Poker Bluff: The Exit Strategy Theme For 2010

Many have used the strong showing of 2009 to advert that 2010 would be the year of “exits”. I don't buy it.

As in the game of poker, I’d call this equivalent to a policymaker’s Poker bluff.

Clear Divergence: Periphery Versus Core

This ‘exit strategy’ may be probably ring true for many emerging markets whose economies have been more responsive to the hodgepodge of policies designed to cushion the economies from downside volatility.

Again, the wide variance of performances of emerging markets relative to advanced economies validates our theory since the peak of the crisis where each nations would respond differently to the near uniform set of policies adopted, leading to divergent market and economic results.

And such patent discrepancies have led to earlier tightening policies of some nations. According to the Businessweek, ``Since Nov. 30, the central banks of Australia, Vietnam, Norway and Israel have raised interest rates, and signs the global recession is ending have spurred speculation the U.S. Federal Reserve will follow this year.”

On Thursday, China joined the roster of countries engaged in a rollback of easy money policies, the Businessweek quotes the Bloomberg, ``China's move to raise the cost of three-month bills will probably lead to the nation's first interest-rate increase in almost three years by September, a survey of economists showed.”

Figure 2: Economist: Decoupling in Government Debt and Growth

The Economist says that a major source of this growth discrepancy will likely emanate from the PONZI scheme employed by major economies to substitute lost ‘aggregate’ demand with leverage incurred by government to spur this ‘demand’.

From the Economist, ``Advanced economies, which aggressively stimulated demand and are forecast to experience weak GDP growth next year, contrast starkly with the G20’s developing countries. After some gentle fiscal stimulus, these countries are on track for strong growth next year. The IMF forecasts that gross government debt among advanced economies will continue to rise until 2014, reaching 114% of GDP, compared to just 35% for developing nations. With governments struggling to rein in their finances, rating agencies are becoming increasingly twitchy; rich countries such as America and Britain are fearful of losing their hallowed triple-A status.” (all bold highlights mine)

Of course there are many other reasons to suggest why emerging markets seem to be on a secular trend to play catch up with advanced economies, particularly positive demographic trend, urbanization, high savings rate, low debt or systemic leverage, unimpaired banking system, rising middle class and most importantly a trend towards embracing economic freedom via more freer trade, investments, financial and migration flows [e.g. see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone]

However the more important factor revealed by the Economist in the terse article above is that the debt onus for advanced economies implies low productivity, cost of crowding out private investments, larger tax burden, greater risks of escalating consumer prices, higher than average unemployment rate, greater cost of financing debt, heightened sovereign risk premia and fiscal austerity measures that may entail a higher degree of political volatility.

Harvard’s Carmen Reinhart and Kenneth Rogoff seconds this view in a recent study,

``Our main finding is that across both advanced countries and 23 emerging markets, high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. In addition, for emerging markets, there appears to be a more stringent threshold for total external debt/GDP (60 percent), that is also associated with adverse outcomes for growth. Seldom do countries simply “grow” their way out of deep debt burdens.”

Alternatively, this also raises the risks of an implosion in the fast emerging government debt bubble, which we will call as the Keynesian Debt Crisis-(since most of these debts were acquired in the context of the Keynesian ideology), one of the risks that could spoil our fun in 2010.

Nearly 90% of the world’s bond markets have been denominated in these four major currencies (Ivy Global Bond): the US dollar, the Japanese yen, British pound, dollar, and the euro.

This means that even if many emerging markets will tighten, it is the policies from the advanced economies that will likely have a greater impact on global capital flows.

And it is why we hypothesize that even if global policymakers pay lip service to the so-called “exit strategies”, what truly matters will be the policy actions by authorities in the face of the evolving activities in the marketplace, the real and the political economy.

Hence, it would be an immense mistake to parse on a single variable, e.g. unemployment, when there would be sundry factors in determining political action.

In other words, this means deducing political and economic persuasions or ideology of the incumbent officials, interpreting their underlying cognitive biases based on their speeches, interviews or official pronouncements, analyzing their interpretation of events and lastly appraising on the political influences of certain interest groups that may determine the prospective actions of policymakers.

The Underlying Incentives Of The Poker Bluff

So what factors could likely determine the direction of policy actions?

Interest Rate Derivatives. One must realize of the extent of sensitivity of global asset values are to interest rates.

Figure 3: BIS: Composition Of Global Derivatives

Interest rate derivatives account about 72% or $437 trillion of the notional $605 trillion as of June of 2009 according to the Bank of International Settlements.

Any unexpected volatility from so-called monetary rollback could amplify the risks of unnerving the markets. Thereby, policymakers would likely remain supportive of unorthodox actions like Quantitative Easing.

Hence, we see the recent measures by the Bank of Japan to impose their version of Quantitative Easing last December has catapulted the Nikkei to outperform [see The US Federal Reserve Experiments On Unwinding Stimulus As Bank Of Japan Engages in QE]. In addition, the Bank Of England remains with on track with its ₤ 190 billion of asset purchases and which is likely to increase to ₤ 200 billion (Edmund Conway, Telegraph) and possibly more.

Expanding GSE Operations. In the US, a day before Christmas eve, as everyone had been partying, the US government via the US Treasury stealthily lifted its financing cap on the Government Sponsored Enterprise of Fannie Mae (FNM) and Freddie Mac (FRE) [Wall Street Journal].

Essentially, this places the GSE debt on the US balance sheets, which technically has been operating on “implied” guarantees. Some analysts see that the ambiguity of the US position has led to foreigners to become risk-averse and avoid purchases of these securities.

Hence, the US treasury hopes that by making “implicit” guarantees as “explicit”, it would reduce the pressure on US Fed to bolster the US housing market via Quantitative Easing, and make GSE assets more attractive.

Remember about 9 out of 10 mortgages transacted today have been consummated by these GSE entities, thereby by opening the checkbook to absorb more tainted assets and in the absence of the resumption of foreign interests, the alternative view is that the Fed could increase its scope of quantitative easing programs.

Of course by incorporating the aforementioned GSE debt on the US balance sheets, recorded US liabilities will rise and exert pressures on its sovereign credit ratings.

The point is, US housing market, even faced with some semblance of recovery, remains heavily sensitive to interest rates movement which will likely compel authorities to tweak with financial markets and remain policy easy.

Policymaker’s Economic Ideology. Ben Bernanke is known as an expert of the Great Depression from which his views on monetary policy has been oriented towards the Milton Friedman model, i.e. to provide generous liquidity during an economic recession. The illustrious Mr. Milton Friedman in an interview with Radio Australia said, ``So in our opinion, the Great Depression was not a sign of the failure of monetary policy or a result of the failure of the market system as was widely interpreted. It was instead a consequence of a very serious government failure, in particular a failure in the monetary authorities to do what they'd initially been set up to do.”

And it is likely that from this monetary paradigm he sees the risks of an economic relapse from premature tightening as that in 1937-38. Hence Mr. Bernanke is likely to pursue what he sees as a triumphant path dependency policy of money printing.

