Global Debt Time Bomb

Here is a nice interactive counter of the world’s cumulative debt from the Economist.

According to the Economist (bold emphasis mine)

The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock shows the global figure for all (or almost all) government debts in dollar terms.

Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.

The global debt time bomb is no more than a symptom of the fundamental flaws of the fiat based money system which has been anchored on policies predicated on mainstream economics. As the Economist rightly points out, the larger the debt, the riskier the economic environment. Yet, there are two possible outcomes to these unsustainable conditions: massive inflation or default (restructuring).

Presently, policymakers are taking on the inflation path.

Commodity Inflation

The mainstream says there is LITTLE inflation to worry about.

However, evidence seems to go against this view.

Aside from the vibrant actions in the emerging market’s financial asset markets, where we seem to be witnessing ‘asset inflation’, we also seem to be seeing a broadening of rising price level activities in the commodity spectrum.

Below are nice charts from Bespoke Invest.

The Bespoke team comments

Most but not all have been on strong runs higher lately. In the charts, the green shading represents between two standard deviations above and below the 50-day moving average. Moves above or below the green zone are considered overbought or oversold. As shown, the two most widely followed commodities -- oil and gold -- are both trading outside of their trading ranges into extreme overbought territory. Silver, platinum, and copper are all at overbought levels as well. Wheat has pulled back to the bottom of its trading range recently, while coffee and orange juice have been heading lower as well. Corn pulled back from overbought territory a couple weeks ago, but it has bounced back some. Finally, natural gas remains in an epic downtrend.

These are symptoms of the relative effects of inflation.

Like in the domestic stock market, the rising tide tends to lift all boats but not simultaneously and not in the same degree. But overall, the general price level increments higher overtime as real purchasing power of currencies fall.

Well, even the US Treasury Inflated Protected Securities (TIPS) seem to be manifesting the same progressing expectations of inflation.

Bottom line: We seem to be experiencing the spreading effects of inflation.

Video: Best Way To Maintain Fiscal Discipline Is To Cut Government Spending

How to balance the budget? Simple, cut government spending.

Dan Mitchell of the CATO institute explains how...

Trigger To The Inflation Time Bomb

Will the trigger to the inflation time bomb be setoff soon?

According to Dr. Antony Mueller

Look at these two curves as if they were electrical wire all it takes a little twiggle of the money multiplier to surge and the bomb will explode. While it would be hard and enduring task for the central bank to reduce the monetary base, it only takes a whiff for expectations that determine the multiplier to shoot up. The bomb that will be ignited has already a name. It's name is "hyperinflation".

Mainstream have long been fixated about deflation.

But like Waiting for Godot, this has not occurred yet, and will unlikely happen unless the Fed accedes to the environment of shrinking liquidity at the risk of the implosion of the US banking system.

Ironically, this would defeat all their trillions of rescue efforts to the politically privileged industry. (As we long have been saying---bailouts were directed NOT primarily to save the economy but the political-economic class that depended on the benefits of seignorage from the US dollar standard.)

Also as we have long spelled out, the US yield curve cycle has a 2-3 year lag period from which we should expect it to generate “traction” by the last quarter of 2010.

And given the recent marked improvements in the credit markets of the US as shown below...

From St. Louis Federal Reserve...

From Northern Trust...

Not only is the yield curve cycle being validated, as US banks become more “open” to issue loans rather than seek safety in securities, but this also heightens the risk of the proverbial "pulling of the trigger" to the inflation time bomb.

When The Rubber Meets The Road: Political Controversies Hound The Aquino Administration

``The most important benefit of population size and growth is the increase it brings to the stock of useful knowledge. Minds matter economically as much as, or more than, hands or mouths.”- Julian Simon, More People, Greater Wealth, More Resources, Healthier Environment

Our projections are not only getting validated in the financial markets but also in the political front.

Many have come to fallaciously believe that the election of a new leadership would prompt for an overhaul in the management of the Philippine government. Now grinding reality has gradually been unmasking the mirage of “change”.

The Aquino administration is being rocked by several controversies. One is the hostage drama which has turned out to be a foreign policy relations disaster and has put into question the competence of the fledging administration.

Next is the allegation that the people close to the Aquino administration have been on the take[1], where the immaculacy of graft and corruption free image is evidently being chaffed.

As we have earlier argued[2], regulations that ignore the fundamental law of economics will only backfire.

Prohibition laws only foster and nurture violence, corruption and criminality and would not eliminate demand for the outlawed products or services, whether it is about drugs, abortion, prostitution or gambling.

Prohibition only worsens the situation by bringing these activities underground which undermines social institutions.

Apparently hardly anyone seems to have learned from history or from recent experience (President Estrada’s downfall was due to jueteng).

This is the fundamental pitfall of converting political “moral” issues into legal statutes without discerning on the responses of the individual.

Population Bill Controversy: Looking At The Wrong Picture

Another controversy hounding the Aquino administration is the religious uproar over the population control bill being sponsored by the administration.

