Greece PM Papandreou Wins Vote of Confidence

From the Bloomberg,

Prime Minister George Papandreou won a confidence vote after offering to form a government of national unity that may lead to him stepping down as he sought to reach an accord on European aid needed to avert default.

The premier said he’ll meet with President Karolos Papoulias to discuss his proposal to create a unity government. Main opposition leader Antonis Samaras rejected the offer and called for elections.

“I ask for a vote of confidence tonight so that we can secure the course of this country,” Papandreou said. “I have already communicated with the president of the republic to inform him that I intend to proceed with consultations for a government of cooperation.”

Papandreou’s offer caps a tumultuous week that started with him securing a second bailout from the European Union then roiling markets by unilaterally deciding to put the terms of that rescue to the Greek people in a vote. The premier must heal political divisions to secure agreement on the aid package before Greece runs out of funds next month.

PM Papandreou’s win on a slim margin (153 to 145) only shows how divisive Greek politics has been. The offer by the PM for a conciliatory gesture to ‘step down’ could have been a mawkish bait to garner votes.

And the formation of a ‘Unity government’ whatever that means will likely remain elusive, as the Greece political class seem to have different interests. Nevertheless their common interest is to maintain their privilege of free lunches, the only problem is who and how will these be financed.

The political maneuverings and the bizarre twists manifests of the ongoing political circus in Greece.

I doubt if this political smoke and mirror act will prevent Greece from a default. Yet like almost every political act, this has been meant to buy time.

Wealthy Chinese Consider Emigration

Many say that the 21^st Century belongs to China.

While I certainly hope that China will, I am not entirely convinced, especially not if the Chinese themselves seem distrustful of their nation’s future.

This bleak news from the Wall Street Journal, (bold highlights mine)

More than half of China's millionaires are either considering emigrating or have already taken steps to do so, according to a survey that builds on similar findings earlier this year, highlighting worries among the business elite about their quality of life and financial prospects, despite the country's fast-paced growth.

The U.S. is the most popular emigration destination, according to the survey of 980 Chinese people with assets of more than 10 million yuan ($1.6 million) published on Saturday by Bank of China and wealth researcher Hurun Report.

While growth has slowed, China's economic performance is still the envy of the Western world: It registered annual gross domestic product growth of 9.1% in the third quarter, and the International Monetary Fund has forecast growth of 9.5% for all of 2011.

Concerns are mounting, however, that China's growth could be derailed by a raft of problems, including high inflation, a bubbly real-estate sector and a sharp slowdown in external demand.

Many Chinese who have profited most from the country's growth also express increasing concerns in private about social issues such as China's one-child policy, food safety, pollution, corruption, poor schooling, and a weak legal system.

Rupert Hoogewerf, the founder and publisher of Hurun Report, said the most common reason cited by respondents who were emigrating was their children's education, followed by a desire for better medical treatment, and the fear of pollution in China.

"There's also an element of insurance being taken out here," he said, citing concerns about the economic and political environment.

He cautioned, though, that it was unclear if the survey results signaled capital flight as many high-net-worth individuals who were emigrating also said they were keeping much of their money invested in China.

China maintains capital controls that make it hard for rich Chinese to move their money out of the country, but there are substantial loopholes in the system.

Some economists say they have detected signs of large capital outflows in recent months, likely driven by a decline in global risk appetite and expectations of slower yuan appreciation.

A research report from Bank of America Merrill Lynch's strategy team in Hong Kong last month cited "hot-money outflows" as one of four systemic risks that could lead to a hard landing for China's economy. It said that a sign of such outflows were record gambling revenue in the gambling enclave of Macau, a former Portuguese colony near Hong Kong, where many mainland Chinese go to gamble.

In another indication of the jittery mood among China's rich, several Western embassies have also noted a marked increase this year in the number of applications for investment visas, a category that allows people to immigrate if they invest a certain amount of money, according to diplomats.

There is evidence, too, of an uptick in the number of Chinese people buying high-end properties in major Western cities, especially London, Sydney and New York, according to property analysts.

The recent economic success experienced by China has mainly been due to her embrace of globalization.

However, deepening tensions brought upon by rapidly expanding bottom-up economic forces has apparently come into conflict with the rigid political priorities of the China’s government aimed at the preservation of the incumbent structure.

And because of the attendant fear of social disorder arising from an economic bust, which may upset the current political balance, China’s political authorities have careened towards adapting short sighted Keynesian policies that has resulted to an inflating bubble economy that risks a massive bust, possibly in the near future.

Perhaps many of these Chinese millionaires may be sensing trouble ahead (see bold highlights above), not only from a bubble bust, but also from the growing fragile state of China’s unsustainable capitalist-communist political economy.

Yet, a substantial exodus from many of China’s productive sectors will likely put further strain on such tenuous relationship.

This is not to say that a China Century may not be ahead, instead this is to say that China must ultimately depend on market forces to determine the economic direction than rely on temporary nostrums from political diktat that only hastens erosion of the current political economic framework.

Eventually China’s political leadership will have to decide either to cope up with the swift and material changes in her economy or to revert to the old China model of a closed society. The success or failure of the goal of a China Century, thus, depends on the political choices taken.

Laugh of the day: The Godfather and his Lawyer

A Mafia Godfather finds out that his bookkeeper, Guido, has cheated him out of $10,000,000.00.

