Tanzania: A Case of Democracy Destroying Itself?

The great Austrian Economist Friedrich von Hayek once warned about the perils of democratic government,

And if a democratic people comes under the sway of an anti-capitalistic creed, this means that democracy will inevitably destroy itself.

Could this be the evolving case in Tanzania? 

Writes Lauren Bishop at the NYU Development Research

Tanzania looks an awful lot like a democracy. The East African nation has been holding multi-party elections since 1995, which international observers have deemed free and competitive. In Tanzania, votes are not miscounted, opposition parties compete actively, and the ruling party—the Chama Cha Mapinduzi (CCM), which has controlled the government since independence—seems to play by the rules.

But according to Bruce Bueno de Mesquita, NYU politics professor and DRI affiliated faculty member, Tanzania is in fact sliding down a slippery slope to autocracy, even as it maintains the trappings of a “transitioning” democracy. A working paper with Alastair Smith describes how Tanzania’s completely legal and institutionalized electoral laws are placing power in the hands of a small and increasingly entrenched elite.

Read the rest here.

Democracy has ushered in various despots like Adolf Hitler, the Philippines’ Ferdinand Marcos, or even modern day contemporaries as Hugo Chavez of Venezuela as well as Argentina’s Cristina Elisabet Fernández de Kirchner.

The populist idea that the "majority knows best" has simply been a fraud.

Quote of the Day: A War over Insignificant Scrubby Rocks?

Here is a link to the Google Maps Satellite view of the Senkaku Islands. Take a moment to contemplate how insignificant these scrubby rocks really are. 

Some observations after zooming in and out and panning around. First, there are no visible houses, bases, airstrips, factories, or really anything of value other than some timber and potential (note - potential, not proven) oil reserves. Second, the total size of the islands is 1700 acres - slightly bigger than most modern swim tennis communities in the US. Third, given that Japan, Taiwan, and Mainland China are all well within surface to surface missile distance from each other, these islands offer no military or strategic advantage. Fourth, if there are oil reserves of any significant amount they undoubtedly extend beyond the immediate confines of these tiny islands into the waters of Japan and China. Next time someone tells you we need government to resolve international disputes peacefully, send them this.

(bold mine)

From John Keller at the Lew Rockwell Blog.

In the world of politics, common sense has hardly been common.

Are Expanding Deals in Currency Swaps Signs of Currency Wars?

Lately I questioned the popular wisdom promoted by politicians and by media as “currency wars”

Reports say that the Bank of England (BoE) may seal a deal with the People’s Bank of China (PBoC) for currency swap lines.

From Reuters

Britain said on Friday it hopes to set up a currency swap line with China soon to help finance trade, a move that will enhance London's drive to become a leading offshore centre for yuan trade.

China, in an effort to internationalize the yuan and eventually make it a world reserve currency, has already agreed swap lines with more than 15 other countries, mostly emerging markets.

The Bank of England said on Friday it would work with China's central bank to sign a final agreement shortly on a reciprocal three-year yuan-sterling swap, building on its statement last month that it was ready "in principle" to adopt the swap line.

Last December global central banks went on to renew arrangements for forex swap lines

From Reuters

The U.S. Federal Reserve said it had extended for another year the dollar swaps with the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank. The announcement was released at the same time by the other central banks.

These provisions were an important part of the powerful response launched by monetary authorities during the crisis to keep global financial markets open, curbing lofty dollar funding costs which had spiraled due to fear over counter-party risk.

Swap arrangements were revised and extended in November, 2011 as the euro zone debt crisis intensified, to ease the dollar funding pressure being experienced by some European banks.

China has said to have closed 18 swap arrangements worth a total of 1.6 trillion yuan involving different nations since 2009 (China Daily).

So essentially as these governments embark on their respective domestic money expansion programs, what they do to “hedge” against potential “shocks” (implicitly caused by such programs) has been to accommodate each other currencies through swap line deals.

Some currency war eh?

US Fed Ben Bernanke: No Asset Bubbles

Ben Bernanke denies that there has been an inflation of asset bubbles.

From the Bloomberg,

Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions.

The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee. Fed spokeswoman Michelle Smith declined to comment.

