``Man, on the other hand, does not now possess a like set of instinctual do-nots: built-in prohibitions. Instead, he must enjoy or suffer the consequences of his own free will, his own power to choose between what's right and what's wrong. In a word, man is more or less at the mercy of his own imperfect understanding and conscious decisions.” -Leonard E. Read Find the Wrong, and There's the Right
WHENEVER someone quotes passages from the Holy Scriptures, in social media or in articles, in order to preach their version of morality, I would almost cringe out of cynicism. Quoting the Bible per se isn’t what I am averse at, but it is the excerpts meant to pontificate on one’s perceived sense of virtues.
Fundamentally, that’s because morality or our sense or perception of right or wrong has massive political implications. And being no stranger to the Bible, which is a daily fare for me, it is my understanding that “sacred words” can be construed or interpreted differently.
Moralism As False Reality
One of the worst things we see from self-designated moralists is reductionism, i.e. the oversimplification of reality as solely operating based on morally redeeming actions.
This view myopically ignores the role of scarcity (resources, time and spatial constraints), prices, individual scale of values, distinctive perception and interpretations of information depending on the sources or the accounts of events, cost of decisions (opportunity costs), cognitive biases, the impact of social mores, rules and regulation and authority, peer influences and the role of human action in adapting to a constantly changing environment.
It would always seem plausible to argue from a generalized standpoint on abstractions as honesty, fairness, equality and etc., but from a case to case basis such applications can exposed as being muddled or twisted or vastly misunderstood. For instance, people can all be honest in their actions, but conflicting opinions, based on interpretation of events or respective interests on how to distribute resources, can lead to conflicts[1].
The fact that conflicts are frequent occurrences even among family members, among friends, associates, or in other diverse types of social interactions reveals of human frailty which is not necessarily about the lack of virtues. Yet self-designated moralists ignore this reality.
As Gene Callahan writes[2], ``Abstraction can be an entertaining and useful activity. But every abstraction falsifies reality simply because it is an abstraction – it is a one-sided emphasis on certain aspects of the real at the expense of neglecting or even denying others. That is not necessarily harmful as long as we remember what we have done. But the abstraction, being simpler and more manageable than the real world, is a seductive fantasy, and the temptation to ignore messy reality and attempt to replace it with a clean and neat dreamworld.” (bold emphasis mine)
In other words, morality as a form of escapism will simply not work.
True, moralization is always melodious to hear. That’s why moralism is the primary staple of politics. Yet, a caveat is that one should vet if the incentives guiding such moralizers matches with their actions.
That’s because morality can be used as instrument for different goals, such as to ingratiate oneself to acquire group acceptance or to promote political agenda-outside of faith alone.
Murray N. Rothbard[3] explains how these are achieved, through the lens of the founder of modern political science Niccolò Machiavelli, (all bold emphasis mine)
`` Following straightaway from power as the overriding goal, and from his realism about power and standard morality being often in conflict, is Machiavelli's famous defense of deception and mendacity on the part of the prince. For then the prince is advised always to appear to be moral and virtuous in the Christian manner, since that enhances his popularity — but to practice the opposite if necessary to maintain power. Thus Machiavelli stressed the value of appearances, of what Christians and other moralists call "hypocrisy."
More from Rothbard on the major work of “Old Nick”,
``Niccolò Machiavelli is the same preacher of evil in the Discourses as he had been in The Prince. One of the first atheist writers, Machiavelli's attitude toward religion in the Discourses is typically cynical and manipulative. Religion is helpful, he opined, in keeping subjects united and obedient to the state, and thus "those princes and those Republics which desire to remain free from corruption should above all else maintain incorrupt the ceremonies of their religion."
It’s no different when applied to many ASEAN tycoons. Author Joe Studwell argues that one of the chinks of vulnerability of the economic elite group has been insecurity. And this has led to an “obsession with status” of which religion is part of assimilative “IN” character ASEAN tycoons has toiled to attain.
``What no godfather believer suggests, but what may also be true, is that evangelical Christianity allows them to have a strongly held belief where their daily lives are all about expressing no beliefs at all unless given a cue by a political power. It is also possible to believe in religion without upsetting Asian politicians, whereas to have independent political or social views is disastrous[4].” (bold highlights mine)
In short, the need to be seen as “moral” is understandably just part of peoples’ prestige seeking intuition or can be a source of fulfilment of social esteem needs.
At worst, moralism can be used as manipulative tools to acquire and or maintain political power or privileges.
And it is the latter aspect which our revulsion is directed to.