This has placed incumbent leadership in direct confrontation with the largest religious cum political lobby group—the Catholic Church, which has even threatened President Aquino with excommunication[3]. The Church reportedly backtracked[4] on this.

While I agree that people should be given a free choice on what to do with their lives, the population control issue is fundamentally a deflection of the genuine pathology surrounding the Philippine political economy—the lack of capital and the dependency culture.

Figure 1: Google Public Data[5]: Population versus Wealth Creation

It’s basically false to impute population growth as the cause of poverty.

As figure 1 from the World Bank (Google Public Data) shows, world population growth (upper window) has more than doubled from 3 billion in 1960 to 6.7 billion in 2008. Yet global GDP per capita leapt from $445 to $9045 or some 19 times!

One would note that the gist of the improvement of global GDP per capita occurred when China opened her “to get rich is glorious[6]” doors to international trade in 1980 and when India likewise joined the global community which gave rise to globalization.

Globalization, which anchored China’s economic reforms, led to a massive decline in poverty rates “from 64% at the beginning of reform to 16% in 2004”[7].

The same holds true for India whose poverty rate declined sharply: According to the criterion used by the Planning Commission of India 27.5% of the population was living below the poverty line in 2004–2005, down from 51.3% in 1977–1978, and 36% in 1993-1994[8].

So in contrast to popular wisdom, two of the most populous nations saw a massive improvement in wealth creation as trade diffused into their economies.

In other words, contra neo-Malthusians, population growth is a positively associated with wealth creation because having more people enhances the division of labor and specialization as well as the broadening of the diversity of knowledge which increases the chances of innovative ideas. Thus, the essence to economic growth is the coordination of these attributes, channelled through voluntary exchange, which would allow more products and services or economic goods to be offered for exchange.

Here is Jean Baptiste Say’s* rejoinder to Thomas Malthus[9] who believed that population growth would adversely affect the distribution of resources (bold emphasis mine)

When men are once provided with the means of producing, they appropriate their productions to their wants, for the production itself is an exchange in which the productive means are supplied, and in which the article we most want is demanded in return. To create a thing, the want of which does not exist, is to create a thing without value: this would not be production. Now from the moment it has a value, the producer can find means to exchange it for those articles he wants.

As we earlier pointed out it is the lack of capital and the culture of dependency that hampers economic development which policymakers erroneously pinpoint to population growth. And the starting point of the lack of capital is the inadequate protection of property rights.

As Murray N. Rothbard explains[10],

The Third World suffers from a lack of economic development due to its lack of rights of private property, its government-imposed production controls, and its acceptance of government foreign aid that squeezes out private investment. The result is too little productive savings, investment, entrepreneurship, and market opportunity. What they desperately need is not more UN controls, whether of population or of anything else, but for international and domestic government to let them alone. Population will adjust on its own. But, of course, economic freedom is the one thing that neither the UN nor any other bureaucratic outfit will bring them.

In other words, persistent government intervention serves as a major hurdle to promoting productive activities of trade and free exchange and significantly hampers the development of “the political and institutional conditions required for a smooth and by and large uninterrupted progress of the process of larger-scale saving, capital accumulation, and investment.[11]”

And by culture of dependency, we refer to the welfare state, whereby population growth is impliedly encouraged by institutional policies such as public education.

The fundamental premise is if people are not held liable for their actions, or when the cost of committing errors are low, then the incentive to repeat such mistakes are high. For instance, since the cost of public education is borne by the taxpayers, the underprivileged will exercise little restraint on sexual reproduction knowing that education is “free”.

So while it would seem “compassionate” on the surface to finance the education of the poor, what is not seen is the cost of redistribution or the transfer of resources away from productive activities to non-productive activities. Such transfers not only reduce productivity or lower the standards of living but likewise encourage irresponsible behaviour. In short, or irresponsible actions are rewarded while productive actions are punished. Thus, the negative aspects of population growth as portrayed by media.

One should add that more government control over our lives chafes at our freedom.

Of course the chief beneficiaries of these have NOT been the recipients of redistribution but the administrators of the government. For they not only financially benefit from such transfers, they benefit by the inequality of distribution of power or that they exercise undue control over our lives.

And it is why despite the high penetration levels of education in the Philippines, we end up exporting labor as a consequence of a cauldron of interventionist policies, the symptoms of which are: mass production of low quality of education (industrial age mentality), the glaring mismatch of required skills for the available jobs relative to the output (graduates) of public education [e.g. Business Process Outsourcing], skyrocketing cost of private education[12], the heavily politicized education sector, high levels of unemployment, combined with the lack of property rights, underdeveloped and politicized markets and social institutions, the lack of savings and investments, and etc...

Political Talking Points: Do As I Say, But Not As I Do

Finally, the battle between the religious cum political lobby group (the Catholic Church) and the population bill proponents reveal the nature of Philippine politics—the struggle to promote their versions of statist doctrines reinforced by economic and political (religion) biases.

Like loose cannons, many shout out nonsensical “moral” arguments or politically correct sounding talking points which they either don’t understand or don’t practise at all. The essence of their opinions has been founded on blind faith[13] rather than reality.

