What Media Didn’t Tell About the Peso

``If a man tries to question the doctrines of etatism or nationalism, hardly anyone ventures to weigh his arguments. The heretic is ridiculed, called names, ignored. It has come to be regarded as insolent or outrageous to criticize the views of powerful pressure groups or political parties, or to doubt the beneficial effects of state omnipotence. Public opinion has espoused a set of dogmas which there is less and less freedom to attack. In the name of progress and freedom both progress and freedom are being outlawed.”-Garet Garrett (1878-1954), American Journalist

Meanwhile, we are pleased to say that the first segment “Gold, US Dollar and Oil: Markets Simply REFLECT On Collective Policies Imposed!” has been featured at Canadian website Safehaven.com. http://safehaven.com/article-8759.htm

Oddball comment of the week, this from Bloomberg (emphasis mine),

``Mexico's central bank Governor Guillermo Ortiz said policy makers can do little to stem rising food prices, and future interest-rate decisions will focus on stopping the spread of inflation to wages and other costs.

``Increases in the price of wheat, milk and other food items pushed Mexico's inflation rate above the bank's 2 percent to 4 percent target band in eight of the past 12 months. The five- member board led by Ortiz unexpectedly raised the benchmark interest rate on Oct. 26 to 7.5 percent from 7.25 percent, the second increase this year.

``There's little central banks around the world can do to prevent food prices from rising,'' Ortiz, 59, said in an interview in Miami today. ``But we can react to avoid second- order effects.''

Since inflation is a product of government policies, then such statement is a practical admission of arrant incompetence. What good is it for central banks to exist when they can’t control the effects of their own policies?

What Media Didn’t Tell About the Peso

In an open forum of a recently hosted “market outlook” by an international bank, the company’s treasurer was asked by a client if the it was advisable to still hold the US dollar.

To our surprise the officer says that because the Philippines have been embroiled in too much politics, particularly tainted by “corruption”, the Peso’s strength was unlikely to last. Duh! This was the same line of reasoning we were confronted with when we audaciously took on the contrarian stand to forecast the Peso to strengthen at the end of 2004, (see November 29 to December 3, 2004 The Philippine Peso’s Epiphany?).

Yet the said official admitted that contrary to their head office which saw the Peso’s rising trend to continue, the advice had been a ‘personal opinion’.

The same perspective can be gleaned from the headlines. When the Peso goes to a milestone record we read economic “experts” instinctively denounce the Peso’s rise as “baneful” to the economy given the adverse implications to the “competitiveness” of our exports and the ramifications to the OFW’s “buying power”.

Nonetheless, the common denominators attributed to the Peso’s rise are the same grounds used for such criticisms and its implied course of action; primarily remittances and trade-economic linkages.

The Endogenous View and the Framing Effect

As a contrarian analyst we try to follow the principles of French liberal economist Frédéric Bastiat’s who wrote about the Parable of the Broken Window in the 1850 essay Ce qu'on voit et ce qu'on ne voit pas (That Which Is Seen and That Which Is Unseen). The precept, of which, centers on the hidden costs of every decisions or the law of unintended consequences (usually seen through the prisms of government interventions). For example, applied to our field, while contrarians tend to serendipitously make occasional major accurate forecasts, the hidden cost or side effect of going against the crowd or of espousing a radically unpopular theme have been ostracization.

Applied to the Peso, domestic experts tell us that exchange rates are determined by demand and supply. True enough. But when we are contented to look at remittances, trade balances or foreign direct investments, we are then vetting from THE INSIDE LOOKING OUT or these variables are seen only as a FUNCTION of the Philippine Economy. That is not the complete picture.

And quite importantly, when we become totally entranced with politics to the point of logical paralysis like a deer who freezes in front of the headlights, such is called obsession or fanaticism and not analysis.

Again while exchange rates are indeed a function of demand and supply, these views purposely limits the public’s perception to the dimension of the Philippine Peso relative to the US dollar ALONE. Since currency markets reflect a ZERO sum game, where one wins at the expense of the other then it is easy to build a case against the rising Peso.

In other words, such arguments facilely plays into the variant of an economic concept known as the Dutch Disease, (wikepidia.org), ``The theory is that an increase in revenues from natural resources will deindustrialise a nation's economy by raising the exchange rate, which makes the manufacturing sector less competitive”. In our case, it is not natural resource exports yet, but of HUMAN exports.

Unfortunately this form of presentation is called the Framing Effect or (wikepidia.org) ``the packaging of an element of rhetoric in such a way as to encourage certain interpretations and to discourage others.” (highlight mine).

Objective analysis attempts to look from a balanced angle against biased analysis whose views are directed by a certain desired outcome. In the markets, losses are usually suffered by those who are consumed by their biases. It certainly seems applicable to everything we do. Since extreme biases “tunnels” our vision to the point of absolute rigidity, we become less open and flexible and squarely insist on our perceived outcomes. We simply cannot move forward if we are drowned by false expectations.

Myths versus Observable Reality

Well in contrast to such views our thoughts is that the currency markets operate from three divergent angles; namely endogenous, exogenous and market expectations (speculative capital). Hence the domestic frame we presented above could be called as endogenous or internal view.

Initially to give us a broader perspective let us examine the historical performance of Philippine Peso from two horizons, a long term 62 year time frame and a medium term 7 year period, as shown in Figure 1.

Figure 1: Philippine Peso’s Long Term or 62 year (left) and Medium Term or 7 year Historical Performance (right)

Since 1945, the Peso (left chart) has experienced about 60 years of continued depreciation relative to the US dollar with only marginal stability attained during the early 1990s or when the Philippines and the PSE’s Phisix was buoyed by a REGIONAL boom. Most of the recent decline came in the wake of the Asian Crisis.

It is important to emphasize that the Philippines has NOT moved beyond what its neighbors have been, which means luck played a substantial role when we advanced (shown below), instead of policy choices.

In short, like today, the Philippine financial markets and its economy has been captive to external forces rather than internal driven factors, subjecting us to external risks more than the internally generated one in contrast to what the others say.

Under such premise it pays to understand how the Philippines have been latched to the global economy, its shifting role relative to regional and world dynamics and the underlying drivers that could hold sway to the direction of both its financial markets and economic path.

As you can further see in the long term chart, it is only during the present period where the Philippine Peso has made a meaningful advance, particularly during the inflection point in 2005.

One should note that in 2005, the Peso attempted to advance in January but was spurned by “politics”, remember the “Hello Garci” scandal? Yet by September, the markets have simply discounted the political window and went on to adjust materially (see left chart of Figure 1). Since then, all of the significant blips of the Peso had been due to external factors. Not even the recent Glorietta blast was enough to turn the Peso around.

Before we proceed, it is an important reminder that the charts of Figure 1 or the historical trend of the Philippine Peso would serve as an ANCHOR for comparison to the subsequent charts in our discussion.

Figure 2: IMF: Remittance Flows (left), Yardeni.com: Philippine Trade Balance (right)

Mainstream media and their attendant experts always impress upon us that the strength of the Peso has been primarily due to remittances, which has now comprises about 10% of the GDP.

