Euro Debt Crisis: The Confidence Fairy Tale and Devaluation Delusion

The Confidence Fairy (Fear and Greed) Fable

Suggestions have been made that Euro crisis has been an issue of confidence or “animal spirits” as alleged by the mainstream analysts.

This represents half-truth.

The idea that people are driven by sheer optimism or pessimism dumbs down the people’s ability to look after their self-interest. Of course those peddling such rubbish assume that they are above the rest of mankind.

Yet in a bizarre way of thinking, they use assorted and complex economic analysis when at the end of the day, everything for them, essentially boils down to random optimism or pessimism.

The assumption that psychological factors as purely driving the marketplace ignores the truism of the collective individual’s ability to calculate on the elemental tradeoffs of cost relative to benefits or of risk relative to rewards.

People don’t buy financial securities because they wake up in the morning feeling ‘optimistic’ or sell when they feel ‘pessimistic’. People buy or sell because they see, rightly or wrongly, beneficial aspects from the execution of such actions. Whether psychic or monetary, the assumed rewards are subjectively determined by the person taking action.

The supposed confidence fairy of fear and greed are essentially driven by an underlying event stimulus or incentive and not by mere impulse.

For instance, a market crash doesn’t happen because of fear itself. Instead a crash happens when people discover that the issues they own have not been priced accordingly or has substantially been worth below the most recent value as a result of some chain of causes.

Like those stampeding out of a theater (effect) because of a sudden discovery of fire (cause), the simultaneous act by many to exit ownership of financial securities fuels impulses or emotions to go along with the crowd (bandwagon effect). Thus fear signifies a symptom of an underlying cause rather than a cause in itself.

Yet fear and greed are prominent symptoms of bubble cycles.

During market euphoria usually at the acme of a bubble cycle, people pile up on ascendant prices because of the thought of the perpetuity of such price trends.

Of course, this can be only made possible by the loosening of extensions of credit (circulation credit) where the credit-collateral feedback loop mechanism gets rolling—where rising collateral values prompts for more lending, and more lending increases collateral values.

Thus, circulation credit (which are consequences of artificially suppressed interest rates and from policy directives, e.g. credit subsidies, bailouts) fuels bubble cycles which impels contortions in people’s economic calculations and subsequently results to the emotive price chasing phenomenon—Greed.

The opposite phenomenon holds true during bubble busts. The credit-collateral feedback loop mechanism goes into a reverse operation—falling collateral values prompts for margin calls and the calling in of bank loans both of which decreases collateral values. The simultaneous acts of exodus essentially signify—Fear.

In truth the confidence fairy has nothing been more than a pretext for more government intervention.

As the great Murray Rothbard once wrote[1]

Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending. Of the two major categories of spending, consumption is passive and determined, almost robotically, by income; hopes for the proper amount of spending, therefore, rest on investment, but private investors, while active and decidedly non-robotic, are erratic and volatile, unreliably dependent on fluctuations in what Keynes called their "animal spirits."

Fortunately for all of us, there is another group in the economy that is just as active and decisive as investors, but who are also--if guided by Keynesian economists--scientific and rational, able to act in the interests of all: Big Daddy government. When investors and consumers underspend, government can and should step in and increase social spending via deficits, thereby lifting the economy out of recession. When private animal spirits get too wild, government is supposed to step in and reduce private spending by what the Keynesians revealingly call "sopping up excess purchasing power" (that's ours).

The Euro crisis has hardly been founded from the issue of greed and fear, but of boom bust cycles.

Following massive imbalances acquired from the antecedent boom, market prices have been prevented from clearing or from seeking to adjust to the required levels that would allow resources to be transferred from unproductive to productive use. The discoordination and coordination mechanism of the marketplace have been impeded.

Yet the constant interventions that has sustained the current artificial price levels have led to mass distortions and market participants astray. So once the effect of interventions subsides or once markets discover the artificiality of such price levels, volatility ensues. Emotional transactions follow.

Hence, the distributive outcomes from a significantly politicized marketplace suggest of massive price distortions from repeated government interventions. This has been mistakenly construed or touted as fear. Those saying so have been misreading effects as the cause.

Political Insanity and the Devaluation Elixir

The mainstream has also been suggesting that the gold standard effect from the Eurozone Union, which prohibits internal devaluation of member states, has been a cause to this crisis. For me this represents as unalloyed hogwash[2].

While I agree that the EU needs to be dissolved because of the latent intention to politically centralize Euro economies such as the supposed need to fiscally integrate the EU, I oppose the idea of nationalizing currency for the sole purpose of inflationism via devaluation.

I will not elaborate on the evils of inflationism[3], but rather point out how ridiculous the assertion of supposedly allowing Greece, for instance, to devalue to become ‘competitive’.

Based on the average hourly labour costs in the business economy in 2009[4], Greece has been one of the cheapest among the peripheral EU states. Italy, Spain and Portugal are just within the range of Greece.

The cheaper labor costs (on the right) belong to those of emerging Europe.

