Paul Volker Swings at Ben Bernanke on Inflationism

Writing at the New York Times former Federal Reserve Chairman Paul A. Volcker takes a swing at Ben Bernanke over the latter’s inflationist policies (bold emphasis mine)

IN all the commentary about Ben S. Bernanke’s recent speech in Jackson Hole, Wyo., little attention has been paid to six crucial words: “in a context of price stability.” Those words concluded a discussion by Mr. Bernanke, the Federal Reserve chairman, of what tools the central bank could consider appropriate to promote a stronger economic recovery.

Ordinarily, a central banker’s affirming the importance of price stability is not headline news. But consider the setting. There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.

It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.

The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability.

Well, good luck.

Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth.

My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.

What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate.

It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy.

At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.

Mr. Paul Volker appears to live up by his “inflation fighting” reputation

And with special emphasis, Mr. Volker criticism highlights Mr. Bernanke’s excessive reliance on models.

Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way.

Mr. Volker’s stinging rebuke reminds me that inflation is not a policy that will last.

From the great Ludwig von Mises,

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.

Definitely Not a Reprise of 2008, Phisix-ASEAN Equities Still in Consolidation

Note: I am in a hurry so this week's outlook will be abbreviated.

This year’s top-notch performers among global stock markets[1] (based on year-to-date) accounted for biggest losers in the region this week: I am referring to ASEAN equities.

Correction and NOT a Reversal

ASEAN markets had recently been defying ‘gravity’ but as I noted last week[2] there seems to be signs of tightening correlations.

Over the short term or during past two months, the correlation of Phisix and ASEAN indices with that of distressed global equity markets have evinced formative signs of tightening or reconvergence.

As I have been saying, divergences in market performance may persist for as long as a global recession is not in the horizon.

One must remember that decoupling signifies as an unproven thesis that can only be validated during a full-blown crisis. It’s a theory that I have been sceptical of, considering the concurrent interconnectedness and interdependence of global economies.

So the previous downside volatility of the global financial markets appears to have been carried over during this week, which had adversely affected ASEAN markets.

Yet reports of China-led BRIC (Brazil, Russia and India) proposed rescue[3] of the Eurozone by buying of Euro bonds, and most importantly, the joint or coordinated liquidity infusions by major central banks[4] as the U.S. Federal Reserve, the Bank of England, Bank of Japan, and the Swiss National Bank through foreign currency swap lines or exchanging of an agreed amount of currencies (see the basics here[5]), underpinned a fierce rally in major global equity markets.

We seem to be witnessing another variety of quantitative easing (QE) or money printing measures at work.

Perhaps one unstated objective for the synchronized liquidity injections has been to finance $800 billion derivatives[6], where 40% of which has been accounted for by “equity” options, whose expiration on during last week would have reportedly triggered tremendous pressure on the marketplace. Also such interventions could have been meant to forcibly cover equity ‘shorts’ via the derivatives market which signifies another war against the markets and alternatively represents as policies aimed to bolster equity markets.

As I have repeatedly been pointing out, what I call as the Bernanke’s doctrine[7] has been about inducing a stock market boom that would serve as a wealth effect transmission to the economy.

Furthermore, the violent pendulum gyrations seen in the market breadth[8] of US markets resonates how today’s financial markets have behaving—boom bust cycles.

Essentially, emanating from the embers of the 2008 meltdown, global equity markets have increasingly been steroid dependent which means MORE boom bust cycles ahead.

Again as I projected last week

Friday saw big declines in Asian currencies as the US dollar fiercely rebounded over a broad number of major currencies. This US dollar rally may see an extension this Monday (unless there will be declarations for major actions by US and European policymakers over the weekend).

The unfolding crisis in the Eurozone has been prompting for short term funding predicaments that has led to liquidations across financial markets worldwide, including Asia.

This has been reflected on Asian currencies as well as the Peso.

This terse quote from a Bloomberg article summarizes the week’s action in Asia’s currency markets[9]

Losses for the won, rupee, ringgit and Taiwan dollar were the worst since mid-2010.

As with most of Asia, the Philippine Peso lost a hefty 1.91% over the week.

This Is NOT 2008, Redux

I would disagree to imputations that current environment is about rising risk aversion. Such description would likely apply to financial markets of crisis afflicted economies but not to Asia markets.

Proof?

