Showing posts with label government intervention. Show all posts
Showing posts with label government intervention. Show all posts

Tuesday, July 05, 2011

Corn Prices, Ethanol Subsidies and the Farmland Bubble

Here is an interesting chart illustrating the correlationship between corn prices and corn used in ethanol (also in feed).

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The Bloomberg writes,

The portion of this year’s U.S. corn crop going to ethanol may surpass the amount used in feed for the first time. Federal subsidies for ethanol production, due to expire at the end of 2011, have spurred corn demand and pushed up prices, to the dismay of livestock farmers

The chart reveals that rising corn prices have accompanied the expansive growth of corn bushels used as ethanol. In short, usage of corn as food have been diverted to energy.

The question is if this correlation constitutes causation or merely a coincidence.

According to a study, the answer has partly been yes; subsidies to the ethanol industry has been generating additional demand for corn, which consequently has been influencing corn prices.

From the AFP,

US ethanol subsidies pushed up corn prices as much as 17 percent in 2011, according to a study released Wednesday at a time when Washington's policies on biofuels are coming under heightened scrutiny.

The study by Bruce Babcock of Iowa State University and released by the Geneva-based International Centre for Trade and Sustainable Development, suggests that high gasoline prices this year may have intensified demand for ethanol, creating a tighter market for maize than in previous years.

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To see how relevant this relationship has been. Corn prices recently tumbled. Apparently, the collapse has been coincidental or timed with the elimination of subsidies for the ethanol industry.

According to the Reuters last June 16th,

The Senate voted overwhelmingly on Thursday to eliminate billions of dollars in support for the U.S. ethanol industry, sending a strong message that the era of big taxpayer support for biofuels is ending.

The 73-27 vote may ultimately be symbolic since the White House has vowed not to repeal ethanol subsidies fully and the bill the repeal language is attached to is not expected to make it into law. But it underscores the growing desperation to find savings in a budget crisis that is forcing both sides of the aisle to consider sacrificing once-sacred government programs.

In my view, this shows that the answer has also partly been a yes. Subsidies have had significant distortive effects on the balance of corn economics which has been reflected on prices.

Although the White House is expected to veto the Senate bill, the corn market probably interprets that these subsidies may not last (subject to the winner of the Presidential elections of 2012).

The recent spate of interventions in the commodity markets may have also influenced the downdraft.

Aside, other factors could also be in play: the Fed’s monetary policies, global monetary policies, global supply and demand balance, (lesser) degree of globalization of agriculture trade among many other variables involved.

The side effect of levitated corn prices from ethanol subsidies has been contributing to a boom in US farmland

According to Douglas French at the Mises.org,

today's Big Ag boom is sponsored by ethanol subsidies from the state. Just as when the federal government told farmers during WWI to grow wheat to win the war, Congress voted to double production of corn-based ethanol "to win Al Gore's war" — and so a third of the US corn crop could be dedicated to making fuel, up from 7 percent in 2001.

David Peligal at Grant's Interest Rate Observer says that if the ethanol subsidy were removed, the price of corn would collapse. Senator Tom Coburn, a Republican from Oklahoma, has put forth just such a bipartisan proposal to end the 45-cent federal tax credit for every gallon of ethanol-blended gasoline.

Farmland prices doubled nationally in the 2000s, to more than $2,300 per acre, according to the US Department of Agriculture, and prices today in soil-rich areas of Iowa and Illinois are more than three times that level. Values for nonirrigated cropland soared by 10 percent or more in 2010 alone in states across the Midwest, according to the Federal Reserve Bank of Kansas City.

Net cash yields cluster around 3.5 percent for corn land in Iowa and wheat land in Kansas. At the height of the 1970s boom the net cash yield was 4.55 percent.

As corn prices have shot upward, so has Iowa farmland, which is selling for $8,500 to $10,000 an acre.

Recently an 80-acre parcel was auctioned in Mitchell County, Iowa, going for $10,000 an acre, or $800,000. But with only 72.2 acres actually tillable, it works out to $11,080 an acre — a country record.

Grant's Interest Rate Observer provides some color to the auction. It turns out the farmers bidding for the ground dropped out at $9,000 an acre and then two investors took it the rest of the way. A gentlemen who attended the auction said it was the slowest he'd ever seen. The last $1,000 was bid up in $25 increments.

In Kansas, with wheat going for $3.25 a bushel, the land is going for $1,500 an acre, double what it was five years ago.

Bottom line: Myriad government interventions have been producing pockets of bubbles in the US and the global economy.

