The Phisix And The Boom Bust Cycle

``If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortization allowances is fairly inelastic, and optimism about the development of security prices would promptly lead to a "tightening" on the credit market, and the cessation of speculation "for the rise." There would thus be no chains of speculative transactions and the limited amount of credit available would pass into production without delay.”- Fritz Machlup, The Stock Market, Credit and Capital Formation

At this time of the year, many institutions and experts will be issuing their projections. Some, like me[1], have already done so late last year.

Most of the forecasts will be positive as they will likely be anchored on the most recent past performance. And I would belong to this camp but for different reasons.

The Phisix Boom Bust Cycle At A Glance

While the mainstream interpret and analyse events mostly from the lens of economic performance, technical (chart) and corporate financial valuations, as many of you already know, I look at markets based boom bust (business) cycles as a consequence of incumbent government policies (see figure 1).

Figure 1: Stages of the Bubble and Phisix Bubble Cycle of 1980-2003

As one would note, the Phisix played out a full bubble cycle over a 23 year period in 1980-2003 (right window). The cycle also shows that in the interregnum, there had been mini-boom bust cycles (1987 and 1989).

A formative bubble cycle appears in the works since 2003, with the 2007-2008 bear market representing a similar mini countercycle similar to the previous period.

The lessons of the previous bubble cycle impart to me the confidence to predict that the Phisix will likely reach 10,000 or even more before the cycle reverses.

Although one can never precisely foretell when or how these stages would evolve, as past performance may not repeat exactly (yes but it may rhyme as Mark Twain would have it), the important point is to be cognizant of the whereabouts of the current phase of the bubble cycle.

And evidence seems to point out that we are in the awareness phase of the bubble cycle as demonstrated by the swelling interest for Philippine assets. The latest success of the $1.25 billion PESO 25-year bond offering[2] and the upgrade of the nation’s credit rating by Moody’s[3] serve as good indications.

In addition, local authorities audaciously and ingeniously tested the global market’s risk appetite for the first time ever with a substantial placement at a long tenor that passed with flying colours. With 160 investor subscriptions mostly from the US and Europe, the Peso bond offering further illustrates the mechanics of cross currency arbitrages or carry trades arising from monetary policy divergences.

Of course for the mainstream, this will be read and construed as signs of confidence. For me, these events highlight the yield chasing phenomenon in response to present policies.

Figure 2: McKinsey.com[4] Global Financial Assets

And considering that the global financial markets have immensely eclipsed economic output as measured by GDP (see figure 2), the yield chasing dynamic will likely be magnified, largely driven by the disparities in money policies and economic performance. Another apt phrase for this would be ‘rampant speculation’.

To reiterate for emphasis, anent the Phisix, we don’t exactly know if there would be another countercyclical phase or if the present bubble cycle will persist unobstructed until it reaches its zenith.

In addition, we can’t identify how the rate of acceleration of the cycle will unfold nor can we ascertain the exact timeframe for each of the stages in succession.

Instead we can measure the bubble cycle by empirical evidences such as conditions of systemic credit, rate of asset or consumer price inflation and mass sentiment.

The Growing Influence Of Negative Real Interest Rates

With interest rates artificially suppressed, which fundamentally distorts the price signals that account for the time preference of the public over money and the economic balance of the credit market, policy influenced interest rates and the interest rate markets that revolve around them will lag the rate of inflation.

In short, real interest rate will be negative for an extended period.

In the milieu where government here and abroad have been working to stimulate ‘aggregate demand’ via the interest rate channel and for developed economies who employ unconventional monetary operations in support of the banking sector and the burgeoning fiscal deficits, the impact on consumer price inflation will likely go beyond the targets of their respective authorities.

As an aside, some governments in the Europe, such as Hungary, Bulgaria, Poland, Ireland and France have begun to “seize” private pensions[5], but applied in diverse degrees, all of which have been aimed at funding unsustainable deficits accrued from welfare programs and the cost of bailouts.

This only serves as evidence that governments are getting to be more desperate and would unflinchingly resort to unorthodox means to keep the status quo.

Figure 3: Global Negative Real Interest Rates[6] and Record Food Prices (courtesy of US Global Funds and Bloomberg)

Real interest rates were at the negative zone for several countries (see figure 3 left window) even as 2010 had largely been benign.

But with the most recent explosion of food prices[7] to record levels on a global scale as measured by the Food and Agriculture Organization Index (FAO- right window), aside from surging energy prices, we should expect consumer price inflation rates to ramp up meaningfully.

Meanwhile, Federal Reserve Chairman Ben Bernanke imputes high oil prices to “strong demand from emerging markets”[8]. This would represent as a half truth as Mr. Bernanke eludes discussing the possibility of the negative ramifications from his policies.

In the Philippines, such broad based price increases in many politically sensitive products or commodities have even triggered alarmism of the local media. Similar to Fed chair Ben Bernanke, local authorities and the media seem to have conspired to sidetrack on the scrutiny of the real origins[9] of such price hikes.

Nonetheless, most governments will, as shown above, try to contain interest rates from advancing, as this would increase the cost of financing of many of their liabilities. But this will only signify a vain effort on their part as politics will never overcome the laws of scarcity.

For the public, the growing recognition of widening negative real interest rates will further spur the dynamics of reservation demand—call it speculation, hoarding or punting, or in the terminology of the Austrian economists the “crack-up boom” or the flight to commodities as the purchasing value of money erodes.

And that those who expect fixed income to deliver positive returns while underestimating on the impact of changes in the rate of inflation will suffer from underperformance.

Yet the same dynamics are likely to incite further “risk taking” episodes (note again: reservation demand and not consumption demand), one of the fundamental source of boom bust or bubble cycles.

As a caveat, I am not an astrologer-seer who will predict day-to-day movements, rather in taking the role of an entrepreneur we should see or parse the business or bubble cycle as an active process that is subject to falsification.

This also means market actions won’t be moving in a linear path.

Figure 4: Markets Drive Policies (source: Danske Bank and economagic.com)

And as earlier stated, policy interest rates trail inflation.

And where market based rates partly reflect on prevailing inflation conditions, one would observe that market rates almost always lead policy rates (see figure 4 right window). Despite the Fed’s QE program aimed at keeping interest rates low, markets have started pricing US treasuries higher. In other words, policy interest rates react to market developments than the other way around.

