Quote of the Day: Prices and the Myth of Energy Budgets

There is no "energy budget" any more than there is a lumber budget, coffee budget, iron budget or oatmeal budget. There are supplies of these products, which can increase or decrease depending upon prices, but to call these supplies "budgets," suggests A. a fixed amount and B. something that needs to be managed at some national level.

Anyone who understands free markets, would not for a minute be concerned with the amount of energy that is used by various consumer products. Prices will simply dictate limitations of use of products.. For example, gold is a perfectly functional metal that could be used in the construction of bridges. It is not because gold is valued more as jewelry and as a safe non-inflationary alternate medium of exchange. This is reflected in its price. There is no need for any thinking about a "gold budget." The price of gold provides the knowledge to bridge builders that gold should not be used in the building of bridges.

In the same way, it is economic ignorance to be thinking about an "energy budget." Prices will signal to us how energy sensitive our products need to be. That plenty of people use  full-sized HD television sets and X-Box Consoles + a TV, suggests that the energy used for these products is not prohibitive for most…concern about a "world energy budget" belongs up there with the concern for the "world jock strap" budget. It's a complete central planning notion that results from the failure to understand how prices signal uses and production.

This is from Robert Wenzel at the Economic Policy Journal. 

The point is to understand the essence of market price signals than to fall for political demagoguery.

Quote of the Day: Better Regulation Means Regulation by Markets Forces

No stock market commentary for this week

We do need better regulation. But what does that mean? Once we understand the nature of markets and bureaucracies, there’s only one reasonable conclusion: Better regulation means regulation by market forces. Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy. Anything government does to weaken those forces simultaneously weakens the otherwise unforgiving discipline imposed on business firms (and their counterparties)—to the detriment of workers and consumers. Public well-being suffers.

Admittedly, this is a hard sell. Explaining how markets work when they are free of the government’s easy money, favoritism, implicit guarantees, and other perverse incentives takes time and the listener’s concentration. Denouncing markets, railing against greed (which of course never taints politicians), and calling for more government power makes for good sound bites. In the Internet and remote-controlled-cable-TV era, patience is a scarce commodity. So advocates of liberty have barriers to overcome.

Of course government interference with free exchange (misleadingly called “regulation”) is portrayed as necessary for the public good. A key to understanding why it is not is grasping the inability of bureaucrats to know what they would  need to know to do the job they promise to do. Markets–particularly financial markets–are too complex for government officials (or anyone else) to manage. No matter how much power they are given, they will not be able to see the future, spot “excessive risk,” or anticipate how things might go wrong.  But they can be counted on unwittingly to interfere with innovation that would yield public benefits. Any move toward central direction courts disaster. Decentralization and the discipline of competition are our only hope for economic security.

 This is from Sheldon Richman at the Freeman on how political regulation leads to the “money power” (cronyism)

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 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

Quote of the Day: The Folly of Trusting Competence and Character of Public Officials

It is dangerously naive to trust chiefly in the competence and character of government officials while paying little attention to the temptations and complexities that confront such officials – temptations and complexities that grow exponentially with growth in government’s powers.

This from Professor Donald J. Boudreaux at the Café Hayek

Public Work Failure: US Stadiums Burn $4 Billion

Devotees of public work (infrastructure) spending, who see such measures as necessity to lift statistical economic growth, should learn from the experience of US taxpayer funded stadium spending binges.

From Bloomberg,

New York Giants fans will cheer on their team against the Dallas Cowboys at tonight’s National Football League opener in New Jersey. At tax time, they’ll help pay for the opponents’ $1.2 billion home field in Texas.

That’s because the 80,000-seat Cowboys Stadium was built partly using tax-free borrowing by the City of Arlington. The resulting subsidy comes out of the pockets of every American taxpayer, including Giants fans. The money doesn’t go directly to the Cowboys’ billionaire owner Jerry Jones. Rather, it lowers the cost of financing, giving his team the highest revenue in the NFL and making it the league’s most-valuable franchise.

“It’s part of the corruption of the federal tax system,” said James Runzheimer, 67, an Arlington lawyer who led opponents of public borrowing for the structure known locally as “Jerry’s World.” “It’s use of government funds to subsidize activity that the private sector can finance on its own.”