Yet, for all its alleged angelic purity, moralizers fail to account for institutional lapses of the Church which had engaged in a nearly 200 year war known as the Crusades (This involved 9 major “Crusades” expeditions plus minor Crusades against Tatars, Balkans, Aragonese Alexandrian and Hussite[5]), the French Religious Wars[6] and even today’s controversial supposed cover up by the Pope of a priest engaged in child molestations[7] and other sex based scandals.
And one of the stated reasons of the Crusades was due to “an outlet for an intense religious piety which rose up in the late 11th century among the lay public” which ironically implies self-righteous intolerance (“us against them” concept). [Whatever happened to the doctrine of forgiveness?]
If World War II was about extremist nationalism, the earlier religion based wars accounted for fatalistic zealotry, both of which vainly fought for idealistic but demented causes aimed at the realization of the universality of morals based on the interpretations and perceptions of their leaders.
And this has been no different for the failed grandest experiment of the 20th century: communism, whose death toll took a horrendous (estimated) 94 million lives[8], in a futile attempt at establishing a communist Utopia!
As Tibor Machan rightly avers[9] (bold highlight mine), ``Does morality need to be reconceived? If one considers what horrible deeds have been perpetrated in the name of serving others, there is little doubt that morality needs a serious reexamination. All the major tyrannies have been carried out in the name of making us serve others instead of ourselves. The very call to submit to czars and tyrants goes hand in hand with the idea that everyone needs to serve something bigger than himself in his life! That would be God or society or humanity. The individual certainly comes off as deserving little love from himself. From commencement speeches to sermons and political oratory galore, one's self doesn't much matter, only other people do. As the poet W. H. Auden quipped, "We were put here on earth to serve other people, what the other people were put here for I don't know."
Moralistic Policies of Redistribution and Inflation Nostrums
What has this got to do with markets? Everything.
Markets are simply mechanisms or platforms of social interactions, via property rights, contractual obligations and voluntary exchanges, meant to fulfil the needs and wants of individuals, which comprise a society, based on the principle of scarcity.
Where the moralists tends to fixate on certain angles, for instance in the flows of money from which exposes some or certain moral shortcoming, the desire to attain a moralist “utopia” or agenda means a call to action for political authorities to close on such gaps. Yet the political act of doing so translates to the curtailment of someone’s property rights or liberty in order to achieve a benefit for another. In short, someone’s benefit is another man’s burden or simply, redistribution.
The booming markets of today are manifestations of such redistribution.
The forcibly lowering of interest rates by global central banks punishes savers, depositors and lenders/creditors and rewards borrowers and speculators. It’s bizarre and dichotomous situation.
For the current crop of moralists, who mostly wears the hat of the regulators and their academic followers, a fixation on short term patches guided by economic theories based on government dicta of money printing and spending, essentially conditions the public’s mindset to engage in wanton immoral acts (of greed and speculation) from which they rail against. It’s like handing a child a bunch of porno magazines while telling him/her that nudity or reading sex magazines is immoral. Yet the mainstream hardly upbraids the skewed incentives provided for by today’s policymakers.
Yet since there is no free lunch, the effective price control coursed through interest rates, like the previous experience, should lead to a massive production and resource allocation distortions in the global economy, which should also be manifested on market pricing. And an eventual capital consumption would occur, following the transition of the boom-bust cycle, once the manipulations of the laws of economics becomes overstretched and snaps backs.
The central bank of Indonesia, which has determined that her markets are presently in a state of a bubble or “Whatever methodology we use” shows an excess valuation”, should be a clear example.
From Bloomberg[10], (bold highlights mine)
``Bank Indonesia board members last year discussed the risks posed by an influx of foreign funds, and the bank did a study on the feasibility of imposing capital controls, Warjiyo said. For now, the bank is “confident” Indonesia can cope.
There is “no need to put capital controls” in place now, Warjiyo said. “The existing framework of monetary policy through setting the benchmark interest rate, foreign-exchange intervention and managing expectations is able to manage monetary and financial stability.”
``At the same time, “if the market behaves irrationally, the study has some reference of measures that can be used to put sand in the wheel on capital flows on a temporary” basis, he said. Mulya said in his e-mail that the bank “reaffirms that there is no plan for capital control.” He also said the bank has a “cautious stance towards large capital inflow of late.”
While Indonesia’s central bank acknowledges that one of its primary or key policy tools is the benchmark interest rates, there will hardly be attributions that interest rates shape the public’s expectations and that the bubble cycles are manifestations of the artificially suppressed interest rates.
As you can see, policymakers are always portrayed as beyond reproach, always need to be seen in control and panders to the public’s impression that they can successfully shape or nurture the laws of economics to their whims....until the basic laws of economics unravels such pretentions.
Yet forcing savers to speculate out of the economic doctrine to spend is simply to rob the public of money, through inflation and eventual capital losses, via the said misplaced policies.