In a parallel context, the interest rate markets seem to also price aggressively[10] Fed fund rate futures (left window) contradicting the promulgated policy by the US Federal Reserve.

Bottom line: the surging consumer inflation signifies as unforeseen consequences to the current polices.

The Continuing Policy of Bailouts

Of course higher interest rates, at a certain level, will ultimately be detrimental to local or national economies, particularly to those in the hock.

But the risk of a high interest rate environment will depend on the leverage of policymaking. Debt in itself will not be the main source of the risk, prospective policy actions will.

Many government institutions (or even politicians) are aware of the risks of overstretched debt levels.

In the US, the Federal Reserve has its 220 PhDs and many more allied economists in the academia or in financial institutions[11] to apprise of the debt-economic conditions and the available policy options and their possible implications. The problem is that they are math model based and hardly representative of actual state of human affairs.

Besides, most of them are predicated on Keynesian paradigms whose fundamental premises are in itself structurally questionable. Thus, market and economic risks come with the methodology guiding the policy actions that are meant to address present concerns.

For instance, should the problem of debt be resolved by taking on more debt?

Applied to US states whom are in dire financial morass, will the US, through the US Federal Reserve, bail them out?

Ben Bernanke pressed by the Senate recently said no[12], but his statements can’t be relied upon as proverbially carved in the stone. That’s because this would largely depend on the degree of exposure of the banking system’s ownership of paper claims of distressed States on its balance sheets. A ‘no’ today can be a ‘yes’ tomorrow if market volatility worsens and if credit market conditions deteriorates based on the financial conditions of the banking system.

Early last year, Ben Bernanke spoke about ‘exit strategies’[13] when at the end of the year exit strategies transmogrified into QE 2.0 and where talk of QE 3.0[14] has even been floated. Talk about flimflams.

In short, since the banking system is considered as the most strategic economic sector by the present political authorities, enough for them to expose tens of trillions worth of taxpayer money[15], then the path dependence by the Fed would be to intuitively bailout sectors that could weigh on their survival.

The fact that the US has had an indirect hand in the bailout of Europe[16], via the IMF and through the activation of the Fed swap lines hammers the point of Bernanke’s preferred route.

And of course, we shouldn’t be surprised if the Fed collaborated anew with European governments to any new bailout schemes in case of any further escalation in the financial woes of European banks and or governments.

So the US has been in a bailout spree: the US banking system, the Federal government, Europe and the rest of the world (through Fed swaps and through the transmission mechanism of low interest rates), so why stop at US states?

Hence given the policy preference, we should expect a policy of bailouts as likely to continue and should hallmark a Bernanke-led Federal Reserve.

And the policy of bailouts is likely to also continue in developed economies affected by the last crisis.

All these cheap money will have an impact on the relative prices of assets and commodities worldwide.

Thus, we see these internal and external forces affecting the Philippine assets--equities, real estate and corporate bonds.

What Would Stop Bailouts?

The preference for bailout option would only be stymied by natural (market) forces—higher interest rates from heightened inflation expectations (through broad based price signals-we seem to be seeing deepening signs of this)—which reduces the policy tools leverage available to the authorities, the resurrection of bond vigilantes as seen in the deterioration of the credit quality of sovereign papers, or a Ron Paul.

Of course the Ron Paul option, I would see as most unlikely given that a one man maverick is up against very well entrenched institutionalized vested interest groups which have been intensely associated with the government.

As Murray N. Rothbard exposited[17], (bold highlights mine)

But bankers are inherently inclined toward statism. Commercial bankers, engaged as they are in unsound fractional reserve credit, are, in the free market, always teetering on the edge of bankruptcy. Hence they are always reaching for government aid and bailout. Investment bankers do much of their business underwriting government bonds, in the United States and abroad. Therefore, they have a vested interest in promoting deficits and in forcing taxpayers to redeem government debt. Both sets of bankers, then, tend to be tied in with government policy, and try to influence and control government actions in domestic and foreign affairs.

This leaves us with inflation and credit quality which I think are tightly linked underpinned by a feedback mechanism.

A bubble bust elsewhere in the world from high interest rates would drain capital, but if inflation remains high this will reduce authorities leverage to conduct further bailouts. Think the stagflation days of 1970s (the difference is the degree of overindebtedness today and in the 70s).

In addition, high interest rates at a certain point will puncture global governments liquidity bubble which will expose nations propped up by the liquidity mask to deteriorating credit quality.

And at this point, crisis affected governments, including the US, are likely to choose between the diametrically opposed extreme options of continuing to inflate that may lead to hyperinflation or to declare a debt default (Mises Moment).

As a side note, under such scenario, people who argue that the US dollar’s premier status as international reserve won’t be jeopardized would be proven wrong, if, for instance, the policy route would be to inflate.

The health of any currency greatly depends on society’s perception of the store of value function. Once the public recognizes that debasement of the currency has been a deliberate policy and likely a process that would persist overtime, the perception of the store of value function corrodes significantly. And the public will likely look for an alternative.

In finding little option among the available choices, society may choose to revert to a commodity linked currency as default currency, as it always has.

Albeit the worst alternative would be that debasement of the currency or inflationism will lead to totalitarianism.

As Friedrich von Hayek warned[18],

At present the prospects are really only a choice between two alternatives: either continuing an accelerating open inflation, which is, as you all know, absolutely destructive of an economic system or a market order; but I think much more likely is an even worse alternative: government will not cease inflating, but will, as it has been doing, try to suppress the open effects of this inflation; it will be driven by continual inflation into price controls, into increasing direction of the whole economic system. It is therefore now not merely a question of giving us better money, under which the market system will function infinitely better than it has ever done before, but of warding off the gradual decline into a totalitarian, planned system, which will, at least in this country, not come because anybody wants to introduce it, but will come step by step in an effort to suppress the effects of the inflation which is going on.

So the policy tethers will depend on the conditions of several factors such as the rate of commodity and consumer price inflation, real and nominal interest rates, falling bond prices or rising yields, currency volatility and administrative policies choices of protectionism or globalization/economic freedom and capital and price controls vis-a-vis the status quo.

