IMF Declares: Philippines Insulated to the Fed's Taper-Exit

The demigod known as the IMF declares that the Philippines will be insulated from the FED’s taper and exit.

Reports the Wall Street Real Economics Blog

The Fed’s eventual exit from easy-money policies will separate the emerging market wheat from the chaff.

One country that can handle the Fed exit is the Philippines, says the International Monetary Fund.

Reason? This time is different

But Ms. van Elkan says the country’s strong current account receipts, net creditor status, steady reductions in public debt and low foreign participation in government debt markets have helped insulate the economy against more capital flight. Manila’s own Fed, Bangko Sentral ng Pilipinas, can also release funds from its Special Deposit Account to provide a cushion to growth, she said.

Upside risks instead?

In fact, Ms. van Elkin says risks to the country’s growth are to upside.

“Absorbing the ample liquidity into productive sectors may prove challenging,” she says, after an annual review of the country’s economy.  “Part of the liquidity could finance credit that is used to fuel demand for real estate, potentially with a strong procyclical effect on the economy,” she added.

The IMF Philippine representative seem to suggest that the recent ruckus in the domestic financial markets have been one of the seller’s imagination.

The Philippine Phisix got slammed not once but TWICE within a span of three months.

That’s because perhaps, from the IMF perspective, foreign investors may have been spooked by some imaginary hobgoblin who stampeded out of local assets during the same period (table from the BSP).

The domestic currency, the peso,  has likewise been whipped.

The IMF seems to contradicting US Fed chair Ben Bernanke who has been terrified by the tightening conditions

I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank

Should the taper hit the US economy, the IMF assumes away all economic, financial and political linkages between the US and the Philippines, such that the latter can simply ride off to the sunset because of the reliance on backward looking data. Yet such event defies what occurred in 2008.

And with companies like San Miguel Corporation already been in a debt shindig (total debt Php 424 billion or about 5% of total banking assets-universal, thrift and rural), insatiably gorging on “finance credit”  that has a “procyclical effect on the economy”, it is a wonder how sustained rise foreign interest rates and a fall in the domestic currency, as the IMF assumes, will hardly have an impact to foreign denominated loans, as well as, how a rise in domestic rates will hardly affect credit quality of peso denominated loans. 

Yet what will likely be the ramifications to the broader economy once high geared companies will be exposed to them? Such risks have been dismissed as irrelevant. And the IMF demigods says these the Philippines should continue to borrow like mad and inflate more bubbles.

The reality is that there is no free pass to systemic imbalances molded via debt financed bubbles. Once tightening occurs, the law economics will prevail and delusions will be exposed.

But sorry for ad hominem, but the IMF has been devastatingly wrong in so many times. 

The IMF revised their flawed outlook on Greece’s growth several times, as Keep Talking Greece points out: (bold mine)

The IMF’s review on its Greek program was released late last night. The 51-pages document on Greece’s fiscal adjustment program 2010-2013 is more than clear: The IMF screwed Greeks for three consecutive years. The IMF failed to realize the damage  austerity would do. The IMF failed to predict the real recession. The IMF applied wrong multipliers. The list in which the IMF officially admits its mistakes and failures in the case of Greece is long and despicable, if one takes into consideration the thousands of impoverished Greeks, the 1.3 million unemployed, the crash of the health care and the social welfare, the practical collapse of the public administration and inhuman austerity measures like taxing the verified poor. - 

How they were wrong in Jordan, from the Jordan Times (bold mine)

The estimates made by the staff of the International Monetary Fund, for example, are absolutely undependable. They have no real value, not only in the long run i.e., after several years, but also in the short run i.e., in the same year, as I shall demonstrate.

IMF delegates visited Jordan recently. They examined all figures and statistics, listened to officials at the Ministry of Finance and the Central Bank and came up with a set of economic and financial predictions for the current year 2012.

They published those predictions on the IMF Internet site dated in April, i.e., after an important part of the year had passed and the trends had become clear.