The Euro debt crisis and fears of another recession has indeed been increasing overall market anxieties around, but for Asia such concern has been muted, relative to 2008.

The above graph of Credit Default Swap prices representing debt default risks of Asian sovereigns from ADB[10] shows that credit concerns in the region subdued.

In addition, net foreign trade in the Philippine Stock Exchange has been inconsequential despite emergent signs of selling pressures so far.

It could be that local investors may seem to have been more ‘traumatized’ (Post Stress Traumatic Disorder) by the last crisis to stampede into US dollars, relative to foreigners.

Moreover, while emerging markets in general have endured equity outflows from the recent volatility, this has partly been offset by inflows to the bond markets[11].

And there is even more evidence that risk environment has been conspicuously nuanced compared to 2008—the continuing lofty levels of prices of gold and other precious metals and even of oil.

Notice that the recent downside actions of the S&P 500 (SPX) has been accompanied by downswings of gold, precious metals (DJGSP) and oil (WTIC), yet the former two has basically risen above the levels from where the declines were triggered.

Furthermore, oil at $87 hardly accounts for a ‘recessionary’ environment.

And there have been some insinuations that bullion banks have been significantly hurt by the recent upsurge in gold prices, such that manipulation of the gold-precious metal markets downwards has been undertaken to ease on the losses of these banks under the camouflage of central bank actions.

As Goldmoney.com Alasdair Macleod writes[12],

In common with dealers and market makers in all markets, bullion traders run short positions in bull markets. The turnover on the bullion markets is massive, and a dealer active on behalf of its customers and its own trading book can make substantial dealing profits. So long as those profits exceed the losses on their short positions, all is well. This is why the greatest threat to the bullion market is not the bull market itself, but prices rising too rapidly.

In the last two months, the market for gold has been particularly strong, erasing trading profits for many bullion dealers. Central bankers see this as the result of financial flows building due to the difficulties in the euro area. The targets for these flows out of the euro are the Swiss franc and gold, so the SNB’s move is designed to take the heat out of both of them.

The whopping $2 billion trading losses racked up by Swiss bank UBS[13] from supposedly unauthorized trade by a ‘rogue’ trader, Kweku Adoboli, has allegedly been due to voluminous exposure in “shorting” silver[14].

All machinations to manipulate the metals market will prove to be a temporary event. We should see metals rally significantly in the light of intensifying interventions (via assorted money printing measures) in the marketplace.

With the team Ben Bernanke meeting this week (September 21^st) for an extended 2 days[15], we should expect Operation Twist, a pioneering measure telegraphed by Mr. Bernanke in his last speech[16], which aims to lower interest rates on the longer duration securities, to be formally in operation.

This could be backed by another formal QE 3.0 or by a significant interest rate cut on excess reserves (IOER) meant to disincentivize banks from parking their excess reserves at the Fed.

And considering that much of the developed world has been already been immersed into various forms of QE, we should expect improvements in global equity markets that should filter over to ASEAN markets.

Again, to repeat, this has NOT been 2008. There are hardly signs of deflationary risks that warrant an increase of cash holdings. In the US, money supply has been rampaging along with improving signs of credit conditions[17]. Elsewhere, we should expect policy directions towards an accommodative stance by keeping current levels of interest rates or perhaps even by lowering policy rates.

Central bank activism essentially differentiates today’s environment from that of 2008.

PSE Still in Consolidation Mode

The local market has indeed been under pressure, but again there have hardly been signs of major deterioration.

True, every sector has been marked by declines this week with the ALL sector suffering the largest loss due to Manulife (-6.02%).

Mining, being overextended, suffered most from last week’s profit taking. Again I view this as a fleeting event.

The Phisix has been rangebound. However, trading indicators seem to suggest of partially oversold conditions (MACD). This implies that a rebound could be in the offing.

And peso volume has been dropping as the Phsix consolidates. This serves as indication of the diminishing strength of sellers.

Market internals, despite last week’s significant profit taking, has not materially deteriorated.

If US markets will continue to rebound, then we should see the current consolidation trend in the Phisix to segue into an ascending trend.

I would certainly watch the US Federal Reserve’s announcement and the ensuing market response.

If team Bernake will commence on a third series of QE (dependent on the size) or a cut in the interest rate on excess reserves (IOER), I would be aggressively bullish with the equity markets, not because of conventional fundamentals, but because massive doses of money injections will have to flow somewhere. Equity markets—particulary in Asia and the commodity markets will likely be major beneficiaries.

