Halili Kho Sex Video Scandal: A Case of Political Opportunism

A short commentary on the Katrina Halili-Dr. Hayden Kho Sex video scandal.

It is quite dumbfounding how media and politicians have turned in haste an isolated problem into some sort of a collective spectacle or "national" crisis-as Senators and the Palace has joined the fray. And some of them have used the opportunity to scream for new legislation/s to curb so called abuses.

This isn't about "offensive to public morals" - the cyberspace has hundreds if not thousands of sites that cater to pornography, sex videos or "voyeurism". And these include some locals.

Moreover, through the years police enforcement hasn't been able to contain the sale of lewd "illegal" DVDs as scandals upon scandals have emerged.

Besides, this problem isn't anything new-anyone remember the Betamax scandal of a local politician and a sexy movie star?

This only goes to show how our officials have little understanding of the cyberspace or they are not being forthright or have other latent interests.

The main difference in this scandal is that those involved have been public personalities, if not celebrities. And given the proximity of the national elections, the sensationalism surrounding the incident seem like an egregious opportunity to generate broad publicity mileage.

Going back to the case, the issue again is NOT about morality but about the violation of the aggrieved party's private property.

If it can be established that the perpetrator willfully deceived the other party to broadcast their private tryst in breach of trust then there should be an indictment.

And it can also be seen from the context of client-confidentiality if such circumstances have existed.

For instance, the recent sex scandal in Hong Kong saw the arrest of a computer technician who spread the private videos he illicitly obtained when his actor client brought the computer for repair; where the so called "voyeurism" or sex video wasn't disseminated by the participants but by a third party.

In any case, passing fickle laws to curb "this" and "that" has only worsened the problems by creating legal loopholes, fostering bureaucratic inefficiencies, opened opportunities to extortion, bribery and corruption, and has increased profit margins for politically backed operators which sustains the business of "illegality".

Moreover, the proposed law is a form of state expansion which could be utilized as an instrument to suppress the freedom of speech and expression.

Don't forget that each new law comes with attendant expenses that funds the bureacracy for its implementation-all at the expense of the taxpayer and the costs to do business here.

In short, people pay for the mischiefs, profligacy, grandstanding and wrong policies by politicians through higher consumer prices, lack of jobs and poverty.

What may be seen as a popular may in fact be an illusion, learning from Thomas Sowell, ``Televised congressional hearings are not just broadcasts of what happens to be going on in Congress. They are staged events to create a prepackaged impression.

``Politically, they are millions of dollars’ worth of free advertising for incumbents, while campaign-finance laws impede their challengers from being able even to buy name recognition or to present their cases to the public nearly as often.

``The real work of Congress gets done where there are no cameras and no microphones — and where politicians can talk turkey with one another to make deals that could not be made with the public listening in.

``To be a fly on the wall, able to listen in while these talks were going on, would no doubt be very enlightening, even if painfully disillusioning. But that is not what you are getting in video footage on the evening news.

``Some might argue that, in the absence of the cameras, many people might not know what is going on in Congress or in the courts. But being uninformed is not nearly as bad as being misled.

``For one thing, it is much easier to know that you are uninformed than to know that you are being misled."

Don't be misled.

Update on Tracking Swine Flu's Global Reach

An update on Swine flu's global tentacles.

According to the Economist, ``THE annual meeting of the World Health Assembly this week has been dominated by swine flu, as the number of cases continues to climb. Over 400 cases have been confirmed since Monday May 18th alone; Greece is the latest country to report a patient with the (A)H1N1 virus, bringing the number of countries with infections to 41. Of the 80 people that have died, most were in Mexico, where the infection originated. Neighbouring America accounts for over half of the world's reported cases. Global efforts will now focus on ensuring that developing countries have sufficient vaccines."
So far the hysteria on swine flu seems to have been somewhat dissipating even as the disease have spread to far more corners of the world.

The Google trend above shows of the public's diminishing concerns as swine flu searches have materially waned.

Gallup has also the same observation.

Nonetheless as long as the flu doesn't mutate, whose origin has been heatedly contested (claims of human error being investigated), the impact should be contained.

