Trojan Horse Advise Of PIMCO's Bill Gross

PIMCO's William Gross writes, (bold highlights mine)

``It is this lack of global aggregate demand – resulting from too much debt in parts of the global economy and not enough in others – that is the essence of the problem, which only economists with names beginning in R seem to understand (there is no R in PIMCO no matter how much I want to extend the metaphor, and yes, Paul _Rugman fits the description as well!). If policymakers could act in unison and smoothly transition maxed-out indebted consumer nations into future producers, while simultaneously convincing lightly indebted developing nations to consume more, then our predicament would be manageable. They cannot. G-20 Toronto meetings aside, the world is caught up as it usually is in an “every nation for itself” mentality, with China taking its measured time to consume and the U.S. refusing to acknowledge its necessity to invest in goods for export.

``Even if your last name doesn’t begin with R, the preceding explanation is all you need to know to explain what is happening to the markets, the global economy, and perhaps your own wobbly-legged standard of living in recent years. Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened. We have arrived at a New Normal where, despite the introduction of 3 billion new consumers over the past several decades in “Chindia” and beyond, there is a lack of global aggregate demand or perhaps an inability or unwillingness to finance it. Slow growth in the developed world, insufficiently high levels of consumption in the emerging world, and seemingly inexplicable low total returns on investment portfolios – bonds and stocks – lie ahead. Stop whispering (and start shouting) the words “New Normal” or perhaps begin to pronounce your last name with an RRRRRRRRRRRR. Our global economy, our use of debt, and our financial markets have changed – not our alphabet or dictionary."

Well this is one good example why the Fed economist Kartik Athreya recently assailed on economic bloggers for trying to "oversimplify economics".

What's wrong with the picture described by Mr. Gross?

Many. But we will stick with two major flaws: Producers are painted to be distinct from consumers and that all debts are treated as equal.

Nations constitute people and that production and consumption are activities aimed at satisfying peoples' desire. In other words, people produce to consume. The difference is that in emerging markets, consumption is mostly funded by savings (surplus production output) and little of debt. In developed economies consumption is mainly financed by debt.

Mr. Gross wants EM economies and developed economies to trade places in terms of consumption and production. He sees government as using its force to make this shift on their people, according to his simplified gospel of prosperity.

He is not straightforward to say that when people undertake debt to finance spending on consumption goods, that would be equivalent to capital consumption (spending more than one earns). He isn't even candid to say that this had also been the root of the recent crisis.

In other words, to advance the notion that people should indulge in unproductive debt is equivalent to an advocacy of poverty. Therefore, Mr. Gross' recommendation would seem like an implicit trojan horse recipe for people in emerging markets-an advise that should be ignored. His agenda is that inflationism would lift total returns of investment portfolio for his self interest.

Moreover, I wonder how Mr. Gross would react if the US government strictly applies his recommendation---that would require him and/or PIMCO to forcibly go into manufacturing and forego of their current financial investments model. His outlook assumes that everyone else has a problem but him and his RRRR, such that government should apply his remedies only to the others.

Finally, another important thing Mr. Gross glosses over is that since governments are also run by people whose interests are determined mostly by local political factors, this translates to innate policy divergences in national and global issues for every country. Thus, there is such a thing as competition among governments. The other way to say this, is that harmonization of policies among governments is another mirage.

Credit Default Risk: From PIIGS To The 4 US States

Four US states, particularly California, Illinois, New Jersey, and New York, has been in a race with the European "PIIGS" in terms of credit risks or default risk as measured by CDS (Credit Default Risk).

As Bespoke Invest notes,

``All four states are closer to the top of the list than the bottom in terms of default risk. As noted earlier, Illinois has the highest default risk at 368.6 bps. The state sits between Dubai and Bulgaria. California ranks second out of the four at 352.9 bps, while New York and New Jersey are both right around the 290 bp level. Illinois and California are both at higher risk than Portugal, while all four are in a worse situation than Spain. In terms of year-to-date change, Illinois default risk is up 117%, New York and New Jersey are both up about 87%, and California is up 35%."

The difference is that the European PIIGS constitute about 18% of EU's GDP while the US contemporary is about 29% of the US GDP. Incidentally, the 4 states are among the biggest (in terms of share of GDP): California (ranked 1st), New York (3rd), Illinois (5th) and New Jersey (8th).