Unfortunately, those predictions were way far from reality.

And how they failed to see the 2008 crisis

From the Foreign Policy.com (bold mine)

The IEO has just released its report—and it's a very tough critique of the IMF's performance and internal culture:

"The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.

One key assertion is that the IMF's staff was intellectually and psychologically unprepared to challenge the regulatory authorities in the most advanced economies.

"IMF staff felt uncomfortable challenging the views of authorities in advanced economies on monetary and regulatory issues, given the authorities’ greater access to banking data and knowledge of their financial markets, and the large numbers of highly qualified economists working in their central banks. The IMF was overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise; this is perhaps a case of intellectual capture.

In short, the IMF’s Achilles Heels is one of “pretense of knowledge”.

As the great Austrian economist F. A. Hayek noted

this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

Oh by the way, if the IMF remains “overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise”, then this should be a source of MORE concern.

One reason why the Philippines occurred portfolio outflows in August according to the Bangko Sentral ng Pilipinas has been due to “hesitancy to invest during the “ghost” month of August (believed to be unlucky for business)”  

You can’t make this up. Local officials experts attribute Chinese superstitions as economic analysis. Incredible.

And who were the biggest selling investors in August. 

Again the BSP

The United Kingdom, the United States, Singapore, Luxembourg and Hong Kong were the top five (5) investor countries for the month, with combined share of 76.4 percent.  The United States continued to be the main beneficiary of outflows from investments, receiving US$1.1 billion (or 77.6 percent of total).

I didn’t know that US-UK investors subscribed heavily to the Chinese tradition.

But that’s expert analysis for you.

Knowledge Problem and the US Housing Bubble

The great Austrian economist Friedrich August von Hayek explained of the fundamental reason why central planning can’t work: the knowledge problem—or the limitations on what people can know.

In his Nobel Prize speech “The Pretense of Knowledge” Mr. Hayek said, (bold mine)

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, "dizzy with success", to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Alex Pollock, of the American Enterprise of Institute writing at The American exposes on such knowledge problem by political authorities who blatantly misdiagnosed and consistently made failed predictions during the recent US housing bubble.

How much can you trust the word of government officials? How much about the financial future can central bankers or anybody know? Consider the lessons of the following 10 quotations:

1. About whether Fannie and Freddie’s debt was backed by the government: “There is no guarantee. There’s no explicit guarantee. There’s no implicit guarantee. There’s no wink-and-nod guarantee. Invest and you’re on your own.” — Barney Frank, senior Democratic congressman, notable Fannie supporter, later chairman of the House Financial Services Committee

It would be difficult to imagine a statement more wrong.

2. “We do not believe there is any government guarantee, and we go out of our way to say there is not a government guarantee.” — John Snow, Republican and secretary of the Treasury

Saying it did not make it so, unfortunately.

3. “The facts are that Fannie and Freddie are in sound situations.” — Christopher Dodd, senior Democratic senator, prominent Fannie supporter, chairman of the Senate Banking Committee

Pronounced two months before Fannie and Freddie collapsed.

4. “We have no plans to insert money into either of those two institutions [Fannie and Freddie].” — Henry Paulson, Republican and secretary of the Treasury

Stated one month before the Treasury started inserting money into Fannie and Freddie.

5. “Home prices could recede. A sharp decline, the consequences of a bursting bubble, however, seems most unlikely.” — Alan Greenspan, chairman of the Federal Reserve Board

The common wisdom of the bubble years. At the time of this statement in 2003, the Fed was in the process of dramatically reducing short-term interest rates and stimulating house-price increases.

6. “Global economic risks [have] declined.” — International Monetary Fund

Observed four months before the international financial panic started in August 2007.

7. “More than 99 percent of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.” — Federal Deposit Insurance Corporation

This statement was made in the second quarter of 2006, at the peak of the housing bubble. More than 400 such institutions later failed and others were bailed out in the ensuing bust. The FDIC failed its own required capital ratio, reporting negative net worth.