Analyst Mike Larson says it best, ``Look at Chairman Bernanke’s background. Massive money printing is at the heart of his entire philosophy. He literally wrote the book on this subject — the book that’s now essentially the Fed’s operating manual on precisely how to print enough money to overwhelm almost any economic collapse.

``Bernanke believes in his heart of hearts that the Fed prematurely hiked rates in 1937, prolonging the Great Depression into 1938 and beyond. He’s convinced that that single, momentous blunder of history is what doomed the world to a nasty “double dip.” (emphasis added)

It’s also the reason why Fed Chair Ben Bernanke recently put the blame squarely on the shoulders of belated regulatory response as having caused the crisis and exculpated the low interest regime (Bloomberg).

By keeping the political heat off low interest rates, he hopes and intends to divert the public’s attention away from his primary tool to manipulate markets.

Ironically and bizarrely too, Mr. Bernanke used the Taylor Rule model to justify the exoneration of role of low interest to the recent crisis.

However John Taylor, a Professor at Stanford University and a former Treasury undersecretary, the creator of the popular model challenged and issued a rejoinder on Bernanke’s interpretation saying ``The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust.” (Bloomberg).

This goes to show that the fudging, twisting and the manipulation of the means (model or data) in order to come up with the desired end signify as a symptom of economic dogmatism, which operates regardless of the veracity of the implied causality.

Record Debt Issuance, Rollover and Interest Payments. We have pointed out that the US economy, while indeed has been manifesting signs of recovery, hasn’t been entirely out of woods.

The next wave of mortgage resets, which we identified as Alt-A, Prime mortgages, and commercial real estate, which follows the original strain-the subprime mortgages, are still putting pressure on the US real estate industry [as discussed in Governments Will Opt For The Inflation Route].

Moreover, many US States have been staggering from bloated deficits stemming from falling tax revenues in the face of bubble day spending budgets, probably this year will mark a series of bailouts from the Federal government [see Federal Bailout For US States In 2010?]

So together with huge fiscal spending slated for 2010 plus the rollover of maturing debts and the attendant interest payments, as previously discussed in Market Myths and Fallacies On The Dubai Debt Crisis, all these would translate to some $3.6 Trillion of financing required for the US for this year.

We said then,

``$1.9 trillion of debt required for refinancing + $1.5 trillion in additional deficits + $ .2 trillion in interest payments=$3.6 trillion of financing required for 2010! Since US and global savers (particularly Asia) are unlikely to finance this humungous amount, [other parts of the world will require debt financing too (!!)], the available alternative options appear to be narrowing-the Federal Reserve would have to act as the financer of last resort through the Bernanke’s printing press or declare a default. Of course, Bernanke could always pray for a “Dues ex machina” miracle.”

This means that to activate an “exit” mode by raising interest rates risks heightening the amount required for financing. That’s obviously is a NO CAN DO for the authorities.

Moreover, the US won’t likely take the risks of a “failed auction” during its record Treasury sales this year, since this would likely send the interest and bond markets into a tailspin or a mayhem.

This means that as contingent plans we expect that the US Federal Reserve will remain as THE buyer of the last resort for the US treasury markets.

Devaluation as an unofficial policy. We have stated in numerous occasions [e.g. see Changing The Rules Of The Game By Inflation] how Ben Bernanke champions the mainstream view of oversimplifying economic problems by reducing (yes reduction ad absurdum) them into few variables. Hence by focusing on a few variables such as global imbalances, he sets forth devaluation as the key instrument for economic salvation- via his Helicopter “nuclear” option.

Again Mr. Bernanke in his Helicopter speech, ``it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.”

Yes it’s a supreme irony for government to promote debt, yet fear its consequence-deflation.

It’s also worth repeating that the only way to achieve devaluation is through inflationism which is what Bernanke’s Zero Interest Rate policy, quantitative easing and host of other interventionism-in the form alphabet soup of programs to the tune of Trillions of spending and guarantees, have all been about.

As Ludwig von Mises wrote in Stabilization of the Monetary Unit? From the Viewpoint of Theory ``The valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money.”

The same ideology afflicts other policymakers as seen in Japan, England and most of the central bankers of the world.

Remember, inflationism is a form of protectionism, since it supports or protects the interests of some politically favorite sectors at the expense of the rest of the society.

In the case of the US, such collective ‘devaluation’ policies appear aimed at alleviating the untenable debt levels held by the banking industry.

Although the public seem to have been grossly misled by political demagoguery and politically colored experts who try to make believe the tomfoolery that devaluation is about exports (only 11% of the economy see Dueling Keynesians Translates To Protectionism?) or about jobs.

Of course, another mechanism of devaluation is the transferring of the resources from the real economy to the banking and finance industry.

Unfortunately for the gullible adherents, who seem to have lost any semblance of critical thinking and common sense enough to swallow hook line and sinker the hogwash that such political propaganda as the “truth”, “candidness” of the messenger and meant as “best” for the social order.

Hardly in the understanding that such political actions represent as ruse for a political end. Again from Professor von Mises, ``By deceiving public opinion, it permits a system of government to continue which would have no hope of receiving the approval of the people if conditions were frankly explained to them.”

Hence, the so-called “exit” program would be antipodal to the policy thrust to devalue the currency.

Political Influences On Policy Making. One unstated reason why companies like General Motors or Chrysler have been nationalized or significantly buttressed by the government is due to the payback of favors to a political constituent, particularly in this case the labor union.

Considering that labor had been a big contributor to Obama’s election, where according to Heritage Foundation, ``Big Labor spent an estimated $450 million on the 2008 election, and the SEIU alone put $85 million into the political campaign — almost $30 million just for Obama’s election”, many of Obama’s major policies appears to have been designed as remuneration for political ties.

This can be seen with the recent tariffs slapped against China, the infrastructure stimulus spending which forces contractors to hire labor union members, the latest $154 billion round of stimulus passed in Congress last December targeted at reducing unemployment, proposed taxes on stock trades to fund labor projects, mass unionization of the US government which now constitutes more than half or 51.2% compared to 17.3% in 1973 and many more.

Of course the other vested interest group as stated above would be the banking sector.

The point is- a higher cost of financing from a series of interest rate increases and monetary policy rollback will vastly reduce the Obama administration’s capacity to fund the pet projects of his most favored allies.

And going into the election year for the US Senate in 2010, greatly reduces this incentive especially that the popularity of Democrats has been on a free fall, as shown by recent Gallup polls, WSJ-NBC News, and Ramussen Reports

Finally, the Question Of Having To Conduct Successful Policy Withdrawals. This would be technical in nature as it would involve the methodology of how excess reserves, the alphabet soup of market patches, guarantees and commitments will be successfully scaled down.

For us, thinking that garbage would be bought back at the original “subsidized” price is no more than wishful thinking. Most of the so-called “plans: would be like having off balance sheet holdings.