Yet financial markets seem to be singing contrasting tunes which seem inconsistent: jump in the Euro, firming CDS of 4 US states while new lows in 10 year US treasury yields. If there is a shift in concerns towards the 4 US states then treasuries yields are suppose to go higher.

I'd like to add that the gap between the PIIGS and the US-4 relative to the ASEAN-4 led by Indonesia and the Philippines seems to have widened. This partly explains the signs of 'decoupling'.

Remembering Frédéric Bastiat

Yesterday marked Frédéric Bastiat's 209th birthday.

And below is a favorite essay of mine " The Little Arsenal of the Freetrader" from a collection of articles in Economic Sophism, which deals with common objections to free trade.

Here is Frédéric Bastiat... (all bold emphasis mine)

Suppose someone tells you: "There are no absolute principles.

Interdiction can be bad, and restriction good."

Answer: "Restriction interdicts the importation of everything it prevents from entering."

Suppose someone tells you: "Agriculture is the nutricial mother that furnishes the whole country with food."

Answer: "What furnishes the country with nutriment is not strictly agriculture, but wheat."

Suppose someone tells you: "The sustenance of the nation is dependent on agriculture."

Answer: "The sustenance of the nation is dependent on wheat. That is why a law compelling the nation to obtain two hectolitres of wheat by agricultural labor instead of the four hectoliters it might have obtained, in the absence of the law, by applying the same amount of labor to industrial production, far from being a law for the people's sustenance, is a law for their starvation."

Suppose someone tells you: "Restricting the importation of foreign wheat is conducive to an increase in domestic agriculture and, therefore, to an increase in domestic production."

Answer: "It is conducive to the extension of agriculture to the rocky slopes of mountains and the barren sands of the seashore. If you milk a cow and keep on milking, you will get more milk; for who can say just when you will no longer be able to squeeze out another drop? But that drop will cost you dear."

Suppose someone tells you: "Let the price of bread be high, for the farmer who becomes rich will enrich the industrialist."

Answer: "The price of bread is high when it is scarce; but scarcity makes only for poor people, or, if you like, starving rich people."

Suppose someone presses the point and says: "When the price of bread goes up, wages go up."

Answer by showing that in April, 1847, five-sixths of the workers were living on charity.

Suppose someone tells you: "A rise in wages must necessarily follow a rise in the cost of living."

Answer: "That is tantamount to saying that in a ship with no provisions everyone has as much to eat as if it were well stocked."

Suppose someone tells you: "The man who sells wheat must be assured a good price."

Answer: "Very well. But in that case the man who buys it must be assured a good wage."

Suppose someone tells you: "The landowners, who make the law, raised the price of bread without concerning themselves about wages because they know that, when the price of bread goes up, wages go up quite naturally."

Answer: "By the same token, then, when workers make the law, do not blame them if they fix a high wage rate without concerning themselves about protecting wheat, for they know that, when wages are raised, the cost of living rises quite naturally."

Suppose someone asks you: "What must we do, then?"

Answer: "Be just to everyone."

Suppose someone tells you: "It is essential for a great country to have an iron industry."

Answer: "What is more essential is that this great country have iron."

Suppose someone tells you: "It is indispensable for a great country to have a clothing industry."

Answer: "What is more indispensable is that the citizens of this great country have clothes."

Suppose someone tells you: "Labor is wealth."

Answer: "That is not true."

And, by way of explanation, add: "Bloodletting is not health; and the proof is that its object is to restore health."

Suppose someone tells you: "To compel men to dig a mine and to extract an ounce of iron from a quintal of iron ore is to increase their labor and consequently their wealth."*

Answer: "To compel men to dig wells by forbidding them to take water from the river is to increase their useless labor, but not their wealth."

Suppose someone tells you: "The sun gives its light and heat without remuneration."

Answer: "So much the better for me; it costs me nothing to see clearly."

And suppose someone replies: "Industry in general loses what you might have spent for artificial illumination."

Parry with: "No; for what I save by paying nothing to the sun, I use for buying clothing, furniture, and candles."

Similarly, suppose someone tells you: "These English scoundrels have amortized their investments."

Answer: "So much the better for us; they will not oblige us to make interest payments."