The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said…

Speculation about scaled-back asset purchases by the Fed was fanned by the Feb. 20 release of minutes of the central bank’s last policy making meeting in January.

Of course, it would be natural to expect  Mr. Bernanke to dismiss the idea of bubbles. For an acknowledgement would mean that he would be forced to reverse current policies. And this would undermine his theory of how the world operates, or of the interests (political, economic or financial) whom they have been implicitly protecting. 

Importantly, an admission would translate to self-indictment of the policies he and his team has implemented.

As I have pointed out, whether former Fed chair Alan Greenspan or incumbent Ben Bernanke (via the Bernanke doctrine), these guys project to the public of their belief that the conditions of asset prices determines economic growth via the “wealth effect” transmission.

Their concept of the economy hasn’t been about making and producing things for people to consume, but for assets to drive people’s consumption habits. Thus, all these global central banking balance sheet expansions. I say global, because evidently much of the world central banks has espoused, imbued and or mimicked the Greenspan-Bernanke paradigm.

The reality is that such ideology camouflages the real intent:  the desire to prop up the highly fragile and insolvent privileged banking cartel whom have been tightly linked to the equally bankrupt welfare-warfare state as financiers, and whose intertwined relationships have been underwritten by central banking PUT. 

Of course another perspective is to preserve the “Deficit without Tears” framework, where the US gets a free lunch arrangement with the world by exchanging green pieces of paper with goods produced by the rest of the world, via the US dollar standard. Arguing that no asset bubbles exists implies that the US must continue to rely on the growth of "financialization".

Like in 2007, eventually the laws of economics will expose on such a sham that will be ventilated on the markets.

Mr. Bernanke, like most the mainstream experts, got it all so horribly wrong in 2007. 

Here is a video of comparing the predictions of Peter Schiff and of Ben Bernanke during the ballooning housing bubble in 2005-2006.

In the world of politics, the laws of demand and supply just doesn’t apply.

Are Central Bankers Poker Bluffing the Gold Markets?

Dr. Ed Yardeni at his blog writes

Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? Perhaps the most important reason for the weakness in gold is that after three years of “living dangerously”--with lots of panics about apocalyptic endgame scenarios--the global economic and financial outlook is improving. That means that central banks may start to ease off on easing.

Earlier he wrote of the important role played by the FED in influencing stock market prices, (chart from Dr. Yardeni)

The Fed has contributed greatly to the bull market with its NZIRP and QE ultra-easy monetary policies, as evidenced by the close correlation of the S&P 500 and the securities holdings of the Fed. Bond yields fell to historic lows as the Fed purchased more fixed-income securities, increasing the attractiveness of stocks.

If gold prices indeed has been anticipating a forthcoming squeeze in the monetary environment due to an alleged "improving" fundamentals, which has bolstered the stock market, then we can easily deduce that tightening policies may similarly lead to falling stock markets.

This means that gold prices could be a leading indicator of the stock markets.

One can easily correlate the substantial contraction of the ECB’s balance sheet (left window), with the recent collapse in gold prices (right window).

The ECB’s balance, which has shrank to its lowest level since March of last year, began its accelerated descent since October almost simultaneously with peak gold prices.

Also, China’s government has announced pulling back on her easing policies through “a net 910 billion yuan ($145.89 billion) drain from the interbank market this week” (Reuters) which has coincided with a slump in her stock markets.

Of course, today’s booming US stock markets, as well as property markets, has prompted for the increasing hawkish statements from FED officials.

As Bloomberg’s Caroline Baum rightly points out,

Market participants forget that the Fed is neither omniscient nor a very good forecaster. What it is is the sole proprietor of the printing press. If the hint of cutting back on its hours of operation is enough to frighten the stock market, then the Fed really has to be concerned by what it hath wrought. 

This only means the Fed has been caught in a box. Once the stock markets gets freaked out by the prospect of a money squeeze, two question arises: 

-Will the central bankers stand firm and let the market clear (bubble bust)?  

-Or will they come rushing back to reflate the markets?

At the end of the day, my bet is that all these hawkish talks will pave way for future easing, thus a resurgent gold.