For instance, the Catholic Church as a political lobby group hardly seem to practice on what they preach.

They have been allegedly staunch pro-environment (anti-mining) advocates by rhetoric, but actions appear to speak louder than words (see figure 2)

Figure 2: Philippine Stock Exchange: Catholic Church: Do As I Say Not What I Do?

Philex Mining, one of the top mining companies in the Philippines, in its disclosure of the top 100 shareholders of June 2010[14], reveals that some entities of the Catholic Church have significant shareholdings in the company, which ironically practices what they allege as engaging in a morally wrong act of environmental degradation.

I would wonder if their self-contradictory stance is about defeating competition more than ‘well meaning’ pronouncements.

Bottom line: I’d advise you to be very careful about heeding the specious arguments of sanctimonious statists.

*in my newsletter mailing list, I erroneously placed John Stuart Mill for Jean Baptiste Say

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[1] Inquirer.net Aquino won’t ax Puno yet, September 24, 2010,

GMAnews.tv Bishop links moves to oust Robredo to jueteng, September 12, 2010

[2] See Plus Ca Change: President Aquino's Policy On Jueteng, May 24, 2010

[3]Inquirer.net Aquino faces threat of excommunication, October 1, 2010

[4]Inquirer.net CBCP: No threat vs Aquino, October 2, 2010

[5] Google Public Data Explorer, World Bank: Population and GDP per capita

[6] Wikipedia.org, Deng Xiao Peng Quote commonly attributed to Deng Xia Peng but has NOT been sourced

[7] Wikipedia.org, Poverty In China

[8] Wikipedia.org, Poverty In India

[9] Say Jean Baptiste Second letter to Malthus 1821 (The Pamphleteer)

[10] Rothbard, Murray N. Population Control Chapter 41, Making Economic Sense

[11] Mises, Ludwig von Period of Production, Waiting Time, and Period of Provision, Chapter 18 Section 4, Human Action

[12] See Is There A Brewing Bubble In The Philippine Education System? August 11, 2010

[13] See Blind Faith Analysis, October 1, 2010

[14] Philippine Stock Exchange, Philex Mining Corporation Top 100 Stockholders As Of 06/30/2010

Stock Market Investing: The Search For The Mythical Holy Grail

“A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply.” -Fritz Machlup, The Stock Market, Credit And Capital Formation

If you think that the bullmarket in the Philippine Phisix is an isolated ‘special’ affair and has been exhibiting signs of economic or corporate (micro fundamental) improvements or political endorsements, then you would be wrong (see Figure 3).

The same applies to the mainstream permabears who can’t seem to get their focus away from the debt problem angle or the supposed “lack of aggregate demand” in major economies.

The US Dollar Story

Figure 3 Bloomberg: Exploding MSCI Emerging Market and Asian Currencies

As one would note, emerging markets stocks, as represented by the MSCI Emerging Market index (upper window), have been exploding of late. But still has some distance from reaching the 2008 highs.

And this has not just been a dynamic in the Emerging market stock markets, but also in the currencies of Emerging markets and their Asian contemporaries.

This is best represented by the Asian currency index, the Bloomberg-JPMorgan Asia Dollar Index (ADXY) which have similarly spiked (lower window)!

With Asian currencies surging, I would assume that in spite of the recent appreciation of the Philippine Peso, the relative performance of the Peso has been lagging, considering that foreign money flows have been quite active. Nevertheless, despite my suspicion of the repeated intervention by the local central bank, the Bangko Sentral ng Pilipinas (BSP), the Peso should follow her neighbours and appreciate going into the yearend.

So domestic assets are evidently being juiced up by foreign and local money flows.

And as further proof that past performance can’t serve as reliable indicator of the future, even the ongoing troubles in Ireland hasn’t prevented the Euro from appreciating against the US dollar.

And more on more mainstream analysts appear to be getting it.

This from the BCA Research[1], (bold emphasis mine)

``Four currencies – dollar, euro, sterling and yen – currently account for the vast majority of reserve holdings. All of these four major reserve currencies have their own fundamental weaknesses. At the margin, this will force reserve managers to look for alternatives. Indeed, according to the IMF, there is already a sharp spike in holdings of “other” currencies, to 3.6% of total reserves...

``Bottom line: Reserve diversification away from the U.S. dollar remains an ongoing structural theme in the foreign exchange market and commodity currencies will be a main beneficiary.”

It has been an open theme for us here that the so-called policy divergences between the major economies led by the US and emerging market economies, which can be likewise as the called the US dollar carry trade, has underpinned the actions in today’s financial markets.

And the telegraphed actions by the US Federal Reserve in support of a weaker dollar have been causing a flood of liquidity flowing into emerging markets, gold and other commodities.

The Holy Grail Is The Rising Tide

However in the domestic front, I sense alot of psychological changes as some people seem to get aggressive over their expectations of stock market returns.

Some seem to think that the role of the analysts is to provide them optimal returns by capturing the trajectory of price actions via market timing of every issue.

They desire to be in every security that are rapidly going up and expect analysts to be able to identify and predict them.

