Quote of the Day: The Mercantilist’s Pareto Strawman

The market economy has never been without its critics and enemies.  Those who feel threatened by the market; those who, however unwisely, feel they could do better without it; economists with little imagination; those, like the devotees of Pareto optima, with only too much of it; those who find most entrepreneurs disgusting characters; those attracted by the romantic charm of a feudal order in which they never had to live; social thinkers offended by the raucous tone of modern advertising; and social thinkers who know only too well how to exploit envy and greed in the service of anticapitalistic movements – all these make a formidable array of opponents.

This quote is from Ludwig Lachmann’s 1978 essay “An Austrian Stocktaking: Unsettled Questions and Tentative Answers,” Chapter 1 in Louis M. Spadaro, ed.,New Directions in Austrian Economics (1978) page 11 lifted from Professor Don Boudreaux of Café Hayek’s Quotation of the Day 

Anti-capitalists critiquing the societal benefits of voluntary exchange through the Pareto efficiency strawman have been presumptive of the possession of omniscience of the summation or aggregation of interpersonal evaluations or interpersonal utility comparisons from which to clearly establish the parameters where “no one can be made better off without making at least one individual worse off” from a “perfectly competitive equilibrium” environment.

If I go to my neighborhood sari-sari store to buy beer/s, who is to say and under what objective technical-ethical-welfare framework will they determine if my actions (as buyer) or of the sari sari store’s (as seller) are Pareto efficient or not? The government ‘expert’ or some appointed institutional economist? Duh!

Free trade have always always a function of individual actions coursed personally or through varying forms of organization where geographical or political boundaries are irrelevant.

Yet these romantic and self-absorbed (deluded) anti-capitalists utopians fail to account that in as much as the markets, which are an expression of actions constituting individual subjective value scales and time preferences, are imperfect, governments likewise operated by a cadre of individuals also should be measured by the same Pareto efficiency effected through their policies.

The appropriate question, measured relatively, should be: Which is more Pareto efficient: decentralized voluntary exchanges or centralized government coercive redistribution?

Unfortunately for the utopians there is such a thing as the law of unintended consequences: government failures.

Bastiat on The Case for Unilateral Free Trade

The great Frédéric Bastiat makes the case for unilateral free trade. (source Mises Institute)

We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.

A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.

There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.

But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.

People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.

The following apologue will demonstrate this.

Stulta and Puera

There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, "See how Puera inundates us with her products; we must see to it." In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.

At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: "We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose." So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.

On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, "The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better."

A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: "Don't listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)

"This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules." Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.

The following passage resonates on the political stumbling block, mentioned by Bastiat above, for unilateral free trade:

The compelling economic case for unilateral free trade carries hardly any weight among people who really matter…

But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports—no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense—but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.

This was written by then international trade economist Paul Krugman in 1997 prior to his tergiversation of the free trade doctrine to become consumed by the forces of mercantilism whom he once condemned. (hat tip Professor Don Boudreaux) Given the temptations to power from "the economist who wants to influence that policy", Mr. Krugman reminds me of the transformation of Anakin Skywalker into Darth Vader

Bastiat on Mercantalism: The Candle Maker's Petition

Many intellectually incapacitated or practitioners of political religion frequently use pretentious economic arguments on what they perceive as threat of competition posed by anything foreign on the local economy: be it immigrants, trade, investments, capital flows, education, jobs and etc…

Xenophobia thus calls for the government to institute protectionist measures (mercantilism) to supposedly achieve their brand of utopia. Never mind if history keeps proving that closed economies leads to a path of poverty.

In reality, these xenophobes apply the fallacy of reductio ad absurdum when they oversimplify what truly is a complex world, and forget or deliberately ignore or discount the large influences of technology, globalization, inflationism (boom bust cycles) that reduces capital thereby jobs, as well as other forms of interventionism via regulations and taxes that all affect people’s incentives and time preferences on allocation of capital.

The great Frédéric Bastiat exposes on the absurdity and ridiculosity of the mercantilist argument through the classic The Candle Maker’s Petition (From Mises.org) [bold emphasis mine]

Petition of the Manufacturers of Candles, Waxlights, Lamps, Candlelights, Street Lamps, Snuffers, Extinguishers, and the Producers of Oil, Tallow, Resin, Alcohol, and, Generally, of Everything Connected with Lighting

To the Members of the Chamber of Deputies.

Gentlemen:

You are on the right road. You reject abstract theories, and have little consideration for cheapness and plenty. Your chief care is the interest of the producer. You desire to protect him from foreign competition and reserve the national market for national industry.

We are about to offer you an admirable opportunity of applying your — what shall we call it? — your theory? No; nothing is more deceptive than theory — your doctrine? your system? your principle? But you dislike doctrines, you abhor systems, and as for principles you deny that there are any in social economy. We shall say, then, your practice — your practice without theory and without principle.

