Inflationism And The Bailout Of Greece

``The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.”- Leo Tolstoy

Speaking of economic reality, the unsustainable state of welfare system in Greece and the PIIGS in the Eurozone today seems like a good example of government wastrel, that needs to be rebalanced or ‘revert to the mean’.

But this outcome while necessary may not likely be a preferred path for policymakers.

Mainstream’s Penchant For Currency Devaluation

Figure 4: Danske Bank[1]: The Euro Crisis

Yet the problems of the PIIGs (see figure 4) is not mostly because of the recent bursting of the US housing bubble but from previous government profligacy which arose from the incentives brought about by the prevailing monetary platform...the fractional reserve system operated by central banking.

Economists Peter Boone and former chief of the IMF, Simon Johnson formerly chief of the IMF writes[2], (bold highlights mine)

``The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros. The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels.

``This same structure directly distorts the incentives of commercial banks: they have a backstop at the ECB, which is the “lender of last resort”; and the ECB and European Union (EU) put a great deal of pressure on each nation to bail out commercial banks in trouble. When a country joins the eurozone, its banks win access to a large amount of cheap financing, along with the expectation they will be bailed out when they make mistakes. This, in turn, enables the banks to greatly expand their balance sheets, ploughing into domestic real estate, overseas expansion, or crazy junk products issued by Goldman Sachs. Just think of Ireland and Spain, where the banks took on massive loans that are now sinking the country.” (all bold highlights mine)

While Messrs. Boone and Johnson prescribe a whopping $1 trillion backstop for Portugal, Italy and Greece, they also call for the end of the current “repo window” to be substituted by “eurozone bonds”.

And like most of the Euro doomsayers, the common denominator to blame for the Greece or the PIIGS crisis has been the rigid monetary system from the Union or that these crisis-affected-countries can’t devalue its way out of the mess.

However, contra such generalizations, devaluing a currency would have some merit if the debts had been priced in local currency. But if they are priced in foreign currency then devaluation raises the cost of real debts. Hence, devaluations will not resolve the problems that require massive adjustments or reversion to the mean in economic sphere.

Central Banking Means Inflationism, ECB Included

For the mainstream economists, as always, money printing appears to be the only feasible solution to the mess surrounding the government’s spendthrift ways for so-and-so noble reasons.

Whether it is the ECB or the Fed, the political incentives for the central banks remain the same, to re-quote Murray N. Rothbard[3] anew,

``The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.”

In other words, governments are not likely to radically alter the framework of the banking system because of the following reasons:

One, it defeats the purpose of having a central bank, i.e. finance government deficit, cartelize private banks and circumvent market’s restriction to expand credit,

As for the government banks financing of government debt, Germany’s government banks had been recently reported to have sizeable holdings of Greek debt. According to the New York Times[4], (bold highlights mine)

``Germany’s financial institutions hold some €28 billion, or $37 billion, in Greek bonds, Barclays Capital estimates, extrapolating from International Monetary Fund data.

``A quick survey of Germany’s largest banks Wednesday indicates that probably half of that debt — rated “junk” by Standard & Poor’s since Tuesday — sits on the balance sheets of institutions that are owned or controlled by the government. The percentage could be much higher, but outsiders have no way of knowing for sure because bank regulators and many of the banks refuse to disclose precise numbers.”

So this only serves as proof of how central banks and the banking cartel system work hand in hand.

Second, the most conspicuous path dependency for the authorities of the ECB and the US Fed (or even with Bank of Japan) would be to inflate the system (as we previously discussed[5]), given the du jour mainstream ideology triumphalism of present policies and the addiction to the printing press,

Third, except for some tweaks (via financial reforms) in the banking regulation, the path towards banking regulation is to maintain the status quo but with more control over the cartelized system (one just needs to ask why has governments steadfastly refrained from the nationalizing the system?) and

Importantly, as long as the private sector continues to use government’s “legal tender” as the preferred medium of exchange then some semblance of political control over the economy is assured.

In essence, central banks are means to a political end. This only extrapolates that politics and central banking have been tightly enmeshed. And to argue that politics only emerged recently is unalloyed hogwash.

So it would be quite naive to suggest that for instance, Germany can simply walk away given the current problems, as this view ignores the main function of central banks.