And labor costs signify as part of labor market efficiency[5]

The crisis affected PIIGS also belong to the least competitive rankings[6] in terms of labor efficiency.

In other words, cheap labor did not translate to export greatness.

Thus, devaluation will hardly impact the competitiveness of the labor market because this does not treat the disease.

The disease which plagues the PIIGS are highlighted by the unfriendly business enviroment[7] caused by too much regulations and bureaucratic hurdles.

And importantly, by the intractable government expenditures[8] mostly from the welfare state as measured by the Fiscal Imbalances (FI)[9].

At the end of the day, those who yearn for a Zimbabwe solution to the Euro don’t have the intention of resolving the crisis but to promote the same ills that has blighted them.

No wonder Albert Einstein called—doing the same thing and expecting different results—insanity.

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[1] Rothbard Murray N. Keynesianism Redux, Chapter 12, Making Economic Sense

[2] See Quote of the Day: A Very Expensive Education in Basic Economics, November 10, 2011

[3] See Vatican Banker Endorses ECB’s Inflationism November 24, 2011

[4] Euro Commission Wages and labour costs, Eurostat

[5] Financial-lib.com Labor efficiency variance: the number of hours actually worked minus the standard hours allowed for the production achieved multiplied by the standard rate to establish a value for efficiency (favorable) or inefficiency(unfavorable) of the work force

[6] Infectiousgreed.com Reforming Labor Markets, November 14, 2011

[7] Danske Research Euro Area Macro Handbook, November 2011

[8] Gokhale Jagadeesh Measuring the Unfunded Obligations of European Countries January 2009

[9] The fiscal imbalance (FI) measures the size of the total imbalance built into current fiscal policies, including future changes already scheduled by law. It is a country’s unfounded liability, looking indefinitely into the future. It is the difference between the present cost of continuing current government spending programs, including entitlement promises, present public debt, net of expected tax revenues. It is the amount of additional resources the government must have on hand today, invested and earning interest, in order to continue policies forever. Alternatively, it equals the additional net revenue or cost savings required from future policy adjustments to close the budeget gap embedded in current fiscal policies.

The FI is similar to outstanding public debt in one important way: It grows larger over time because of accruing interest costs. In addition fiscal policies that imply a positive FI are unsustainable: Because the ratio of FI to the present value of future GDP also grows larger over time, the implied annual service payments would eventually become larger than annual GDP

Will the European Central Bank Relent to Political Pressures to Increase Debt Monetization?

Here is what I said last week

I would conjecture that rules, laws, regulations, policies or self-imposed limits change according to the convenience and the interests of politicians.

This seems to be happening. A dithering European Central Bank (ECB) may be “softening” their stance as pressures for her to backstop the Eurozone mounts.

The Euro crisis has been rapidly spreading like a wildfire.

Even Germany’s bonds are being dragged by the crisis. (chart from Bespoke Invest).

Last night, Belgium’s credit rating had been lowered by the S&P. Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece as euro-area countries having their credit rating cut this year. The country of 10.8 million people, whose capital, Brussels, is home to the European Commission and the North Atlantic Treaty Organization, last had its credit standing lowered in December 1998 by Fitch Ratings. (Bloomberg)

The following report from Bloomberg shows us how political interests will likely lead to a change in the rules of the game in dealing with the Euro Crisis, (bold emphasis mine)

European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts, German Finance Minister Wolfgang Schaeuble suggested.

Schaeuble signaled that Germany may retreat from demands that private creditors contribute to rescues in exchange for European treaty amendments toughening rules on budget oversight.

European efforts to speed the setup of the 500 billion-euro ($662 billion) European Stability Mechanism from its planned mid-2013 debut have lost momentum as Germany and the Netherlands resisted pleas by France, Spain, Portugal and Ireland to drop its bondholder-loss provisions.

“Basically, we agreed on the principle for the ESM already in July,” Schaeuble told reporters in Berlin after talks with his Dutch and Finnish counterparts today. “If we now manage to move toward a stability union, we’ll see how one might possibly adjust the treaty.”

The debt crisis rattled Germany, Europe’s biggest economy, with the failure of a bund auction two days ago. Bond yields in Spain and Italy surged today, with Spain dropping a plan to auction a three-year benchmark next week and Italy being forced to pay more to borrow for two years than for 10. Belgium's credit rating was cut today to AA from AA+ by Standard and Poor's.

While there “may be discussions in Brussels” next week on sector involvement under the ESM, the aim of a finance ministers’ meeting will be to flesh out details of the agreement by EU leaders last month to write down Greek debt, recapitalize banks and strengthen the existing rescue fund, the European Financial Stability Facility, Schaeuble said.

ECB Pressure

As the crisis worsens, the European Central Bank is coming under pressure to step up its response. While France yesterday agreed to stop pressuring the ECB to print money, policy makers today signaled they are willing to offer cash-strapped banks more liquidity if needed.

Pieces of the jigsaw puzzle seems falling into place.