Will officials reverse the policies to curb from apparent “bubbles”? From their tones, they seem to be dithering. Hence the answer is no.
Moreover, with elevated asset prices reflecting economic “recovery”, short term triumphalism is likely to be the path dependency for the prospective actions policymakers: what worked in the recent past should work again (past performance equals future outcome)!
As you can see authorities are merely human beings subject to the same cognitive biases as everyone else.
Do policymakers really set the tone for interest rates?
We think and argue not (see figure 1)
Figure 1: Economagic: Markets Lead Policymakers In Setting Interest Rates
Using the US as example, for every bottom phase (black arrow) of the interest rates cycle, the 10 year constant maturity (red) leads the Fed Fund Rate (blue) higher. The same holds true for the inflection points of an interest rate peak, except during 1981.
In other words, authorities only respond to the rate increases as seen in the markets; they are reactive and not proactive agents. They hardly determine interest rates policy.
Why should government policies lag and not lead the markets?
The answer should be quite obvious, governments through central banks always find low interest rates as an attractive way to finance their spending through borrowing instead of taxation, thereby favor (or would be biased for) extended period of low interest rates.
As Dr. Max More wrote[11], ``The state expands its power largely through taking more of the wealth of productive individuals. Taxation provides a means for funding new agencies, programs, and powers. Raising taxes generates little enthusiasm, so governments often turn to another means of finance: Borrowing and expanding the money supply. Only a legally-enforced monopoly on currency has allowed governments to cover deficits by issuing money. Taxation and deficits are related: If tax rate categories are not adjusted for inflation, inflation pushes people into higher tax brackets: their nominal but not real income rises, giving the government a way of increasing tax revenues seemingly without raising tax rates. Unexpected inflation also reduces the real value of the government's debt.” (bold highlights mine)
In the most recent bubble cycle, the boom was financed by quasi government institutions GSEs, as Fannie Mae and Freddie Mac, which massively underwrote mortgage underwriting activities out of artificially depressed interest rates.
According to Dr. Richard Ebeling[12],
``The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands. This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of uncredit worthy borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac.”
Lessons From The Moralists
So what have we learned from the moralists?
One, it is a misguided belief for anyone to oversimplistically think that central banks will wilfully tighten because it isn’t their interest to do so. If there is a possibility that low rates can stay forever, officials will attempt to do so, because this should be the most politically palatable among other options.
From the mainstream gospel of John Maynard Keynes[13],
``Thus, the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus leaving us in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”
Unfortunately, at the end of the day, the universal laws of economics always prevail.
Second, the tightening of interest rates will come as reactions to the markets which has been experiencing heightened competition for resources via higher prices.
The so called “inflation expectations” are simply nonsense peddled by authorities to hoodwink the public: if the exchange value of one apple is 2 oranges, and if the number of oranges has been doubled then the new exchange ratio of one apple is 4 oranges. Just replace oranges with pesos or dollars you get the same math. The difference is that is the use of money, which functions as a medium of exchange, but does not contain the supernatural powers of Harry Potter.
Athough the moralists imagine that the “expectations” works, in reality they are only defying basic economic laws. Thus, prices will adjust accordingly overtime against their expectations.
Three, rising interest rates doesn’t necessarily or automatically mean a market collapse. Interest rates function as key integral component of business cycles. The peak and troughs of the business cycles largely depends interest rate fluctuations largely manipulated by governments for political reasons.
In a boom phase of the business cycle, markets are thus, sensitive to the rate of increase and the level of increase of the interest rates.
Since rising interest rates reflect on market forces than from government policies, the rate of increases exhibits the degree of competition for resources used on misdirected projects and by the consumers. This should reflect on the moralists’ perverse intention to create a state of permanent but unsustainable boom from unimpeded monetary expansion.
Whereas, the level of rate increases eventually exposes unviable projects to losses, which emerged into existence out of artificially suppressed rates. This will not be uniform though. The tipping point is when interest rate increases would have reached the levels where malinvestments or business errors have massively been clustered.
Fourth it’s not just interest rates. Higher commodity prices from credit or monetary inflation could also impact on the expected returns of unviable projects. Economist James Hamilton argues that an oil shock had also been a major factor in the recent crisis.
We quote Mr. Hamilton[14], ``It is also interesting that the observed dynamics over 2007:Q4-2008:Q4 are similar to those associated with earlier oil shocks and recessions. The biggest drops in GDP come significantly after the oil price shock itself. What we saw in earlier episodes was that the drops in spending caused by the oil price increases resulted in lost incomes and jobs in affected sectors, with those losses then magnifying other stresses on the economy and producing a multiplier dynamic that gathered force over subsequent quarters.” (bold highlights mine)
Today both the interest rates markets and commodities are reflecting the boom phase of what we deem as a new bubble cycle (see figure 2).