While we do not deny the fact that remittances has immensely added to our foreign exchange reserves and has been an important contributor to our economy, as a market observer we find the correlation or the causation of the remittance driven Peso argument as quite doubtful.

The left pane of figure 2 from the IMF (2007 country report) shows of the remittance trends of the Philippines since 1995. What can be observed are as follows:

One, remittance trends has been on a 10 year uptrend and steadily growing since and

Second, the rate of remittances has accelerated since 2002.

Now revert to figure 1 or the peso’s 7 year chart (left); notice that since 2002 the Peso continued to decline in spite of the acceleration of remittances. Again the Peso made its successful turnaround only in September of 2005 a full three years after the quickening of the upside pace. Yet, the most notable part is that in all the years prior to or before 2005, even as remittances rose, the Peso continued to fall!

So the attribution of a causality relationship with its present action or otherwise stated as the rise of the Peso as due to the gains in remittances has NOT been DIRECT. The easy way to say this is that the rise of the Peso cannot be adequately explained by the remittance trends, or simply put, PRESENT correlation does not imply causation! It is a puzzle how so called experts appears to chime in on a supposed “cause and effect” when such has not been supported by price actions.

Of course there will always be some justifications for such incongruence or a simplified explanation for such outcomes such as a “lagged effect” or the Peso could have reacted only after it reached a certain unidentified level called as the “critical mass” level which ultimately served as a tipping point.

We do not argue against these premises (here we are preempting on possible responses), but our question remains which do we follow, a 10 year or 3 year lag? Or what then has been the pivotal measure for the “critical mass” of remittances, 8-10% GDP perhaps?

Then there is the argument that the state of the Peso could also reflect our trading patterns, which appears to be even more defective. Figure 2 courtesy of Yardeni.com tell us that the Philippines have been trading on a deficit (as of August)!

Figure 3: Deutsche Bank: FDI Flows (left), IMF: Net Portfolio flows ex-US dollar assets

On the other hand, others contend that Foreign Direct Investments may have spearheaded the Peso’s rise. Figure 3 from Deutsche Bank shows that FDI compared to our neighbors have severely lagged or has not shown any vital improvements as to equally reflect on the Peso!

Next, media tells us that stock market flows have been one of its factors behind it. While this could have been true in the past, data from the Phisix should tell us of the validity of such claims.

Since the week that ended September 7, the Peso has gained by about 8% or more than half of its year to date gains of about 14%.

The reason we chose the two months of time line is to smooth out away from the talks of the latest developments in the corporate world such as San Miguel’s recent divestment of Australian Dairy National foods and Australian Premier Brewer J Boag & Son (which for us is a questionable strategy in the bottomline enhancement issue; instead the company plans to emigrate to a divergent platform of unrelated interests such as mines, energy-which deserves another article) and the privatization of PNOC-Energy Development Corp, which is said to affect further the Peso’s firming trend.

Not that we disagree with these; we do subscribe to the grounds that these “corporate events” could further support gains of the Peso. But our point is, beyond all these chatters, the fact is since September 7^th the Phisix has accrued some Php 7.0356 billion of net foreign selling in contrast to what has been reported. This foreign selling occurred in 7 out of the 10 weeks, which suggests that this has not been a one-off event. Therefore, we have not seen inflows material enough to extrapolate that the Peso rose because of stock market activities.

Of course, alternatively, we do not know if the past selling activities by foreign money actually translated into outflows since the proceeds could have been used to either acquire other Peso denominated assets or remain liquid or deposited in some banks or financial institutions.

The point of all of these is to demonstrate what is reported in media which is supported by the mainstream “experts”, has less to do with the function of the Peso’s present conditions than commonly believed. In short, the Peso as a function of the Philippine economy, the ENDOGENOUS VIEW, is only one factor but has not been accurately the ENTIRE picture.

The Exogenous Perspective

Here are some empirical based analysis alluding to the themes which supports our second thesis of what drives the Peso; the EXOGENOUS perspective.

From the prolific Stephen Jen of Morgan Stanley (highlight mine), ``Exchange rates are no longer driven by trade or concerns about trade imbalances. We don’t remember the last time someone told us that they were selling the USD because of its C/A deficit. Rather, more than ever, exchange rates are driven by cross-border flows, e.g., diversification flows by central banks in Asia and the Middle East, and structural portfolio adjustments in the private sector, as ‘home bias’ declines worldwide. These flows are very powerful, and have little to do with where USD/CNY is.”

From another article “Global Official Reserves Just Breached US$6.0 Trillion” by the same author Stephen Jen (highlight mine), ``…while the depreciation of the dollar has led to some valuation gains of EUR, GBP and other currencies, in dollar terms, most of the increases in the official reserves reflected actual interventions. Thus, the dollar has indeed weakened this year, but the size of the interventions conducted by the emerging market central banks is rather extraordinary.”

From RGE Monitor’s astute Brad Setser, ``That story – when augmented with a story about rising oil savings and the investment of the oil surplus in (offshore) dollar assets – describes the world from 2001 to 2005 rather well. The US deficit rose from $385b to $755b (an increase of $370b). That increase offset a $127b increase in developing Asia’s surplus and a $263b increase in the surplus of the oil exporters.

``But as the dollar-RMB depreciated against Europe and oil-exporters started buying more European assets, the system evolved. China started to run large bilateral surpluses with Europe. And if 1/3 of the $1.2 trillion increase in official assets is invested in Europe, Europe is now receiving a $400b capital inflow from emerging market central banks and oil funds. That inflow seems to have induced a swing in Europe’s current account balance – This swing doesn’t show up in the data for the Eurozone as clearly as it shows up in the data for the European Union as a whole. That makes sense. Eurozone banks take the inflow from Asia and the oil states and lend it to Eastern Europe. But the overall result is clear: the IMF now forecasts that the rise in the emerging world’s surplus will be offset by a rise in Europe’s deficit.”

Notice some key words: “trade/current account imbalances”, “driven by cross-border flows”, “diversification flows by central banks”, “interventions of emerging markets” and “oil savings and the investment of the oil surplus”, where none of these delve with the issues of domestic currencies relative to its respective domestic economy but rather in the context of the currency’s relationship seen in the spectrum of global trade, savings, investments and/or finance flows.

Succinctly put, the Philippine Peso can be seen as a function of the global dynamics, particularly of the present Fiat Paper money standard.

Figure 4: RB of Australia/IMF: Regional Movement

To illustrate, since we have introduced the macro perspective in currency market dynamics, the left chart in Figure 4 shows to us how ASEAN countries have performed since 1985, courtesy of Glenn Stevens Governor of the Reserve Bank of Australia in his July 18^th speech.

Since 1997, ASEAN countries have moved almost uniformly in terms of the general trend, i.e. from crash to recovery, albeit, the distinguishing factor comes with the degree of relative price actions.

In the right side of the same chart, courtesy of IMF, shows of how Asian Currencies have generally appreciated in 2006. In pecking order, the Philippines ranked fifth following Thailand, South Korea, Indonesia and Singapore.

Again our point is, evidences point toward the Philippines’ predisposition to move along with the region, concomitantly or belatedly.