Jones is one of dozens of wealthy owners whose big-league teams benefit from millions of dollars in taxpayer subsidies.Michael Jordan’s Charlotte, North Carolina, Bobcats basketball team plays in a municipal bond-financed stadium, the Time Warner Cable Arena, where the Democratic Party is meeting this week. The Republicans last week used Florida’s Tampa Bay Times Forum, also financed with tax-exempt debt. It is the home of hockey’s Lightning, owned by hedge-fund manager Jeffrey Vinik. None of the owners who responded would comment.

$4 Billion

Tax exemptions on interest paid by muni bonds that were issued for sports structures cost the U.S. Treasury $146 million a year, based on data compiled by Bloomberg on 2,700 securities. Over the life of the $17 billion of exempt debt issued to build stadiums since 1986, the last of which matures in 2047, taxpayer subsidies to bondholders will total $4 billion, the data show.

Those estimates are based on what the Treasury could have collected on interest from the same amount of taxable bonds sold at the same time to investors in the 25 percent income-tax bracket, the rate many government agencies assume. In fact, more than half the owners of tax-exempt bonds pay top rates of at least 30 percent, according to the Congressional Budget Office. So they save even more on their income taxes, a system that U.S. lawmakers of both parties and President Barack Obama have described as inefficient and unfair.

There hardly are major nuances when government undertake projects in the form of Public-Private Partnership, monopolies or public outsourcing to private contractors, or other forms of concessions to the politically favored private enterprises. The incentives guiding private enterprises will be directed towards attaining political objectives of the political masters rather than servicing the consumer.

Importantly, not only have these been a waste on taxpayers money, they become sources of rent seeking, corruption and other unethical relationships.

They have even become sources of public disasters.

And as I recently pointed out, the proposed 407 billion pesos spending by the Philippine government on infrastructure has been seen by media as signs of progress. They see this, under the impression that the incumbent government has been “clean” enough to undertake them.

All these signify a grand delusion. Populism ignores economic reality.

The public fails to understand that NO government have the requisite knowledge of the value scales and time preferences of individuals or of the the knowledge of the particular circumstances of time and place (Hayek) from which serves as the foundation of economic activities. Economic activities basically represent a bottom up phenomenon.

Second, government projects are likely designed under the influences of vested interest groups or cronies or if not by bureaucrats who will be designating them to the same groups for implementation.

Third, the private sector collaborators will benefit from the exposure of taxpayers money through guarantees or subsidies.

In many instances, both parties will find ways to game the system.

Moreover, money spent on public works focuses on short term political goals to promote media popular unproductive employment (to generate approval ratings and votes) at the expense of productive enterprises which provides real productive jobs.

As the great Henry Hazlitt wrote,

For then the usefulness of the project itself, as we have seen, inevitably becomes a subordinate consideration. Moreover, the more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment. Under such circumstances it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.

Of course, all these leads to higher taxes and to price inflation (if these debts will be funded by politically directed credit expansion).

Finally, as shown by the US Stadium experience, politicization of resource allocation leads not only to inefficiency, wastage, but to immoral relationships between officials and their private sector lackeys.

The impression where government will be “virtuous” enough to undertake “honest” public work spending has been founded on utopian fantasies.

Corporations Are People

Emotions can make even the best lose their sense of reasoning

My favorite marketing guru, Seth Godin, writing in disgust from an unfortunate experience by a customer with an insurance company, rants,

if someone in your neighborhood used this approach, treating others this way, if a human with a face and a house and a reputation did it, they'd have to move away in shame. If a local businessperson did this, no one in town would ever do business there again.

Corporations (even though it's possible that individuals working there might mean well) play a different game all too often. They bet on short memories and the healing power of marketing dollars, commercials and discounts. Employees are pushed to focus on bureaucratic policies and quarterly numbers, not a realization that individuals, not corporations, are responsible for what they do…

Corporations don't have to act like this. It's people who can make them stop. Corporations aren't people, people are people.

I sympathize with the tragic case presented by Mr. Godin. But personal tragedies should not be mixed up with ethical principles.