Yet they read momentum as a way to generate outsized returns and seek all sorts of information (earnings, economic growth and etc...) to confirm on such biases in order to justify their participation. They seem to be seeking the elusive Holy Grail of investing. Unfortunately, either they are being misled or are being overwhelmed by emotions.

Let me reiterate, this isn’t about special events surrounding particular issues. This is about the rising tide lifting all, if not most boats. (see figure 4)

Figure 4: PSE: Number of Traded Issues (Daily)

It’s been happening across emerging markets, where many EM bourses appear to be reacting “positively” to the “leash effects” of the falling dollar-policy divergence trade.

And the same phenomenon seems underway in the local stock exchange where the massive liquidity spillover has been generating a broader interest on publicly listed issues.

The underlying bullmarket has drawn market participants to trade on more issues, where an increasing number of formerly illiquid issues have now become “liquid”. The search for yield has been expanding and lifting prices across the most issues.

This only goes to show how an inflation driven bullmarket has relative effects on prices of securities even when the general level is likewise being lifted overtime.

The other way to say it is that rotational price actions of publicly listed issues is a general feature of a blossoming boom-bust cycle. As for which issues becomes tomorrow’s darling is a phenomenon that can be divined by Lady Luck and not any mortal analysts. Yet to narrow one’s timeframe is to unnecessarily increase risk tolerance and very dicey gambit.

So those who pin their analysis on a variety of non-essentials will certainly get the surprise of their lives when such dynamics reverses. For the meantime, as price levels go up, everyone’s a genius.

Interest Rates As Key

And it is equally important to remember that should there be any pin that may pop this liquidity driven activities (bubble) in the marketplace, it would be due to rising interest rates.

Figure 5: Casey Research[2]: Inflation Is The Biggest Driver of Interest Rate

And the benign levels of interest rates, which have been mainly due to manipulations by the governments will eventually succumb to one of the following factors:

-greater demand for credit or

-deterioration in the expectations of governments’ ability to settle existing liabilities, or

-most importantly, rising consumer price inflation which in the past have been the most pivotal factor in the determining interest rate levels (see figure 5).

As a final note, let me add to Warren Buffett’s advise, “The dumbest reason in the world to buy a stock is because it's going up”, and use all sorts of justifications to do so.

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[1] BCA Research, Prospects For FX Diversification September 28, 2010

[2] CaseyResearch.com Debtflation, September 13, 2010

Facebook’s Genesis: A Sensually Inspired Success?

This looks like an interesting trivia about the origins of Facebook.

From Naresh Vissa of Minyanville

Facebook founder Mark Zuckerberg started the site in his Harvard dorm room, though not to make money or get famous. Zuckerberg built several programs while attending high school at Phillips Exeter Academy in New Hampshire. He even had a seven-figure offer from Microsoft (MSFT) upon his high school graduation, but turned it down.

Ben Mezrich chronicled Zuckerberg’s journey in his best-selling novel, The Accidental Billionaires: The Founding of Facebook -- A tale of sex, money, genius, and betrayal. To Zuckerberg, it was never about money, rather his passions. More than anything else, he wished to get laid.

Zuckerberg should have thousands of friends, but social-networking’s father is far from social. After the woman of his dreams rejected him during his sophomore year, Zuckerberg sought revenge. He stole pictures from Harvard’s database and created Facemash, a site for users to rate girls against farm animals. Within a day, his server crashed due to high traffic, so then-Harvard President and President Obama’s former top economic advisor Lawrence Summers placed him on probation and even threatened expulsion. Zuckerberg’s dopamine levels rising through the roof, Facebook’s genesis was established.

It’s one of the unique moments were sensuality seem to have inspired a monumental productive idea.

Blind Faith Analysis

Arguing political or economic issues based on biases, in my view, seems similar to layman’s argument in the context of religion.

They are hardly grounded from reasoning but from ‘blind’ faith.

Well, it’s interesting to know that in surveys, a vast number adherents of world religions fundamentally know less about their ‘beliefs’.

This from Pew Research

More than four-in-ten Catholics in the United States (45%) do not know that their church teaches that the bread and wine used in Communion do not merely symbolize but actually become the body and blood of Christ. About half of Protestants (53%) cannot correctly identify Martin Luther as the person whose writings and actions inspired the Protestant Reformation, which made their religion a separate branch of Christianity. Roughly four-in-ten Jews (43%) do not recognize that Maimonides, one of the most venerated rabbis in history, was Jewish.

In addition, fewer than half of Americans (47%) know that the Dalai Lama is Buddhist. Fewer than four-in-ten (38%) correctly associate Vishnu and Shiva with Hinduism. And only about a quarter of all Americans (27%) correctly answer that most people in Indonesia – the country with the world’s largest Muslim population – are Muslims.