His bookkeeper is deaf. That was the reason he got the job in the first place.

It was assumed that Guido would hear nothing and would therefore never have to testify in court.

When the Godfather goes to confront Guido about the missing $10 million, he takes along his lawyer, who knows sign language.

The Godfather tells the lawyer, “Ask him where the money is.”

The lawyer, using sign language, asks Guido, Where’s the money?

Guido signs back, “I don’t know what you are talking about.”

The lawyer tells the Godfather, “He says he doesn’t know what you are talking about.”

The Godfather pulls out a pistol, puts it to Guido’s head and says, “Ask him again or I’ll kill him!”

The lawyer signs to Guido, “He’ll kill you if you don’t tell him.”

Guido trembles and signs back, “OK! You win! The money is in a brown briefcase, buried behind the shed at my cousin Bruno’s house.”

The Godfather asks the lawyer, “What did he say?”

The lawyer replies, “He says you don’t have the balls to pull the trigger.”

Don’t you just love lawyers?

(source The Grandich letter)

ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut

You’ve just got to love how predictable welfare state politics operate.

Yesterday I pointed out that the global Banking cartel has intensified lobbying for the European Central Bank (ECB) to conduct more asset purchases or Quantitative Easing (QE)

Goldman Sachs alumni now ECB President Mario Draghi in his first meeting gave them an indirect platter—interest rate cuts using the Greece political drama as well as a potential Greece exit as an excuse!

From Bloomberg, (bold emphasis added)

The European Central Bank unexpectedly cut interest rates at President Mario Draghi’s first meeting in charge after the prospect of a Greek exit from the euro region sent bond yields soaring in Italy and Spain.

ECB officials lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point reduction. The euro fell almost a cent to $1.3729 and the yield on Italian 10-year bonds retreated to 6.14 percent after surging to a euro-era high this week.

“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of the year and beyond,” Draghi said at a press conference in Frankfurt today.

European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases.

Global financial markets just love it when they are being pampered…

Artificially manipulated low interest rates (premised on the “euthanasia of the rentier”) and quantitative easing (premised on “parting with liquidity”) translates to inflationism as opium to the political and banking-financial elites. Of course there is a third one: socialization of investment (bailouts).

How these elites love Keynesian policies of redistributing or diverting resources from the poor to the rich. (Wall Street Occupy people, where are you?)

US and European equity markets immensely applaud on ECB Draghi’s surprise cut.

Well I may be getting quite ahead of myself, ECB’s Draghi’s baptism of fire looks like a precursor to what the global banking elite has been asking for. Take it one step at a time.

The Greek Political Circus

Prime Minister George Papandreou surprised everyone with a call for a referendum then suddenly backs out, reportedly out of pressures from the Euro political elites…

From the Daily Mail, (bold emphasis mine)

EU leaders have forced the Greek leader George Papandreou to back down on his promise of a popular vote on the European debt treaty.

So what is it about the EU and referendums?

The Brussels elite positively loathes them - or indeed democracy in general.

But those pesky nation states keep insisting on them. And every now and again they get the wrong answer - voting No to a proposal blessed by the high priests of the EU (Denmark 1992 over Maastricht, Ireland 2001 over the Treaty of Nice, France and the Dutch over the proposed European Constitution, Ireland again over the Treaty of Lisbon).

The standard Brussels response is to demand a second vote, usually after offering a few debatable concessions. That got the Danes off the hook and the Irish twice. More cynically, plans for a European Constitution were dropped after the French and Dutch votes, only to be reincarnated as the Lisbon Treaty (much the same package but a different wrapper).

But this time the European high command has gone a stage further. No sooner had Greek prime minister George Papandreou announced a referendum on the Greek bailout plan - to the shock and fury of the Eurocrats and their allies in the chancelleries of the big European states - France, Germany and Italy all denounced the Greek leader's move as bordering on betrayal

Papandreou had his own internal reasons for proposing a referendum. His main opponents back home in Athens are the New Democrats, who are against the bailout plan because of the tough conditions attached but at the same time want Greece to stay in the euro. Papandreou wanted to force them to face the contradictions of their stance - either to back savage spending cuts bringing rioters onto the streets or to recognise that Greece could not survive in the euro.

He was also looking for a popular mandate - the kind of thing you are meant to do in a democracy - for cuts that slash public sector wages and pensions and to apply pressure to the big powers to offer more favourable terms to Greece.

But New Democracy is that in name only. It was against a referendum, presumably because it saw advantage in perpetual political grandstanding.

With his MPs and Cabinet ministers defecting and Papandreou facing a no-confidence vote, we may well see a new short-term National Unity Coalition government, made up of technocrats not politicians, formed in Athens to do the bidding of Brussels.

Well up to this writing, there has been no coalition government yet.

From the Bloomberg,

Prime Minister George Papandreou struggled to hold on to power after Greece’s largest opposition party rebuffed his overtures to form a national government, raising the prospect of elections that could delay aid needed to prevent default.

Opposition leader Antonis Samaras rejected sharing power with Papandreou and called on the premier to quit. Papandreou, 59, scrapped a referendum on an accord with the European Union to avert a split in his party before a confidence vote scheduled for midnight tonight.