Profiting From Folly: The Inflationary Boom And Cyclical Banking Crisis

For now, the incipient signs of commodity inflation and rising rates have yet to diffuse into alarming levels.

Thus, I perceive that much of the applied inflationism will likely get assimilated into financial assets, thereby projecting an inflationary boom.

So going back to assembling of the pieces of the jigsaw puzzles, the Philippine bubble cycle will merely represent as one of the symptoms of the escalating woes wrought by the paper money system.

Figure 5: World Bank[19]: Surging Banking Crisis Post 1970s

The Philippine markets like other emerging markets have been the one of the main beneficiaries of the transmission mechanisms of the monetary policies of developed economies aside from the impact from the domestic low interest rate policies.

This favourite chart of mine (see figure 5) reveals of the manifold banking crisis post the Bretton Woods dollar-gold exchange convertibility standard.

While many in the mainstream blame the spate of crisis on capital account liberalization and international capital mobility, this misleads because it is the capacity to inflate (or expansion of circulation credit) rather than capital flows that causes malinvestments. Capital flows merely represent as transmission channels for inflating economies. Like in most account, the mainstream misreads effects as the cause. The repeated banking crisis suggests of a continuing cycle which implies of more crisis to come in the future, despite new regulations introduced meant to curb future crisis.

So while the mainstream will continue to blabber about economic growth, corporate valuations or chart technicals, what truly drives asset prices will be no less than the policies of inflationism here and abroad that leads to cyclical boom and bust in parts of the world including the Philippines.

And that would be the most relevant big picture to behold. Yet relevance seems not a measure of importance for most.

Nevertheless, we’ll heed Warren Buffett’s sage advice,

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

Get it? Our objective then is to profit from folly by playing with the cycle rather than against it.

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[1] What To Expect In 2011, December 20, 2010

[2] FinanceAsia.com Philippines and Stats ChipPac usher in new year with style, January 7, 2011

[3] Inquirer.net Moody’s upgrades PH outlook to ‘positive’, January 6, 2011

[4] McKinsey.com Mapping global capital markets: Fourth annual report, January 2008

[5] csmonitor.com European nations begin seizing private pensions, January 2, 2011

[6] US Global Investors Investor Alert, December 31, 2010

[7] Bloomberg.com World Food Prices Jump to Record on Sugar, Oilseeds, January 5, 2011

[8] WSJ Blog, Bernanke on Munis, Oil and Fed’s Mandate, January 7, 2011

[9] The Code of Silence On Philippine Inflation, January 6, 2011

[10] Danske Bank, 2011 off to a good start, Weekly Focus, January 7, 2011

[11] Grim Ryan Priceless: How The Federal Reserve Bought The Economics Profession, Huffington Post, September 7, 2009

[12] Reuters.com Bernanke balks at bailout for states, January 7, 2011

[13] Testimony of Chairman Ben S. Bernanke on the Federal Reserve's exit strategy Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. February 10, 2010

[14] QE 3.0: How Does Ben Bernanke Define Change, December 6, 2010

[15] $23.7 Trillion Worth Of Bailouts?, July 29, 2010

[16] Reuters.com U.S. plays 2 roles in European bailout plan, May 11, 2010

[17] Rothbard, Murray N. Wall Street, Banks, and American Foreign Policy, 2005 lewrockwell.com

[18] Hayek, F. A. A Free-Market Monetary System, p. 23

[19] World Bank Data Statistics Worldview 2009 p.9

10 Economic Reasons Why Trade Is Beneficial

Cato’s Dan Ikenson improves on U.S. Chamber of Commerce John Murphy’s list of the top 10 reasons why trade is good trade for America.

Below is John Murphy’s list along with Mr. Ikenson’s enhancements (bold highlights original) [from Cato.org Blog]

1. The United States is the number one manufacturing nation in the world, and that success depends on exports. And since over half of the total value of U.S. imports consists of “intermediate goods” (products that are used as inputs for further value-added activity), manufacturing success also depends on imports.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. And one of the reasons that foreigners are able to purchase American services is because they have been able to earn dollars by selling goods to American businesses and consumers.

3. U.S. agricultural exports support nearly a million jobs in the United States. And, agricultural and manufactured imports have made life’s necessities and conveniences more affordable to hundreds of millions of Americans.

4. 95 percent of the world’s consumers lives outside the United States…as do 95 percent of the world’s workers, who produce many of the goods Americans consume as imports less expensively than Americans can, freeing up U.S. resources for investment, innovation, and consumption of the higher value products and services that Americans produce.

5. FTA countries purchased more than 40 percent of U.S. exports in 2009. And imports from those countries have helped extend families’ budgets and reduced the costs of production for U.S. business relying on inputs from those countries.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion. And real U.S. GDP has increased by 50 percent.

7. Imports support millions of U.S. jobs in retail, research, design, sourcing, transportation, warehousing, marketing and sales…and in manufacturing.

8. U.S. exports to China have quadrupled over the past 15 years, and China is now the 3rd largest market for U.S. exports. And U.S. imports from China, too often wrongly portrayed as evidence of U.S. profligacy or decline, have enabled U.S. industries that require access to lower-cost labor for economic viability to be born, to blossom, and to spark the advent of new products and industries.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports. And foreign companies operating in the United States employ 5.6 million Americans, support a payroll of $408.5 billion, provide compensation that is 33% higher than the U.S. average, account for 18% of U.S. exports, pay U.S. taxes, support local charities, and act as investment magnets in communities across the country.

10. Trade supports 38 million jobs in the United States–more than one in five American jobs. And most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; talking on foreign-made mobile telephones; having extra disposable income because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; eating healthier because they now can enjoy fresh imported produce that was once unavailable out-of-season, etc.

Additional comments:

Of course trade IS NOT only good for the US, but FOR THE WORLD. Note that 95% of the world’s consumers and workers reside outside America!

In addition, foreign trade SHOULD NOT be seen or interpreted in isolation.

Instead, what must be understood is that the market represents a process where consumers and producers (and service providers) are vastly interdependent with each other and whose activities are coordinated through the price mechanism.