We are suffering from the intolerable competition of a foreign rival, placed, it would seem, in a condition so far superior to ours for the production of light that he absolutely inundates our national market with it at a price fabulously reduced. The moment he shows himself, our trade leaves us — all consumers apply to him; and a branch of native industry, having countless ramifications, is all at once rendered completely stagnant. This rival, who is none other than the sun, wages war mercilessly against us, and we suspect that he has been raised up by perfidious Albion (good policy nowadays), inasmuch as he displays toward that haughty island a circumspection with which he dispenses in our case.

What we pray for is that it may please you to pass a law ordering the shutting up of all windows, skylights, dormer-windows, outside and inside shutters, curtains, blinds, bull's-eyes; in a word, of all openings, holes, chinks, clefts, and fissures, by or through which the light of the sun has been in use to enter houses, to the prejudice of the meritorious manufactures with which we flatter ourselves that we have accommodated our country — a country that, in gratitude, ought not to abandon us now to a strife so unequal.

We trust, gentlemen, that you will not regard this our request as a satire, or refuse it without at least first hearing the reasons which we have to urge in its support.

And, first, if you shut up as much as possible all access to natural light, and create a demand for artificial light, which of our French manufactures will not be encouraged by it?

If more tallow is consumed, then there must be more oxen and sheep; and, consequently, we shall behold the multiplication of meadows, meat, wool, hides, and above all, manure, which is the basis and foundation of all agricultural wealth.

If more oil is consumed, then we shall have an extended cultivation of the poppy, of the olive, and of rape. These rich and soil-exhausting plants will come at the right time to enable us to avail ourselves of the increased fertility that the rearing of additional cattle will impart to our lands.

Our heaths will be covered with resinous trees. Numerous swarms of bees will, on the mountains, gather perfumed treasures, now wasting their fragrance on the desert air, like the flowers from which they emanate. Thus, there is no branch of agriculture that shall not greatly develop.

The same remark applies to navigation. Thousands of vessels will proceed to the whale fishery; and in a short time, we shall possess a navy capable of maintaining the honor of France, and gratifying the patriotic aspirations of your petitioners, the undersigned candlemakers and others.

But what shall we say of the manufacture of articles de Paris? Henceforth, you will behold gildings, bronzes, crystals in candlesticks, in lamps, in lustres, in candelabra, shining forth in spacious showrooms, compared with which, those of the present day can be regarded but as mere shops.

No poor resinier from his heights on the seacoast, no coal miner from the depth of his sable gallery, but will rejoice in higher wages and increased prosperity.

Only have the goodness to reflect, gentlemen, and you will be convinced that there is perhaps no Frenchman, from the wealthy coalmaster to the humblest vendor of lucifer matches, whose lot will not be ameliorated by the success of this our petition.

We foresee your objections, gentlemen, but we know that you can oppose to us none but such as you have picked up from the effete works of the partisans of Free Trade. We defy you to utter a single word against us which will not instantly rebound against yourselves and your entire policy.

You will tell us that, if we gain by the protection we seek, the country will lose by it, because the consumer must bear the loss.

We answer: 

You have ceased to have any right to invoke the interest of the consumer; for, whenever his interest is found opposed to that of the producer, you sacrifice the former. You have done so for the purpose of encouraging labor and increasing employment. For the same reason you should do so again.

You have yourselves obviated this objection. When you are told that the consumer is interested in the free importation of iron, coal, corn, textile fabrics — yes, you reply, but the producer is interested in their exclusion. Well, be it so; if consumers are interested in the free admission of natural light, the producers of artificial light are equally interested in its prohibition.

But, again, you may say that the producer and consumer are identical. If the manufacturer gains by protection, he will make the agriculturist also a gainer; and if agriculture prospers, it will open a vent to manufactures.

Very well! If you confer upon us the monopoly of furnishing light during the day, first of all we shall purchase quantities of tallow, coals, oils, resinous substances, wax, alcohol — besides silver, iron, bronze, crystal — to carry on our manufactures; and then we, and those who furnish us with such commodities, having become rich will consume a great deal and impart prosperity to all the other branches of our national industry.

If you urge that the light of the sun is a gratuitous gift of nature, and that to reject such gifts is to reject wealth itself under pretense of encouraging the means of acquiring it, we would caution you against giving a death-blow to your own policy. 

Remember that hitherto you have always repelled foreign products, because they approximate more nearly than home products the character of gratuitous gifts. To comply with the exactions of other monopolists, you have only half a motive; and to repulse us simply because we stand on a stronger vantage-ground than others would be to adopt the equation + × + = − ; in other words, it would be to heap absurdity upon absurdity. 

Nature and human labor cooperate in various proportions (depending on countries and climates) in the production of commodities. The part nature executes is always gratuitous; it is the part executed by human labor that constitutes value and is paid for. 