It’s is true that there will always be unscrupulous corporations. But CROOKED or IMMORAL behaviors or actions are NOT exclusive to corporations, they apply to PEOPLE—individuals or even communities (e.g. hate groups)—and most especially this applies to GOVERMENTs who wields coercive power over the community.

Corporations are no other than juridical or legal entity comprising sets of individuals.

Yet one unfortunate experience does not justify a sweeping condemnation of the rest. This represents a fallacy of composition.

Otherwise markets become zero-sum games which tilts the balance according to Mr. Godin’s accusations to producers or service providers at the expense of consumers. This is patently false.

In a market economy, corporations essentially do NOT force ‘people’ to buy their products or services. Mr. Godin admits to this, “If a local businessperson did this, no one in town would ever do business there again.”

But why should this be different elsewhere?

Only governments forces people to avail of their services. On many occasions these may come along with political arrangements with privileged private or semi-private owned corporations (e.g. public private partnerships, monopolies, subsidies and etc).

Corporations under such politically directed setting then would focus “on bureaucratic policies” or meeting political goals rather than servicing the consumers. The incentives guiding profit based private enterprises and public institutions are different.

In a market environment if corporations do not fulfill on their promises, then consumers can vote with their wallets and or file legal suits or countersuits against them.

Markets basically do not reward greed or “the power of marketing dollars” as the consumers are kings—unless inhibited by politics

Apparently, social media pressure (yes the free markets) seems to have forced the alleged corporate non-people antagonist to a settlement with the aggrieved. So the supposed villain has some people aspects too.

The idea of corporations as not representing the individual or the people looks like a Janus faced populist self-contradicting argument riding on people’s emotions in order to get “likes”.

Yet assuming Mr. Godin’s censure is true, this implies that since he possibly owns corporations (e.g. Seth Godin Productions Inc and Squidoo) then his denouncement could also mean that he must be similarly liable for “Corporations aren't people, people are people”

Ever heard of the proverbial pot calling the kettle black?

Olympics and the Egalitarian Bunk

Politicians and their mainstream sycophants frequently lectures, directly and indirectly (through media), the public about the supposed necessity of having a society based on ‘equality’ or egalitarianism.

Unfortunately they hardly practice what they preach.

Professor Tibor Machan exposes the egalitarian balderdash.

The Olympic Games come in very handy for those of us who find egalitarianism morally and politically intolerable. The Games show how little appeal there is to forcing everyone into the same mold, how much violence and coercion it would--and where attempted does--take to even toy with bringing about an egalitarian society.

The only place where equality has a decisive role in human social affairs is when it comes to protecting everyone’s basic rights. This is the way the Declaration of Independence finds room for equality. Once everyone’s basic rights are secure, from that point on no room exists for equalization in a just human community.

Sure, there can be special areas where equality can be of value, for example in the application of standards and rules, as shown in athletics. But even there equality will apply in highly diverse ways--one way in the classroom, another in the legal system, and yet another at a beauty contest. General equality belongs only in the protection of individual rights, period.

Elsewhere it is just as it’s illustrated by the Olympic Games, with variety and differences breaking out all over. As long as these are peacefully obtained, as long as ranking comes about without corruption, there is nothing objectionable about inequalities in human affairs. Furthermore, attempting to make things equal achieves the exact opposite since those doing the attempting will enjoy the worst kind of inequality, namely, power over their fellows as they try to manipulate everyone to be equal.

Just as elsewhere in most of nature, in human affairs, too, inequality is the norm. But since human beings are free to establish various rules in their societies, they have the option, which they ought to exercise, to preclude all coercion from human interactions. Beyond that, it is futile to try to exclude inequalities in human affairs.

It is not inequality that needs to be abolished but coercive force. With that achieved, at least substantially, let diversity and difference be the norm. As that old saying goes, “Vive la difference.” Any serious examination of the prospects of an egalitarians polity should reveal just how insidious the idea is. Just consider requiring that all outcomes of the Olympic Games be equal!

The simple point is that Olympics is all about the inequality of human affairs. The fact that governments promote Olympics has been an implicit recognition of such diversity.

Yet in reality, the politics of egalitarianism represents nothing more than convenient excuses to implement social policies of redistribution or interventionism and the rule of philosopher kings.

Is Hong Kong’s Free Economy a Myth?