Euro Pacific Peter Schiff, in the following video, expounds on this matter:

Quote of the Day: Deficit Without Tears

For its part, the United States finds congenial a world in which a dollar sent to China for cheap goods comes back overnight in the form of a near-zero interest loan, which can then be recycled through the U.S. financial system to create yet more cheap credit.

Neither partner in this monetary marriage is, therefore, likely to file for divorce any time soon.

This is from the highly influential political think tank the Council of Foreign Relations CFR via Benn Steil and Dinah Walker.

I say “deficit without tears” because the above resonates with the unsustainable free lunch system from the de facto world monetary standard, the US dollar system, aptly described by Jacques Rueff. 

"Deficit without tears" has widespread global economic and financial repercussions (e.g. financialization and global boom bust cycles), as well as, geopolitical ones (think Scarborough-Spratlys dispute).

Has the Decline of the US Steel Industry been about Wages?

The following has not been meant to be a blog post, but a reply to a dear "mercantilist" friend who stubbornly insists that the US Steel industry’s decline has been solely due to "high" wages which require the "inflation" or the Keynesian "money illusion".

Since I am not an expert of the steel industry, I based the following from a variety of studies to debunk such “fallacy of a single cause” political absurdity

I am posting this to share with others, as well as, for my personal reference too. 

The idea that the steel industry has been primarily about high wages is simply not a reality.

The Peterson Institute of International Economics suggested that long years of government interventionism has prompted for the declining competitiveness of the industry

Interventionism in History:

Steel trade has been in turmoil since the late 1960s. Without exaggeration, more Washington trade lawyers work on steel disputes than any other trade issue. To recap the trade saga:

-In 1968, US steel producers filed a series of countervailing duty cases against subsidized European steel- makers. These cases led to “voluntary restraint agreements” that were terminated when the global steel market recovered in 1974.

-In 1977, US steel producers filed a series of antidumping cases primarily aimed at Japanese steel firms. These cases led to a system of minimum reference prices for steel imports, known as the “trigger price mechanism” (TPM). The TPM system was soon extended to European steel.

-In 1974 and 1979, at both the launch and the ratification of the Tokyo Round of multilateral trade negotiations, the US antidumping law was amended (at the insistence of the steel industry and to conform with the Tokyo Round Antidumping Code), making it easier for domestic producers to prevail in antidumping cases.

-In 1982, dissatisfied with the workings of the TPM system, US steel producers filed many antidumping and counter- vailing duty cases. These were resolved by new voluntary restraint agreements, which lasted until 1992.

-In the mid-1980s, trade remedy cases were filed against “new” exporters, such as Brazil and Korea. Most of these cases resulted in high antidumping and countervailing duty penalties.

-In 1989, the United States launched an effort to negotiate a Multilateral Steel Agreement designed to abolish subsidies. The negotiations failed and were ultimately abandoned in 1997.

-In 1992, when the voluntary restraint agreements expired, a new set of trade remedy cases were filed. Many of the resulting penalty duties remain in effect today.

-In March 1999, the House of Representatives passed H.R. 975, Congressman Peter Visclosky’s (D-IN) steel quota bill, 289 to 141. After a spirited debate, bill was defeated in the Senate. The current round of steel trade initiatives essentially renews the 1999 debate.

Why so much trade turmoil? One reason is persistent overcapacity in the global steel industry abetted by widespread market distortions. Persistent overcapacity has translated into cyclically falling prices and industry losses in every business slowdown. Another reason is the combination of rapid productivity growth and slow demand growth. Wheat farmers and steel workers share two traits: both have greatly increased their output per worker-year and both face sluggish demand for their products. The result is a painful secular decline in employment. These forces—in an effort to cushion the domestic steel industry—have provoked a series of rearguard trade actions.

The Unintended Effects from Peterson

Market Distortions

In a normal industry, prolonged operating losses will weed out weak firms. Ideally, steel firms with the highest costs would be the first to close. But the real world is far from ideal. Many plants have closed and steel employment has plummeted. In the United States alone, over the last three years, 18 steel firms went bankrupt and about 23,500 workers lost their jobs. However, it is not production costs but rather market distortions that often determine the global “exit order” of struggling firms. Moreover, these distortions prolong the agony of failing firms by stretching the duration of depressed prices for the whole industry.