If a Lisbon orange sells for half the price of a Paris orange, it is because natural, and consequently gratuitous, heat does for one what artificial, and therefore expensive, heat must do for the other.

When an orange comes to us from Portugal, we may conclude that it is furnished in part gratuitously, in part for an onerous consideration; in other words, it comes to us at half price as compared with those of Paris.

Now, it is precisely this semigratuity (pardon the word) that we contend should be excluded. You say, How can national labor sustain competition with foreign labor, when the former has all the work to do, and the latter only does one-half, the sun supplying the remainder?

But if this half, being gratuitous, determines you to exclude competition, how should the whole, being gratuitous, induce you to admit competition? If you were consistent, you would, while excluding as hurtful to native industry what is half gratuitous, exclude a fortiori and with double zeal that which is altogether gratuitous.

Once more, when products such as coal, iron, corn, or textile fabrics are sent us from abroad, and we can acquire them with less labor than if we made them ourselves, the difference is a free gift conferred upon us. The gift is more or less considerable in proportion as the difference is more or less great.

It amounts to a quarter, a half, or three-quarters of the value of the product, when the foreigner only asks us for three-fourths, a half, or a quarter of the price we should otherwise pay. It is as perfect and complete as it can be when the donor (like the sun in furnishing us with light) asks us for nothing.

The question, and we ask it formally, is this: Do you desire for our country the benefit of gratuitous consumption or the pretended advantages of onerous production? Make your choice, but be logical; for as long as you exclude, as you do, coal, iron, corn, foreign fabrics, in proportion as their price approximates to zero, what inconsistency it would be to admit the light of the sun, the price of which is already at zero during the entire day!

At the end of the day, in the world of politics, logic and the basic law of demand and supply gets swallowed by the black hole of preposterous political correctness.

As Julius Caesar once said,

Men in general are quick to believe that which they wish to be true

Aggressive Interventions from Philippines and Emerging Market Central Banks

Actions speak louder than words.

Central banks of emerging markets including the Philippines have aggressively been intervening in the marketplace signaling an ambiance of heightened instability.

From the Bloomberg,

Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.

Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies.

After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.

“Policy makers will become more aggressive,” said Bhanu Baweja, a London-based strategist at UBS. “The currency strengthening is in contrast with the state of the economy. That argues for much weaker foreign-exchange rates.”

Again the elixir of cheap currencies reveals of the deep seated mercantilist dogma espoused by central bankers. ‘Cheap currencies’ to promote exports have signified as the standard slogan in justifying ‘inflationism’. The real concealed reason has been to promote the interests of the elites.

The Philippine’s Bangko Sentral ng Pilipinas has been no exception.

From the same article,

In the Philippines, the central bank tightened rules on capital inflows last month by prohibiting foreigners from parking funds in so-called special deposit accounts. Policy makers also cut the benchmark interest rate by a quarter- percentage point on July 26 to a record 3.75 percent, a move that Deputy Governor Diwa Guinigundo said will help “temper” peso gains. The currency’s 4.6 percent advance versus the dollar this year is the best performance in Asia. The peso fell 0.2 percent yesterday.

There are many ways to skin a cat as the old saw goes. This means that should foreigners decide to put in money here, they can do so through many law circumventing options such as padding of local export receipts or transfer pricing and etc…, so the BSP’s action can be seen as superficial and symbolical.

None the less, given that the risks of a global economic slowdown seems to be intensifying, home bias has been the natural response resorted to by foreign investors. The possible exception would be from the capital flight dynamic in response to the Euro debt crisis.

All these inflationism resorted to by global central bankers will distort the real economy through the pricing system. This only means that boom bust cycles will be global and will intensify.

Understanding Political Terminologies 3: Frédéric Bastiat on Mercantilism

Why is it very easy to sell political crap? Because all one needs is to broach information that caters to heuristics and emotionalism.

In the case of mercantilism or protectionism, the great Frédéric Bastiat wrote of how the public can easily be swayed by falsehoods,

We must confess that our adversaries have a marked advantage over us in the discussion. In very few words they can announce a half-truth; and in order to demonstrate that it is incomplete, we are obliged to have recourse to long and dry dissertations.

This arises from the nature of things. Protection concentrates on one point the good which it produces, while the evils it inflicts are spread over the masses. The one is visible to the naked eye; the other only to the eye of the mind. In the case of liberty, it is just the reverse.

In the treatment of almost all economic questions we find it to be so.

You say: Here is a machine that has turned 30 workmen onto the street.

Or: Here is a spendthrift who encourages every branch of industry.

Or: The conquest of Algeria has doubled the trade of Marseilles.

Or: The budget secures subsistence for 100,000 families.

You are understood at once and by all. Your propositions are in themselves clear, simple, and true. What are your deductions from them?

Machinery is an evil.

Luxury, conquests, and heavy taxation are productive of good.