The great Professor Ludwig von Mises calls this connexity. He wrote, (all bold highlights mine)

What links together in our actual world the various fields of want-satisfaction is the existence of a great many nonspecific factors, suitable to be employed for the attainment of various ends and to be substituted in some degree for one another. The fact that one factor, labor, is on the one hand required for every kind of production and on the other hand is, within the limits defined, nonspecific, brings about the general connexity of all human activities. It integrates the pricing process into a whole in which all gears work on one another. It makes the market a concatenation of mutually interdependent phenomena.

It would be absurd to look upon a definite price as if it were an isolated object in itself. A price is expressive of the position which acting men attach to a thing under the present state of their efforts to remove uneasiness. It does not indicate a relationship to something unchanging, but merely the instantaneous position in a kaleidoscopically changing assemblage. In this collection of things considered valuable by the value judgments of acting men each particle's place is interrelated with those of all other particles. What is called a price is always a relationship within an integrated system which is the composite effect of human valuations.

This means that foreign trade is highly interrelated with domestic trading activities.

Thus, trade data shouldn’t be seen only in the light of either foreign or local but should account for both.

Looking at trade in different prisms would only stimulate the misimpression that trade operates on a closed framework, a false fodder for anti-trade exponents or the protectionists.

The Deepening Of The Information Age: News Sources And Ad Spending

If educational trends appear to be turning digital, the same dynamic seems to take hold with the way people use media.

A poll says that in the US, while news acquisition by the public has been mainly through TV, the internet, as major competitor, has rapidly been catching up.

According to Pew Research (chart also from them)

The internet is slowly closing in on television as Americans' main source of national and international news. Currently, 41% say they get most of their news about national and international news from the internet, which is little changed over the past two years but up 17 points since 2007. Television remains the most widely used source for national and international news -- 66% of Americans say it is their main source of news -- but that is down from 74% three years ago and 82% as recently as 2002.

The study further notes that the less educated has remained as the last bastion or the key consumer of TV.

In other words, the less educated will likely be the last segment to adapt to the deepening use of technology.

And such transition appears to be corroborated by corporate ad spending on a global scale, where online spending has been fast closing on the gap with TV.

According to the Economist,

GLOBAL spending on advertising will grow by 4.5% in 2011, double the rate of the previous year, according to ZenithOptimedia, an ad agency. This will be led by online advertising which will increase by 16%. Television advertising will also grow, led by emerging markets, where it is an especially dominant medium. But spending on print advertising will fall by around 1%. Extending print-media brands online offers some hope of reversing the downturn, but digital ad revenue will not replace that lost by print in the foreseeable future, according to the World Association of Newspapers.

Changes have been happening at the margin.

These suggest of the broadening use of digital web based technology for a substantial share of our social activities.

Traditional mass based lifestyle tailored to the industrial era have been paving way to the information age characterized by social connectivity predicated on competition, diffusion, diversity, and specialization; an environment which can be identified with the great Austrian economist F. A. Hayek. Even TV programming trends appear as exhibiting similar symptoms (chart above from the same Pew study).

Overall, this means that lifestyle and commerce will increasingly evolve towards niches—or based on shared interests or specific ethos, that will be marked by more competition.

The implication is that statistics based on aggregates will likely become more irrelevant. In addition, investments will likely center on these growth “niche” areas. (yes, that’s an investment tip alright)

Some Insights From The Legalization of Taiwan’s Sex Industry

Taiwan’s sex industry will be legalized.

This from Forbes.com,

What sets Taipei apart from, say, Beijing or Hong Kong is that the government is legalizing the sex trade instead of squelching it. Taiwan will formally decriminalize prostitution in November, but it will be legal only in certain areas. Officials are now studying where those areas should be; one proposal would allow studio-style brothels in parts of Taipei. The explanation for this move to live and let live: The world's oldest profession happens to be one of Taiwan's best organized.

Read the rest here

Some thoughts

-Perhaps in realization of the futility in eradicating prostitution through legal means, the Taiwanese government finally relents to its legalization.

Just a reminder, contrary to popular wisdom, edicts don’t stop the demand and supply or the economics of deemed 'immoral' activities such as prostitution, drugs, gambling or etc., instead they get to be diverted from official channels to the underground with accompanying unforeseen (mostly untoward) consequences.

-as seen with most accounts of prohibition laws, the adverse side effects have been legalized criminality or corruption. As the article notes

“Inconsistent law enforcement also troubles the trade. Police prey on lone streetwalkers while taking bribes from pimps to protect the prostitutes who work for underground brothels, the collective charges.”

-The government’s epiphany did not come impulsively though; major lobby groups by the stakeholders and their supporters had been forged and grew powerful enough to advance the thrust towards decriminalization.

Quote of the Day: Decentralized Education

As the centralized control over the content of education fades, the diversity of choices will undermine the existing political order.

That’s from Professor Gary North on how digital technology or the internet will radically transform or democratize the educational process which subsequently will likewise spillover into the socio-political realm.

An earlier related post: A Bet On Free Education

The Code of Silence On Philippine Inflation

Today’s headline yells “Prices, fares, toll go up” where the report shows of widespread price increases in food, energy and transportation costs.

This would be inconsistent with Bangko Sentral ng Pilipinas (BSP), or the Philippine central bank, claim that inflation in 2010 was within target set by the government agency. While it may be true that statistical figures may partly have reflected their stated goals, with barely a few days into 2011, statistics and media headline appear to be swiftly headed in opposite directions.

2010 may have signified the twilight of the seductive face of inflationism. And 2011 would most likely prove the BSP wrong.

From tradingeconomics.com

Yet nowhere in both articles say why prices of politically sensitive commodities have begun to surge, as reports only narrate on what has been happening.

One would only suspect that the government, media and the economic profession have deliberately opted to observe a code of silence that leaves the public groping in the dark.

No one likes to take the blame for any untoward events, much especially for the power hungry political leaders, the bureaucrats and her worshippers as this would erode their credibility and the attendant votes and political-economic privileges that go with it.

But as we have long stated--the lethal cocktail policy mix (here and abroad) of artificially suppressed interest rates, fiscal “stimulus” spending (pump priming), monetary operations (quantitative easing) from central banking authorities and the latent impact of other welfare or redistributive policies all conspired to these unfolding events abetted by the integration or globalization of finance.

