making of law is limited to a few persons. But then, participation in the making of law becomes universal. And then, men seek to balance their conflicting interests by universal plunder. Instead of rooting out the injustices found in society, they make these injustices general. As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder. (This objective would demand more enlightenment than they possess.) Instead, they emulate their evil predecessors by participating in this legal plunder, even though it is against their own interests.

It is as if it were necessary, before a reign of justice appears, for everyone to suffer a cruel retribution — some for their evilness, and some for their lack of understanding

Accounts of lawful plunder are manifested through gaming or manipulation of the laws to secure their self-interests, e.g. insider trading, anti-competition laws and etc…, crony capitalism, logrolling and or corruption through earmarks (pork barrel) or through other means.

The same Bloomberg article gives us some clues

“The rich in China have strong incentive to become ‘within system’ due to the relative weakness in the rule of law and of property rights,” Victor Shih, a professor at Evanston, Illinois-based Northwestern University who studies Chinese politics and finance, wrote in an e-mail.

Transparency International’s corruption perception index also gives us more hints…

China is perceived as more corrupt compared to the US which could partly explain the wealth inequality between Chinese and American politicians.

Bottom line: Unknown to most, (wealth or income) inequality mostly emanates from political actions, particularly instituted arbitrary laws which facilitates “lawful plunder” that works to benefit the political class, their cronies and their dependants at the expense of everyone else.

Laws create corruption, to quote the legendary investor Doug Casey, and corruption engenders laws.

Quote of the Day: Perversion of the Law

The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish! If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.

A very time relevant quote from the great Frédéric Bastiat, The Law (hat tip Professor Art Carden)

Quote of the Day: Bastiat on Symbolism

From James Grant’s review of Frédéric Bastiat’s works, (hat tip David Boaz)

Because nobody else can understand them, modern economists speak to one another. They gossip in algebra and remonstrate in differential calculus. And when the pungently correct mathematical equation doesn't occur to them, they awkwardly fall back on the English language, like a middle-aged American trying to remember his high-school Spanish. The economist Frédéric Bastiat, who lived in the first half of the 19th century, wrote in French, not symbols. But his words—forceful, clear and witty—live to this day.

Are Renewable Energy ‘Renewable’?

One of the most valuable lessons I have learned in life is not to see things as presented or as they are. That’s because things or events that we see or sense does not cover on how they existed or how they got there in the first place.

I am indebted to the late great proto-Austrian Frederic Bastiat, who inspired an overhaul of life’s outlook personified by this stirring passage

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. 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.

This applies to everything we do.

And these have been most pronounced especially in the domain of politics where populist political solutions are sold on the merits of superficiality or visibility.

In the realm of environmental politics, one good example would be the politically correct populist practice of ‘Earth Hour’.

We are told to close lights for an hour so that we can symbolically celebrate on ‘saving the environment’ by reducing carbon footprints.

However in reality, unless we decide to stop living, we will be using energy. PERIOD.

And the alternative to using ‘environmental hazardous’ conventional fossil based energy would be to revert to the medieval age and use candles. People hardly see that candles signify as more environmental unfriendly than the conventional energy.

Of course by proposing to cut lights also extrapolates to stopping or to reducing production and trade. Doing so means creating shortages in people’s needs. This means widespread hunger and famine. This brings the Malthusian nightmare to a reality.

How do you suppose that we would be able to survive 6.77 billion people by reverting to the medieval age of economic system?

So saving the environment means we end up killing one another (politics of plunder-via war) or killing ourselves (man made catastrophe).

It isn’t that Malthus was right. Instead, it is because political correctness founded the concept of saving earth signifies as concealed misanthropy.

The same blight haunts proponents of renewable energy.

From the surface, renewable energy would seem as environmental friendly. That is what is seen. What is not seen is how environmental damaging renewable energy would be when they are constructed for commercial operations.