The probable reason why France has “agreed to stop pressuring the ECB” is because Benoit Coeure, chief economist at the country’s finance ministry has reportedly been nominated to the ECB to replace Lorenzo Bini Smagh, which appears to be part of the horse trading on the political appointments happening at the European Central Bank.

The growing clamor for the EU to have a "fiscal union" has served as veneer for the ECB to go on the path similar to the US Federal Reserve in pursuing an aggressive monetary policy stance.

Looks like we may be headed there pretty soon.

Quote of the Day: Perversion of the Law

The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish! If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.

A very time relevant quote from the great Frédéric Bastiat, The Law (hat tip Professor Art Carden)

War on Drugs: Misplaced ‘Follow the Money’ Priorities by Cops Results to More Crimes

You think the war on drugs make society peaceful? Think again.

Police officers, like any human being, also follow the money. But unlike us, since they are armed by mandate, they may use the law for their self-interest or benefit at our expense.

From Radley Balko of the Huffington Post (bold emphasis added) [hat tip Don Boudreaux]

As Jessica Shaver and I chat at a coffee shop in Chicago's north-side Andersonville neighborhood, a police car pulls into the parking lot across the street. Then another. Two cops get out, lean up against their cars, and appear to gaze across traffic into the store. At times, they seem to be looking directly at us. Shaver, who works as an eyebrow waxer at a nearby spa, appears nervous.

"See what I mean? They follow me," says Shaver, 30. During several phone conversations Shaver told me that she thinks a small group of Chicago police officers are trying to intimidate her. These particular cops likely aren't following her; the barista tells me Chicago cops regularly stop in that particular parking lot to chat. But if Shaver is a bit paranoid, it's hard to blame her.

A year and a half ago she was beaten by a neighborhood thug outside of a city bar. It took months of do-it-yourself sleuthing, a meeting with a city alderman and a public shaming in a community newspaper before the Chicago Police Department would pay any attention to her. About a year later, Shaver got more attention from cops than she ever could have wanted: A team of Chicago cops took down her door with a battering ram and raided her apartment, searching for drugs.

Shaver has no evidence that the two incidents are related, and they likely aren't in any direct way. But they provide a striking example of how the drug war perverts the priorities of America's police departments. Federal anti-drug grants, asset forfeiture policies and a generation of battlefield rhetoric from politicians have made pursuing low-level drug dealers and drug users a top priority for police departments across the country. There's only so much time in the day, and the focus on drugs often comes at the expense of investigating violent crimes with victims like Jessica Shaver. In the span of about a year, she experienced both problems firsthand….

In other words priority has been skewed towards milking out drug felons at the expense of other peacekeeping tasks. All because of following the money

Again from Huffington Post…

Arresting people for assaults, beatings and robberies doesn't bring money back to police departments, but drug cases do in a couple of ways. First, police departments across the country compete for a pool of federal anti-drug grants. The more arrests and drug seizures a department can claim, the stronger its application for those grants.

"The availability of huge federal anti-drug grants incentivizes departments to pay for SWAT team armor and weapons, and leads our police officers to abandon real crime victims in our communities in favor of ratcheting up their drug arrest stats," said former Los Angeles Deputy Chief of Police Stephen Downing. Downing is now a member of Law Enforcement Against Prohibition, an advocacy group of cops and prosecutors who are calling for an end to the drug war…

At the same time, there's increasing evidence that the NYPD is paying less attention to violent crime. In an explosive Village Voice series last year, current and former NYPD officers told the publication that supervising officers encouraged them to either downgrade or not even bother to file reports for assault, robbery and even sexual assault. The theory is that the department faces political pressure to produce statistics showing that violent crime continues to drop. Since then, other New Yorkers have told the Voice that they have been rebuffed by NYPD when trying to report a crime.

The most perverse policy may be asset forfeiture. Under civil asset forfeiture, police can seize property from people merely suspected of drug crimes. So long as police can show even the slightest link of drug activity to a car, some cash, or even a home, they can seize it. In the majority of cases, most or all of the seized cash goes back to the police department. In some cases, the department has taken possession of cars as well, but generally non-cash property is auctioned off, with the proceeds then going back to the department. An innocent person who has property seized must go to court and prove his property was earned legitimately, even if he was never charged with a crime. The process of going to court can often be more expensive than the value of the property itself.

Asset forfeiture not only encourages police agencies to use resources and manpower on drug crimes at the expense of violent crimes, it also provides an incentive for police agencies to actually wait until drugs are on the streets before making a bust. In a 1994 study reported in Justice Quarterly, criminologists J. Mitchell Miller and Lance H. Selva watched several police agencies delay busts of suspected drug dealers in order to maximize the cash the department could seize. A stash of illegal drugs isn't of much value to a police department. Letting the dealers sell the drugs first is more lucrative.

Read the rest here

Again like all human beings, the police resorts to actions based on priorities or on personal value scales. And arbitrary laws affect their underlying incentives to act as public officials. Apparently the war on drugs tend to misplace their priorities, all at the expense of society.