As a caveat, with markets being sustained by policy steroids, expect sharp volatilities in both directions.

---

[1] See Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders, September 13, 2011

[2] See Phisix-ASEAN Equities: Staying Afloat Amidst Global Financial Market Hurricane, September 11, 2011

[3] See BRICs Mulls Bailout of the Eurozone September 14, 2011

[4] See Hot: Major Central Banks to Jointly Offer US Dollar Liquidity, September 15, 2011

[5] See How Does Swap Lines Work? Possible Implications to Asia and Emerging Markets, October 30, 2008

[6] Naked trader.com Almost 40% of S&P 500 Options Expire Sept. 16, JPMorgan Says

[7] See US Stock Markets and Animal Spirits Targeted Policies, July 21 2010

[8] See US Equity Markets: Signs of Intensifying Boom Bust Cycles, September 17, 2011

[9] Bloomberg.com Asian Currencies Fell in Week on Concern Europe’s Debt Crisis Will Worsen, September 17, 2011

[10] Asianbondsonline.org Emerging East Asia CDS - Senior 5-year

[11] Wall Street Journal Emerging Market Local Currency Bonds Funds Continue To Draw Money, September 16, 2011

[12] Macleod Alasdair Central banks and the gold price goldmoney.com September 11, 2011

[13] Washington Post, UBS says rogue trader caused $2 billion loss, September 15, 2011

[14] Keiser Max BREAKING: UBS rogue trader was trying to exit a naked silver short…. [UPDATED], maxkeiser.com September 15, 2011

[15] IBTimesFX The Week Ahead September 16, 2011

[16] See US Mulls ‘official’ QE 3.0, Operation Twist AND Fiscal Stimulus, September 9, 2011

[17] See US in a Deflationary Environment, NOT! (In Charts) September 16, 2011

Quote of the Day: Law Differs from Legislation

Today’s quote of the day comes from Professor Don Boudreaux

law is not at all the same thing as legislation. Law deserves far more respect (although, still, not respect given mindlessly) than does legislation; indeed, legislation, by its very nature, is frequently used to break the law. For example, Jim Crow legislation in the late 19th-century American south broke the law that effectively enforced racial desegregation on streetcars.

One of the greatest dangers unleashed by modern language is the treatment of “legislation” and “law” as synonyms for each other – and, hence, the bestowal on legislation of the genuine respect that is due to law.

Gold as Money: China’s Gold ATMs and Donald Trump’s Gold Security Deposit

We are witnessing more signs of gold’s reassuming its place as money.

From Forbes, (bold emphasis mine)

China’s got the gold bug. Recently, the government allowed citizens to actually own gold bullion. And now, starting on Sept 23, Chinese people can buy gold bars directly from vending machines.

Gold has caught on like a wrong and oversold political narrative. Is this WMD, or is gold for real?

The China machines, made by German firm TG Gold Super Market, is the first of its kind there, but are already up and running in Las Vegas and Boca Rotan in the U.S., as well as Abu Dhabi, Germany, Spain and Italy. The ATMs dispense gold bars weighing up to 2.5 kilograms and work just like the normal ATMs. The machines can accept both cash and credit cards.

The cash-for-gold machines will be on trial at Beijing’s upscale night clubs and private banks during the initial period for security reasons.

I posted Germany’s first gold vending machine or ATMs in 2009 here.

With gold more accessible to the public, it won’t be long when the function of payment and settlement in the marketplace will include gold bars or coins. (That’s if governments won’t engage in gold confiscation)

In fact, Donald Trump may be setting a precedent on this.

Mr Trump recently accepted gold bars as payment for Security Deposit for property rentals.

From the Wall Street Journal,

On Thursday, the newest tenant in Donald Trump's 40 Wall Street, a 70-story skyscraper in Manhattan's Financial District, will hand Mr. Trump a security deposit worth about $176,000. No money will change hands—just three 32-ounce bars of gold, each about the size of a television remote control.

The occasion will mark the first time the Trump Organization has accepted 99.9% pure gold bullion, rather than cash, as a deposit on a commercial lease. The tenant, precious-metals dealer Apmex, will sign a 10-year lease for 40 Wall's 50th floor at a leasing rate of about $50 a square foot, according to Apmex Chief Executive Michael R. Haynes. The company is promoting the use of gold as a replacement for cash in some situations.