Hong Kong has been known as the freest economy in the world.

But skeptics argue that such claims may not be accurate as Hong Kong’s capitalist political economy may have been shadowed by cronyism.

Writes Eddie Leung and Pepe Escobar at the Asia Times,

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".

Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive…

We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".

As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".

Read the rest here.

Hong Kong has certainly not been an ideal laissez faire economy as no country in this world has been.

But rankings of economic freedom, whether by Heritage Foundation or by the Fraser Institute, has been relatively established and have not been measured on absolute terms.

It is also important to note that for as long as the distribution of any resources are politically determined, the natural outcome will be one of collusion, horse trading, favoritism and corruption.

Virtuous or moral government is an illusion more than Hong Kong’s free economy is a myth.

Government officials are human beings too limited by knowledge problem, cognitive biases, value preferences (determined by education, religion, culture, ideologies, family values and etc…), peer pressure, social standings, career ambitions and etc...

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

Also Asia’s increasing social mobility has been an influence to Hong Kong’s property market.

Hong Kong has been the second hottest property market in the world according to MSNBC.com

The growing wealth of mainland Chinese, coupled with China’s property restrictions, has led to an influx of mainland buyers into Hong Kong’s residential market in recent years. According to industry estimates, three in 10 deals in Hong Kong’s luxury property markets are done by mainland Chinese buyers.

Property restrictions too add to the politicization of Hong Kong’s real estate market.

Finally the above authors seem to have misunderstood the meaning of competition by which they ascribe to flawed neo-classical concepts of oligopolies and monopolies through “captive markets” or “limited competition”.

Let me quote the explanation of Austrian economist Dr. George Reisman (bold emphasis mine)

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of "pure and perfect competition." It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won't be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat's world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to "marginal cost" or their day by day, minute by minute adjustment to the requirements of "rationing scarce capacity." It is the setting of prices perhaps only once a year — by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P — not a microscopic-sized wheat farmer or sharecropper — that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men's toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of "pure and perfect competition" have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

I agree that there have been accounts of cronyism in Hong Kong. But Hong Kong’s largely open economy has also been materially influenced by external forces (monetary transmission and mainland immigration and or speculation), focusing on one at the expense of the other only exposes of analytical bias and would signify a big mistake.

Thus to conclude that Hong Kong’s political economy has veered towards an oligarchic-monopolistic environment would “currently” seem exaggerated as there has been little evidence of the deficiency of price competition in the context of the promotion of efficiency, competence and ability.

I say “current” because Hong Kong seems to have taken the slippery slope towards China’s mixed economy (by the introduction of minimum wages) which may change the incumbent political economic setting.

Hong Kong may not be a laissez faire or classical liberal paradise, but relatively speaking, I don’t think that Hong Kong’s free market has been a myth, especially not when compared to the Philippines.

BSP's loan to the IMF: Costs are Not Benefits

The simmering debate over the proposed loan to the IMF by the Bangko Sentral ng Pilipinas (BSP) can be summarized as:

For the anti-camp, the issue is largely one of purse control or where to spend the government (or in particular the BSP’s money) seen from the moral dimensions.

For the pro-camp or the apologists for the BSP and the government, the argument has been made mostly over the opportunity cost of capital or (Wikipedia.org) or the expected rate of return forgone by bypassing of other potential investment activities, e.g. best “riskless” way to earn money, appeal to tradition, e.g. Philippines has been lending money to the IMF for decades, and with some quirk “foreign exchange assets …are not like money held by the treasury” which is meant to dissociate the argument of purse control with central bank policies.

I will be dealing with latter

This assertion “foreign exchange assets …are not like money held by the treasury” is technically true or valid in terms of FORM, but false in terms of SUBSTANCE.

Foreign exchange assets are in reality products of Central Banking monetary or foreign exchange policies of buying and selling of official international reserves (Wikipedia.org)

This means that foreign exchange assets and reserves are acquired and sold by the BSP with local currency units, or the Philippine Peso, prices of which are set by the marketplace

It is important to address the fact that the local currency the Peso has been mandated as legal tender by The New Central Bank Act or REPUBLIC ACT No. 7653 which says

Section 52. Legal Tender Power. -

All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private

This means that ALL transactions made by the BSP based on the Peso are guaranteed by the Philippine government. This also further implies that foreign exchange assets held by the BSP, which were bought with the Peso, are underwritten by the local taxpayers. Therefore claims that taxpayer money as not being exposed to the proposed BSP $1 billion loan to the IMF are unfounded, if not downright silly. We don’t need to drill down on the content of the balance sheet and the definition of International Reserves for the BSP to further prove this point.