Figure 5: Yardeni.com: Philippine Foreign Exchange Reserves (left), Joey Salceda/PSE Economic Stock Briefing-Feb 21, 2005 right

The right frame of Figure 5, from a PSE presentation of Presidential Chief of Staff Joey Salceda shows how the Peso severely lagged the region in early 2005, hence its present outperformance could viewed from a perspective of a “catch-up mode”.

Nonetheless, the left frame of figure 5, again from yardeni.com manifests of the explosion of Philippine forex exchange reserves at the end of 2004. This forex trend appears to show of more correlation to the Peso than that of the others, but then again such correlation seems to have incepted only in 2005.

Like us, the IMF believes that portfolio flows have been a key variable in determining the Peso’s increase here is what they wrote (emphasis ours), ``There was also a pronounced acceleration in net portfolio inflows once global risk appetite resumed in Q3 following the sell-off in May-June, with net portfolio inflows from July through November of $1.3 billion, five times the level in the same period in 2005 (Chart 8) [figure 3-ours]. Against this backdrop, the peso appreciated by 7½ percent against the U.S. dollar during 2006, even as the Bangko Sentral ng Pilipinas (BSP) continued to build reserves, while using off-balance sheet currency swaps with local banks to reduce the impact on reserve money. The authorities also used the greater availability of foreign exchange to repay external debt, and to reduce their reliance on external borrowing."

So the IMF tells us that global dynamics have had a hand in influencing portfolio inflows which has coincided with the strength of the Peso.

Hence from an exogenous point of view, one has to factor in demand and supply relative to global monetary and fiscal policies (e.g. which countries are printing more money, forex reserves allocation and trends of sovereign wealth/pension funds), global trading patterns (e.g. growing regionalization trends), macro savings and investment dynamics (e.g. oil surpluses recycled into domestic real estate investments, Japan housewives “Mrs. Watanabes” into carry trades, and demographic trends), global financing and market trends (e.g. US-Asian/Petro Economies-Vendor Financing scheme or the “Bretton Woods 2”, McKinsey’s New Power Brokers-Petro dollars, Asian dollars, Hedge funds and Private equity), evolution of the financial markets (e.g. integration and consolidation of markets, innovative securitized or structured finance products), cross border capital flows, geopolitics and economic linkages.

In our point of view, the premier variable in today’s Peso is the state of the US dollar as a consequent to these agglomerated variables. The alternative aspect is that the Philippine Peso has not been rising but rather the US dollar has fallen against almost all currencies, given the US dollar’s de facto reserve currency status in today’s Paper Money system. Given the change of perspective the issues hinged from the domestic angle changes.

Market Expectations or Speculative Capital

Non market practitioner-experts usually view issues from the perspective of theories but usually base their analysis from select or preferred statistics. Some of such analysis most frequently discounts on the dynamism of market forces, where the nomenclature is that people act or behave like automatons; easy to diagnose, responds uniformly and actions easy to forecast. This resonates very rigid thinking.

In contrast, many market practitioners clearly understand that markets reflect on the psychological output from collective investors. As such, given that people are inherently emotionally driven, markets could occasionally mirror bouts of irrationality or undergo emotional vertigos at certain points of a trend.

Since the Peso, which is traded in the currency market, is rated by investors, speculators and other market participants who are responsible for setting a price for it, based on subjective opinions then they are equally subject to such volatilities and extremities.

Hence we will borrow from George Soros’ as our third view for the currency market, called the “Speculative Capital” or in our terminology the market’s expectations.

Speculative capital essential deals with returns expectations, where as George Soros wrote in his book the Alchemy of Finance (highlight ours), ``moves in search of the highest total return. Total Return has three elements: the interest rate differentials, the exchange rate differentials, and the capital appreciation in local currency. Since the third element varies from case to case we can propose the following general rule: speculative capital is attracted by rising exchange rates and rising interest rates.”

The basic motive by any market participant is to seek the highest returns. And when a confirmatory trend is set, investors tend to pile in so as to reinforce the beliefs or convictions established by the nascent trend. Hence momentum sets in which allows for the trend to persist until a certain phase where the cycle turns or inflects.

Adds Mr. Soros (highlight ours), ``To the extent that exchange rates are dominated by speculative capital transfers, they are purely reflexive: expectations relate to expectations and the prevailing bias can validate itself almost indefinitely. The situation is highly unstable: if the opposite bias prevailed, it could validate itself. The greater the relative importance of speculation, the more the unstable the system becomes: the total rate of return can flip-flop with every changes in the prevailing bias.”

So while “fundamental factors” such as Endogenous or Exogenous facets could be utilized to establish rational based valuations for investors in the currency market, cyclical factors based on price based expectations can thus lead investors to make fundamental justifications based on prevailing price actions, instead of the other way around.

Hence, under extreme ends experts are likely to be susceptible to justify or provide simplified explanations based on present prices even if the markets have been in essence prompted by unstable speculation. A view likely to be erroneous.

This is why in contrast to the “know-them-all experts” we can say through our experience that markets can in itself become inexplicable at certain times.

So as Mr. Soros implicitly warns, one must not always trust or depend on fundamental based views when markets could actually be swayed by sheer emotions, and thus lend to boom busts cycles.

We share such view.

The Politics Behind The Peso

``The moment we want to believe something, we suddenly see all the arguments for it, and become blind to the arguments against it."-George Bernard Shaw

Again we can’t help but emphasize on what the history says; in all 60 years where the Peso devalued from Php 2 to a US dollar until its peak of Php 56.4 (or about 96% loss) in 2005, our export industry has NOT gained a hefty market share enough to navigate or steer our economy into Nirvana, which has remained sluggish all throughout the past 6 decades, as we discussed in our August 20 to 24 edition [see In Defense of the Philippine Stock Exchange From Political Correctness].

The point being that the function of price as represented by currency changes alone has not been a beneficial factor to our export industry simply because OTHER variables has led to our lack of competitiveness, ergo the seeming price inelasticity of our exports.

Whereas even if the Peso falls to Php 100 to a US dollar, it is not guaranteed that our export industry will recover without adequate reforms in the areas which has impeded on our capacity to compete. Those arguing on the elasticity of our export industry are simply suggesting of short term solutions again, notably through government interventions-a cure worse than the disease-without asking how such wretched conditions emanated from in the first place.

This fallacious linear way of thinking, “falling peso is good for exports” can easily be debunked using with Zimbabwe as an example. Because of Zimbabwe’s hyperinflationary depression has resulted to an inflation rate of 6,598% in August 2007 (BBC), the value of its currency has dropped like a stone from a cliff, where its official rate is at Z$30,000 to a US dollar, but in the unofficial “black markets” are trading at (VOA) Z$1 Million to a US dollar! In effect, Zimbabwe, given such grotesquely skewed premise, should be the WORLD’S LEADING EXPORTER! Duh!

When reforms are made to reflect on the capacities to compete in the market, then prices come into play depending on the level of products produced and to which markets they are sold to, here the cost efficiency and productivity factors would play the leading roles. Hence, addressing these factors requires no short term solution where eventually currency markets should reflect on its true price levels.

As you have seen in Figure 4, the entire region has appreciated against the US dollar in relative terms. So if one argues about pricing in terms of currency adjustments, ALL Asian countries have generally seen their export pricing costs climb. This holds true for most of the rest of the world. So the argument of losing export market share is entirely out of context.