Figure 2: stockcharts.com: Broadening Inflation Signs
The commodity markets are not only influenced by expansion of credit and massive government spending but likewise influenced by government restrictions to access more supplies. With oil, 88% of global reserves are held by state and state owned companies[15].
So the missives promoted by moralizers that greed or speculation drives oil or commodity prices has hardly any merit; government owns the printing press that fosters extraordinary demand, while supply is equally constrained by government restrictions basically monopolized by governments. 1+1=2.
While there are other factors involved such as government subsidies, the export land model, strategic petroleum reserves, Hubbert Peak curve for conventional oil, lack of investments for over 2 decades (especially for gasoline refineries in the US), technology and etc.., the cocktail mix of these two forces alone are enough to send towering high energy prices.
Lastly, markets do not react mechanically. They represent human response to ever changing conditions. Today’s market has been more responsive to financial innovation given the more liberal or freer and deeper markets underpinned by rapid technology enhancements and the integration of global markets.
In the chase for the profits, today’s business cycle probably means an attendant credit cycle which would undergird interest rates.
Essentially this means a reflexive self-reinforcing feedback loop between borrowing appetite and state of collateral values-where higher prices raises the collateral value from which encourages more borrowing and vice versa.
Moreover, financial innovation is likely to compel a transition of the credit cycle to what we see as Mr. Hyman Minsky’s model of hedge, speculative and ‘ponzi’ economy.
We quote Mr. Minsky[16], (all bold highlights mine)
“Three financial postures for firms, households, and government units can be differentiated by the relation between the contractual payment commitments due to their liabilities and their primary cash flows. These financial postures are hedge, speculative, and ‘Ponzi.’ The stability of an economy’s financial structure depends upon the mix of financial postures. For any given regime of financial institutions and government interventions the greater the weight of hedge financing in the economy the greater the stability of the economy whereas an increasing weight of speculative and Ponzi financing indicates an increasing susceptibility of the economy to financial instability.”
Bubble policies are likely to encourage a transition from risk averse, to bigger risk taking appetite to outright gambling.
This means that investors at the start of the cycle will engage in hedging (borrow to expand from which the income is used to pay for outstanding interest and principal), will turn to speculators (borrow and use the income to pay only interest rates) and ultimately peak with the transformation to Ponzi phase (borrow to chase rising prices).
And guess what? As in the previous boom, this will be encouraged by the moral hazard provided by big governments.
Back to Mr. Minsky[17] (all bold emphasis mine)
``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”
In short, all the recent government backstops would only stimulate a greater and far larger bubble, despite all the “regulatory reforms” being mulled today.
While it isn’t clearly evident where all the money has been flowing to yet or where the next concentration of misdirected investments would be, everything as we have discussed above simply points to a formative bubble.
This means that yes, markets and the global economy will likely be headed for a positive surprise for 2010. And yes, moralizers will probably achieve what they had hoped over the short to medium term. But no, this isn’t a sustainable economic growth, but a continuation or a sequel of the spectacle of serial bubbles.
[1] See Is Honesty Enough For A Society To Succeed?
[2] Callahan, Gene; The Abstract and the Concrete, ThinkMarkets
[3] Rothbard, Murray N.; Who Was Niccolò Machiavelli? Mises.org
[4] Studwell, Joe; Asian Godfathers: Money and Power in Hong Kong and Southeast Asia, p.51. Grove Press.
[6] Wikipedia.org, French Religious Wars
[7] New York Times, Vatican Priest Likens Criticism Over Abuse to Anti-Semitism
[8] Courtois, Stéphane et. al., The Black Book of Communism, Harvard Press Wikipedia.org
[9] Machan, Tibor, Lessons in Freedom: A Bit of Nietzsche Will Help; weblogbahamas.com
[10] Bloomberg, Indonesia Stocks in Bubble, Central Bank Study Shows
[11] More, Max; Denationalisation of Money, Friedrich Hayek's seminal work on Competing Private Currencies, Maxmore.com
[12] Ebeling Richard M. Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies, Northwood University
[13] Keynes, John Maynard, The General Theory of Employment, Interest and Money (p.20-21)
[14] Hamilton, James D., Oil prices and the economic recession of 2007-08; voxeu.org
[15] See Peak Oil: Where Art Thou?
[16] Minsky, Hyman; Finance and Profits: The Changing Nature of American Business Cycles, 1980
[17] Minsky, Hyman; "Inflation, Recession and Economic Policy", 1982 (page 43)
