Did You Know? Media Landscape Is Changing Rapidly

The Economist on the fantastic rate of changes in media convergence...

``The surge of new technologies and social media innovations in today's environment is significantly altering the future media landscape for marketers. Consumer behaviour is changing and the way marketers reach their audience must also change. Marketers are searching for new ways to not only reach their customers, but to understand them, to peer inside their minds. As the level of consumer understanding increases, so can the knowledge of how best to reach them. However the plethora of tools at a marketers disposal is not easy to navigate and real learning comes from a real understanding of the future of media convergence.

``Media Convergence forum gathers a unique speaking faculty of thought leaders, marketing psychologists, technology experts, futurists, media and marketing professionals to look into the future to consider the ideas, technologies and tactics that tomorrow's best organisations will adopt.'

Since the embed video doesn't want to appear on the blog, pls. watch the video by clicking on the link

Chicken Tax: Example of Distortive Effects of Taxes and Regulations

This is a superb example of the distortive effects of taxation and regulations on the marketplace.

Fundamentally, regulations and taxes affect people's behavior. And market participants usually circumvent or go around regulations to resume their business, even in odd or perverse ways.

This From Wall Street Journal's To Outfox the Chicken Tax, Ford Strips Its Own Vans

(Bold highlights mine)

``BALTIMORE -- Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

``Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

``The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.

``Why all the fuss and feathers? Blame the "chicken tax."

``The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

``The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks.

``The company's wiggle room comes from the process of defining a delivery van. Customs officials check a bunch of features to determine whether a vehicle's primary purpose might be to move people instead. Since cargo doesn't need seats with seat belts or to look out the window, those items are on the list. So Ford ships all its Transit Connects with both, calls them "wagons" instead of "commercial vans." Installing and removing unneeded seats and windows costs the company hundreds of dollars per van, but the import tax falls dramatically, to 2.5 percent, saving thousands."

Read the rest here

(Hat tip: Mark Perry)

Global Stock Market: Investors Recover $18.31Trillion

Fascinating charts from Bespoke. It shows of how global stock markets have "V"-igorously bounced.


This from Bespoke, ``At its peak in 2007, total world market cap was $62.57 trillion. By the lows this March, world market cap had dropped to $25.6 trillion! That's a loss of $36.97 trillion in stocks globally. Since the March lows, however, world market cap has risen $18.31 trillion back up to $43.9 trillion.

Again from Bespoke, ``In the US, market cap has risen $4.88 trillion from its low of $8.09 trillion in March. The peak in total US stock market value was $19.14 trillion in 2007, and the current value of all US stocks is $12.97 trillion. The US accounts for 29.5% of total stock market value in the world."

Additional comments:

1) It has been a rising tide lift all boats phenomenon which clearly has been a manifestation of liquidity driven markets.

2) global stock markets are about 30% away from full recovery.

3) US markets still account for one third of stock market value, albeit on a downtrend. This phenomenon is similarly seen in developed economies.

chart from livemint.com

In contrast, emerging markets continues to capture a larger share in the global market cap due to secular forces which has been punctuated by the recent crisis.

According to Manas Chakravarty of livemint, ``The decline in the share of the global pie of the advannced economies is not just due to the current crisis but is a long term trend. According to projections from Credit Suisse, the percentage share of global consumption of the US will decline from 30.2% in 2007 to 20.8% by 2020. In sharp contrast, the share of Chinese consumption is projected to improve from a mere 5.3% of global consumption in 2007 to 21.1% by 2020. India’s consumption, which was 2% of global consumption in 2007, is forecast to rise to 5.3% by 2020. By 2020, according to the Credit Suisse forecasts, China will be the largest contributor to global consumption and India will be the fourth largest."

I think it is more than that. Asia and emerging markets likely move towards less dependence on the banking sector and expand utilization of the capital markets to deepen the financing intermediation within the economy and the region.

Of course there is also the issue of the divergent impact from inflationary policies on developed economies relative to emerging markets and Asia.

Consumer Electronics, Energy and the Jevons Paradox

The explosion of consumer electronics globally has been putting pressure on energy consumption.


This from the New York Times,

``Electricity use from power-hungry gadgets is rising fast all over the world. The fancy new flat-panel televisions everyone has been buying in recent years have turned out to be bigger power hogs than some refrigerators.