It is not the issue of the Philippines versus the US alone; in the global trade dynamics, it is the issue about the US dollar falling against most global currencies.

To likewise expose such misleading grounds, exporters can always hedge their exports via currency forwards, which if I am not mistaken are also offered by domestic banks. That is why financial markets need to generate more sophistication and deepening, so as to allow our investors alternative sources of financing or acquire additional capabilities to hedge their risks. A natural outcome of a well functioning market is for our industries to achieve increased efficiencies and heightened competitiveness.

Looking at the context of statistics, our external trade has been a less significant factor if based on our 2^nd quarter GDP’s computation, by expenditure at current prices (NSCB). Private consumption accounts for about 70% of the GDP, followed by capital formation 15% and government consumption 11%. Net exports (Exports- Imports) account for only .1% of the GDP. This means that both exports and imports are almost at parity with the exports having a slight edge (both 42% of GDP), hence the net exports.

Of course, what the market critics wants to say is that the government needs to protect these groups by intervening in the markets. And the unseen part is that intervening eventually translates to balance sheet losses by our (BSP) Bangko Sentral ng Pilipinas which would imply to future actions of selling assets to cover deficits. Exhausting all available assets for sale extrapolates to either incurring more debts or printing more money or increasing taxes, whose side effects would mean losing purchasing power over the longer horizon aside from again the loss of competitiveness.

The desire to help a select group over a popularly themed perceived inequality over the short term means sacrificing the future for the benefit of a few.

The following excerpt reflects on the sentiment of domestic businessmen on the perceived factors which inhibits the country from attaining competitiveness (Businessworld), ``But from a list of 14 "factors for doing business," senior business executives in the poll selected corruption, inadequate supply of infrastructure, policy instability, an inefficient government bureaucracy, and "government instability/coups" as their five top concerns.

``Others include stiff taxes and complicated tax regulations, lack of access to financing, restrictive labor regulations, crime and theft, poor worker ethics, and inflation.” (highlight ours)

Our guess is that inflation which rank last seems so because it is the least understood among the lay people. However, generally stated, the frustrations emanate from again misdirected and distortive (inflationary) policies, which have been the main cause of our present plight. Yet ironically, these experts have been urging our officials to apply the same measures with which had caused them in the first place. It’s like giving an alcoholic his next bottle of gin.

Just take the account of remittances; bleeding hearts say that since remittances accounts for about 10% of the economy, it makes up a big portion of private consumption. And since it is a big part of our consumption it should be subsidized by a weak peso.

We wrote NSCB to ask for an estimated figure from which remittances contributes to this share. Apparently since I made the initial query two weeks ago and they have not responded, our guess is that they have no precise figure for such claims. Previously our requests were promptly responded for, not this one though.

The implication is while remittances do vastly help the GDP, rising currencies ex-Peso or a falling peso should help in the purchasing power of those who benefit or the supposed “majority”.

Again, the deceptive linear logic, “falling peso=greater purchasing power for OFWs=the better economy”, yet nobody says anything about higher future consumer prices, an offshoot to such policies.

First of all, if remittances account for 10% of GDP then apparently 90% of the other sectors are also there to deal with. When has the “popular” 10% been greater than the “unheralded” 90%?

Second, even assuming that the OFW’s beneficiaries constitute a big portion say a majority of our consumer spending power today, it is not spending that helps our economy but generating savings and channeling them into investments. The assumption that consumer spending has a multiplier effect is a dubious one. Even if we send half of our population abroad, if the country does not generate enough investments we are unlikely to improve and remain as we are today.

From Dr. Frank Shostak of the Ludwig von Mises Institute (emphasis ours),

``What gives rise to the expansion of real wealth is the expansion in the pool of real savings. It is real savings that funds the making of various capital goods i.e. tools and machinery. In short, it is real savings that sustain various individuals that are engaged in various stages of production. All that money does in all of this is to provide the facility of the medium of the exchange. It makes it possible for individuals to exchange goods and services. The services of money are not enhanced on account of its greater supply. If anything the increase in the supply undermines the services of money. After all when people’s demand for money rises they don’t want more money as such but rather more purchasing power, it is the increase in the purchasing power of money that makes goods and services more marketable. The increase in the supply of money only prevents an increase in the purchasing power of money from taking place.”

Third, all you have to do is look at the Peso for empirical evidence; has 60 years of devaluation and greater OFW exports resulted to a better economy??? I think the answer is quite evident for those who are wise enough to see the truth. Besides, OFW flows are likewise levered to global growth. In general, if global growth slows substantially so will the flow of OFWs and the remittances. Mexico’s remittance flows, which has been levered to the US economy, has started to slow (MSNBC).

Fourth, there is also the unseen implication of money flows, where under a falling peso, OFWs tended to delay remittances in the hope of garnering more “purchasing power”.

Investors are seen in the same light, under a falling peso, capital flight is the common option. People invest in the US dollar instead of the Peso investments. How can withholding money or investing in ex-Peso assets by resident investors benefit the economy?

If there is one domestic reason why we specialize in exporting labor, aside from globalization/demographic trends, is the belated effect of policy outcomes or the law of unintended consequences. It seems that we never learn.

Finally some pertinent quips from US presidential aspirant Ron Paul on currency manipulation (from Mish Shedlock),

``[The answer] is inflate the currency. They don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people. They say lower the interest rates.'"

``And you never tell them 'the only way you can lower the interest rate is to create more money'. I see this as the problem we don't want to talk about…

``We ignore the fundamental flaw and that is not only have we had a subprime market in housing, the whole economic system is subprime in that we have artificially low interest rates. This has been going on for 10 years or longer and now we are bearing the fruits of that policy… The real deception is when we distort the value of money, when we create money out of thin air…. So my question boils down to this: 'How in the world can we expect to solve the problems of inflation, that is the increase in the supply of money, with more inflation.” (highlight ours)

In essence most of the policy makers, political demagogues and anti-market experts have the all same solution to the very problem from which was created; inflate the system, distort the markets, benefit from it (by being a part of the bureaucracy or the special interest/parallel groups), feed the public with the scraps of money and cry inequality! That is what personality based rent seeking politics is all about.

As they say in France, “plus ca change, plus c'est la meme chose” or in English, the more things change the more they remain the same.

Gold, US Dollar and Oil: Markets Simply REFLECT On Collective Policies Imposed!

``I do not feel obliged to believe that the same God who has endowed us with sense, reason, and intellect has intended us to forgo their use.” -Galileo Galilei (1564-1642)

Another week, another record.

As the US dollar index fell to its lowest level ever, Crude oil and gold hit record milestones, a historical high and a new 27 year high, respectively.

While everybody can see prices, only a few realize that they have a common denominator and transmit a message.

The market for crude oil can’t be exactly characterized as FREE, as about 77% of the world’s 1.1 trillion barrels in proven oil reserves is controlled by governments (Washington post). And so as with the US dollar Index, where collective governments monopolize the role of money creation. In short, in a demand supply equation, the supply side of these markets is mostly controlled by governments, whereas the demand side is one that is being rated in the markets.