Wednesday, June 29, 2011

Do Filipinos Need a New Attitude on Entrepreneurship?

I received a promotional email for an entrepreneurship seminar which comes with a column from Brian Quebengco entitled “Championing Philippine Ideas: The Rise of Silicon Valley in the Philippines”

Mr. Quebengco writes, (no link included in the email),

It is not an evolution that we need, nor is it a revolution. Rather, what we need is a transformation. Since the glory days of Semi Conductors and the Filipino entrepreneurs that championed them, we have evolved a great deal up to our present state. And as we are witnessing right now, a revolution in technology and communication has made the world flat. But what is lacking, and I feel the most important, is for us, the individual Filipino, to transform our attitude and ways to give rise to the Filipino Entrepreneur. We don't need mechanisms, infrastructures, or even the presence of a strong venture capital community to do this. In my own view, business is about people first, and everything else second. That transformation must and can only start with the individual Filipino.

He further says entrepreneurs should be individually motivated which should permeate to culture and subsequently to infrastructure. And from this he advocates the promotion of “a new kind of Enterpreneur”, one who will “challenge the global arena”.

I am delighted that there are local experts advocating entrepreneurship which functions as the cornerstone for any market economy.

However, I would suggest that any “new kind of entrepreneur” hardly matches the operational concept of entrepreneurship.

Entrepreneurs are those who allocate factors of production (labor, capital goods and natural resources) in the service of consumers. (Mises wiki)

Further, entrepreneurs employ “discovery” or “alertness” to profit opportunities in scanning the market horizon which can bring about innovation, better quality of goods or services or cheaper prices. (Israel M. Kirzner)

So aside from Silicon Valley which he seems to see as a paradigm to emulate, homegrown entrepreneurs are the balut vendors, carinderia operators, laundry services and etc… to the bigwig who compete internationally like Jollibee, San Miguel Brewery and others.

Each of them offers specific goods or services to serve their consumers in return for profit opportunities. These voluntary exchanges constitute the free markets.

What I am trying to say is that the marketplace hardly operates on “new” entrepreneurs founded on “new attitudes” but rather on individual specialization.

As the great Austrian economist Ludwig von Mises wrote, (bold emphasis mine)

The selection of the market does not establish social orders, castes, or classes in the Marxian sense. Nor do the entrepreneurs and promoters form an integrated social class. Each individual is free to become a promoter if he relies upon his own ability to anticipate future market conditions better than his fellow citizens and if his attempts to act at his own peril and on his own responsibility are approved by the consumers. One enters the ranks of the promoters by spontaneously pushing forward and thus submitting to the trial to which the market subjects, without respect for persons, everybody who wants to become a promoter or to remain in this eminent position. Everybody has the opportunity to take his chance. A newcomer does not need to wait for an invitation or encouragement from anyone. He must leap forward on his own account and must himself know how to provide the means needed.

It must be understood too that the entrepreneurship ethos is also hardly acquired from formal educational training.

Again from von Mises, (highlights added)

In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entrepreneur cannot be trained. A man becomes an entrepreneur in seizing an opportunity and filling the gap. No special education is required for such a display of keen judgment, foresight, and energy. The most successful businessmen were often uneducated when measured by the scholastic standards of the teaching profession. But they were equal to their social function of adjusting production to the most urgent demand. Because of these merits the consumers chose them for business leadership.

There is NO holy grail to successful entrepreneurship, as it takes sustained “keen judgment, foresight, and energy” to compete in the marketplace, even in the global arena.

What needs to be transformed is NOT the individual attitude towards entrepreneurship but rather the Filipinos’ seeming dependence on political means of dispensing economic opportunities.

In the environment where...

-taxes are high,

-red tapes are byzantine,

-bureaucracy is bloated

-regulatory compliance costs are numerous, time consuming and burdensome,

-corruption is rampant,

-competition is restricted,

-economic opportunities are distributed as political concessions (subsidies, monopolies, private-public partnership, cartel, and etc.)

-redistribution programs are plentiful (which essentially transfers productive resources to non-productive activities and at worst, induces people toward entitlements and subsequently takes away the drive for entrepreneurship)

-and many more,

...so even if most Filipinos would want to become entrepreneurs they can’t. That’ because the Philippine government (regardless of who is in power) prevents them from doing so. The cost of doing business or the risk premium is prohibitive enough to require high hurdle rates for entrepreneurs to generate decent returns.

All these signify as the Filipinos’ aversion to free markets which is what genuinely inhibits the Filipino entrepreneurial discovery process from taking hold.