``The proliferation of personal computers, iPods, cellphones, game consoles and all the rest amounts to the fastest-growing source of power demand in the world. Americans now have about 25 consumer electronic products in every household, compared with just three in 1980.

``Worldwide, consumer electronics now represent 15 percent of household power demand, and that is expected to triple over the next two decades, according to the International Energy Agency, making it more difficult to tackle the greenhouse gas emissions responsible for global warming.

``To satisfy the demand from gadgets will require building the equivalent of 560 coal-fired power plants, or 230 nuclear plants, according to the agency.

``Most energy experts see only one solution: mandatory efficiency rules specifying how much power devices may use.

``Appliances like refrigerators are covered by such rules in the United States. But efforts to cover consumer electronics like televisions and game consoles have been repeatedly derailed by manufacturers worried about the higher cost of meeting the standards. That has become a problem as the spread of such gadgets counters efficiency gains made in recent years in appliances.

``In 1990, refrigerator efficiency standards went into effect in the United States. Today, new refrigerators are fancier than ever, but their power consumption has been slashed by about 45 percent since the standards took effect. Likewise, thanks in part to standards, the average power consumption of a new washer is nearly 70 percent lower than a new unit in 1990."

Read the rest here.

In short, regulations which try to conserve energy by forcing technologically based efficiency on consumer electronics has resulted to an unintended consequence-exploding demand.

This is the Jevons Paradox or the Jevons effect at work.

From wikipedia.org, ``In economics, the Jevons Paradox (sometimes called the Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource. It is historically called the Jevons Paradox as it ran counter to popular intuition."

Hat Tip: Paul Kedrosky

The Myths Of Government’s Managing The Economy

`The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”- Ludwig von Mises Human Action

Overheard from a recent social gathering: “We need a president that can run the economy like a corporation!”

My impression is that the alluded corporation is one of a privately run enterprise.

Nevertheless this has been a popular myth advanced by government loving liberal experts, politicians and their media adherents which have likewise been widely espoused by the public.

We cite 5 reasons why this thinking is seriously flawed.

First, it misses the fundamental nuances in the contribution of private enterprises and government to society.

A private enterprise generates revenues by producing goods and services that consumers need or want with which they pay for. In other words, the success or the failure of a private enterprise is entirely dependent on consumers voting with their money, this is known as capitalism or an economic system that thrives on profit and loss.

On the other hand, government as an institution survives mainly by taxation. It coercively takes from the pocket of Juan and gives to Pedro and keeps a share of it to finance the bureaucracy.

Essentially the government does not produce anything but consumes the nation’s resources which are funded by such taxes.

At a certain point, after the provision of basic public goods, such as police and military services, the safeguarding property rights and enforcing the sanctity of contracts, government becomes a net consumer of capital. The rate of taxation (Laffer’s Curve) which finances such increased social consumption eventually squeezes out productivity and further exacts a toll on the nation’s resources.

So if a government does not produce, and is a drain on the resources of the economy and is net consumer of capital, how can it possibly contribute by “managing” the economy?

Second, it’s all about incentives.

A private enterprise is incentivized to generate wealth by efficiently allocating scarce resources or by economizing in order to profit.

On the other hand, the government’s incentive is to theoretically find “optimal” ways to redistribute wealth.

However, redistribution of wealth is a political issue, simply because it chooses which sectors or interests groups that would both benefit from such privilege.

Meanwhile on the opposite end, the government ascertains the interest groups and sectors that would pay for such task. In short, it plays the analogical role of God in determining who survives or not.

Say for example, because of the popularity of OFWs as our economic saviors, policymakers decide to tweak the Peso lower by printing money.

While the families of the OFWs will have additional spending power because of a lower Peso, which may also partly buttress the export sector, on the other hand the unseen costs from inflating the system is to lower the amount of goods and services (due to price increases) that could be acquired by a depreciated peso. In other words, the benefits will be temporary for a certain segment of the society but at a greater cost to the whole over the long term.

Moreover because governments are politically oriented they don’t normally operate under the economic pressures, hence the proclivity to overspend.

As the illustrious economist Milton Friedman once said, ``There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.”

Furthermore, when government decides to spend money say, for example on “stimulus” packages or the highly popular “pump priming”, not only does it spends on things that the market does not see viable or necessary, it risks spending on inefficient projects which again consumes capital.