Understanding The Euro’s Political Foundation, The Bailout Of Greece

One major reason why the Eurozone forged a union through a common currency had been to avoid from having to get immersed into repeated military conflicts, given its vulnerable geographic location.

As Marko Papic and Peter Zeihan of Stratfor[6] writes, (bold emphasis mine)

``Germany’s exposure and vulnerability thus make it an extremely active power. It is always under the gun, and so its policies reflect a certain desperate hyperactivity. In times of peace, Germany is competing with everyone economically, while in times of war it is fighting everyone. Its only hope for survival lies in brutal efficiencies, which it achieves in industry and warfare.”

``Pre-1945, Germany’s national goals were simple: Use diplomacy and economic heft to prevent multifront wars, and when those wars seem unavoidable, initiate them at a time and place of Berlin’s choosing.”

So I guess Frederic Bastiat’s “when goods don’t cross borders, then armies will” serves as the foundation behind Euro’s emergence.

From a moral point of view (which I subscribe to), the EU should have kicked Greece’s wazoo for fudging or falsifying her data, just to be included in the elite membership. But that would be overly simplistic reasoning.

Again we cite Messrs. Papic and Zeihan[7], (all bold highlights mine)

``The problem with that logic is that this crisis also is about the future of Europe and Germany’s place in it. Germany knows that the geopolitical writing is on the wall: As powerful as it is, as an individual country (or even partnered with France), Germany does not approach the power of the United States or China and even that of Brazil or Russia further down the line. Berlin feels its relevance on the world stage slipping, something encapsulated by U.S. President Barack Obama’s recent refusal to meet for the traditional EU-U.S. summit. And it feels its economic weight burdened by the incoherence of the eurozone’s political unity and deepening demographic problems.

``The only way for Germany to matter is if Europe as a whole matters. If Germany does the economically prudent (and emotionally satisfying) thing and lets Greece fail, it could force some of the rest of the eurozone to shape up and maybe even make the eurozone better off economically in the long run. But this would come at a cost: It would scuttle the euro as a global currency and the European Union as a global player.”

And this appears to undergird why Germany assiduously took all the time and efforts to convince Greece on reforms, than to speedily embrace a bailout. By successfully convincing Greece to adapt fiscal austerity, Germany would be able to reduce the leash effect from the moral hazard that would influence the actions of the other “crisis affected countries” from taking on the same path.

Yet Greece has adamantly resisted reforms until last week’s panic in the CDS and bond markets (see Figure 5), which apparently posed as the proverbial straw that broke the camels’ back.

Figure 5: Danske Bank[8]: Greece Debt Meltdown - What's Next?

And this has forced the arms of both the Eurozone and Greece to come up with a package.

And as of this writing, Greece appears to have finally acceded to a €100 billion (US $133 billion) bailout[9], which appears to validate our view once again!

No Trend Goes In A Straight Line

Does the panic in the European bond markets imply the end to the inflation driven financial markets?

Hardly.

The incentives driving the authorities of central banks have been to use more inflation in the face of any crisis (throw them money at them[10]), and the Greek episode simply amplified and validated this path dependency.

Considering that much of the world has been more on the recovery phase in the current economic cycle (or at the next phase of a budding bubble cycle), we aren’t inclined to believe that a market meltdown from a contagion is likely to prosper.

Also, it doesn’t mean that because global equity markets stumbled this week translates to the end of the current cycle.

For the perma-bears that would be wishful thinking.

In the US, the Dow Jones Industrials has been up for 8 consecutive weeks prior to this correction along with the Nasdaq, while the S&P 500 had been up for 6 straight weeks prior to 2 successive weekly declines (see figure 6).

In short, markets don’t move in a straight line!

Figure 6: stockcharts.com: Greece Contagion?

Yet there is hardly any trace that the correction has been related to the contagion of the Greek crisis.

Funny how, perma bears scamper for any piece of evidence to justify a bearish outlook- a cart before the horse logic. Two weeks ago it was Goldman, now they’re back to Greece after failing last February.

If the recent correction is about a Greece sovereign spillover, then why has US treasury 10 year yields fallen or why has US treasuries bonds rallied?

We seem to be seeing some rotation away from the Euro area and into US Treasuries. The US dollar appears to likewise validate this perspective.

Most of Asia, except for China, has been less as pressured. The Philippine Phisix was up this week, while the Philippine Peso was slightly lower. Asia’s mixed performance implies that the rotation was very much a Euro-US dynamic.