Sunday, May 08, 2011

Philippine Mining Index and the Manipulated Collapse of Commodity Prices

We're living in an amazing world where real assets can be purchased with fantasy money. It won't last because it's illogical and synthetic. But it has already lasted longer than most realists thought possible.-Richard Russell

The Phisix finally took a breather, falling by 2.33% over the week, the first decline over 7 weeks. Such loss substantially reduced the year to date gains to only .43%.

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The decline had been broad based, but ironically the mining and oil sector eluded the downturn supposedly on a raft of speculations over prospective deals.

I say ironic because such defiance comes in the face of a manipulated collapse of commodity prices in the world markets.

The Manipulated Collapse

Abruptly changing the rules of the game represents manipulation.

Since trades are essentially anchored upon expectations based on existing information which incorporates rules and other operating parameters (e.g. architecture of trading platform), drastically altering the rules midway dramatically shifts the balance of cost-benefit expectations and the economic distribution of resources, as manipulation benefits the regulators and their allies at the expense of market participants.

While I expected the huge run up in silver prices to be met with sharp price volatility[1], I didn’t expect that this would be prompted for by a series of steep credit margin hikes imposed by the CME[2]. Silver prices fell 25% over the week.

Since commodity markets are interrelated, as many investors or institutions position in different commodities or commodity indices, the assault on the silver markets rippled throughout the commodity sphere and to other markets.

One evidence of such imbalance is that even as silver prices collapsed, the physical inventory of silver shriveled[3], instead of ballooning. This means that instead of a panic from a sharp price downswing, many have taken the price drop as an opportunity to accumulate physical silver! What appears to be happening is that the heavily leveraged positions or those who fail to meet the margin calls, have forcibly been closed regardless of price, but the new entrants have used such opportunity to accumulate substantially.

If this should serve as a clue then the interventions mean that the effect on silver prices is likely to be transitory as players adjust to the new environment.

The other point is that the fundamental drivers of silver and other commodities remain firmly entrenched.

Commodity Prices Underpin the Fate of Mining and Resource Firms

Changing the rules midway was part of the scenario of the silver bubble meltdown in 1980. The Hunt brothers, whom attempted to corner the silver market, suffered from the same credit margin hikes which led to their bankruptcy.

But of course, the major factors that led to the commodity bubble bust had been due to sharp increases in the interest rates, coming from a shift in the monetary policy stance by US Paul Volcker led US Federal Reserve, and that a global commodity glut had accrued as the globalization gradually took hold[4].

Except for the manipulation, the above events hasn’t shaped the de facto climate.

Why is this important? Because share prices of mining or other commodity based companies essentially depend on the prices of the commodity products.

The almost two decade of bear market in commodities led to the hibernation of mining and other resource based companies or a slump in terms of stock market prices.

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Remember Atlas Consolidated at php 400 per share in the 70s and was seen as a ‘blue chip’? Today, Atlas trades at a measly php 15 per share following years of dormancy in the company’s operations. To consider, real or inflation adjusted prices in the 70s means a lot more Pesos today.

As one would note, the CRB Reuters futures index (lower window) courtesy of chartrus.com[5] squares with the performance of the Philippine Mining Index (upper window).

When I turned bullish on gold in 2003 I called this the “Rip Van Winkle”[6] moment. The concurrent rise of the CRB Reuters index also reflects on the Philippine Mining Index.

The point is that the buoyancy of domestic mining and oil index (or prices of mining and oil companies) greatly depends on the underlying trends of their commodity products.

Commodities As Hedge

The war against precious metals is being waged most possibly as part of the signaling channel tools which Central Banks employ to manage inflation expectations. This I think is part of the orchestrated conditioning employed by the US Federal Reserve that is being used to justify further interventions particularly the QE 3.0[7].

All talks about tightening and the ending of QE part of another series of poker bluff at work.

Given the weak housing market (which risks endangering the balance sheets of the US banking system which Fed chair Bernanke sees as the heart of the US economy), the declining interests of foreign governments to finance US deficits, insufficient private savings and the wobbly financial conditions of states[8], plus the ideological economic (quasi boom) biases and path dependency of the policymaking by US political authorities, the US is left with little option but to reengage in quantitative easing sometime in the near future after the end of the QE 2.0 in June.

And part of the propaganda, through biased research studies by the Fed and allied institutions, has been to delink the Fed’s policies with that of surging commodity prices. And the other way to create this impression is to manipulate the commodity markets.