Suppose someone tells you: "These perfidious Englishmen find iron and coal in the same pit."

Answer: "So much the better for us; they will not charge us anything for bringing them together."

Suppose someone tells you: "The Swiss have lush pastures that cost little."

Answer: "The advantage is on our side, for this means that less labor will be demanded on our part to promote our domestic agriculture and provide ourselves with food."

Suppose someone tells you: "The fields of the Crimea have no value and pay no taxes."

Answer: "The profit is on our side, since the wheat we buy is exempt from these charges."

Suppose someone tells you: "The serfs of Poland work without wages."

Answer: "The misfortune is theirs, and the profit is ours; since their labor does not enter into the price of the wheat that their masters sell us."

Finally, suppose someone tells you: "Other nations have many advantages over us."

Answer: "Through exchange, they are, in fact, compelled to let us share in these advantages."

Suppose someone tells you: "With free trade, we are going to be flooded with bread, beef _ la mode, coal, and overcoats."

Answer: "Then we shall be neither hungry nor cold."

Suppose someone asks you: "What shall we use for money?"

Answer: "Don't let that worry you. If we are flooded, it will be because we are able to pay; and if we are not able to pay, we shall not be flooded."

Suppose someone tells you: "I should be in favor of free trade if foreigners, in bringing us their products, took ours in exchange; but they will take away our money."

Answer: "Money does not grow in the fields of the Beauce any more than coffee does, nor is it turned out by the workshops of Elbeuf. For us, paying foreigners with cash is like paying them with coffee."

Suppose someone tells you: "Eat meat."

Answer: "Permit it to be imported."

Suppose someone tells you, like La Presse: "When one does not have the means to buy bread, one must buy beef."

Answer: "This is advice just as wise as that of Mr. Vulture to his tenant:

"When one does not have the means to pay his rent, One has to get a house of one's own."

Suppose someone tells you, like La Presse: "The government should teach people why and how they ought to eat beef."

Answer: "The government has only to permit the importation of beef; the most civilized people in the world are sufficiently grown up to learn how to eat it without being taught."

Suppose someone tells you: "The government should know everything and foresee everything in order to manage the lives of the people, and the people need only let themselves be taken care of."

Answer: "Is there a government apart from the people? Is there any human foresight apart from humanity? Archimedes could have gone on repeating every day of his life, 'Give me a fulcrum and a lever, and I will move the earth'; he would never, for all that, have been able to move it, for want of a fulcrum and lever. The fulcrum of the state is the nation, and nothing is more senseless than to base so many expectations on the state, that is, to assume the existence of collective wisdom and foresight after taking for granted the existence of individual imbecility and improvidence."

Suppose someone tells you: "Good heavens! I am not asking for favors, but just enough of an import duty on wheat and meat to compensate for the heavy taxes to which France is subjected; only a small duty equal to what these taxes add to the sales price of my wheat."

Answer: "A thousand pardons, but I too pay taxes. If, then, the protection that you are voting yourself has the effect of adding to the price I pay for wheat an amount exactly equal to your share of the taxes, what your honeyed words really come to is nothing less than a demand to establish between us an arrangement that, as formulated by you, could be expressed in the following terms:

'Considering that the public charges are heavy, I, as a seller of wheat, am to pay nothing at all, and you, my neighbor who buys it, are to pay double, viz., your own share and mine as well.' Wheat merchant, you may, my neighbor, have might on your side; but you surely do not have right."

Suppose someone tells you: "It is, however, very hard for me, who pay taxes, to compete in my own market with a foreigner who pays none."

Answer: "1. In the first place, it is not your market, but our market. I, who live on wheat and pay for it, ought to count for something too.

"2. Few foreigners nowadays are exempt from taxes.

"3. If the tax that you are voting repays you, in the form of roads, canals, security, etc., more than it costs you, you are not justified in barring, at my expense, the competition of foreigners who do not pay the tax, but who, by the same token, do not enjoy the advantages of the security, roads, and canals that you have. It would make just as much sense to say: 'I demand a compensatory duty, because I have finer clothes, stronger horses, and better plows than the Russian peasant.'

"4. If the tax does not repay you what it costs, do not vote it.

"5. And finally, after voting the tax, do you desire to exempt yourself from it? Then contrive some scheme that will shift it onto foreigners. But the tariff makes your share of the tax fall upon me, who already have quite enough of my own to bear."

