Gold And Sound Money

Sometimes I am predisposed to think that gold may be in a bubble, even if I know it isn’t.

This happens when I get feedback of gold’s alleged immutable role as a wealth preservation asset especially in the supposed prospects of an ‘Armageddon’ of either the US dollar or the US economy.

Chart from Casey Research

I don’t know whether gold’s successive rise maybe instilling a false sense of security or may be leading some people to become proselytes or cult followers of the ‘gold bug’ dogma.

However, given that the reactions I get seemingly emanate from false premises, or from the idea that gold functions as an anti-US dollar trade, where in fact gold has been rising against ALL currencies, I think it is more about the former.

In addition, when one becomes an idealist who aspires to share of gold’s ‘wealth preservation’ status as a social mission, it would seem as wrong source of advocacy.

For one, it represents a false belief to think that gold prices as only moving in one direction enough for it to function as an enduring ‘wealth preservation’ asset.

While it is true that gold has functioned as money over many generations, gold has likewise shown periods of volatility as shown by the 650 year chart courtesy of chartrus.com or sharelynx.

In other words, gold like all other commodities is subject to the forces of demand and supply.

The main difference with gold from other commodities is that gold and the precious metal family has demonstrated special qualities (marketability, divisibility, durability, scarcity, high value per unit weight, homogeneity and a stable supply) that have made people reconsider them to discharge of an additional role-money.

Second, the rejuvenated price of gold has mostly occurred after the Nixon Shock or the closing of the gold window in August 15, 1975 that has transitioned the monetary framework from that Bretton Woods gold-US dollar convertibility to the US dollar standard.

Chart courtesy of Wiltontech

The implication is that with the current monetary platform unanchored to commodities, global central bankers and their respective political authorities have been free to inflate on their currencies to meet many unsustainable political agenda. And the repercussions of these actions appear to be coming home to roost.

Thus, the rising prices of gold, not exclusively to the US dollar, could most likely be symptomatic of the escalation of these ongoing inflationist maladies around the world.

And a continuity of gold’s rise would only suggest of further stress in the current US dollar centric fiat standard.

Put differently, rising gold prices may be pointing to a prospective inclusion of gold in the reconfiguration or reform of the incumbent currency architecture. World Bank’s Robert Zoellig recent overtures may be interpreted as a gradual warming of authorities on such a possibility.

The fact that current conditions have been prompting changes to peoples perception of gold, which includes political entities, implies that the gold’s current price trend could reverse once inflationism would be recognized as the source of economic and financial ailments and subsequently addressed.

While the odds of this may be slim for the moment, worsening inflation conditions or the public’s sudden recognition of the inflation tax, may radically alter this mentality.

The point is, it would be wrong to view gold prices as perpetually headed skywards because people act and react based on the unfolding conditions. And the same applies with government policies, policymakers respond to changes in political conditions or sentiment especially when their privileges are under threat.

In short, past performance may not be indicative of future results.

As caveat, this is NOT to say that I have changed my stance on gold as I remain steeply bullish.

The lesson I want to impart is that no asset can be seen as static or even permanently risk free.

Lastly, it would be wrong to worship gold as if contains some mythical powers or deified like the Biblical idol, the golden calf.

The value of gold represents what society perceives it to be.

And if there is anything that gold has symbolized in the past, it is no less than sound money on the framework of economic freedom.

As Ludwig von Mises explained,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which — through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period — had learned what a government can do to a nation's currency system...

Thus the sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system.

So any advocacy should center not on the metal itself but on the essence of what gold truly stands for-Liberty and Economic Freedom.

Video Interview Of Milton Friedman: In Defense of Free Trade

Here is a great video of the late Milton Friedman debunking protectionism which the US steel industry had wanted to impose against the Japanese in the 70s. (Hat tip Professor Mark Perry)

The premises are fundamentally the same today except that the economic actor at the receiving end of protectionism involves China instead of the Japan.

Some notes:

Import dollars eventually find their way back.

There are invisible and visible effects from policies (ala Bastiat). What makes the protectionist advocacy attractive to the public is the visibility of the effects (loss of jobs of steelworkers), while ignoring the invisible benefits (expansion of jobs in the other industries and importantly lower consumer prices).

As for Japanese mercantilism or a policy of unilateral free trade: “Why should we object to the Japanese giving us foreign aid?”

Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets

Here is more proof that stock markets around the world have been mainly propped up by inflation (bank credit expansion)

If you recall, we earlier noted that the stock market of Bangladesh (Dhaka Index) posted as the second best performer in the world in 2010 gaining nearly 83%.

Chart from Bloomberg

Yesterday fortunes seem to have reversed, as the Dhaka index suffered a record crash. This provoked street riots and prompted for the forced closure of the exchange.

Picture from Marketwatch.com

According to Sify News

Stock exchanges in Bangladesh were forced to close down for the day Monday after share prices registered their biggest fall ever and investors took to the streets.

Angry investors vandalised some vehicles and set fire to tyres as they demonstrated in Motijheel area in the heart of the national capital.

People have been lured by easy money where “over three million people - many of them small-scale individual investors” had been affected by the crash, according to a BBC report. A crash reportedly brought upon by a “series of measures” implemented by authorities to restrain “overvaluation”.

Here is a short BBC report…

The series of measures involved the raising of the cash reserve requirements for banks…

From AFP

On December 15, the Bangladesh Bank had raised the cash reserve requirement (CRR) by 50 basis points, tightening money supply in a bid to rein in soaring inflation.

Analysts, protesters and the SEC say this is what triggered the collapse as some banks, which had invested heavily in the market, tried to offload their shares quickly in an attempt to meet the new requirements.

and the curtailment of industrial loans that was being diverted into the stock market.

From Sify news

The limit for giving loans by the banks to their subsidiary companies was set at 15 percent of their total capital, but many banks invested more than the threshold only to increase their stakes in the capital market. BB had earlier directed the banks that invested more than the ceiling to adjust the excess amount by December 31.

Also, the central bank set January 15 as the deadline for the banks to recover loans taken by borrowers as industrial credit but were diverted into the share market.

And as Austrian economist Fritz Machlup correctly postulated

``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.”

Bank credit expansion plus retail investor euphoria seem as prima facie evidence of the Boom Bust cycles brought about by easy money policies.

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.

---

[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