What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis

``The most popular method of deprecating capitalism is to make it responsible for every condition which is considered unsatisfactory. Tuberculosis and, until a few years ago, syphilis, were called diseases of capitalism. The destitution of scores of millions in countries like India, which did not adopt capitalism, is blamed on capitalism. It is a sad fact that people become debilitated in old age and finally die. But this happens not only to salesmen but also to employers, and it was no less tragic in the precapitalistic ages than it is under capitalism. Prostitution, dipsomania, and drug addiction are all called capitalist vices. Ludwig von Mises Economic Teaching at the Universities

Lessons from Nassim Taleb

There are two important things I’ve learned from my favorite iconoclast Nassim Taleb, the chief proponent of the Black Swan Theory.

One is that he cautions the public to indulge in the study of markets or economies centered upon highly flawed but popular econometric models which are nothing but algorithms designed to operate on sterilized environments similar to classroom or laboratory conditions.

Since these computer models unrealistically operate on the assumption that every factor can be anticipated, examined and evaluated, risks are therefore assumed to be under control. Yet, the complex nature of our world can lead to manifold variables which can’t be read, evaluated or anticipated. The impact of which is known as randomness or the BLACK SWAN, a low probability but HIGH impact event, and is the nemesis of these ‘quant’ models. For instance the humongous losses in today’s financial crisis have been be partially blamed on the failure of quant models to anticipate risks from statistical fat tails.

Second, the other lesson taught by our unorthodox savant is to avoid getting trapped with cognitive biases such as projecting past connections and outcomes into the future.

The Sanctity of Delusion

Today we are told that the world is going to the sewer.

That is because the US, which has functioned as the only major ‘aggregate demand’ of the world, can’t live up to its role as it is undergoing a deep recession. In corollary, these experts further assert that the world won’t be able won’t replace the US as the provider of demand because of its sheer size. In other words, past performance guarantees tomorrow’s outcome.

Based on their economic premise, where supply exists only as a function of demand, then with today’s imploding private sector credit bubble, which has deeply dented the demand equation, must be replaced and absorbed by the government. Therefore, the government’s role MUST be to create artificial demand by printing up as much money in order to sustain the bursting bubble structure.

Tersely said, from the private sector, the credit bubble now is being reconfigured to one known as a government credit bubble. And this seems to be what we are seeing all around the world. From nationalization, “bad bank” or other means of government interventions, the idea is to transfer the leverage and the attendant losses to the government.

The same logic says that if Bernard Madoff was a fraud, and had operated on an unsustainable platform which didn’t last, the government’s insistence of operating on the same an unsustainable platform, but charged to the taxpayers and meant for the “good of the citizenry”, MUST SUCCEED. The difference was that Madoff was a felon, while governments sustaining bubbles for chimerical prosperity, are deemed as legitimate and for a good cause.

Unfortunately for Madoff, he was an individual and not privileged to conduct the same scheme which is equally being thrown to the public by governments. But the underlying principle of both Madoff and the governments is the same: to get something from nothing!

In other words, you resolve the problem of drug addiction by providing more drugs. If you are Madoff you get charged with drug pushing. But if you are the government, you receive plaudits for a fighting for a good cause.

In a reality check, unsustainable trends which can’t last, won’t! NO amount of the printing press nostrums will make illusions a reality.

Reality has finally landed in Zimbabwe. The Mugabe-Gono government finally capitulated to the marketplace realities by allowing the depressed African economy to trade in foreign currencies which in effect jettisoned the local currency, the Zimbabwe dollar. This also means the Mugabe-Gono government will fall soon. And in the same vein, all nationalizations or government guarantees are only as good as the real capital standing behind these.

Does the words of Karl Marx in Das Kapita in 1867…``Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism"…ring a bell?

Fairy Tales Cures and Self Righteousness

Yet popular opinion believes in fairytale cures.

To call for market forces to rectify the situation, one risks being labeled as insane, inhuman or bloodless.

Nevertheless just look at level of desperation policymakers are into so as to consider ridiculous ideas to restore an unsustainable structure of economic growth:

-In déjà vu to the hog reduction program of the Great Depression of the 1930s, US policy makers are considering to boosts car sales via a program known as "cash for clunkers". (CNNmoney) Yes, the US government plans to buy and junk old cars so as to motivate its populace to buy new ones. If the policy gets enacted, this is going to be a waste of productive resources.

-Moreover, they are considering “to renegotiate mortgages it owns that might otherwise enter foreclosure” (Washington Post) or allow “bankruptcy judges to modify the mortgages of troubled homeowners” (Washington Post) all at the expense of the property rights of American people.