At the end of the day commodities still represents as insurance from the adverse unintended consequences of the monetary interventionism—an addiction inspired by grand delusions of power.

To quote Michael Taylor[9],

the state exacerbates the conditions which are supposed to make it necessary. We might say that the state is like an addictive drug: the more of it we have, the more we 'need' it and the more we come to 'depend' on it.


[1] See Hi Ho Silver!, April 23, 2011

[2] See War on Precious Metals Continues: Silver Margins Raised 5 times in 2 weeks!, May 5, 2011

[3] See War Against Precious Metals: Silver’s Collapsing Prices in the face of Collapsing Inventories, May 6, 2011

[4] See War on Precious Metals: Silver Prices Plunge On Higher Credit Margins, May 2, 2011

[5] Chartrus.com CRB Reuters Futures

[6] See Philippine Mining Index; We’ve Only Just Begun! April 10, 2006

[7] See War on Precious Metals: The Rationalization Process For QE 3.0, May 7, 2011

[8] See The US Dollar’s Dependence On Quantitative Easing, March 20, 2011

[9] Taylor, Michael The Possibility of Cooperation (Cambridge: Cambridge University Press, 1987), p. 168 Quotes.liberty-tree.ca

Thursday, April 28, 2011

Volatility of China’s Food Prices Largely Due to Policies

In China, rising food prices have been blamed on speculators. Now that select food prices have slumped, particularly vegetables, the culpability has been assigned to speculators anew.

From Business China,

Farmers across China are suffering from unmarketable vegetables since the arrival of spring, hurt by an increase in output following speculation last year’s surge in demand would continue in 2011.

Last week, the average price of 19 kinds of vegetables in 286 wholesale markets nationwide was RMB 2.66 per kilogram, down 11.4% from the previous week, according to data from the Ministry of Agriculture.

Many farmers blamed oversupply as the main reason for the poor market. Due to climate factors, leaf vegetables from northern and southern China came onto the market almost at the same time, making the supply much higher than last year.

Speculators also played a major role in the price collapse, as they dumped vegetables that they had been hoarding onto the market.

Since the markets have always been the villains then obviously the government, as hero, would come to the rescue.

From the same article,

Chinese government authorities have stepped in to help the farmers and deal with the vegetable oversupply.

Some supermarkets, schools and company canteens are on a buying spree in east China's Shandong province as the government urged them to help relieve farmers from a glut of vegetables.

Municipal authorities should take immediate action to "help farmers tackle difficulties in selling their produce and maintain a stable market," said a notice from Shandong's commerce department released on April 22.

The Ministry of Commerce (MOFCOM) and the Ministry of Agriculture have also issued a notice to ask local authorities to take immediate action to "help farmers tackle difficulties in selling their produce and maintain a stable market".

Of course, the article has not been that candid.

A better explanation from the World Bank’s quarterly report on China comes with the supply side perspective, (bold emphasis mine)

In addition to normalizing the overall macro policy stance it took some measures to boost food supply and reduce the cost of production and logistics, including releasing grain from China’s large reserves, increasing subsidies to farmers, exempting transport of vegetables from road toll, and boosting food imports. More recently, this was followed by limiting the increase in domestic fuel prices arising from higher oil prices and applying moral suasion on manufacturers of food and consumer products.

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So a combination of price controls, import liberalization, targeted subsidies and tax reliefs has been applied.

In essence, massive interventions has been employed to control inflation, from which the effects could likely be temporary, and could further add to the imbalances from the previous actions of China’s government to blow bubbles.

Importantly, if inflation is a monetary phenomenon as Milton Friedman would have it, then the bust in the vegetable market in China could be a symptom of the prevailing monetary policies...

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Again from the World Bank, (bold emphasis mine)

Since October 2010 the government has raised benchmark interest rates 4 times and RRRs 7 times. Most importantly, quantitative guidance on bank credit, traditionally the backbone of monetary policy tightening, began to be reinforced, especially in early 2011. As a result, M2 growth came down from 19.5% in the fourth quarter to 16.6% on average in the first quarter, close to the target for the end of 2011, with a similar slowdown in bank lending. In recent years, total bank credit extention has been significantly larger than headline data suggests as banks expanded the use of credit instruments such as designated loans, trust loans and corporate paper, financed in part by trust and wealth management products that are not counted as deposits and are not part of M2, in order to evade lending quotas, capital requirements and RRRs.

China’s equity markets, specifically the Shanghai index appears to have recoiled after hitting the resistance levels as earlier discussed.