Also such expenditure could compete with private sector for resources resulting to the crowding out effect and a loss of productivity.

Worst, government spending increases the risks of bureaucratic corruption.

So how does politicization of the allocation of resources, wastefulness, deadweight loss (inefficient allocation of resources), and corruption contribute to the meaningful managing of the economy?

Third it’s also about accountability.

A private enterprise that fails to please the consumers, because of fatally wrong decisions, ends up losing money, filing for bankruptcy and or closing shop.

Reckless policies pursued by a political leader could lead to economic devastation yet the perpetrator’s political career can remain unaffected, Robert Mugabe of Zimbabwe could serve as an example.

Moreover a political leader may keep a big segment of the voting population happy by mass redistribution of wealth (tyrannical socialism, fascism, dictatorship) by extorting the most productive sectors or by buying off voters by benefiting from crony capitalism or corruption and may yet retain his/her career on election day.

So how can a self serving politician be responsible for managing the economy when his/her interest is to remain in power by political maneuvering?

Fourth is the dearth of economic calculation.

A private enterprise is guided by market pricing signals which determines the relationship of price and costs expressed in money terms and the coordination and allocation of resources in accordance to profit and loss statements.

A government which is not a profit seeking enterprise cannot make use of any economic calculation wrote Mr. Ludwig von Mises.

For instance, to quote Ludwig von Mises anew, the ``success or failure of a police department's activities cannot be ascertained according to the arithmetical procedures of profit-seeking business. No accountant can establish whether or not a police department or one of its subdivisions has succeeded. It is precisely when a manager is rewarded by a share of the profits that he becomes foolhardy because he does not share in the losses too”. (emphasis added)

In other words, the cost of delivering most public goods by the government cannot be accounted for in money terms.

So if government cannot account for its services then how can it ascertain how to manage the economy?

Fifth is the lack of local knowledge.

A private enterprise, operating under the market process and is directed by pricing signals, needs to acquire or get updated with the local knowledge of the market, one is serving or intends to cater to, for them to be able to operate profitably.

A central authority plagued with a lack of economic calculation is likewise handicapped by deficient local knowledge. The underlying response will be to rely on inaccurate statistics which may lead to inaccurate analysis and policy blunders.

As Friedrich A. Hayek described in "The Use of Knowledge in Society" ``The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot." (bold emphasis mine)

Since regulatory policies are always imposed based on “social” motives, the economic viability of such motive needs to be established. Otherwise, such policies may lead to serious distortions in the marketplace which may result to adverse unintended consequences.

As Professor Art Carden eloquently wrote, ``Any social policy must be economically possible before it can be considered morally desirable.”

So if central planners don’t have the right information to make the strategic decisions on important aspects of the “local” economy, how can they manage?

In the 80s, as Japan went into a bubble, I recalled the much ballyhooed Japan Inc...

It was a moniker describing the relationship of Japan’s public-private sector partnership that luxuriated in the glory of easy money policies.

In looking at Investopedia.com we saw a short narrative on its miserable ending as follows, ``The high degree of collusion between Japan's corporate and political sectors led to corruption throughout the system and contributed to the downfall of the overvalued Nikkei.”

A Deeply Embedded Inflation Psyche

``What deflationists always overlook is that, even in the unlikely event that banks could not stimulate further loans, they can always use their reserves to purchase securities, and thereby push money out into the economy. The key is whether or not the banks pile up excess reserves, failing to expand credit up to the limit allowed by legal reserves. The crucial point is that never have the banks done so, in 1990 or at any other time, apart from the single exception of the 1930s. (The difference was that not only were we in a severe depression in the 1930s, but that interest rates had been driven down to near zero, so that the banks were virtually losing nothing by not expanding credit up to their maximum limit.) The conclusion must be that the Fed pushes with a stick, not a string.” –Murray Rothbard, Making Economic Sense

Many have touted today’s action in the marketplace as a manifestation of success from government intervention.

Given public’s predisposition to focus on the short-term and interpret heavily on current information, especially after repeatedly being seduced from the incentives provided for by inflationary policies, today’s appearance of success equals tomorrow’s seismic crisis.

Betting The House On Too Big To Fail

In the US, the “Too Big To Fail” syndrome is becoming deeply entrenched in the heavily regulated banking industry.