Suppose someone tells you: "For the Russians free trade is necessary to enable them to exchange their products to advantage."

[Opinion expressed by M. Thiers in committee, April, 1847.]

Answer: "Free trade is necessary everywhere and for the same reason."

Suppose someone tells you: "Each country has its wants and it must act accordingly." [M. Thiers.]

Answer: "It does so of its own accord when it is not hindered from doing so."

Suppose someone tells you: "Since we have no sheet iron, we must permit its importation." [M. Thiers.]

Answer: "Much obligedl"

Suppose someone tells you: "Our merchant marine needs freight. The lack of cargoes on return voyages prevents our ships from competing with foreign vessels." [M. Thiers.]

Answer: "When a country wants to produce everything at home, it cannot have cargoes either to export or to import. It is just as absurd to want a merchant marine when foreign products are barred as it would be to want carts where all shipments have been prohibited."

Suppose someone tells you: "Even granting that the protectionist system is unjust, everything has been organized on the basis of it: capital has been invested; rights have been acquired; the system cannot be changed without suffering."

Answer: "Every injustice is profitable for someone (except, perhaps, restriction, which in the long run benefits nobody); to express alarm over the dislocation that ending an injustice occasions the person who is profiting from it is as much as to say that an injustice, solely because it has existed for a moment, ought to endure forever."

Video: The Secret of Powers of Time

This is a terrific video on time perspective. (Hat tip: Keith Rabin)

It's about our choice in viewing life in terms of future or present/past orientation.

As RSA Animate's Philip Zimbardo concludes "It's really the most simple thing there is!"

It seems simple but it is complex because people have different time scale weightings.

Yet this video goes in true fashion with Austrian Economics, where time preference plays a key role in people's choices and thus shape distribution and consumption patterns.

Here is Ludwig von Mises on time preference... (bold highlights mine)

``Time for man is not a homogeneous substance of which only length counts. It is not a more or a less in dimension. It is an irreversible flux the fractions of which appear in different perspective according to whether they are nearer to or remoter from the instant of valuation and decision. Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.

``Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not--other things being equal--preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative."

Rotarian Ludwig Von Mises' Message To Fellow Rotarians: The Principle Of Solidarity

I am pleased to discover that Dr. Ludwig von Mises was a Rotarian.

And in one of Rotary's tabloid, Dr. von Mises wrote about the principle of solidarity, a message I hope to share with fellow Rotarians.

From Dr. Ludwig von Mises (emphasis added)

"Service" is the device of the Rotarian.

In no sphere of human activity can this principle find an application on a larger scale than in economics. Human society being based on a division of labor, the work of individuals is of necessity piecework only. Every human being performs one task only and his activity is limited to a narrow field. Unaided by the work of others he cannot exist.

The manner in which every individual arranges his life presupposes the activity of other members of society in occupations which harmoniously complement his own work and vice versa. If we consciously specialize in one kind of activity, we can do so only because we count upon other individuals being ready to serve us just as we are prepared to serve them. It is here that the great principle of solidarity, which govern society, comes into play.

The principle of solidarity, however, does not lose its force at the frontiers of a country. Economic solidarity does not unite compatriots only, but it ties together all peoples. The European feeds on, and clothes himself in, the products which America, Asia, Africa, and Australia supply, giving in exchange the fruits of his industrial efforts. The present standard of life of all nations is based on the enormous increase of productivity of human work which has been made possible only by an international division of labor...

To recognize the need for solidarity in economic life and to affirm it by conscious action is service in the sense in which a Rotarian uses the word.

Economics Should Never Be Treated As Science

Here is a stinging rebuke by Telegraph's Ambrose Pritchard's on the supposed hubris of a Federal Reserve economist, who recently condemned economic bloggers as "chronically stupid and a threat to public order".

From Mr. Pritchard, (bold highlights mine)

``The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.

``The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws.

``In any case, Newton was wrong. He neglected the fourth dimension of time, as Einstein called it, and that is exactly what the new classical school of economics has done by failing to take into account the intertemporal effects of debt – now 360pc of GDP across the OECD bloc, if properly counted.