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This is the interim price action of the Shanghai Composite bellwether. (chart from Bloomberg)

In my view, the current retracement of the Shanghai index could also be reflecting on the current monetary tightening environment.

If there should be a broader weakening of consumer and financial market prices then this would possibly prompt Chinese authorities to unleash their main Keynesian weapon--inflation.

I’d posit that since the stage of China’s inflation cycle looks more advanced than the rest of the world, then the ongoing developments in China’s financial markets needs to be closely monitored.

Thursday, March 10, 2011

Does Higher Education Pay Off?

Higher education is not only in a bubble, but is fast becoming an unviable activity or unworthy of personal investments—meaning costs exceeds the returns.

So argues Professor Laurence Kotlikoff at the Bloomberg, (bold highlights mine)

The notion that education pays and that better education pays better is taken for granted by almost everyone. For college professors like me, this is a very convenient idea, providing a high and growing demand for our services.

Unfortunately, the facts seem to disagree. A recent study by economists Stacy Dale and Alan Krueger showed that going to more selective colleges and universities makes little difference to future income once one accounts for the underlying ability of the student. Their work confirms other studies that find no financial benefit to attending top-tier schools.

It’s good to know that Harvard applicants can safely attend Boston University (my employer), and that "better" higher education doesn’t pay better. But does higher education pay in the first place?

The answer seems obvious. On average, doctorate holders earn more than those with master degrees, who earn more than those with bachelor degrees, who earn more than high school graduates. How can education not pay?

The answer is that education isn’t free. Top undergraduate programs are now charging students $50,000 a year to eat, sleep and, hopefully, attend class. But that’s just the direct cost. Education’s hidden cost is the time spent learning rather than earning.

Read the rest here

Again the soaring costs of education are largely due to government’s numerous interventions, which renders what used to be a stepping stone personal development, as unfeasible.

Moreover, rising costs of education also reflects on the old political economic order. This is going to change see here and here.

Wednesday, September 29, 2010

Will A Ban on ‘Texting While Driving’ Reduce Accidents?

In examining accidents, the intuitive response by policymakers is to look at the immediate cause and subsequently apply restrictions on it.

And this applies to “texting while driving”, where the underlying belief is--just ban ‘texting while driving’ and accidents will go away.

Simple antidote right?

Well, a study demonstrates that this socialist “feel-good-to-do-something-about-it” policy is nothing but nonsensical fairy tale, with even more vicious consequences (other than restricting one’s liberty).

From the Cleveland Leader, (bold highlights mine) [Hat tip: Professor Don Boudreaux]

Laws that ban the practice of texting while driving are designed to keep drivers' attention on the road and avoid accidents, but new research published Tuesday by the Highway Loss Data Institute suggest otherwise. Laws banning texting while driving may actually increase the risk of road crashes, according to the study.

The HLDI research showed that crash rates rose in three out of four states after texting bans were implemented

Adrian Lund, president of HLDI and the Insurance Institute for Highway Safety says:

"Texting bans haven't reduced crashes at all. In a perverse twist, crashes increased in three of the four states we studied after bans were enacted.

It's an indication that texting bans might even increase the risk of texting for drivers who continue to do so despite the laws."

Lund added that the findings "call into question the way policymakers are trying to address the problem of distracted driving crashes", and said that the increased crash rates were due to drivers responding to the regulations by moving their phones lower down and out of sight when sending a text. This increases the risk of a crash because the driver's eyes are diverted further from the road and for a longer time.

So, the unintended consequences appear to be worse than the desired the goal of reducing accidents or that the costs of the policy seems greater than the intended benefit.

So what’s wrong with the policy?

It basically overlooks human response to circumvent or go around regulations.

Of course, there are other possible ramifications: this law could be used to harass the public, increase the incidence of extortion and corruption, increase taxpayer costs of applying the law (bureaucracy), selective implementation of the law, curtail personal liberty and etc…

In short, the end does NOT justify the means.

Saturday, June 12, 2010

Philippine Sports: The Craze For Basketball And The Lack Of Interest In The World Cup

``Almost everywhere on the planet, people on Friday were stocking up on beer and food and readying themselves for long hours in front of the television set as football’s World Cup mania hit fever-pitch with the opening matches in Johannesburg, South Africa.”

This is from the Inquirer, who observed of the Filipinos’ lack of interest with the international football games.

The same article rationalizes such indifference...

``Fegidero said the continued failure of the Philippines to compete in major tournaments abroad had been the main reason football had not picked up here.

“We’re nowhere near the level of the world’s best teams, even in Asia, which is considered a weak continent in football,” he explained.