China Aims To Centralize Underground Stock Exchanges

Informal economies are symptomatic of the state of affairs for economies struggling with byzantine legal and bureaucratic entanglements.

But in today’s modern finance based economy, it’s my first time to hear of the proliferation of informal stock exchanges.

From Bloomberg,

China will ban trading of securities and futures on unauthorized exchanges to regulate the market and prevent financial risks, the State Council said.

Some of the trading activities have led to price manipulation and fund embezzlement by the exchange managers, China’s cabinet said in a statement dated yesterday. Such problems may cause regional financial risks and endanger social stability, the statement said.

There are over 300 unregulated bourses across the country, the Financial Times reported today, citing analysts. Turnover on the three authorized commodity futures and a financial futures exchanges in China fell 4 percent to 113.4 trillion yuan ($18 trillion) in the first ten months from a year ago, according to the China Futures Association.

“Regulators are concerned because these exchanges do not pay much attention to risk control, and volatile trading could hurt the participants and have a spillover effect on other companies and related industries,” said Shen Zhaoming, a Shanghai-based analyst at brokerage Changjiang Futures Co. “Local governments all hope for bigger economic influence, and they think establishing such exchange platforms is an efficient way to achieve the goal.”

Apart from the stock and futures exchanges approved by the State Council, no other bourses are allowed to list new shares, offer centralized pricing or make markets, the statement said. Exchanges that trade gold, insurance or credit products must receive approvals from financial authorities under the State Council, it said.

Price manipulation and fund embezzlement (e.g. MF Global Holdings) have also been present in ‘regulated’ exchanges.

Centralization does not sanitize or prevent markets from having miscreants. To the contrary, politicized regulated markets may even spawn them e.g. Philippines’ BW Resources Scandal and the US shadow banking system, where the former is the result of cronyism and the latter has mostly been product of regulatory capture and regulatory arbitrage.

So price manipulation and fund embezzlement would be a flimsy pretext by the Chinese government to exercise control over informal exchanges.

Besides, bailouts, unilateral credit margin maneuvering, quantitative easing, artificially low interest rates, Operation Twist (manipulation of the yield curve), Basel Accord (Financial Repression), ban on shorts and other forms of politicization of the marketplace represent price manipulations which has been the du jour policies being undertaken by global governments at the expense of the average market participants and the taxpayers.

So it is ‘legal’ for governments and their cronies to finagle or to manipulate or to exercise insider trading of the markets. To add, governments are beyond or are exempt from the laws which they implement. Again this implies that 'what may be legal is not moral'. One would call this political inequality.

Finally it is simply amazing how “300 unregulated bourses” exists in China.

Again some possible drivers here,

-regulated exchanges have been too much bureaucratic or extensively politically controlled to force many financial market investors to go underground,

-the major bourses of mainland China Shanghai and Shenzhen have not expanded enough to cover the entire country. However, the current state of technology seem to reduce the odds of such dynamic unless restrained by politics.

-China’s capital markets have been so limited or constrained such that boom bust policies have been compelling many investors to seek ways to stretch on yields by participating in the informal stock exchanges. And a possible symptom of this would be the China’s version of the shadow banking or financing system that has funded the recent property boom (and possibly informal stock exchanges too?).

This should be a great example of how the markets are always way ahead of and manage to circumvent regulators—a perpetual cat and mouse game.

Magazine Cover Indicator: Signs of a Euro Bottom?

The business of any magazine publisher is to sell. That’s why magazines usually dwell on the popular, sensational and or the controversial—they are easy to sell.

And because the dominant public sentiment has usually been reflected on magazine covers, popular themes occasionally serve as useful indicators of pivotal market inflection points.

The recent cover of The Economist magazine deals with prospective end of the Euro.

See Economist article here

I am not to argue here about the prospects of the dissolution of the Euro, as I think all paper currencies will eventually meet their fate in the fullness of time. However, to repeat, magazine covers may imply an important inflection point which essentially could manifest on what is known as the crowded trade phenomenon.

And the magazine cover indicator seems to have a noteworthy track record as shown below.

January 1983. Time Magazine worries about the debt bomb which didn’t happen. This looks more appropriate today.

September 1977. Time magazine exhibited concerns of real estate bubble. A bubble that happened nearly 2 decades later.

August 1997. This has been one of the most popularly featured contrarian magazine indicator. 1979 was followed by the greatest boom in the US stock market history.

July 2002. Businessweek’s Angry Bear cover signaled the US stock market bottom and the next phase of the bubble cycle.

2006. Time Magazine swings to the beat of the US real estate bubble as the the bubble peaked.

Oct 2003 The Economist accentuates the End of Oil Age as oil prices bottomed, article here

December 2004. The Economist underscores popular sentiment of the crashing US dollar. A furious rally in the US dollar occurred the following year or in 2005.

See more magazine cover indicators from Minyanville here

As caveat, I don’t know what were the other magazine covers during the abovestated periods, and that there has been no tabulation of the batting averages of such indicators of specific magazines. I am disclosing this to avoid on “framing” the issue.