Matt Ridley eloquently explains, (bold emphasis added)

It turns out that the great majority of this energy, 10.2% out of the 13.8% share, comes from biomass, mainly wood (often transformed into charcoal) and dung. Most of the rest is hydro; less than 0.5% of the world's energy comes from wind, tide, wave, solar and geothermal put together. Wood and dung are indeed renewable, in the sense that they reappear as fast as you use them. Or do they? It depends on how fast you use them.

One of the greatest threats to rain forests is the cutting of wood for fuel by impoverished people. Haiti meets about 60% of its energy needs with charcoal produced from forests. Even bakeries, laundries, sugar refineries and rum distilleries run on the stuff. Full marks to renewable Haiti, the harbinger of a sustainable future! Or maybe not: Haiti has felled 98% of its tree cover and counting; it's an ecological disaster compared with its fossil-fuel burning neighbor, the Dominican Republic, whose forest cover is 41% and stable. Haitians are now burning tree roots to make charcoal.

You can likewise question the green and clean credentials of other renewables. The wind may never stop blowing, but the wind industry depends on steel, concrete and rare-earth metals (for the turbine magnets), none of which are renewable. Wind generates 0.2% of the world's energy at present. Assuming that energy needs double in coming decades, we would have to build 100 times as many wind farms as we have today just to get to a paltry 10% from wind. We'd run out of non-renewable places to put them.

You may think I'm splitting hairs. Iron ore for making steel is unlikely to run out any time soon. True, but you can say the same about fossil fuels. The hydrocarbons in the earth's crust amount to more than 500,000 exajoules of energy. (This includes methane clathrates—gas on the ocean floor in solid, ice-like form—which may or may not be accessible as fuel someday.) The whole planet uses about 500 exajoules a year, so there may be a millennium's worth of hydrocarbons left at current rates.

Read the rest here.

What you see isn’t always what you get.

Graphic: Obamacare And The Law

This is how the Obamacare is supposedly structured...

chart from Joint Economic Committee (Republican) /hat tip Daniel Mitchell of Cato

According to Frederic Bastiat, [The Law (p.69)] (all bold emphasis mine, italic original)

The mission of the law is not to oppress persons and plunder them of their property, even though the law may be acting in a philanthropic spirit. Its mission is to protect persons and property. Furthermore, it must not be said that the law may be philanthropic if, in the process, it refrains from oppressing persons and plundering them of their property; this would be a contradiction.

The law cannot avoid having an effect upon persons and property; and if the law acts in any manner except to protect them, its actions then necessarily violate the liberty of persons and their right to own property.

The law is justice--simple and clear, precise and bounded. Every eye can see it, and every mind can grasp it; for justice is measurable, immutable, and unchangeable. Justice is neither more than this nor less than this.

A law that is perplexing in complexity like the Obamacare exemplifies or embodies what we call as arbitrary law--a law opposed to the fundamental concept of clear, precise and bounded (observable), of protecting property rights and of equal treatment of application (enforceability). Hence, Obamacare is unlikely a law that would serve to promote its mission--social justice.

Financial Reform Bill And Regime Uncertainty

``But the law is made, generally, by one man, or by one class of men. And as law cannot exist without the sanction and the support of a preponderant force, it must finally place this force in the hands of those who legislate. This inevitable phenomenon, combined with the fatal tendency that, we have said, exists in the heart of man, explains the almost universal perversion of law. It is easy to conceive that, instead of being a check upon injustice, it becomes its most invincible instrument.” Frédéric Bastiat, The Law

Yo-yo Markets And The Financial Reform Bill

Writing in the Wall Street Journal, hedge fund manager and author Andy Kessler seems right; the actions of the US markets, which directly affects other financial markets, will be in a state of a Yo-yo for as long as the US government continually intervenes to suppress market forces from revealing its true conditions.

Mr. Kessler writes[1],

``Call it the yo-yo market—from the top of the wall to the bottom of the pit and back—and you better get used to it. It's hard to tell which market moves are real and based on prospects for better profits, as opposed to moves that are driven by all the extraordinary government measures to prop up the world economy. Until a few things are resolved, you'd better learn the yo-yo sleeper trick—that is, keep spinning at the bottom without going up.”