Figure 4: BIS: Central Bank Balance Sheet and Spreads for the Crisis

Analyst Jim Bianco was spot on when quoted by Tyler Durden of Zero Hedge, ``We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan.” (Bold highlight mine)

Bottom line: Interest Rate Derivatives, Expanding GSE Operations, Economic Ideology Record Debt Issuance, Rollover and Interest Payments, Devaluation as an unofficial policy, Political Influences On Policy Making and the Question Of Having To Conduct Successful Policy Withdrawals all poses as huge factors or incentives that would drive any material changes in the Federal Reserve and or the US government policies.

In knowing the above, I wouldn’t dare call on their bluffs.

Politics Ruled The Market In 2009

``Looking back, policymakers of all stripes missed their opportunities to make tough but necessary decisions in 2009. And now 2010 just doesn’t have the feel of a year that will witness a lot of decisive policymaking. In Washington, the focus will turn to the 2010 elections. The Fed will worry about its reputation and independence. Fearing for their jobs and fearful of mistakes, timid will win over bold. Bubbles treasure timid.”-Doug Noland, Issues 2010

At the start of the year, a friend asked, where I thought the local stock market is headed for in 2010. When my reply wasn’t in a definitive, I was asked instead where I FELT the market would go. Not satisfied in dealing with matters most- an analysis of the risk reward tradeoffs-I was expected to reply in the reductio ad absurdum or a confirmation of a preconceived bias.

And this is why Warren Buffett’s pejorative of stock forecasters becomes a reality, ``We have long felt that the only value of stock forecasters is to make fortune-tellers look good”. That’s because it has been a propensity for the public to reduce the role of financial market investments into intuitive based pulsating adrenalin based fortune telling “punts”, i.e. the euphemism for gambling.

Well, in dealing with markets most people deserve their fate.

Making New Year’s projection would have been evident from our notes of late last year. You can check out Following The Money Trail: Inflation A Key Theme For 2010, where we argued that inflation will be a concern for the year or How The Surging Philippine Peso Reflects On Global Inflationism where we argued for the case of a stronger Peso and a higher Phisix.

Nevertheless while it is easy to say or to get wedded to the notion or be overwhelmed by the bias that the Phisix will likely be significantly higher and that the Peso might be materially stronger, we might fall into a Pollyannaish trap without taking into consideration of what might preclude this from happening.

Market Extraordinaire

For starters, one must realize that last year, hardly anything that operated in the markets seemed traditional or conventional. Said differently, the market sailed in uncharted waters.

The fundamental distinction from the tradition market behavior had been the extent of concerted and coordinated inflationism engaged by global governments.

Data provider and research outfit Trim Tabs recently decomposed the buyers of the latest rally in the US markets and found little proof of mass public participation (see figure 1).

Figure 1: Fool.com/Trim Tabs: Who’s Buying This Rally?

This is why the “desperately seeking normal” camp has utilized myriad justifications for declaring the market’s unsustainable trend, such as a low volume or sponsorship (John Hussman), low cash levels of mutual funds (Claus Vogt), or even worst cycle for dividends (Floyd Norris) [But unlike the others, Mr. Norris makes a spin that a sharp plunge in dividends may translate to a sharp recovery] to many other issues mostly focused on valuations (e.g. Vitaliy Katsenelson).

Little have these experts noticed that government policies of printing colossal waves of digital and paper money would have an impact to the markets, had to go somewhere or find something to exchange for and would affect the markets and the economy unevenly. One analyst even called “inflation” as “secondary” concern.

In short, the basic flaw wasn’t only to underestimate on money’s neutrality but to greatly discount the incentives of the policymakers that prompted for such policy actions.

Value Scale Of Authorities: Banking Gets The Priority

Importantly, the obvious policy priorities of global authorities, especially in the US have been to rescue and ensure the survival of its banking system. The US and European governments have spent and guaranteed some $15 trillion (Bloomberg) of commitments or liabilities! This signifies as more than two fifths of the combined economy.

For anyone to argue that these governments have been devoting their efforts to mitigating economic woes (such as unemployment) have severely been misjudging the scale of values of those in power.

And this also has been evident with a shift in the model of the banking system from one providing traditional “loan services” to a “Banker as Trader” business model, where major banks have seen profit windfall from arbitraging financial markets that have been heavily massaged by the US government.

In 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects, we have discussed why most of the financial markets have been dysfunctional to price market based risks.

We said that…

1. By manipulating the mortgage markets and US treasury markets with the explicit goal of lowering interest rates, in order to ease the pressures on property values and to mitigate the losses in the balance sheets of the banking system,

2. By working to steepen the yield curve, which allows for conducive and favorable trading spreads for banks to profit and to enhance maturity transformation aimed at bolstering lending, and

3. By providing the implicit guarantees on ‘Too Big To Fail’ banks or financial institutions, this essentially encourages the revival of the ‘animal spirits’ by fueling a run in the stock markets.

Let me add that by implementing quantitative easing programs, the US government has fundamentally been subsidizing her banks by absorbing the toxic assets of the banking system allowing for the cosmetic enhancements of their balance sheets.

Next, by juicing up the equity markets, the US government has attempted to unleash the “animal spirits” in order for the market to abet on the financing of equity to the capital dispossessed banking and financial industry.

And like hitting two birds with a single stone, such unprecedented scale of market manipulations attempts to paint a picture of recovery and allow for the redeployment of stashed capital at the expense of savers.

In other words, the incentives to manipulate the financial markets to attain stabilization of the banking system appear commandingly superior to any other concerns.

Ergo, the markets of 2009 behaved in terms of the impact from political policies, as we correctly predicted in November of 2008 [see Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?], and believe that such dynamics will remain in operation for 2010, as we asserted in Investment Is Now A Gamble On Politics.

How does the US government manipulate the stock market? Perhaps through the Presidential Working Group On Financial Markets, an ad hoc group created in March 18, 1988 via Executive Order 12631 by President Ronald Reagan “established explicitly in response to events in the financial markets”, possibly channeled through the S & P futures.

As Zero Hedge’s Tyler Durden suggests, ``One way to manipulate the stock market would be for the Fed or the Treasury to buy $20 billion, plus or minus, of S&P 500 stock futures each month for a year. Depending on margin levels, $20 billion per month would translate into at least $100 billion in notional buying power. Given the hugely oversold market early in March, not only would a new $100 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $300 billion in newly printed shares that have been sold since the start of April.”

Of course, manipulation of the stock market would be speculation on our part. But the underlying incentive seems credible enough to suggest that such conjecture could be for real.

China And The Bubble Cycle In Pictures

Most of the time narratives haven't been convincing enough to present a strong case.

Hence I decided to put into pictures, some relevant data that may signal the whereabouts of China's bubble cycle.

In our earlier post [see Jim Chanos Goes From Micro To Macro With Bet Against China] we showcased the chart of a bubble cycle.