So far this episode has been mostly a media hype based on government alarmist mien, which has been validating our thesis...see our previous posts:

Swine Flu: Mostly A Media Fuss
Swine Flu: The Politics of Fear and Control
Swine Flu: The Black Swan That Wasn’t

Has The Crisis Been Mainly A Sin Of Free Markets? President George Bush's 2002 Speech As Evidence

Has today's crisis been a sin committed by the Free Market?

This speech "REMARKS BY THE PRESIDENT ON HOMEOWNERSHIP" from ex-President George Bush at the Department of Housing and Urban Development Washington, D.C.June 18, 2002, should serve as evidence for the guiding policy of the US aimed at boosting its housing program (all bold highlights mine)...

``But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country.

``One of the things that we've got to do is to address problems straight on and deal with them in a way that helps us meet goals. And so I want to talk about a couple of goals and -- one goal and a problem.

``The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.

``We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. Five-and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it's going to mean we're going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.

``And so I want to, one, encourage you to do everything you can to work in a realistic, smart way to get this done. I repeat, we're here for a reason. And part of the reason is to make this dream extend everywhere.

``I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector.

``And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy.

``We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year -- 40,000 families a year -- will be able to realize the dream we want them to be able to realize, and that's owning their own home.

``The second barrier to ownership is the lack of affordable housing. There are neighborhoods in America where you just can't find a house that's affordable to purchase, and we need to deal with that problem. The best way to do so, I think, is to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America.

``The third problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. There's too many pitfalls. So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership.

``It is essential that we make it easier for people to buy a home, not harder. And in order to do so, we've got to educate folks. Some of us take homeownership for granted, but there are people -- obviously, the home purchase is a significant, significant decision by our fellow Americans. We've got people who have newly arrived to our country, don't know the customs. We've got people in certain neighborhoods that just aren't really sure what it means to buy a home. And it seems like to us that it makes sense to have a outreach program, an education program that explains the whys and wherefores of buying a house, to make it easier for people to not only understand the legal implications and ramifications, but to make it easier to understand how to get a good loan.

``There's some people out there that can fall prey to unscrupulous lenders, and we have an obligation to educate and to use our resource base to help people understand how to purchase a home and what -- where the good opportunities might exist for home purchasing.

``Finally, we want to make sure the Section 8 homeownership program is fully implemented. This is a program that provides vouchers for first-time home buyers which they can use for down payments and/or mortgage payments.

``So this is an ambitious start here at the federal level. And, again, I repeat, you all need to help us every way you can. But the private sector needs to help, too. They need to help, too. Of course, it's in their interest. If you're a realtor, it's in your interest that somebody be interested in buying a home. If you're a homebuilder, it's in your interest that somebody be interested in buying a home.

``And so, therefore, I've called -- yesterday, I called upon the private sector to help us and help the home buyers. We need more capital in the private markets for first-time, low-income buyers. And I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. They've used their influence to create that much capital available for the type of home buyer we're talking about here. It's in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.

``There's a lot of faith-based programs that want to be involved with educating people about how to buy a home. And we're going to have an active outreach from HUD.

``And so this ambitious goal is going to be met. I believe it will be, just so long as we keep focused, and remember that security at home is -- economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security. It's also a part of making sure that this country fulfills its great hope and vision."

My comment:

Essentially what President Bush wanted, President Bush got, but at a tremendous costs-a bubble and a subsequent bust which transitioned into a global financial meltdown.

Alternatively, this also means that the recent bubble had been policy induced and was not a function free markets but of government manipulated markets.

Remember, interventionism and inflationary policies distorts the capital structure of an economy.

As Ludwig von Mises wrote in Human Action The Crisis of Interventionism, ``An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself."