Take oil, the problem from the supply side stemmed from years of non-transparency practices, subsidies, nationalization, cheating among cartel members, environmental restrictions, fund diversion to social programs, underinvestment, and others-all of which has the distorted price signals in the marketplace which lent to complacency and therefore today’s massive disequilibrium which has now been reflected in prices.

On the demand side, both the currency market and oil markets reflect the effects of the inflationary policies (money and credit creation) instituted during the earlier years.

As for gold, which has served as a better part of global money for more than 2,500 years, the earliest coinage was said to have been in Lydia between 660 and 643 BC (wikipedia.org), it simply echoes on the collective malpractices of governments in inflating the system with excess money under today’s Paper Money standard.

Everybody sees gold rise in terms of US dollars, but this hasn’t been the case, gold has been rising against ALL currencies, including the best performing Canadian Loonie, as shown in Figure 1.

Figure 1: stockcharts.com: Gold’s Outperformance!

The US dollar index basket consists of 6 currencies which are weighted in different scales, namely the Euro (57.6%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and the Swiss Franc (3.6%).

With the Japanese Yen and the Swiss Franc functioning as funding currencies in today’s Carry Trade, it is obvious that gold’s rise has had far greater impact than the rest, so we purposely didn’t include them.

As you can see even against the Euro (lowest pane), which represents over half of the US dollar index, and has been gaining quite steeply vis-à-vis the US dollar, gold’s ascent has been conspicuous, and so with the British Pound (pane below main window).

Commodity currencies which benefit from the rise of exports of commodities such as the Australian dollar (middle pane) and the best performing Canadian Loonie (main window) are likewise underperforming gold.

Mind you, while the chart speaks of a one year frame, this phenomenon has been ongoing for several years.

Now instead of quoting other known figures, we purposely quote the favorite or the “idol” of Statist practitioners, the illustrious John Maynard Keynes, ``By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Our point is Mr. Keynes clearly understands the implications of inflation, why can’t their followers?

Yes, it’s funny how mainstream media including their cohorts of experts don’t tell you this. They focus on other aspects, the tangential aspects of economic ills…so as to generate support for MORE spending programs in the name of public welfare-hahaha! More inflation! Hahaha!...when in fact inflationary policies or the COST OF SOCIAL PROGRAMS or Government INTERVENTIONS have been basically the principal reason why our collective purchasing power has been eroding and widening the so-called “inequality” effect (which is actually a mirage since inequality is an undeniable fact of life!), a topic well-loved by demagogues and easily bought by the gullible public.

Look at these comments (telegraph) ``We are of course concerned about high oil prices, but the market is increasingly driven by forces beyond Opec's control.” Mohammed bin Dhaen al-Hamli, president of Opec and ``Please don't blame us for $93 oil... The market is out of control." He said that the oil market is "very confused", Qatar's Abdullah al-Attiyah oil minister. (highlight mine). How pathetic!

What this means? Governments have done ALL it can through the years to “manage” or “control” prices of oil, the issuance of paper money and even gold.

It is even alleged that the gold market has been sold short by western governments to limit the impact of the public’s inflation expectations, where a group called Gold Anti-Trust Committee (www.gata.org) has long spearheaded the campaign to expose the collective government’s manipulation.

Needless to say, despite all the “control and command features” imposed on the markets, these actions eventually BACKFIRE! The Law of Unintended Consequences, anyone?

If it is TRUE that gold has been shorted, then high 4-digit to even 5-digit gold is not improbable where $100+ fluctuations per day become a reality.

$150 oil backed by Peak oil syndrome is now clearly on horizon. Texas oilman T. Boone Pickens (hedgefund.net), whose streak has been on a roll, just recently predicted the price of oil will probably reach $100 before falling to $80 where he theorized ``that “peak oil,” the point at which oil production worldwide has reached its zenith, has arrived. After its peak, production will begin an unstoppable decline.” Looks like we are heading there!

As governments turn to rescue their factotums and conduits, watch the inflation genie morphs into a hideous Godzilla.

Because of the angst of the SYMPTOMS of inflation (high prices) more and more pressures will be applied to governments to undertake political “safety nets” programs to mitigate the impact on the populace. Argentina, Russia and China have initiated some semblance of price controls. Says Daniel Gross of Slate Magazine, ``If the price controls continue much longer, these economies could see the revival of another distressing factor that defined socialist economies in the 20^th century: rationing.” So aside from MORE price distortions we are seeing MORE inflationary policies again! Inflation in itself a self-reinforcing dynamic! Hahaha!

Alas, the world’s financial system is clearly undergoing an incredible stress. And the Austrians School have been dead on with their projections, either we see a destruction of the currency or face up to a Depression that would make the US 1930s and Japan’s lost decade look like a picnic.

Markets simply REFLECT on the collective policies imposed, or as the bible says what we sow, we reap. Markets don’t fail, Governments does.

People see what they want to see, but refuse to see what needs to be seen. In the end we all fall victim to our biases and blame others.

History Is Not A Closed Book: MARKET FAILURE or POLITICAL BIAS?

``If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reason also reject every kind of government action.”- Ludwig von Mises, Planning for Freedom

Cramming results to mayhem, my apologies for the earlier unedited post.

Media Versus Reality

In our first History is not a closed book series March 12 to 16 (see Filipinos’ “Flawed” Culture? History Is Not A Closed Book) one of the issues we tackled on was the public’s common perception where a “virtuous” government would serve as the proverbial magic wand to save the Philippines from degeneration.

The assumption is, if we put in a saint-like leader, he/she will unshackle us from our poverty bondage and bring affluence to the nation. That is how public’s mindset is shaped by mainstream media in our society.

Part of the propaganda, circulating in the cyberspace, was to show countries with NO resources had attained their prominent status through “virtuous” leadership. The peculiar part was that the countries mentioned as examples are today’s thriving market economies where the domestic political leadership had opted to LEAVE the economic direction to the entrepreneurial “spirits” of their constituents instead of rigid central planning.

In other words, because governments OPTED to become LESS of an obstacle to the society’s economic development, LESS government became somewhat “virtuous”. But of course, less government was NOT indicated, virtuousness was. Such is selective presentation which unfortunately reveals of the political biases of the promoter. (see below The View from AT Kearney)

Where Morality is one’s expectations or perceptions of how government needs to be run, we DO NOT dispute that “virtuousness” is important. However, our contention is that government virtuousness can immensely be achieved ONCE ITS BUREAUCRACY CAN VASTLY BE TRIMMED TO THE BASICS and where GOVERNMENT ADOPTS A MARKET-ORIENTED PRACTICE OR A MARKET ECONOMY.

Once an economy depends on its politicians for direction or quasi-Central planning, it will all be “same dog with different a collar” affair. The more things change, the more they stay the same.

We can’t blame the public for buying up the blather that leadership musical chairs will result to economic recovery. It has been quite apparent that the public’s memory has been very short; we had 3 EDSA revolutions during the last 21 years yet still inhabit on the same wretched conditions; a mostly patron client (semi-feudal) system.

By watching media from an external view, one’s possible impression of the country is a perpetual chaos.