To add, not content with plans to impose tons of regulations on the national level, the statists have been contemplating on to expand impositions abroad. Signs of protectionism, which had greatly contributed to the Great Depression of the 1929, are surfacing in the political arena. At the confirmation hearing, Treasury Secretary Tim Geither unleashed what he “believes that China is manipulating its currency” (Wall Street Journal). In addition, the stimulus bill which was recently passed by Congress contained a “Buy America” rider (Washington Post).

All these actions seem to agitate for a mutually devastating global trade war.

And why would authorities engage in such potentially calamitous actions? We understand 3 possible things: economic ignorance, messianic complexity or plain political rhetoric.

Realities say that the US doesn’t produce enough, that’s why it incurs trade deficit. And a trade war would mean massive catastrophic shortages. Think oil. The US imports 60% of its oil requirements (CNNmoney). If world trade shuts, the economic implication would be a collapse in the US economy with a geopolitical implication of a possible World War 3.

And also considering that the US is the largest debtor nation in the world, it wouldn’t be far where a trade war would also extrapolate to an equally internecine debt default. And what’s to stop these interventionists fools from inciting a war economy or the misguided belief that only war, after everything else fails, can stimulate the economy?

Now we turn the tables and wonder who is insane, inhuman or bloodless? Does provoking a trade war which has dire consequences similar or worst in scale than the Great Depression a humane and charitable option? How altruistic is it, if the world goes into war out of the desire to stimulate the economy? How does hyperinflation as in the case of Zimbabwe lead to progress? How charitable can it be to live a world of self delusion?

Does the 2008 Global Trade and Production Collapse Signify Posttraumatic Stress Disorder?

If a bubble structure can be characterized by unrestrained credit creation, speculative excess seen in asset inflation and unparalleled concentration of financial wealth and power, then in as much as the massive wage or income disparities or “Shameful bonuses” in Wall Street relative to the average Americans had been a function of a bubble structure, the world’s production-supply chain structure have also been partly been built around the same bubble environment.

And today’s bursting bubble which has prompted for “demand destruction” has been met by more “supply destruction”.

Yet what seems to be remarkable has been the sharp collapse in global production and trade.

Figure 3: IMF World Economic Outlook: Collapse of Global Industrial Production and Merchandise Trade

The chart IMF’s World Economic Outlook demonstrates the seeming peculiarity of the last quarter’s world trade and production activities.

If you are to compare with the dot.com days or the previous bubble bust and its ensuing recession, you’d notice that the same trends went into a steady decline over a period of time (years). But this hasn’t been the case last year. The outright collapse in just ONE MONTH by both economic variables suggests that world suddenly stopped doing anything and merely watched in shock and awe!

And why would the world do that? The obvious answer is the shock emanating from the near meltdown of the US banking system subsequent to the Lehman debacle. This has been prompted for by the institutional bank run in the US banking system as discussed in last October’s Has The Global Banking Stress Been a Manifestation of Declining Confidence In The Paper Money System?

So contrary to mainstream views which ANCHORS upon this collapse as their basis for prediction, we suggest instead that this could be a function of a Posttraumatic stress disorder (PTSD) where according to Wikipedia.org, ``is an anxiety disorder that can develop after exposure to one or more terrifying events that threatened or caused grave physical harm.”

As an example, the 9/11 terrorist attack on the World Trade Center was graphically captured in living color by media. The repeated airing of the deplorable terrorist event heightened the fear of air travel which thereby caused a shift or substitution in some of the public’s traveling patterns.

And the shift emanating from the fear, resulted to more casualties from the higher risk land transportation.

According to a study The Impact of 9/11 on Driving Fatalities: The Other Lives Lost to Terrorism by Garrick Blalock, Vrinda Kadiyali, Daniel H. Simon, ``We find that driving fatalities increased significantly following the terrorist attacks of September 11, 2001, an event which prompted many travelers to substitute less-safe surface transportation for safer air transportation. After controlling for time trends, weather, road conditions, and other factors, we attribute an increase of 242 driving fatalities per month to additional road travel undertaken in response to 9/11. In total, our results suggest that about 1,200 driving deaths are attributable to the effect of 9/11. We also provide evidence that is consistent with the 9/11 effect on driving fatalities weakening over time as drivers return to flying. Our results show that the public response to terrorist threats can create unintended consequences that rival the attacks themselves in severity.”

Why is this so? According to Trevor Butterworth, ``Because fear strengthens memory, catastrophes such as earthquakes, plane crashes, and terrorist incidents completely capture our attention. As a result, we overestimate the odds of dreadful but infrequent events and underestimate how risky ordinary events are. The drama and excitement of improbable events make them appear to be more common.”