8. “The risk to the government from a potential default on GSE [Fannie and Freddie] debt is effectively zero.” — Joseph Stiglitz, Nobel Prize–winning economist, Peter Orszag, a future White House budget director, and Jonathan Orszag

Conclusion after considering “millions of potential future scenarios” — but obviously not the scenario which then actually happened.

9. "'Not only didn’t we see it coming,' but once the crisis started, central bankers 'had trouble' understanding what was happening." — Remarks by Donald Kohn, vice chairman of the Federal Reserve Board

A candid statement of the truth.

10. Finally: “Libenter homines id quod volunt credunt.” That is: “People easily believe that which they want to believe.” — Julius Caesar

Nothing has changed in this respect since Caesar’s day, and his dictum applies to government officials, central bankers, economists, and experts — just as it does to you and me.

Graphic of the Day: MIT Academes Govern World’s Money Policies

Could revolving door relationships between central banks and the highly protected banking industry signify manifestations of more than just the Goldman Sachs connection?

Central bank policies appear to have another a common denominator; they seem to be undergirded by academic pedantry from the stealth sanctums of the Massachusetts Institute of Technology (MIT). 

From the Wall Street Journal (bold mine) [hat tip zero hedge]

Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

Their monetary strategy isn't found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.

How the world’s tightly knit central bank cabal operates, again from the same article:

Central bankers themselves are among the most isolated people in government. If they confer too closely with private bankers, they risk unsettling markets or giving traders an unfair advantage. And to maintain their independence, they try to keep politicians at a distance.

Since the financial crisis erupted in late 2007, they have relied on each other for counsel. Together, they helped arrest the downward spiral of the world economy, pushing down interest rates to historic lows while pumping trillions of dollars, euros, pounds and yen into ailing banks and markets.

Three of the world's most powerful central bankers launched their careers in a building known as "E52," home to the MIT economics department. Fed Chairman Ben Bernanke and ECB President Mario Draghi earned their Ph.D.s there in the late 1970s. Bank of England Governor Mervyn King taught briefly there in the 1980s, sharing an office with Mr. Bernanke.

Many economists emerged from MIT with a belief that government could help to smooth out economic downturns. Central banks play a particularly important role in this view, not only by setting interest rates but also by influencing public expectations through carefully worded statements.

While at MIT, the central bankers dreamed up mathematical models and discussed their ideas in seminar rooms and at cheap food joints in a rundown Boston-area neighborhood on the Charles River.

This gives light to the cartel-like operations of world’s central banks, who operate in consonance or in apparent collaboration with each other. 

Experimental policies, which encompasses excessive reliance on mathematical models, centralization and presumption of knowledge, are a fatal mix to the real world. 

As Nassim Taleb wrote in The Bed of Procrustes: Philosophical and Practical Aphorisms; p.72

Academics are only useful when they try to be useless (say, as in mathematics and philosophy) and dangerous when they try to be useful.

On the Central Planner’s Forecasting Failures

Do central planners have detailed or accurate knowledge about the workings of the markets and the economy? 

From Bloomberg,

The Bank of England’s forecasting capabilities have deteriorated in the past five years, resulting in “large” errors, and officials should investigate the reasons for such shortcomings, an independent review said today.

The report by David Stockton, a former Federal Reserve official, sets out options including encouraging “more assertive” staff to challenge the central bank’s “house view” and incorporating financial-stability risks into forecasts. It said the latter should be “high on the agenda.”

The review is one of three commissioned by the central bank’s governing body following a lawmaker push for an inquiry as the BOE prepares to take on unprecedented powers to regulate the financial system. The bank also released reports on its framework for providing liquidity to the financial system and its emergency support to banks.

“The Monetary Policy Committee’s recent forecast performance has been noticeably worse than prior to the crisis, and marginally worse than that of outside forecasters,” Stockton said. “The bank and the MPC need to introspect more deeply and more systematically about the lessons that can be gleaned from episodes of large forecast errors.”