The more important point here: whether foreign exchange or treasury or private sector assets, we are dealing with money.

And money, as the great Austrian professor Ludwig von Mises pointed out, must necessarily be an economic good, the notion of a money that would not be scarce is absurd.

As a scarce good, money held by the National government or by the BSP is NOT money held by the private sector.

Therefore the government or the BSP’s “earnings” translates to lost “earnings” for the private sector.

Costs are not benefits. To paraphrase Professor Don Boudreaux, that the benefit the BSP gets from investing in the asset markets might make sacrificing some unseen private sector industries worthwhile does not mean such sacrifices are a benefit in and of itself.

The public sees what has only been made to be seen by politics. Yet the public does not see the opportunities lost from such actions. Therefore, the cost-benefit tradeoff cannot be fully established.

Besides, any idea that loans to the IMF is risk free is a myth. There is no such thing as risk free. The laws of economics cannot be made to disappear, or cannot become subservient, to mere government edicts as today’s crisis has shown. Remember the IMF depends on contributions from taxpayers of member nations. And for many reasons where taxpayers of these nations might resist to contribute further, and or where the loan exposures by the IMF does not get paid, then the IMF will be in a deep hole.

As I pointed previous out the risk to IMF’s loan to crisis nation are real. There hardly has been anything to enforce loan covenants or deals made with EU's crisis restricted nations.

Also, it is naïve to believe that just because the Philippines has had a track record of lending to the IMF, that such actions makes it automatically financially viable or moral. This heuristics (mental short cut) wishes away the nitty gritty realities of the distinctive risks-return tradeoffs, as well as the moral issues, attendant to every transaction. Here the Wall Street saw applies: Past performance does not guarantee future outcomes.

It is further misguided to believe that the government (in particular the BSP) behaves like any other private enterprises.

As a side note, I find it funny how apologists use logical verbal sleight of hand in attempting to distinguish central bank operations from treasury operations but ironically and spuriously attempts to synthesize the functionality of government and private enterprises.

Two reasons:

1. Central banks are political institutions with political goals.

As the great dean of Austrian School of economics, Murray N. Rothbard pointed out,

The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.

2. The guiding incentives and structure of operations for government agencies (not limited to the BSP) is totally different from profit-loss driven private enterprises.

Again Professor Rothbard,

Proponents of government enterprise may retort that the government could simply tell its bureau to act as if it were a profit-making enterprise and to establish itself in the same way as a private business. There are two flaws in this theory. First, it is impossible to play enterprise. Enterprise means risking one's own money in investment. Bureaucratic managers and politicians have no real incentive to develop entrepreneurial skill, to really adjust to consumer demands. They do not risk loss of their money in the enterprise. Secondly, aside from the question of incentives, even the most eager managers could not function as a business. Regardless of the treatment accorded the operation after it is established, the initial launching of the firm is made with government money, and therefore by coercive levy. An arbitrary element has been "built into" the very vitals of the enterprise. Further, any future expenditures may be made out of tax funds, and therefore the decisions of the managers will be subject to the same flaw. The ease of obtaining money will inherently distort the operations of the government enterprise. Moreover, suppose the government "invests" in an enterprise, E. Either the free market, left alone, would also have invested the same amount in the selfsame enterprise, or it would not. If it would have, then the economy suffers at least from the "take" going to the intermediary bureaucracy. If not, and this is almost certain, then it follows immediately that the expenditure on E is a distortion of private utility on the market — that some other expenditure would have greater monetary returns. It follows once again that a government enterprise cannot duplicate the conditions of private business.