As the great Ludwig von Mises wrote, (bold emphasis mine)

Under the gold standard gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government. What counts is that these coins really contain a fixed weight of gold and that every quantity of bullion can be transformed into coins. Under the gold standard the dollar and the pound sterling were merely names for a definite weight of gold, within very narrow margins precisely determined by the laws. We may call such a sort of money commodity money.

Sound money could be in the future as the current paper money based system self-destructs.

Video: Jon Stewart on President Obama’s Solyndra Green Jobs Scandal

President Obama’s green jobs showcase… (hat tip: Lew Rockwell blog)

The true engines of economic growth will always be companies like Solyndra...

It's here that companies like Solyndra are leading the way towards a brighter and most prosperous future

…appears to collapsing into a scandal.

Here is the Daily Show Jon Stewart’s comical take…

US Equity Markets: Signs of Intensifying Boom Bust Cycles

More evidence where US equity markets seem as increasingly being influenced by monetary policy propelled tidal flows.

Again another marvelous observation as exhibited by the chart above and the comment below by Bespoke Invest

we have made numerous references to how the increased volatility this Summer has caused a big uptick in the number of 'all or nothing' days for the equity market. We consider 'all or nothing' days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400.

So far this year there have been 38 days where the net A/D reading for the S&P 500 was above +400 or below -400. On an annualized basis, this now puts 2011 on pace to see 54 'all or nothing' days, which would make it the most volatile year since at least 1990.

The amplifying accounts of market breadth volatility signifies as intensifying price distortions which have been symptomatic of the escalating government interventions in the US financial and monetary system, which I would add as being transmitted or diffused worldwide.

Deutsche Bank: We’re Austrians Now

From Thomas Mayer of Deutsche Bank: (bold emphasis mine)

Modern macro- and financial economics are based on the belief that economic agents always hold rational expectations and that markets are always efficient, in other words, that the earth is flat. We now find out that this is not true. There are elements of irrationality and inefficiencies in the behavior of people and markets. Therefore we need to dump the flat-earth theories promising that economic and financial outcomes can be planned with a high degree of certainty and need to look at other theories that accept the limits of our knowledge about the future. A revival of Austrian economics could be a good start for such a research programme.

Unfortunately, however, the battle cry of the public and politicians is for more regulation: regulate banks, regulate markets, regulate financial products! But those who push for blanket regulation suffer from the same control-illusion that got us into this crisis. In our view, instead of more regulation we need more intelligent regulation. At the heart of such regulation must stand the simple recognition that we can at best tentatively plan for the future and must feel our way forward in a process of trial and error.

In a world where we need to reckon with ―unknown unknowns‖ – in a world where Knightian uncertainty reigns – financial firms and investors need larger buffers to cope with the unforeseen, i.e. more equity and less leverage. In a world, where markets are not always liquid but can seize up in a collective fit of panic, financial firms and investors also need a greater reserve of liquidity.

Mr. Mayer can always visit the Ludwig von Mises Institute, so he can get ahead of the snowballing revival.

Nonetheless this is revolutionary, from the above, Austrian Economics appears headed mainstream.

Bloomberg Chart: Gold Prices Headed for $10,000 an ounce?

The Bloomberg chart of the day features Societe Generale’s Dylan Grice assessment that Gold prices could reach $10k.

From Bloomberg, (hat tip Lew Rockwell blog)

Gold has the potential to jump more than fivefold as the precious metal’s price catches up with the surging amount of money in the U.S. economy, according to Dylan Grice, a global strategist at Societe Generale SA.

The CHART OF THE DAY shows the price at which each U.S. dollar in the monetary base, compiled by the Federal Reserve, would have been backed by an ounce of gold for the past half century. International Monetary Fund data on the country’s gold reserves were used in the calculation.

Grice, based in London, identified this price as the metal’s “fair value” yesterday in a report. Since June, it has exceeded $10,000 an ounce, as depicted in the chart’s top panel. Gold for immediate delivery closed at $1,819.63 an ounce on the spot market yesterday.

The bottom panel tracks the value of U.S. gold holdings, based on the spot price, as a percentage of the monetary base for the 50-year period. August’s proportion was 18 percent of the $2.66 trillion in the economy. The latter figure was more than triple the amount three years earlier, reflecting efforts by the Fed to spur economic growth.