Update: Global Stock Market Performance

Here is an update of the global stock markets courtesy of Bespoke Invest (as of May 19th).
According to Bespoke, ``After nearly every country was down earlier in the year, 62 out of the 83 are now up in 2009. Peru is up the most at 72.92%, while Costa Rica is down the most at -39.94%. And the BRIC (Brazil, Russia, India, China) countries are significantly outperforming the developed G-7 countries. Russia, India, and China rank 2nd, 3rd, and 4th in terms of year to date performance, and Brazil isn't far behind in 10th place. Canada has been the best performing G-7 country with a gain of 12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7 countries are bunched up in the 0%-5% range, which is closer to the bottom of the list than the top. And the US is the worst of the seven with gains of less than 1%. While the markets here in the states have rallied nicely off of their March lows, most other countries have bounced back even more 2009." (bold highlight mine)

We'd like to add that the top performing benchmarks can be be categorized by region. For instance for the top 10: 4 comes from Asia (India, China, Taiwan and Indonesia), 3 from Latin America (Peru, Argentina and Brazil), 2 for Europe (Russia and Ukraine) and Israel.

The Philippines ranks 23rd.

We'd like to also take note of the underperformance of several Emerging Market bellwethers relative to the developed counterparts can be distinguished regionally-many are from Middle East and Africa and are considered frontier markets (smallest EM bourses).

It is important to emphasize that 62 gainers out of 83 has been a gradual broadening of gains or a "rising tide lifts all boats" phenomenon. This implies that markets appear to be responding to collective governments inflationary measures.


Nonetheless, global equity benchmarks have been outperforming the US.

From Bespoke, Since March 9th, major US stock indices are up 25%, but since other countries are outperforming, the US' market cap as a percentage of world market cap has actually fallen about 75 basis points. It initially spiked in the early days of the rally, implying that the US sparked the global rebound, but as the rally progressed, investors have spread their sights elsewhere."

The US underperformance should be expected considering it has been the epicenter of today's crisis and where its banking system has been impaired and has been operating under government support.

Moreover, deflationary pressures still poses a threat which means more inflationary activities by the US government.

India Boots Out Communists, Sensex Scores Largest One Day Gain Ever!

After a landslide victory for the Party of Prime Minister Manmohan Singh, India's stock markets went into a bacchanalia with a fantastic record breaking one day run!

According to Forbes, ``Talk about a post-election party. Indian stocks rose so fast on Monday that trading had to be halted.

``The market was euphoric over the Congress party's unexpectedly strong showing in India's national elections. Congress' unexpectedly strong majority means the party will not have to compromise by forming another coalition with leftist parties, which the business community blames for slowing down India's much-needed economic reforms." (highlight mine)

Bespoke Invest observes, ``the next biggest one-day gain came in March 1992 when the index rallied 13.14%. From its peak in January 2008 to its recent low, the Sensex dropped 60.91%. From its low, however, the index has now rallied 75.04% in just over two months. Even after this 75% gain, India needs to rally another 46.13% to reach its old highs."

Both Charts from Bespoke.

So while emerging markets seem to be embracing globalization, even in the face of the present crisis, developed markets appear run on the opposite route.

Needless to say, decoupling dynamics seem to be surfacing even in terms of political trends!

Tomorrow’s Investing World According To The Bond King

``Get your facts straight, apply them to the current valuation of the market, take decisive action, and then hold on for dear life as the mob hopefully comes to the same conclusion a little way down the road.”-William Gross, 2+2=4

The highly reputed Bond King PIMCO’s William Gross suggests that the global investment climate have radically been transforming where ``future of the global economy will likely be dominated by delevering, deglobalization, and reregulating”, from which the investment sphere would lead ``to slow global growth, a heightened risk aversion, a distrust of conventional investment model portfolios, and a greater emphasis on surviving as opposed to thriving.” (bold highlights mine)

Protectionism From Reregulation

Seen from a general sense, the idea seems true. For instance, aside from a sharp drop in global trade and investment flows as a consequence to the near US banking collapse last year, recent signs of deglobalization include the steep decline in migration trends especially from the corridor of Mexico to the US (New York Times) or the emergence of protectionism from policies aimed at “protecting ” locals-interest groups and not the local population-and the subsequent trade frictions in reaction to these policies such as the recent escalating row between the US and Canada over pipe fittings (Washington Post).

However, the chaotic reregulation in the misguided and the convoluted premise of the market’s inability to self-regulate is likely to spawn an even deadlier backlash.