``The Philippines has never qualified for the World Cup since 1930, when the quadrennial meet began.

``This year, the country was only one of four countries that did not even bother to join the qualifying series for the tournament. The other three were Bhutan, Brunei and Laos.

“We don’t have the programs that can produce good players who can compete internationally,” Fegidero said. “We lack participation in international tournaments and local leagues.”

The Philippines has been obsessed with basketball, a sport, which unfortunately, we fail to excel in and continues to see rapid deterioration in performance based on the global or even regional competition standards.

The losing glory of Philippine men's basketball performance in the Asian Championship and the Asian Games, shown in the above table, where from the triumphant days in 60s to the early 70s, our competitive ranking continues to plunge, as time goes by.
But as consolation, at least based on South East Asia, we still remain dominant. (both charts from wikipedia) But the question is, given the underlying trend, for how long will this last?

Maybe we should ask first why Filipinos have been so fixated with a sport which we can't seem to win internationally due to structural reasons (lack of height)?

Yet this has been the case in spite of the active "participation in international tournaments and local leagues" in basketball, opposite to the reasoning of the expert as quoted above by the Inquirer article.

To consider, Philippine basketball teams have been complimented with Fil-Ams or Filipino Americans to fill in on the endemic height handicap, yet this has not been enough to reverse the degenerating trend.

The point is, it doesn't seem to be the lack of programs that determines the lack of acceptance of the World Cup. Instead, it is the lack of incentives brought about by the undue obsession on an unviable or unwinnable sport (basketball) and the attendant misdirection of investments that continues to feed on such delusion.

I see three reasons why Filipinos can't move away from basketball, in spite of the harsh reality that this is a sport which we simply can't compete in globally.

One, it seems a form of status signalling, which misleads Filipinos to believe that basketball is an irreplaceable cultural or social norm that needs to be conformed with. Otherwise said, to be IN (or to be identified as Filipino) means to patronize basketball in one way or another.

Second, it is part of the Groupthink fallacy, which Filipinos seem so entranced with.

According to Gloria Allendorfer Anderson, PhD., ``One of the dangers of our world today is group-think. It occurs as a person lets identification with a group cloud their reasoning and deliberations when reaching a position on a given issue. At best, it is a rhetorical device. At it's worst, it can be a very harmful replacement for sensible thought. In fact, it is considered one of the common fallacies of modern society." (emphasis added)

And groupthink is part of what shapes social or cultural norm, adds Ms. Anderson,

``When individuals identify with the state where they live, or a country of their heritage or origin, they relate to other individuals from the same state or country in their views of the world around them. This type of group identification indicates that they are part of a group of people who share the same life experience."(emphasis added)

Lastly basketball is a political sport or a sport used by politicians to attain political goals.

Basketball courts are one of the pet projects for pork barrel spending of local officials bent on achieving "accomplishments" for reelection or posterity or for financial purposes.

According to
Gary W. Elliott,

``This year each of the 214 congressmen is allocated 60 million pesos (roughly USD1.5 million) for spending at his discretion, and each of the 24 senators receives twice that amount. With no real oversight or accountability, this institution is rife with corruption. Some of the funds intended for priority development projects in the congressmen’s districts, such as health care, clean water, and poverty alleviation, are typically spent on trivial projects which contribute nothing to the social and economic development of the country. Common examples are cement outdoor basketball courts and “waiting sheds,” small awnings or covered benches beside roads, where those waiting for a bus can get out of the rain. Large signs laud the congressman for spending government funds on the project (instead of just pocketing them?). Such projects are often accomplished just before elections, so signs touting the congressmen provide free campaign advertising for those seeking re-election." (bold highlights mine)

Since a basketball court has more player density per unit area, adding more courts on the local level draws in greater number of people to the sport. One may say that this is an example of Keynes' misinterpretation of Say's law where "
supply creates its own demand"

So massive grassroot political investments in basketball courts impels more patrons relative to the other sports, hence more patrons translates to cultural acceptance, and the unwarranted fixation to basketball, in spite of the inherent handicaps, in terms of global standards. So goes the feedback mechanism driving the dynamics of basketball as a political sport.

So in my view, domestic politics represent as one of the key obstacles (if not the key hurdle) to the lack of diversity of Filipinos to engage in other more internationally competitive sports such as football.

Thursday, December 31, 2009

China's Bubble And The Austrian Business Cycle

Is China in a bubble?

That's THE current debate between China optimists and pessimists.