One needs to see only a booming broad based domestic credit market in the automobiles, residential, consumer loans and other consumer loans, to know how the policy of punishing savers and rewarding debtors via low interest rates have been gaining ‘traction’.

From tradingeconomics.com

Portfolio flows into the local market from foreign institutions have most likely been representative of international arbitrages or a global carry trade in the search for higher yields. They are most likely impelled by the same low interest rate dynamics, and taxpayer funded money from pump priming and from bailouts.

These, alongside remittances, are reflected in the exploding record forex reserves. And rapidly expanding foreign exchange implies more Philippine peso in circulation, unless they are mopped up or absorbed by the BSP.

All these suggest of a blossoming business cycle in play that has been prompted for by the combined dynamics from government policies here and abroad.

Good days would eventually come to an end.

Consumer price inflation which is politically unpalatable especially for the Philippine setting, where the Philippines is shown as the most sensitive to food inflation in Asia (see chart from businessinsider.com), would eventually compel government to drastically tighten.

When this happens depends on the level or degree of rate of increases in consumer price inflation which will likewise be reflected in the interest rates.

But before that happens, expect the private sector to bear the brunt as the principal scapegoat for alleged economic 'greed', when the main culprit is no other than political greed.

And this will be met by a gamut of price controls which only exacerbates the situation.

Inflation’s alter ego, price controls are meant to deflect on the culpability of government, as the great Ludwig von Mises explained,

``those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation—the rise in prices—are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.”

Only the truth shall set us free.

How Statistics Don’t Measure Up To ‘Global Imbalances’

People’s way of conducting commerce has always been changing, i.e. from agriculture to industrial and now to the information age. However statistics used by vested interest groups to promote certain policies don’t.

Presently global trading platform has been shifting towards a supply chain network.

This from Xinhua,

Measuring global trade in line with the principle of "the country of origin" fails to reflect the complexities of global commerce where the design, manufacturing and assembly of products involves several countries, experts said...

"The concept of country of origin for manufactured goods has gradually become obsolete," said Pascal Lamy, director-general of the WTO, in a speech to the French Senate in October.

"What we call 'made in China' is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries," said Lamy.

"For instance, every time an iPod is imported to the U.S., the totality of its declared customs value (150 U.S. dollars) is ascribed as if it were an import from China," said Lamy, adding that "In fact, according to American researchers, less than 10 of the 150 dollars actually come from China and all the rest is just reexportation."...

This means that current trade data used and extrapolated by the mainstream does not accurately account for the genuine picture.

From the same article... (bold highlights mine)

Sheng Guangzu, head of China's General Administration of Customs, told Xinhua in an interview in April that much of China's trade surplus was "transferred" from foreign-funded enterprises operating in China.

In the first 11 months this year, exports of foreign-funded enterprises totaled 779.14 billion U.S. dollars, accounting for 54.7 percent of China's total exports, according to China's customs authorities.

The data also showed that, during the same period, foreign-funded firms generated 112.51 billion U.S. dollars of trade surplus, accounting for 66 percent of China's total surplus.

In short, 'global imbalances' are not what they are projected to be.

The take away is that those arguing about global imbalances, aimed at advancing the cause of mercantilism via protectionism and inflationism, using old statistics are either missing the big picture by unwittingly parroting popular misperceptions or deliberately engaged in economic sophistry.

As Mark Twain rightly pointed out: There are three kinds of lies: lies, damned lies and statistics.

Quote of the Day: Macroeconomics Is Not A Science

Macroeconomics is not a science. We don’t understand the way the economy works in any way shape or form akin to way physicists understand the solar system, say. We shouldn’t pretend otherwise.

Professor Russ Roberts (Cafe Hayek) on Hayek's pretense of knowledge.

How Global Equity Markets Performed in 2010

Here is the tabulation of the final returns of global equities for the year 2010 (based in local currency; courtesy of Bespoke Invest)

Contrary to the prognostications by the mainstream, most equity markets posted positive gains. (Double dip, where?) Only 19 national benchmarks suffered losses or 22% out of the 83. Again this may seem like a rising tide phenomenon.

While emerging markets peripheries led gainers, some developed economies such as Denmark and Sweden posted significant gains of over 20%, whereas Austria, Norway and Germany posted above 15% increases (European crisis anyone?).

More on Europe: Obviously the tailenders had been those directly hit by crisis—Greece Spain and Italy. But the divergent performances between crisis and non-crisis economies suggest of insulation and not of a contagion—again which the mainstream significantly misread.

The top 10 represented a mélange of emerging markets. Nevertheless the rankings can be seen in the following order: South Asia, Eastern Europe, Southeast Asia and Latin American EM’s.

The Philippine Phisix ranked 11th.

G-7 and BRICs had mixed performances. The race of 2010 belonged to the EM peripheries.

For 2011, I don’t think there would be much of a difference, except that I expect BRICs, who dominated 2009, to vastly improve their showing this year and possibly close on the gap with EM peripheries.

I certainly don't share the opinion that developed countries with all its internal tethers to outperform EM economies (periphery or the BRIC).

The Economist: Top Charts Of 2010

The most popular charts of 2010 from The Economist

Despite High Education Levels, Filipinos Workers Among The Lowest Paid

From the Yahoo news

The ILO's "Global Wage Report 2010" also noted a paradox in Philippine wage trends: Higher education did not correlate with higher wages, contrary to the pattern in many other parts of the world.

The ILO's "Global Wage Report 2010" also noted a paradox in Philippine wage trends: Higher education did not correlate with higher wages, contrary to the pattern in many other parts of the world.

In the Philippines, low pay--particularly among domestic workers--"is partly caused by the lack of proper wage protection, notably the common practice of excluding such workers from the application of minimum wages," said the latest report.

And while low wages are correlated with low educational attainment in most parts of the world, the Philippine case seems to be the opposite.

"Surprisingly, the Philippines seems to represent an interesting exception to this common pattern, registering a high incidence of low wage employment among those with a primary and secondary education," the report said. (all bold emphasis mine)

So what does all these suggest?

Here are some:

In contrast to common wisdom, education per se does not automatically translate into jobs or employment.

There is a great deal of mismatch between the educational output and the jobs demanded in the marketplace. The shift towards the information economy is likely to enhance the requirements for work specialization as niche markets expand.