One such distortion is cartel practices—private arrangements that enable some steel producers to maintain high prices in their home markets and sell abroad at low prices. Another distortion is public subsidies used to cover huge fixed costs (debt burdens, pension benefits, etc.). The United States is not the worst sinner when it comes to market distortions, but it is hardly free of guilt. Federal guarantee programs totaling several billion dollars have absorbed the pension responsibilities of some bankrupt steel firms and staved off bankruptcy for others.

As a result of these distortions, the least efficient firms are not necessarily the first to close their doors and the industry as a whole sheds its excess capacity at a very slow pace.

Same observation from Cuts International

No different from the Heritage Foundation

The overproduction of steel is due to government intervention in the marketplace. Steel producers, left to themselves, have an incentive to produce only what consumers demand. Otherwise, they would be adding needless costs to their operations. When government intervenes and offers subsidies or other protections, normal market incentives are altered. Government subsidies thus may encourage a steel firm to produce more steel even if it exceeds consumer demand.

Subsidies are a common practice in the steel industry, both around the world and in the United States. For example, the American Iron and Steel Institute reports that between 1980 and 1992, foreign steel manufacturers received over $100 billion in subsidies. In the United States, the steel industry was the beneficiary of more than $1 billion in federal loan guarantees in 2001. When an industry produces more than consumers demand, the surplus puts downward pressure on the price of the product and makes it difficult for firms to earn a profit. As recently as January 10, 2002, even though the price of hot-rolled steel was rising, it was still being sold below cost.

Homegrown problems are another reason why the U.S. steel industry is suffering. Prior to 1968, the year the steel industry began receiving government protection from foreign competition, average compensation in the industry was roughly equal to the average in the manufacturing sector. Today, the average total compensation for the steel industry is $37.91 per hour--56 percent higher than the average compensation in the manufacturing sector. One of the principal reasons for this high average compensation is that the steel industry's very strong unions, without the threat of foreign competition, are able to negotiate high compensation packages for employees.

Harvard School’s Crimson Staff who wrote against the Bush era Protectionist tariff resonates

In defending the administration’s decision, U.S. Trade Representative Robert B. Zoellick said, “The global steel industry has been rife with government intervention, subsidies and protection,” and explained that the American response served to counter the protectionism of other governments. In order to equalize trade opportunities, the administration should not raise America’s trade barriers, but rather continue to break down the barriers of other countries. American tariffs will only lead to retaliatory tariffs, which will weaken the international free market economy and possibly lead to a trade war.

Failure to adapt with technological changes has also been a factor:

From the US Bureau of Labor and Statistics Technology and its effect on labor in the steel industry

Advancement in a technology led to productivity boom that led to a decline in employment

Again from the BLS:

From Multinational Monitor.org or “Fifteen Years of Neglect Have Left the Industry in Crisis - And Thousands of Workers Without Hope”

Since the early 1970s, when Japan became the world's leading steel producer, the industry has followed a policy of disinvesting in low-profit operations and diversification into oil and other industries. U.S. Steel has led the way: once the nation's largest industrial corporation, its share of the market has dropped from 75 percent in 1906 to around 20 percent today; and its major mills at Gary, Indiana, and Fairfield, Alabama were constructed at the turn of the century.

Instead of rebuilding, the industry has relied on outdated technology. According to Ira C. Magaziner and Robert B. Reich in their recent book Minding America's Business, the industry "made small, incremental investments to obtain `cheap' capacity rather than make the larger, more aggressive, and riskier investments that could have led to superior productivity.

A 1986 MIT paper analysis the significance of technology

This paper exemplifies a techno-economic-strategic analysis in which key characteristics of technologies are first analyzed, economic consequences are then derived, and strategic implications are followed. Additionally, it demonstrates how technological innovations coupled with critical fixities of a firm can partially explain the entry, exit, and performance of firms in the U.S. steel industry. Because of the reluctance of existing firms to switch to new technologies, entrants using these new technologies entered the low carbon steel market and earned an extra profit. The existing integrated firms would rather have suffered accounting losses than replace their obsolete equipment as long as the cash flow remained positive.