And your theory receives wide support in that you are in a situation to support it by reference to undoubted facts.

On our side, we must decline to confine our attention to the cause and its direct and immediate effect. We know that this very effect in its turn becomes a cause. To judge correctly of a measure, then, we must trace it through the whole chain of effects to its final result. In other words, we are forced to reason upon it.

To the unwitting public, if you tell lies that are big enough and keep repeating it, people will eventually come to believe it.

And that’s why even centuries after being debunked or being refuted by classical economics and by classical liberals, the spirit of mercantilism has remained politically popular.

This only exhibits that because many seem to have hardly been capable to think beyond their emotions, they become instruments for oppression, especially through the tyranny of mob-rule (democracy), by scheming politicians and their institutional followers.

Graphic: Made Everywhere, Even the Apparel Industry has been Globalized

“Made in China” has been a politically colored phrase not only in the US (US Olympic Uniform controversy), but also in the Philippines –the other day while on a cab, I heard a similar balderdash coming from a local radio announcer, who in ranting against China over territorial disputes included such false claims.

In reality, even the apparel or clothing industry has been about globalization, particularly the supply chain network. (hat tip Scott Lincicome)

To add, the apparel industry’s value added comes from design and post production facilities (marketing and distribution), an article from the Businessweek/Bloomberg.com points this out,

Garment manufacturing is a low-cost commodity business. Most of the value in the apparel industry comes from design, technology, sales, marketing, and distribution—not manufacturing. The successful players in apparel, such as Ralph Lauren and Nike, figured this out long ago.

Because the economics are bad, most U.S. apparel manufacturing operations folded decades ago. Only 97,000 Americans still have jobs in apparel production, according to the U.S. Department of Labor, and most of them are making highly specialized products like DuPont Kevlar uniforms that cannot be made elsewhere.

But just because America doesn’t manufacture apparel anymore doesn’t mean we can’t lead the industry. In fact, the world’s largest apparel companies are almost all U.S.-based, including Nike, VF, PVH, and Ralph Lauren, to name a few. These companies have grown a combined 146 percent during the past 10 years, adding more than $27 billion in revenue. Nike has created more than 15,000 new jobs in the U.S. during this time, Ralph Lauren almost 10,000. And unlike the low-paying production jobs next to sewing machines, these are well-paying jobs in marketing, accounting, design, and management.

These companies are winning globally by out-designing, out-innovating, and out-marketing the competition. Nike, for example, is unveiling a new TurboSpeed running suit at the London Olympic Games that it claims can reduce 100-meter sprint times by .023 seconds. Nike’s gear will be used by teams from many countries, including Russia, China, and of course, the U.S.

What Nike and Ralph Lauren don’t do is make their own products, in the U.S. or elsewhere—and this has become their competitive advantage.

Both companies source products from hundreds of independent manufacturers in more than 30 countries (less than 3 percent coming from the U.S.). The flexibility allows them to be cost-competitive globally. It also allows their design teams to focus on creating the most exciting new products possible without having to worry whether they can be made on a legacy production line.

Remember Fruit of the Loom? Brown Shoe Co.? Cannon Mills? Levi Strauss? In 1970 these were the largest U.S. apparel and fabric companies. They all owned their own U.S. manufacturing plants. They all struggled to innovate and grow, and they either went bankrupt or were bypassed by more nimble competitors who had no factories. If only they had outsourced …

Not only is outsourcing good for business, but the future of the American economy is dependent upon it.

So let’s stop whining about a few “Made in China” tags and start cheering for all of the great athletic performances made possible by superior U.S. innovation.

So when you hear someone rail about “Made in China” you can be assured that the person regurgitating such absurdities have either been ignorant of the real developments or have been deliberately employing deception as part of political propaganda to invoke nationalist (us against them) sentiment.

Contagion Risk: More Signs of Asian Economic Slowdown

As I noted last night, the nasty repercussions of bubble bust conditions have been percolating into the global economy from different directions. [Good luck to the stock market bulls]

Here are more evidences of the escalation of the transmission… (from Bloomberg)

Hong Kong and Vietnam signaled growth may fall short of government forecasts this year as Asian policy makers stepped up efforts to protect their economies and currency markets from the worsening global outlook.

Hong Kong may revise its 2012 economic forecast next month, Financial Secretary John Tsangsaid on July 7. In Vietnam, Deputy Prime Minister Vu Van Ninh said the country may miss its growth target and the central bank told lenders to cut borrowing costs on existing loans to help businesses. The Philippines unveiled plans to contain currency gains that may hurt exports.

The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP) reveals of their mercantilist leanings where destruction of the Peso is seen as the elixir to prosperity. History and theory serves no lesson to political agents who uses mercantilists policies to promote the interest of cronies and the political class in the name of exports (or remittances). Good governance? Duh!

