Exposing Ben Bernanke’s Fatal Conceit

In Fatal Conceit : The Errors of Socialism, the great F.A. Hayek wrote the following:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Below is a collection of some of US Federal Reserve Chairman Ben Bernanke’s monumental blunders which essentially validates Hayek’s observations.

From Center for Economic Policy and Research (all bold highlights mine, italics original) [ht Bob Wenzel]. Behold the wonders of analysis derived from econometrics.

10/1/00 – Article published in Foreign Policy Magazine
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.

7/1/05 – Interview on CNBC
INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

7/1/05 – Interview on CNBC
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

10/20/05 – Testimony before the Joint Economic Committee, Congress
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

11/15/05 – Confirmation Hearing before Senate Banking Committee
SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.

3/6/07 – At bankers’ conference in Honolulu, Hawaii… as delinquencies in the subprime mortgage sector rise
The credit risks associated with an affordable-housing portfolio need not be any greater than mortgage portfolios generally.

3/28/07 – Testimony before the Joint Economic Committee, Congress
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

5/17/07 – Remarks before the Federal Reserve Board of Chicago
...we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

8/31/07 – Remarks at the Fed Economic Symposium in Jackson Hole
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

1/10/08 – Response to a Question after Speech in Washington, D.C.
The Federal Reserve is not currently forecasting a recession.

2/27/08 – Testimony before the Senate Banking Committee
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

4/2/08 – New York Times article after the collapse of Bear Stearns
“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”

6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

7/16/08 – Testimony before House Financial Services Committee
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.

9/24/08 – Response to a question after JEC testimony… during the TARP debate, two weeks before the Fed initiates its liquidity facility for commercial paper markets
I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.

3/16/09 – Interview on CBS’s 60 Minutes
It’s absolutely unfair that taxpayer dollars are going to prop up a company (AIG) that made these terrible bets, that was operating out of the sight of regulators.

5/5/09 – Response to Questioning at Senate Joint Economic Committee Hearing
The forecast we have is for the economy, in terms of growth, to begin to turn up later this year, but initially not to grow at the rate of potential, which means that unemployment and resource slack will continue to rise into 2010. We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that. Um, currently, we don’t think it’s going to get to 10 percent, we’re somewhere in the 9’s, but clearly, that’s way too high.

7/21/09 – Testimony before the House Committee on Financial Services
A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.

Falling Markets, QE 3.0 and Propaganda

The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution.-Ludwig von Mises

Some say that falling markets won’t account for the imminence of QE 3.0.

That would signify a blatant misread.

For me, falling markets account as one of the two possible conditions for the re-institution of QE

As I previously wrote[1],

Although I expect that this extension won’t come automatically which I see as either tied to the US Congressional vote to raise debt limits or in reaction to growing pessimism in the some of the world’s economic environment due to a cyclical slowdown or to the accrued effects of signaling channels applied by governments or from mainstream’s addiction to inflationism. Besides if the debt ceiling will be raised this gives further excuse for the FED to activate QE 3.0.

Today’s financial markets have essentially been influenced by political forces more than economic developments. All the accounts of bailouts, rescues and assorted market interventions (quantitative easing, currency interventions, credit margin hikes on commodity markets) are part of the many examples. All these have effects on the marketplace[2].

Thereby, the state of the current sluggishness in the Philippine and global markets could likely be symptomatic of more of political design than merely reactions from economic forces.

Markets as Hostage to Politics

This week, we saw a political representative of China and one of the Fed officials jawbone on the possible adverse repercussions[3] from the palpable dabbling of a brief debt default by several Republican lawmakers as the debt ceiling is being deliberated.

This week, reports also say US President Obama pondered on using tax cuts as possible concession to the Republicans to reach a compromise[4].

Earlier both President Obama[5] and Treasury Secretary Tim Geithner[6] warned of a global recession if a settlement on raising the debt limits won’t be reached.

About a month ago a series of studies from the US Federal Reserve came out to state that commodity prices have not been tied with Quantitative Easing. Also during the same period commodity markets were slammed by the repeated increases of credit margins[7] of several commodities.