From a 2012 Princeton Paper by Allan Collard-Wexler and Jan De Loecker Reallocation and Technology: Evidence from the U.S. Steel Industry

There is extensive evidence that large gains in productivity can be attributed to reallocation of resources towards more productive plants. This paper shows the role of technology and competition in the reallocation process for the American Steel industry. We provide direct evidence that technological change can itself bring about a process of resource reallocation over a long period of time and lead to substantial productivity growth for the industry as a whole. More specifically, we find that the introduction of a new production technology spurred productivity growth through two channels.

First, the entry of minimills lead to a slow but steady drop in the market share of the incumbent technology, the vertically integrated producers. As minimills were 11 percent more productive, this movement of market share between technologies is responsible for a third of productivity growth in the industry.

Second, while the new technology started out with a 25 percent productivity premium, by the end of the sample, minimills and vertically integrated producers are very similar in terms of efficiency. This catching-up process of the incumbents came about from a large within reallocation of resources among vertically integrated plants. On the other hand, minimills productivity grew moderately, and almost entirely because of a common shift in the production frontier.

As as consequence of productivity growth, prices for steel products fell rapidly, though at different rates for those products which minimills could produce, versus those they could not. Markups decreased substantially, reflecting that prices fell more rapidly than production costs. This indicates increased competition for U.S. steel producers, which further drove increases in productivity.

The Economist went against Bush steel tariffs and cited the puffed up high costs from labor union privileges of “legacy liabilities”

Tariffs fail to address the real problem—high costs, including “legacy liabilities” in health-care and pension benefits. Many companies will fold anyway. When they do, putting workers out of a job and rendering those promised benefits null, the tariffs will only make the victims, as consumers, even worse off than they would have been

Failure to address inefficiencies through bankruptcy laws are another:

From Cato’s Dan Ikenson’s How Subsidies and Protectionism Weaken the U.S. Steel Industry

Some say that industry consolidation is necessary, but that significant legacy costs are preventing mergers and acquisitions. That may be true, but consolidation is not the only alternative for eliminating inefficient capacity. Attrition works too. Attrition works if the inefficient firms are liquidated in bankruptcy, and their assets are auctioned to the highest bidders.

The largest obstacles to attrition are subsidy programs like the Emergency Steel Loan Guarantee Program, unrealistic unions seeking to prevent shutdowns, and the U.S. trade remedy laws. Inefficient operations need to be retired, and this can be accomplished only if market signals are not distorted by these interferences.

When an operation is inefficient and losing money, access to investment naturally dwindles. Attempts to mitigate this outcome perpetuate the root problem. Although its expansion is being considered under different legislation pending in Congress, the Emergency Steel Loan Guarantee program should be abolished

The Living Economics says in Blocked Exit that a combination of the above have prompted for the decline in competitiveness of the US Steel Industry

In a mature industry with a saturated market such as steel, demand comes largely from replacement of existing products and normal growth. Generally, existing capacity that was inherited from the phase of explosive growth is much more than is necessary for current demand. Ideally, market competition should eliminate higher-cost producers in favor of lower-cost producers. However, all steel-producing countries have tried to preserve their production capacity regardless of cost efficiency considerations. In the U.S., for example, many factors have helped to delay consolidation of its steel industry:

First, U.S. bankruptcy laws have unnecessarily delayed the steel industry consolidation process. Although 28 U.S. steel companies have filed for bankruptcy since 1997, including the nation's third and fourth largest, not many have actually gone out of business altogether. Chapter 11-bankruptcy protection often keeps the incumbent creditors at bay while allowing the bankrupt companies to receive new loans to continue production.

In addition, the huge retiree benefit liabilities of weak companies have deterred potential acquisition by stronger companies. In an extraordinary bid to salvage the industry, USX-U.S. Steel Group proposed buying its troubled competitors Bethlehem Steel Corp., National Steel Corp. and Wheeling-Pittsburgh Corp. in early December 2001. But the $13 billion retiree healthcare and pension liabilities of the acquisition targets have stalled the consolidation process.