Mr. Kessler appears to echo what we’ve been saying all along[2]---that politics has and will shape the outcome of the markets.

Mr. Kessler cites the pervasive impact of the Zero Interest Rate Policy (ZIRP), the assorted “crutches” or the guarantees, stimulus packages, and money printing, and importantly, the impact of the changes in the regulatory environment.

Since we had exhaustively discussed on the first two factors, in the light of the passage of the Financial Reform Bill[3], we’d tackle more on the aspects of the regulatory environment.

After having a rather promising start for the week, the US markets fell hard Friday after the ratification Financial Reform Bill. The losses virtually expunged on the early gains made whereby the net weekly result for the US S&P 500 had been a net loss of 1.21% (see figure 1).

Figure 1: US Global Investors[4]: Sectoral Performance

Nevertheless the degree of losses had been uneven, where some sectors of the S&P 500 have managed to escape the clutches of the selling pressures, such as the Consumer staples and the Technology sector.

True, correlation doesn’t automatically translate to causation. The Financial Reform bill may or may not have directly affected Friday’s performance.

However, given that the largest victim of the selloff had been in the financial sector, which is the target of the slew of new regulations, then I must argue that there could have been a substantial connection in the way the markets perceive how these purported reforms would affect the industry.

In other words, markets may have seen more downside risks to the industry, as a result of the law, and these perceptions have filtered into the other sectors.

Yet it’s simply amazing how some mainstream analysts fail to acknowledge of the vital role played by the regulatory environment in shaping the allocation of resources.

They seem to think that investment is merely consequence of waking up on a particular side of the bed which determines their “animal spirits”, or that, confidence is simplistically established as a function of random temperaments or moods—and largely detached from the coordination of consumers and producers in the marketplace.

Thus, many make specious arguments that new regulations won’t affect the business operations.

Importantly, the same experts fail to take into account that entrepreneurs invest with the aim to profit from providing or servicing the needs or desires of the consumers. Thus, a material change in the regulatory environment may affect the fundamental profit and loss equation. And the ensuing changes could also alter the feasibility of the operations of any enterprises, to the point which could lead to either closures, or impair the business operations. The net effect should be more losses and rising unemployment.

In short, business confidence is a function, not of some mood swings, but of property rights. Likewise confidence relative to investment should be predicated not just with the return ON capital, but with the return OF capital.

Regime Uncertainty From Arbitrary Laws

Economist Robert Higgs calls this reduced confidence factor as “regime uncertainty” where he argues[5] (bold emphasis mine)

``To narrow the concept of business confidence, I adopt the interpretation that businesspeople may be more or less “uncertain about the regime,” by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.”

Thus, to allege that new regulations will hardly be a factor in the investment environment would redound to utter detachment with reality.

Well, what can we expect from so-called ivory tower “experts” who seem to think that they own the monopoly of knowledge, via mathematical models and aggregates, when their sources of income depends on wages than from wagering on the dynamic trends of the marketplace? (Pardon me for the ad hominem, but perspectives are mostly shaped by interests)

Take the Great Depression (GD) of 1930s, which many prominent bears have anchored their projections as the probable direction of today’s market.

From the monetarist viewpoint, the GD had been all about monetary contraction, whereas from the Keynesian perspective this had been about falling aggregate demand. Both of which has been diagnosed by the incumbent Federal Reserve chief Ben Bernanke[6] as the major causes from which current policies have been designed to address. Yes—the solution? The printing press!

While both did have a role to play, the oversimplistic account of the GD fails to incorporate the havoc generated by the legion of intrusive laws enacted by the US government’s New Deal program, aimed at keeping prices at status quo ante or from adjusting to the realities of the unsustainable misdirection of capital from the inflation boom induced depression. These policies, which threatened property rights, had greatly exacerbated and prolonged the grim conditions then.