Policy measures, which piggybacks on noble sounding myopic populism, have immediate beneficial solitary effects but at the expense of long term and far larger and wider damage to the system. And in the case of the pipe fittings, the political boomerang appears to have generated a greater impact than from the immediate intended benefits for the privileged groups.

And as the Washington post aptly reports, ``With countries worldwide desperately trying to keep and create jobs in the midst of a global recession, the spat between the United States and its normally friendly northern neighbor underscores what is emerging as the biggest threat to open commerce during the economic crisis.”

``Rather than merely raising taxes on imported goods -- acts that are subject to international treaties -- nations including the United States are finding creative ways to engage in protectionism through domestic policy decisions that are largely not governed by international law. Unlike a classic trade war, there is little chance of containment through, for example, arbitration at the World Trade Organization in Geneva. Additionally, such moves are more likely to have unintended consequences or even backfire on the stated desire to create domestic jobs.” (emphasis added mine)

Yet, this may serve as a casus belli for a global trade war which requires our vigilance. So reregulation seems to be inspiring more of “risk aversion” than containing it-again another unintended consequence.

Delevering Isn’t Equal

However where we depart with Mr. Gross’ outlook is on the premise of delevering.

The notion of delevering implies of a world, including the Philippines, equally swamped by an ocean of debt.

In the Philippines, it is the public sector and NOT the private sector (household or corporate) that has significant debt exposure. But the public sector has been “delevering” since the Asian Crisis in 1997. So this observation, while true in many or most of the OECD economies, is far from being accurate yet from many of the Emerging Market’s standpoint. I say yet because present policies could drive the public to indulge in a debt spree.

Moreover, the notion of delevering puts into the prism that the world revolves around the US only. Similar to the defective idea that “decoupling is a myth”, recent events have disproved much of this misplaced conventional academic expectations as the world seems to be recovering earlier than the US, see charts in Investing "Ins" and "Outs": US led Global Economic Recovery and Decoupling a "Myth". Thereby, deglobalization and reregulation will likely accentuate the decoupling process as previously discussed in Will Deglobalization Lead To Decoupling?.

In the layman’s perspective, globalization can be interpreted as a process of world integration via the trade, investments, migration, and financial channels. A more globalized world should imply of more “recoupling”. On the other hand, deglobalization does the opposite.

Further, while many debt overstretched private sector in the OECD economies have indeed been “delevering”, governments have been substituting these losses with its own massive debt expansion binge see figure 1.

Figure 1: Economist: Pumping It Up

Savings rich and foreign currency surplus laden Asian nations have commodious room to undertake lavish fiscal stimulus.

If the policy options for Asian economies has been to choose between stashing US dollars at the cost of risking currency losses from a devaluing US dollar and spending these domestically then it would appear that Asia has opted for a “politically favorable” profligate public spending option-that’s because they can afford it!

US And China Pursues Diametric Policy Directions

Yet while many economists ascribed the recent the recent “outperformance” to these government activities, our take is much more of the “unseen”- aggregate colossal liquidity, the inherent low systemic leverage in the region, high savings, greater thrust towards regional integration in spite of the financial crisis, the aftershock of “Posttraumatic Shock Distress (PTSD)” effects and creative destruction have been the major driving force around Asia’s resurgence.

For instance, while the US seems to be antagonizing its closest and friendliest neighbor and ally Canada with “closed door” policies, China, on the other hand, has been aggressively adapting “open door” policies with erstwhile archrival, Taiwan.

Recently both key Asian countries announced more transportation linkages via new shipping routes, and the expansion of direct airway routes, aside from the easing of once prohibited investments where according to the Time magazine, ``For the first time, mainland investments would be allowed in a broad range of Taiwan manufacturing and services companies. China Mobile, the mainland's largest cellular-service provider, has already agreed to invest about $530 million in Taiwan's Far EasTone Telecommunications, although the landmark deal has not been approved by Taipei.”

Tax incentives have also been extended by China to the Taiwanese investors (Bloomberg).

Moreover, such collaboration hasn’t been confined to the economic plane but also extends to the world of politics, again from the Times Magazine, ``In perhaps the most hopeful sign of change, China recently relaxed its longstanding opposition to Taiwan's inclusion in international organizations. After being rejected since 1997, Taiwan was finally invited this year to be an observer at the World Health Assembly, the governing body of the World Health Organization — the first time it has participated in a U.N.-related forum since Taiwan lost its U.N. seat to China in 1971.”