Even weak steel companies may have out-sized political clout. The industry remains big in swing states of presidential elections such as Pennsylvania, Ohio and West Virginia, where a good portion of 600,000 retired steelworkers live. It is understandable that these states want to preserve the steel companies and their suppliers that provide local and state taxes and jobs.

The idea that high wages alone has been the culprit for the dearth of competitiveness that merits either protection or inflation as a solution has simply been unfounded and wishful thinking, bereft of reality.

This of course, has raised by the great dean of Austrian school of economics, Murray N. Rothbard, who dismissed the impact of inflation and other forms of protectionism to solve what is a politically engendered problem.

On inflationsim…

And every week at his Philadelphia salon, the venerable economist Henry C. Carey, son of Matthew and himself an ironmaster, instructed the Pennsylvania power elite at his "Carey Vespers," why they should favor fiat money and a depreciating greenback as well as a protective tariff on iron and steel. Carey showed the assembled Republican bigwigs, ironmasters, and propagandists, that expected future inflation is discounted far earlier in the foreign exchange market than in domestic sales, so that the dollar will weaken faster in foreign exchange markets under inflation than it will lose in purchasing power at home. So long as the inflation continues, then, the dollar depreciation will act like a second "tariff," encouraging exports as well as discouraging imports.

…as well as other nonsensical interventionists excuses:

The arguments of the steel industry differed from one century to the next. In the 19th century, their favorite was the "infant industry argument": how can a new, young, weak, struggling "infant" industry as in the United States, possibly compete with the well-established mature, and strong iron industry in England without a few years, at least, of protection until the steel baby was strong enough to stand on its two feet?

Of course, "infancy" for protectionists never ends, and the "temporary" period of support stretched on forever. By the post-World War II era, in fact, the steel propagandists, switching their phony biological metaphors, were using what amounted to a "senescent industry argument": that the American steel industry was old and creaky, stuck with old equipment, and that they needed a "breathing space" of a few years to retool and rejuvenate.

One argument is as fallacious as the other. In reality, protection is a subsidy for the inefficient and tends to perpetuate and aggravate the inefficiency, be the industry young, mature, or "old." A protective tariff or quota provides a shelter for inefficiency and mismanagement to multiply, and for the excessive bidding up of costs and pandering to steel unions. The result is a perpetually uncompetitive industry. In fact, the American steel industry has always been laggard and sluggish in adopting technological innovation--be it the 19th-century Bessemer process, or the 20th-century oxygenation process. Only exposure to competition can make a firm or an industry competitive.

So there you have it, so while wages may have been a factor, it has been miniscule compared to the myriad political interventionism (subsidies, protection, inflation and etc…), the dearth bankruptcy laws, trade unions, and other political influences (lrentseeking, cartels etc…) which have prevented the US steel industry from adjusting to market forces, as evidenced by the failure to embrace technological advances.

Yet the proposed solution of more interventionism will only wound up in worsening of the current status.

For protectionists, the story has always been the same; address the symptoms and not the disease with the more of the same prescription that led to the disease.

Other references:

-Stefanie Lenway, Randall Morck and Bernard Yeung Rent Seeking, Protectionism and Innovation in the American Steel Industry

-ITA.doc.gov The U.S. Steel Import Crisis Global Steel Trade: Structural Problems and Future Solutions

-Wikipedia.org History of the steel industry (1850-1970)

The War on Coins

Since minting coins have become more expensive and costs taxpayers more, governments are beginning to have second thoughts about issuing them. Some have even pondered to prohibit hoarding or collection.

From Bloomberg’s chart of the day:

Pennies and nickels have cost more than their face value to mint since 2006, resulting in a loss of at least $436 million to U.S. taxpayers.

The CHART OF THE DAY shows that in 2012, the penny cost almost 2 cents to make and the nickel more than 10 cents, according to the U.S. Mint’s annual report released in January. Those prices have almost doubled over the past seven years.

“If you look around in the budget, there aren’t a lot of places you can find savings where you don’t cut a program and you don’t raise anybody’s taxes and you can impact the deficit,” said Jim Kolbe, a former Arizona congressman who sponsored legislation to abolish the penny and dollar bill. “This is one where you can do that.”