These laws included[7]:

1933 Agricultural Adjustment Act, National Industrial Recovery Act, Emergency Banking Relief Act, Banking Act of 1933 Act, Federal Securities Act, Tennessee Valley Authority Act, Gold Repeal Joint Resolution, Farm Credit Act, Emergency Railroad Transport Act, Emergency Farm Mortgage Act National Housing Act, Home Owners Loan Corporation Act

1934 Securities Exchange Act, Gold Reserve Act, Communications Act, Railway Labor Act

1935 Investment Company Act, Revenue Act of 1940, Bituminous Coal Stabilization Act, Connally (“hot oil”) Act, Revenue Act of 1935, National Labor Relations Act, Social Security Act, Public Utilities Holding Company Act, Banking Act of 1935, Emergency Relief Appropriations Act, Farm Mortgage Moratorium Act

1936 Soil Conservation & Domestic Allotment Act, Federal Anti-Price Discrimination, Revenue Act of 1936

1937 Bituminous Coal Act, Revenue Act of 1937, Act Enabling (Miller-Tydings) Act

1938 Agricultural Adjustment Act, Fair Labor Standards Act, Civil Aeronautics Act, Food, Drug & Cosmetic Act

1939 Administrative Reorganization Act

1940, Second Revenue Act of 1940

Figure 2: Wikipedia.org[8]: US Income Tax (left window), Higgs: Government Purchases (Current$) and Gross Private Investment (Current$) Relative to Gross Domestic Product (Current$), 1929–1950

For instance, one should also take into account how the surge in taxation (left window) to fund the explosion in government expenditures during the Great Depression (right window) contributed to stymie investments or production (see figure 2)

As Henry Hazlitt aptly described how taxes affect investment or production[9]

``When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble.”

In other words, when the expectations for profits are reduced, borne out of the expectations of higher taxes or from other regulatory interdictions which places property rights at risks, then investments will obviously follow—and decline.

Therefore the regulatory and tax regime functions as crucial factors to the conditions of confidence in the marketplace.

Paradoxically, one function of the law is the avoidance of this “regime uncertainty”. But when the state is unclear about the direction of policies and regulation, the “means” can contradict the “end”. So, instead of stability, such laws could engender or promote “regime uncertainty”. Yet, these are commonplace feature of many arbitrary laws.

Take the recently enacted Financial Reform Bill, it has been reported to contain 2,319 pages (see figure 2)

Figure 2: Mark Perry[10]: Major Financial Legislation: Number of Pages

The sheer mountain of pages by itself would make the reformist law seem like a regulatory quagmire and appears appallingly political relative to the enforcement issues.

Heritage’s Conn Carroll explains[11],

``With the single stroke of a pen, President Barack Obama signed the Dodd-Frank financial regulation bill that set in motion 243 new formal rule-makings by 11 different federal agencies. Each of the 243 rule-makings will employ hundreds of banking lobbyists as they try to shape what the final actual laws will look like. And when the rules are finally written, thousands of lawyers will bill millions of hours as the richest incumbent financial firms that caused the last crisis figure out how to game the new system.”

The implication is that where financial firms compete, not to please customers, but to gain the favour of regulators, this essentially represents as the hallmarks of corporatism or crony capitalism.

Thus, the financial reform bill is likely to foster political privileges which entrenches the “too big too fail” institutions, who will profit from economic rent.

The litany of adverse effects from such ambiguous bill will be one of expanded corruption, lack of credit access for consumers, reduced consumers protection (in contrast to the purported letter of the law), regulatory capture, regulatory arbitrages, higher risks to taxpayers on greater risk appetite for the politically privileged firms (moral hazard issue), increased red tape via an expanded bureaucracy, higher compliance costs, more government spending and reduced competition which overall translates to broad based economic inefficiencies.

Yet the reformist law is also said not only to be opaque, but gives undue confiscatory power based on the whims of regulators.