From the inside, having been inundated and constantly bombarded with day in and day out of scandals and intrigues, which is usually a common feature for showbiz, one’s perception is the need for an upheaval to restore some sense of stability. Hence, the persistent “coup” rumors. Even the recent Glorietta blast was imputed to be politically motivated.

While we sympathize with the public on their frustrations, we understand why they have been so desperate as to embrace any plausible rational, although illusionary, for the country’s emancipation from heretofore. Their problem appears to be the limited access to divergent information.

Recalling a recent splendid talk given by a youthful ex-mainstream media honcho who dealt on how technology changes affected the business sphere, he cited an example where media presentations and reality greatly differ. For instance, the Guimaras oil spill in 2006 impressed upon the general public that island had been a disaster zone. However, the emergent power of third generation media, seen through the eyes of the blogsphere or independent “resident” bloggers contested this perception which showed that the spill was insulated. So as traditional media painted the proverbial “mountain out of a molehill” picture, independent bloggers rebelled. Many, according to our speaker, responded in support of such bloggers.

As a result, the wired public has now started to get empowered with the option of having to choose from a diversity of opinions, and not been captive to mainstream thinking. In short, technology has begun to democratize information.

Yes while he likewise pointed out that with the growing worldwide technology diffusion, mainstream media’s role is seen to be gradually diminishing. Unfortunately, this country has been slow to pick up on such revolutionary trend (see below: The View From AT Kearney).

Our point is, for the public to become more empowered by information, it is a requisite for them to try to reach the far corners of the cyberworld and explore the rich availability of information. This should give them a more balanced view of the political economic sphere rather than swallowing hook line and sinker the controversy laden business motive/incentives of mainstream media.

Lastly, many today are talking of “virtuous” leadership possibly arising from the ranks of the church as a future head of the country. We won’t dispute the rights of these advocates, but one must be alerted that if the church ends up controlling the government machinery then such political system would be identified as a theocracy.

Some theocracies exist today as Iran, Saudi, the Vatican (wikepidia.org) and some in the past, e.g. Florence, Deseret, Montenegro. But in contrast to the public’s expectation of an economic Nirvana, theocracies have not been proven to be a guaranteed success, or otherwise such would have been a universal formula. So be careful of what you wish for.

Market Failure or Government Failure?

As we study the functionality of markets, we coincidentally come across observing the evolution of several political economic structures by different countries. Our observation has led us to suggest that market oriented economies have been a common feature of modernizing nations and could be applicable to us.

Recently, our suggestions had been criticized by a member of mainstream media. The critic’s main objection was that because market economies do not achieve equal distribution, they are thus pejoratively labeled such as “MARKET FAILURE”.

Our rebuttal to this is quite simple. The argument is basically a squid tactic, otherwise known as a NON CAUSA PRO CAUSA or false causes, operating under the LOGICAL fallacy of “Cum hoc ergo propter hoc”, or “with this, therefore because of this” or as we always say-correlation does not imply causation.

How? When somebody argues that a system is a failure, or attributes causation to it, because the BASIS OF REFERENCE is that of a correlation to perfection or in this case failed to achieve “equitable distribution” or otherwise economic UTOPIA, then obviously we recognize this to be extremely flawed.

Why? Because, there is simply NO PURE market economy. The fact that poverty or even Money exists signifies IMPERFECTION in this world. Money would not exist in a Perfect world, just ask the hardcore communist ideologue.

Why again? Because Money as medium of exchange represents inequality; under a normal scenario for instance, a baker is not a shoemaker and vice versa hence the uniqueness (inequality) of their jobs entails that their needs of a bread (by the shoemaker) and a pair of shoes (by the baker) be fulfilled via the exchange route based on the terms of exchange agreed upon by both parties. To fill the vacuum of needs money therefore becomes its means of exchange. Note: the above example represents real money, not inflated money for charitable purposes.

Hence, would it not be common sense to say that NO system can be a “total” success in this “imperfect” world?

We can turn the table and apply the same logic; since money and poverty still exists then all systems are hence FAILURES, including those advocated by the critic!

Obviously such blatantly fallacious statements reflect again on skewed biases instead of objective analysis.

Yes, our critic can further cite again “Market failure” as part of the “textbook” academia, but again textbooks are written from the perspective, and not exclusive of the biases, of its authors. Japan’s recent TEXTBOOK row with China is a recent example.

Moreover, textbook themes are usually grounded on what the authorities would like their constituents to learn. To suggest that a theory exists doesn’t extrapolate to outright acceptance or refutation of its universality, just ask Philosopher Karl Popper (Problem of Induction).

As an aside, academics can recite all sorts of “Market failures” mumbo-jumbo technicalities such as externalities, public good, monopoly, information asymmetry or path dependence but this does not again suggest that these are truisms. On the other hand, the laissez faire school of thought led by the Austrian School of Economics has a library rebutting all these.

In essence, while Market failure is a THEORETICAL argument, central planning failure is a FACT, evidenced by HISTORICAL examples of the collapse of the Stalinist USSR and the 180° turnaround from Mao Tse-tung’s China. So the argument that market fails lies on a tenuous ground compared to its obverse alternative, central planning.

Let us take the Philippine setting as one particular example, this excerpt from ADB’s March outlook, as we quoted earlier see History is Not A Closed Book: The View From IMF.

``In the 1950s, a sophisticated manufacturing sector emerged in the Philippines, supported by protection and a well-developed human capital base (Hill 2003). The problems for manufacturing began subsequently. A combination of factors appear to have played a part, including a period of costly and badly directed interventions, a tendency to focus on protecting rents rather than improving efficiency, poor physical infrastructure, and, to a lesser extent than in India, some problems with labor market regulation. High levels of corruption, disputed property rights and difficulties with contract enforcement have also played their part (ADB 2005). These facets of everyday economic life seem to reflect deeply embedded institutional difficulties including high concentration of wealth and a political system based on patron-client relations (World Bank 2005, p.3).”

Let me repeat the litany of misdeeds cited by ADB, curiously a MULTILATERAL institution owned by several governments…

costly and badly directed interventions,
focus on protecting rents,
some problems in labor market regulation,
high levels of corruption,
disputed property rights,
difficulties with contract enforcement,
institutional difficulties and
political system based on patron-client relations

Does this in any small way suggest that there is a so-called market prompted failure during the past 50 years???? Nada, zilch, zap.

As we have always argued, policies REFLECT on markets, instead of the other way around.

Incidentally, the protection of property rights and the enforcement of contracts serve as the cornerstone of ANY well functioning market economy.

By contrast, all of these signify or sum up to P-O-L-I-C-Y or G-O-V-E-R-N-M-E-N-T Failures!

Yet, behind the scenes these are the very same attributes we see intact today. Why do you think the intense obsession by the public to politics? Because economic opportunities are determined by the state and not through market forces! If you don’t have the right connections you can’t get things done…sounds familiar?

So despite all the leadership musical chairs the country had been through, we see same operating inefficiencies, which have led to persistently high costs and low levels of competitiveness hence the low investment levels. Is it any wonder why these persist to reflect on our continuing difficulties? Funny thing is we constantly carp about low investments yet insists to look on the other way.

And the unfortunate part is that markets always to get to be blamed even when they have been to a lesser degree, part of our heritage.