Yet even if the Euro were to bottom, I’d buy gold instead.

China Expands Bailout Measures, Reduces Reserve Requirements for Select Financial Firms

China’s government selectively lowered reserve requirements as part of credit boosting measures (euphemism for bailouts)

From Bloomberg, (bold emphasis mine)

China widened efforts to support cash-strapped companies in Zhejiang and rural areas hit by a credit squeeze that’s slowing the second-largest economy just as Europe’s debt crisis saps export demand.

The People’s Bank of China cut the reserve ratio for more than 20 rural credit cooperatives nationwide by half a percentage point, according to an announcement from its Hangzhou branch in Zhejiang, where small businesses have complained about lack of access to credit. Bank of America Merrill Lynch predicts officials will lower the ratio for large commercial banks early in 2012.

Evidence is mounting that growth has moderated in the economy that’s led the global expansion, with home sales falling 25 percent last month and a report yesterday signaling manufacturing may shrink the most in almost three years. Premier Wen Jiabao has pledged to “fine tune” policy as needed.

“The unexpectedly sharp drop in China’s flash PMI for November, if corroborated by other indicators, is likely to push policy makers to go beyond policy ‘fine-tuning’ to outright easing,” said Mark Williams, a London-based Asia economist at Capital Economics Ltd. “Confirmation that the People’s Bank has lowered reserve requirements for some banks is likely to be only the start.”…

The Chinese central bank’s move yesterday reduces the percentage of deposits the cooperatives are required to park with the central bank to 16 percent, a “normalization” after an increase a year ago, the Hangzhou branch said in its statement yesterday. The extra 0.5 percentage point requirement had penalized lenders that failed to meet lending targets in rural areas, and was imposed after a check carried out each November, it said.

In another sign of China’s shift, the central bank on Nov. 11 said local-currency lending was 586.8 billion yuan ($92 billion) in October, exceeding September’s 470 billion yuan and higher than the 500 billion yuan median estimate in a Bloomberg News survey.

Injecting Liquidity

The PBOC has also injected greater liquidity into the market for loans between banks, through open market operations that have depressed interbank rates, Goldman Sachs Group Inc. economists wrote in a note to clients last week. Further tools will include a slower pace of currency appreciation and looser fiscal policy, Goldman analysts said.

Under the incumbent fiat currency regime, the policy of bailouts has become a widespread practice, which China has not been exempt. Nonetheless, these political actions will intensify China’s domestic boom bust cycle dynamics.

Vatican Banker Endorses ECB’s Inflationism

Not even the pious seem to be exempt from the temptations of inflationism

From Wall Street Journal,

The European Central Bank should act as the euro zone’s lender of last resort and the implementation of the euro-zone bonds proposal are both necessary in the bloc’s efforts to rein in the debt crisis, the head of the Vatican’s bank said Wednesday.

The signal that these measures would send to investors would be so strong as to abate speculative attacks on some euro-zone countries, Ettore Gotti Tedeschi, chairman of the Vatican bank, known as the Institute of Religious Works, said at a conference in Rome on the debt crisis.

The aforementioned Vatican banker advocates on the GREED which the Vatican recently vehemently censured. This also implies that he endorses the rescue of the politically privileged banking class and the political class at the expense of the average citizens.

The left hand does not know what the right hand is doing.

Inflationism is evil, Henry Hazlitt explained why…

The real evil of inflation is that it redistributes wealth and income in a wanton fashion often unrelated to the contribution of different groups and individuals to production. All those who gain through inflation on net balance necessarily do so at the expense of others who lose through it on net balance. And it is often the biggest gainers by inflation who cry the loudest that they are its chief victims. Inflation is a twisted magnifying lens through which everything is confused, distorted, and out of focus, so that few men are any longer able to see realities in their true proportions.

More…

An inflation tends to demoralize those who gain by it even more than those who lose by it. The gainers become used to an "unearned increment." They want to keep their relative gains. Those who have made money from speculation prefer to continue this way of making money instead of working for it. I remember once, early in 1929, a conversation between two friends, both of whom held prominent posts as book reviewers but both of whom were heavily in the stock market. They were exchanging stories about their profits. "Today your salary," they agreed, "is just a tip." People do not like to work full time just for a tip.

The long-term trend in an inflation is toward less work and production, and more speculation and gambling. The profiteers from inflation tend to spend freely, frivolously, and ostentatiously. This increases the resentment of those who have been less favored. The incentive to ordinary saving, in the form of savings accounts, insurance, bonds, or other fixed-income obligations, tends to disappear. The spectacle of quick and easy returns increases the temptations to corruption and crime.

It is not merely that inflation breeds the gambling spirit and corruption and dishonesty in a nation. Inflation is itself an immoral act on the part of government. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped the coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.

‘Heavenly’ noble sounding policies applied to reality ‘earth’ doesn’t work. Inflationism is the work of the devil in disguise.