Neither of Kolbe’s bills, introduced in 2001 and 2006, made it to a full congressional vote.

Canada has scheduled to phase out their version of penny.

As pointed out above, both coins in the US costs about or more than twice the face value.

The real reason for the rising costs of coin issuance has been due to the government’s domestic monetary policies of inflationism or currency devaluation.

The Nickel, which is a 5 cent coin issued by the US Mint, has maintained its composition of 75% copper and 25% nickel since 1866, according to Wikipedia.org

On the other hand, the penny, a one cent coin, has changed content over the years.

Table from Wikipedia.org

As I earlier pointed out, as the US government debates on the destiny of coins, some people like hedge fund manager Kyle Bass have embarked on hoarding coins. Popularly been known for introducing the “Nickel trade”,  Mr. Bass bought 20 million nickels worth $1 million in order to hedge.

The difference between the Nickel and the Penny aside from the nominal face value has been that content-wise, Nickel has maintained its mix, while the penny has been gradually reconfigured or debased.  Thus I believe Mr. Bass’ preference for the Nickel.

Former Texas Congressman Ron Paul has likewise advocated that people shelter their savings through coins.

People hoarding coins in the realization that coins provide hedge against inflationism has been a natural response. This is known as the Gresham’s Law

As the great Ludwig von Mises explained,

Mintage has long been a prerogative of the rulers of the country. However, this government activity had originally no objective other than the stamping and certifying of weights and measures. The authority's stamp placed upon a piece of metal was supposed to certify its weight and fineness. When later princes resorted to substituting baser and cheaper metals for a part of the precious metals while retaining the customary face and name of the coins, they did it furtively and in full awareness of the fact that they were engaged in a fraudulent attempt to cheat the public. As soon as people found out these artifices, the debased coins were dealt with at a discount as against the old better ones. The governments reacted by resorting to compulsion and coercion. They made it illegal to discriminate in trade and in the settlement of deferred payments between "good" money and "bad" money and decreed maximum prices in terms of "bad" money. However, the result obtained was not that which the governments aimed at. Their decrees failed to stop the process which adjusted commodity prices (in terms of the debased currency) to the actual state of the money relation. Moreover, the effects appeared which Gresham's law describes.

The Philippine government recognizes of the growing disparity between coin content and face value which they suspect has led to “hoarding”.  Thus, like the warnings of Mises, the government reacted by resorting to compulsion and coercion: A bill has recently been introduced to ban coin hoarding in the Senate.

Apparently, taxing people hasn't been enough, politicians want to forcibly acquire more of people’s savings through inflation, and this is why a local representative recently urged the domestic central bank to impose stiffer fine for coin hoarding.

The bias against coins can be seen even in the BSP commemorative offering. Of the coins and notes available for sale at the BSP website, the only coin is the Nickel commemorative coin: 1998 People Power Revolution P10 BUS is offered, the rest are notes.

 

Funny how times have changed. Do you know that coin debasement was punishable by death in the US in 1792? Today, preserving your savings via coins has been seen as crime. Or may I say inflation was evil then, today inflation has been seen as the moral order.

Quote of the Day: A Letter of Advice

Erudition without bullshit, intellect without cowardice, courage without imprudence, mathematics without nerdiness, scholarship without academia, intelligence without shrewdness, religiosity without intolerance, elegance without softness, sociality without dependence, enjoyment without addiction, and, above all, nothing without skin in the game.

This terse but stirring “letter of advice to a younger person” is from Nassim Nicolas Taleb at Facebook.

Does Unemployment Cause Deflation?

I was apprised by a dear friend that in a part of the US, call center jobs have been migrating to the Philippines. Such phenomenon he sees as having a “deflationary” impact on the US economy. 

Such popular reasoning is fairly simple. Lack of jobs equals a fall in aggregate demand. Falling demand leads to falling prices. Falling prices result to more job losses. Thus the circular reasoning translates to an endless loop: a deflationary spiral.

The bottom line from such aggregate demand framework is that unemployment causes price deflation.