I am republishing it below for comparison purposes.


In the outset of the new millennium, the US dot.com bubble appears to have unraveled exactly as the dynamics shown above.

The Nasdaq chart (courtesy of bigchart.com) shown below went parabolic before collapsing.

Today, or nearly 10 years after, sadly the Nasdaq remains distant from its bubble highs.

And it's seems no different from the way the US real estate bubble unfolded in 2002-2006 (courtesy of the New York Times)...

...and as earlier stated bubble dynamics are manifested on asset prices via massive overvaluation and a manic 'euphoric' mood by the public.

China is alleged to be at a risk of an imploding bubble, which is deemed by some as a clear and present danger. Given such premise we should then expect some parallels with the bubble cycle template above to take shape.

In other words, China's asset markets should somewhat resemble the above dynamics.

So have these concerns been justified?

While it is true that there has been an unprecedented surge in credit expansion which has been the primary cause of concern of bears... (the following charts except indicated are sourced from World Bank China)

...these has not yet been apparent in property prices.(see below)

Even Bloomberg's own property index chart for China hasn't been frothy...yet.

We don't see the same phenomenon in China's stock markets too (unless one interprets the 2008 top as the main inflection from which today's rally accounts for merely a countertrend action)...
And so far the booming conditions experienced by China has emanated from government spending...
Although the massive credit expansion appears to be filtering into the domestic economy...
Bottom line: China's Bubble has yet to mature or transition into the mania phase. It's probably not the right time to bet against a bubble.

Yet if China is truly in a bubble but the timing of the bet is wrong, then a short position can be bloody or devastating (see bubble cycle template above) to a portfolio, since the manic phase has yet to emerge.

Mercantilism: Misunderstanding Trade And The Distrust Of Foreigners

One of goal is to expose on false doctrines peddled by mainstream media.

Here is another example of the fixation of the currency "magic wand" solution to global ills.

In a recent article by the Economist, the woes of Japan's diminishing share of world trade has unfairly been pinned to its firming currency.

From the Economist, ``Its 10% slice this year will equal that achieved by Japan at its peak in 1986, but Japan’s share has since fallen back to less than 5%. Its exporters were badly hurt by the sharp rise in the yen—by more than 100% against the dollar between 1985 and 1988—and many moved their factories abroad, some of them to China. The combined export-market share of the four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) also peaked at 10% before slipping back."

While it may be true that Japan's share of world exports have fallen, blaming the strong yen is far from accurate. There may have been some companies or industries that may be affected, but this can't be applied in the general or macro sense.

What this implies is that the article has engaged in selective perception of its presentation of facts or has engaged in fact twisting in of support of a preconceived bias, i.e. inflationism via anti-market bias currency interventions.


As you will note from the chart above by Google's public data, exports as % of GDP has been rising for the world.

This means that for most of the world's major economies, exports have been improving. This includes the BRIC's or particularly China or even the 'burdened' strong yen of Japan.

Yet, to give a better perspective, the world's GDP has been in an uptrend going into the 2008 crisis, with most of the world's economies reflecting such improvement.

In other words, the impression that China has been stealing export market share, by manipulating her currency, at the expense of Japan who 'suffers' from a strong currency is far from the reality.

Instead, what has been happening is that as globalization gets entrenched, the pie of world output has been increasing with an increasing share of contributions from more nations nations participating in global trade, particularly, from emerging markets as China.

In short, the major fallacy of the mercantilist view is the perspective that trade is a zero sum game. It isn't. In fact globalization has generally benefited the world.

And currencies, the favorite snake oil nostrum, have hardly been the determinant of the share of exports or competitiveness or economic growth. [see previous discussion: Big Mac Index: The Fallacy of Blessed And Burdened Currencies]

In fairness to the Economist, they mentioned other factors that may have helped China's expanding exports amidst a falling share of her major trading partners during the recent recession.

``Lower incomes encouraged consumers to trade down to cheaper goods, and the elimination of global textile quotas in January 2009 allowed China to increase its slice of that market."

Nevertheless, article's underlying theme seems slanted towards 'Sino phobia' -which unnecessarily portrays her as arbitrarily benefiting from the recession.

Again the Economist, ``Strong growth in China’s spending and imports is unlikely to dampen protectionist pressures, however. China’s rising share of world exports will command much more attention. Foreign demands to revalue the yuan will intensify. A new year looks sure to entrench old resentments".

Well perhaps it is more than just a misperception of the role of trade but from an anti-foreign bias endemic in the public's mind.

According to Professor Bryan Caplan, ``The root error behind 18th-century mercantilism was an unreasonable distrust of foreigners. Otherwise, why would people focus on money draining out of “the nation” but not “the region,” “the city,” “the village,” or “the family”? Anyone who consistently equated money with wealth would fear all outflows of precious metals. In practice, human beings then and now commit the balance of trade fallacy only when other countries enter the picture. No one loses sleep about the trade balance between California and Nevada, or me and iTunes. The fallacy is not treating all purchases as a cost but treating foreign purchases as a cost." (emphasis added)

Bottomline: Mercantilist solution deals with symptoms and not the cause. This means that policymakers who follow mainstream prescriptions is likely to suffer from the law of unintended consequences.

Jim Chanos Goes From Micro To Macro With Bet Against China

Jim Chanos, one of the most successful and well respected investors, who specializes is short selling, has reportedly bet against China.

This from the New York Times,

``Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.

``As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

``“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point." [emphasis added]

Credit excesses is a necessary but not a sufficient condition in the formation of bubbles. That's because valuation excesses have always been a manifestation of the collective actions of mass psychology filliped by excessive doses of credit.

And markets are primarily and basically psychology, which means people respond to incentives from which government policies have been a key instrument.

So yes, while we agree with Mr. Chanos that current policies in China, and the continued pursuit thereof may bring her towards a full bubble cycle, we don't agree that China has reached a manic phase of typical bubble cycle [as we have argued in China's Bubble And The Austrian Business Cycle.]

There will be more convincing and obvious signs where China would have reached its 'euphoric' or manic zone. Mr. Chanos may be betting too early and too soon which may be catastrophic (see below).
Here is the next chink in the armor for Mr. Chanos, again the same New York Times article,

``For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.

``“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

``Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion."

``But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans. [emphasis added]

Two noteworthy developments here:

One, in contrast to Mr. Jim Chanos' former exploits where he had been one of the originating or 'lead' contrarian, here we have the famous short seller cramming with a crowd of China bears or skeptics.

In other words, instead of relying on his convictions from self-analysis, he seems to be simply borrowing the unproven idea of others.

As Warren Buffett warned, "risks comes from not knowing what you are doing".

Two, Mr. Chanos appears to confuse interpreting actions of profit driven corporations as similar with that of an economy. The latter of which is more complex with multitude of working parts driven by distinct incentives, e.g. enterprises-profits, government leadership-politics, bureaucracy-technical guidelines provided by leadership, state owned enterprises- a mixture of both etc...