An article by Peter Eavis at the Wall Street Journal entitled “Uncle Sam Bets the House on Mortgages” gives as a stirring depiction of the growing intensity of systemic concentration risks.

(bold highlights mine)

``It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America and J.P. Morgan Chase?”

Graph 1: Wall Street Journal: Too Big To Fail Getting Bigger

``Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.”

``The optimistic take is that this support, though large, will shrink when market forces regain confidence. But there is a darker possible outcome: The emergency assistance is entrenching a system in which the taxpayer takes the default risk on most mortgages, while a small number of large banks get a larger share of the fee revenue from originating and servicing mortgages.

``That is what is happening now. While big banks are originating lots of mortgages, they are selling nearly all of them to Fannie Mae and Freddie Mac. Indeed, combined single-family mortgages held on the balance sheets at J.P. Morgan, BofA and Wells actually fell 3.5% in the first half. Before the bust, these banks sold large amounts of loans to Fannie or Freddie, but they also held on to products like jumbo mortgages. The volumes for those large loans now have tumbled.”

What you have here is essentially the politicization of the US banking industry, where the top 3 banks have cornered the meat of the “economic rent” from mortgage servicing and issuance which it deals with the US government.

And this concurrently, becomes an issue of moral hazard, where these highly privileged banks, which operates on implied guarantees from US government that they are “too big to fail”, may indulge on more aggressive risk taking activities at the expense of US taxpayers.

Moreover, the US government stands as THE market for home mortgages.

Alternatively, this also posits that since the US government is a political entity and is less constrained by economic pressures, the pricing structure for transacting these mortgage securities have been above what the market is willing to pay for. Thus, government intervention translates to massive tax payer subsidies to cover losses meant to keep the banking system afloat.

Analyst Doug Noland in his Credit Bubble Bulletin recently dissected the Federal Reserves 2^nd Quarter Flow of Fund and construed that instead of targeting stabilization for conventional mortgages, the Fed has been propping up private label Mortgage Backed Securities.

He says (all bold emphasis mine), ``So, the Fed is amassing quite a stockpile of “conventional” GSE MBS, but often these are “private-label” mortgages recently “refinanced” into GSE securities. And as the Fed buys the new GSE MBS, newly created funds become available to flow back to reliquefy the formerly illiquid ABS marketplace (along with agencies, Treasuries, corporates, and equities). To be sure, placing essentially federal government backing upon previously “private-label” mortgages dramatically changes the market’s perception of these securities’ worth (“moneyness”) – especially with fed funds pegged for an extended period at near zero and the Fed in the midst of a $25bn weekly purchase program in order to fulfill it commitment to purchase $1.25 TN of mortgage securities….”

``Not only is the vast majority of new mortgage Credit this year government-backed, Washington guarantees are being slapped on hundreds of billions of existing “nonconventional” mortgages. This intrusion and transfer of (Credit and interest rate) risk has terrible long-term ramifications. Although in the near-term this mechanism provides a powerful stabilizing force for both the Credit system and real economy.”

Here is an example of the “privatization of profits and socialization of losses” from which would most likely exact a heavy toll on US productivity and which would likewise be reflected on the economy, as the productive segments will be penalized dearly for the subsidies or the losses incurred by the US banking system.

Nevertheless all these accounts for the priorities of the incumbent officials and their penchant to salvage a preferred industry via the inflation route, as we discussed in Governments Will Opt For The Inflation Route.

Bernanke’s Fascism Risks An Inflation Crisis

One would have to wonder whether Fed Chair Ben Bernanke is a chronic prevaricator or has been captured by the industry he regulates or operates with a tacit vested interest on the industry or has been fanatically blinded by ideology to declare that the Fed won’t monetize debt and likewise yearn for expanded powers or control over more parts of the economy including the proposed regulation of banker’s pay. Mr. Bernanke failed to predict, was in denial of the crisis and panicked in front of Congress to ask for bailout money.

To quote John H. Cochrane And Luigi Zingales who wrote on a Wall Street Op-ed on the Lehman anniversary, `` these speeches amounted to the financial system is about to collapse. We can't tell you why. We need $700 billion. We can't tell you what we're going to do with it." That's a pretty good way to start a financial crisis.”

Yet the justification to “help the agency act more decisively to reduce the chances of a recurrence” would only entrench the growing politicization, reduce the systemic efficiency and transition the US market economy into fascist state.