Even a recent study from the US Federal Reserve of St. Louis questioned the debt and deficit forecasting capabilities of the Congressional Budget Office (CBO) whose “projections for longer horizons are considerably worse than those for shorter horizons”

Of course one can’t resist pointing out the astounding blindness of US Federal Reserve Chairman Ben Bernanke’s to the onset of the crisis of 2008 which continues to linger or haunt the US and world economies, today.

The central planner’s fundamental mistake emanates from the dependence on the supposed accuracy of the substitution or the simplification of knowledge through numerical aggregates based on econometric-statistical models for what in real life is a complex world operating on decentralized knowledge from human action from a combination of localized knowledge or “particular circumstances of time and place”, the individual’s unique and immeasurable preferences and value scales, economic calculation and the dynamic stimuli-response/action-reaction to the ever changing environment.

In accepting the Nobel Prize, the great F.A. Hayek explained of the pretense of knowledge by so-called experts

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

If central planners have been blatantly, consistently and pathetically wrong with their economic forecasting—stemming from erroneous assumptions, premises, theories or models—then what more should we expect of the consequences derived from policies grounded on these wrong projections?

Black Swan theorist and author Nassim Taleb warns about mistaking centralization for stability (Foreign Affairs):

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to "Black Swans" -- that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.

Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems.

Seeking to restrict variability seems to be good policy (who does not prefer stability to chaos?), so it is with very good intentions that policymakers unwittingly increase the risk of major blowups. And it is the same misperception of the properties of natural systems that led to both the economic crisis of 2007-8 and the current turmoil in the Arab world. The policy implications are identical: to make systems robust, all risks must be visible and out in the open -- fluctuat nec mergitur (it fluctuates but does not sink) goes the Latin saying...

Social policies aimed at ‘suppressing volatility’ which ultimately ends up with ‘massive blowups’ signifies as bubbles in motion are the risks we all envisage considering the path towards centralization (for instance, EU’s political union, bank supervision, expansive financial regulation)  undertaken by most developed economies.

Bottom line: I would not trust an iota of what central planners say.

China’s Public Works Disasters

Here is another example of the unintended nasty effects from China’s centrally planned capital-infrastructure spending boom

From the International Business Times

A collapsing bridge in northern China killed three people and injured five others on Friday.

The Yangmingtan Bridge stretched across the Songhua River in the Heilongjiang province, according to the BBC. But the collapsed section, which was about 328 feet long, came from a ramp over dry land. It was about 5:30 a.m. when four loaded trucks spilled onto the ground as the road beneath them fell apart.

The worst part is that nobody is surprised by Friday's tragedy; this was China's sixth major bridge collapse since July of 2011.

Note: This incident has been the SIXTH major bridge collapse since July 2011. This appears to be the result of the 2008-2009 stimulus program, which prompted the Chinese government to rush public works for the sake of keeping up with statistical job growth via Keynesian policies.

Other grand “public work” projects have also experienced accidents. Again from the same article…

The Yangmingtan Bridge, a multi-million-dollar project, was finished just nine months ago. It is one of many infrastructure projects undertaken by the Chinese government in recent years. These include over 4,200 miles of high-speed rail tracks, which may increase to 12,000 miles by 2020; the Three Gorges Dam on the Yangtze River, which is the largest hydroelectric project the world has ever seen; and the rapid construction of new airports that, if all goes according to plan, will bring China's total up to 230 by 2015

But for all their successes, each of these grand projects has been marked by serious failures.

China's high-speed trains, for instance, may be going a bit too fast; there have been several accidents over the last few years. In July of 2011, a two-train collision killed 40 people. In March of this year, a 980-foot stretch of track along the Yangtze River collapsed due to nothing more than heavy rains. And in the Heilongjiang Province on Thursday evening, a minor crash injured 24 people.

The Three Gorges Dam has plenty of issues too, though it generates enough watts to power Switzerland. It has necessitated the relocation of over a million people, and its construction has come at a huge environmental cost. Lately, a change in the reservoir's water level has resulted in dangerous landslides, and Reuters reported this week that another 100,000 people will soon have to head for higher ground.