Professor Bryan Caplan adds a brain twister to what he calls rationally ignorant,

Now consider: If people sincerely believed that their eternal fates hinged on their knowledge of religion, their ignorance wouldn't be rational. If you could save your soul with 40 hours of your time, you'd be mad to watch t.v. instead. Unfortunately for religious believers, this leaves them with two unpalatable options:

1. Option #1: Deep-down, most religious believers believe that death is the end. (This is consistent with the fact that even the pious mourn their loved ones at funerals, instead of celebrating the good fortune of the deceased). Even if this covert atheism is mistaken, the idea that most of the people in church aren't true believers seems threatening.

2. Option #2: Most religious believers are so stupid and/or impulsive that they'll knowingly give up eternal bliss for trivial mortal pleasures. But why then do so many believers show intelligence and self-control in other areas of life?

Strange or self contradictory as this is, rational ignorance only goes to show that what most people believe in runs in contrast to their actions.

And applied to economic and political analysis, blind faith analysis is simply cart before the horse logic; of which the common characteristics are: they are full of factual errors, the frequent use of logical fallacies, deliberately misinterpretation of theories, ambiguous definitions and data mining or selective application of evidence.

The Mentality of A Government Expert

An interesting quote by the Wall Street Journal Blog on Professor Adam Posen, a Harvard PhD economist, who sits on the Bank of England’s Monetary Policy Committee, revealingly illustrates the mentality of government experts.

(bold emphasis mine)

Along the way, he adds a few new metaphors to the debate over central banking: “Fear of looking ineffective should not be a deterrent to doing the right thing, he said. “When facing a worsening situation, you work with the tools you have, whether you’re a central bank in the aftermath of a financial crisis, or someone stranded on the road with a car problem when night is falling. And you try to get help.”

First, the quote simply reveals what we have pointed out in many occasions—bureaucrats and their academic cohorts are NOT there simply to make things “work”. Rather, they need to be seen first, as having a hand in “doing something”, a form of signaling to get accepted by the public, regardless whether their actions put to risk the general welfare.

In addition, the quote also exposes how so-called experts are willing to gamble with public treasury. That’s because at the end of the day, these entities are not held accountable or subjected the consequences of their actions.

Third, the analogy about someone stranded on the road with a car problem and getting some help is blatantly misleading. The car problem is mostly about voluntary assistance or public service to some of the afflicted and not everybody else.

Central banking policies are about putting a gun on our head and forcibly demanding us to act in accordance to the whims of the politically unelected leaders. It affects everyone else albeit in different degrees.

This effectively differentiates government experts from that of the private sector.

As Professor Arnold Kling aptly writes in the Era of the Expert Failures,

The power of government experts is concentrated and unchecked (or at best checked very poorly), whereas the power of experts in the private sector is constrained by competition and checked by choice. Private organizations have to satisfy the needs of their constituents in order to survive. Ultimately, private experts have to respect the dignity of the individual, because the individual has the freedom to ignore the expert.

Lastly, the quote also reveals on the hubris or what Friedrich von Hayek would call as the ‘Fatal Conceit’ of those in the political echelons.

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

They who cannot foretell of where the markets are headed for, seem to be consumed by the belief that social problems can be solved with presumptive models.

Will A Ban on ‘Texting While Driving’ Reduce Accidents?

In examining accidents, the intuitive response by policymakers is to look at the immediate cause and subsequently apply restrictions on it.

And this applies to “texting while driving”, where the underlying belief is--just ban ‘texting while driving’ and accidents will go away.

Simple antidote right?

Well, a study demonstrates that this socialist “feel-good-to-do-something-about-it” policy is nothing but nonsensical fairy tale, with even more vicious consequences (other than restricting one’s liberty).

From the Cleveland Leader, (bold highlights mine) [Hat tip: Professor Don Boudreaux]

Laws that ban the practice of texting while driving are designed to keep drivers' attention on the road and avoid accidents, but new research published Tuesday by the Highway Loss Data Institute suggest otherwise. Laws banning texting while driving may actually increase the risk of road crashes, according to the study.

The HLDI research showed that crash rates rose in three out of four states after texting bans were implemented

Adrian Lund, president of HLDI and the Insurance Institute for Highway Safety says:

"Texting bans haven't reduced crashes at all. In a perverse twist, crashes increased in three of the four states we studied after bans were enacted.

It's an indication that texting bans might even increase the risk of texting for drivers who continue to do so despite the laws."

Lund added that the findings "call into question the way policymakers are trying to address the problem of distracted driving crashes", and said that the increased crash rates were due to drivers responding to the regulations by moving their phones lower down and out of sight when sending a text. This increases the risk of a crash because the driver's eyes are diverted further from the road and for a longer time.

So, the unintended consequences appear to be worse than the desired the goal of reducing accidents or that the costs of the policy seems greater than the intended benefit.

So what’s wrong with the policy?

It basically overlooks human response to circumvent or go around regulations.

Of course, there are other possible ramifications: this law could be used to harass the public, increase the incidence of extortion and corruption, increase taxpayer costs of applying the law (bureaucracy), selective implementation of the law, curtail personal liberty and etc…

In short, the end does NOT justify the means.

End The Fed: The Apostasy of Ambrose Evans Pritchard

Ben Bernanke and the US Federal Reserve just lost a popular mainstream media supporter.