Mr. Kessler writes[12], ``What is even more troubling is the prospect of government seizures built into the Dodd-Frank financial bill. This is much like the seizure of property from auto industry bond holders (denounced as speculators) in the bankruptcy of GM and Chrysler.

``Dodd-Frank also provides government leeway to seize firms it considers a systemic risk, without really defining what that systemic risk is. Why anyone would provide debt to large financial institutions (or auto makers) is beyond me, certainly not without demanding a huge premium for the seizure risk. The cost of capital for the U.S. economy is sure to rise, slowing growth.”

This means that Financial Reform bill also entails that the political favoured institutions are likely to become veiled instruments for political agenda of those in power.

And laws of this nature is what Frédéric Bastiat long admonished[13],

``But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

``This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy. to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.”

In short, arbitrary laws, as the Financial Reform bill, can function as instruments of injustice.

Thus, it is NOT impractical or improbable to argue that in the wake of the enactment of the Financial Reform Bill, the ambiguity and arbitrariness of the law and the increased politicization of the financial industry would likely result to greater perception of risks which may be reflected on the “Yo-yo” actions or a more volatile US markets.

At the end of the day, regulatory obstacles will likely compel capital to look for a capital friendly environment from which to flourish.

---

[1] Kessler, Andy, The Yo-Yo Market and You, Wall Street Journal, July 16, 2010

[2] See How Political Tea Leaves Will Shape The Investment Landscape

[3] Bloomberg, U.S. Congress Passes Wall Street Regulation Bill, July 15, 2010

[4] US Global Investors, Investor Alert, July 16, 2010

[5] Higgs, Robert Regime Uncertainty, Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War

[6] Bernanke, Ben Deflation: Making Sure "It" Doesn't Happen Here, Speech Before the National Economists Club, Washington, D.C. November 21, 2002

[7] Higgs, Ibid

[8] Wikipedia.org, Income tax in the United States

[9] Hazlitt, Henry Taxes Discourage Production, Chapter 5 Economics In One Lesson

[10] Perry, Mark ‘I Didn’t Have Time to Write a Short Bill, So I Wrote a Long One Instead,’ Part II The Enterprise Blog July 16

[11] Carroll, Conn Morning Bell: The Lawyers and Lobbyists Full Employment Act, Heritage Blog, July 16, 2010

[12] Kessler, Andy Ibid.

[13] Bastiat, Frédéric The Law

Remembering Frédéric Bastiat

Yesterday marked Frédéric Bastiat's 209th birthday.

And below is a favorite essay of mine " The Little Arsenal of the Freetrader" from a collection of articles in Economic Sophism, which deals with common objections to free trade.

Here is Frédéric Bastiat... (all bold emphasis mine)

Suppose someone tells you: "There are no absolute principles.

Interdiction can be bad, and restriction good."

Answer: "Restriction interdicts the importation of everything it prevents from entering."

Suppose someone tells you: "Agriculture is the nutricial mother that furnishes the whole country with food."

Answer: "What furnishes the country with nutriment is not strictly agriculture, but wheat."

Suppose someone tells you: "The sustenance of the nation is dependent on agriculture."

Answer: "The sustenance of the nation is dependent on wheat. That is why a law compelling the nation to obtain two hectolitres of wheat by agricultural labor instead of the four hectoliters it might have obtained, in the absence of the law, by applying the same amount of labor to industrial production, far from being a law for the people's sustenance, is a law for their starvation."

Suppose someone tells you: "Restricting the importation of foreign wheat is conducive to an increase in domestic agriculture and, therefore, to an increase in domestic production."

Answer: "It is conducive to the extension of agriculture to the rocky slopes of mountains and the barren sands of the seashore. If you milk a cow and keep on milking, you will get more milk; for who can say just when you will no longer be able to squeeze out another drop? But that drop will cost you dear."

Suppose someone tells you: "Let the price of bread be high, for the farmer who becomes rich will enrich the industrialist."