“I never excluded any topic from the discussion, not even my own position,” Papandreou told lawmakers in Parliament. “I am not tied to a particular post. I repeat I am not interested in being re-elected but just in saving the country.”

While the highly fluid developments in Greece remain a potential tinderbox, as shown above, the direction of political actions still seem to emanate from Brussels than from the 'people of Greece'. Plutarchy-Oligarchy over Democracy.

Quote of the Day: Discontinuity

Financial prices certainly jump, skip, and leap—up and down. In fact, I contend the capacity for jumps, or discontinuity, is the principal conceptual difference between economics and classical physics. In a perfect gas, as molecules collide and exchange heat, their billions of individually infinitesimal transactions collectively produce a genuine “average” temperature, around which smooth gradients lead up or down the scale. But in a financial market, the news that impels an investor can be minor or major. His buying power can be insignificant or market-moving. His decision can be based on an instantaneous change of heart, from bull to bear and back again. The result is a far wilder distribution of price changes: not just price movements, but price dislocations.

That’s from the illustrious French American mathematician and author Benoit Mandelbrot (November 20, 1924—October 14, 2010) in his bestseller, The (Mis)Behavior of Markets: a fractal view of risk, ruin and reward (p.237).

It is important to note that a distinguished mathematician can spot the indispensable difference between ‘discontinuity’ as consequence of human action with that of the ‘averages’ as an output of natural ‘physics’ sciences.

US Healthcare: Price Controls Results to Shortages in Cancer Drugs

Bush-Obama price controls have led to a shortage in cancer drugs.

That’s according to the Wall Street Journal editorial

Shortages have more than tripled since 2005, according to the University of Utah's Drug Information Service, and by the end of the year more than 300 products are likely to be back-ordered, in short supply or totally unavailable. Some are anesthetics and pain therapies, others emergency room "crash cart" drugs. But most—about 70% in 2010—belong to the class of drugs known as "sterile injectables" that are mainstays of the chemotherapy arsenal, such as paclitaxel or cytarabine.

The result is that more and more patients are receiving substandard care—relying on less effective or more expensive substitutes or else forced to postpone treatment. In oncology, delays of weeks or even days can be fatal.

Most sterile injectables have been off-patent for decades, but unlike other cheap generic drugs with low profit margins, production is complex and requires special facilities. Nonetheless, George W. Bush and the Republican majority decided that Medicare was "overpaying" for these cancer drugs and included a 6% cap on price increases every six months in the 2003 prescription drug bill. These new price controls (which apply to the providers that purchase the drugs) took effect in 2005, when the shortages began.

In a rational market, sterile injectable prices would now be rising to encourage more supply, since the demand for cancer drugs is inelastic. The old reimbursement system, called "buy and bill," was imperfect, but at least it allowed prices to float and wasn't producing the scarcity that central planning always does. The sterile injectables that are in short supply currently sell for $37.88 a dose on average, and modest price increases could make the market economic.

The problem is compounded because Food and Drug Administration rules cause pointless delays. It takes as long as two and a half years to receive FDA manufacturing approval for a generic, so other drug makers can't ramp up production if a company cancels a product line due to these disincentives or even if the fragile supply chain for sterile injectables is contaminated and manufacture is delayed.

This should serve as another evidence of the economic infeasibility of political policies cloaked with noble intentions that eventually succumbs to the laws of unintended consequences.

And another important lesson exhibited from the above is that the whims of politicians via edicts or by fiat cannot and will not ever subvert the laws of economics.

In short, the political therapy is worse than the misdiagnosed disease.

Failed repeated attempts to politicize economics has posed as a vicious cycle that had been experimented for the last 40,000 years (Professor Thomas DiLorenzo has a synopsis here).

This means that people have never learned from history. And that people simply get mesmerized and tolerate political insanity or doing the same things over and over again yet expecting different results.

I’d say that political insanity seems far worst in many aspects in the Philippines but maybe not as much as in the healthcare sector yet.

Flaws of Economic Models: Differentiating Social Sciences from Natural Sciences

David Freedman of the Scientific American asks “Why Economic Models Are Always Wrong?”

He gives the answer,

The problem, of course, is that while these different versions of the model might all match the historical data, they would in general generate different predictions going forward--and sure enough, his calibrated model produced terrible predictions compared to the "reality" originally generated by the perfect model. Calibration--a standard procedure used by all modelers in all fields, including finance--had rendered a perfect model seriously flawed. Though taken aback, he continued his study, and found that having even tiny flaws in the model or the historical data made the situation far worse. "As far as I can tell, you'd have exactly the same situation with any model that has to be calibrated," says Carter.

That financial models are plagued by calibration problems is no surprise to Wilmott--he notes that it has become routine for modelers in finance to simply keep recalibrating their models over and over again as the models continue to turn out bad predictions. "When you have to keep recalibrating a model, something is wrong with it," he says. "If you had to readjust the constant in Newton's law of gravity every time you got out of bed in the morning in order for it to agree with your scale, it wouldn't be much of a law But in finance they just keep on recalibrating and pretending that the models work."

We can’t simplify, through mathematical models, what truly is a highly complex environment. Repeated “recalibrating their models” or “calibration problems” only exposes on these structural analytical errors.