In the definition of Sheldon Richman, Fascism is ``where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities. Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically. In doing all this, fascism denatured the marketplace.” (bold emphasis mine)

Yet, the diminishing role of institutional check and balances and an increasingly centralized flow of power would only amplify the systemic concentration risks that could spark a runaway inflation crisis (given Bernanke’s tendency to inflate).

One man’s error could lead to another global systemic mayhem.

The Fed didn’t monetize debt?

Again Doug Noland on the Fed Fund Flow, ``In total, Rest of World purchased $403bn SAAR of Treasuries during Q2, about a quarter of total issuance ($1.896 TN SAAR). Who were the other major purchasers? The Fed monetized $647bn SAAR, the Household Sector bought $343bn SAAR, and Broker/Dealers accumulated $404bn. And while it is positive that American households are buying Treasuries and saving more, this does not change the fact that this so called “savings” was bolstered by income effects from massive government spending increases.”

For us, the outcome of inflation or deflation is a result of a deliberate policy. It’s only the fat tails or the extreme outcomes that function as a form of unintended consequences, similar to the meltdown post Lehman bankruptcy in 2008.

Moreover we don’t believe that inflation can only occur via a revitalized US consumer.

Such view myopically underestimates the role of fiscal channels [Noland: “bolstered by income effects from massive government spending increases”] or an increasing concentration or centralization of power by central banking [Richman: “Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically”].

In addition, given today’s increased globalization or deepened integration by global economies and financial system, there are transmission mechanisms or interlinkages from global governments undertaking the same inflationary tools [Noland: “Rest of World purchased $403bn SAAR of Treasuries during Q2, about a quarter of total issuance ($1.896 TN SAAR)”].

Hence while the risks of debt deflation seem a concern for some parts of the world, it does not apply to all. Yet if debt deflation is premised from a monetary phenomenon perspective, based on country specific issues, then the argument crumbles especially when applied to countries that have been least leveraged.

Not even a “ghost fleet of recession” or massive number of ships idly anchored in Asia in the absence of international trades arising from the recession would be enough to circumvent a steadfastly determined central bank to inflate a system.

A central bank can simply print a dollar per every dollar of liability, even if it means hundreds of trillions, if it deems it as beneficial.

Zimbabwe’s recent example should be a reminder that no amount of capacity utilization, unemployment rate, velocity of money [see last week’s Velocity Of Money: A Flawed Model], consumer spending or consumer debt and other traditional econometrics used by mainstream experts deterred a tyrant (operating on centralized power and a politicized economy) and an inflation obsessed central banker in Dr. Gideon Gono from fanning 89,700,000,000,000,000,000,000% hyperinflation in 2008.

While the US or UK may not be the same as Zimbabwe, an increasing centralization of power and politicization of the economy could neutralize any inherent advantages thereof. As former Fed Chief Alan Greenspan quoted in Bloomberg commented, ``It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable” with the Fed withdrawing its stimulus, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities Inc. today. He later said that “if inflation rears its head, it will swamp long-term markets,” referring to bonds.”

In short, Mr. Greenspan appears sardonically worried about the US government’s addiction to inflation, a policy which incidentally, he applied extensively throughout his tenure. One might say that he inured the world with the “Greenspan Put” or Mr. Greenspan’s repeated policy of rescuing or providing support for the markets with artificially lowered interest rates during the 1987 stock market crash, the Gulf War, the Mexican Tequila crisis, the 1997 Asian crisis, the LTCM debacle, Y2K, the burst of the internet bubble, and the 9/11 terror attack.

Not until a significant part of the world becomes as deeply indebted as those afflicted by the recent bubble, will deflation become a meaningful threat to the global banking system or perhaps not until the destruction of the present currency system.

Yet deflation is a natural and rightful antidote to the excesses of inflation.

Exploding Bond Markets, From Periphery To The Core

Moreover, while debt deflation advocates continue to tunnel onto the banking system as the key source for benchmarking credit market conditions, they seem to forget the existence of the bond market as an alternative venue for credit access.

However, the difference is that credit via the bond markets won’t trigger the fractional reserve nature of today’s banking platform that would expand monetary aggregates. Nonetheless it helps push up prices of securities.