Answer: "The price of bread is high when it is scarce; but scarcity makes only for poor people, or, if you like, starving rich people."

Suppose someone presses the point and says: "When the price of bread goes up, wages go up."

Answer by showing that in April, 1847, five-sixths of the workers were living on charity.

Suppose someone tells you: "A rise in wages must necessarily follow a rise in the cost of living."

Answer: "That is tantamount to saying that in a ship with no provisions everyone has as much to eat as if it were well stocked."

Suppose someone tells you: "The man who sells wheat must be assured a good price."

Answer: "Very well. But in that case the man who buys it must be assured a good wage."

Suppose someone tells you: "The landowners, who make the law, raised the price of bread without concerning themselves about wages because they know that, when the price of bread goes up, wages go up quite naturally."

Answer: "By the same token, then, when workers make the law, do not blame them if they fix a high wage rate without concerning themselves about protecting wheat, for they know that, when wages are raised, the cost of living rises quite naturally."

Suppose someone asks you: "What must we do, then?"

Answer: "Be just to everyone."

Suppose someone tells you: "It is essential for a great country to have an iron industry."

Answer: "What is more essential is that this great country have iron."

Suppose someone tells you: "It is indispensable for a great country to have a clothing industry."

Answer: "What is more indispensable is that the citizens of this great country have clothes."

Suppose someone tells you: "Labor is wealth."

Answer: "That is not true."

And, by way of explanation, add: "Bloodletting is not health; and the proof is that its object is to restore health."

Suppose someone tells you: "To compel men to dig a mine and to extract an ounce of iron from a quintal of iron ore is to increase their labor and consequently their wealth."*

Answer: "To compel men to dig wells by forbidding them to take water from the river is to increase their useless labor, but not their wealth."

Suppose someone tells you: "The sun gives its light and heat without remuneration."

Answer: "So much the better for me; it costs me nothing to see clearly."

And suppose someone replies: "Industry in general loses what you might have spent for artificial illumination."

Parry with: "No; for what I save by paying nothing to the sun, I use for buying clothing, furniture, and candles."

Similarly, suppose someone tells you: "These English scoundrels have amortized their investments."

Answer: "So much the better for us; they will not oblige us to make interest payments."

Suppose someone tells you: "These perfidious Englishmen find iron and coal in the same pit."

Answer: "So much the better for us; they will not charge us anything for bringing them together."

Suppose someone tells you: "The Swiss have lush pastures that cost little."

Answer: "The advantage is on our side, for this means that less labor will be demanded on our part to promote our domestic agriculture and provide ourselves with food."

Suppose someone tells you: "The fields of the Crimea have no value and pay no taxes."

Answer: "The profit is on our side, since the wheat we buy is exempt from these charges."

Suppose someone tells you: "The serfs of Poland work without wages."

Answer: "The misfortune is theirs, and the profit is ours; since their labor does not enter into the price of the wheat that their masters sell us."

Finally, suppose someone tells you: "Other nations have many advantages over us."

Answer: "Through exchange, they are, in fact, compelled to let us share in these advantages."

Suppose someone tells you: "With free trade, we are going to be flooded with bread, beef _ la mode, coal, and overcoats."

Answer: "Then we shall be neither hungry nor cold."

Suppose someone asks you: "What shall we use for money?"

Answer: "Don't let that worry you. If we are flooded, it will be because we are able to pay; and if we are not able to pay, we shall not be flooded."

Suppose someone tells you: "I should be in favor of free trade if foreigners, in bringing us their products, took ours in exchange; but they will take away our money."

Answer: "Money does not grow in the fields of the Beauce any more than coffee does, nor is it turned out by the workshops of Elbeuf. For us, paying foreigners with cash is like paying them with coffee."

Suppose someone tells you: "Eat meat."

Answer: "Permit it to be imported."

Suppose someone tells you, like La Presse: "When one does not have the means to buy bread, one must buy beef."