The ultimate reason why economic models are always wrong is that investigations have been patterned after natural sciences. Yet analyzing natural sciences isn’t the same as social sciences. That’s what modelers and their disciples cannot seem to grasp.

The great Ludwig von Mises draws a clear distinction between the two sciences, (bold emphasis mine, italics original)

Since the elements of social cognition are abstract and not reducible to concrete images one would like to have metaphors. First there were biological metaphors, now mostly mechanistic ones. These are based in positivist view of social science that holds that social science should be built up by experimental method as ideally applied in Newtonian physics. Economics becomes experimental, mathematical and about measurement. This is all wrong:

1. Social sciences cannot be based on experience like the natural sciences. Social experience is of a complexity and cannot be experimented with

2. Therefore the social sciences can never use experience to verify their statements. Every fact and experience is open to multiple interpretations (but see Kuhn. KS)

3. The impossibility of experimenting implies the impossibility of measurement. In human behavior there are no invariable relations like there are between physical properties, which means that it is pointless to mathematize them in order to make predictions. Statistics merely studies history.

4. Mathematics does not deal with actual operations of human actions but with a fictitious concept, static equilibrium (tomorrow is like today, no uncertainty), that economists build up for instrumental purposes. But not only is this unrealistic, it is also inconsistent for lack of uncertainty and change implies lack of actions. The only purpose mathematics can have in economics is the study of the nature of relations between costs and prices and thereby of profits.

5. Mathematics cannot tell us how the market arrives at a static equilibrium.

6. Mathematicians are prone to consider the price either as measurement of value or as equivalent to the commodity. But prices are neither; they are simply the amount of money exchanged for a commodity and there is reversed valuation.

Economics deals with human action, not with objects (as physics does) such as commodities, economic quantities or prices. Therefore economists do not consider their subject matter from without, but from within, through our own understanding of what it is to be human and to act. What makes natural science possible is the power to experiment, what makes social science possible is the power to grasp the meaning of human action….

Social sciences have a distinct method, praxeology and verstehen, due to the special character of their objects, and owe their progress through it and do not have to and cannot use the method of the natural sciences.

Praxeological concepts refer exactly and with certainty to the reality of human action because both the science of human action and human action itself have their toot in human reason. The quantitative approach would not render them more exact.

Nobody denies that economics is not perfect yet, but:

1. the present unsatisfactory state of social and political affairs is not due to deficiencies in economic theory, but in policy. People just don’t use economic theory enough.

2. even if economics needs to be drastically reformed someday it cannot take the direction proposed by those who use the model of the natural sciences. This idea has been thoroughly refuted forever.

Again many people seem to find comfort in models, for many possible reasons such as social signaling, conversation, career, politics and others.

But in terms of the predictive value, as the Scientific American article’s inquiry as indicated by the title, economic models have always been wrong.

Banking Cartel Pressures ECB to Expand QE

The banking cartel lobbies the European Central Bank [ECB] to engage in more Quantitative Easing [QE] or asset purchases by central banks funded by “money from thin air”

Here is the Wall Street Journal Blog,

The banking sector’s international lobbying group on Wednesday joined the campaign to boost the European Central Bank‘s role in the euro-zone rescue, calling for the ECB to backstop struggling bond markets while the currency bloc implements its latest debt deal.

The comments by the Washington-based Institute of International Finance, which represents more than 450 financial institutions in 70 countries, add another major voice for a heightened ECB role despite concerns from some European officials — particularly in Germany — about the central bank’s bond purchases.

As Europe develops details around its new debt deal, “it is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market,” IIF Managing Director Charles Dallara wrote in a letter to officials from the Group of 20 industrial and developing economies meeting in Cannes, France, this week. “This will allow time for national authorities’ adjustment efforts to take hold, and help stabilize markets at this crucial juncture.”

The ECB’s new president, Mario Draghi, who took his post Tuesday, faces the question of whether to continue or increase ECB purchases of Italian government debt to push yields lower. The ECB has bought an estimated 70 billion euros in Italian debt since August, but that hasn’t been enough to keep the 10-year yield on Italian debt below 6%.

Direct lobbying might not be enough though. A wider range of publicity tools would be required to justify these actions to the public, especially given the du jour populist demonstrations

So the politically embattled banking and finance sector would have to employ the same set of tools used by central banks to manipulate the public’s expectations—signaling channel (a.k.a propaganda).

And a lot of these will come from the academe or from the mainstream media.

An example of which is an excerpt from a recent article of Telegraph’s Ambrose Pritchard Evans, who uses the stereotyped deflation bogeyman to argue for more of ECB’s QE.

The two halves are locked together in a broken marriage. To pretend otherwise is no longer responsible. The structural gap cannot be closed by debt-deflation in the South – the current default setting of EU policy. It could arguably be closed if Germany were to let the European Central Bank reflate the whole eurozone system.

Instead, the ECB has done the opposite, opting to blight the chances that Spain might just be able to claw its way back to viability within the constraints of EMU.

Paradoxically, Mr. Evans is a popular columnist whose opinions easily flip-flops, i.e. from mainstream views towards espousing the contrarian [end the Fed] and backsliding again to the mainstream.