This from the Financial Times, ``European bond issuance has hit $2,000bn so far this year, the fastest ever pace of issuance, as companies race to refinance in the bond markets and banks remain reluctant to lend.

``European sovereigns, agencies and companies have sold 38 per cent more than the $1,450bn issued in 2008 in the year to date, according to analysts at data provider Dealogic, who add that issuance has never previously stood at such a high level so early in the year.

``Non-financial companies accounted for a record $446.3bn so far this year, 55 per cent more than in all of 2008….

``Financial issuers have sold a record of $542.8bn year to date, 24 per cent more than issued in 2008.”

In Asia, a somewhat similar dynamics could be at work as bond market growth has also been robust see figure 2.

Figure 1: ADB Bond Monitor: Hefty Growth in Bond Markets

According Standard & Poors as quoted by Researchrecap ``Notwithstanding a near universal attempt by central banks to ease monetary conditions, bank lending—still the predominant source of funds in the emerging markets—has varied from country to country. China is a standout, having reportedly injected as much as $1.1 trillion in new lending during the first six months of 2009. For many other markets, however, credit growth is decelerating (and, in some cases, contracting) in comparison with a year ago. This suggests that banks, even those that were largely unscathed by the financial crisis, are remaining cautious to stave off a potential increase in nonperforming loans.” (bold highlights mine)

In short given the fresh memory of the 2008 setback, some banking system in the region has opted to remain conservative in their lending practice. Nonetheless, the other route has been through the debt markets.

According to the ADB’s Bond Monitor, (bold underscore mine)

``Emerging East Asia’s bond market grew by 12.8% year-on-year (y-o-y) on an local currency (LCY) basis to USD3.94 trillion in the first half of 2009. The market also expanded by 5.2% quarter-on-quarter (q-o-q) in 2Q09 as financial markets showed signs of stabilization and the region’s growth showed signs of recovery. This lifted the growth rate for outstanding LCY bonds for the first half of the year…

``The strongest improvements in y-o-y bond market growth rates on an LCY basis in the first half of 2009 were in Hong Kong, China (19.4%); the People’s Republic of China (PRC) (14.8%); Republic of Korea (Korea) (13.1%); Indonesia (12.3%); and the Philippines (8.2%).”

Anyway, one of the publicly listed companies in the Philippines, the SM Investments, successfully sold $500 million worth of bonds from which two-thirds of the placements had been made local investors (FinanceAsia). This is a testament of the immense liquidity of the domestic system which had been reinforced by a faster growth clip in July (BSP).

In addition, domestic bank credit growth has remained vigorous in terms of trade and production, household consumption and bank repo lending activities (BSP).

And the growth in both the banking and bond markets have been indications of inflationary policies gaining continued traction in Asia. This as we repeatedly been saying is simply due to low systemic leverage, high savings rate, unimpaired banking system, current account surpluses and an apparent trend towards a deepening regionalization, and likewise, integration with the world economic system.

And as discussed in The Growing Validity Of The Reflexivity Theory: More PTSD And Periphery, we proposed that growth dynamics would probably shift from the core (US consumers) to the periphery (emerging markets), ``money appears as being transmitted to support growth in the developing countries as part of the collaborative efforts to inflate the system.”

Morgan Stanley’s Joachim Fels, takes a parallel view in his recent outlook, ``near-zero interest rates in the US and Europe eased monetary conditions in those emerging market economies that peg to the dollar or the euro, adding to their domestic stimulus packages. Thus, it didn't come as a surprise that China was the first major economy to emerge from recession, given that it imports easy money from the US through the exchange rate link without having the US's financial sector problems.

``The point worth noting here is that we may all still be underestimating the effects of the stimulus that has already been put into place and is still playing out. If so, growth would not moderate from its current 4%+ global pace going into 2010 as in our base case, but accelerate further. The most plausible upside scenario, in our view, would be one where Asia keeps motoring ahead with domestic demand strengthening further in response to the stimulus, leading to a surprisingly strong revival of global trade.” (bold emphasis added)

Stages Of Inflation Redux

Instead of the deflation scenario, today’s sweet spot in inflation could actually signify as the initial phase of the three stages of inflation as also discussed in Warren Buffett’s Greenback Effect Weighs On Global Financial Markets.