Quote of the Day: Charitable Markets

But the truth is, Wal-Mart and its counterparts spread far more holiday-food cheer than do churches and public-service groups.

Scholars estimate that the presence of Wal-Mart in a community reduces food prices somewhere between 10% and 15%. That's equivalent to shoppers receiving an additional 5.2 to 7.8 weeks of "free" food shopping. That Wal-Mart's customer base is skewed toward lower-income shoppers reinforces the beneficent consequences of its price effect.

That’s from T. Norman Van Cott of Ball State University in a letter to the Editor at the Wall Street Journal (hat tip: Don Boudreaux)

Global Capital Markets: Debt over Equity

The Economist writes,

Many observers are worried about the rapid growth of bank lending in the Middle Kingdom. Indeed, China's private-sector credit grew to 131% of GDP by the end of 2010, according to a recent financial-stability report by the IMF. However, this partly reflects the unusual dominance of banks in China’s financial system. If other forms of finance are included, such as bonds and equities, China ceases to stand out so much when compared with other countries. Total financial credit is only 2.5 times GDP, not much higher than in Brazil or India, and far less than some of the developed countries now facing more worrying economic difficulties, such as low-growth America, Britain and Japan.

I’d see the chart from a different angle.

The chart reveals of the bias of debt over equity financing where a broad part of today’s distribution of “credit intermediation” has been forged by myriad regulations and mandates. Much of these has been made to promote the interests of the welfare-warfare state via the politically endowed banking sector which has been backstopped by the central banks.

Will the US Foreign Policy of Encirclement Stoke a South China Sea War?

Historian Eric Margolis sees a similar pattern to World War I developing in the Spratlys Dispute

Writes Mr. Margolis (bold emphasis mine)

China is usually very cautious in its foreign affairs. But of late, Beijing has been aggressively asserting maritime claims in the resource-rich South China Sea, a region bordered by Indonesia, Vietnam, Brunei, the Philippines, Malaysia, Taiwan and China.

Japan, India, South Korea and the United States also assert strategic interests in this hotly disputed sea, which is believed to contain 100 billion barrels of oil and 700 trillion cubic feet of natural gas.

China has repeatedly clashed with Vietnam and the Philippines over the Spratly and Paracel islands and even mere rocks in the China Sea. Tensions are high.

In 2010, the US strongly backed the maritime resource claims by the smaller Asian states, warning off China and reasserting the US Navy’s right to patrol anywhere. Beijing took this as a direct challenge to its regional suzerainty.

Last week, Washington raised the stakes in this power game, announcing it will permanently base 2,500 Marines at the remote northern Australian port of Darwin.

Marine regiment can’t do much in such a vast, remote region, but Washington’s symbolic troop deployment is another strong signal to China to keep its hands off the South China Sea. China and nearby Indonesia reacted with alarm. Memories in Indonesia of 1960’s intervention by CIA mercenaries and British troops remain vivid.

The US is increasingly worried by China’s military modernization and growing naval capabilities. Washington has forged a new, unofficial military alliance with India, and aided Delhi’s nuclear weapons development, a pact clearly aimed at China. China and India are locked in a nuclear and conventional arms race.

US military forces now train in Mongolia. China may deploy a new Fourth Fleet in the South China Sea. Washington expresses concern over China’s new aircraft carrier, anti-ship missiles and submarines, though these alarms coming from the world’s leading naval power seem bit much.

The US is talking about selling advanced arms to Vietnam, an historic foe of China. The US is also modernizing Taiwan’s and Japan’s armed forces.

These moves sharpen China’s growing fears of being encircled by a network of America’s regional allies.

The recent ASEAN summit in Indonesia calling for a US-led "Trans-Pacific Partnership" was seen by Beijing as an effort to create an Asian NATO directed against China.

Rising tensions over the South China Sea disturbingly recall the naval race between Britain and Germany during the dreadnaught era that played a key role in triggering World War I….

US foreign policy has become almost totally militarized; the State Department has been shunted aside. The Pentagon sees Al-Qaida everywhere.

Read the rest here

I’d further add that prevailing economic conditions in developed nations like the US may prompt their politicians to divert the public’s attention by inciting geopolitical tensions. And this also exhibits how the state loves and thrives on war.

Why George Soros Loves Big Government

Because Mr. Soros enormously benefits from them.

From Wynton Hall of Big Government.com (hat tip Bob Wenzel)

Billionaire George Soros gave advice and direction on how President Obama should allocate so-called “stimulus” money in a series of regular private meetings and consultations with White House senior advisers even as Soros was making investments in areas affected by the stimulus program.

It’s just one more revelation featured in the blockbuster new book that continues to rock Washington,Throw Them All Out, authored by Breitbart News editor Peter Schweizer.

Mr. Soros met with Mr. Obama’s top economist on February 25, 2009 and twice more with senior officials in the Old Executive Office Building on March 24^th and 25^th as the stimulus plan was being crafted. Later, Mr. Soros also participated in discussions on financial reform.