Telegraph’s Ambrose Evans Pritchard does a turnabout…

I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.”

NO, NO, NO, this cannot possibly be true.

Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.

Read the rest here

Nothing is fixed, people’s minds can and has always changed. Parlayed into politics, this only means politics always evolve.

Could Mr. Pritchard’s volte-face presage on the emergence of mainstream’s clamor to end the fiat money central banking regime or a return to sound money?

Marc Faber On Gold, Moral Hazard and Inflation

Marc Faber recently interviewed by Hera Research Newsletters: (all bold emphasis mine)

HRN: Is there a relationship between monetary expansion and the fact that the US economy depends so heavily on consumption?

Dr. Marc Faber: Basically, if you look at consumption as a percent of the economy and at housing activity, the excessive debt growth began essentially after LTCM and, I have to say, it was a huge mistake of the Treasury and Fed to bailout LTCM because it gave Market participants in the financial sector a signal that there is a Greenspan put, and later on a Bernanke put [1], with an even higher strike price and this resulted in excess leverage. So, if you have problems, the Federal Reserve will bail you out or the system will bail you out. That’s where I think the Federal Reserve acted irresponsibly—irresponsibly—that has to be said very clearly. They didn't pay attention to credit growth. Every central banker in the world pays attention to credit growth, but not in the US.

HRN: What would you recommend that the Federal Reserve do differently?

Dr. Marc Faber: The first action Mr. Bernanke should take is to resign. If I had messed up the system so badly, as he has done, I would have to resign. He has talked constantly about the Great Depression and what caused the depression but the problem is that he really doesn't understand what caused the depression, which was also excessive leverage at that time. I have to stress that in 1929 the debt to GDP ratio was of course minuscule in comparison what it is today. It was 186% of GDP but you didn't have Social security, Medicare and Medicaid and unfunded liabilities for Social Security and so forth. So, debt today, as a percent of GDP, is 379% and if you add the unfunded liabilities we are at over 800%. The Federal Reserve should pay attention to that.

HRN: With debt levels and liabilities so high, what solution is there for the United States?

Dr. Marc Faber: The solution is, basically, for the government to move out and not intervene in the economy. There are economists who will dispute that the Federal Reserve is partially responsible for the crisis and there are economists that will still tell you that debt doesn’t matter, that deficits don't matter and they want to continue to intervene in the free market constantly. To these economists I respond: What about Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB)? It was an intervention by the government into the housing market and into the mortgage market and the biggest bankruptcies—bigger than Citigroup (C) and all the banks—are Fannie Mae and Freddie Mac—government-sponsored enterprises. [1] The same economists will tell you that the government has to intervene and to these economists I say: Well, you have made so many mistakes already with interventions do you think that in the future your interventions will improve anything? Einstein defined insanity as doing the same thing over and over and expecting different results, but these economists and the Federal Reserve think that by more interventions with fiscal measures and more money printing they will improve things. No, they won’t. They will make things worse.

HRN: It seems the US is moving towards more government intervention into the free market rather than less.

Dr. Marc Faber: Yes. That’s why I’m very negative about economic growth in the US. It just won’t happen. Can the US economy grow at 2% per annum or, in the best case scenario, at 3% per annum with current policies? Yes, but it will create a lot of distortions. The best case for an economy that goes into a boom phase, in other words over consumption, is to bring it back into the trend line as quickly as possible. So when you have an excursion into a boom, what you need is a cleansing of the system and that may take a few years to happen in the US because the excesses were built up not just in the last 7 years between 2000 and 2007 but, over the last 25 years. So, to really bring the US back into sanity—into a healthy mode where the economy can grow—might take 5 to 10 years, but it won’t happen under the Obama administration.

HRN: Given the poor prospects for US economic growth, do you foresee a flight of capital from the United States?

Dr. Marc Faber: You would be out of your mind, with health care reforms and with the government interventions and the uncertainty about future taxes in the US, to even consider expanding in the US and this is a problem. I mean people say that loan demand is down because banks are not lending, but maybe nobody wants to borrow any money in the US and nobody wants to expand in the US but they are expanding in China, India, Vietnam, Bangladesh, Africa and Brazil. The business world is an international place today, and if you run a corporation, whether you employee 50 people or 10,000, you can choose where you invest your money in terms of capital spending. [2] Where do you want to expand factories? If I employed people in the US, I would rather think of reducing the 50 employees maybe to only 20.

HRN: Where should American investors put their money?

Dr. Marc Faber: Different people have different investment objectives but I made a presentation recently where I showed, that in terms of goods markets, the emerging world is now larger than the developed world and so I think people should have at least 50% of their money in emerging economies. With interest rates at zero and with the prospect that they will stay at zero, or below zero in real terms for a long time, I think cash is not particularly attractive. I think US government bonds are unattractive in the long run, although they may be attractive for the next three months. I would recommend to people to accumulate precious metals and invest in a basket of shares in emerging economies.

HRN: Are you saying you would consider buying gold even at today’s prices?