The VIX or the fear index isn’t likely much of a forward looking indicator either. The current spike in the VIX index hasn’t even surpassed the February high, yet the S&P after this week’s correction is still very much higher than the when the VIX previously spiked.

Moreover we are seeing a rally in Gold and Oil.

While US treasuries haven’t chimed with these commodities to indicate general inflation, this only continues to affirm our outlook that we are currently treading in the sweet spot of the inflation cycle.

So there are hardly any vital signs to exhibit that markets are about to inflect. What we are likely seeing is just a natural pause from a persistent run-up.

China’s Next Wall Of Inflationism

Finally, today’s Keynesian world only means more money printing to fund the government sponsored shindig as insurance against any crisis.

China’s market is in an apparent doldrums following the repeated assaults by her government to stem a localized bubble. The latest government directive was reportedly the “most draconian measures in history[11]” as noted by an analyst, as China’s government ordered a total freeze in loans on acquisitions of third properties.

So aside from the government actions, China’s languid markets may also reflect on the present weakening of her domestic credit cycle.

Nevertheless China appears to be preparing for any eventuality. A Chinese daily have recently floated that the next tsunami of government spending worth 4 trillion yuan ($586 billion) for nine industries will be announced in August[12].

Apparently for policymakers there is no alternative route but to engage in rampant inflationism.

In my view, it is not worthy to fight this trend.

---

[1] Danske Bank, The Euro Crisis, Can Politicians Catch Up With The Avalanche?

[2] Boone, Peter and Johnson, Simon; To Save The Eurozone: $1 trillion, European Central Bank Reform, And A New Head for the IMF

[3] Rothbard, Murray N. The Case Against The Fed p. 58

[4] New York Times, Germany Has Big Investment in Greece Even Before Bailout

[5] See Why The Greece Episode Means More Inflationism

[6] Papic, Marko and Zeihan, Peter; Germany's Choice stratfor.com

[7] Ibid

[8] Danske Bank Greece Debt Meltdown - What's Next?

[9] Bloomberg, Greece Accepts Terms of EU-Led Bailout, ‘Savage’ Budget Cuts

[10] See Mainstream’s Three “Wise” Monkey Solution To Social Problems

[11] Bloomberg.com, China’s Property Demand May Remain ‘Strong,’ HSBC’s Yorke Says

[12] Bloomberg.com, China May Announce 4 Trillion Yuan Stimulus, China Business Says

Global Migration Trends: Youth And Least Educated Prefers US, US Expats Think Otherwise

Gallup's article on global migration trends, which involves some 700 million people (nearly 10% of global population) and growing, reveals that the US still remains as the most desired destination among 15 nations that attracted most (500 million or 70%) of the migration flows.

What piqued my interest is that Gallup imputes the 'youth and the least educated' as having to prefer the US as the ideal place for relocation, in contrast to the second ranked Canada.

From Gallup:

Together, the number of potential migrants who would like to move to the United States, which represents 24% of adults who would like to move overall, and Canada, which represents 7%, make Northern America the most desired region to move to in the world. But individually, both countries appeal to people from different parts of the world. Gallup finds the U.S. appeals more to the youngest and least educated adults, while those who choose Canada are on average slightly older and more educated. (bold highlights mine)

And interestingly, people from Asia and Africa appear to be the sectors most in favor of the US.

In a choice between the US and Canada, I'd also be in the minority camp. But if I would be granted the opportunity to relocate I would choose as my priority one of Asia's key financial centers Hong Kong, Singapore and Japan, or perhaps even Australia or New Zealand as alternatives. That should make me stand opposite to the conventional wisdom as posited by the polls.

Well, various forms of perceived opportunities constitute that the incentives to relocate. Here is Gallup again,

``The United States and Canada attract potential migrants for various reasons -- personal, political, or economic -- but opportunity is the common, overarching theme. People may see moving to these countries as a chance to reunite with family members who have already moved, to find jobs, or to provide better lives for their children. Immigration policy and migrant policy, too, could play a role in the talent each nation attracts. Health and social services available to them as newcomers, and their future benefits as citizens, may be yet another factor."(bold underscore mine)

Again I would be in the opposite camp, as political and economic opportunities, for me, appear tilted to the East more than the West, especially if America's "gradualist" political trend to emulate Europe's social democracy is likely to get entrenched which obviously would have unfavorable ramifications on both her financial balance sheets aside from diminishing civil liberty or personal freedom.