In addition, the establishment of government enterprise creates an inherent competitive advantage over private firms, for at least part of its capital was gained by coercion rather than service. It is clear that government, with its subsidization, if it wishes can drive private business out of the field. Private investment in the same industry will be greatly restricted, since future investors will anticipate losses at the hands of the privileged governmental competitors. Moreover, since all services compete for the consumer's dollar, all private firms and all private investment will to some degree be affected and hampered. And when a government enterprise opens, it generates fears in other industries that they will be next, and that they will be either confiscated or forced to compete with government-subsidized enterprises. This fear tends to repress productive investment further and thus lower the general standard of living still more.

From here we derive the third view that distinguishes from the two mainstream camps:

Government is NOT supposed to “earn” money. Government should leave the private sector to earn from productive undertakings. Whatever “surpluses” or “earnings” should be given back to the taxpayers. How? By reducing taxes, by cutting down government spending and or by paying down public debt.

The “returns” from these actions will surely outweigh gains made from political speculations. Unfortunately this has been unseen.

As the great Frederic Bastiat once remarked

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

Dealing with Today’s Uncertainty: Patience is the Better Part of Valor

Highly volatile markets will be the outcome of today’s treacherous geopolitical conditions. That’s what I have been saying all along.

Volatility in Both Directions but with a Downside Bias

So far my perspective has been continually confirmed: volatility on both directions with a downside bias, especially for the Phisix.

A week ago, the Phisix got slammed early but the bulls worked their way to cover on the lost ground, and by the end of the week, losses had been trimmed to less than half[1].

The opposite scenario occurred this week: the Phisix had a strong opening carried mostly by the initial torrent from Spain’s bailout, but bulls eventually succumbed to the bears by the week’s close.

Technically speaking, in spite of all the volatility, the Phisix has been rangebound.

Volatility has been global.

In seeming defiance of gravity where bad news conventionally extrapolates to lower markets, today, bad news IS good news.

It is ironic to see central bankers scream for blood[2], yet global equity markets trekked higher. That’s because market participants have been conditioned to the Bernanke Put or expectations that central bankers, led by the US Federal Reserve, will like a knight in shining armor, ride to the rescue.

News of the $125 billion Spanish bailout prompted for a one day euphoria which quickly faded. It was evident that markets saw through the flaws of the proposed bailout[3]. However as the week progressed, the spate of bad news gave way to intensifying speculations, which has been further fuelled by promises[4] of renewed interventions by central bankers.

Except for ASEAN bourses which posted mixed showing, major global indices registered modest to significant gains over the week.

China’s Loan Growth and Chart Patterns

China’s loans unexpectedly jumped in May, according to news reports[5]. This has prompted the Shanghai index to post a modest advance of 1.13% over the week.

Most of the growth in China’s credit markets seems to have been driven by State Owned Enterprises (SOE). This means that China may have embarked on a furtive state based stimulus rather than a nationwide program.

Unfortunately SOE’s which have played a prominent role in the expansion of China’s highly fragile shadow banking system and which has already been encumbered by questionable loans, may have limited actions for further expansion. But of course, given that SOEs are government owned firms, restrictions may be circumvented to advance political goals.

Yet given the moderate gains exhibited by China’s equity markets on such development, investors must have remained cynical to the sustainability of China’s bailout policies.

Nevertheless surging bond yields have not posed as a burden to global stock markets in heavy anticipation of central bank steroids. In spite of Spain’s bailout, Spain and Italy’s bond yields soared[6].

A week’s action cannot be read as a sustainable trend, thus we must continue to observe how prices in various markets will react to China, as well as to the developments in Europe, particularly the Greece moment and in the US.

Many have crowed about the bullish potentials of the US stock market through the reverse head and shoulder pattern, which they think may have a spillover on the Philippines.

As I pointed out in the past, patterns don’t make prices, people’s actions do.

It will be actions of central bankers that will determine the directions of the marketplace rather than chart patterns. I pointed out last year that the death cross in the US S&P 500 in August of 2011 signified a false alarm[7] (false positive error) and was eventually validated four months after[8].

So far, US money supply M2 seem not supportive of a sustained rise by the S&P 500 owing possibly to the US Federal Reserve’s offsetting of the “flight to safety” inflows coming from the EU and from the closure or winding up operations of Operation Twist as discussed last week[9].

It would likely take the FED another ramping up of their balance sheet expansion to rekindle the monetary accommodation.