So given Mr. Butterworth’s tread, could we be “overestimating the odds of dreadful but infrequent events and underestimating how risky ordinary events are”?

Evidences of PTSD

Some evidences show we are.

One, global barter trade has been picking up. [see Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?]

According to the Financial Times, ``Officials estimated that they ranged from $5m for smaller contracts to more than $500m for the biggest.” It could be more. There have been accounts of barter since this episode has unraveled.

And the reported cause? ``Failure to secure trade financing as bank lending has dried up.”

The fact that governments have traded OUTSIDE the financial system, means demand and supply seems intact for basic necessities for them to conduct trade. The fundamental problem lies within the traditional means of facilitating payment and settlement via the banking system.

Two possible reasons why governments have been undertaking barter, which is a primitive method of trade:

One, the banking system remains dysfunctional despite the heavy interventions by global governments and

Two, there is a growing distrust for the present medium of exchange. The second finds a voice in Russian Prime Minister Vladimir Putin’s speech in Davos, ``Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.”

The next evidence could be seen via the surging Baltic Dry Index see figure 4.

Figure 4: stockcharts.com: Rising Baltic Index=Rising Oil and Copper?

The Baltic Dry index according to the wikipedia.org is ``a number issued daily by the London-based Baltic Exchange. The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

Plainly put, the Baltic Index is the cost of freight to move raw materials or basic commodities. It could be seen as a leading indicator.

So far the Baltic Index has risen by 60%, whereas oil and copper appears to be consolidating or “bottoming” even as the US dollar index has been going up. To recall, during the October-November collapse, the US dollar has inversely accompanied the rapid declines of the Baltic index as with the oil and copper.

The seeming divergence could be added signs of the diminishing influences of debt deflation.

Furthermore, even in the US, there are signs that production and inventory or supply destruction have been catching up with its counterpart demand destruction see figure 5.

Figure 5: Danske Bank: Is the US Manufacturing Sector Beginning to Recover?

These observations from the Danske Team (bold emphasis mine),

``First, prior to the recession the US manufacturing industry ran very lean inventories. Second, the liquidity squeeze from the credit crisis has led to an unusually fast alignment of production to demand fundamentals.

``Consequently, the pace of production is now undershooting the slowdown in demand. Hence, it will merely take stabilisation in demand growth to spark an industrial recovery.

The Danske team suggests that the first signs of recovery will be manifested over the ISM index which may stabilize and recover over the coming 3-6 months. In addition, a recovery in the ISM index will most likely add pressure to long US bond yields and signal stabilization in corporate earnings.

While I don’t necessarily share the optimism of the Danske team, the point is that the recent collapse have meaningfully adjusted both the demand and supply equation possibly enough to generate some market based (and not government instituted) revival.

So from growing world barter activities, buttressed by the rising Baltic Dry index, and a potential run down of inventories and similar downside adjustments in the supply side production could mean a semblance of restoration of global trade.

And if indeed the Danske Team is right about their forecast about the manufacturing recovery in the US, then this could signal a potential trough or nearing close of the US recession.

But then again, as a reminder, the cardinal sins in policymaking that could lead to prolonged bear markets: protectionism (nationalism, high tariffs, capital controls), regulatory overkill (high cost from added bureaucracy), monetary policy mistakes (bubble forming policies as negative real rates), excess taxation or war (political instability). Except for the last threat, the 4 seems likely a clear and present danger.

Will An Easing PTSD Lead To A Resurgent Asia?

Nonetheless, if the US supply side has adjusted to counterbalance the sharp fall in demand, then it is likely that the spate of sharp declines in the economic activities in most of Asia can be construed as the same degree of supply/production side adjustments.

Figure 6: DBS Bank: Asia’s Industrial Production Recovered earlier during the .com recession

Like in 2001, Asia’s heavy exposure to the technology sector hit exporters. Today, the sharp decline in US consumer spending has equally affected Asia’s exports as much as it also affected production. However, the sharp drop late last year could likely be explained by the Posttraumatic stress disorder (PTSD) emanating from the distress in the banking system.

But unlike in 2001, which saw Asia as floundering from the nasty side effects of the Asian Crisis, where there essentially had been no domestic demand, this isn’t the case today. Asia has simply grown bigger and more dynamic and with ample shield from its high savings enough to potentially generate its own demand.