In short, the underlying trend of policies undertaken by the US and China have been running on a diametric path. So if incentives drive human action, seen from the vastly divergent aggregate policies undertaken, then obviously the expected returns, considering the risks variables, should likewise be different. This view runs in contrast to mainstream ideology, who does not believe in incentives but on the inexplicable effervescent impulses of “animal spirits”.

So yes, the atmosphere where “heightened risk aversion”, a “distrust of conventional investment model portfolios” and “greater emphasis on surviving as opposed to thriving” most probably is applicable to the defunct US centric financial paradigm and the fast evolving politicization of the US economy which seemingly has become increasingly hostile to its business environment.

But we suspect that this path shouldn’t necessarily apply to Asia or to emerging markets unless a global trade war erupts.

Delevering In A World That Rewards Leveraging, Profiting Around Regulations

Yet delevering should be seen in the “right” context and not from a generalized point of view. We shouldn’t interpret some trees as representative of the forest. This is the Achilles’ heel of macroeconomists whose inclination is to oversimplify events.

Specifically, delevering is a market process being experienced by the private sector (mostly the housing and financial industry) in key OECD economies. This has not been valid relative to its counterparts for most of the Asian or Emerging Market economies-especially in the Philippines.

Aside from the thrust to replace private delevering with government leveraging, the collective policy thrusts by global governments has been to resurrect the status quo ante of systemic leveraging by imposing aggregate policies (Zero bound interest rates, Quantitative Easing, etc.) that encourage the “buy, speculate and spend” incentives, which effectively penalizes savers.

So systemic delevering isn’t likely to happen yet unless a global government bond bubble goes ka-boom which isn’t distant from our perspective.

Incidentally, Mr. Gross has been staunchly supportive of the same unsustainable serial bubble blowing interventionist policies. Mr. Gross expects the US Federal Reserve to buy more long term treasuries in order to keep mortgage rates down. However, we can’t say as to how long artificial rates can be maintained by the US Federal Reserve’s manipulation and distortion of the marketplace, considering the huge amount needed to “fix” the price of the treasury markets. But we understand that interest rates in the US are ultimately headed higher, and Mr. Gross thinks so too as revealed by actions-PIMCO has reportedly been selling US Treasuries.

It would appear that world’s bond king’s alpha (extra or premium returns) has been to arbitrage from regulations and maybe that’s why his strong support for interventionist policies.

The Growing Dependence On US Government’s Inflationary Mechanism

``Inflation, in brief, essentially involves a redistribution of real incomes. Those who benefit by it do so, and must do so, at the expense of others. The total losses through inflation offset the total gains. This creates class or group divisions, in which the victims resent the profiteers from inflation, and in which even the moderate gainers from inflation envy the bigger gainers. There is general recognition that the new distribution of income and wealth that goes on during an inflation is not the result of merit, effort, or productiveness, but of luck, speculation, or political favoritism. It was in the tremendous German inflation of 1923 that the seeds of Nazism were sown.”-Henry Hazlitt, What You Should Know About Inflation p.130

Despite signs of recovery in the US stockmarket which most have imputed as “green shoots” of economic recovery, the immense inflationary policies, the unwinding of huge short positions, adjustments in accounting standards to accommodate financial statements of the banking sector, huge oversold levels, the PTSD effects and ‘positive’ earnings from the financial sector have all been significant factors which may have contributed to the recent rally.

Nonetheless here’s the message we’d like to repeat: inflation is a political and not a market process. When governments chooses the winners over the rest, through subsidies, loans, guarantees, bailouts, transfers, market maker or buyer of last resort or through fiscal spending-these are actions decided not by the marketplace but by the political authority. Price inflation as manifested in the markets or in consumer prices signifies as symptoms or the consequences emanating from the accrued policies of the past.

Today’s inflationary process has been driven by the promulgated desire by the global political authorities to cushion or jumpstart markets or economies from the recent crisis based on the economic ideology that governments can substitute for markets during “market failures”. In their ideology, it is assumed that markets always needs to go forward and should never falter- a misplaced perception of capitalism which is actually a profit and loss system.