Nevertheless I am reminded by the great Murray N. Rothbard who presciently wrote [modifications mine]

An "impartial" Central Bank, on the other hand, driven as it is by the public interest, could and would restrain the banks from their natural narrow and selfish tendency to make profits at the expense of the public weal. The stark fact that it was bankers themselves who were making this argument was supposed to attest to their nobility and altruism.

In fact, as we have seen, the banks desperately desired a Central Bank, not to place fetters on their own natural tendency to inflate, but, on the contrary, to enable them to inflate and expand together without incurring the penalties of market competition. As a lender of last resort, the Central Bank could permit and encourage them to inflate when they would ordinarily have to contract their loans in order to save themselves. In short, the real reason for the adoption of the Federal Reserve European Central Bank [strike through and italic insertion mine], and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations. Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition. [bold mine]

Seems like a case of sleeping with the enemy

Losses from Japan’s Currency Market Intervention Mounts: Estimated at $512 billion

I earlier posted that Bank of Japan’s losses have accrued to $281 billion, it seems that the losses have been accruing pretty fast.

From the Bloomberg,

Japan’s government faces almost 40 trillion yen ($512 billion) in losses from intervening in the foreign-exchange markets to stem the yen’s advance, according to estimates by JPMorgan Chase & Co.

Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

“It’s difficult to change the trend of the currency market” with intervention, said Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, at a forum in Tokyo yesterday. “Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”

Japan on Oct. 31 intervened in foreign-exchange markets to weaken the yen for the third time this year after the currency gained to a postwar record. Finance Minister Jun Azumi said he will continue to intervene until he’s “satisfied.”

Japan may have spent a record amount to stem the yen’s gains, according to the BOJ’s projection of deposits held by financial institutions at the central bank. It estimated that deposits climbed 7.7 trillion yen to a total 37.2 trillion yen, according to a statement released yesterday. The figure suggests that the government sold approximately 8 trillion yen, said Yuichi Takahashi, a market economist at Totan Research Co. in Tokyo.

Perhaps for Japan’s political authorities, central banks losses can merely be covered or financed by more money printing. Yet unknown to most, such actions only intensifies the transferring of scarce sources from the public to the political institutions and to their stewards, as I pointed out here.

Maybe Japan could just be too wealthy for political authorities to desire a larger piece of the pie or that maybe the average Japanese has been more condescending and tolerable to the actions of their political leaders. Or maybe the average Japanese are not aware of this.

May be too global political and monetary authorities, including those of Japan, have venerated and are tacit disciples of Gideon Gono and his doctrine.

Mr. Gono is the incumbent governor of the Reserve bank of Zimbabwe, who successfully steered the nation’s currency, the Zimbabwe dollar, to its sensational hyperinflationary demise.

Or that there could be many more maybes left unsaid.

Ben Bernanke Dangles QE, Redux

Is the public being hypnotized by US Federal Reserve Chairman Ben Bernanke?

I will give you stimulus, I will give you stimulus, I will give you stimulus, I will give you stimulus…

For the umpteenth time, from the Bloomberg, (emphasis added)

Federal Reserve Chairman Ben S. Bernanke said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.

Additional stimulus “remains on the table,” Bernanke said today at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”

Bernanke spoke after the policy-setting Federal Open Market Committee said the economy picked up in third quarter and repeated its statement from September that there are “significant downside risks” to the outlook. Officials kept policy unchanged, saying they would lengthen the maturity of the Fed’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013 if unemployment remains high and the inflation outlook is “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Again the repeated dangling of QE 3.0 or additional stimulus, which represent a monetary policy tool used by Central Banks called as 'signaling channel' or as the article implicitly puts it—“changing the way it communicates its policy goals”—have been directed at conditioning or manipulating the public’s expectations.

We are being treated like Pavlov’s dogs. According to Wikipedia on Classical conditioning, Pavlov used a bell to call the dogs to their food and, after a few repetitions, the dogs started to salivate in response to the bell. The dogs are the financial markets, and the ringing bell is the signaling policy used, and the food is the QE 3.0. In essence, the financial markets are being conditioned to be dependent on US Federal Reserve or central bank policies.

Bernanke must be pleased with how equity markets has responded to his communication tool (see above table from Bloomberg), which seem to have neutralized the surprise developments in Greece.

Yet, the constant conditioning being applied to the market is most likely meant not only to project policy “transparency” but also to reduce political opposition to Bernanke’s favorite tool.

With US money supply growth exploding, which may perhaps be indicative of indirect tools being utilized by team Bernanke, QE 3.0 seems no more than a formality.

On the count of three, you will awaken…

The Economist’s Marxist Fallacies on Corporations and Profits

The Economist eulogizes Karl Marx (bold emphasis mine)

WRITING in "Das Kapital" in 1867, Karl Marx observed that in the capitalist system competition "ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors". This way, he posited, capital would become increasingly concentrated in the hands of a few. Out of the 6,000 or so companies whose primary listing is on an American stock exchange, the top 5% accounted for 70% ($10.6 trillion) of the market value and 90% ($765 billion) of the total profit in 2010. In 2000, the profit from the top 5% of companies was greater than 100%, offsetting the huge losses by the bottom 50%. The figures are remarkably similar for listed companies in Western Europe. Confounding the view of the "Occupy" protests taking place across the globe that the world is run by increasingly rapacious corporations, those proportions have declined since 2000 (the earliest year for which robust data are available). At the very top, the largest 1% of listed companies in America and Western Europe accounted for 53% and 48% of market value in 2000. In 2010, those proportions had declined to 40% and 28% respectively.