The investment environment likewise determines employment conditions. Excessive government intervention only serves to reduce opportunities by distorting investment and labor markets.

Low wages does not translate to more employment.

Of course all these have policy ramifications.

Mass (free and compulsory) education and low wages are not optimum policy options that deal with socio-economic development.

Interventionism (via manifold regulations and inflationism) only makes good instruments for the promotion of the interests of politicians and to the specific groups they implicitly represent than of the general public. This applies to public education as well.

Professor Barry Simpson explains,

Public education, with the added feature of compulsion, reduces the cost to politicians of making wealth transfers. The cost of making transfers is diminished by reducing the opposition to transfers. If politicians can reduce the cost of transferring wealth by reducing the opposition to them, then they can continue to authorize transfers to interested parties for a price.

At the end of the day, good intentions don’t square with economic reality. And the Philippine experience is a demonstration of such unintended consequences.

Firecrackers and Social Signalling

Many Filipinos greet the New Year with a bang-literally.

During New Year’s eve, they turn the streets into virtual war zones, despite all the years of gory casualties from one moment’s fun.

And this comes despite repeated government intervention by prohibiting and or regulating the manufacture sale and use and media’s bombardment to show harmful effects of such activity.

Many Filipinos fondness for firecrackers, despite its high risks, I see as the following;

-It represents a form of informal traditionalism. It is somewhat like fiesta where New Year is annually commemorated but unlike fiesta where the means of celebration is not entirely accepted by the community.

-Exploding firecrackers could be seen as a form of sublime status signalling aimed at drawing upon public’s attention. The dominance of male usage enhances this ‘masculinity’ or ‘machismo’ syndrome.

-This activity can also serve as an expression of socio-political opinion, which had been used as signs to protest against the Marcos regime or even as opiate- an avenue to vent personal frustrations for some. In short, in my opinion, there are many psychological factors behind its persistence and not limited to a single dominant variable.

-With respect to social signals, I don’t share the view that firecrackers are representative of the flawed mentality particularly symptomatic on the ‘poor’. To what category defines poor? Will people earning $2 a day (moderate poverty as defined by World Bank) really sacrifice or exchange subsistence (food) for firecrackers? This defies logic.

The fact that the $16 million firecracker industry has reportedly been constantly growing reveals that such allegation is unfounded. The industry won’t and can’t grow if it had depended on the ‘poor’.

Alternatively, this means that it is the middleclass and the rich that has continually financed the industry’s growth.

As a side note, the local firecracker industry has turned international, with a local outfit partly hosting the World Pyro Olympics. The internationalization of the industry means a growing market for its ‘quality’ products abroad.

-It isn’t capitalism fault too. Some maliciously argue that manufacturers are out there to find new markets to sell. This is grossly misleading.

The fact that firecrackers have long been a part of this society (here is an article which links to the Pinoy ethos to Chinese origins), and the fact that government has repeatedly imposed different forms of restrictions (from bans to selective regulation) to the supply-side which has failed to curb the growth of the industry means that the supply side have only caught up with existing demand and not the other way around.

To repeat for emphasis, supply caught up with extant demand. As to whether demand constitutes as psychological or cultural or social expressions is actually beside the point. The fact is there has been demand for firecrackers.

Instead, what bans have nurtured have been an underground movement which has only weakened product quality and contributed to the statistics of injuries.

Some have used the Davao prohibition as a regulatory success story, which apparently many statists sees as a matter of implementing 'political will'.

Well, I am unsure of the veracity of the claims to the success story (to what degree is the success- 100% or absolute compliance???)

Yet even if true, Davao’s micro dynamics (1.3 million population 2007 census) would certainly be different with the NCR (11.5 million 2007 census) and with the rest of the nation.

Importantly, where Metro Manila is the political capital of the Philippines this implies that as home of lawmakers and equally lawbreakers (those who think they are above the law-mostly through patron-client relations), such diversity and inequality in the distribution of political power may translate to complexities in the implementation of such regulations.

One must be reminded that it does NOT take only political will (again strictly a supply side view) from political leaders but likewise the conformity of the populace with the regulation (demand side).

As 1923 Pultizer Prize William Allen White (1868-1944) wrote to his anxious friend, ``You can have no wise laws nor free enforcement of wise laws unless there is free expression of the wisdom of the people -- and, alas, their folly with it. But if there is freedom, folly will die of its own poison, and the wisdom will survive."

So people either choose to comply with laws (or regulations) or they don't. Think People Power Revolution. And that's the demand side which the opinion makers frequently forget to account for.

Have a wonderful 2011!

The False Khodorkovsky Truth On Globalization

The Street’s Eric Rosenbaum pins the blame of the 2^nd guilty verdict on Russian Tycoon Mikhail Khodorkovsky, which allegedly had been manipulated, to globalization.

He writes, (bold emphasis mine)

In any event, if we have long ago left behind the Cold War and entered the age of globalization, it's pretty clear that globalization means turning a deaf ear to serious human rights and legal rights issues for trade partners like the US, Russia and China, or at least often being hard of hearing.

When a tycoon rots in prison because he was getting too powerful, and too democratic, or when a Nobel Prize winning political dissident is serving a long sentence and his family barred from going to Sweden to accept the Nobel on his behalf -- and yet the major US move in relation to China is to win a dispute at the World Trade Organization over the unfair support of China for its automobile tire manufacturers -- that's the lips speaking truth to the way the powerful act in the age of globalization, as opposed to the lip service that once again overflows with blabber as Khodorkovsky quietly read his book in the metal cage of the Russian court room.

We'll say thank you very much for that cheap plastic mobile for our baby's crib, China, and, thank you very much for the oil that's not coming from those unstable Arabs, Russia, and forget about Khodorkovsky until his next trial, and let Chinese democracy die a silent death. And of course, when it comes down to it, we'll hem and haw and we'll say it's not our place to interfere in the internal affairs of other countries -- except of course, when it's the internal affair of manufacturing car tires.

It’s certainly misleading to impute the seemingly untoward developments in Russia’s domestic political front to globalization since the current body politic of Russia has evolved around the dynamics of the previous polity (Lenin-Stalinism) compounded by the ongoing changes in the economic and international dimensions.