The recent DBS bank outlook says it best, ``Asia now generates almost as much new demand every year as the US- and it is that fresh demand that’s the very definition of global growth. The US is still a key driver and will remain so for a long time. But it is not the driver it used to be.” (bold emphasis mine)

And the Economist seems to agree, ``The question is, might domestic demand now take up some of the slack? There are reasons to think so. Falling commodity prices are boosting consumers’ purchasing power, just as they squeezed it last year. More important is the impact of monetary and fiscal expansion…(bold emphasis mine)

And the Economist sings to be singing a tune similar to ours, ``Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP.” (bold emphasis mine)

In our Will “Divergences” Be A Theme for 2009?, we brought up the Austrian economics explanation that ``market rate of interest means different things to different segments of the structure of production.”

In essence we believe that convergent actions by global central banks will ultimately lead to divergent responses based on the capital and production structure of every economy.

Where the same amount of rain is applied to a desert land, forest land or grass land, the output will obviously be different. And to complement the DBS and Economist outlook, we recently said ``this crisis should serve as Asia’s window of opportunity to amass economic, financial and geopolitical clout amidst its staggering competitors. But this will probably come gradually and develop overtime and possibly be manifested initially in the activities of the marketplace.”

So to refrain from overestimating the odds of dreadful but infrequent events and underestimate how risky ordinary events are, we revert to the study of Garrick Blalock, Vrinda Kadiyali, Daniel H. Simon who concludes, ``Although we are unable to identify precisely reasons for either the 9/11 effect or its weakening, the existence of the effect is consistent with theoretical models in behavioral economics and psychology of inaccurate assessment of risks by consumers and exaggerated adjustments to risk assessments. The fortunate weakening of the 9/11 effect may be attributable to consumer learning over time in response to environmental changes. For example, the perceived risk of flying may have declined with the absence of any further terrorist incidents since 9/11, or travelers may have become accustomed to the increased inconvenience of flying.”

No we don’t just read past data and project them to the future like most of the experts. Instead, we try to understand that human action, to quote Ludwig von Mises, is a purposeful behavior!

10 Reasons Why Pump Priming Won’t Work As Planned

``The Marxians, Keynesians, Veblenians, and other "progressives" know very well that their doctrines cannot stand any critical analysis. They are fully aware of the fact that one representative of sound economics in their department would nullify all their teachings. This is why they are so anxious to bar every "orthodox" from access to the strongholds of their "un-orthodoxy."- Ludwig von Mises, Economic Teaching at the Universities

Here are 10 reasons why Keynesian stimulus won’t help pull the US out of its economic miseries.

1. Money will have to be paid by someone.

From Wall Street Journal Street, ``Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion.”

There is NO free lunch. Stimulus will have to be paid by higher taxes, increased borrowing or inflation.

2. Incoherent plan addled by too many objectives.

From the New York Times, ``Some caution that President Obama’s proposals try to achieve too many objectives — for example, broader health care coverage and energy efficiency — at the expense of focusing tax dollars on the core issue of job creation. By this argument, more should be spent on things like infrastructure repair, either directly or by channeling money to the states for projects now delayed for lack of adequate tax revenue.

``Others argue that the best bang for the buck would come from a stimulus package devoted mainly to tax cuts rather than public investment. The breakdown in the $819 billion bill that the House approved on Wednesday and the Senate will take up next week is two-thirds spending, one-third tax cuts.

From the Washington Post, ``All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy?”

Acts of desperation to come up with messianic one off solutions will only lead to more extravagance, leakages and ineffective policies all at the expense of the taxpayers.

3. Ambiguous “targeting” and chronic “deficits”.

From Henry Hazlitt in Man vs. The Welfare State (all bold highlights mine),

``The reason the Keynesian medicine can work — under special conditions and for short periods — is that by increasing monetary demand and prices it may increase both sales and profit margins, and so restore production and employment. Yet this could be done even more effectively — and without the poisonous side effects and aftereffects — by restoring freedom of competition and individual coordination of prices and wages.

``The Keynesians think in terms of aggregates. Their remedy is to increase the total money supply, and thereby to bring the price "level" sufficiently above the wage "level" to restore or maintain profit margins and so keep the wheels of industry spinning at full speed.

``This remedy is defective in two respects. It tacitly assumes that there is a uniform discrepancy between prices and wages and a uniform percentage of "idle capacity" throughout industry. Neither is true. If "industry" is estimated to be operating at 80% of capacity, we must remember that this figure is at best an average. It may cover a situation in which, say, industry A is operating at only 60%, industry B at 63%, and so on up to industry M at 97% and industry N at 100%. If we try to expand the money supply enough to return industries A and B to full capacity, we may completely "overheat" industries M and N and produce serious productive distortions and bottlenecks.