In addition he appears to be bewitched by mainstream's "aggregate-ism" or the flawed notion that the world operates in simplistic dynamics-so as to fall for inane sloganisms as China Inc.

In short, Mr. Chanos appears to have departed from his field of specialization (residual specific risk), and now dabbles with issues which he seems unfamiliar with, particularly by engaging in macro bets (systematic risks).

Considering that policy based imbalances have brought upon many opportunities to engage in specific risks globally, it a curious thing for Mr. Chanos to deviate from his expertise.

And this leads us to wonder, "Could Mr. Chanos have reached what is known as the Peter Principle or "Rising to one's level of incompetence"? Or could his actions reflect on overconfidence from his strings of successes?

Big Mac Index: The Fallacy of Blessed And Burdened Currencies

The Economist recently published its updated Big Mac Index aimed at demonstrating whether a currency is cheap or expensive relative to the US dollar, as benchmarked to the price of the a McDonald's Big Mac Burger in the US.


According to the Economist, (bold highlights mine)

``THE Big Mac index is based on the theory of purchasing-power parity (PPP)—exchange rates should equalise the price of a basket of goods in different countries. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark. So our light-hearted index shows which countries the foreign-exchange market has blessed with a cheap currency, and which has it burdened with a dear one. The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago.

Looking at the chart above, 'expensive' nations hail mostly from the Euro zone except for Australia, Canada and Turkey.

On the other hand, emerging markets, especially our ASEAN neighbors Indonesia, Thailand and Malaysia have been classified along with China as "cheap".

So by virtue of association we assume that the Philippine Peso is likely to be in the 'cheap' category.

Yet reading through the article we observe that 'cheap' currencies have been reckoned as "blessed" whereas 'dear' currencies have been deemed as "burdened".

This is just an example of the perverted mainstream view [as recently discussed in Dueling Keynesians Translates To Protectionism?] which gives prominence to mercantilist ideology that the advocates "inflationism" and varied form of regulatory protectionism.

The oversimplistic idea is that 'cheapness' equals export strength and competitiveness which translates to economic growth.

Yet such preposterous prejudice is unfounded.


Based on the list of world's export giants from wikipedia.org estimates (left window), 8 nations from Europe plus Canada comprise the top 15 biggest international exporters belong to the "expensive" category. In short, a majority.

Meanwhile, only 3 of the ultra blessed 'cheapest' currency nations (Mexico, Russia and China) and marginally cheaper (South Korea and Japan) are part of the roster of elite exporters.

Moreover, in terms of competitiveness, except for Singapore, Japan and the US, 7 out of the 10 most competitive nations, according to the World Economic Forum, come from the 'burdened' expensive currency group.

In other words, the rationalization of 'cheap' as blessed and 'dear' as burdened greatly misleads because, as evidence reveals, cheapness doesn't guarantee competitiveness or export strength.

Why the mainstream's predisposition on such a view? Because of the fixation to parse on economic disequibrium predicated current account asymmetries.

Zachary Karabell writes in the Wall Street Journal that global imbalance is a myth because in no time in history has there been a global economic equilibrium.

From Mr. Karabell (bold highlights mine), ``The blunt fact is that at no point in the past century has there been anything resembling a global economic equilibrium.

``Consider the heyday of the "American century" after World War II, when Western European nations were ravaged by war, and the Soviet Union and its new satellites slowly rebuilding. In 1945, the U.S. accounted for more than 40% of global GDP and the preponderance of global manufacturing. The country was so dominant it was able to spend the equivalent of hundreds of billions of dollars to regenerate the economies of Western Europe via the Marshall Plan, and also of Japan during a seven year military occupation. By the late 1950s, 43 of the world's 50 largest companies were American.

``The 1970s were hardly balanced—not with the end of the gold standard, the oil shocks and the 1973 Arab oil embargo, inflation and stagflation, which spread from the U.S. through Latin America and into Europe.

``The 1990s were equally unbalanced. The U.S. consumed and absorbed much of the available global capital in its red-hot equity market. And with the collapse of the Soviet Union and the economic doldrums of Germany and Japan, the American consumer assumed an ever-more central position in the world. The innovations of the New Economy also gave rise to a stock-market mania and overshadowed the debt crises of South America and the currency implosion of South Asia—all of which were aggravated by the concentration of capital in the U.S. and the paucity of it in the developing world. When the tech bubble burst in 2000, it had little to do with these global dynamics and everything to do with a glut of telecommunication equipment in the U.S., and stock-market exuberance gone wild."

In looking at the US current account chart from globalpolicy.org one would note that deficits began to explode during the 80s.

This probably implies that, aside from the above assertion by Mr. Karabell, as the China and emerging markets got into the globalization game, the US deficits soared. This bolsters the Triffin Dilemma theory as vastly contributing to such phenomenon.

Moreover, mainstream experts seem mixed up on the participating identities of those involved in current account and trade deficits with that of budget deficits.

With budget or fiscal balancing it is the government that accrues the surpluses or deficits. In contrast with trade balances, individuals through enterprises and not nations engage in commerce.

Professor Mark Perry makes a lucid explanation, (all bold underscore mine)

``It might be a subtle point, but it's important to realize that countries don't trade with each other as countries - rather it's individual consumers and individual companies that are doing the buying and selling. The confusion gets reinforced when we constantly hear about the "U.S. trade deficit with Japan" or China, which might again imply that the "unit of analysis" for international trade is the country, when in fact the unit of analysis is the individual U.S. company that engages in trade with other individual companies on the other side of an imaginary line called a national border.

``It's possible that some of the confusion about international trade can be traced to confusion about the "trade deficit" and the "budget deficit." The relevant unit of analysis for the budget deficit is indeed the country, since it's the entire country via elected officials that is responsible for the "budget deficit." By conflating these two distinctly different deficits, it's then easy to assume that the relevant unit of analysis for both is the "country" when in fact that only applies to the "budget deficit" and not the "trade deficit."

``Once one understands that it's individual companies, not countries, that are doing the trading, then it's not so easy to get fooled by statements or headlines like "Punitive tariffs are being imposed on China," or "Obama to hit China with tough tariff on tires." Since China doesn't actually trade with the United States at the national level, tariffs cannot be imposed on the country of China - it's not like the United States government sends a tax bill to the Chinese government.

``Rather, since it is companies that are trading, it's companies that have to pay the taxes (tariffs) TO their OWN government. In the case of U.S. tariffs on Chinese tires or steel, the tariffs (taxes) are being imposed not on the Chinese government or even the Chinese steel-producers, but on American companies who now are taxed for buying tires or steel from China, and then those taxes are ultimately passed along to the individual Americans who purchase the tires and purchase the consumer products like automobiles that contain Chinese steel."

In addition, it would seem similarly incoherent and ironic to think that manipulating currencies to subsidize "exporters" would generally benefit the country engaged in such policies.