Market’s Social Dimensions and Unspecified Goals

By definition, a market economy, according to Wikipedia.org, “(also called a free market economy or a free enterprise economy) is an economic system in which the production and distribution of goods and services take place through the mechanism of free markets guided by a free price system.”

Since markets basically serve as mechanisms or platforms that allows for the people to conduct VOLUNTARY exchanges, as examples-buying from a fish vendor in the public market, or acquiring an insurance policy from an agent or obtaining a loan from a bank-it is thereby a social phenomenon and has no specifically stated goals for accomplishment.

To add, a free market system allows people accumulate capital and redeploy these to areas of production and services to which bests serves its consumers.

This is unlike a government where it has to face up with specific stated goals usually measured by economic or financial statistical yardsticks as GDP, per capita or etc.

Importantly, government functions to CONSUME private savings or CAPITAL with the purported aim to redistribute, no matter how inefficient or unequal-depending on which interest group gets to the blessings from the incumbent. These social programs eventually have a way of belatedly manifesting itself through the law of unintended consequences. Why do you think gold prices are rising?

As an example, the Philippine Stock Exchange has no specific function to equitably partition wealth or income compared to the Philippine government which has to contend with the demands of its fickle minded short term oriented voters.

One might say that such is an apples-to-oranges comparison but this is exactly the point, the economic direction of a market economy is driven by the aggregate actions of individuals partaking in a system of voluntary exchange or Adam Smith’s “invisible hands” with less participation from the government. The latter being mostly limited to protecting property rights and enforcing contracts.

So based on goals alone, there can hardly be a system “failure” when markets as a social phenomenon are simply avenues for exchanges…unless people stop acting as people.

Prices, in effect, act as a stimulus from which people conduct exchanges and allocate accordingly for their intended purposes. Governments fail when specific benchmarks are unmet.

Market Economies: Uncharitable and A Zero Sum Game?

Then there is the specious argument that markets function similarly to a zero-sum game or the law of the jungle, where the assumption is markets cannot move the economy forward because there would be so many losers in as much as there would be gainers.

Of course this is patently untrue, empirical evidences in our daily lives alone can disprove such assertion.

Maybe we have all seen the phenomenon called Cluster Effect, where same or similar businesses are located in one area healthily competing with one another other. Take Greenhills’ Cellphone Tiangge as an example.

Naturally, there would be losers as some store owners would find such dog-eat-dog competition to be so fierce that it would result to losses and eventual closures to the most inefficient stores. That’s where our critic’s sympathies lie with; the losses of some parties.

On the other hand, stiff competition has allowed the consumers to benefit from LOWER prices, so as with more diversified scope of services. Another, is that these network effects draw in more consumers to the area which effectively reduces their transaction costs (don’t have to scour from places to places), by the allowing them the privilege of having more options. Besides as competition lower prices of goods and services this should translate to more purchasing power. So how bad can that be?

In other words, losses by some have been more than offset by the gains of the general public or the consumers.

Notwithstanding, if such model had been defective outright, then we should see less and not more of these “cluster effects”, instead these privately initiated models appear to be sprouting everywhere!

As Murray Rothbard wrote in Man, Economy and State,

``The free market, in fact, is precisely the diametric opposite of the “jungle” society. The jungle is characterized by the war of all against all. One man gains only at the expense of another, by seizure of the latter’s property. With all on a subsistence level, there is a true struggle for survival, with the stronger force crushing the weaker. In the free market, on the other hand, one man gains only through serving another, though he may also retire into self-sufficient production at a primitive level if he so desires. It is precisely through the peaceful co-operation of the market that all men gain through the development of the division of labor and capital investment. To apply the principle of the “survival of the fittest” to both the jungle and the market is to ignore the basic question: Fitness for what? The “fit” in the jungle are those most adept at the exercise of brute force. The “fit” on the market are those most adept in the service of society. The jungle is a brutish place where some seize from others and all live at the starvation level; the market is a peaceful and productive place where all serve themselves and others at the same time and live at infinitely higher levels of consumption. On the market, the charitable can provide aid, a luxury that cannot exist in the jungle.”

Like the stock market, companies have value added components such as dividends and are notably distinct from the currency market, where when one goes down the other equally reacts in reverse (known as currency pairs). The sad part is that all markets get slapped with the same charges. As for the currency market, they can always serve as hedges.

And as Mr. Rothbard said, aside from the benefits of social cooperation through trade which paves way for advancement, charity can happen VOLUNTARILY coming from excess real savings. So it isn’t simply true that free market is a system for savages.

So if free markets can be charitable, can governments be as charitable as implied by some?

Again from Murray Rothbard, Man Economy and State (emphasis mine),

``The appeal to “charity” is a truly ironic one. First, it is hardly “charity” to take wealth by force and hand it over to someone else. Indeed, this is the direct opposite of charity, which can only be an unbought, voluntary act of grace. Compulsory confiscation can only deaden charitable desires completely, as the wealthier grumble that there is no point in giving to charity when the State has already taken on the task. This is another illustration of the truth that men can become more moral only through rational persuasion, not through violence, which will, in fact, have the opposite effect."

The unfortunate part is to look for all sorts justifications to discredit the markets in order to promote the welfare system which for all these years has been proven to be ineffective.

Yet, in contrast to the pleasantly sounding missions, government charity undertakings in most instances bear the insidious side effects of reducing our purchasing power unknown to many.

The View From AT Kearney

For clarity purposes the following are some empirical evidences from the international consulting firm AT Kearney which expounds on our missives:

Figure 2: AT Kearney: Tiny Countries Trade Big!

The public have been long made to believe that central planning “virtuousness” is the key to the successes or the affluences attributable to small countries with no resources. Instead, we suggested that the responsible factors had been the operating efficiency through open competition and trade, as shown in Figure 2.
Here we lengthily excerpted AT Kearney (ours emphasis)…

``If there is one big factor that many of the most globalized countries have in common, it’s their size: They’re tiny. Eight of the index’s top 10 countries have land areas smaller than the U.S. state of Indiana; and seven have fewer than 8 million citizens. Canada and the United States are the only large countries that consistently rank in the top 10.

``So, why do small countries rank so high? Because, when you’re a flyweight, globalizing is a matter of necessity. Countries such as Singapore and the Netherlands lack natural resources. Countries like Denmark and Ireland can’t rely on their limited domestic markets the way the United States can. To be globally competitive, these countries have no choice but to open up and attract trade and foreign investment, even if they’re famously aloof Switzerland.

``Indeed, economic integration is where these top-performing, tiny countries flex their muscle. All eight rank in the top 11 on the economic dimension of globalization, which incorporates trade and foreign direct investment. Hong Kong and Singapore, the top two performers in this category, leave other economies in the dust. Additionally, the World Bank placed all the high-ranking, small countries except Jordan in the top 25 out of 175 economies in ease of doing business. Jordan, though, ranks first on the index’s measure of political engagement, due to its participation in treaties and U.N. peacekeeping missions.

``And if you’re living in a small country, reaching out beyond your country’s borders may be the only way to find new opportunities.”