The Greece crisis seems merely a prologue of the gamut of ailments that will plague these welfare states. Yet America's leadership seems steadfastly navigating her political economy into the same trap.

And a growing number of Americans appear to be renouncing their citizenship seemingly shares this view.

From the New York Times (bold emphasis mine),

``The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their U.S. citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.

``Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown.

``Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

``American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income."

More...

``Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.

``Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision."

I find the articles' incoherence in suggesting that taxation isn't a political problem, when it notes that the primary incentive in relinquishing citizenship has been out of onus of regulatory and taxation compliance.

Taxation and regulation is a product of politics, so how can these not be related? For instance, $1.42 trillion in fiscal deficits in 2009 to "save favored sectors", which would obviously leads to higher taxes in the future isn't about politics?

Going back to the original topic, while the US of A would seem like an ideal place to relocate, this would seem more of a delusion, unless we see a dramatic around in the current political trends.

In Spain, Pop Goes The Magic 'Green' Bubble

ONE of the likely casualty from the Greece led PIIGS debt crisis seems to be "Green" energy.

From Businessweek,

``Spain is lancing an 18 billion-euro ($24 billion) investment bubble in solar energy that has boosted public liabilities, choking off new projects as it works to cut power prices and insulate itself from Greece’s debt crisis...

"Spain is battling on several fronts to revive its economy and convince government bondholders it can avoid getting dragged into a Greek-style debt spiral after Standard & Poor’s cut its credit rating April 28. Solar-plant owners including General Electric Co. earn about 12 times what’s paid for power from fossil fuels. Most of that is a subsidy charged to customers

``Prime Minister Jose Luis Rodriguez Zapatero’s government last cut solar rates in 2008, hitting plants not built at the time. Now it’s weighing reductions for the thousands of installations already making power from the sun, wind and biomass.

‘Excessive Subsidy’

“This is necessary,” said Leon Benelbas, chairman of Atlas Capital Close Brothers investment bank in Madrid. “It’s an excessive subsidy at a time Spain has to gain competitiveness, and the cost of energy is a determining factor.”

``Spain’s fixed-price system for renewable power, which attracted more investment in solar panels in 2008 than the rest of the world put together, boosts the state’s liabilities even though they don’t show up on its balance sheet.

``That’s because the Spanish system delays payments by consumers for part of their electric bills for years. The government guarantees repayment to power suppliers such as Endesa SA and Gas Natural SDG SA. The cost of those unpaid bills rose last year by about 4 billion euros to 16 billion euros.

``Spain intends to revise the clean-energy rates down “to avoid damaging the competitiveness of industry,” Sebastian told the Spanish parliament yesterday."

This only shows that industries that cannot stand on its two feet, that can't compete, but survives mainly on government mandates and subsidies (or crutches), will be subjected to politics and this includes suffering from cuts in spending or support when austerity is required, especially in response to a crisis.

And the impracticality or non-feasibility would be eventually revealed from such retrenchment. In short, "the emperor has no clothes!"

Yet, "green energy" hasn't been proven to be a net positive contributor to the economy.

George Will comments on a study by Professor Calzada on Spain's alternative energy programs,

``Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs elsewhere in Spain's economy."

Overall, like typical bubbles, resources spent on these government pet projects only means waste.

Iceland's Eyjafjallajokull Volcanic Eruption In Pictures

Fantastic photographs from the recent volcanic eruption of Iceland's Eyjafjallajokull.

Find more pictures in Boston.com's The Big Picture (click on the link)

Axel Merk On Greece: Political Resolve Needed On The Greece Crisis

Last night while I was scanning the TV, I came across and watched Bloomberg's Mark Crumpton's interview of Axel Merk President of Merk Mutual funds, whose insights are relevant to the ongoing concerns over Greece and the PIIGs

I scoured the internet and found the video (see below)...



Some notes:

-Spain is not a short term debt problem but very different structural issues (economic problem)

-This is not a monetary question, this is a political question. Is there political will to resolve Greece’s problem?

-would require policy measures that have teeth (to implement against Greece's profligacy)

-sovereign debt is a global issue

-there will be more sovereign downgrades outside the Eurozone.

-Collateral rules will be relaxed

-Any bailout should include Greek Banks.