That's because as a general rule for every subsidy someone has to pay for the "subsidized" cost. In short, subsidies redistribute rather than generate wealth.

Professor Donald Boudreaux debunks the favorite fixation of the mainstream: the US-China imbalances,

``The real costs of the resources and outputs exported by the Chinese people are not lowered simply because Beijing keeps the price of the yuan artificially low. And the resources spent to supply the extra American demand that results from an artificially low price of yuan—even though they are unseen by the untrained eye—represent a huge cost that harms the Chinese economy."(emphasis added)

So not only have mercantilists been barking up at the wrong tree, they have been brazenly promoting policies that focuses on short term fixes, which favors a select political group, and importantly, raise the risks of provoking a mutuality destructive trade war.

In closing this apt quote from John Chamberlain, ``when nations begin worrying about the "balance of trade," they are saying, in effect, that the price of a currency expressed in an exchange rate is more important than bananas, or automobiles, or whatever. This is a perversion that sacrifices the consumer to an abstraction; better let the currency seek its own level in the world's money markets."

Federal Bailout For US States In 2010?

In spite the seemingly sanguine outlook radiated by the key markets, which appears to be reflected on many economic indicators as to signify a 'recovery', fiscal conditions of US states continue to languish.

That's because the profligate spending during the boom days haven't not been filled by falling tax revenues amidst the recent recession until the present. And this has resulted to huge budget deficits for US states.

The chart below by Casey Research shows of the dramatic fall of State revenues over the last 12 months.


According to Casey's Bud Conrad, ``The important point is that the revenues are still in decline, indicating that we are not yet out of the recession."

State fiscal conditions are lagging indicators.

Nevertheless last year's collapse in State revenues, which appears to have bottomed, still reflects on the fragile state of the US economy.

Moreover, the enormous deficits will likely entail a drastic austerity (cut in social services and bureaucratic personnel) or raise taxes or entreat for a Federal bailout in 2010 or a combination of these measures.


The Center on Budget and Policy expects budget shortfalls for the 48 States at an estimated $193 billion for 2010 and $180 billion for 2011, or some $350 billion for the next two years.

Possibly compounded by the deficits haunting the US public pension system and the still struggling real estate industry whose next wave of resets [see 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects],may further place additional strains on the crisis affected States, the Federal government may likely to opt for a bailout route.

And in accord with Minyanville's Todd Harrison who recently wrote,

``States across the union -- particularly those that benefited from the housing bubble and the taxable income associated with it -- are now experiencing a massive reversal of those golden years. The decline is so swift that it will take several years for the real estate reset to flush its way through municipal budgets.Additionally, The US public pension system -- one of our 2009 themes -- faces a higher-than-expected shortfall of $2 trillion that will increase pressure on strained finances and further crimp economic growth, according to the chairman of New Jersey’s pension fund, as quoted in the Financial Times.

``This evolution should lead to a comprehensive Federal bailout package in 2010. TARP money returned to the government will likely be funneled back to the states, including but not limited to Arizona, California, and New York, as taxpayers shoulder the load and bear the burden of our outsized societal largesse."

Finally, while authorities appear to be engaged in a rhetorical deliberation towards a transition to an "exit" mode, where administrative (but political) therapy is supposed to pave way for organic growth dynamics, it is my view that 2010 will continue with policy accommodations (a euphemism for inflationism).

Nonetheless the string of prospective interventions will also likely put pressure on US savings, as shown in the chart below from Bloomberg's chart of the day...


...where government expenditures have more than offset accrued savings from individuals and corporations.

To quote the Bloomberg article,

``The savings shortfall widened to negative 2.3 percent in the first three quarters of last year from negative 0.2 percent in all of 2008. Before 2008, there hadn’t been a full-year drop since 1934, the last year of a four-year period when rates were below zero.

``Deficit spending by the federal government reduced net savings at an annual rate of $1.33 trillion during last year’s third quarter. State and local government deficits widened the gap by another $14.9 billion. At the same time, personal and corporate savings increased by a record $983 billion."

The grand question is who gets to finance this shortfall? The answer of which is likely to determine the fate of the markets for 2010.

Asian Companies Go For Value Added Risk Ventures

In the ambiance of globalization or free markets, Asian companies have now been boldly embarking to enhance their competitiveness by scaling up the value chain in the technology sphere.

Yes, Asians appear to realize that we are transitioning into a post-industrial era or the third wave or the information age more than mainstream would like us to believe.

This telling article from the New York Times, (all bold highlights mine)

``For years, the process remained relatively static: PC makers like Hewlett-Packard and Apple, with well-staffed research labs and design departments, would dream up their next product and then hire a Chinese or Taiwanese fabricator to manufacture the largest number of units at the lowest possible cost."

``But lately, this traditional division of labor has been upended. Many of those Asian companies have moved well beyond manufacturing to seize greater control over the look and feel of tomorrow’s personal computers, smartphones and even Web sites.

``The investment arms of large Taiwanese and Chinese manufacturers have created an investment network in Silicon Valley operating under the radar that pumps money into a variety of chip, software and services companies to gain the latest technology. As a result, some Asian manufacturers have proved more willing than entrenched Silicon Valley venture capitalists to back some risky endeavors.

``“In the past, the manufacturers would sneak around and get inside information on technology by investing in these companies,” said K. Bobby Chao, the managing partner at DFJ DragonFund China, a business that invests in technology companies in China and the United States. “Now, they’re more involved, more visible and charging after more complex maneuvers.”

``As manufacturing of electronics in the United States began moving offshore decades ago, some feared the American economy would suffer. But the American companies, as well as economists and policy makers, said that as long as the high-value jobs like research and design remained in the United States, there was little danger.

``Asian investments in Silicon Valley present some risks for America’s top technology companies, which could lose their connection to top innovations."

The recent crisis, perhaps, may have opened the windows for Asians to make use of their accumulated savings, liberal access to financing, manufacturing and technology experience accrued over the years, revitalized confidence to take on new challenges and importantly a freer market environment, aside from a continually advancing research and development capabilities to advance on their risks ventures.

Again from the New York Times,

``The investments by Asian companies have already started to pay off. At the Consumer Electronics Show this week in Las Vegas, people will see laptops that end sluggish start times and instead boot up instantly and TVs that do not require remotes because they can see the gestures of viewers. These features are a result of strategic investments in technology by Asian manufacturers. One Asian manufacturer turned investor is Quanta, based in Taiwan, which has long been one of the largest manufacturers of laptops and personal computers for major brands like H.P., Acer and Dell.

``To keep those customers coming back, it needs unique product designs and technologies that give it an edge over competitors."

In other words, for Asia to improve its wealth and economic conditions requires capital accumulation or added economic value (or the lengthening of the economic structure) by producers competing to satisfy the needs of the consumers. The article appears to underscore on such a transition.