The point is the markets are seemingly being held hostage by politics. The idea is that markets can indeed go down, for the plain reason that the market is being used as leverage to secure political concessions.

Intervening and manipulating, directly or indirectly in the marketplace has been the du jour trend of today.

And what appears to be the imperative political tenet resonates in the famous statements of President Obama’s former Chief of Staff Rahm Emanuel[8]...

Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before.

Don’t you see, the vehement aversion to crises has been the hallmark of today’s politicking?

This runs along with the prevailing economic ideology which guides on the directives of the political orthodoxy, where the prescription to supposed “market failures” would be through interventions channeled mainly through Keynesian concepts of ‘parting with liquidity’ (giving up liquid assets in exchange for employment-creating illiquid assets) ‘euthanizing the rentiers’ (low interest rates), and ‘socializing investment’ (public private partnership)[9].

Even Harvard Professor Carmen Reinhart along with her colleagues observes of the ongoing non-market features of today’s marketplace[10] characterizing an environment which they call as financial repression, (bold emphasis mine)

Undoubtedly, a critical factor explaining the high incidence of negative real interest rates was the aggressively expansive monetary policy (and, more broadly, official central bank intervention) in many advanced and emerging economies during the crisis. This raises the broad question of the extent to which current interest rates reflect the stance of official large players in financial markets rather than market conditions. A large role for nonmarket forces in interest rate determination is a key feature of financial repression.

In short, official players will likely manipulate markets to meet their ends.

Stoking Fear

And part of such tactical operations would probably mean instilling fear to paint an ambiance of urgency.

And speaking of fear, the current stock market declines seem to have twitched Wall Street’s fear measures higher.

Whether seen from original computation of volatility ($VXO), the current VIX ($VIX) and volatility applied to the CBOE S&P 500 3-Month ($VXV) signs of fear have emerged. The rallying US dollar appears to chime with such an environment.

This fear has been evident even seen Google Search trends (chart below).

Lately Google has shown increasing searches by the public for ‘double dip’. Meanwhile news and articles featuring double dip have also grown.

Given that Wall Street has been a politically privileged sector, with more fear comes the greater clamor for interventions.

Wall Street operates in an environment fostered by the moral hazard, which reveals on their sense of entitlement.

Rescues signify political events. Only in the pretext of growing risks of a crisis that would incur pernicious broad market and economy welfare implications will bailout measures be deemed as justifiable by politicians and the bureaucracy.

And along this line, it wouldn’t be farfetched to say today’s actions in the marketplace could be part of the effects of the conventional signaling channel tool used by central banks in preparation for the next set of rescue measures.

That’s why mainstream media seems to have misinterpreted Bernanke’s last comments as having ‘no QE 3.0’ when the fact is Bernanke’s statements prior to November 2010’s QE 2.0 resembled his latest comments[11].

In short, if there is no emergency, then there will be no rescue. Falling markets sow the seeds of alarmism, and thereby, setting in motion the conditions required for prospective rescues.

As previously noted, this has been the routine recourse by political leaders almost everywhere.

A Possible Growth Scare and Not a Crisis

Despite the recent signs of fear, credit markets in the US and in Euro seem to remain calm.

The above chart from Danske Bank[12] shows marginal signs of impact from the current equity-commodity downdraft on US bond markets and on interbank loans as represented by the LIBOR OIS spread.

But this has not been powerful enough to stir the proverbial hornet’s nest.

And the cyclical downturn of major economies following a vigorous upside could also be part of the story.

As the Danske Research writes[13],

Global leading indicators have suffered a setback recently, pointing to slower growth. The US ISM dropped considerably in May and European PMIs also fell faster than expected. China, on the other hand, seems to have stabilised, as the PMI dropped slightly in May and order-inventory bottomed.

The current declines could represent more of a growth scare instead of imminent risks of crisis or recession as presented by politicians.

Also, Danske Research[14] thinks that the dislocation from Japan’s recent disaster has partly been the culprit of the downturn of economies. But signs according to them are that Japan has been recovering fast.

The above evidences seem to show that the essence of fear being manifested by reports which highlights ‘double dip’ concerns may seem unwarranted.