``There has been a cosy self-delusion that rising debt is largely benign because it is merely money that society owes to itself. This is a bad error of judgement, one that the intuitive man in the street can see through immediately.

``Debt draws forward prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke’s Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.

``Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data.

``It is a branch of anthropology and psychology, a moral discipline if you like.

The basic problem with bureau-technocrats and their adherents is that they mistakenly presume the monopoly of economic wisdom solely based on its treatment with mathematical and or scientific equations or from PhD degrees, which Mr. Pritchard rightly lambastes.

This reminds us of Ludwig von Mises who wrote in Omnipotent Government (p. 120),

``Nothing could by more mistaken than the now fashionable attempt to apply the methods and concepts of the natural sciences to the solution of social problems. In the realm of nature we cannot know anything about final causes, by reference to which events can be explained. But in the field of human actions there is the finality of acting men. Men make choices. They aim at certain ends and they apply means in order to attain the ends sought."

Update.

I read the controversial article, and the apparent targets of the Fed Economist Kartik Athreya commentary seem to be the populist bloggers who always paint the world as simple adjustable mechanical instruments.

Says Mr. Athreya, ``They are the patron saints of the “Macroeconomic Policy is Easy: Only Idiots Don’t Think So” movement: Paul Krugman and Brad Delong. Either of these men will assure their readers that it’s all really very simple (and may even be found in Keynes’ writings)...

But outside the unpleasant "ex-cathedra" and "PhD coursework" reference, Mr. Athreya makes some valid points...(bold highlights mine)

``The main problem is that economics, and certainly macroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers: vice versa. What makes macroeconomics very complicated is that economic actors... act. Firms think about how to make profits, households think about how to budget their resources. And both sets of actors forecast. They must. One has to take a view on one’s future income, health, and familial obligations to think about what to set aside for retirement, how much life insurance to buy, and so on. Of course, all parties may be terrible at forecasting, that’s certainly a possibility, but that’s not the issue. Even if one wanted to think of all economic actors as foolish and purposeless organisms making utterly random choices, one must accept that their decisions will still affect, and be affected by what others do. The finitude of resources ensures this “accounting” reality.

``Beyond this, some may recall that Economics 101 is usually insistent on reminding students of the Fallacy of Composition: what is true for some may not be true for all. Much of macroeconomics is dedicated precisely making sure that when we talk about the “economy”, we don’t fall afoul of this fallacy."

I guess what may have gotten Mr. Pritchard's goat is that his writings has been tilted towards the oversimplistic the macro perspective, which Mr. Athreya critiqued.

Nevertheless, Mr. Pritchard's argument about economics as distinct from science is valid, but doesn't refute Mr. Athreya's point on the simplistic macro perspective.

The Revivalism of Friedrich Hayek's Ideas

Great stuff by Professor Russ Roberts at the Wall Street Journal on "Why Friedrich Hayek Is Making a Comeback"

(all bold highlights mine)

He championed four important ideas worth thinking about in these troubled times.

First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren't buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch-diggers with limited effects outside that sector.

Second, Hayek highlighted the Fed's role in the business cycle. Former Fed Chairman Alan Greenspan's artificially low rates of 2002-2004 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market.

Third, as Hayek contended in "The Road to Serfdom," political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live. When the state has the final say on the economy, the political opposition needs the permission of the state to act, speak and write. Economic control becomes political control.

Even when the state tries to steer only part of the economy in the name of the "public good," the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don't attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn't be confused with the real thing.

The fourth timely idea of Hayek's is that order can emerge not just from the top down but from the bottom up. The American people are suffering from top-down fatigue. President Obama has expanded federal control of health care. He'd like to do the same with the energy market. Through Fannie and Freddie, the government is running the mortgage market. It now also owns shares in flagship American companies. The president flouts the rule of law by extracting promises from BP rather than letting the courts do their job. By increasing the size of government, he has left fewer resources for the rest of us to direct through our own decisions.

Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful—when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit—in our work and in our play—is the road to true and lasting prosperity. Hayek gave us that map.

Despite the caricatures of his critics, Hayek never said that totalitarianism was the inevitable result of expanding government's role in the economy. He simply warned us of the possibility and the costs of heading in that direction. We should heed his warning. I don't know if we're on the road to serfdom, but wherever we're headed, Hayek would certainly counsel us to turn around.