The political process to inflate the market is seen as the only antidote against the market process, which had been recoiling based on natural economic laws against systemic over indebtedness or overleverage, overvaluation and a system built on excess capacity which produced supply surpluses against an artificially constructed debt inflated demand.

The most recent global collapse in the markets and economies simply reflected the natural state of markets which overwhelmed the untenable imbalances accreted in the system.

Yet by government’s opting to duke it out with market forces works to only delay and worsen the impact on the day of reckoning. Even more so are the policies which have been aimed to perpetuate the same unsustainable paradigm which had been at the root of the crisis.

We never seem to learn that the more imbalances built into the system, the bigger the impact of the next crisis.

And while inflationary policies appear to be gaining traction, which has managed to juice up the activities in marketplace or parts of the US and global economy over the interim, the ongoing market driven deflationary forces will most likely result to outsized volatility, especially in areas plagued by the recent bubble bust.

So those aspiring for “market timing” won’t likely get the same expected conventional patterns because the operational structure of the marketplace has been unprecedented in terms of the scale of government intervention and unparalleled in the scope of massive inflationary measures applied.

The same global inflationary process has apparently been manifesting its presence in the equity and commodity markets.

And that’s why most of the mainstream analysts have apparently been perplexed by the present developments, as economic figures and market signals have been in a deep disconnect. For the bulls, present market actions seem reflexive, they read today’s signals as signs of recovery, for the bears, market actions signify as overreaction and rightly the effects of manipulation. For us, today’s market action has been anticipated and represents as principally a function of inflationary dynamics.

Diminishing Federalism And The Emergence Of Centralized Government

Nonetheless, we expect that global governments to continue to use their “limitless” power to churn money from their printing presses to counter the adverse reactions from market forces.

The financing of US states could be an example why inflationary policies will persist. Presently, revenues in 45 out 47 states in the US have been sharply falling as shown in Figure 2.

Figure 2: Rockefeller Institute: Across The Board Slump in Taxes

And falling revenues against present level of expenditures implies of huge state budget deficits, this also translates to rising risks of state bankruptcies, if not the loss of the autonomous “federalist powers” from a deepening trend of dependency on Washington.

According to the USA Today, ``In a historic first, Uncle Sam has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments.

``The shift shows how deeply the recession is cutting. Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations…

``Federal grants — early stimulus money plus conventional federal aid — soared 15% in the first quarter to a seasonally adjusted annual rate of $437 billion, eclipsing sales taxes, which fell 2%.”

Incidentally, California will hold a “special election” or plebiscite aimed at addressing the largest ever state budget gap next week (May 19^th). The electorate will vote on several proposed measures as raising taxes, paring down several social service programs, selling state landmarks and laying off some state workers. However, polls suggest that Californians will likely to vote down on the proposed measures which could translate to a credit rating downgrade or higher costs of financing.

Given the high chances of voter’s disapproval, the state of California will possibly have a harder time borrowing, which means that the odds for a bailout from the Federal Government loom larger, otherwise a state bankruptcy .

California could be a precedent for other states. And state bailouts by the US Federal government should translate to expanded deficits which will likely be met with more money printing, especially if the borrowing window shrinks (Financial Times). Yet if we look for signs from the recent actions in the auction market of US Treasury bonds, then government borrowing does not seem like a promising option.

So aside from inflationary costs, the other costs from state dependency on Washington, according to Conn Connell of the Heritage Foundation (bold emphasis mine) are, ``The costs of the loss of federalism to the American people are real. As Reagan outlined above federal aid to states blurs the lines of government accountability, making it easy for politicians to sneak in government-growing legislation and hard for voters to hold those politicians accountable. Moreover, as states become more dependent on federal funding, they begin to lose their ability to set priorities and make policy decisions that are best-suited to their specific needs. Finally, sending money to Washington, only so that it can later come back to the states, creates a fiscal detour of inefficiency and inequity.”

The point is: The Federalist structure of the US government appears to be evolving into a centralized platform gravitating around Washington, which has been using deficit financing as the primary instrument to shore up or consolidate power.