A growth scare and not a crisis could be taking place.

Yet it is quite obvious that politics have been dominating feature of the marketplace.

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[1] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets, June 5, 2011

[2] See Poker Bluff: No Quantitative Easing 3.0?, June 5, 2011

[3] See China Warns US on Debt Default as ‘Playing with Fire’, June 9, 2011

[4] See US President Obama Mulls Tax Cuts as Compromise for Raising Debt Limits June 9, 2011

[5] Huffington Post, Obama Debt Ceiling Warning: Raise Limit Or Risk Global Recession, April 15, 2011

[6] Wall Street Journal Geithner Issues Warning on Debt Ceiling, May 15, 2011

[7] See War on Commodities: Intervention Phase Worsens and Spreads With More Credit Margin Hikes! , May 14, 2011

[8] Wall Street Journal A 40-Year Wish List, January 28, 2009

[9] what-when-how.com SOCIALIZATION OF INVESTMENT

[10] Reinhart Carmen M., Kirkegaard Jacob F., Sbrancia M. Belen Financial Repression Redux, June 2011, IMF FINANCE & DEVELOPMENT

[11] See Bernanke’s Comments Mirror Those of Pre-QE 2.0 in 2010, June 8, 2011

[12] Danske Bank, Bad macro indicators and Greece weigh on market sentiment, Weekly Credit Market, June 10, 2011

[13] Danske Bank, Global: Business Cycle Monitor, June 6, 2011

[14] Danske Bank, ECB confirms July rate hike, Weekly Focus June 10, 2012

Phisix: Negative Real Interest Rate and Stagflation Risks

The real interest rate is not the difference between the nominal rate and the change in the CPI; it is actually the rate of exchange between present goods and future goods. Also, there is no such thing as the real interest rate — there are a multitude of real rates, which cannot be added to a total. -Frank Shostak

In sympathy with the actions in global markets, the Phisix declined 1.82% over the week which reduced year to date gains to .44%.

Negative Real Interest Rate and BSP’s Admission of External Influences

The Philippines and most of ASEAN have so far been less politically influenced relative to other markets.

But this doesn’t make us immune.

Proof?

From Bloomberg[1],

``Bangko Sentral will review inflation forecasts for this year and 2012 at the June 16 meeting, Tetangco said. An extension of the Federal Reserve’s so-called quantitative easing, “if it happens,” will tend to boost inflows to emerging- markets, bolster liquidity and strengthen currencies, he said.”

The good governor does not directly say it; but he implicitly acknowledges that there exists a strong transmission mechanism from US Federal Reserve policies, which have substantial effects on local assets, the local economy and inflation.

Governor Amando Tetangco thinks he has all the required tools to manage this.

I quote Governor Tetangco anew from the same article,

“If you look at the May figure, inflation pressures still exist,” Tetangco told reporters in Manila today. “We will look at the options available, the instruments included in the toolkit including the policy rate, reserve requirement and macro prudential measures.”

And I have been saying that local media and the BSP have not been forthright[2] and will miscalculate on estimating inflation trends.

This has been happening.

Nevertheless, the Philippines still operates on an accommodative monetary policy.

Previously, the Philippine (CPI) inflation rate, as shown in the chart from tradingeconomics.com[3], has been slightly above interest rates which make for a negative real interest rate environment[4], where inflation is greater than interest rates. In this article, I will be wearing on the mainstream’s thinking cap on interest rates.

So accounting gains from fixed income investments on a nominal basis could likely be overestimated unless adjusted for by inflation.

The Bangko Sentral ng Pilipinas (BSP) increased its policy interest rates twice this year but so far, the level of rates are just about the level of BSP’s statistical inflation.

Yet given the public’s outcry over price hikes in energy and food, I think that the mathematical construct of the BSP’s CPI basket seems to underreport real CPI inflation.

This only means that the current operating conditions imply that negative interest rate environment could be alot greater than what can be gleaned seen using BSP computations.

The overall implication, according to Wikipedia.org[5], is that negative real interest rates leads

to commodity speculation and business cycles, as the borrower can profit from a negative real interest rate

Also, given the combination of the current level of economic growth rate, which remains far above the interest rate, coupled with the negative real interest rate outlook, suggests that the Philippines continues to operate on a loose monetary inflation stoking environment.