The Economist, if they are not engaged in a pun, has been guilty of logical sophism.

“Capital would become increasingly concentrated in the hands of a few” represents a post hoc fallacy; capital does not mechanically or automatically gravitate into the hands of a few. The Economist does not elaborate on the process except to irresponsibly and uncritically adhere to the Marxian creed.

Next, it would be a monumental folly to imagine that the world today as operating on a laissez faire ‘capitalist system’ considering the countless regulations, legal proscriptions, market manipulations and other forms of interventionisms in almost every social activity that one is engaged in, everywhere around the world.

Also by also engaging in reductio ad absurdum the article attempts to oversimplify correlations and the causation nexus between corporations and profit concentrations.

Such preposterous assertions assume away the influences, contributions and the effects of specific political policies on affected groups, the periphery and the rest of society, as well as, the impact of the incumbent legal environment and political institutions to the marketplace...which ultimately shapes the variable scale of interrelationships and degree of complicity between corporations and their respective governments (where they operate on).

As earlier pointed out, many of these huge companies has been beneficiaries of government concessions or political privileges as subsidies, cartels, monopolies, licensing, behest loans, tariffs, bailouts, private-public partnerships, tax credits, and sundry regulations that are essentially anti-competition based that has led to their current heft and widespread global reach.

In short, 'rapacious corporations' are the outcome of policies from political leaderships aimed at sustaining welfare-warfare based crony capitalist governance and not of the deceptive and logically bereft Marxist premises.

As Ludwig von Mises wrote of Marxism,

The incomparable success of Marxism is due to the prospect it offers of fulfilling those dream-aspirations and dreams of vengeance which have been so deeply imbedded in the human soul from time immemorial. It promises a Paradise on earth, a Land of Hearts Desire full of happiness and enjoyment, and — sweeter still to the losers in life's game — humiliation of all who are stronger and better than the multitude. Logic and reasoning, which might show the absurdity of such dreams of bliss and revenge, are to be thrust aside

Quote of the Day: Political Zombiesm

From Daily Reckoning’s Bill Bonner

Here is the foundation of our General Theory of Zombieism:

1. All (or almost all) people want wealth, power and status.
2. They want to get it in the easiest way possible.
3. The easiest way to get wealth is to steal it, which is why all groups turn to the government, the only institution which gets to steal lawfully.
4. Over time, more and more groups are able to use the system for their own ends.

If they are poor, they implore the government to ‘tax the rich’ and give the money to the poor. If they are rich, they want the government to protect their wealth and status — with every means available to them. Democratic governments generally do both. They support the poor with loud attacks on the rich combined with whimpers of money (for the poor can generally be bought — vote for vote — much cheaper than the rich). As for the rich, their support is more subtle and underhanded. There are tax credits and loopholes for anyone who can afford them; sugar-laden contracts for the insiders and plenty of jobs for well-credentialized blowhards.

The rich complain about the poor. The poor complain about the rich. Both complain about the government. And everybody hates capitalism.

But over time, the giveaways, bribes, regulations, intercessions and meddling on the part of the government have a big effect on the economy. The more the government interferes with market signals and market-based capital allocation, the less able the economy is to produce real wealth. More and more resources are purloined by the insiders before the truck reaches its destination. Paperwork, lawyers, administration, regulation, taxes take a toll. So does misallocation of capital investment to huge, unproductive industries such as education, health, and defense. There is also a shift of wealth generally from those who earn it to those to whom it is redistributed…and from capital formation to consumption. And gradually the economy becomes paralyzed and parasitic…and nearly everyone gets poorer. And often, the state…and the mobs that support it…become desperate for more money. Then…the rich had better watch out!

The Swiftly Unfolding Political Drama in Greece

Last week the ECB’s Bazooka deal seems to gotten the financial market upbeat.

Yesterday, positive sentiments suddenly evaporated on the bizarre twist of events unraveling in Greece.

Greek Prime Minister George Papandreou unexpectedly called for a referendum on the Euro bailout measures that heightened the risks of a default. A default could trigger a derivatives meltdown, as well as, jeopardize the recent agreement.

This from Bloomberg,

Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote, raising the prospect of derailing the European bailout effort and pushing Greece into default. Stocks and the euro tumbled.

Papandreou’s gambit risks pushing the country into default if rejected by voters, and raises the ante with dissidents in his own party. Papandreou’s popularity has plunged after a raft of austerity measures cut pensions and wages, increased taxes and sparked a wave of social unrest. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative.

“Papandreou could lose the referendum, which means that new elections would have to be called,” Thomas Costerg, European economist at Standard Chartered Bank in London, said in an e-mail. “Heightened Greek uncertainty could propagate to other fragile euro-area countries, in particular Italy.”…

Separately, the International Swaps and Derivatives Association said that the euro-area proposals for Greek bonds appear to involve “a voluntary exchange that would not be binding on all holders,” according to an e-mailed statement.

“As such, it does not appear to be likely that the euro zone proposal will trigger payments under existing CDS contracts,” the statement said. “However, whether or not it does so will be decided by the Determinations Committee on the basis of specific facts, if a request is made to them.”