More Evidence Of Stock Market Tidal Flows

If you read mainstream reports, they are distilled to make the public believe that stocks are "fundamentally" driven.

Yet squaring "fundamentals" with market actions would seem like describing circle as square--they simply won't fit!

Instead, we've been asserting that inflationism and inflation psychology has been the major forces behind the gyrations of stock market pricing.

I've called this the Machlup-Livermore model. A model which combines the empirical accounts of the legendary trader Jesse Livermore, who deals with market psychology, and the theoretical insights of inflation from economist Fritz Machlup.

The recent episode of stock market corrections abroad seem to strengthen our case.

According to Bespoke Invest (chart courtesy of Bespoke too),

``Today's drop to new correction lows has once again put the percentage of stocks in the S&P 500 below the 10% level (currently 7%). Prior pullbacks during the runup from the March 2009 lows only saw declines in this indicator to around 20-25%, and they didn't stay down there long. The current correction has seen the indicator remain in the single digits and teens for some time, and the bounce we got two weeks ago didn't take the indicator back above the 50% level. Clearly we're in a period that's testing the resolve of bulls, and multiple days like today cause more and more bulls to throw in the towel."

In short, most stocks move in the general direction of the market, which hardly accounts for micro-"fundamentals".

Presidential Inaugural, Traditionalism And Spending Other People's Money

People are enthralled with ritualism.

This would be evident today in the inaugural of President-elect Benigno “Noynoy” Aquino III and Vice President-elect Jejomar Binay.

And the pomp and pageantry attendant to this celebration comes with a cost; we learned that more than 10 million pesos (US $215,000) had been earmarked for this grand event.

My wife tells me to let this be (which I guess reflects the mainstream view), since this has been a tradition.

To heck with tradition! Money consumed from public spending extravagance is always lost productivity.

And the same reason holds why Philippine poverty rates has also been a tradition, the Australian government website notes that, ``In 2006, almost 27.6 million people lived below the Philippines' poverty threshold. This represents 26.9 per cent of Philippine families and 32.9 per cent of the population. According to international data, 44 per cent of the population subsisted on US$2 or less a day.”

Since money is a scarce resource, public spending, which is always political, represents the priorities of political leaders. Therefore, traditionalism means “the heck with poverty, long live grandiosity!” Poverty, thus, is reduced to political convenience. They matter only during elections and when justifying policies to the public to expand government's role in society.

As the illustrious Milton Friedman precisely said, ``If I spend somebody else’s money on myself, then I’m sure going to have a good lunch!"

4 ways to spend money, table from Freedom Channel Blog

Thus, free lunch it is, at our expense.

How true, yet how unfortunate.

Unfortunate because, as Ludwig von Mises wrote in Omnipotent Government, "people lack the mental ability to absorb the principles of sound economics. Most men are too dull to follow complicated chains of reasoning".

In other words, the public's lack of understanding makes us all so easily manipulated by political leaders.

Technology And The Growing Dysfunctionality Of The Political Institutions Of The Old Order

In the book Revolutionary Wealth, Alvin and Heidi Toffler writes,

``It becomes clear that what America world [strikethrough mine] confronts today is not simply a runaway acceleration of change but a significant mismatch between the demands of the fast growing new economy and the inertial new institutional structure of the old society. Can a hyperspeed, twenty-first century info-biological economy continue to advance? Or will society’s slow paced, malfunctioning obsolete institutions grind to a halt? Bureaucracy, clogged courts, legislative myopia, regulatory gridlock and pathological incrementalism cannot but take their toll. Something it would appear, will have to give. Few problems will prove more challenging than the growing dysfunctionality of so many related but desynchronized institutions." [bold emphasis added]

Some recent examples where such conflict applies (hat tip David Boaz)

From the Washington Post, (bold emphasis mine)

A satellite TV station co-owned by Rupert Murdoch is pulling in Iranian viewers with sizzling soaps and sitcoms but has incensed the Islamic republic's clerics and state television executives.

Unlike dozens of other foreign-based satellite channels here, Farsi1 broadcasts popular Korean, Colombian and U.S. shows and also dubs them in Iran's national language, Farsi, rather than using subtitles, making them more broadly accessible. Its popularity has soared since its launch in August...