Dr. Marc Faber: Yes, I keep accumulating gold although in the next three months it may go down and not up, but maybe it won’t go down. To me, it doesn’t really matter if it goes down by 10% or 20% or whether it stays where it is. I think if in case gold came down 20% it would be because tightening of global liquidity and, in that scenario, equities wouldn’t do particularly well either [3].

HRN: You mentioned that cash is not attractive. What are the prospects for the US dollar?

Dr. Marc Faber: The dollar has been relatively weak in the last few years. It’s just that the other currencies are not much better. There has been a tendency for the dollar to weaken and certainly it has weakened against the price of oil, against the price of precious metals and raw materials and it's lost its purchasing power. There is no question about the fact that, today, if you have $100,000 you can buy less than 10 years ago or 20 years ago. Just look at the housing market. It has come down somewhat but a house is much more expensive than in 1980.

HRN: Can you comment on inflation versus deflation?

Dr. Marc Faber: In this whole inflation and deflation debate investors have to realize that in a system—say you have a room like this and then the money is dropped from helicopters into this room, it can flow into real estate; it can flow into equities; it can flow into precious metals; it can flow into the art market or it can flow out into other currencies or into commodities that the Federal Reserve doesn’t control [4]. They only control essentially how much money they will drop from the helicopters.

HRN: Is this an example of why central planning of the economy by the Federal Reserve isn’t effective?

Dr. Marc Faber: Yes. Exactly.

HRN: Do you think hyperinflation in the US is possible?

Dr. Marc Faber: The Federal Reserve doesn’t want to create a hyperinflation. I mean Mr. Bernanke may be incompetent, but he’s not an evil person per se. He just doesn’t have sufficient knowledge to be a central banker, in my opinion, and has misguided economic theories, but he’s not evil in the sense that he would not wish to debase the currency entirely. Clearly, if the US economy moves into a double dip recession and you have deflationary pressures reappearing, in the housing market, for example, and if the S&P drops from roughly 1,100 down to say 900, then I think further monetization will happen. I believe that because of the unfunded liabilities and the deficits of the US government, which will stay high for a long time; sooner or later there will be more monetization anyway [5].

It’s more a question of when it will happen rather than if it will happen. For sure it will happen but will it happen right away, say in September, or maybe only in two years time? Eventually, before everything collapses we’ll have an inflationary bout which may not be so strongly felt in consumer prices, as in stocks or housing or precious metals prices or in commodities like oil; or inflation could occur mostly in foreign currencies, in other words, in Asia where the currencies could appreciate.

My comments:

[1] Boom bust cycles have been amplified by the environment of moral hazard as consequence to repeated ‘bailouts’ or interventionism.

[2] In the era of globalization, US investors are most likely to arbitrage between domestic interest rates and potential returns on emerging markets, hence the US dollar carry trade.

Of course, one can’t discount that the deepening of international trade would attract capital to where it is best treated.

[3] Gold is a long term buy, regardless of short term fluctuations, predicated on government interventionism and the debasement of fiat currency system.

[4] We are in the sweetspot phase of inflationism.

[5] Addiction to the printing press as a way to resolve economic ailments will lead to unintended serous consequences.

US Dollar Carry Fuels ASEAN Stock Market Boom

Now my themes on the current market actions in the ASEAN markets appear to be gradually gaining acceptance among a few perceptive observers.

While I call it arbitrages from policy divergences, they call it US dollar Carry Trade. Point is policy divergences of developed economies and emerging markets have incentivized cross-border capital flows that has helped pumped up asset prices (asset inflation).

Here is a terse excerpt from Howard Simons... (bold highlights mine/charts Minyanville.com)

``If it seems like the cheap dollar is propelling Thai stocks higher relative to US stocks, it is. Now let’s duplicate the exercise with another one of 1997’s chalk outlines on the pavement, the Philippines.

``The song remains the same: Filipino stocks have been feasting on cheap dollars; just borrow the USD, lend the PHP, rinse and repeat. The Philippines actually get a twofer for our policies as the stimulus increases demand for Filipino expatriate workers throughout the region; their remittances are one of the top sources of export earnings for the nation.”

Carry trade is seen from the perspective of foreign money flows INTO the ASEAN markets. Of course, NOT all trades are foreign based. In fact, foreign money account for less than half of the overall trade. This implies that the other important half is the domestic business cycle at play.

What this points to is that those who insist that this run up is about economic success or political endorsement or positive micro fundamental developments will one day get a RUDE awakening.

For now enjoy the party!

Deflating The Mythical Powers Of Central Bankers

For those who believe that government officials can do magic, this should be a reality check.

Here is a list of major recent failures of central bank interventionism which Fortune’s Colin Barr commented as having “caused a kerfuffle, much to their citizens' dismay.”

From Mr. Colin Barr:

The Bank of Switzerland. It spent around $200 billion between March 2009 and this past June in a bid to hold down the Swiss franc's appreciation against the euro. How did that work out? The swissie appreciated 10% during that span anyway. "Those are some serious paper losses," said Popplewell. "You'd have to say their big picture strategy hasn't worked out."