The ISDA statement late yesterday follows a review of whether the proposal would constitute a “credit event” for holders of credit-default swaps linked to the securities.

The deteriorating political events has even led to an abrupt reshuffling of their key military officers.

From the Telegraph,

In a surprise development, Panos Beglitis, Defence Minister, a close confidante of Mr Papandreou, summoned the chiefs of the army, navy and air-force and announced that they were being replaced by other senior officers.

Neither the minister nor any government spokesman offered an explanation for the sudden, sweeping changes, which were scheduled to be considered on November 7 as part of a regular annual review of military leadership retirements and promotions. Usually the annual changes do not affect the entire leadership.

To my perspective, the Greek political drama (or tragedy) has now diffused to the military hierarchy which implies of increased risks of a mutiny or a coup d'état.

Additionally, Papandreou’s grip over the Greek government appears to be crumbling

According to the Business Insider,

Meanwhile, turmoil seethes within Papandreou's ruling PASOK party. One PASOK MP has already resigned over the referendum decision and six more have called for Papandreou's resignation, according to eKathermirini.

The opposition has even stepped up calls for a snap election instead of a referendum where the referendum “was putting Greece's EU membership at risk”.

Again, political events in the Eurozone has been unfolding real fast. Uncertainty clouds the marketplace.

More Evidence of Tidal Flows in the US Stock Markets

Boom. Bust. Financial markets are being held hostage by politics and subjected to monetary tidal flows which can be seen in increasing correlations of price actions of US stocks.

Evidence from Bespoke,

We consider all or nothing days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400. With today's current net A/D reading of -460, there have now been 55 all or nothing days for the S&P 500 in 2011. At this rate, 2011 is now on pace to see 66 all or nothing days, which is well above the prior high of 52 back in 2008.

In the 66 trading days since the start of August, more than half (35) have now been all or nothing days. As we noted last week, the number of occurrences that we have seen in the last three months eclipses the total number of all or nothing days that we saw from 1990 through 2001 (34).

Again because of the politicized nature of the financial markets, price actions can go extremely volatile either way.

It would signify a reckless assumption that the prevailing risk environment can be traded short term.

The highly fluid turn of events that brings about an aura of heightened uncertainty appears to enhance the risks of rapid deterioration of events which could be vented on the marketplace beyond anyone’s expectations.

This should apply to the Philippine markets as well.

Where the extreme gyrations of the financial markets reflect on casino like odds, I’d rather play cards.

Video: Halloween Day Tax Lesson

Comedian Tim Slagle shows how to teach taxes to kids using the Halloween Day celebrations (hat tip Professor David Henderson)

7 Billion People: Boon or Bane?

The United Nations says that world population have reached 7 billion.

In attempting to visualize the impact of 7 billion people The Economist writes,

THE UN's doughty demographers have declared that October 31st is the day on which the world's population reached 7 billion. They may be wrong (the UN got the timing of the 6 billionth birth out by a couple of years) but no matter: the announcement has triggered celebrations in maternity wards around the globe and a hunt for the 7 billionth child. Yet the growth in the world’s population is actually slowing. The peak was in the late 1960s, when it was rising by almost 2% a year. Now the rate is half that. The last time it was so low was in 1950, when the death rate was much higher. The result is that the next billion people will take 14 years to arrive, the first time that a billion milestone has taken longer to reach than the one before. The billion after that will take 18 years. Where will all these people fit? The chart below, worked out on a maximum population density of six Economist staffers per square metre, gives the space needed to accommodate the world's population at various points in history, expressed in multiples of the borough of Manhattan. Looked at another way, each of us now has the equivalent of Red Square to ourselves.

7 billion represents merely a statistical estimate which most likely is an inaccurate measure of the real number of the world’s population.

Yet, the UN’s declaration seems loaded with political inferences.

For instance, the Economist article above tries to project maximum land allocated per individual or a population density. But this would be a chimera for the simple reason that all land area are not the same (e.g. mountains are different from coastline or from hills or from plateau; there are private owned and public owned) and that each individual does not use up or require as much space as what the Economist implies.

So the framing from the 7 billion figure could essentially foster political alarmism over a potential conflict from growing population relative to the scarcity of land which is fundamentally not only false but unrealistic.

The other implication of the UN’s hype is to give neo-Malthusians (who falsely believed that overpopulation would translate to a catastrophe for mankind or the Malthusian Catastrophe) room to advocate for more political controls on everyone. Their focal point has been centered on the strains to access scarce resources and to the environmental impact from a growing population.

Following charts from World Bank-Google Public Data

Yet even if there is some semblance of truth to the claim that we are now 7 billion people, the $7 billion question is that how have we been able to successfully reach this state in defiance of the doom mongers’ expectations of a ‘catastrophe’? And importantly if such factors will continue to support even a larger population?

The Economist rightly points out that world fertility rate have been going down.

If this slowing fertility trend should continue, then population growth trends would imply for a slowdown or even a potential peaking.

Nevertheless, another very important aspect that has supported today’s 7 billion people has been a huge jump in GDP per capita that coincides with the slowing fertility growth

The substantial improvement in per capita GDP has mostly been because of globalization and a more pervasive adaption of economic freedom.