Man made disasters and accidents account for some of the unintended consequences.

But there is more, many upcoming projects risk underutilization or becoming white elephants…

And if all goes to plan, China's planned airport development will put a full 80 percent of the population within 65 miles of an air transport hub. Some argue that this might be a little excessive for a country where, just last year, two-thirds of China's current 180 airports were unprofitable. (Chinese officials argue that air travel is a burgeoning industry, and that an extensive network of transit hubs will generate the traffic needed to make it profitable.)

Japan’s bubble bust legacy of “socialization of investments” from numerous money losing taxpayer funded public airports should be an example.

Assuming the noble intentions of political authorities, central planning implies omniscience and the superiority of knowledge over the marketplace which simply isn’t true. Political authorities cannot know of the individual preferences and values and of the particular circumstances of time and place with respect to individual actions.

Also this also disregards the notion of the incentives guiding policymakers

Virginia Postrel in her 1998 book, The Future and Its Enemies as quoted by Professor Don Boudreaux,

To centralize knowledge for the sake of planning and “efficiency” – the technocratic dream – we have to throw away vast amounts of local knowledge.

Depending on topsight can easily lull us into imagining that we see not only the “big, big, big, big, big, big, big, big picture” but the whole, including the critical details. At a distance, it is easy to think that other people just don’t know what they’re doing – especially when you can override their decisions by decree rather than through persuasion or competition.

Yet most seem to forget that political authorities tend to itch on spending other people’s money.

Politicization of the allocation of resources leads not only to waste, deaths from accidents and corruption, but to systemic fragility from centralization of policy errors—the hemorrhage of resources and capital on unproductive undertaking (capital consumption), of mounting debts to finance political boondoggles (debt crisis) and of the loss of civil liberty.

In Defense of Insider Trading

From Harvard Professor Jeffrey Miron (Hat tip: Bob Wenzel)

Most policymakers, along with the general public, believe that insider trading should be banned. Yet straightforward economic reasoning suggests the opposite.

The most obvious effect of a ban is delaying the release of relevant information about the fortunes of publicly traded companies. This means slower adjustment of stock prices to relevant information, which inhibits rather than promotes market efficiency.

Imagine, for example, that the CEO of a pharmaceutical company learns that a blockbuster drug causes previously unknown side effects. Absent a ban, the CEO might rush to sell or short his company’s stock. This would have a direct effect on the share price, and it would signal investors that something is amiss. Insider trading thus encourages the market to bid down the shares of this company, which is the efficient outcome if the company’s fortunes have declined.

Under a ban on insider trading, however, the CEO refrains from dumping the stock. Market participants hold the stock at its existing price, believing this is a good investment. That prevents these funds from being invested in more promising activities. Thus the ban on insider trading leads to a less efficient allocation of the economy’s capital.

Whether these efficiency costs are large is an empirical question. Short delays of relevant information are not a big deal, and the information often leaks despite out the rules. Thus, the damage caused by bans is probably modest. But efficiency nevertheless argues against a ban on insider trading, not in favor.

And bans have other negatives. Under a ban, some insiders break the law and trade on inside information anyway, whether by tipping off family and friends, trading related stocks, or using hidden assets and offshore accounts. Thus, bans reward dishonest insiders who break the law and put law-abiding insiders at a competitive disadvantage.

Bans implicitly support the view that individuals should buy and sell individual stocks. In fact, virtually everyone should just buy index funds, since picking winners and losers mainly eats commissions, adds volatility, and rarely improves the average, risk-adjusted return.

Thus, if policy is worried about small investors, it should want them to believe they are at a disadvantage relative to insiders, since this might convince them to buy and hold the market. Bans instead encourage people to engage in stupid behavior by creating the appearance – but not the reality – that everyone has access to the same information.