And it is only under free market environs where producers become sensitive to changes of consumer desires, as Professor Ludwig von Mises explains, ``But it is precisely modern capitalism that is faced with rapid changes in conditions. Changes in technological knowledge and in the demand of the consumers as they occur daily in our time make obsolete many of the plans directing the course of production and raise the question whether or not one should pursue the path started on."

The Lost Decade: US Edition Part 2

As we earlier pointed in The Lost Decade: US Edition, stock market returns had been dismal, a decade since the new millennium.

Well, America's blemished decade hasn't just been confined to the performance of its stock markets, but likewise reflected on major economic indicators as magnificently shown in the chart below from the Washington Post.
According to the Washington Post, (bold emphasis mine)

``The U.S. economy has expanded at a healthy clip for most of the last 70 years, but by a wide range of measures, it stagnated in the first decade of the new millennium. Job growth was essentially zero, as modest job creation from 2003 to 2007 wasn't enough to make up for two recessions in the decade. Rises in the nation's economic output, as measured by gross domestic product, was weak. And household net worth, when adjusted for inflation, fell as stock prices stagnated, home prices declined in the second half of the decade and consumer debt skyrocketed."

The obvious lesson is that policies that promote short term prosperity through inflating asset bubbles negates the ephemeral yet unsustainable policy driven gains.

As Ludwig von Mises presciently warned in his magnum opus, ``The boom squanders through malinvestment scarce factors of production and reduces the stock available through overconsumption; its alleged blessings are paid for by impoverishment."

In short, bubble blowing policies simply don't work.

To add, the impact of the fast ballooning Federal regulations as seen in the Federal Register journal [as earlier discussed in Has Lack Of Regulation Caused This Crisis? Evidence Says No] should likewise be considered in the decomposition of the prevailing conditions of the US economy.

As previously quoted,``According to the Washington, DC-based Competitive Enterprise Institute’s 2009 edition of “Ten Thousand Commandments” by Clyde Crews, the cost of abiding federal regulations is estimated at $1.172 trillion in 2008 – 8% of the year’s GDP. This “regulation without representation,” says Crews, enables the funding of new federal initiatives through the compliance costs of expanded regulations, rather than hiking taxes or expanding the deficit."

In other words, numerous opportunity costs from the costs of compliance, costs of an expanded bureaucracy and the attendant corruption, the cost of the crowding out of private investments, the misdirection and wastage from inefficient use of resources and other forms 'unseen' distortions from the said regulations should also be reckoned with in appraising the economy.

To argue that America's decade have been emblematic of the frailties free markets is to engage in Ipse Dixitism or plain falsehood.

That's because it's easy to use the strawman to blame others, yet the worst is to admit one's mistakes. And passing the buck won't solve anything but agitate for more restriction of individual liberties and possibly provoke unnecessary conflicts.

In 2009, Stocks Over Bonds Means Inflation Over Deflation

This should be an interesting chart from Bloomberg's chart of the day.

According to Bloomberg,

``U.S. stocks beat 30-year Treasury bonds by a record 36 percentage points in 2009 as investors bet on a recovering economy and the government sold a record $2.11 trillion in debt.

``The CHART OF THE DAY shows the performance of 30-year bonds versus the Standard & Poor’s 500 Index since 1978, according to data compiled by Bloomberg and Bank of America Merrill Lynch. Last year, the debt lost about 13 percent, while the benchmark index for U.S. stocks surged 23 percent. Gold futures added 24 percent in New York.

``Stocks trailed bonds in 2008 as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. They switched places in 2009 as the yearlong contraction in U.S. gross domestic product ended and President Barack Obama raised money to fund economic stimulus programs."

I'd like to add to the perspective where 2009's outperformance of stocks over bonds essentially validates the camp of those who argued for inflation to prevail over the camp of those who advocated for deflation. And the difference hasn't been marginal.

Yet this serves as an example where a misread would have been devastating to the real returns of a portfolio.

We should see the same dynamics for the 2010.

Dueling Keynesians Translates To Protectionism?

Finger pointing seems to be the favorite but fatalistic past time for self-righteous mainstream experts and their gullible followers.

Not content with assigning blame on the marketplace for last year's crisis, a further step is to engage and rebuke foreign central planners on their elected policies.

For instance, the mainstream tends to focus on global imbalances as a source of the present tensions, where savers mainly from China have been blamed for the troubles in the US, primarily by manipulating the former's currency.

Hence, the prescription from the mercantilist camp is simplistically to demand China to conform to the interests of Americans by revaluing its currency, in order to rebalance the world by regenerating the lost "aggregate demand".

And on the other end, for the Americans to devalue their currency.

In short, a waving of the magical wand in view of currency adjustments will automatically resolve today's problems in the eyes of the politically correct mainstream.

Mainstream seem to see the problem like a shower faucet that can simply be turned hot or cold. It's that simple.

Never mind, if a "manipulated" Chinese currency translates to overall cheaper goods for US and global consumers.

Yet, if we go by the words of Adam Smith consumers and not producers should be the chief concern, ``Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce."

The mercantilist policy of forcing currencies to adjust benefits a politically privileged select "producers" more than the consumers or society in general.

Never mind too, that even when some currencies had been repriced, evidence doesn't automatically extrapolate to support expected benefits.

For instance the Japanese yen, which firmed from 350 (in the 70s) to about 100 (today) remains as one of the world's major exporters, and is ranked 8th among the world's most competitive nations in 2009 according to the World Economic Forum is said to be still deficient in domestic demand after all these years of currency strength.

On the other hand, following the recent hyperinflation episode, Zimbabwe has yet to transform into a major exporting powerhouse, while the Philippines, following over 4 decade of devaluation from Php 2 to Php 55 to a US dollar, remains an underdog in terms of goods and services exports.

And if one were to argue in the context of low net wages then the Philippines, India and Indonesia should be powering ahead based on a study by UBS.

As previously argued, currencies aren't everything. Capital and economic structures, political framework and its underlying institutions aside from cultural influences essentially varies from country to country.

Besides mainstream's dogmatism on the currency panacea presumes that all products have similar price sensitivity and is sold to one class of consumers, which isn't anywhere true.

Never mind too that when the mainstream argue about oversimplified nostrums, which is for China to revalue and for the US to devalue, exports as % of the GDP for the US translates to only 11%.

This means that devaluation isn't truly directed at boosting exports at the expense of the society, but instead tacitly aimed at reducing outstanding liabilities (about 350% of the GDP) to the benefit of select industries as the banking system and Wall Street.

Never mind too that the world operates on the US dollar standard system where according to the Triffin Dilemma, expanding global trade requires US dollar financing via expanded deficits. It would appear that the mainstream sees no distinction in the economic and trade categorization of China and the US.

Never mind too that the Chinese didn't force Americans to engage in a euphoric mania to buy houses, or for US institutions to engage in excessive risk taking or for the lapses of American regulators who had been caught asleep at the wheel.