The Bank of Japan. It has spent almost $800 billion since 1977 on currency intervention that "seems to have had little lasting effect" on the value of the yen, a 2007 report to Congress concluded. But try try again. And so it is that this month Japan intervened for the first time in six years in a move that was almost universally derided as doomed to fail – particularly since any Fed announcement of QE2-related action would likely send the dollar lower against all currencies.

The Central Bank of Brazil. It has wasted large sums in a forlorn bid to hold down the value of the real over the past year. But setting an example all central bankers are surely taking note of, Finance Minister Guido Mantega said last week the government won't let that stop it from making the same mistake over and over again. "We won't just stand here and watch this game," he said. But the moral of this story might be: Don't just do something, stand there.

Bottom line: Governments recklessly gamble away with OUR money yet FAIL to accomplish the intended goals!

Why Philippine Elite Schools Are Inclined Towards Statism

Recently a libertarian colleague frustratingly observed that elite Philippine schools appear biased towards socialism.

Before dwelling directly with this issue, we should first look at the bigger picture and ask whether Filipinos, in general, are inclined towards (classical) liberalism or socialism.

In observation of the major source of influences which shapes the public’s mindset—particularly, the context of TV and newspaper or mainstream media’s reports and opinions, combined with the influences of the Church (largely the Catholic Church), one may conclude that Filipinos seem largely predisposed with the notion of social democracy (socialism).

And this is why domestic politics has popularly but erroneously been seen as the elixir to prosperity: just put in the “right” people and everything will be fixed. Yet this prevailing mindset has led to the public’s undeserved fixation towards politics at the expense of enhancing productivity.

And conversely, this seems to be the reason why (classical) liberalism seems to be a strange and unpopular concept here.

And only with the help of the internet has the principle of individual freedom, upholding private property as means of production, freedom of contract and social cooperation (or peace) via free trade gradually spread to a handful of adherents.

And likewise given that the domestic education industry has been highly regulated in terms of the enforcing curriculum standards, education cycle (see How Bro. Armin Luisitro’s 12 Year Basic Education Cycle Will Benefit The Big League Schools), the obsession towards compulsory education (e.g. subsidies to private schools for underprivileged students- See Is There A Brewing Bubble In The Philippine Education System?) and in many other aspects, this only suggests that Philippine educational system could somewhat constitute as a form ‘indoctrination’ towards the acceptance of state absolutism.

Apparently this hasn’t escaped the elite schools.

But there seems more to this.

In my view the most important factor is what I would call this the insider-outsider dynamics.

Insiders, represent the symbiotic relationship between the economic elite and ruling political class while the outsiders are the average citizen.

In consideration of the operating framework of the domestic political economy, where the Philippines is considered economically less free, and where, to quote Joe Studwell in Asian Godfather: Money and Power in Hong Kong and Southeast Asia (bold highlights mine), ``business interest gain so close a control of the political system that they are unaffected by the changes of government that do occur (as in Thailand and the Philippines). In both instances politicians spend huge sums to maintain a grip on power that has some semblance of legitimacy. This can only be financed by through direct political ownership of big business or more usually, contributions from nominally independent big business that is beholden to politicians. Whichever, the mechanism creates a not entirely unhappy dependence of elites between politicians and tycoons”, the elite schools has served as THE breeding or training grounds into fostering and nurturing the union of this exclusive insider political-economic relationship.

In other words, the primary reason elite schools have been inclined towards statism is because they benefit from such relationship. They represent the status quo.

Think of the Presidents who came from the ranks elite schools, including the incumbent. Or think of the cabinet members or bureaucrats who emerged from such top rank schools throughout the past and present administrations.

In addition, think of all those “donations” made by “Godfathers (tycoons)” to the elite schools, after having financially benefited from “political concessions” (monopolies, subsidies, cartel, access to funding, and etc...).

It’s been a give and take for the elite schools and the privileged political and economic class.

This also means that for people aspiring to get assimilated with the privileged clique, the best chances to gain entry would be through the elite schools route, via networking or by establishing connections. And obviously the passport has costs—skyrocketing tuition fees!

This also implies that elite schools are likely to fight to maintain status quo by promoting statism, despite the oxymoronic rhetoric towards ‘good’ government.

However, not all of the graduates of the elite schools aspire to be part of the insider. And I am talking about myself and a handful of emerging local contrarian classical liberals.

That’s because the status quo political economy benefits some at the expense of the rest of the society by instituting inequality of political and economic power through arbitrary laws and regulations.

And classical liberalism hopes to disentangle this “inequality”—by giving everyone (or democratizing) the “equality” of opportunity to succeed.

At any rate, for my colleagues, Murray N. Rothbard offers the best way to disseminate the principles of classical liberalism...

This is why, by the way, strategically, if you're an Austrian, you shouldn't spend time trying to convert Paul Samuelson or Milton Friedman. These guys are not going to be converted: they're locked into their paradigm. You convert people who are just coming up, new people, people who are on the fence. Graduate students, these are the people you can convert. Don't waste your time trying to convert Samuelson or Friedman or whoever the other paradigm people are.