The economic growth slowdown also slams Japan hard (from another Bloomberg article)

Japan’s current-account surplus was the smallest in May since at least 1985 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation’s rebound.

The excess in the widest measure of the nation’s trade shrank 63 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg News was for a surplus of 493.1 billion yen. Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005.

Japan’s trade position has weakened due to growing energy imports after last year’s earthquake and nuclear meltdown and also the yen’s gain of 4.9 percent against the dollar since mid- March. Prime Minister Yoshihiko Noda gave approval for a restart of reactors at the Ohi nuclear plant, which resumed power generation last week, to avoid power shortages and rolling blackouts over the summer.

“Today’s machinery order drop is very large, and it may be a signal that Japanese companies are becoming cautious about investment” amid concern about a global economic slowdown, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “Though exports have been slumping, we don’t expect Japan to have any major trade deficit.”

Given that the economic slowdown emanates from multiple fronts, which amplifies the global contagion risks, for any interventions to have short term palliative effect, they must be really huge, coordinated or in collaboration with central banks of major economies from both BRIC and G-7.

Yet if they do so, expect a major train wreck that would make the 2007-2008 episode a picnic ahead.

The Anatomy of Rent Seeking: China Edition

Rent seeking is simply the manipulation of the social or political environment in order to obtain wealth through monopoly privileges (Wikipedia.org). Such actions usually comes in the form of subsidies, various political concessions and or regulations which works to prevent free market competition.

The following controversial article from Bloomberg (which reportedly has been censored in China, according to Zero Hedge) gives an example.

Bloomberg: (bold emphasis mine)

Xi Jinping, the man in line to be China’s next president, warned officials on a 2004 anti-graft conference call: “Rein in your spouses, children, relatives, friends and staff, and vow not to use power for personal gain.”

As Xi climbed the Communist Party ranks, his extended family expanded their business interests to include minerals, real estate and mobile-phone equipment, according to public documents compiled by Bloomberg.

Those interests include investments in companies with total assets of $376 million; an 18 percent indirect stake in a rare- earths company with $1.73 billion in assets; and a $20.2 million holding in a publicly traded technology company. The figures don’t account for liabilities and thus don’t reflect the family’s net worth.

No assets were traced to Xi, who turns 59 this month; his wife Peng Liyuan, 49, a famous People’s Liberation Army singer; or their daughter, the documents show. There is no indication Xi intervened to advance his relatives’ business transactions, or of any wrongdoing by Xi or his extended family.

While the investments are obscured from public view by multiple holding companies, government restrictions on access to company documents and in some cases online censorship, they are identified in thousands of pages of regulatory filings.

The trail also leads to a hillside villa overlooking the South China Sea in Hong Kong, with an estimated value of $31.5 million. The doorbell ringer dangles from its wires, and neighbors say the house has been empty for years. The family owns at least six other Hong Kong properties with a combined estimated value of $24.1 million.

Standing Committee

Xi has risen through the party over the past three decades, holding leadership positions in several provinces and joining the ruling Politburo Standing Committee in 2007. Along the way, he built a reputation for clean government.

He led an anti-graft campaign in the rich coastal province of Zhejiang, where he issued the “rein in” warning to officials in 2004, according to a People’s Daily publication. In Shanghai, he was brought in as party chief after a 3.7 billion- yuan ($582 million) scandal.

A 2009 cable from the U.S. Embassy in Beijing cited an acquaintance of Xi’s saying he wasn’t corrupt or driven by money. Xi was “repulsed by the all-encompassing commercialization of Chinese society, with its attendant nouveau riche, official corruption, loss of values, dignity, and self- respect,” the cable disclosed by Wikileaks said, citing the friend. Wikileaks publishes secret government documents online.

A U.S. government spokesman declined to comment on the document.

While inequality is an innate feature of the marketplace, it is even worse when political access and privilege drives these.

Again from the same Bloomberg article:

Increasing resentment over China’s most powerful families carving up the spoils of economic growth poses a challenge for the Communist Party. The income gap in urban China has widened more than in any other country in Asia over the past 20 years, according to the International Monetary Fund.

“The average Chinese person gets angry when he hears about deals where people make hundreds of millions, or even billions of dollars, by trading on political influence,” said Barry Naughton, professor of Chinese economy at the University of California, San Diego, who wasn’t referring to the Xi family specifically.

Read the rest here

Realize that when politicians and their followers peddle arguments based on “noble sounding” or “feel good policies” such as self sufficiency, nationalism, anti-foreign, currency manipulations-trade deficits, the need for political spending to generate employment (make work bias) and etc.., they are preaching of mercantilism and protectionism which tacitly promotes their interests and NOT of the consumers or of the “people”.

The ultimate beneficiaries of interventionists policies, like the above, are the powers that be.

Interventionism is the essence of rent-seeking politics or crony capitalism.