And this has been accentuated by reports that China will surpass Japan, by next year, as second in the order of ranking among the world's economic heavyweights.


The Economist underscores the mainstream polemic, (bold emphasis mine)

``NEXT year
China will overtake Japan to become the world’s second-largest economy. Its rapid ascent has led some to question whether China will follow in Japan’s footsteps, with the bursting of a massive bubble followed by years of decline. But China is still far poorer than Japan was at its peak, and thus has more room to improve productivity. A transition of surplus labour from agriculture to industry and services would increase efficiency and bring its economy more in line with the developed world. And China’s stimulus package has produced much needed infrastructure that will reinforce future growth. But in the long run, a shift away from investment and exports towards domestic consumption would make China’s output more sustainable, and help it to avoid experiencing a bubble like Japan's."

I do not share the mainstream economic gobbledygook.

Although establishing China's current conditions would likely be tricky and complicated.


First, we share with the bears that China could be in a bubble if they continue to pursue current interventionist policies on their banking, finance and the real economy.

For instance, easy monetary policies and a massive jump in money supply are suspected to have buoyed prices of real estate and the stock market as bank credit (circulation credit) have been presumed to have channeled into speculative activities.

Empirical evidence of this would be the emergence of several uninhabited or ghost cities [see
China's Ghost Cities].

In the Austrian Business Trade Cycle, the manipulation of interest rates essentially leads to massive clustering errors or huge malinvestments that will eventually unravel-hence the boom bust cycle.


To quote
Dr. Richard M. Ebeling, (bold emphasis mine)

``Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes;
threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

``Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job.
All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Nonetheless, Chines corporations have remained cash liquid and may not have reached the state of wild orgy of misdirected investments.

According to the
US Global Investors, ``Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating." (see Chart upper right window)

Moreover, private spending has taken over public spending since September; see chart above from US Global Funds

In other words, for the meantime it would seem like some semblance of economic recovery, however as earlier cited, the persistence of present policies are likely to foster massive economic and financial imbalances.


Moreover, China's stock market as signified by the Shanghai (topmost chart below) and the Shenzhen (bottom) benchmarks are quite distant yet from ALL time highs. [chart courtesy of
Bloomberg]


Like in most bubbles, both real estate and the stock market benchmarks would likely reach new highs before inflecting as in the case of the Japan (1990) and the Asian Crisis (1997) with the exception of the US mortgage crisis (2007-8) [see previous post The Lost Decade: US Edition].

One possible factor that could offset or extend the bubble cycle would be China's thrust to integrate with Taiwan [see
Tomorrow’s Investing World According To The Bond King] and with ASEAN [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone].

In addition, while there have been indeed some signs of bubble, usually in the context of grandeur edifices such as China's unveiling of Speeding Bullet Train program, to quote
Bloomberg,
Picture from Bloomberg

``Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who aren’t sharing in China’s economic boom.

``The line is part of China’s 2 trillion yuan ($292.9 billion) investment in a nationwide high-speed passenger-rail network that may be too much train, too fast."


...these may not seem as extravagant yet-relative to other recent bubble afflicted economies or markets as Dubai.


In
Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, we noted, ``Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role."

You see, 'delusions of grandeur' typically herald bubble climaxes, such as the emergence of towering skycrapers...

or even in the art markets as previously posted see Global Art Market As Bubble Meter, China's Fast Expanding Role

Bottom line: Political policies based on path dependency suggest that China will mostly endure a boom-bust cycle, although it may not necessarily redound to a Japan model or experience. However, these policy based imbalances would likely evolve overtime, and will be manifested in diverse asset markets, before facing her fateful day of reckoning.


Sunday, November 29, 2009

Vietnam’s Inflation Control Measures And The Japanese Yen’s Record High

``If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley

There are other issues that appear to have been eclipsed by the Dubai Debt Crisis.

Vietnam’s Inflation Control Measures

First, Vietnam announced a sharp hike in its interest rate to allegedly combat inflation. According to Finance Asia, ``The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1”

In addition, Vietnam likewise devalued its currency the Dong by 5.2%. According anew to Finance Asia, [bold emphasis mine] ``The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.

``This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks.”


Figure 6: Wall Street Journal: Vietnam’s Devaluation

In other words, currency controls have widened the spread between the black market rate of the Vietnam Dong relative to the US dollar and the official devaluation merely is an attempt to close the chasm. The Vietnamese economy has been suffering from a huge current account deficit to the tune of almost 8% of its GDP.

However, in spite of the fresh monetary actions (see figure 6) the black market rate for the Dong and the official rate remain far apart.