Entitlement Imbalances + Deficits From Present Crisis = Risk Of New Crisis

We may further add that recent developments have point to the imminence of the possible entitlement crisis encompassing the welfare programs of the US Social Security and Medicare as discussed in US Presidential Elections: The Realisms of Proposed “Changes”, see figure 3.

Figure 3: Heritage Foundation: Entitlement Crisis Dwarfs Current Spending

According to a report from Bloomberg (emphasis added), ``Spending on Medicare, the health insurance plan for the elderly, will reach a legal limit by 2014, the same year predicted in 2008, the trustees’ report said. It’s the third year in a row that Medicare’s trustees have pulled the so-called trigger, a law mandating that the president introduce legislation the following year to protect the program’s financing.

``The trustees’ annual report also estimated that Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago. The trust fund will need an additional $13.4 trillion to meet all its obligations over the next 75 years…

``Spending on Social Security is expected to exceed revenues in 2016, one year earlier than last year’s forecast, the report said. The trust fund will need an additional $5.3 trillion over the next 75 years to meet all scheduled benefits, the trustees said. The retirement-assistance program can continue to pay full benefits for about 30 years, the report said.”

In short, growing payments to beneficiaries are likely to be unmatched by revenue collections which should lead to expanded deficits. Again according to the same Bloomberg article,`` The government retirement system faces a cash shortfall because the number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year. By 2045, there will be 2.1 workers paying into the system for every retiree, compared with 3.2 workers this year.”

This implies another major source of pressure to raise financing.

Author and former Treasury Department economist Bruce Barlett in Forbes recently posited that the US may require taxes to rise by some 81% just to meet these coming budgetary shortfalls.

And considering the degree of deficit financing arising from today’s crisis, which if present programs don’t succeed to rekindle an immediate return to growth “normalcy” for the US economy, and combined with the growing risks of the entitlement crisis, all these could translate to a jarring future for Americans-the risks may not be one of deflation but one of bankruptcy or at worst hyperinflation.

On the same plane, the former comptroller general of the US David Walker recently warned at the Financial Times of a prospective downgrade of America’s AAA credit rating should current trends persist.

Hence it seems to be much ignored by the mainstream or by policymakers how the structure of the US political economy has been evolving to apparently increase dependence on the US government’s inflationary mechanism to support the status quo, as currently depicted by evidences of the diminishing Federalism and from the huge intractable welfare programs which looks increasingly like a Ponzi financing model.

As famed economist Herb Stein once said ``If something cannot go on forever, it will stop.”

Ignoble Deficits And The $33 Trillion Global Government Debt Bubble?

``Let us be clear, the Dow rally is not squaring Obama's economic circle. His policy of big government is — at best — guaranteed to retard economic growth. The bigger the government the more resources it commands and the more resources it commands the fewer resources there are for capital accumulation. Even without the suffocating effects of increased regulation the increased demand for resources will in itself reduce the amount of entrepreneurial activities. And it is entrepreneurship that drives economic growth while savings fuel it. Obama's policy — deliberate or not — is one of severely curtailing both. Gerard Jackson Dark clouds hover over US economy

It must be an uncanny feeling for an incumbent President to warn on unsustainable deficit spending when the present surge in deficits has been a product of no LESS than HIS own doing see figure 3.

So from our end, such moralizing looks very much like chutzpah more than a sincere declaration to curb profligate spending.

Figure 4: Heritage Foundation: Change We Believe In-Exploding Deficits

But rhetoric aside, we understand that action speaks louder than words.

And where the US government seems to have opted for an inflationary path, underpinned by a political structure increasingly becoming dependent on an inflationary mechanism, inflationary dynamics tells us that policies will be directed towards achieving such end.

Hence what the government wishes for, is what we most likely will end up with-i.e. to the extreme ends. This is the fundamental bubble character of inflationary dynamics.

Remember, mainstream economists and policymakers favor rising prices over falling prices. The former is equated with “growth” while the latter is construed as a dreaded menace. Hence, the embedded inflationary mindset of policymakers, supported by the coterie of experts, requires policies that can engender an accelerating pace of monetary inflation to keep prices continually rising in order to create the illusion of prosperity.