To quote Henry Hazlitt, ``What we commonly find, in going through the histories of substantial or prolonged inflations in various countries, is that, in the early stages, prices rise by less than the increase in the quantity of money; that in the middle stages they may rise in rough proportion to the increase in the quantity of money (after making due allowance for changes that may also occur in the supply of goods); but that, when an inflation has been prolonged beyond a certain point, or has shown signs of acceleration, prices rise by more than the increase in the quantity of money. Putting the matter another way, the value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money. As a result, the larger supply of money actually has a smaller total purchasing power than the previous lower supply of money. There are, therefore, paradoxically, complaints of a "shortage of money." (bold emphasis mine)

What could be seen as some pockets of deflation today, could actually be the initial phases of inflation. And a continued rise in the commodities space even if it signifies as a currency “pass through” from the sagging US dollar would likely intensify the inflation expectations.

Then when the late stage of inflation have been reached, where the value of monetary unit falls faster (or consumer prices are rising faster) than the increase in the quantity of money which leads to the perception of “a shortage of money”, the central bank under the auspices of the government would either elect to print money at an ever accelerating “exponential” rate to meet such shortages-ergo the hyperinflation scenario, or opt to withhold feeding the boom (or by declaring a default) -the deflation scenario.

Again this will all be a result of policy choices.

So simply reading conventional metrics when governments have taken a lead role in the marketplace will lead to misdiagnosis and mass confusions on the disconnection between the market from economic reality. Analyzing how political trends will shape policy decision making will likely be a better alternative [see Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?]

Anyway, a hyperinflation episode would also lead to deflation once the hyperinflated currency have been eschewed and replaced by another currency. The recent case of Zimbabwe which has abrogated its currency, the Zimbabwean Dollar, for the US dollar and South African Rand is a prime example.

At the end of the day, global policymakers will continue to bask on the triumphalism from present day policies and will most likely continue to keep the booze flowing.

Hence even if markets don’t move in a straight line they will likely respond positively to policy sustained policy accommodations over this early phase of the inflation cycle.

Debating The Fate Of The US Dollar, A Gold Linked Currency And China’s Yuan

In view of the falling US dollar, many articles have emerged to defend the US dollar as being either irreplaceable or will become substitutable only after a defined period of years or the Chinese yuan may follow the unsuccessful attempt of the Japan yen to emulate the US dollar as reserve currency or of inapplicability of a gold linked currency in today’s paper money standard.

While they maybe correct, I inclined to think many of these have been relying heavily on past performances and projecting these into the future.

Debating The Fate of the US dollar

For me the issue of the continued privilege of the US dollar as reserve currency will depend on the extent of inflationary policies imposed by its government, and secondly, from the responses of the world to such policies.

Next, the US dollar hasn’t been stable relative to its purchasing power. The fact that it has declined by 95% since 1913, makes it “stable” in terms of the rate of purchasing power lost over the years.

Perhaps the US dollar could be seen as “stable” in relative terms, or against other currencies, as paper currencies in general continue to collectively suffer from eroding purchasing power based on the continued abuse of the elastic currency due to sundry political goals.

Moreover, given mercantilist tinge by many of the world’s central bankers who continue to embrace “cheap currencies for exports” mindset via the imposition of varying degree of exchange rate pegs, assorted subsidies and tariffs and other proscriptions, a global campaign for “competitive devaluation” could lead to a currency war.

To quote, Murray N. Rothbard, in Making Economic Sense, ``The whole world would then be able to inflate together, and therefore not suffer the inconvenience of inflationary countries losing either gold or income to sound-money countries. All the countries could inflate in a centrally- coordinated fashion, and we could suffer manipulation and inflation by a world government-banking elite without check or hindrance. At the end of the road would be a horrendous world-wide hyper-inflation, with no way of escaping into sounder or less inflated currencies.” (bold emphasis mine).

So again we shouldn’t see this as analyzing against a constant but of an action-reaction dynamics to evolving policies. Say for instance if the US will see an upsurge in inflation will global governments continue with the current setup?

My guess is no.

A Gold Link Currency In Today’s Fiat System?

Another, currency volatility has been due to too much distortion brought about by government interventions in the economic system.

A country which adopts a gold standard may indeed be destined to see its currency’s price swings based on gold’s price performance.

However, what must be understood is that the accompanying fiscal restraint brought about by adapting a gold-linked currency system will probably lead to an appreciation based on significantly less politicization of the nation’s political economy that could lead to a productivity spike.