Easy money policies which favor debtors also mean favoring speculators. Thus, current environment remains supportive of an upbeat Phisix, despite a current slowdown elsewhere.

So both external and internal forces in fusion points towards higher inflation which will go beyond the expectations and the statistical estimates of the BSP.

The Peso yield curve seems to be indicating the same inflation outlook (chart from ADB’s Asian Bonds Online[6])

Our current yield curve (red) has further steepened from last year (yellow) implying higher future inflation.

To add, going back to the economic growth, inflation and interest rate chart, despite the slowing growth momentum (measured in quarterly changes upper window), which is signified by the red arrow, the above dynamics seems representative of symptoms known as stagflation—high inflation accompanied by high unemployment and slower economic growth[7].

So this could be a preview of what’s going to happen once inflation intensifies.

Stagflation and the EPIRA law

Aside from local and foreign monetary policies, part of the worsening of domestic inflation has recently been seeded.

The passage or the extension of the politically correct but economically unfeasible decree signified by the massive electricity subsidies based on the Electric Power Industry Reform Act [EPIRA] law[8] will be part of such force. In 2010[9], I have previously discussed on how this would contribute to today’s inflation. Apparently we see signs of price pressures[10] part of which has been due to this.

These subsidies would intensify demand for electricity consumption, where the benefits of political free lunches aimed at acquiring votes, will only be passed and added to the burdens of all productive enterprises.

The outcome will reminisce the past where increasing costs of energy will translate to higher cost of doing business, elevated risk premiums and high hurdle rates that would imply fewer investments, higher levels of unemployment, lower growth rate and importantly lower standards of living.

Moreover, this law impels for the growing risk of power supplies shortages.

Eventually socialist type of free lunches runs dry. As former UK Prime Minister Margaret Thatcher says[11], Socialism

always run out of other people's money. It's quite a characteristic of them

Proof?

Venezuelan President Hugo Chavez claims that energy is a “birthright” for Venezuelans[12]. The result has been a massive rolling blackout, a model we should look forward to especially in the face of the continued uptrend in commodity and energy prices.

In addition, like Venezuela[13], we can expect more smuggling or black market or illegal connections to take place.

Indonesia has learned from such unviable and absurd policies and has begun dismantling subsidies to all sectors.

As the Jakarta Post reports[14],

The government expects to remove the electricity subsidy completely by as early as 2014 so that it will have more funds available to fight poverty and improve healthcare directly for the poor, a minister has said..

Unfortunately we have taken the opposite route.

Yet this is an example of redistributive tax scheme, where publicly listed Meralco, a legally franchised monopoly, would serve as the conduit for such mandate. This validates only my observation about Meralco’s status as a pet company for politicians[15].

The good news is that stagflation does not automatically translate to wreckage for the stock markets. Not if we use Venezuela as a model.

Venezuela has had an amazing stock market run this year[16] despite inflation tipping towards hyperinflation earlier, along with high unemployment and a two year economic slump which she has reportedly emerged from[17].

This is not to say that stagflation is good for the stock market, instead the returns of Venezuela’s stock markets remains negative when computed for inflation.

Put differently Venezuela’s stock market could have functioned as a defensive store of value from her rapidly devaluing currency.

The other point is that Venezuela’s dynamic may or may not apply elsewhere because of every nation’s idiosyncrasy or structural uniqueness.

For most, the current state of boom bust cycles, which drives global stock markets evinces that meltdowns are a mostly result of liquidity contraction from a previous inflationary environment such as the recent cases of Bangladesh[18] and Vietnam[19] or the global 2008 crisis.

PSE: It’s a Correction Phase

Last week’s correction seem as broadmarket based.

All sectors endured losses. Even the mining sector which has sizzled for 10 consecutive weeks finally relented.

The good news is that despite the losses, market breadth hasn’t been as dire as declining issues led advancing issues moderately.

Even net foreign trade posted slightly negative.

The Peso declined along with the local benchmark market, albeit only marginally lower from php 43.205 to a US Dollar last week to php 43.28 at Friday’s close.