``What is more, an increase in the stock of money, contrary to Keynesian theory, will begin to force an irregular increase in prices long before "full capacity" has been reached and the "slack" taken up — if only for the reason that the "slack" is never uniform throughout industry. In a very short time, also, with the increase in prices and the increase in the demand for labor, wages will start climbing too. Then, if the previous trouble was that most wages were already too high in relation to most prices, there will again be discoordination between wages and prices; and the Keynesian prescription will call for still further doses of government spending, deficits, and new money.

``So the Keynesian medicine must lead to chronic deficits and chronic inflating of the money supply. This is precisely what we have had. It is no accident that we have just run eight annual deficits in succession, and that we have had 32 deficits in the last 38 years. It is no accident that the US money supply (currency plus demand deposits) has been increased more than fivefold — from $36 billion at the end of 1939 to $199 billion in September, 1969. And so it is no accident that, in spite of a tremendous increase in industrial production in this thirty-year period, consumer prices have increased (to June, 1969) by 164%.

Good or bad economics can always be distinguished from the perspective of time horizon, particularly the tradeoff between short versus long term. Where the policy priority seems focused on short term relief and eventually countermanded by long term pain, such represents as bad economics.

``In the long run, we are all dead” is a tenet espoused by economists with no children who will pay for future bills.

4. Mistaken assumptions lead to flawed economic models.

From the Heritage Foundation, ``Policymakers are basing the “stimulus” bill on economic models that wrongly assume every $1 of government spending increases the economy by approximately $1.60. Is it really that simple? By that logic, debt-ridden, big-government countries like Italy, France and Germany should be wealthier than America. And why stop at $800 billion? Such logic suggests unlimited prosperity could be guaranteed by the government borrowing and spending $800 trillion. Should America be basing such costly decisions on these types of economic models?

From Harvard Professor Robert Barro at the Wall Street Journal, ``What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

``John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one.

Selectivity bias- experts blinded with economic ideology selectively use data which supports their argument even if the assumptions are defective.

5. Inefficient or wasteful government spending because it is NOT demanded for by the markets.

From Professor Gary Becker, ``Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there. However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future. Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located in growing areas that might have relatively little unemployment, but do have great demand for more roads, schools, and other types of long-term infrastructure.”

Not all infrastructure spending works. Ask Japan.

6. Theory and reality don’t match.

In theory, deficit spending should be switched on during bad times and switched off during good times.

But in reality, deficit spending has been a permanent affair.

Figure 7: Heritage: Real annual federal spending has more than tripled since 1965 and has nearly doubled since 1980.

From the Heritage Foundry, ``According to the suddenly back in style Keynesian theory, government can stimulate economic growth by temporarily increasing government spending. Problem is, there was nothing temporary about increases in government spending under Nixon and there is nothing temporary about the trillion dollars in new spending currently being debated in Congress.”

7. Stimulus meant to impose political IDEOLOGY than sound economics.

From Wall Street Journal, ``The spending portion of the stimulus, in short, isn't really about the economy. It's about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The "stimulus" is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.

Some have used the “stimulus” as a vehicle to impose on the society their personal ideological convictions. Ultimately it is the people that pay for flawed ideologies. Think Marx, Lenin, Stalin, Mao, Pol Pot, Hitler, etc…

8. Time Lag for Government Spending.

Where spending is supposedly needed NOW, public works spending will come later.

Again, from Professor Gary Becker, ``Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy. Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time.

The net effect is that the stimulus will either be late or unneeded.

9. Inefficiencies due to political dispensation.

From Mr. George Melloan at the Wall Street Journal, ``The central defect of government bailouts and stimulus packages is that the money is allocated through a political process. It goes to recipients who have the most political influence. Private entrepreneurs and even big business, by contrast, employ investment to earn a profit. The record shows that the latter yields greater economic efficiency, and hence creates real jobs.”

Political doleouts are almost always based on political affiliations and not on economic needs. The net effects are, wastage, corruption and inefficiencies.

Fellow Filipinos, learn that it isn’t personality based leadership that drives corruption but big bureaucracy, escalating government spending and the subsequent political process driven distribution of government endowments and the dependency and rent seeking culture.