Then, in the first quarter of 2009, Mr. Soros went on a stock buying spree in companies that ultimately benefited from the federal stimulus.

• Soros doubled his holdings in medical manufacturer Hologic, a company that benefited from stimulus spending on medical systems
• Soros tripled his holdings in fiber channel and software maker Emulus, a company that wound up scoring a large amount of federal funds going to infrastructure spending
• Soros bought 210,000 shares in Cisco Systems, which came up big in the stimulus lottery
• Soros also bought Extreme Networks, which, months later, said it was expanding broadband to rural America “as part of President Obama’s broadband strategy”
• Soros bought 1.5 million shares in American Electric Power, a company Mr. Obama gave $1 billion to in June 2009
• Soros bought shares in utility company Ameren, which bagged a $540 million Department of Energy loan
• Soros bought 250,000 shares of Public Service Enterprise Group, 500,000 shares of NRG Energy, and almost a million shares of Entergy—all companies that came up winners in the Department of Energy taxpayer giveaway that produced the Solyndra debacle
• Soros bought into BioFuel Energy, a company that benefitted when the EPA announced a regulation on ethanol
• Soros bought Powerspan in April 2009. Just weeks later, the clean-energy company landed $100 million from the Department of Energy
• In the second quarter of 2009, Soros bought education technology giant Blackboard, which became a big recipient of education stimulus money
• Soros also bought Burlington Northern Santa Fe and CSX, both beneficiaries of Mr. Obama’s plans for revitalizing the railroads
• Soros bought Cognizant Technology Solutions, which scored stimulus funds in education and health care technology
• Soros also bought 300,000 shares of Constellation Energy Group and 4.6 million shares of Covanta, both of which landed taxpayers’ money through the stimulus, the former of which bagged $200 million

The short of it is that George Soros, like Warren Buffett, seem to operate as political entrepreneurs in an environment which appears to be evolving towards anti-competition based crony capitalism. For them, political capital and clout today seems a far better investing strategy than the traditional methods.

Euro Debt Crisis: Eurozone Lifeline Depends on the European Central Bank

For the Eurozone, so far, survival seems like an all European Central Bank (ECB) affair now

From Reuters, (bold emphasis mine)

Euro zone banks' demand for central funding surged to a two-year high on Tuesday, and U.S. funds cut their lending to the bloc's banks, tightening a squeeze that looks unlikely to ease this year.

Fast-spreading sovereign debt worries have left lending markets virtually frozen and the European Central Bank as the only available funding option for many banks.

The ECB's weekly, limit-free handout of funding underscored the widespread problems, with 178 banks requesting 247 billion euros, the highest amount since mid-2009.

Just as fears about the financial health of Italy and Spain have stopped banks lending to some their peers, U.S. funds have also continued to retreat from the region, and Italian and Spanish banks have seen corporate deposits flow out to safer havens.

U.S. money market funds, which are key providers of liquidity to banks and have been pulling back from the euro zone since May, cut their exposure to European banks by a further 9 percent in October, according to ratings agency Fitch.

Bankers said there appeared little chance of wholesale funding markets reopening for euro zone banks this year, and the best that can be hoped is for a return to more normal conditions early in 2012.

"The reality is it's hard to see investors get any confidence (before the end of the year), as the sovereign crisis is out of control. Confidence has disappeared from the banks as they are a conduit for the sovereigns," a senior debt market banker said.

There are several warning signs flashing for euro zone banks' liquidity, limiting options and raising borrowing costs, leaving the European Central Bank as the only option for many of them.

Current dynamics exhibits that either the ECB will tolerate the markets to find the necessary (most likely disorderly) adjustments or the ECB will have to unleash a tsunami of money printing.

Of course printing of money just delays the inevitable.

Nevertheless the mainstream continues to prescribe snake oil therapies as more inflationism and more centralization of the EU via a political union.

Video: The Moral Case for Organ (Kidney) Trade

From LearnLiberty.org

Prof. James Stacey Taylor argues that willing rational adults should be allowed to buy and sell kidneys. Instead of providing complex theoretical arguments, one can look at the human stories to see why markets in kidneys should be allowed. Peter Randall, for instance, became famous in 2003 for offering his kidney for sale on eBay. He was offering his kidney for sale to raise money for therapy for his six-year-old daughter, Alice, who was suffering from cerebral palsy.

A market for kidneys would allow people like Peter to sell his kidney legally and safely. Additionally, a market in kidneys enables individuals to purchase a kidney in order to alleviate the suffering caused by dialysis.

Some may accept the arguments above, but feel that the gift of life is too priceless to place a price tag on. However, when kidneys are illegal, as they are now in the United States, everyone in a transplant operation is paid except for the kidney donor. According to Prof. Taylor, this seems wrong. The sale of kidneys should be allowed just as the sale of all other medical products and services. Banning kidney sales means that people like Alice will not receive the therapy they need and also ensure that thousands of people will suffer through crippling dialysis.