So the bullish chart pattern may play out its trend if the Fed will ease further, otherwise, the chart pattern will likely fail.

Buy the Rumor, Sell the News

Global financial markets have relied heavily on the “buy the rumor” from central banking rescues.

These are likely to have two short to medium term outcomes.

One, if central bankers FAIL to deliver in accordance to market’s expectations, then we will likely see another huge bout of downside volatility in global equity markets.

The Phisix, whom has not been immune to contagion, may breakdown its recent support level at 4,863, a level which represents nearly 10% from the peak. But a breakdown may not necessary lead to a bear market.

Yet such market turmoil may likely serve as fulcrum for the next batch of intensive interventions. Nevertheless, under such conditions, it would be best to wait and see until volatilities in the financial markets (stocks, commodities, bonds) subside, before considering to reposition.

On the other hand, if markets may be temporarily satisfied with REAL actions of central banks (e.g. $1 trillion bailout) then we should see a minor or a slight “sell on news”. But this should be seen as opportunities to RE-ENTER the markets incrementally.

Of course, the direction of gold prices, as well as, prices of general commodities, will serve as crucial indicators in determining the strength of the trend.

While gold’s price trend has significantly improved, there have been little signs of progress in the oil market (WTIC) and the general commodities (CRB).

Finally as caveat, I would like to reiterate that should markets continue to rise in ABSENCE of REAL actions from central bankers, we cannot rule out that the markets could fall like a house of cards (fat tail risks) or what I would call a Dr. Marc Faber event[10].

The market’s deep addiction to stimulus will eventually seek REAL stimulus more than just promises or in central bank lingo, signalling channel. Reversal of expectations can become violent.

As a side note, I find it ridiculous for people especially so-called experts to assert that today’s problems have been caused by lack of confidence, as if confidence has been randomly determined, and not in reaction to changes in the environment or in response to interactions with people. People have been not confident with the markets because of the persistent problem of insolvency and price artificiality and price distortions from political meddling. It’s a severe mistake to interpret effects as THE cause.

Bottom line: Global financial markets, including the Phisix, remains in a state of limbo. Uncertainty still governs. Under current conditions, the best guiding principle would be; patience is the better part of valor.

---

[1] See Expect a Continuation of the Risk ON-Risk OFF Environment, June 11, 2012

[2] See Central Bankers Talk Doom, Markets Surge, June 16, 2012

[3] See Why Spain’s Bailout may NOT Work June 12, 2012

[4] See Talk Therapy boost US Markets, June 15, 2012

[5] See China’s New Loans Unexpectedly Surged in May, June 12, 2012

[6] Danske Bank, All eyes on Greek election June 15, 2012 Weekly Focus

[7] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[8] See US Equity Markets: From Death Cross to the Golden Cross, December 31, 2011

[9] See Expect a Continuation of the Risk ON-Risk OFF Environment, June 11, 2012

[10] See Dr. Marc Faber Warns of 1987 Crash if No QE 3.0, May 11, 2012

We Owe it to Ourselves: US Federal Reserve buys as US Treasury Sells Debt

Well, the US government continues to indulge in self-financing her ballooning debts.

The Zero Hedge notes,

Same time, same place, One day later. After yesterday the Treasury engaged in nearly contemporaneous monetization in the 10 Year bond courtesy of the Fed, first buying then selling the paper, at a record low yield of course, so minutes ago the Treasury just sold $13 billion in 30 year paper at another fresh record low yield of 2.72%, down from 3.06% in April. Ignore that the Bid To Cover plunged from 2.73 to 2.40, the lowest since November 2011, and that Indirects were barely interested, taking down just 32.5%, it was all about the Directs, whose 24% take down soared, and as in yesterday's case, was one of the Top 5 highest ever. China? or Pimco? We will find out soon. Dealers were left with the balance, or 43.5% the lowest since October 2011. Something tells us that once the Fed extends Twist, or engages in more outright LSAPs, we will be seeing much more of this same day turnaround service as little by little all interest-rate sensitive instruments slowly grind down to zero.

As the great Ludwig von Mises wrote,

The most popular of these doctrines is crystallized in the phrase: A public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people.