Market internals and the Peso’s actions have not yet been manifesting signs of sharp deterioration.

Thus, I’d read the actions in the Phisix as a consolidation phase awaiting a trigger for a next run.

One would further note that the last time the Phisix collapsed was in an environment of higher rate of inflation and higher level of interest rates than today. Of course the 2008 episode accounted for as contagion which whose origins were from external forces.

The point is I don’t see substantial signs of severe corrosion of financial and economic conditions yet.

Finally, we should expect the continuance of current global volatility until political issues abroad would get threshed out.

As for the timing of when this resolution will happen is beyond my capabilities as analyst, I can only speculate.

As Ludwig von Mises wrote[20], (bold emphasis mine)

In the real world acting man is faced with the fact that there are fellow men acting on their own behalf as he himself acts. The necessity to adjust his actions to other people's actions makes him a speculator for whom success and failure depend on his greater or lesser ability to understand the future. Every action is speculation. There is in the course of human events no stability and consequently no safety.

And since I expect the current market actions to represent more of a countercyclical reprieve than a major inflection point, then it should be considered as windows of opportunities to accumulate or for trade.

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[1] Bloomberg.com Philippines’ Tetangco Says Inflation Pressures ‘Still Exist’ (1), June 10, 2012

[2] See The Code of Silence On Philippine Inflation, January 16, 2011

[3] Tradingeconomics.com Philippine Indicators

[4] Investorglossary.com Real Interest Rates

[5] Wikipedia.org Negative Real Interest Rates

[6] Asianbondsonline.adb.org Philippines

[7] Wikipedia.org, Stagflation

[8] Businessworldonline.com Legislators OK extension of lifeline subsidy scheme, June 7, 2011

[9] See Earth Hour In The Philippines: Rotational Brownouts! The Revenge Of Economics, April 09, 2010

[10] Philstar.com Power, fuel rates up, April 6, 2011

[11] Thatcher Margaret TV Interview for Thames TV This Week 1976 Feb 5 Th

[12] Yahoo.com Hugo Chávez challenges Venezuelan 'birthright' to cheap gas, March 4, 2011

[13] Reuters Africa, World's lowest gas prices fuel Andean smuggling, June 10, 2011

[14] Jakarta Post, Govt expects to remove electricity subsidy by 2014, March 23, 2010

[15] See Meralco’s Run Reflects On The Philippine Political Economy, July 12, 2009

[16] See Global Equity Markets: Signs of Exhaustion; What US Outperformance Means, May 17, 2011

[17] Wall Street Journal 2nd UPDATE: Venezuela 1Q GDP Up 4.5% Vs Previous Year, May 17, 2011

[18] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011

[19] See Vietnam Stock Market Plunges on Monetary Tightening, May 24, 2011

[20] Mises, Ludwig von UNCERTAINTY: Case Probability, Chapter 6 Section 4 Human Action

Ron Paul: Expect 50% Inflation

US Presidential candidate Ron Paul expects the US government to default via inflation

The unionleader.com writes, (hat tip lew rockwell political theatre)

Texas congressman Ron Paul on Friday predicted that inflation will hit 50 percent in the next couple of years, thanks to the massive debt the country has accumulated.

Paul, who spoke to admirers and Republican activists at a Manchester house party, said the inflation will act like default.

Social Security checks will still be cut and interest payments will still be made, but the inflated dollars will allow the government to repay borrowed dollars with devalued money, Paul said.

“They cannot pay the debt,” he said. “I don't think that means you shouldn't try and work things out, but with the size of this debt it never gets paid.”

The national debt is about $14.3 trillion.

Currently about 2/5 of the US CPI index accounts for housing which only means that for inflation to reach 50% that commodity prices will have to go vertical. There would be a flight to real assets. The inflation would have to be so devastating that even housing prices which currently has reverted to a declining price trend, would rise.

Thus Ron Paul sees that the US Federal Reserve will likely take, or experiment, on the path of hyperinflation rather than an outright default.

I would surmise that this is more of a warning than of a prediction.