Answer: "This is advice just as wise as that of Mr. Vulture to his tenant:

"When one does not have the means to pay his rent, One has to get a house of one's own."

Suppose someone tells you, like La Presse: "The government should teach people why and how they ought to eat beef."

Answer: "The government has only to permit the importation of beef; the most civilized people in the world are sufficiently grown up to learn how to eat it without being taught."

Suppose someone tells you: "The government should know everything and foresee everything in order to manage the lives of the people, and the people need only let themselves be taken care of."

Answer: "Is there a government apart from the people? Is there any human foresight apart from humanity? Archimedes could have gone on repeating every day of his life, 'Give me a fulcrum and a lever, and I will move the earth'; he would never, for all that, have been able to move it, for want of a fulcrum and lever. The fulcrum of the state is the nation, and nothing is more senseless than to base so many expectations on the state, that is, to assume the existence of collective wisdom and foresight after taking for granted the existence of individual imbecility and improvidence."

Suppose someone tells you: "Good heavens! I am not asking for favors, but just enough of an import duty on wheat and meat to compensate for the heavy taxes to which France is subjected; only a small duty equal to what these taxes add to the sales price of my wheat."

Answer: "A thousand pardons, but I too pay taxes. If, then, the protection that you are voting yourself has the effect of adding to the price I pay for wheat an amount exactly equal to your share of the taxes, what your honeyed words really come to is nothing less than a demand to establish between us an arrangement that, as formulated by you, could be expressed in the following terms:

'Considering that the public charges are heavy, I, as a seller of wheat, am to pay nothing at all, and you, my neighbor who buys it, are to pay double, viz., your own share and mine as well.' Wheat merchant, you may, my neighbor, have might on your side; but you surely do not have right."

Suppose someone tells you: "It is, however, very hard for me, who pay taxes, to compete in my own market with a foreigner who pays none."

Answer: "1. In the first place, it is not your market, but our market. I, who live on wheat and pay for it, ought to count for something too.

"2. Few foreigners nowadays are exempt from taxes.

"3. If the tax that you are voting repays you, in the form of roads, canals, security, etc., more than it costs you, you are not justified in barring, at my expense, the competition of foreigners who do not pay the tax, but who, by the same token, do not enjoy the advantages of the security, roads, and canals that you have. It would make just as much sense to say: 'I demand a compensatory duty, because I have finer clothes, stronger horses, and better plows than the Russian peasant.'

"4. If the tax does not repay you what it costs, do not vote it.

"5. And finally, after voting the tax, do you desire to exempt yourself from it? Then contrive some scheme that will shift it onto foreigners. But the tariff makes your share of the tax fall upon me, who already have quite enough of my own to bear."

Suppose someone tells you: "For the Russians free trade is necessary to enable them to exchange their products to advantage."

[Opinion expressed by M. Thiers in committee, April, 1847.]

Answer: "Free trade is necessary everywhere and for the same reason."

Suppose someone tells you: "Each country has its wants and it must act accordingly." [M. Thiers.]

Answer: "It does so of its own accord when it is not hindered from doing so."

Suppose someone tells you: "Since we have no sheet iron, we must permit its importation." [M. Thiers.]

Answer: "Much obligedl"

Suppose someone tells you: "Our merchant marine needs freight. The lack of cargoes on return voyages prevents our ships from competing with foreign vessels." [M. Thiers.]

Answer: "When a country wants to produce everything at home, it cannot have cargoes either to export or to import. It is just as absurd to want a merchant marine when foreign products are barred as it would be to want carts where all shipments have been prohibited."

Suppose someone tells you: "Even granting that the protectionist system is unjust, everything has been organized on the basis of it: capital has been invested; rights have been acquired; the system cannot be changed without suffering."

Answer: "Every injustice is profitable for someone (except, perhaps, restriction, which in the long run benefits nobody); to express alarm over the dislocation that ending an injustice occasions the person who is profiting from it is as much as to say that an injustice, solely because it has existed for a moment, ought to endure forever."