-We like the Euro, others are fully priced.

-Euro is priced at an "end of the world scenario"

Graphic: Central Planning

Below is an example of how central planning looks like. (hat tip: Russ Roberts)

It's a powerpoint presentation which attempts to define the conditions in Afghanistan




Try figuring it out.

As a military official commented,

"'When we understand that slide, we'll have won the war,' General Stanley McChrystal, the US and NATO force commander, remarked wryly when confronted by the sprawling spaghetti diagram in a briefing."

Just goes to show of the impossibility of comprehending every bit of information in a constantly changing world.

As F.A. Hayek once wrote, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Key Drivers To Emerging Market Outperformance: Increasing Trends of Economic Freedom, Trade Openness And Rule of Law

US Global Investor's Frank Holmes enumerates six key drivers in favor of a secular emerging markets outperformance over the coming years.

Mr. Holmes writes(black bold highlights his, blue mine) :

1. Rapid Economic Growth: In the coming years, growth in emerging economies is expected to outpace that of the developed world. This growth is fueling an increase in household income in places like China and India where nearly 60 million people—roughly the combined populations of Texas and California—are joining the ranks of the middle class each year.
2. High Savings Rates in Asia: Despite rising consumption, households in emerging Asia save 17 percent of disposable income—that’s roughly four times what is saved in the U.S. and much higher than the developed world. These high savings rates allow them to meet the higher requirements for home ownership—many require at least 20 percent down—and have larger amounts of funds to invest in capital markets.
3. Urbanization: The world’s urban population is growing by more than 70 million people each year. China already has over 100 cities with 1 million people and is expected to have over 200 of them by 2025. This urban migration has overwhelmed existing infrastructure like roads, sewers and electrical grids. The buildout of this critical infrastructure will require vast amounts of copper, steel and increase demand for all commodities.
4. Desire for Social Stability: One main goal of emerging market governments to remain in power is to keep the public happy. They are doing this by increasing personal freedoms for citizens and providing them with opportunities to increase their quality of life. Many governments have found the key to social stability is focusing on job creation which establishes a path of upward mobility for citizens.
5. Natural Resources Wealth: Many of today’s most promising emerging nations sit atop some of the largest oil, metal and other valuable resource deposits in the world. Many of these nations have teamed up with private and/or foreign enterprises to bring these resources to market. Revenue generated through taxation and direct ownership allows for these governments to build infrastructure, create jobs and pursue other economic opportunities.
6. Corporate Transparency: A history of corruption and political turmoil has given way to higher standards of corporate governance in today’s globalized world. Though still far from perfect, the improved transparency and oversight has made important information available to investors and reduced uncertainty. By aligning themselves with international business standards and requirements, emerging nations will attract more foreign capital and better integrate themselves into the global marketplace.

I'd like to add three more important variables.

Although Mr. Holmes did mention in passing about the increasing "personal freedom", it must be emphasized that the respect for property rights serves as the root for economic freedom and trade openness which predominates all the above.

Not to mention the legal "rule of law" framework that underpins social institutions from which all these would be operating on.

In short, prosperity or capital accumulation emanates from economic freedom, trade openness and the rule of law, where all the others are simply offshoots or products of these 'sine qua non' underlying drivers.

Outside the incentives brought about by privatize profits and socialize losses, no rational person will invest in any country or markets where they see great risk from governments' arbitrary confiscation of investor's risk capital.

In other words, it isn't much of the issue of return on investments but the return OF investments.

As you can see below, the reason for the explosive growth in emerging markets has been because of the deepening depth of economic freedom and freer trade relative to the past.

chart courtesy of Moody's/ FT Alphaville

While Moody's expects a retreat, as the reason for the orange dot (arrow from FT Alphaville) I don't share the pessimism.

That's because many, among the emerging markets, have been realizing the benefits of trade, which has started to filter into the political process of many EM countries but whose impact comes at a different scale.


Yet much of the perceived pessimism has been due to the financial crisis which caused a dramatic retrenchment in global trade.

But this seems more of a the blip, though. Most of the disruption had been triggered by the Lehman event, which prompted for a near seizure of the US banking industry, which rapidly escalated across the world. To be sure, it hasn't been due to increased signs of protectionism (as pointed out in this space, example see WTO: Little Signs Of Protectionism).

And the swift recovery in global trade (chart courtesy of finfacts) appears to validate our analysis.