The rent seeking political economy is a universal phenomenon. The greater share of the political influences on the economy, the more economic opportunities are driven by rent seeking. This includes the Philippines. All you’ve got to do is to OPEN your eyes, use common sense and stop listening to sycophants and the institutional propaganda machines.

Politicians hardly practices on what they preach, as they are focused mainly on generating votes or approval ratings to preserve or expand their entitlements.

In the rent seeking political economy, there are many ways to skin a cat, something which the public can hardly see.

When media and politicians talk about “inequality”, like magicians, they simply are engaged in verbal manipulative framing of the public’s mindset. They deliberately shift the blame on market forces, what in essence are mainly caused by political inequality.

More Devaluation Myths

Investing guru Mark Mobius, executive chairman of Templeton Emerging Markets Group says,

In some cases, a devalued currency can be an engine for future growth. A lower currency price means the nation’s exports will be more competitive (less expensive) in the global market, and imports will become more expensive, so many companies can benefit.

A discussion about currency values should include a discussion about inflation, which is closely interconnected. Inflation has been problematic for many emerging economies, and while it does seem to be ebbing temporarily in some markets, it’s important to remain vigilant about it. High inflation can cause a strong public response (even a mass uprising), as consumer purchasing power quickly erodes.

It would be patently misleading to present devaluation as a different animal from inflation. That’s because devaluation IS inflationism. Consumer price inflation signifies as the effect of prior monetary inflation.

Professor Jeffrey M. Herbener explains,

When a government announces devaluation, as the United States did in 1934 and again in 1971, it is merely recognizing the reality of the consequences of its monetary inflation. Its inflationary policy has eroded the purchasing power of its currency which will be suffered both domestically, with price inflation, and internationally, with devaluation.

The undesirable effects of monetary inflation cannot be eliminated with floating exchange rates. Then the price inflation and devaluation occur gradually instead of being bottled up behind the government’s unsustainable peg. But whether the currency is pegged, as the dollar was in the 1920s and 1930s, or floats, as the dollar has since 1971, monetary inflation and credit expansion cause a boom-bust cycle.

Yet prescribing devaluation is tantamount to, or a euphemism of saying poverty promotes growth.

By having to lower standards of living, as a consequence of the transference of resources to politicians and their cronies, people are expected to work harder in order to generate growth.

So inflationistas are essentially moral schadenfreudes—finding satisfaction in the miseries of people.

Not to mention that inflation represents highway robbery (plunder) by governments of their people.

Even the divine inspiration of statists and facists, John Maynard Keynes admitted to these. (Wikipedia.org; bold highlights original)

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Let’s take the Philippines as example.

The Peso devalued from 2 pesos: 1 US dollar in 1960s to about 42 pesos to a US dollar today. This means the Peso devalued by about 4% annually.

From the perspective devaluation exponents, this should have made the Philippines an export giant. However the Philippines ranks only 57th based on 2011 data according to Wikipedia.org

Ironically, most of the top exporters are represented by ‘strong’ currencies from developed economies, and not from economies that has massively devalued their currencies as Zimbabwe.

It’s good news to see that the Philippine GDP per capital has skyrocketed from $257 in 1960 to $ 2,140.12 in 2010, according to Index Mundi.

But this only accounts for an average annual growth of about 1.7%. That’s way below the rate of devaluation (inflation) at 4%. Also the surge came amidst globalization. As a side note, to put a political spice on this, much of the increase came from the 2003 onwards.

And this has been the "magic" that has spawned PEOPLE exports or the Overseas Filipino Workers (OFWs) whom has been politically labeled as today’s economic heroes, out of the paucity of economic opportunities.

In reality, OFWs are MANIFESTATIONS of an uncompetitive economy borne out of interventionism and inflationism.

And much of that “economic growth” has not only emanated from OFWs, but from the INFORMAL economy which government statisticians downplays or deliberately hides behind the numbers. The informal economy has also been symptom of government failures and of the uncompetitive nature of the economy brought by sustained interventionism and inflationism.

Lastly the idea that exports or tourism benefit from the policy of poverty as a path to prosperity (devaluation) also misrepresents the reality. Devaluation or inflationism provides short term benefits at the expense of the long term.

The great Professor Ludwig von Mises exposes such deception,

If one looks at devaluation not with the eyes of an apologist of government and union policies, but with the eyes of an economist, one must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, favor them exclusively. A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations' monetary systems.

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.

Legal plunder through currency inflationism or devaluation has neither provided long term (or lasting-sustainable) economic solutions nor has it been a moral one.

How Foreign Trade Restrictions Obstructs Economic Growth

In discussing the official complaint filed by the US at the World Trade Organization (WTO) against China’s rare earth export restrictions, Cato’s Dan Ikenson explains the adverse implications of trade restrictions. Mr. Ikenson writes, (bold emphasis mine)

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions). In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Feel good protectionist policies does the opposite of what they intend to accomplish

Yet such policies have been imposed by vested interest groups, who uses the law (in cahoots with vote seeking politicians) to protect their economic standings at the expense of consumers and of the society. This is known as Rent Seeking.