Nonetheless currency values will always fall under natural law of demand and supply, as Ludwig von Mises in Theory of Money and Credit wrote, ``the valuation of the monetary unit depends not upon the wealth of the country, but upon the ratio between the quantity of money and the demand for it, so that even the richest country may have a bad currency and the poorest country a good one. (emphasis added)

This leads us to international trade, currency values aren’t everything; weak currencies don’t necessarily imply export strength, for instance Philippine exports plunged by 25% in July in spite of the underperforming Peso (Inquirer), whereas strong currencies don’t automatically translate to feebleness in exports, for example Europe registered a surplus on “strong exports” in July in spite of the steep appreciation of the Euro (google).

What would crucially matter is the market from which a producer of goods or services sells into, the capital structure of an economy and importantly policies that underpin the trade structure, as discussed in Asia: Policy Induced Decoupling, Currency Values Aren’t Everything.

But of course, a gold linked currency given today’s political setting and economic ideological framework isn’t likely to be in the cards for policymakers, simply because it is not politically appealing. A gold backed currency would restrain politicians from taking advantage of the easiest, least understood and most discreet form of wealth redistribution.

China’s Remimbi As International Reserve?

Finally past performances don’t equate to future outcome.

Figure 2: Wall Street Journal: Yen Denominated Trade Transactions

The Yen’s failure to emulate the US dollar as a reserve currency, see figure 2, doesn’t necessarily extrapolate to the destiny of the Chinese Yuan. The circumstances behind the Yen’s unsuccessful attempt are not exactly the same forces faced by the Chinese today.

Becoming an international reserve standard would depend on many factors that would make a currency accepted as an international store of value, unit of account and medium of exchange, such as convertibility, market economy, depth and sophistication of the financial markets, transparency, low transaction costs, military might and etc…

Nevertheless, one good starting ground is by way of marketability.

Again Murray Rothbard in What Has Government Done To Our Money, ``Now just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media--in almost all exchanges--and these are called money.” (bold highlights mine)

The degree with which China would assimilate a market economy will serve as the pivotal fundamental steps towards achieving such a goal.

Nonetheless, again it will also depend on the underlying policies that China would be undertaking aside from the policies by the US government as the de facto currency reserve and of the world relative to China.

It’s a complex and a highly fluid issue to speculate on.

Wonders of Market Innovation: Text-to-Speech Technology Reaches an Inflection Point

This is just one of the numerous examples of the miracles borne out of the marketplace mainly through technological innovation.

This from Ashlee Vance of the New York Times, (bold emphasis mine)

``Moore’s Law is a funny thing. Computing gear ticks along, getting faster and often cheaper at a steady rate. But, every now and then, we hit an inflection point where things change in a drastic fashion. Such is the case with the iPhone from Apple and with netbooks -– products that nailed the right recipe of horsepower, size and cost at the right time.

``In an article published Tuesday, I took a look at how iPhones and netbooks have disrupted not only the consumer electronics market but also health care. People with speech-impairing conditions like A.L.S., autism, Down syndrome and strokes have started to discover that general-purpose devices, equipped with downloadable text-to-speech software, can in many cases help them communicate better and more cheaply than the proprietary speech devices covered by Medicare and private health insurance.

Read the rest here
The S-Curve as shown above depicts of the technology breakthrough cycle or where "an inflection point where things change in a drastic fashion" as applied to the text-to-speech technology.

As explained by AVG Aerospace, ``The S-Curve figure illustrates both the evolution of a given technology, and the breakthrough event when a new, superior technology becomes viable. For a given technology, the evolution is as follows: Initial efforts result in little advancement and then the technology becomes successful. This success point, at the lower knee of the curve, is where the technology has finally demonstrated its utility. After this point significant progress and improvements are made as several embodiments are produced and the technology becomes widely established. Eventually, however, the physical limits of the technology are reached, and continued effort results in little additional advancement. This evolution (effort expended versus performance gains) takes the form of an S-Curve. To go beyond the limits of the top of a predecessor's S-Curve, a new alternative must be created. This new alternative will have its own S-curve and will eventually require yet another new approach to surpass its performance limits. The breakthrough event, is when the new method demonstrates its viability to exceed past the limits of its predecessor." (emphasis added)