Hence, the trend towards greater economic freedom and trade liberalization in key emerging markets are likely to resume as the main trend and provide the framework as to why emerging markets are likely to outperform developed markets.

Failed Predictions From Enviromental Gloom-Mongers

One of the fundamental errors of mainstream analytics is that it focuses mainly on the interpretation of available information from the present angle. It hardly, in layman terms, “put oneself in the shoes” of those who saw it earlier based on their existing knowledge or conditions.

For instance, environmentalism has long been one aspect of a social concern. While the basics (or even the politics) of environmentalism today and the past are the same, the “issues of the day” have been different. And as events are developing, the alarmist concerns of the past are being repeated today.

Yet, these predictions have been utterly wrong.

Some examples from Ihatethemedia.com (hat tip Cafe Hayek)

Here are some of the hilarious, spectacularly wrong predictions made on the occasion of Earth Day 1970.

“We have about five more years at the outside to do something.”
• Kenneth Watt, ecologist

“Civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind.”
• George Wald, Harvard Biologist

“We are in an environmental crisis which threatens the survival of this nation, and of the world as a suitable place of human habitation.”
• Barry Commoner, Washington University biologist

“Man must stop pollution and conserve his resources, not merely to enhance existence but to save the race from intolerable deterioration and possible extinction.”
• New York Times editorial, the day after the first Earth Day

“Population will inevitably and completely outstrip whatever small increases in food supplies we make. The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years.”
• Paul Ehrlich, Stanford University biologist

“By…[1975] some experts feel that food shortages will have escalated the present level of world hunger and starvation into famines of unbelievable proportions. Other experts, more optimistic, think the ultimate food-population collision will not occur until the decade of the 1980s.”
• Paul Ehrlich, Stanford University biologist

“It is already too late to avoid mass starvation.”
• Denis Hayes, chief organizer for Earth Day

“Demographers agree almost unanimously on the following grim timetable: by 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions….By the year 2000, thirty years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine.”
• Peter Gunter, professor, North Texas State University

“Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half….”
• Life Magazine, January 1970

“At the present rate of nitrogen buildup, it’s only a matter of time before light will be filtered out of the atmosphere and none of our land will be usable.”
• Kenneth Watt, Ecologist

“Air pollution…is certainly going to take hundreds of thousands of lives in the next few years alone.”
• Paul Ehrlich, Stanford University biologist

“We are prospecting for the very last of our resources and using up the nonrenewable things many times faster than we are finding new ones.”
• Martin Litton, Sierra Club director

“By the year 2000, if present trends continue, we will be using up crude oil at such a rate…that there won’t be any more crude oil. You’ll drive up to the pump and say, `Fill ‘er up, buddy,’ and he’ll say, `I am very sorry, there isn’t any.’”
• Kenneth Watt, Ecologist

“Dr. S. Dillon Ripley, secretary of the Smithsonian Institute, believes that in 25 years, somewhere between 75 and 80 percent of all the species of living animals will be extinct.”
• Sen. Gaylord Nelson

“The world has been chilling sharply for about twenty years. If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age.”
• Kenneth Watt, Ecologist

Moral: Realize that the predictions before have been wrong, and today’s alarmism is likely to reflect on the same shortcomings. Don’t fall into the environmental politics trap.

Are We Seguing Into The Next Phase Of The Bubble Cycle?

There's been some discussions about the increasing participation of US commercial banks in the longer end of the US sovereign market.

This suggest that some of the excess reserves could now be "leaking out".

Taking a glimpse at the chart from the St. Louis Fed, I'm not sure that such "leakage" into the 10-year and 30 year treasuries has really been occurring as bank reserves remain high.

Instead the prospective seepage could likely occur elsewhere.

As seen above, there's been a recovery in commercial and industrial loans for large commercial banks, but this hasn't been true yet for all banks.


However, surprisingly, consumer loans at all commercial banks have spiked! (hat tip: Mark Perry)

And as we have repeatedly noted in this space, [e.g. see A Sweet Vindication And Validation As The Phisix Soar To A 25 Month High!], we expect the leakage to turn into a flood as global market responds to the incentives brought about by the steep yield curve.

"And as the report says, the hoarded liquidity in the US banking system is starting to find some leakage, as short term money market funds are regaining more confidence or “animal spirits” to redeploy cash into other asset markets in search of higher returns.