Every action has consequences. These will be revealed in due time.

Philippine Overseas Workers Help Fuel Philippine Property Bubble

Again reports glorify political superficialities as supposedly fueling economic progress.

From Bloomberg,

Filipinos investing in the local property market with money earned overseas helped make the peso Asia’s best-performing currency of 2012, even as a global economic slump sapped demand for riskier assets.

Euliver Dizon, a web designer in the U.S., is scouting for a home in Manila, praising President Benigno Aquino for improving the economy. Rommel Adre, a software developer who worked abroad from 2000 to 2011, bought a home in the capital and some properties to rent. Aileen Respicio, a former domestic helper, opened a beach resort with her Scottish husband six years ago and is now buying more land.

The peso has gained 3.7 percent this year versus the dollar including interest. Capital inflows aid Aquino’s drive to win an investment-grade rating, which would allow the Philippines to attract pension money needed to build roads, bridges and airports. Central bank data shows remittances from overseas workers rose 5.4 percent in the first quarter from a year earlier to $4.8 billion, accounting for 10 percent of the economy. They don’t detail use of funds.

There seems hardly a meaningful correlation between the year on year changes of remittances AND the Philippine Peso. In other words, it would be misguided to allude a causal relationship between the Peso and Remittances. This would be a post hoc fallacy.

Moreover, in reality, the Peso has been appreciating prior to the current administration. So domestic politics has hardly been a big factor in the Peso’s advances.

Also, the Peso’s rise has not been in isolation, the Peso has risen ALONG with major ASEAN contemporaries. This means that the Peso’s rise, as well as the Phisix has been a regional if not global phenomenon as I previously discussed.

This is another validation of George Soro’s reflexivity theory which describes the feedback loop mechanism between the influences of price actions in the financial markets and perceptions affecting real actions.

This also shows how policies can be manipulated to promote political agenda: What is misread as progress has in reality, been an offshoot of negative real interest rate policies. This ongoing property boom has long been in my tarot cards.

Yet local officials can’t see bubbles.

More from the same article…

The peso rose 0.7 percent to a one-month high of 42.635 per dollar yesterday. The central bank, due to report April data tomorrow, predicts remittances will reach a record $21 billion this year. They are growing faster than the 5 percent target, helping to support the peso, Finance Secretary Cesar Purisima said. He said there is no evidence of hot money driving property prices higher.

“We are monitoring carefully the situation to make sure we don’t create problems down the road for us in terms of asset bubbles,” Purisima said in an interview at Bloomberg’s headquarters in New York on June 12. “We are very far from the situation.”

Overseas Filipinos account for about 30 percent of residential sales, as many workers have already satisfied the food and clothing needs of their families, said Alex Pomento, head of research at Macquarie Group’s Manila unit. About 100,000 housing units have been added per year since Aquino took office in 2010, up from about 60,000 in 2007, he said.

Of course, it would be self defeating for politicians to curb the bubble which has been part of their image building or in projecting of their “success”. Public opinion is easily swayed by actions with short term impact.

Let me add that such news tend to overrate the 30%, which account for the residential sales by Filipino overseas buyers, but has been silent on the 70%--the local buyers. Media, mainstream experts and politicians panders to OFWs because the latter has gained political clout.

With the rate of real estate projects mushrooming over the metropolis, one would wonder where all the buyers and tenants would come from to fill up coming supplies.

Metro Manila has nearly 12 million population with a annual growth rate of around 2%. I don’t have data on the per capita growth of the metropolis, but construction activities suggest of expectations of immense (unrealistic) growth or an unsustainable boom.

Besides unlike Hong Kong and Singapore which has lack of land space to build on, the Philippines has vastly wide areas for residents especially if one considers the adjacent outskirts.

A little observation will help. Go out at night and observe the existing condos. I estimate that occupancy level, based on lights, has been less than 50% for most condo buildings especially on business districts. So more supplies will improve occupancy?

Overseas hot money may not (at the moment) be the drivers of the current property bubble but local money from easy money policies will. This will be compounded by money from Filipino Overseas Workers whom will be impelled by monetary policies abroad and seduced by political fiction.

I’d rather be picking on the wreckage of a bubble bust, than be a victim of political hysteria.