Never mind too that Americans had responded to an ad hoc cocktail mix of domestic policies that promoted a bubble:

An extended ultra low interest rate regime, administrative housing policies that encouraged speculation and subsidized mortgage indebtedness, tax policies that tilted the public's incentives towards assuming debt than equity and capital regulations that prompted for regulatory arbitrage via financial innovation.

Yet the mainstreamism parses their perception of 'macro' problems on their perceived one dimensional framework than considering the mutual or bilateral aspects.

NYU's Professior Mario Rizzo asserts that the conflicting interests of international policymakers operating on the Keynesian framework leads to a negation of their system.

From Professor Rizzo,(emphasis added)

``But, as some economists freely admit, the problem is that this pits one country’s interest against another. Either China could gain or the US could gain by manipulating exchange rates.

``Yet I cannot help imagining that a Beneficent World Planner with Keynesian views might think it equitable to permit unemployment to stay high in the US but not in China. Not only is the US safety net better, many of our poor or lower middle class are better off than Chinese workers.

``However, the ideal Keynesian solution, we are told, is to have an internationally coordinated policy of low interest rates. Of course, China has been following a low interest-rate monetary policy; credit is abundantly available. But Chinese bankers and economists have become increasingly worried about bubbles. Should they not be?

``The Keynesian world-view is skeptical of the classical liberal idea of the international harmony of interests under free trade, when the economy is operating at less than full-employment. In this world, there are definite conflicts of interest among nations. A Chinese Keynesian would not have the same views as Krugman. This is not because they differ about theory but because the theory sets up conflict. Such conflict is naturally settled by the partiality of their perspectives.

``If the Keynesians are right, this is another example of traditional microeconomic theories being annulled in their system. I suggest that the formal limitation to conditions of less than full employment is not as stringent as it sounds. Much, perhaps most, of the time the economy will arguably be in either a state of less than full employment or be threatened with some change in the news that will knock it out of full-employment equilibrium."

I would add to Prof Rizzo's position that not only would the result be a nullification but 'settled by the partiality of their perspective' via a non-zero sum game theory called the Prisoner's dilemma or a game theory which "demonstrates why two people might not cooperate even if it is in both their best interests to do so".(wikipedia.org)

This involves policymakers to either cooperate or adversely outdo or undertake policies that clashes with each other, even to the extent that they could be mutually destructive, possibly in the form of protectionism.

And indications of the partiality of political policies in the direction of an internecine trade war between two camps of opposing Keynesian practitioners seems to have emerged.

As observed by John Stossel,

``The administration continues their relentless march towards a Trade War with China:

``Trade disputes between Beijing and Washington over exports of tires, chickens, steel, nylon, autos, paper and salt are multiplying and further damaging the already tense relationship between the two economic powers.

``The Obama administration says it only aims to protect the country's rights, but the Chinese counter that the United States started the whole thing by launching an unprovoked attack".

So while China has been opening up to its neighbors, a gamut of "beggar thy neighbor" or tit-for-tat policies appears to be engaged by Keynesian adherents of both US and China at risks of another world recession or even depression.

Again John Stossel, (bold highlights mine)

``This is madness. Even if China is subsidizing their exports, the US consumer benefits at China's expense. A Trade War will simply make everyone worse off (except maybe unions), leaving consumers with fewer choices and higher prices. The Administration needs to swallow its pride and drop the tarriffs, because if the US doesn't lead on free trade, no one will. A recent study by Global Trade Alert, a trade policy think tank based in Europe, shows that global protectionism is on the rise, with the wealthiest nations imposing more than 180 protectionist measures in the last year. Congress, meanwhile, won't even bring the Colombia Free Trade Agreement to a vote".

In the past free market devotees had been deceptively labeled as ruthless 'liquidationists'. We turn the tables and ask, what should we call policymakers and their adherents who espouse on belligerent or hostile short term oriented policies predicated on ideological zealotry that places society at extreme risks?

Prices, Statistics and Lies

Here is an interesting table that compares prices of select items in the US in 1999 (before) and in 2009 (after) or over a period of ten years.

courtesy of walletpop.com (tip of the hat to Jeffrey Tucker of the Mises Blog)

The table shows that prices don't move up or down uniformly and are relative (some prices move more than the others).

Over the decade, most of the prices of goods or services had been higher although some were lower.

Prices reflect an amalgam of factors: government policies, supply demand or market dynamics, productivity, globalization, innovation, competition, demographics, cultural and others.

Would it not be a puzzle as to how these widely variant figures can be cobbled or aggregated as simplified statistical measures that are deemed by the officialdom and the public as accurately representing "inflation"?

Nevertheless these are the same tools used by central planners to determine and effect political and economic policies. No wonder the laws of unintended consequences exist.

As Mark Twain once observed, "There are three kinds of lies: lies, damned lies and statistics."

Japan Exporters Rediscovers Evolving Market Realities

Mainstream economists tell us that falling aggregate demand from developed economies will cause global deflation. Hence they justify government intervention via various kinds of stimulus to replace "lost demand".

Unfortunately, such oversimplified concept mistakenly infers that markets trades based on one type of product with single class of producer and buyer, and operates on similar level of price sensitivity.

In the real world, markets are complex and respond or adjust to reflect on where the consumers are.

As marketing guru Seth Godin aptly writes, ``Your customers define what you make, how you make it, where you sell it, what you charge, who you hire and even how you fund your business. If your customer base changes over time but you fail to make changes in the rest of your organization, stress and failure will follow." (emphasis added)

That's the reality of business.

Proof?

While it may be true that consumption in developed economies have been slowing, Japan's export producers have reportedly been devising or adopting new marketing strategies that would instead cater to emerging markets and deal with "volume" than stick to old unprofitable models (based on the dynamics of the previous bubble cycle).

This from the Japan Times, (bold highlights mine)

``Although Japanese electronics enjoy a widespread reputation for high quality and stylish design, electronics makers no longer seem able to maintain their presence in the global market by simply relying on these elements.

``Until recently, many makers focused on targeting wealthy overseas consumers who were willing to pay for high quality and expensive Japanese products.

``But given the shrinking domestic market and lackluster consumption in developed countries, they have begun switching their attention to middle-class consumers in emerging nations. Accordingly, they have started making efforts to produce simpler and more affordable products for middle-class workers in those countries.

``Such consumers are often referred to as the "volume zone," and it is believed that about 1 billion people worldwide fall into this category.

``While it won't be easy due to the fierce competition from other Asian electronics makers, analysts agree that winning a leading share of emerging markets is key to the growth of Japan Inc. in the coming years."

Rediscovering the market or "seeking the money trail" is the key to any entrepreneurs or any nation's economic success.

In the Philippines, based on empirical evidence one would be astounded by packed malls last Christmas, considering that we host 4 of the 11 largest mall of the world [see A Nation Of Shoppers??!!] in defiance of the economic assumptions of experts and of self-righteous politicians that the Philippines is "poor".

Businesses or entrepreneurs more than professional economists or politicians dictate on the economic path of a nation.

As Ludwig von Mises once wrote, ``The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him."