Yet, this is one tail risk that the mainstream has continued to ignore which is why Ron Paul raises this concern. The obstinacy to maintain current path of government spending profligacy risks this outcome.

The next global financial crisis will likely signify what I call the Mises Moment—the critical moment where the set of choices of policymakers determines whether the entire paper money system collapses or major economies suffers from debt deflation.

Remember in 2008 the banking system nearly collapsed. Major economy governments assumed many of the banking system’s bad assets by flooding the world with money in the hope that these concerted rescue efforts can wish away the accrued malinvstements.

Today, both the banking system and governments have been disproportionately leveraged, and which continues to rely on further inflation (via serial bailouts) to maintain price levels that keeps the banking system afloat. The unfolding events in Europe, particularly the PIIGS, seem as appetizers to the next government-banking system crisis. The difference would be the intensity.

What is unsustainable can’t last.

Have a nice day.

Has Human Evolution Been Culturally Driven?

The ever spectacular author Matt Ridley proposes a thesis where our genes evolved from cultural developments.

Mr. Ridley writes,

The human genome provides penetrating and unexpected insights into human individual and collective history. Among them is the counterintuitive idea that genes are at the mercy of experience – that what we do in our lives affects which genes are switched on and off.

A stressful experience, for example, can make you more vulnerable to infection, because stress hormones indirectly alter the switches that control the expression of genes.

So, far from genes being the cause of how we act, the new understanding sees them as just as much a consequence of how we act. This subtler view of genes has yet to colonise the popular imagination.

On a much longer, evolutionary timescale, the same reversal of causation is necessary.

We now know that many genetic changes in human beings are driven by cultural ones, at least as much as the other way round.

For example, the ability to digest lactose as adults spread among Africans and Europeans because of dairy farming, rather than vice versa.

Read the rest of the fascinating theory here

Health Risks of Sitting and Smoking

Health risks from smoking parallels extended sitting.

So says the San Francisco CBS

Smoking cigarettes is the cause of so much preventable, deadly disease. But now new research shows sitting for long stretches of time may be just as dangerous.

“Smoking certainly is a major cardiovascular risk factor and sitting can be equivalent in many cases,” explained Dr. David Coven, cardiologist with St. Luke’s-Roosevelt Hospital Center in New York.

Dr. Coven said several new studies show prolonged sitting is now being linked to increased risk of heart disease, obesity, diabetes, cancer, and even early death.

Each of our action seems to be wrong. So what’s next? Regulate our seating hours? Ban sitting in public places like the current anti-smoking ban drive in Metro Manila?

New Animal Species versus Animal Species Extinction

I am glad to read about the possible discovery of NEW animal species in the Philippines

From Yahoo

The Philippines, located at the center of the coral triangle, may have even more secrets hidden in its various ecosystems.

The 2011 Philippine Expedition spearheaded by the University of the Philippines (UP) and the California Academy of Sciences (CAS) announced on Wednesday that it has discovered 75 possibly new species of animals, inserts and sea creatures endemic to the Philippines.

The coral triangle is refers to the area of tropical waters which holds the highest diversity of marine life, according to the World Wildlife Fund.

The reason I’m delighted is because despite claims of alleged risks from animal species extinction brought about ‘mostly’ by environmental destruction or habitat loss (as alleged by communists masquerading as environmentalists), the discovery of new species only shows of the natural life cycles of the animal species, in spite of our presence.

A Booming Anarcho-Capitalist City in India?

At the Mises Blog, Stephan Kinsella points to this fascinating article about a booming city in India.

Gurgaon appears to operate on a very unusual or unorthodox dynamic which the author calls as ‘dysfunctional’.

The New York Times, (bold emphasis mine)

With its shiny buildings and galloping economy, Gurgaon is often portrayed as a symbol of a rising "new" India, yet it also represents a riddle at the heart of India's rapid growth: how can a new city become an international economic engine without basic public services? How can a huge country flirt with double-digit growth despite widespread corruption, inefficiency and governmental dysfunction?

In Gurgaon and elsewhere in India, the answer is that growth usually occurs despite the government rather than because of it…

In Gurgaon, economic growth is often the product of a private sector improvising to overcome the inadequacies of the government.