As Stratfor’s George Friedman notes, (bold highlights mine)

Glasnost, or openness, had as its price reducing the threat to the West. But the greater part of the puzzle was perestroika, or the restructuring of the Soviet economy. This was where the greatest risk came, since the entire social and political structure of the Soviet Union was built around a command economy. But that economy was no longer functioning, and without perestroika, all of the investment and technology transfer would be meaningless.

In other words, Russia’s politics have gravitated around the impulses of ‘command mentality’, which she has yet to slough off.

So with or without globalization, the so-called issues of ‘human rights and legal rights’ would still be in place, because of the embedded political structure that operates in Russia.

And perhaps it could even be under worse conditions if a political regime under isolationism had prevailed, since international pressures towards domestic policies would have been muted.

Myanmar and North Korea should be good examples of such isolationist paradigm. Incidentally according to Human Rights Risks Atlas 2011, among the highest “human rights” risk nations, Myanmar and North Korea ranks 5^th and 9^th respectively whereas Russia is ranked 14th.

The top 4 is DR Congo, Somalia, Pakistan and Sudan—obviously countries that have been least exposed to globalization.

As an aside, China is ranked 10th mostly due to recent geopolitical developments. According to African online,

China fell two places from last year’s ranking into tenth place. It is notable that these rankings were released on the day when China would not allow its’ citizens to see the Nobel Peace Prize Ceremony because Chinese political prisoner Liu was being honored. China is ranked worst or joint bottom of the league in several key classes.

These include violation categories such as freedom of speech, the press and religion, minority rights, judicial independence, and arbitrary arrest and detention.

Overall, to link globalization with human rights violations seem not only unfounded, but importantly, a strawman meant to score political talking points.

And here is the morality aspect.

If I decide not to patronize my neighbor’s store, who is reputed to be a wife beater, out of my perception of ethics, what then is my right to impose my sense of morality to the others who don’t share my views? Doing so would be playing into the hands of the same command mentality (human rights abuse) game which the author so abhors. And this would be tantamount to the proverbial ‘pot calling the kettle black.’

Lastly, it would be uncalled for to imply that globalization or growing free trade as politically inhumane. That’s because it would be in almost everyone’s self interest to see the others in good stead in order to promote his own.

Adam Smith wrote in his magnum opus, the Wealth of Nations, the dynamics of unintended social cooperation from the pursuit of one’s own interest.

He calls this the invisible hands, (bold emphasis mine)

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

And as we have earlier pointed out, the string of years of world peace have coincided with the growth in free trade. We seem to see the similar parallels in the growth of economic freedom and free trade along with reduction of human rights violation risks (China would be the exception rather than the rule).

Bottom line: In general, where people trade, social cooperation expands, where politics rule, social cooperation deteriorates.

Creative Destruction: 20 Things That Have Gone Obsolete From Last Decade

Below is a showcase of capitalism’s creative destruction-a hallmark of progress and innovation.

From Huffington Post: (hat tip Prof Mark Perry)

The last ten years have brought us a windfall of new gadgets and gizmos, and with them, a new way of life.

Since 2000, we've gained iPods and iPads, Travelocity and Twitter, Facebook and Foursquare, BlackBerry smartphones and Android devices, Xboxes and Wiis, among many other new services, sites, and electronics. We're now poking, tweeting, Googling, and Skyping.

See slide here

What this means:

Jobs had been created (in new flourishing industries) and lost (on obsolete sectors).

While changes do not affect everyone similarly, the net result is a positive or a net gain for consumers (and the society) as seen in:

-increased conveniences brought about by better quality of products and services

-greater access and selection

-heightened productivity

-enhanced wellbeing

-added purchasing power (via growth deflation-more supplies)

Overall, real wealth has increased (despite government’s inflationism)

Celebrities of Globalization: Charice Pempengco and Journey’s Arnel Pineda

2 fantastic Filipino international music superstars Charice Pempengco and Arnel Pineda, the lead singer of a pop rock band of the 80s Journey, represent as shining examples one of the miracles of globalization.

Charice Pemepengco (left) and Arnel Pineda (right)

[sorry I am not aware of the billing order for the two celebrities thus made use of family name alphabetical order. Nevertheless portraits from Wikipedia.org]

The stepping stone to newfound stardom for these Filipino artists:

Charice Pempengco, according to Wikipedia.org (bold emphasis mine)

Pempengco made minor appearances on local television shows and commercials, but essentially had fallen off the radar after her stint at Little Big Star. It was not until 2007 that she gained worldwide recognition after an avid supporter started posting a series of her performance videos on YouTube under the username FalseVoice. These videos received over 13 million hits which, according to Reyma Buan-Deveza, makes Pempengco a "YouTube singing sensation"

Arnel Pineda, lead singer of popular 80s rock band Journey, based on the accounts of the mainstay members on this interview:

______________

Arnel Pineda’s biography according to Wikipedia.org here

My observations:

-The recent career success of both Filipino artists has been founded on the crucible of technology, social mobility, and importantly in response to a global audience.

-Both artists have defied the traditional-conventional vertical (organizational) process of discovering talent for the music industry.

In the case of Ms. Pempengco, her seeming unsuccessful debut in the local TV contest (one of the orthodox way of talent scouting) had been representative of the failure of the select judges to appreciate her talents in lieu of the market.

But that didn’t deter her. The viral (word of mouth) ramifications diffused over the web apparently neutralized the rigid and discriminatory screening process that eventually launched her newfound fame.

In short, 13 million hits demolished the subjective opinions of a handpicked few who presupposed ascendancy over the market’s opinion or appreciation over her talents.

Although one might interpret that Ms. Pempengco’s genre of music appear to cater to international audience more than the local ones, which may be partly true, I would suspect more of the rigid screening ‘syndicate’ based process as responsible for missing out in identifying her talent.

After her international success, local outfit have been quick to embrace her.

Of course, her perseverance and creativity had also been instrumental to the advancement of her aspirations.

In the case of Mr. Pineda, while years of exposure may seem to have augmented his recent career glory, the orthodoxy in the artist talent scouting system surely didn’t—as Mr. Pineda’s career didn’t make any significant headway.

Of course, this was not until Journey’s direct discovery through the internet (via Journey’s guitarist Mr. Neal Schon), which serves as a testament to the technology-aided short-circuiting of the archaic agent based process.