The ban on insider trading also makes it harder for the market to learn about incompetence or malfeasance by management. Without a ban, honest insiders, and dishonest insiders who want to make a profit, can sell or short a company’s stock as soon bad acts occur. Under a ban, however, these insiders cannot do so legally, so information stays hidden longer.

Thus, bans on insider trading have little justification. They attempt to create a level playing field in the stock market, but they do so badly while inhibiting economic efficiency

Information will always be asymmetric.

People do not read news or even mandated ‘public disclosures’ at the same time or at similar degrees. And people’s interpretation and absorption of information will be always be distinct.

I don’t read the newspaper by choice, so I am at a disadvantage on information or facts disclosed. Also, readers of broadsheets have different preferences, e.g some value the business section, some read sports, some prefer entertainment and so forth…

Yet this deficiency in information does not deprive me of the necessary knowledge required for investing overall. In short, the desire for information is about tradeoffs and preferences. Legal mandates will not equalize information dissemination.

And this applies to insiders as well.

The price channel is always the best medium for information (economic or fundamentals).

Importantly, a ban on insider trading or attempts to equalize information through restrictions of insider knowledge does not attain the political objectives intended, as pointed by Professor Miron. In reality, such regulations tilt the balance to favor transgressors.

Insider trading bans is another example of feel good arbitrary laws which in reality are ambiguous, uneconomical, and repressive, i.e. can be or has been used to intimidate or harass individuals or entities for political goals rather than to attain market efficiency.

Yet the ultimate violators of insider trading are central banks who have been manipulating the financial markets, through various means (QEs, swaps, zero bound rates, subsidies, etc...), all to the benefit of the banking system and other Fed cronies, as well as, regulators who erect walls of protectionism to protect favored political entrepreneurs (cronies) which enhances their company's stocks values.

Quote of the Day: Real Knowledge versus Pretentious Knowledge

People who know what they're talking about...

Almost always talk like they know what they're talking about. That's why it pays to invest more time than you might imagine on the vocabulary, history and concepts of your industry.

Insider language, terms of art, the ability to use technical concepts... it matters.

On the other hand, sounding like you're smart doesn't mean you are.

Necessary but not sufficient.

My favorite marketing guru Seth Godin says it best.

Admitting to ignorance is a fundamental way to acquire knowledge. On the other hand, the presumption of possessing superlative knowledge exposes one's ignorance. Filtering one from the other matters.

The Negative Impact of the New Chinese Property Law

Here is an example of how discriminatory laws can adversely affect people’s relationship.

This from the New York Times, (bold emphasis mine)

Millions of Chinese women, and some men, woke on Aug. 13 to discover their spouse had, in effect, become their landlord.

On that day, the Supreme Court’s new interpretation of the 1980 Marriage Law came into force, stipulating that property bought before marriage, either outright or on mortgage, reverted to the buyer on divorce. Previously, the family home had been considered joint property. Experts agree the change would mostly affect women, since men traditionally provide the family home.

The result has been uproar — and, in the cities, a rush to add the wife’s name to title deeds.

Some husbands have agreed to this, but others have balked, and Chinese news outlets have already reported on marriage breakdowns caused by a husband’s refusal to add his wife’s name.

How this law came about?

The government says that in an era of soaring property prices — up about 500 percent since 2000, according to the National Bureau of Statistics — the law must protect a family’s investment. Parents and other relatives often contribute money to buy an apartment for their son, in order to help him attract a wife.

The law does not specify gender, so a woman who bought an apartment would also get it back at divorce. Yet social scientists say far fewer women buy family homes.

The interpretation is intended to address an immediate problem, and not build a perfect, logical system, a senior Supreme Court official, Du Wanhua, told legal experts last year, Southern Weekend reported in a recent article, “The Behind-the-Scenes Struggle of the New Marriage Law.”

But marriage law specialists said court officials ignored their opinions, listening instead to property law specialists.

The above is a lucid example of the untoward unintended consequences of the political actions by an elite group of people who believed that they knew what was best for their constituents. This represents what the great F. A. Hayek calls as the ‘pretence of knowledge’ or ‘fatal conceit’.