"And once this seepage turns into a flood, that’s where we should start to worry. But this should take more time, and possibly, based on the cyclical effect of yield curves, inflationary pressures is likely to be more apparent by the last quarter of the year."

Could this be the start of the next phase of the current bubble cycle?

Mainstream’s Three “Wise” Monkey Solution To Social Problems

Say what you want
Say what you will
'Cos I find you think what makes it easier
And lies spread on lies
We don't care
Belief is our relief
We don't care

-Roland Orzabal, Tears For Fears, Ideas As Opiates

For the mainstream, our social problems can be simplified into three “wise monkey” solutions:

First, speak no evil-throw money at every problem.

Everyone desires a free lunch. Almost everybody believes that they deserve a special place in this world. Since society’s interests are divergent, such sense of entitlement should come at the expense of someone else. It’s usually dignified and justified with the word “right”. One man’s effort is another man’s privilege.

For them, scarcity of resources can only solved by forcible redistribution. It doesn’t really matter if there are limitations to the scale of taxation. It also doesn’t matter if redistribution reduces the incentives to produce and trade. It doesn’t matter if “picking winners” takes away resources meant for productive activities which have been meant to enhance livelihood. The only thing significant is to be at the receiving end. And it’s hardly ever been asked “when is enough, enough”?

Heck, it would even be politically incorrect to argue for prudence. ‘Moral’ justifications demand for immediate gratification. It’s almost always about NOW. Forget the future.

That’s why the intellectual classes long came up with varied theories in support of these political demands.

Importantly that’s why the political classes are enamoured with these concepts. Redistribution enhances only their power, esteem and control over the others. And that’s why “inflation” has long been a part of human nature, since the introduction of government.

For as long as the system is tolerant of such nebulous tradeoff, trouble can be kept at bay, ergo speak no evil.

The other way to see it is that while everyone wants to rule the world, in reality this isn’t feasible. It’s a mass delusion. The universal law of scarcity always prevails. By force of nature, artificially induced imbalances are resolved eventually.

Second, see no evil-elect or put in place a virtuous leader.

The popular redress to most social problems has been premised mostly on hope, cosmetically embellished by “specific” ennobling goals.

In times of frustrations, the next alternative has been to look for a saviour.

Yet hope is mostly anchored on symbolism. And these are what elections are mostly all about. Even if one’s vote doesn’t truly count, everybody believes they do. Elections are reduced to the polemic of self-import.

Hardly has the directions of policies been the context of any meaningful discussion. People’s arguments will always be simplified to what seems “moral” in the popular sense. Yet, a vote on a person to office is a carte blanche vote on the ensuing policies. But it’s hardly about stakes involved and the prospective costs, but mostly about emotions and the feeling of being in the winning camp.

And since the world has been condensed into strictly a “moral” sphere, political leaders are most frequently deemed to have been transformed into demigods.

Once in power, people mistakenly believe that these entities have transcended the laws of scarcity. People have assumed that they possess the superlative knowledge that is needed to effect the exigent balance on a complex and continuously evolving society. These leaders are presumed to know of our needs, our values, our priorities and our preferences, which lay as basis of our actions in response to ever changing conditions.

Not of only of knowledge, but people also expect leaders and officials to dispense justice and equity according to our sense of definition. Many see these leaders as reflecting on their values. And that’s why many fall for the dichotomous trappings of the well meaning “motivations”. Yet, motivations barely distinguish the role of “means” and “ends”.

Essentially genuflecting on hope to see one’s moral desires as represented by politics can be construed as refusing to see evil for what it is.

And it’s only when the rubber meets the road, from which people come to realize that their expectations have misaligned with reality-and usually through deepening frustrations or in the aftermath of some horrifying outcome.

Hardly has it been comprehended that politics and bureaucratic activities are merely HUMAN activities.

That leaders and officials are subject to the very same foibles as anyone else. That these people see things and act according to the incentives brought about by their interpretation of events, their existing limited and ‘biased’ knowledge and are swayed by influences brought about by cognitive biases, networks, familiarity, assessment of prevailing conditions, information relayed by the underlings, varying degree of stakes of involved and et. al.

Importantly like everyone else, their actions skewed based on personal values. So when a political or bureaucratic leader forces upon their sense of moral vision to a constituency and which has not well received, the result in some cases has been political upheavals.