Trade restrictions has significant direct and indirect (unseen spillover) impact to the economy.

Understanding America’s Debt Culture

Writes The End of the American Dream

When most people think about America's debt problem, they think of the debt of the federal government. But that is only part of the story. The sad truth is that debt slavery has become a way of life for tens of millions of American families. Over the past several decades, most Americans have willingly allowed themselves to become enslaved to debt. These days, most of us are busy either going into even more debt or paying off the debt that we have accumulated in the past. When your finances are dominated by debt, it makes it really hard to ever get ahead. Incredibly, 43 percent of all American families spend more than they earn each year. Even while median household income continues to decline (now less than $50,000 a year), median household debt continues to go up. According to the Federal Reserve, median household debt in America has risen to $75,600. Many Americans spend decades caught in the trap of debt slavery. Large numbers of them never even escape at all and die in debt. It can be a lot of fun to spend lots of money and go into lots of debt, but it can be absolutely soul crushing to toil and labor for years paying off those debts while making others wealthy in the process. Hopefully this article will inspire many people to try to escape the chains of debt slavery once and for all.

Because the truth is that the American people need a wake up call. Consumer borrowing rose by another $19.3 billion in December. Right now it is sitting at a grand total of $2.5 trillion according to the Federal Reserve.

Overall, consumer debt in America has increased by a whopping 1700% since 1971.

We always criticize the federal government for going into so much debt, but we rarely criticize ourselves for our own addiction to debt.

Debt slavery is destroying millions of lives all across this country, and it is imperative that we educate the American people about the dangers of all this debt.

The following are 30 facts about debt in America that will absolutely blow your mind....

Credit Card Debt

#1 Today, 46% of all Americans carry a credit card balance from month to month.

#2 Overall, Americans are carrying a grand total of $798 billion in credit card debt.

#3 If you were alive when Jesus was born and you spent a million dollars every single day since then, you still would not have spent $798 billion by now.

#4 Right now, there are more than 600 million active credit cards in the United States.

#5 For households that have credit card debt, the average amount of credit card debt is an astounding $15,799.

#6 If you can believe it, one out of every seven Americans has at least 10 credit cards.

#7 The average interest rate on a credit card that is carrying a balance is now up to 13.10 percent.

#8 According to the credit card calculator on the Federal Reserve website, if you have a $10,000 credit card balance and you are being charged a rate of 13.10 percent and you only make the minimum payment each time, it will take you 27 years to pay it off and you will end up paying back a total of $21,271.

#9 There is one credit card company out there, First Premier, that charges interest rates of up to 49.9 percent. Amazingly, First Premier has 2.6 million customers.

Auto Loan Debt

#10 The length of auto loans in America just keeps getting longer and longer. If you can believe it, 45 percent of all new car loans being made today are for more than 6 years.

#11 Approximately 70 percent of all car purchases in the United States involve an auto loan.

#12 A subprime auto loan bubble is steadily building. Today, 45 percent of all auto loans are made to subprime borrowers. At some point that is going to be a massive problem.

Mortgage Debt

#13 Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago.

#14 Mortgage debt as a percentage of GDP has more than tripled since 1955.

#15 According to the Mortgage Bankers Association, approximately 8 million Americans are at least one month behind on their mortgage payments.

#16 Historically, the percentage of residential mortgages in foreclosure in the United States has tended to hover between 1 and 1.5 percent. Today, it is up around 4.5 percent.

#17 According to Dylan Ratigan, 46 percent of all mortgaged properties in Florida are underwater, 50 percent of all mortgaged properties in Arizona are underwater and 63 percent of all mortgaged properties in Nevada are underwater.

#18 Overall, nearly 29 percent of all homes with a mortgage in the United States are underwater.

#19 If you can believe it, the mortgage lenders now have more equity in U.S. homes than the American people do.

Medical Debt

#20 Medical debt is a major problem for a growing number of Americans. One study discovered that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.

#21 Sadly, the number of Americans that are protected by health insurance continues to decline. An all-time record 49.9 million Americans do not have any health insurance at all right now, and the percentage of Americans covered by employer-based health plans has fallen for 11 years in a row.

#22 But even if you do have health insurance, there is still a good chance that you could end up with huge medical debt problems. According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that actually did have health insurance.

Student Loan Debt

#23 Total student loan debt in the United States is rapidly approaching 1 trillion dollars.

#24 If you went out right now and starting spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#25 In America today, approximately two-thirds of all college students graduate with student loan debt.

#26 The average student loan debt load is now approximately $25,000.

#27 After adjusting for inflation, U.S. college students are borrowing about twice as much money as they did a decade ago.