Competition in free markets has been cultivating and accelerating the rate of technological innovations that has helped in resolving the scarcity problem in many aspects such as in the science and medicine, information and communications, business process and etc..

Largely uncelebrated hero Norman Borlaug discovered high yielding wheat varieties which he combined with modern agricultural techniques which paved way for the green revolution. Mr. Borlaug was eventually awarded the Nobel Peace Prize and was known as the ‘father of green revolution’ who has been credited with saving over a billion people from starvation

And further advancements in technology whose costs have materially decreased have became available to a wider range of people which has increased people's lifespans

The very impressive author Matthew Ridley wearing his Julian Simon hat (the famous free market economist who made a controversial bet against Malthusian Paul Elrich and won) sums up at the Wall Street Journal on why population growth trends will slow

(bold emphasis mine)

Birth rates have gone down because of prosperity, not poverty. Everywhere it has occurred, it has followed a fall in child mortality and famine and an increase in income and education. The wider availability of contraception has been necessary, even vital, for this shift, but it has not been sufficient.

To a biologist, the demographic transition is both surprising and intriguing. No other species drops its birth rate when its food supply increases. Frankly, no expert has yet fully explained the phenomenon. It remains something of a demographic enigma.

The best guess is that modern society causes human beings to switch their reproductive strategy from quantity to quality. Thus, once child mortality drops and paid work becomes available to the children of subsistence farmers, parents become more interested in getting one or two children into education or jobs than in begetting lots of heirs and spares for the farm.

Whatever the explanation, history shows that top-down policies aimed directly at population control have generally proved less successful than bottom-up ones aimed at human welfare, which get population control as a bonus. The faster poor countries can grow their economies, the slower they will grow their populations.

While present developments has generated much progress, there are still many afflicted by poverty. That’s because there continues to be meaningful resistance in embracing a bottom up approach in dealing with socio-economic development.

It's really not about the number of people but the process or the means by which people use to sustain their living. This means, in general, the world is much better off with MORE PRODUCTIVE people.

Bank of Japan posts $281m losses from QEs

This seems as poetic justice at work.

From Bloomberg,

The Bank of Japan has lost more than 22.4 billion yen ($281.7 million) purchasing exchange-traded funds as the Topix Index approaches a 27-year low.

The central bank’s stock holdings have fallen about 4 percent since buying began on Dec. 15, 2010, according to estimates calculated by Bloomberg using government filings. Losses climbed above 67.6 billion yen in September as equities plunged amid concern Europe’s debt crisis would trigger a global recession, the data show.

The purchases are part of a 20 trillion yen BOJ plan to stimulate economic growth and boost investor confidence by buying securities, such as government debt, commercial paper and real estate investment trusts. The central bank expanded the program last week by 5 trillion yen after the country’s currency reached a postwar record against the dollar, threatening the export-led economy.

“This is not what a central bank should be doing,” said Masaaki Kanno, the Bank of Japan’s former chief foreign-exchange dealer and now chief Japan economist at JPMorgan Chase & Co. Parliament needs “to debate if the program can get backing from the public after running a loss like this," he said…

This isn’t the first time the central bank has bought stocks. The BOJ in October 2002 purchased shares that financial firms owned in other companies to stem losses at banks after the Topix plunged 52 percent from a peak in February 2000. The BOJ’s investment foreshadowed a rally in the Topix, which bottomed in March 2003 and more than doubled over the next four years.

The BOJ’S ETF purchases accelerated this year after concern over Europe’s sovereign-debt crisis triggered a global equity rout and sent the Nikkei Stock Average Volatility Index on Aug. 9 to the highest level since the aftermath of Japan’s March 11 earthquake and tsunami. The central bank spent 403.5 billion yen on ETF shares tracking the Nikkei 225 or Topix since August, compared with 340.4 billion yen in the previous eight months, filings show.

The purchases, which are listed on the BOJ’s website, have taken place when Japanese stocks declined and have signaled better performance the next day. The Nikkei 225 fell an average of 1.9 percent on days when the BOJ bought, slipping 0.1 percent the following day, data compiled by Bloomberg show.

The investments represent a small part of Japan’s ETF market. The central bank spent 17.3 billion yen buying shares on Oct. 18, less than 1.5 percent of the total value traded in either Nomura’s Nikkei 225 or Topix ETFs, according to data compiled by Bloomberg.

The red arrow shows when the asset purchases began, which again seem to have worked over the short term, and how the Topix has been discounting Japan’s QEs over the longer term or during the one year period.

The $281 million loss may seem negligible to the above report, but it is important to point out that those who made these decisions that led to these ‘hefty’ losses which will eventually be distributed to the average Japanese via taxes, have not been held accountable.

That’s the way politics works; squandering people’s money has always been assumed away, and thus, the propensity to keep making the same mistakes over and over again. Ultimately taxpayers picks up the tab for the mess created by a few. Yes, political insanity.

Of course as earlier pointed out, the public (including the world) is being hoodwinked to believe that these mercantilist measures has been about supporting the “export-led” economy, which in reality isn’t. Exports account for only less than 15% of the GDP, so how can exports lead Japan's economy?

Instead, the whole saga of interventionism and applied inflationism (via QEs) has been meant to shore up Japan’s debilitating political institutions.

Eventually all these anticapitalistic actions will meet its destiny.

Poetic justice.