Satellite receivers are illegal in Iran but widely available. Officials acknowledge that they jam many foreign channels using radio waves, but Farsi1, which operates out of the Hong Kong-based headquarters of Star TV, a subsidiary of Murdoch's News Corp., is still on the air in Tehran.

Viewers are increasingly deserting the six channels operated by Iranian state television, with its political, ideological and religious constraints, for Farsi1's more daring fare, including the U.S. series "Prison Break," "24" and "Dharma and Greg."

From the Wall Street Journal,

A move by Pakistan to begin monitoring for anti-Islamic content on major websites—including those run by Google Inc. and Yahoo Inc.—is the latest sign that censorship looms as a threat to Internet companies in a number of countries.

The Pakistan announcement on Friday came a day after a communications minister in Turkey, which has blocked thousands of sites including Google's YouTube, said the video site was "waging a battle against the Turkish Republic" and suggested that the situation could change if Google were to register and pay taxes.

Authorities in Pakistan on Friday said they would start monitoring major Internet search engines, including Google and Microsoft Corp.'s Bing.com, as well as the e-commerce giant Amazon.com Inc. The move follows an action last month against social-networking site Facebook Inc., which Pakistan blocked for several weeks after it hosted a page in which users could post pictures of the Prophet Muhammad. The portrayal of Muhammad is forbidden by Islam, and the ban was lifted when the site removed the page...

Earlier this year Turkey's communications ministry extended the ban to other Google sites, a move that appeared to be triggered by a separate tax battle with the U.S. giant. As a result, Turks suddenly lost direct access to GoogleMaps and other sites, as well as to YouTube. However, many ordinary users have been able to circumvent the closures.

The opposition People's Republican Party, usually a fierce defender of Ataturk's honor, on Thursday attacked the government in parliament for creating what one parliament member called a "culture of censorship" in the country, including Internet censorship.

Some of Turkey's top leaders have sought to distance themselves from the Internet closures. President Abdullah Gul earlier this month sent out a public message through his account on micro-blogging site Twitter.com, saying he "cannot approve of Turkey being in the category of countries that bans YouTube [and] prevents access to Google."

The growing friction between technology and the old political society is definitely taking shape; eventually one has to give. My bet: creative destruction will win.

Gawad Kalinga Antonio Meloto's Grandest Charitable Act

My salute to Antonio Meloto, founder of private charitable housing organization, the Gawad Kalinga, for declining the offer of President elect Noynoy Aquino to become the country's housing czar.

This from the Inquirer, (bold emphasis mine)

GAWAD KALINGA (GK) founder Antonio Meloto said the post of housing czar was offered to him by President-elect Benigno Aquino III but he turned it down.

In a media interview on the sidelines of the second Global Summit of the GK Community Development Foundation held here, Meloto said he discussed the offer with Aquino’s sisters, Ballsy Aquino-Cruz and Pinky Aquino-Abellada, recently.

At the end of the talks, Meloto said he refused the offer to join the Aquino Cabinet because he felt he would be more effective as a private citizen and philanthropist.

I can do more for my country by not being a Cabinet official,” said the 2006 Ramon Magsaysay awardee for community leadership.

Meloto was also the Inquirer’s Filipino of the Year in 2006.

My comment: Indeed, we share Mr. Meloto's view that his efforts will be more effective if he stays with the private sector.

That's because to quote Floyd Arthur "Baldy" Harper ``True charity must remain purely private rather than public and socialized. It must be voluntary. That is the nature of the greatest economic charity of all — savings invested in privately owned tools of production."

More from the Inquirer,

Meloto is the second RM awardee offered a post in the Aquino government. Former Naga City Mayor Jesse Robredo, the 2000 RM awardee for government service, was also offered the post of heading the Department of Interior and Local Government (DILG).

Meloto said he would rather focus on strengthening and promoting GK, which is expanding its projects to other Asian countries.

GK is a nonprofit organization that builds houses and develops livelihood programs for poor communities in the Philippines and other developing countries.

According to Meloto, developed countries like Singapore and Australia recognize GK not just as a charity organization but also as “a movement for nation-building.”

Schools and government agencies in these countries send students and representatives to the Philippines, through GK, to learn skills for community-building and conduct research studies.

Some companies send investment projects and financial assistance to the Philippines also via GK.