To compensate for electricity blackouts, Gurgaon's companies and real estate developers operate massive diesel generators capable of powering small towns. No water? Drill private borewells. No public transportation? Companies employ hundreds of private buses and taxis. Worried about crime? Gurgaon has almost four times as many private security guards as police officers.

The article continues with the success story.

Today, Gurgaon is one of India's fastest-growing districts, having expanded more than 70 percent during the past decade to more than 1.5 million people, larger than most American cities. It accounts for almost half of all revenues for its state, Haryana, and added 50,000 vehicles to the roads last year alone. Real estate values have risen sharply in a city that has become a roaring engine of growth, if also a colossal headache as a place to live and work.

Before it had malls, a theme park and fancy housing compounds, Gurgaon had blue cows. Or so Kushal Pal Singh was told during the 1970s when he began describing his development vision for Gurgaon. It was a farming village whose name, derived from the Hindu epic the Mahabharata, means "village of the gurus." It also had wild animals, similar to cows, known for their strangely bluish tint.

"Most people told me I was mad," Mr. Singh recalled. "People said: 'Who is going to go there? There are blue cows roaming around.' "

And makes a comparison with the sibling city which has been managed by orthodox means…

Gurgaon was widely regarded as an economic wasteland. In 1979, the state of Haryana created Gurgaon by dividing a longstanding political district on the outskirts of New Delhi. One half would revolve around the city of Faridabad, which had an active municipal government, direct rail access to the capital, fertile farmland and a strong industrial base. The other half, Gurgaon, had rocky soil, no local government, no railway link and almost no industrial base.

As an economic competition, it seemed an unfair fight. And it has been: Gurgaon has won, easily. Faridabad has struggled to catch India's modernization wave, while Gurgaon's disadvantages turned out to be advantages, none more important, initially, than the absence of a districtwide government, which meant less red tape capable of choking development.

Gurgaon’s success comes amidst a seeming absence of central planning agencies…

Ordinarily, such a wild building boom would have had to hew to a local government master plan. But Gurgaon did not yet have such a plan, nor did it yet have a districtwide municipal government. Instead, Gurgaon was mostly under state control. Developers built the infrastructure inside their projects, while a state agency, the Haryana Urban Development Authority, or HUDA, was supposed to build the infrastructure binding together the city.

And that is where the problems arose. HUDA and other state agencies could not keep up with the pace of construction. The absence of a local government had helped Gurgaon become a leader of India's growth boom. But that absence had also created a dysfunctional city. No one was planning at a macro level; every developer pursued his own agenda as more islands sprouted and state agencies struggled to keep pace with growth.

Where public services have been delivered by the private sector…

Even at the fringes of Gurgaon's affluent areas, large pools of black sewage water are easy to spot. The water supply is vastly inadequate, leaving private companies, developers and residents dependent on borewells that are draining the underground aquifer. Local activists say the water table is falling as much as 10 feet every year.

Meanwhile, with Gurgaon's understaffed police force outmatched by such a rapidly growing population, some law-and-order responsibilities have been delegated to the private sector. Nearly 12,000 private security guards work in Gurgaon, and many are pressed into directing traffic on major streets.

Well the above somewhat or partly resembles a society which Austrians call as anarcho-capitalism, where

law enforcement, courts, and all other security services would be provided by voluntarily-funded competitors such as private defense agencies rather than through taxation, and money would be privately and competitively provided in an open market.

Gurgaon's development may not be perfect, but her unorthodox model seems to have vastly outclassed her politically oriented development models adapted by her peers.

Nevertheless Gurgaon’s experience isn’t about attaining perfection but about relative efficiencies.

It’s one development model which should be look at, learned from and possibly assimilated.

US President Obama Mulls Tax Cuts as Compromise for Raising Debt Limits

If anyone thinks that the US government will allow market forces to determine her economy’s direction then they must be hallucinating.

US President Obama seems to be dabbling on another stimulus program aimed at arriving at a deal with Republicans to raise the debt limits.

From Bloomberg, (bold emphasis added)

President Barack Obama’s advisers have discussed seeking a temporary cut in the payroll taxes businesses pay on wages as they debate ways to spur hiring amid signs that the recovery is slowing, according to people familiar with the matter.