Video: The Daily Show's Jon Stewart Hearts Ron Paul

Jon Stewart to Congressman Ron Paul :

"You really are one of our last consistent politician ever seen in this world"

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Chart of the Day: Thanksgiving Inflation

The US will be celebrating Thanksgiving Day on Thursday November 23. However, dinner costs led by the traditional Turkey, has been going up.

From Timothy Taylor

The top line of this graph shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. One could use the underlying data here to calculate an inflation rate: that is, the increase in nominal prices for the same basket of goods was 13% from 2010 to 2011. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate in the last 26 years. But in 2011, the rise in the price of the Classic Thanksgiving Dinner, like the rise in food prices generally, has outstripped the overall rise in inflation.

So much for the liquidity trap.

Quote of the Day: Fervent Love of Individual Liberty

In receiving of the Alexis de Tocqueville Award, I excerpt Professor Robert Higgs' speech, (italics original)

For society as a whole, I wish nothing more fervently than I wish that it should be as free as possible. For me, freedom is not simply the highest-ranked value with regard to public affairs; it stands on a level by itself, far above all the others.

I espouse individual liberty in this “extreme” fashion for two reasons, which in my mind complement one another. The first is that freedom is the optimal condition for each individual’s engagement in society. To be driven, bullied, abused, disregarded, treated with contempt and dishonor―these are bad things in themselves, not only for me, but for every human being. We ought to recoil from them, regardless of whether the perpetrator is a local cop or the government in Washington. Yet all too many of us become accustomed to such official cruelties and take them in stride without much conscious thought that they are wrongs and ought to be stopped, regardless of their source.

Individual liberty, however, is also an instrument for the creation of many of the conditions, goods, and services that constitute material abundance and relieve many of the anxieties and pains that once accompanied social life for almost everyone. Virtually everyone favors economic development, especially inasmuch as it reduces or eliminates extreme poverty. Individual liberty is a necessary condition for sustained economic progress. The specific conditions of a free society―private property rights, secure contracts, a reliable rule of law―are prerequisites for the ongoing creation of wealth in the long run. At this late date, after we have witnessed the personal horrors and economic disasters brought about by socialist central planning, it should not be necessary to go on preaching the gospel of private property and the market economy, yet we all know that many people still do not understand these essential matters and often act politically to thwart the operation of a genuinely free society.

Congratulations for a very much well deserved honor, Professor Higgs.

Escalating European Crisis Weighs on Global Financial Markets

I don’t think last night’s selloff at Wall Street was mainly about the stalemate or the failure by the special debt-reduction committee to come into an agreement over budget cuts as portrayed by media.

Although I’d say that the extant gloomy sentiment may have been partly aggravated by the above events.

I would further add that the developments at the MF Global Holdings, where shortfall in U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected appears to be more of an influence considering the sharp declines in prices of the commodities.

Although I would reckon that last night’s semi-crash mostly reflected on European debt crisis, which according to reports, have been spreading to the core

From Reuters,

ECB policymaker Juergen Stark warned on Monday the sovereign debt crisis had spread from the euro zone's periphery to its core economies and was affecting economies outside of Europe.

"These are very challenging times... The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon," Stark said in a speech to Ireland's Institute of International and European Affairs in Dublin.

"The sovereign debt crisis is not only concentrated in Europe, most advanced economies are facing serious problems with their public debt."

And growing evidence of the banking stress in Europe has been the fund flows (capital flight) to the US Federal Reserve

From Bloomberg

Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

In what appears to be a choice between two seemingly ‘toxic’ assets, investors have been exiting the EU and has flocked to the US, which alternatively means that US dollar has been winning this round so far.

Politically captive financial markets will remain highly volatile.

Spain Votes to Boot Out Socialists

Europe’s debt crisis appears to be forging a new political dimension

From Bloomberg,

People’s Party leader Mariano Rajoy won the biggest parliamentary majority in a Spanish election in 29 years and called on Spaniards to work together to prevent the nation being overwhelmed by the sovereign debt crisis.

The People’s Party won 186 of the 350 seats in Congress compared with 110 for the Socialist Party’s candidate Alfredo Perez Rubalcaba, based on 97 percent of the vote counted. That’s the worst showing for the Socialists since Spain returned to democracy in 1978.

“Today more than ever our destiny is played out in and with Europe,” Rajoy said in an acceptance speech in Madrid. “We will stop being a problem and become part of the solution again.”

Rajoy, 56, who said on Nov. 18 he hoped Spain wouldn’t need a bailout before he’s sworn in as prime minister in month’s time, has pledged to slash the budget deficit and regain the nation’s AAA credit rating. He inherits a stagnant economy with a 23 percent unemployment rate and borrowing costs back at the levels Spain was paying before it joined the euro.

Governments Falling

The ruling Socialists became the fifth European government to be toppled by fallout from sovereign debt crisis, after Italy and Greece appointed new prime ministers and Irish and Portuguese voters fired their leaders after they sought bailouts. Spaniards gave Rajoy the biggest mandate of the group to respond to the crisis.

Evolving signs of times.