Meloto said foreign governments and organizations were willing to support GK because it is a private, nonprofit organization not connected to the government.

If he joined the Aquino government, Meloto said foreign governments might not trust GK anymore.

“They don’t trust politicians,” he said.

(bold emphasis mine)

My comment: Of course, in government all actions are political, so there will be emergent conflicts.

What is seen as charity is actually political redistribution of resources from coercion (taxation). People mostly see who is giving and what is being given, but they hardly see where and how these resources have been taken from.

As Ludwig von Mises once wrote, ``But the substitution of a legally enforceable claim to support or sustenance for charitable relief does not seem to agree with human nature as it is...The discretion of bureaucrats is substituted for the discretion of people whom an inner voice drives to acts of charity."

Therefore, his objection is not only valid it is realistic.

Likewise, he is living up to genuine charity work or social endeavour by avoiding potential conflict from political intervention.

I hope he doesn't change his mind.

It's a wonder, could Mr. Meloto be a libertarian?

Gold Unlikely A Deflation Hedge

This article says Gold is a hedge against deflation

According to mineweb,

``Gold is also an excellent hedge in periods of deflation. What is happening in times of pronounced deflation? Public budgets are strained, the financial sector is faced with systemic problems, currencies are depreciated in order to reflate the system, and the money supply is continuously rising. The creditworthiness of companies and countries is queried, the confidence in paper currencies falls, and gold is subjected to remonetisation."

The article uses historical performance, based on gold and gold mining share prices, to make such claim...

I don't think this is valid.

All one has to do is look at how the US dollar has performed during the years prior to central banking and the years after central banking existed.

In the period of 1814-1897 the US dollar fundamentally retained purchasing power relative to Gold. Post 1914 or the birth of the US Federal Reserve, the US dollar begun its steady decline.

chart from American Institute For Economic Research

And it has not been confined to the US dollar...

chart from Uncommon wisdom

Whether it is the Canadian dollar, Swiss franc or the British Pound, once released from gold as the anchor, paper currencies has steadily lost purchasing power.

Ergo, the fundamental difference is that GOLD and SILVER had then been money, because of the Gold Standard. Today we have fiat money, where gold has been reduced to "reserve assets" for central banks. Therefore we can't apply gold's exalted past with today.

Where the deflation represents the rise of the real purchasing power of money, until gold is accepted by the public as money, will then it serve its purported role as deflation hedge.

Has Swelling Numbers of Asian Millionaires Been Symptomatic of Wealth Transfer?

We’ve been talking about wealth transfer, i.e. from the West to the East. And perhaps, this could be a sign. A report says, Asian's have nearly caught up with the west in the race of High Net Worth Individuals (HNWI).

According to Bloomberg,

``The number of individuals with at least $1 million of investable assets in Asia-Pacific rose 26 percent to 3 million in 2009, matching Europe and almost overhauling North America’s 3.1 million, according to the 14th annual World Wealth Report published yesterday.

``Asia “continues to lead the global economic recovery and this has benefited many of the markets in the region in terms of both growth and wealth creation,” Ong Yeng Fang, market managing director for Indonesia, Philippines and Thailand at Merrill Lynch Wealth Management, said at a conference in Singapore today. Given Europe’s debt crisis, “there is a very high possibility that their numbers will be surpassed.”


To add, the Capgemini-Merrill report says: (bold highlights mine, graphs from Capgemini)

-The Asia-Pacific HNWI population rose 25.8% overall to 3.0 million, catching up with Europe for the first time, after falling 14.2% in 2008. Seven countries within the region actually saw their HNWI populations recover beyond 2007 levels.



-Asia-Pacific HNWI wealth surged 30.9% to US$9.7 trillion, more than erasing 2008 losses and surpassing the US$9.5 trillion in wealth held by Europe’s HNWIs.

-After falling 19.0% in 2008, the HNWI population in North America rebounded, gaining 16.6% in 2009. HNWI wealth there rose 17.8% to US$10.7 trillion. North America remains the single largest home to HNWIs, with its 3.1 million HNWIs accounting for 31% of the global HNWI population

For us, the reason Asia has been fast catching up with the west is that she has been engaged in less relative inflationism, which has been embraced by the west as the orthodoxy. But of course, everything is fluid or subject to change.