#28 One survey found that 23 percent of all college students actually use credit cards to pay for tuition or fees.

#29 The student loan default rate has nearly doubled since 2005.

#30 Student loans made to directly to parents have increased by 75 percentsince the 2005-2006 academic year.

At this point, most Americans are up to their eyeballs in debt. According to a recent study conducted by the BlackRock Investment Institute, the ratio of household debt to personal income in the United States is now 154 percent.

Our entire economy has become based on credit.

Read the rest here

You’d hear or read of many adverse or negative imputations as “consumerism”, “not producing enough”, “spendthrift behavior”, “squanderville” and etc… from the mainstream, as if it has been the nature of Americans to be prodigal.

Lost on the real causation for the present circumstances, the politically popular theme has been to shift the blame on China for “currency manipulation” and or for financing US “profligacy”. In short, China bashing has served as a convenient political scapegoat for politicians and their allies.

Yet there have hardly been significant mainstream inquiries on what forces or variables may have influenced or motivated Americans to adapt on such consumption debt-financed based lifestyles.

In terms of government policies, a black hole emerges from mainstream thinking.

While the mainstream fixates on the moral aspects of the debt-consumption dynamics, they gloss over the effects of government policies that have vastly skewed people’s behavior to take on debts at the expense of savings and equity.

For instance, the credit fueled 2008 housing bubble has largely been policy driven. The speculative environment was entwined with debt based consumption activities.

Tax deductions on interest for corporations, and similarly for individuals—tax deductibility on mortgage interest and government subsidies on mortgages—encouraged debt take up and over-leveraging.

Another, capital regulations discouraged traditional mortgage lending and incentivized securitization, which has been abetted by the conflict of interest role played by credit rating agencies, whom ironically have been tightly regulated by the US government.

Also, public policy to promote housing or homeownership provided the moral hazard aspects via commitment by government to various housing subsidies. Thus, American’s penchant for McMansions. (My source Professor Arnold Kling: THE FINANCIAL CRISIS: MORAL FAILURE OR COGNITIVE FAILURE?)

Importantly, the zero bound interest rate policies, or formerly known as the Greenspan Put, favored debtors at the expense of savers. The Greenspan Put had also functioned as a conventional tool used against past crisis which has successfully kicked the proverbial can down the road.

Policies implemented by team Bernanke today have been NO different from the past, ergo the eponymous Bernanke Put.

Artificially suppressed interest rates thereby increases people’s time preference to consume at the expense production.

As the illustrious Ludwig von Mises explained,

The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

Thus, alternative to consumption activities from boom bust policies would be to entice short term speculation; ergo today’s speculative inflationary boom.

The ‘innovative’ and unparalleled Quantitative Easing (QE) approach also shields the banking system from having to face the harsh reality of the required market adjustments, from the massive malinvestments accumulated, brought upon by past policies.

QEs labeled as credit easing by central banks, have likewise been designed to promote debt by alleviating the conditions of the accounting books of the banking and financial industry.

In addition, America’s debt culture signifies a product of mainstream ideology

I previously wrote,

The culture of debt signifies symptoms of accrued policies shaped by the dominant economic ideology which sees spending as the key force for promoting prosperity or keeping society “permanently in a quasi-boom”.

The war against savings, which is being channeled through policy-based low interest rates (“The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last”-General Theory) punishes savers and rewards speculative activities which benefits the wards of central banks—added profits for the banking industry cartel and expanded government spending for politicians.

Never mind the law of diminishing returns on debt to an economy

Past ephemeral successes [plus sustaining a debt based political economy] will lead global authorities towards path dependent policy choices (which is why I think that global QEs will continue)

Besides, politicians and the bureaucracy sees such policies as even more beneficial to them even if the markets suffer from the convulsions of debt overdose: people will be more captive to them which expands their control over the society.

Put differently, the cartelized political institutions made up of the triumvirate of the central bank, the welfare state and the politically privileged “too big to fail” banks represents as the major beneficiaries of a debt driven society, and thus, the incumbent political agents will continue to focus on maintaining the status quo founded on policies, laws and regulations that rewarded debts.

Sad to say, the laws of economics has been catching up with the artificiality of such political arrangement.

Mercantilism: Economic Theories Founded on Biases of Special Interest Political Groups

In a recent quote of the day examining political virtues, I asked

Does 'mistaken theories' cause political "value and ideas" or the other way around (or biased "value and ideas" of special interest groups use the cover of mistaken theories to promote their policies)?

In terms of mercantilism Murray Rothbard has the answer

The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favored high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favored alliances with nobles and with cartelizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries.

Neither did the cartelizing companies need much of a theory to come out in favor of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles, or favored business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles, and monopoly export companies. And who does not want the supply of money in their pockets to rise?

Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist "theory" was a set of rationales designed to uphold or expand particular vested economic interests.