Yet in spite of the repeated errors, people never learn from George Santayana’s admonition that those who ignore the past are condemned to repeat it.

The third intuitive recourse to any social problems is to hear no evil by enacting new rules/laws.

Like any “throw the money” and “virtuous leader” syndromes, rules are little seen for its costs but nevertheless oftenly envisaged as preferred nostrums to existing problems as identified from the biased viewpoint of the observer/s.

Causal factors are hardly considered in the appraisal of the existing problems. What seems more important is to automatically blame market forces and unduly impose proscriptions. Never mind if the past ills have been caused by the same underlying dynamic-previous interventionism.

The act of simply “doing something” is meant to be perceptibly seen by the voting public for political purposes (extension of career by vote or by appointment). Thus the “hear no evil” therapy, which is merely adding rules for extant fallibilities, are simply props for more of the same malaise.

Many rules, regulations, edicts or laws are imposed upon the “populist demand of the moment”, without the realization that rules, which tend to realign people’s behaviour, can cause huge unintended consequences and likewise entails costs of enforcement. Hence when new rules create distortions in the political economic order, the instinctive response is to have more of rules or regulations.

Importantly, popular clamor for new rules/laws hardly differentiates “rule of laws” against “rule of men”.

Rule of Law are in effect, the guiding principles or the laws that had been a legacy from our forefathers, as the great Friedrich August von Hayek wrote, ``Political wisdom, dearly bought by the bitter experience of generations, is often lost through the gradual change in the meaning of the words which express its maxims[1]”. (underscore mine)

This means because these laws have been constant, are anticipated by all and easily observed or practiced, they become part of our heritage. Again we quote the Mr. Hayek, ``Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand.[2]”

In stateless Somalia, customary laws serve as default laws after her government had been eviscerated,

Benjamin Powell writes[3], ``Somali law is based on custom interpreted and enforced by decentralized clan networks. The Somali customary law, Xeer, has existed since pre-colonial times and continued to operate under colonial rule. The Somali nation-state tried to replace the Xeer with government legislation and enforcement. However, in rural areas and border regions where the Somali government lacked firm control, people continued to apply the common law. When the Somali state collapsed, much of the population returned to their traditional legal system... But Somalia does demonstrate that a reasonable level of law and order can be provided by nonstate customary legal systems and that such systems are capable of providing some basis for economic development. This is particularly true when the alternative is not a limited government but instead a particularly brutal and repressive government such as Somalia had and is likely to have again if a government is reestablished.” [bold highlights mine]

That’s simply proof that “rule of laws” exists even outside of the realm of governments, which also goes to show that society can exist stateless. None of this is meant to say that we should be stateless, but the point is rule of law is what organizes society.

Importantly, “rules of law” have been passed through the ages as a means to protect the citizens from the abuses of the authority, again Mr. Hayek[4],

``The main point is that, in the use of its coercive powers, the discretion of the authorities should be so strictly bound by laws laid down beforehand that the individual can foresee with fair certainty how these powers will be used in particular instances; and that the laws themselves are truly general and create no privileges for class or person because they are made in view of their long-run effects and therefore in necessary ignorance of who will be the particular individuals who will be benefited or harmed by them. That the law should be an instrument to be used by the individuals for their ends and not an instrument used upon the people by the legislators is the ultimate meaning of the Rule of Law.” (emphasis added)

In short, the fundamental characteristics of respected and effective laws are those that to limited, steady or constant, designed for the benefit of everyone and importantly a law that is clearly enforceable.

Of course this doesn’t overrule the occasional use of arbitrary laws, but nevertheless arbitrary rules should compliment and NOT displace the essence of the “rule of law”.

Mr. Hayek quotes David Hume[5], ``No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity.”

In essence, in contrast to mainstream thinking, the rule of law and not simply arbitrary regulations, serves as the central element to well functioning societies.

Former President Ronald Reagan nicely captures part of our “Three Wise Monkey” solution as seen by the mainstream, “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”, from which I would add, “if subsidies are not enough, elect one who makes sure it would”.

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[1] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[2] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[3] Powell, Benjamin; Somalia: Failed State, Economic Success? The Freeman

[4] Hayek, Friedrich August von, The Road To Serfdom

[5] Hume, David; The history of England, from the invasion of Julius Caesar to the revolution, we earlier quoted this see Graphic: Origin of The Rule of Law