Oops! No central planning “virtuousness”, no philanthropy, but just plain “opening up to trade and attracting foreign investments”….all hallmarks of market economies…

Next, as we earlier mentioned, the perceptive resource person we recently listened to, dealt with how businesses models have been rapidly evolving across the globe due to the widespread adoption of technology changes. Again such outlook has been confirmed by AT Kearney as shown in Figure 3.

Figure 3: AT Kearney: Trafficking Information

Again AT Kearney on technology enabled integration,

``An advanced highway system is often credited for the rise of the Roman Empire; goods, soldiers, and tax revenues could move across great distances at remarkable speed for the age. But if all roads once led to Rome, today’s Internet superhighway leads to the world’s most open countries. More-globalized countries tend to have more international Internet bandwidth, a measure of the size of the “pipe” through which e-mail and Web pages cross borders.”

Unfortunately the Philippines is not included in the chart, but since an estimated 6% of the population is wired where only a small fraction of probably around 5% are into broadband connection or about .5% of the population (Businesswire; Sept. 11, 2006) we should be situated around the lowest spectrum.

The idea is, the more wired or connected a country or its population, the more chances of its being part of the economic integration or collaboration with other countries through trade….

Of course we expect that market critics to raise the issue of “digital divide” again. There always has to be an issue where government’s big hand should play a role or risk obsolescence.

But we believe that digital divide, even if it has a slow take up today in the country, will eventually pickup. AT Kearney believes it is one of the key weaknesses of ASEAN countries. If the issue is about affordability then technological advances will clearly compel prices to substantially fall.

Today, Walmart is said to offer $200 computers, comments Bill Bonner chief editor of the Daily Reckoning, (emphasis ours) ``Now every yahoo with $200 in his jeans can read what we write. This is a big step forward for society, too, say the commentators, because now we will have ‘digital equity,’ meaning everyone can have access to all the digital information, news and opinions they want. Of all the crackpot notions to come along in recent years, the idea of the ‘digital divide’ was among the looniest. If you didn’t have access to the Internet, they said, you would be left behind...doomed to live in poverty and obscurity all your life…”

Patricia Yim, managing director of IBM Singapore in 2005 wrote in YaleGlobal “The Blurring Digital Divide” (highlight mine), ``Put it all together. Modern telecommunication is spreading like wildfire - even to areas with little prior contact with the outside world. Falling hardware costs, grid computing and pay-as-you-go pricing options are reducing, if not eliminating, barriers to IT entry. The open source movement is being embraced by developing nations even more enthusiastically than in the West. And with a growing and increasingly well-trained cadre of indigenous IT professionals, the notion of a permanent structural digital divide is fast succumbing to a far rosier reality.”

Privately led technological breakthroughs have far accelerated more than regulations can keep up with. In the financial markets these were revealed through the credit implosion in the US of several securitized instruments as CDOs, CLOs, SIVs and etc.

Next, changes in demographic trends have been one important economic trend which we keep track of simply because these influence savings, investment and consumption patterns. Hence from such standpoint we define our investments criteria and position accordingly.

AT Kearney shows us how globalization affects this trend in Figure 4…

Figure 4: AT Kearney: Urban Outfitted

Again AT Kearney on Urban Outfitted,

``Cities can be a blessing or a curse. Millions leave their villages each year and head to bustling cities to find a better life. But urban centers can also be home to massive slums or sprawl, and the crime, disease, and poverty that come with it. It is generally true that the more urban a country, the more globalized it tends to be. Top-ranking Singapore is the best example; it is 100 percent urban, and its citizens are well educated and relatively affluent. Meanwhile, a less globalized society like Bangladesh is a quarter urban. In fact, less globalized countries often have faster-growing cities. And that is hardly good news. For example, in low-ranking Nigeria, the urban jungle grows by more than 2.5 million people each year. Dhaka, the capital of Bangladesh, was originally designed for a population of 1 million people; today that number stands at 12 million, and demographers predict that the city will be home to more than 23 million people by 2015. Pressures that great can push any city beyond its breaking point.”

Again the idea is, Urbanization works provided an economy is more “globalized”. And it becomes pernicious if such trend is not met with sufficient trade or investments. Naturally if we add the connectivity component, given today’s evolving platform where people can work REMOTE from urban Centers, these trends should slow, which is why we see More globalized countries with slower urban growth.

AT Kearney likewise gives us a profile of an Emerging “Baltic Tiger” in Estonia, which it describes,

``Milton Friedman would be at home in Estonia. That’s because the small former Soviet republic has put many of the late Nobel Prize-winning economist’s ideas to the test. The result? Estonia, having shaken itself free from its communist-era shackles, may now qualify as the first Baltic Tiger; it debuts this year at number 10 in the index.

``In keeping with Friedman’s free-market philosophy, the country’s government has moved aggressively to open itself up to the outside world. For all practical purposes, Estonia has no corporate income tax, and shareholder dividends are subject to a simple flat tax. Bureaucracy isn’t a problem, either; the government just steps aside to let investors do their thing. The World Bank ranks Estonia 17th among 175 economies in ease of doing business, and sixth in ease of trading across borders. Additionally, the government places no restrictions on foreign ownership of real estate, which has fueled a property investment boom among overseas buyers.

``Although the index ranks Estonia 21st in technological connectivity, the country seems poised to pounce higher. The country, dubbed by some as “E-Stonia,” has launched a large online government initiative and even declared Internet access a fundamental human right. In March, it held the world’s first general election that allowed e-voting over the Web.

``Former Prime Minister Mart Laar, who stepped down in 2002, is widely credited with introducing most of the policies that have helped his country roar ahead of the pack. But among his many awards and accolades, one seems particularly apt: the Cato Institute’s Milton Friedman Prize.”

Aside from debunking the allegations of “Zero sum game” and “uncharitable”, these examples from AT Kearney clearly show how market models can transform an economy for the better. Further, personality based politics or “virtuous politics” would greatly be reduced allowing people to focus on productively enhancing their competitive positions.

Finally, the United States had long been a chief proponent of market economies, where according to the US government, particularly the USINFO.State.gov through Mr. Michael Watts (emphasis ours),

``Yet for many, the fundamental principles and mechanisms of the alternative, a market economy, remain unfamiliar or misunderstood -- despite its demonstrable successes in diverse societies from Western Europe to North America and Asia. In part, this is because the market economy is not an ideology but a set of time-tested practices and institutions about how individuals and societies can live and prosper economically. Market economies are, by their very nature, decentralized, flexible, practical and changeable. The central fact about market economies is that there is no center. Indeed, one of the founding metaphors for the private marketplace is that of the "invisible hand."

``Market economies may be practical, but they also rest upon the fundamental principle of individual freedom: freedom as a consumer to choose among competing products and services; freedom as a producer to start or expand a business and share its risks and rewards; freedom as a worker to choose a job or career, join a labor union, or change employers.

``It is this assertion of freedom, of risk and opportunity, that joins together modern market economies and political democracy.

``Market economies are not without their inequities and abuses -- many of them serious -- but it is also undeniable that modern private enterprise and entrepreneurial spirit, coupled with political democracy, offers the best prospect for preserving freedom and providing the widest avenues for economic growth and prosperity for all.

Need we say more?