10. Chronic Deficits Equals Inflation.

From John Hussman, ``It's tempting to think that somehow printing money means an increase in spending power, while issuing bonds means that the government is taking something in return for what it spends, but it's important to focus on the general equilibrium. In both cases, regardless of whether government finances its spending by printing money or issuing bonds, the end result is that the government has appropriated some amount of goods and services, and has issued a piece of paper – a government liability – in return, which has to be held by somebody. Moreover, both of those pieces of paper – currency and Treasury securities – compete in the portfolios of individuals as stores of value and means of payment. The values of currency and government securities are not set independently of each other, but in tight competition. That is particularly true today, when bank balances are regularly swept into interest earning vehicles as often as every night. To the extent that real goods and services are being appropriated by government in return for an increasing supply of paper receipts, whatever the form, aggressive government spending results in a relative scarcity of goods and services outside of government control, and an increasing supply of government liabilities. The marginal utility of goods and services tends to rise, the marginal utility of government liabilities of all types tends to fall, and you get inflation.”

The end result of stimulus programs: a greatly debased currency (lower standard of living).

How can these be of any good?

Dr. Gideon Gono Yields! Zimbabwe Dump Domestic Currency

In the realization of the futility of maintaining transactions based on unlimited issuance of the domestic currency from the printing presses of the Mugabe-Gono regime, the Zimbabwe government has now relented to use alternative currencies as medium of exchange for its economy…

Click on this BBC video link.

According to the BBC (bold highlight mine),

``Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation.

``The announcement was made by acting Finance Minister Patrick Chinamasa…

``BBC southern Africa correspondent Peter Biles says the Zimbabwean dollar has become a laughing stock. A Z$100 trillion note was recently introduced…

``Before the announcement, shops in Zimbabwe were increasingly demanding payment in US dollars - a reality acknowledged by Mr Chinamasa.

``"In the hyper-inflationary environment characterising the economy, our people are now using multiple currencies alongside the Zimbabwean dollar. These include the [South African] rand, US dollar, Botswana pula, euro and British pound among others."

``A Harare resident said even street vendors were refusing to accept Zimbabwean notes.

``Last year, the Central Bank was forced to slash 10 zeros from the local unit in an effort to make the currency more manageable.

In effect, Zimbabwe had been forced by the marketplace (and the economy) to junk its currency regime.

This demonstrates how markets are more powerful than governments. While the latter can manipulate the marketplace up to a certain extent, ultimately unsustainable trends will compel for a market based response or adjustment. Thus Zimbabwe's hyperinflation will be followed by deflation (different from debt deflation).

(HT: Charleston Voice)

Does Mexico’s Falling Remittance Trend Bode Ill For The Philippines?

Mexico’s remittances suffered its first decline since remittance trends have been recorded. From Bespoke Invest, ``According to Mexico's central bank, remittances during 2008 to Mexico by Mexican workers in the US had their first ever annual decrease since the central bank began tracking these statistics in 1995.”

Courtesy of Bespoke

Why? Possibly because a big chunk of the Mexico’s migrant workers have been exposed to heavily affected industries. According to the Wall Street Journal, ``Mexico's Central Bank in October revealed just 5% of migrants today work on U.S. farms, while 38% are in construction and manufacturing, and another 57% in services.” (bold highlight mine)

Many of the economies in the emerging markets depend on remittances for growth, according anew to the Wall Street Journal, ``In the past two decades, workers in poor countries have grown increasingly dependent on job opportunities in countries experiencing sustained growth -- the U.S. for Latin American and Caribbean migrants; Western Europe for Africans and Eastern Europeans; the Gulf Emirates for Pakistanis and Filipinos…Remittances are the single largest source of national income in many countries. The Inter-American Development Bank reports high levels of dependence in Haiti (26%), Guyana (24%), Jamaica (18.5%) and El Salvador (18%).”

Nonetheless, rate of change on Mexico’s remittances has been on decline for a string of months, again from Bespoke, ``thirteen months where remittances have been negative, nine of them occurred during 2008.”

As for the Philippines, remittance trends continue to manifest robust growth: 14.1% during fourth quarter and 15% in first 11 months (Bloomberg) even as the government projects growth figures to moderate to 6-9% for 2009. We aren't confident with the optimistic forecasts.

Courtesy of DBS

Albeit the rate of growth underpinning the local remittance trends, despite the near nominal record levels, seems to be already tapering off.

While it is safe to lean on the camp that says remittance trends should decline similar to that of Mexico, especially based on the assumption that global economic growth seems likely to materially slow, or at worst, deteriorate sharply, one must be reminded that the composition of labor exports is distinct among emerging market economies, aside from the share of remittance to the national income. This implies that the sensitivity of remittances to the global slowdown could vary among EM economies.

Next, we aren’t fully convinced with the mainstream view that last quarter’s world merchandise trade crash portends of a worsening of the global trade trends. While we agree that world trade will definitely slow, the Lehman inspired October crash could account for as a banking induced credit trade finance “shock”, and may somewhat recover gradually than an outright slump. The evidence of economies resorting to go barter [see Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?] as alternative means of trade suggest of these.

Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?

One possible sign of the accumulating distress from today’s monetary disorder is that trades are being conducted in the form of Barter, as previously discussed in Signs of Transitioning Financial Order? The Emergence of Barter and Bilateral Based Currency Based Trading?

This new development from the Financial Times (bold emphasis mine),

``In a striking example of how the global financial crisis and high food prices have strained the finances of poor and middle-income nations, countries including Russia, Malaysia, Vietnam and Morocco say they have signed or are discussing inter-government and barter deals to import commodities from rice to vegetable oil.

``The revival of these trade practices, used rarely in the last 20 years and usually by nations subject to international embargoes and the old communist bloc, is a result of the countries’ failure to secure trade financing as bank lending has dried up.

``The countries have not disclosed the value of any deals, and some have refused even to confirm their existence. Officials estimated that they ranged from $5m for smaller contracts to more than $500m for the biggest.”

The article mentions barter as ‘rarely’ used trade practice. Barter is actually a primitive form of direct exchange which culminated with the emergence of money.

According to Murray Rothbard in “Money: Its Importance, Origins, and Operations” from the Mystery of Banking,`` Before coinage, there was barter. Goods were produced by those who were good at it, and their surpluses were exchanged for the products of others. Every product had its barter price in terms of all other products, and every person gained by exchanging something he needed less for a product he needed more. The voluntary market economy became a latticework of mutually beneficial exchanges.”

But problems accompanied barter as a means of exchange, namely:

1. Double Coincidence of Wants-difficulty of matching specific wants

2. Indivisibilities-the problem of precise adjustments and exchange of supplies

3. Business calculation-determining profit or losses

Thus adds Mr. Rothbard, ``Barter, therefore, could not possibly manage an advanced or modern industrial economy. Barter could not succeed beyond the needs of a primitive village.”

``But man is ingenious. He managed to find a way to overcome these obstacles and transcend the limiting system of barter. Trying to overcome the limitations of barter, he arrived, step by step, at one of man's most ingenious, important and productive inventions: money.

So if barter is a primitive way of conducting trade without money, why do nations today embark on such activities? The article says “failure to secure trade financing as bank lending has dried up”. This means the gridlock in the banking sector has impaired the facility of exchange, particularly in the payments and settlements functions.

Thus, temporarily nations have resorted to direct exchange. One must be reminded that most of the problems of credit paralysis have been centered on the US banking industry, which essentially operates as the main conduit for the US dollar standard. This implies that prolonged disutility of credit from the present system could lead nations to adopt an alternative “medium of exchange”.

So aside from the prospects of massive inflation, a persistent dysfunctional banking system could risk jeopardizing the role of the US dollar as international reserve currency.

Do Central Bankers Know What They're Doing?

Great video portrayal of the Fed's balance sheet expansion from iTulip.com's 'Fed Fail'...

Zimbabwe’s Dr Gideon Gono: To Ensure My People Survive, I Had To Find Myself Printing Money.

To all of you who are Dr Gideon Gono fans out there, here are some of his notable commentaries based on a Newsweek interview:

Dr. Gono: I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the U.S. to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.

My comment: Political survival of the Mugabe regime drives Dr. Gono’s policies. Moreover, as Dr. Gono implies, you don’t need the borrowing and lending gobbledygook to debase a currency. 

And this is a lesson that applies even to developed economies faced with the present crisis. While they speak of doing these for the 'good of the people' or restore economic growth, the crux of the matter is that they are wantonly debasing their currencies to reduce real debt levels at the expense of the general public. Unfortunately mainstream economists, most especially the popular genre, don't seem to get it. Policies based on political survival don't match with the interests of the public. 

Dr. Gono: The stockbrokers were creating a money supply that wasn't there. I printed Z$1.5 quadrillion, but the exchange was operating with Z$100 sextillion. So I said, "Who is doing my job?" Unless there is more discipline and honor, the exchange will stay closed. I can't be bothered. I don't know when it'll open. It's a free market, a business which must be allowed to succeed or fail.

My comment: Dr. Gono hates competition and that’s why Zimbabwe stock exchange was closed. He hates it when people shun their currency to look for a substitute 'store of value'. 

Another probable reason could be due to the industry's desire to conduct transactions in foreign currency which obviously will compete and undermine his authority. Where Dr. Gono's power to wield control of his constituents emanates through its currency, a society's shift to an alternative medium of exchange effectively attenuates the vitality of the tyranical Mugabe-Gono regime.