While it may be true that Mr. Pineda or Ms. Pempengco’s case could be, for the moment considered as unique, nevertheless, such trends appear on the way to radically alter the conduct of business as manifested in the music industry.

-Lastly, the Pempengco and Pineda ‘rags to riches’ success story appear to be representative of the internationalization or the global integration of the marketplace. In particular, the expanded access to a global pool in the matching of ‘specialized’ talent-to-‘niche’ audiences.

Think of it, if one of the three variables (technology, social mobility, and a global audience) had been encumbered, then the many would not have appreciated the magnificent repertoires provided by these newly discovered highly talented Filipino artists.

In short, the democratization of information (via technology platform) and increasing social mobility appears to have played a crucial behind-the-scenes role in the success story for these Filipino celebrities of globalization.

And count me in as a fan of the market elected talents.

Graphic: Contrast Principle

Below is a nice graphical rendition of the contrast principle, courtesy of Jessica Hagy’s Indexed, or seeing the difference between things and not absolute measures (changing minds.com) or best represented by the axiom “what you see depends on where you stand”

Video: Remembering 2010

Great stuff... (hat tip Professor Russ Roberts)


...it's been a good life indeed (great music from One Republic)

Capitalism And World Peace

Here is a wonderful Christmas gift for humanity: World peace!

Citing a study from the Human Security Center at the University of British Columbia, the Democratic Leadership Council (DLC) notes that the world has become more peaceful

Their observations (from DLC): (italics original)

Wars are less frequent: The Center's 2009/2010 report group finds 34 conflicts, including 5 international wars in Afghanistan, Iraq, and the Congo Basin. This is a lower total than at any time since the 1970s, reflecting the fact that warfare in Europe has almost vanished, with exceptions in the Caucasus; and that the numbers of wars in East Asia, Southeast Asia, and Latin America have also plummeted. And despite the Iraq, Afghan, Somalia and Yemen conflicts, the Center argues that wars in the Muslim world are rarer too, reporting a decline of 70 percent in the scale of conflict in these regions.

Great-power wars are rare: No war has pitted great powers -- meaning any of the world's 10 biggest economies -- against one another since the Sino-Soviet clashes of 1969. No war among Asian states has broken out since the Sino-Vietnamese war of 1979; the last war among European big powers is now 65 years in the past. All three intervals -- the great-power, the European, and the Asian -- are the longest periods of peace in the historical record.

Wars are less bloody: The report, reviewing the grimmest statistics, finds that the average war in the 1950s killed 20,000 soldiers and/or guerrillas each year, with war deaths averaging 155,000 in each year of the decade. Figures for the 1960s, 1970s and 1980s were similar. In the new millennium's first decade, the casualty rate was about 3,000 per war; the average for all wars combined, having fallen to 95,000 by the 1990s, has been 27,000 (and 17,000 annually since 2002, with an all-time low of 11,000 in 2005.)

The identified socio-political reasons: (all bold emphasis mine)

Some are political and military: (a) decolonization and the end of the Cold War mean there are fewer nationalistic or ideological reasons to fight, (b) the spread of democracy may produce less belligerent governments, (c) today's great powers are both less bellicose and less vulnerable than they used to be, with armies, air forces and navies strong enough to deter potential aggressors, (d) lots of international activism, from peacekeeping missions to sanctions on potentially aggressive states; and (e) with notable exceptions in East and South Asia, fewer border and land disputes.

And importantly, the economic driver...(all bold emphasis mine)

Economic issues too may play a part: lower trade barriers, more open economic policies, more efficient logistics industries and better communications technology speed up and deepen integration across borders through trade and investment, strengthening mutual interests and reducing reasons for conflict. The report suggests that a 10 percent increase in FDI reduces a nation's chance of international or civil war by about 3 percent, and that globalization reduces the reasons a country might want to fight:

"[T]he most effective path to prosperity in modern economies is through increasing productivity and international trade, not through seizing land and raw materials. In addition, the existence of an open global trading regime means it is nearly always cheaper to buy resources from overseas than to use force to acquire them."

Since politics is ultimately about economics (allocation of scarce resources), where the great Bastiat once said if goods don’t cross borders then armies will, then the improvements in the economic sphere has preceded the marked progress in the socio-economic dimensions. This has been manifested by the apparent lesser degree of political interest towards nationalism, and conversely, a greater tolerance for democracy.

[As an aside, it would be greatly misplaced to suggest that markets operates under the auspices or the graces of governments as markets have existed even prior to the advent of governments. The fact that markets also exists in spite of manifold government regulations, or what is known as as regulatory arbitrage, or circumventing (going around) regulations, is a testament to the innate dominance of markets over politics.]

Of course, technology has also played an important role by vastly enhancing social connectivity. Yet the innovation in technology front has likewise been a product of free market forces.

In short, the deepening trends of free markets (globalization) buttressed by technology has influenced the evolving geopolitical institutional framework, in spite of the recent crisis.

Importantly, the market economy (or capitalism) and war represents as two antipodal forces from which mankind can only choose one.

As the great Ludwig von Mises wrote in Omnipotent Government, (bold highlights mine)

Social coöperation and war are in the long run incompatible. Self-sufficient individuals may fight each other without destroying the foundations of their existence. But within the social system of coöperation and division of labor war means disintegration. The progressive evolution of society requires the progressive elimina­tion of war. Under present conditions of international division of labor there is no room left for wars. The great society of world-embracing mutual exchange of commodities and services demands a peaceful coexistence of states and nations. Several hundred years ago it was necessary to eliminate the wars between the noblemen ruling various countries and districts, in order to pave the way for a peaceful development of domestic production. Today it is in­dispensable to achieve the same for the world community. To abolish international war is not more unnatural than it was five hundred years ago to prevent the barons from fighting each other, or two thousand years ago to prevent a man from robbing and kill­ing his neighbor. If men do not now succeed in abolishing war, civilization and mankind are doomed.

Bottom line: The world appears to be on the path to a deepening degree of acceptance of the politics of free trade (capitalism) than from militant (nationalistic) politics, as Professor von Mises predicted. The only major counterbalance to this is inflationism.

Merry Christmas!