Of course, the alternative implication is that the Philippines, like China through alleged currency manipulation, has been “stealing jobs” from Americans.

And equally this means that for them, the optimal political solution is to inflate or apply protectionist measures or apply both against countries like the Philippines or China.

Have job losses or unemployment resulted to price deflation as alleged?

Here is a list of the largest world unemployment rates from Wikipedia.org.

Since there are many nations with over 10% in unemployment rates, I will only reckon with nations with over 50% in unemployment rates

Nauru 90%

Vanatu 78.21%

Turkmenistan 70%

Zimbabwe 70%

Mozambique 60%

Djibouti 59%

Given the huge unemployment rate, then we assume that these countries, according to the aggregate demand theory, to be in a deflationary depression.

Note: there is no price inflation figure for Nauru

Vanatu’s inflation rate (chart from Index Mundi) Positive inflation.

Turkmenistan price inflation rate (chart from tradingeconomics.com) Positive inflation.

Zimbabwe’s post hyperinflation CPI (chart from tradingeconomics.com) Positive inflation.

Mozambique’s inflation rate (chart from tradingeconomics.com) Positive inflation.

Djibouti’s inflation rate (chart from tradingeconomics.com) Positive inflation.

Surprise, ALL 5 nations with the largest unemployment have ZERO account of price deflation!

So what’s wrong with such a claim or theory?

The fundamental premises are essentially misplaced:

-People all think the same or people don’t think at all. People mechanically and homogeneously follow the circular reasoning that falling demand leads to falling prices in a perpetual feedback loop to an eternal hellhole.

-People’s don't have marginal utility. All people share the same set of values, priorities, incentives and time preferences. 

-People are not human. People simply stop eating, drinking or clothing or finding shelter under a deflationary spiral. Maslow’s hierarchy of needs have been jettisoned out of the window. People are caught in a stasis, freeze like a deer caught in headlights, where demand totally evaporates.

-When people don’t think or when people think the same or when people stop being people then obviously the demand and supply curve, the law of scarcity and opportunity costs becomes inapplicable or ceases to exists.

-Capital has been nonexistent to people who act or behave in aggregates.

-Inflation is NOT a monetary phenomenon so does the consequent deflation.

In the real world, economies are vastly complex, with millions of spontaneously operating parts such that wages represents only part of the myriad of factors that influence the economic environment.

Other real factors are equally or even more important, e.g. proximity to markets, size and categories of markets, state of basic infrastructure, access to credit, connectivity, technology and labor, quality of labor force, comparative advantage/s, state of legal, political and regulatory institutions and environment, tax levels, state of economic freedom, depth of capital markets, monetary regime and much more.

Most important is property rights. When property rights are not secure, no one will dare to invest no matter the relative lower, if not the lowest costs, in terms of labor wages. Who invests in North Korea or in the above 5 nations with the largest unemployment (presumably the cheapest labor force) in the world where one's capital are likely to be arbitrarily seized by the incumbent authorities?

These are real factors that can't be seen as having neutral effects on people's incentives or which operates on a vacuum. 

How about the solution where government must step in to provide jobs, by inflation or protection? 

Well government, of course, comprises of people too.

Under the aggregate demand framework, the political class have been glorified as representing “superior” set of people in terms of knowledge and virtues, relative to the market which is seen as inferior non-political people, that lays ground for interventions on so-called “market failures”.

Such is an unalloyed myth. If the romance on politics is true, then inflation or deflation won’t exist. There won’t anything known as economics.

The reality is that inflation and protectionism represents two sides of the same coin: the political economy of destruction.

As the great Ludwig von Mises explained (bold mine)

By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.

But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners' fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.

The bottom line is that previous interventionists policies, e.g. policy induced boom bust cycles, regulatory mandates, entitlements etc..., have resulted to such lack of competitiveness which neo-mercantilists try to shift the blame onto the others. Yet they are asking for more of the same thing that led to this or they seek doing the same thing over and over again but are expecting different results.

The economics of aggregatism, thus, has mostly been about pretentious or pseudo-economics wrapped in populist anti-market politics constructed from heuristics, political religion and cognitive biases, or might I say, a grand deflation in logic.