The idea, which is in preliminary stages of discussion, is among several being talked about at the White House as the economy holds center stage for the administration and Congress, the people said on condition of anonymity to discuss internal deliberations. The unemployment rate in May rose to 9.1 percent, the highest level this year.

The talks reflect the political constraints the White House is operating under with the Republican majority in the U.S. House pushing to cut federal spending. A hiring stimulus based on a tax break for employers may appeal to Republican lawmakers, many of whom have called for measures to help businesses.

This means that one deal will likely lead to another-a slippery slope of one intervention to another. The power to exert influence over the marketplace has been so irresistible. Likewise this reveals of the venality of politics.

As the great Henry Hazlitt wrote

The political appeal of inflation comes from fostering the
illusion in the great majority of voters that they will somehow get the better of the swindle, and profit at the expense of a few unidentified victims.

Pieces of the jigsaw puzzle keep falling into place, more signs of the imminence of QE 3.0.

China Warns US on Debt Default as ‘Playing with Fire’

Here is another spectacle, China warns the US of ‘playing with fire’ by tinkering with the prospects of default.

From yahoo.com

Republican lawmakers are "playing with fire" by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank said on Wednesday.

The idea of a technical default -- essentially delaying interest payments for a few days -- has gained backing from a growing number of mainstream Republicans who see it as a price worth paying if it forces the White House to slash spending, Reuters reported on Tuesday.

But any form of default could destabilize the global economy and sour already tense relations with big U.S. creditors such as China, government officials and investors warn.

Li Daokui, an adviser to the People's Bank of China, said a default could undermine the U.S. dollar, and Beijing needed to dissuade Washington from pursuing this course of action.

"I think there is a risk that the U.S. debt default may happen," Li told reporters on the sidelines of a forum in Beijing. "The result will be very serious and I really hope that they would stop playing with fire."

China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, U.S. data shows, so its concerns carry considerable weight in Washington.

"I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value," Li said.

This just shows how governments have been addicted towards profligacy and inflationism as recourse to economic predicaments.

By advocating an increase of US debts, the US will genuinely be “playing with fire”.

Eventually this spending-deficit cycle will reach a point where the US economy won’t be able to pay her liabilities and will prompt her to an outright default or pursue hyperinflationary policies. So China is effectively asking the US to kick the can down the road.

However, these warnings do not just come from China, but also from the Fed’s James Bullard and one of the key credit rating agency, the Fitch Ratings

From the Reuters (hat tip Dr Antony Mueller)

A default would have severe reverberations in global markets, a top Federal Reserve official said just hours after Fitch Ratings warned it could slash credit ratings if the government misses bond payments.

St. Louis Federal Reserve Bank President James Bullard told Reuters on Wednesday "the U.S. fiscal situation, if not handled correctly, could turn into a global macro shock."

"The idea that the U.S. could threaten to default is a dangerous one," he said in an interview.

"The reverberations in those global markets would be very severe. That's where the real risk comes in," Bullard warned.

So the political pressure to raise debt limits has apparently been escalating.

Once the US Congress approves such actions, which I think they will, this gives the Fed another rational for QE 3.0: insurance against the risk of a bond auction failure as previously discussed here.

But while China warns of a default, the fact is that the US has already been partially defaulting on her debt via inflationism (QE 1.0 and 2.0)

Repeating what Murray Rothbard wrote,

Inflation, then, is an underhanded and terribly destructive way of indirectly repudiating the "public debt"; destructive because it ruins the currency unit, which individuals and businesses depend upon for calculating all their economic decisions.

So China prefers indirect default by inflation than an outright default.

Finally another paradox is that this warning of China comes amidst what appears to be her declining interest to finance the US.

True China owns lots of US debts (following charts from zero hedge)

But China has been buying less during the past months

Bottom line: Global policymakers appear to be averse at imposing fiscal discipline and would choose the inflationism route instead.

These actions manifest what I call path dependency or the bailout mentality via inflationism. Until the next crisis implodes such dogmatist approach simply won’t change.