Dr. Gono: It's a mystery to many how I have survived. I am modestly credited with the survival strategy of my country. The issue is if you want to break Zimbabwe and want it to fall, just deal with one man. You deal with Gideon Gono.

My comment: Another example of Fatal Conceit.

Dr. Gono: It's impossible to be directing the course of an entire economy and divorce yourself from politics. Politics are important because the turnaround of the economy hinges on political stability, but I can't tell when that will happen.

My comment: This is an example of an oxymoronic or “seemingly self-contradictory effect” statement. Political stability can't be attained because he and Mr. Mugabe are the cause of the miseries of Zimbabwe.

Video Ron Paul: Liquidate Debt and Get Rid of Malinvestments

Some notable excerpts from the media inquest of Congressman Ron Paul:

When government spend money they spend it on non-productive manner and every penny the government spends they have to take it out of a productive source of money, money has to come from somewhere.

The house is on fire and you think you are putting water on it and I think we are putting kerosene on it…yes we should put more money into the car industry but it should come from the private sources. It shouldn’t come from government because governments will divvy up the money politically...If there is anything of value it will be bought up…you have to allow real capital to flow in.

Fault in the thinking that we would need so much government

We should have more [regulations] on the Federal Reserves so that we know what they are doing as they are exempt from regulations

We gave treasury $325 billion dollars and we don’t even know where they spent it

If you understand leveraging up equities and debt you have to look at fractional reserve banking that’s where you pyramid debt. So they’re doing exactly what the federal reserve does, as they create money out of thin air and they pyramid debt. That’s where the bubble comes from. That’s why you have to look at monetary policy, you’re looking at the symptoms rather than the cause.

As long as you do it through debt financing it is impossible, ideally roads and bridges should be taken over by our states, it wasn’t designed by the constitution that the Federal government would take care of every bridge and every road. But that isn’t the worst type of spending and I think in the interim we certainly could cut the spending overseas. But we’re gonna bring ourselves to our knees we’re gonna have a dollar crisis, we’re doing exactly what Osama Bin Laden wanted to do what he did to the Soviets, he is bringing about financial chaos to this country, and we got to realize that excessive of spending is the problem it’s not that we need more government spending.

The reality is you have to liquidate debt and get rid of malinvestments, if you don’t do that you can’t do it. But what you are doing now is you are working on the destruction of the dollar, there is a pretense that you are going to improve things but you’re really gonna destroy the dollar and the financial crisis we have today is going to be a dollar crisis.

So you can’t blame the people who are trying to correct the problems on the unemployment you got to blame the people who created the bubble, the people who were delighted with all the billions of dollars they were making in the last decade...

Technology: From Imagination to Reality (and Business Opportunities too!)

New Scientist suggests of “Ten sci-fi devices that could soon be in your hands ”(pictures from New Scientist)

1 Super-vision…

The Super-vision technology will be introduced by ``the Prism 200 which can detect people through a brick wall by firing off pulses of ultrawide-band radar and listening for returning echoes.”

2 Disappearing act…

Harry Potter’s ‘invisible cloak’ turns real based on the technology of steering electromagnetic waves by virtue of metamaterials!

3 Hands-free healing…

A band aid kit in the future will possibly include high-frequency sound waves based portable scanner that would not only spot internal injuries (e.g. torn arteries), “but also heal them in a flash.”

4 Spider vs gecko…

Spiderman technology or hair based nanotubes that may allow vertical “stick to the wall” movements!

5 You power…

Gadgets like pacemakers that can be implanted and powered by electricity generators from our heart!

6 Jet packs…

James Bond move over, personal rocket belt jets are coming!

7 My other car is a spaceship…

Space travel coming to reality?!

8. Breathe underwater

Swimming with artificial gills ala Man from Atlantis…

9 You speak, it translates

Forget language barriers. The evolving revolutionary technology in speech recognition and translation software is coming to close that gap!

10 Smell-o-vision

To make watching TV attain a vicarious experience, smell-o-vision will give off scents/smells that fit the scenes.

Our observations:

Technology, like any businesses undergo transformational cycles as they get accepted into our lifestyles (see above chart).

Such advances may dramatically progress if they are allowed to develop by means of competition and less regulation.

And dramatic improvements of technology should improve our lifestyles or business process flows the way the cellphones and the web has done (lower communication and transaction costs, ease of flow of communications or data, and etc.)

Moreover, technological progression also translates to huge potential investment opportunities, as the transformational cycle allows for greater diffusion of its application. In Austrian economics lingo: lengthening of the production structure.

Read the entire article and its gallery from New Scientist