And as Ludwig von Mises wrote in his magnum opus Human Action chapter 20 section 6, ``The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.”

Hence, like the Ponzi finance operating in a pyramiding framework, inflation begets accelerated inflation to maintain a trajectory of surging prices, until of course, like the previous bubble based on US housing industry which had been financed by mortgage securities and the subsequent alchemy of designer structured finance products, everything screeches to a halt-out of the unsustainable nature of such debt driven policies.

Political Goals and Present Administrative Requirements Don’t Match

The current deficit spending isn’t only a US phenomenon, it has been global. That means much of the world has been frontloading expenditures through governments to replace “lost demand”, in the hope that their respective economies will see a normalization of growth trends from which should enable them to pay off these liabilities overtime.

According to analyst Satyayit Das, `` In 2009, governments around the world will have to issue US$3 trillion in debt. The US alone will need to issue around US$ 2 trillion in bonds (a staggering US$40 billion a week!). This compares to around US$400-500 billion of annual debt that the US has issued in recent years. This debt must be issued at record low interest rates.” (bold highlights mine)

In other words, two thirds of the world government financing for 2009 will emanate from the US. And present policies to compress interest rates haven’t been merely for mortgage refinancing but also to enable the US to secure low interest rate debts.

Yet in the past, Asians through China and Japan because of the huge accumulated surpluses had been the biggest buyer of US sovereign debts. Asian economies virtually stockpiled on US treasuries for political ends- to keep their currencies competitive for export purposes.

Foreign ownership of all US treasury issuance comprise some 28% according to Wikipedia.org see figure 5.

Figure 5: Wikipedia.org: Ownership Profile of all US Treasuries

Japan and China owns about 45% of the treasury portfolio held by foreign and international investors.

Since Japan and China has undertaken even more intensive government stimulus efforts as shown earlier, this trend doesn’t guarantee a repeat of the same dynamics where savings rich Asian governments will continue to recycle their surpluses on US treasuries.

This implies that the deficit spending of the US government will have to be funded by local (household and corporate) savings.

Yet, this places the US government at a dire predicament or its policies at a crossroad-the policy thrust has been to promote borrowing and spending (or less private sector savings) at a time when government requires the same savings to finance its deficits! So policy goals and present administrative requirements don’t match.

So if there will be a lack of financing from abroad and equally insufficient source of financing from local savers then the US government will most likely have to print its needs away!

$33 trillion worth of Global Government Debt Bubble?

Moreover, one analyst, Neil Jensen of Absolute Partners suggests that the financing needs of the world could have been understated see Figure 6.

Figure 6: Absolute Partners/safehaven.com: $33 Trillion question

Mr. Jensen who uses the research work of Harvard Professors Carmen Reinhart and Kenneth Rogoff on previous banking crisis as benchmark for his own work, says ``The true cost is important, because it has to be financed through new bond issuance, and it is my thesis that the sheer size of this tsunami will eventually overwhelm the world's bond markets...Using the official IMF estimates, the twelve most industrialised of the world's G20 countries (in my book known as the Dirty Dozen) will have to issue about $10 trillion worth of new bonds to cover the cost of the current crisis.”

``However, if you (like me) believe that IMF underestimates the true cost of this crisis, Reinhart and Rogoff offer a more realistic approach. Using their least costly case study (Malaysia 1997) as our best case scenario, the true cost comes to $15 trillion. If one uses the average of 86% instead, the cost jumps to a whopping $33 trillion. I didn't even bother to produce a worst case scenario - it all got too depressing!”

So reverting to basics, we go by Dr. John Hussman’s definition of inflation (bold highlight mine) ``Inflation is not driven by monetary expansion per se, but by growth of government spending, regardless of how it is financed. Inflation basically measures the percentage change in the ratio of two “marginal utilities”: the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities. [the torrent of bond issuance in the above example-my comment] Think ice cream cones – the first one has a very high marginal utility, but the second one you eat has a little less, and so on. So increased supply tends to depress marginal utility, while scarcity raises it.”

So it is not deflation we should be worried about but massive inflation!