Yet the government will not be held accountable for the negative externality or the costs of such laws.

In addition, as admitted by the officials the new law has been meant to “address an immediate problem” which is what politics has mostly been about—short term at the expense of the long term.

Do Americans Buy Stuffs They Don’t Need?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some may not like beer at all!

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

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

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

As the Wikipedia explains, (bold highlight mine)

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

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

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

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

Bottom line:

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

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

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

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

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

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

Science Models Fail To Predict Japan’s Earthquake

If you think man has acquired enough expertise to know the environment, think again.

From the Washington Post, (bold highlights mine)

They have long been ready for the Big One in Japan. But when it arrived Friday, it was still surprising, still utterly devastating, and it left scientists around the world humbled at how unpredictable the heaving and lurching earth can be.

Japanese geologists have long forecast a huge earthquake along a major plate boundary southwest of Tokyo, and have poured enormous resources into monitoring the faint traces of strain building in that portion of the earth's crust. They have predicted in great detail the amount of property damage and the number of landslides such a tremor would generate. They have even given the conjectured event a name: The Tokai Earthquake.

Lesson: Despite the massive advances in technology, there is a limit to the knowledge man can acquire from the innate complexity of nature.

As aptly pointed out by Friedrich von Hayek in his Nobel Prize speech ‘The Pretence of Knowledge’… (bold emphasis mine)

The chief point we must remember is that the great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables - either particular facts or relative frequencies of events. This may even be the ultimate reason why we single out these realms as "physical" in contrast to those more highly organized structures which I have here called essentially complex phenomena. There is no reason why the position must be the same in the latter as in the former fields. The difficulties which we encounter in the latter are not, as one might at first suspect, difficulties about formulating theories for the explanation of the observed events - although they cause also special difficulties about testing proposed explanations and therefore about eliminating bad theories. They are due to the chief problem which arises when we apply our theories to any particular situation in the real world. A theory of essentially complex phenomena must refer to a large number of particular facts; and to derive a prediction from it, or to test it, we have to ascertain all these particular facts. Once we succeeded in this there should be no particular difficulty about deriving testable predictions - with the help of modern computers it should be easy enough to insert these data into the appropriate blanks of the theoretical formulae and to derive a prediction. The real difficulty, to the solution of which science has little to contribute, and which is sometimes indeed insoluble, consists in the ascertainment of the particular facts.

And this applies to sociology too.

Bottom line: We should be leery of anyone who peddle to us the reliability of predictions based on science or math models, especially those who advance the policy of interventionism.

And this applies to whether we deal with the financial markets and the economy or with environmental issues such as global warming.

Quote of the Day: Macroeconomics Is Not A Science

Macroeconomics is not a science. We don’t understand the way the economy works in any way shape or form akin to way physicists understand the solar system, say. We shouldn’t pretend otherwise.

Professor Russ Roberts (Cafe Hayek) on Hayek's pretense of knowledge.

Reasons To Distrust Mainstream Economists

Here is why I wouldn't depend or trust (my life) on the opinions and (most especially) the forecasts of the mainstream economists.

(hat tip: Dan Mitchell of Cato.org) Why the miserable track record?

In my opinion here are the reasons:

One, model based prediction.

Most economists deem math models as representative of reality. They think that their models incorporate all the working variables required to represent market's action.

This is false, as Ludwig von Mises argued, ``The problems of prices and costs have been treated also with mathematical methods. There have even been economists who held that the only appropriate method of dealing with economic problems is the mathematical method and who derided the logical economists as "literary" economists."

Two, hostage to past performance and dogmatism.

Given their penchant to view reality as a construct of economic models, they become susceptible to fall for the "past-performances-determine-the-future" trap.

For instance, many have used the circumstances of the Great Depression as parallel paradigm to project the future given today's predicaments. They seem to forget that the Great Depression had been a product of the massive engagements of protectionism worldwide, and various anti-market and anti-foreign bias based policy interventions that have not emerged in the same degree today.