And because of the spike in interest rates, the Vietnam equity benchmark fell by 11.73% over the week.

However, a curious and notable observation is that Vietnam’s present policies seems like responding to a market symptom which can be characterized as our Mises Moment,

This from Thanhnien.com, ``Vietnamese lenders are facing a shortage of funds to meet rising demand for loans because gains in gold and the dollar are deterring people from putting money in the bank, according to a government statement. Commercial banks have had to raise deposit interest rates to as high as 9.99 percent over the past week and offered gifts and bonuses to depositors to lure them back, the statement on the government’s website said.” [bold emphasis original]

In other words, the Vietnamese people have been hoarding gold and foreign currency (US Dollar) and have shunned the banking system in response to Vietnam’s government repeated debasement of its currency. It’s seems like an early symptom of demonetization.

As we have previously quoted Professor Ludwig von Mises from his Stabilization of the Monetary Unit? From the Viewpoint of Theory,

``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.” [bold emphasis mine]

Will Vietnam follow the path of the most recently concluded Zimbabwean monetary disease?

I was thinking of Venezuela as next likely candidate but here we have a next door neighbor exhibiting the same symptoms that ails every government that attempts to control or manipulate the marketplace.

The Japanese Yen On A 14 Year High

The second issue overshadowed by the Dubai Debt Crisis is that the Japanese Yen soared to its highest level against the US dollar in 14 years.

According to a Bloomberg report, ``The dollar dropped to the lowest level versus the yen since July 1995 and fell against the euro as the Federal Reserve’s signal it will tolerate a weaker greenback encouraged investors to buy higher-yielding assets outside the U.S.”

The strength of the Japanese yen had been broad based against other major currencies but gains were marginal.

The news blamed the Yen’s rise on the carry trade ``delay debt repayments spurred investors to sell higher-yielding assets funded with the currencies.”

Such oversimplification is not convincing or backed by evidence.

As noted earlier, the US dollar fell to new lows on the Dubai incident before rallying back Friday but eventually giving back most of its gains.

Besides, not all markets had been severely hit. In Latin America, Brazil, Columbia, Chile, Mexico and Venezuela all registered weekly gains. Emerging markets are expected to take it to the chin when carry trades unravel. This hasn’t been the general case.

In Europe, Germany, Italy, Norway, Sweden, Switzerland and Italy survived the week on positive grounds. So even if the Dubai debt crisis exposed Europe more than the others, the selling pressure wasn’t the same. UK home to RBS suffered marginal losses (.11%).

Again none of these accounts for as any solid or concrete signs of an unwinding of carry trade.


Figure 7: stockcharts/google: Nikkei-Yen and Japan exports

While the rising Japanese Yen has so far coincided with a lethargic Nikkei since August (see figure 7 left window), it’s not clear that such correlation has causation linkages.

Although the Japanese government thinks it has.

Again from the same Bloomberg article, ``Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed, signaling his growing concern that the yen’s ascent will hurt the economy. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported.

``Japan hasn’t sold its currency since March 16, 2004, when it traded around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.”

Well it came to my surprise that after all the political gibberish about Japan’s so-called export economy or export dependency, we realized that Japan’s economy is hardly about global trade.

According to ADB data, Japan’s trade in 2006 only accounted for 28.2% of the nation’s GDP, where export (right window) is only 16% of the GDP pie (yes this stunned me as I had the impression all along that Japan’s trade was at the levels of Hong Kong and Singapore and I had to check on official or government data).

The Philippines has even a higher share of trade (84.7%) and exports (36.9%)!

In addition, Japan’s industry, as a share of GDP pie registered for only 26.3%, according to the CIA factbook in 2008.

So a policy for a weaker yen is likely to benefit a small but strong lobbying segment of the society at the expense of the consumers (via cheaper products) or the society.

All these are strong evidences on why the world is facing a greater degree of risks from a hyperinflation episode.

The fallacious Mercantilist-Keynesian paradigm wants a race to devalue currency values, based on a simplistic one product, single price sensitivity, one labor, homogenous capital model which presumes global trade is a zero sum game. They hardly think of money in terms of purchasing power but from political interests based on “aggregate demand”.

Finally, Finance Minister Hirohisa Fujii isn’t likely to succeed in convincing his peers to collaborate to prevent the yen from strengthening. That’s because all of them share the same line of thinking or ideology. And Fed Chairman Bernanke has been on a helicopter mission that will likely to persist until imbalances unravel to haunt the global markets anew.