So mainstream protectionists, who impliedly have been 'clamoring' or 'desiring' to see a replication of the Great Depression paradigm, advocate similar mutually destructive policies just to have their convictions validated.

In other words, for such a clique, dogmatism precedes reality.

Unfortunately, the evolving technology based platform from which the world has been transitioning into (information age) has apparently served as major deterrent to the proliferation of such closed door-beggar thy neighbor policies.

In addition, much of the world through emerging markets, which have benefited from recent globalization trends, has been reluctant to jump into the protectionist cockamamie bandwagon.

This great quote attributed to Bertrand Russell encapsulates the surfeit of fallacies and myths seen in the profession,

``What a man believes upon grossly insufficient evidence is an index into his desires - desires of which he himself is often unconscious. If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence. The origin of myths is explained in this way.”

Three, political and vested interests.

The core of mainstream economics have been built around the ideas of John Maynard Keynes from which political institutions have warmly appropriated as their operating creed.

That's because Keynesianism is a proponent for big government, and inflation, in the words of James Buchanan,``The allocative bias toward a larger public sector and the monetary bias toward inflation are both aspects of, and to an extent are contained within, a more comprehensive political bias of Keynesian economics, namely, an “interventionist bias,” which stems directly from the shift in paradigm."

Unfortunately ideas and reality don't square, adds James Buchanan, ``The political process within which the Keynesian norms are to be applied bears little or no resemblance to that which was implicit in Keynes’ basic analysis. The economy is not controlled by the sages of Harvey Road, but by politicians engaged in a continuing competition for office. The political decision structure is entirely different from that which was envisaged by Keynes himself, and it is out of this starkly different political setting that the Keynesian norms have been applied with destructive results." (highlights mine)

In addition, the economic profession appears to have been "bought" or largely influenced by government.

For instance according to the Huffington Post, the US Federal Reserve ``doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship."

In other words, many in the economic profession function as propaganda mouthpieces for the government.

Hence, the views of mainstream economists have been skewed by conflict of interests and hardly reflects on reality. This is what one might call the Agency Problem.

Here is a trenchant satire about mainstream economists...

``A mathematician, an accountant and an economist apply for the same job. The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

``Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."

``Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says "What do you want it to equal?"

Four, oversimplification of analysis.

Economic models and dependence on statistical aggregates allow economists to assume that people's action or reactions work in the same manner even in facing the same circumstances.

Unfortunately this isn't true, that's because everyone have different scale of values or priorities.

Besides, reality means more options (or complexity) than what most economists presume (who assume laboratory conditions).

Yet economists are merely human beings and are thus subject to cognitive frailties. This means they can be swayed by mental shortcuts 'heuristics' or impulse based decision making or analysis derived from the agency problem incentives.

The only difference is that they can they can embellish their statements or studies with technical economic gibberish. As Nassim Taleb of the Black Swan fame says, ``Let us remember that economists are evaluated on how intelligent they sound, not on a scientific measure of their knowledge of reality."

Lastly, Hubris.

Many economists believe that their proficiency in math models and or economic theories privileges them with a clear edge over the rest of humanity that they resort to pedantic moralization of the world's problems accompanied by their sanctimonious prescriptions to such problems.

This is a practice of conceit aside from the cognitive folly known as overconfidence.

As Friedrich von Hayek warned in his Nobel Laureate speech, ``To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights. But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims."

In short, be aware of the hazards from the pretentious knowledge peddled by the mainstream.

Bottom line: Not because most in the economic profession cannot be trustworthy doesn't mean that everyone is.

One way is to examine the incentives that prompts for an economist or expert to argue his point. The other is to keep an open mind to diversified ideas.

And that's why it is recommended that everyone develop their own 'independent' judgment by learning the ropes, since economics encompasses all fields related to human social interactions.

An apt quote from Professor Joan Robinson of Cambridge University, ``The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."