I agree that $10k could indeed be a target or even possibly more. Austrian economist Bob Wenzel says $25k could be a possibility.

These, of course, will ultimately depend on the actions or reactions of global political authorities towards the imploding political institutions based on the troika of welfare-warfare state, central bank and the banking cartel system.

The $64 trillion question is “To what degree are they willing to debauch today’s paper money system?” The answer to this is likely the scale of where the level of gold prices will be + potential excesses from market irrationality (bandwagon effect).

For the meantime, low interest rates and modest inflation numbers (both markets which authorities have materially intervened) have been giving officials the leeway to pump up on inflationism.

So in my view, I’ll take it one step at a time, $2k first, then every additional $500 thereafter, where I would assess the reactions of the political leaders on the unfolding state of affairs.

Will Burma Embrace a Market Economy?

Forbes Magazine’ Simon Montlake thinks so (bold highlights mine)

It usually pays to be bearish on Burma. But a flurry of initiatives by a new, semi-elected government has raised hopes of a fresh start. Since taking power in March, it has begun tackling barriers to economic growth, such as commodity import cartels and restrictive investment and labor laws. President Thein Sein, a retired general, has pledged to support local entrepreneurship and to attract foreign investors to special economic zones. He's also tapped independent thinkers as economic advisors and appointed businessmen as ministers. In much of Asia this would be mainstream politics. In Burma it's almost a Tea Party movement. Even the political standoff that has defined Burma on the world stage--the Lady versus the Generals--appears to have eased with a warm presidential reception on Aug. 19 for Aung San Suu Kyi, the opposition leader. "Things have moved surprisingly quickly," says a European diplomat. A veteran foreign aid worker concurs: "The political conversation has changed."

Burma's political history is strewn with false starts and reversals. The question on everyone's lips is whether this time is different. Skeptics say Thein Sein has yet to deliver on his reformist rhetoric and faces resistance from political hardliners and conservative bureaucrats, as well as rent-seeking tycoons who thrived under the dictatorship.

This uncertainty, as much as sanctions and boycotts, prevents many Western firms from taking the plunge, says Luc de Waegh, founder of West Indochina, a consultancy in Singapore. "The business environment isn't friendly to foreign investors yet. It's challenging to do business there," he says. Asian manufacturers have also been deterred by high costs for inputs and dilapidated infrastructure, despite a cheap labor pool. Only Burma's natural resources have attracted significant investment, led by China, though this has proven controversial.

Still, some Western executives are keen to size up a potential market of 54 million people with an estimated GDP of $43 billion. Tourist arrivals rose 23% in the first half of 2011, and not all were vacationers. "The big guys from the big companies are going there for tourism and business curiosity. It's like the last frontier," says De Waegh, who used to run British American Tobacco's Burma operations. Under political pressure at home, BAT exited in 2003.

While some will think that a seminal market economy for Burma will pose as threats to them, I think Burma’s possible conversion should be very positive, not only for Burma, but for ASEAN and for the world.

This means more business opportunities and access to a previously closed market that is not only resource rich but likewise has significant human capital and also fabulous recreational sites or vacation spots for potential tourists (like me).

A universal axiom is that de-politicization of any economy extrapolates to the empowerment of the masses through the markets, where the interests of the consumers should reign supreme than the interests of the political overlords.

As the great Ludwig von Mises once wrote,

The fundamental principle of capitalism is mass production to supply the masses. It is the patronage of the masses that makes enterprises grow into bigness. The common man is supreme in the market economy. He is the customer "who is always right

I hope Burma will indeed commence on the path of embracing a market economy.

Green Jobs: The Anatomy of Government Failure

From the Washington Post, (bold emphasis mine)

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

President Obama has made “green jobs” a showcase of his recovery plan, vowing to foster new jobs, new technologies and more competitive American industries. But the loan guarantee program came under scrutiny Wednesday from Republicans and Democrats at a House oversight committee hearing about the collapse of Solyndra, a solar-panel maker whose closure could leave taxpayers on the hook for as much as $527 million.

The GOP lawmakers accused the administration of rushing approval of a guarantee of the firm’s project and failing to adequately vet it. “My goodness. We should be reviewing every one of these loan guarantee” projects, said Rep. Marsha Blackburn (R-Tenn.).

Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative-­energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.

“There are good reasons to create green jobs, but they have more to do with green than with jobs,” Princeton University economics professor and former Federal Reserve vice chairman Alan Blinder has said.

The loan guarantee program can also be unwieldy. It works like this: Companies negotiate with the Energy Department for a government loan guarantee, which means taxpayers will pay off bank loans if the project fails. Then the Office of Management and Budget must sign off on the guarantees, often changing terms…

Solyndra’s closure prompted concerns about whether the administration made good bets in the rest of its portfolio of clean-tech projects it had helped subsidize with taxpayer-guaranteed loans. The primary investors in Solyndra were funds tied to a major Obama fundraising bundler, Tulsa oilman George Kaiser.

My take:

Again the article proves that there hardly has been any qualm for political authorities to spend on other people’s money because they won’t be held accountable for decision failures.

The political process of picking winners does not guarantee success.

Wrong decisions by political stewards ultimately mean higher taxes which decreases the competitiveness of the economy. Oh don’t blame globalization for the effects of stupid domestic policies.

Importantly, this has been lucid evidence of how central planning fails and how politics can’t subvert the will of the markets.

With taxpayer guarantees, the political beneficiaries of loans (stimulus) from the government are not only protégés of the administration (crony capitalism) but notably have not been subject to the discipline of market forces, and thus, can or will recklessly handle finances even to the risk of finagling them. Call it corruption and moral hazard.

US in a Deflationary Environment, NOT! (In Charts)

The mainstream meme has been about the US economy being embroiled in a ‘liquidity trap’, therefore enduring a deflationary environment.

There have been many signs that the US economy seems flagging of late. (The following 2 wonderful charts from Bespoke Invest)

But there hardly seem signs of deflation with money aggregates skyrocketing (charts from St. Louis Fed)

M2…

MZM…

And credit environment has been conspicuously improving too.

For businesses…

And so with consumer loans…

Importantly, the current economic landscape has certainly NOT BEEN A PROBLEM OF CONSUMER SPENDING, which have much been bruited about by deflationists.

(chart below from Professor Mark Perry)

…but from the lack of investments. (See Robert Higgs magnificent explanation here)

Lastly, US CPI inflation keeps ascending (again from Bespoke)

…yet one would note that the calculation for the CPI index may not be accurate or has vastly understated the above inflation rates, perhaps for political reasons (Wikipedia.org).

The composition of CPI index has been disproportionately weighed towards housing.

Great chart above and below from DSHORT.com

And in looking at the performance of each of the components…

…we find that except for the apparel, the entire spectrum of goods and services in the CPI basket has been ascendant! With the only difference seen at the relative performance of prices.

Bottom line:

What Deflation, where?

NOT until central banks will cease and desist from inflating either forced by markets or by politics, and NOT until central banks will sacrifice to the alter of economics and the markets, the high privileged but beleaguered banking cartel.

Bonds markets have NOT been an accurate indicator, for the simple reasons of government designed financial repression and or government manipulation (QEs).

In planet earth, we see inflation as THE predominant theme or the prospects of a stagflation (which could transit into hyperinflation) risk.

And with global political authorities coordinating efforts to intensify inflationism in the hope that the liquidity therapy will solve the malady of insolvency, then expect MORE INFLATION ahead.

Deflation, which has signified as a bogeyman, will be further used to justify expanded inflationism which in reality has been designed to preserve the existing political order.

As the great Ludwig von Mises wrote

It is no answer to this to object that public opinion in the capitalist countries favors the policy of cheap money. The masses are misled by the assertions of the pseudo experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by saving. They are deceived by the fairy tales of monetary cranks. Yet what counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes and by credit on the bank books.

Unfortunately for us, political authorities and their zealots, fables are seen and adapted as reality, where we have to bear the consequences of their actions.

Hot: Major Central Banks to Jointly Offer US Dollar Liquidity

From Marketwatch.com,

Along with other central banks, the European Central Bank will undertake new operations to provide U.S. dollar liquidity. The operations will be conducted in coordination with the U.S. Federal Reserve, the Bank of England, Bank of Japan, and the Swiss National Bank. The operations will be conducted in addition to the ECB's ongoing weekly seven-day dollar operations announced in May 2010. The move comes amid worries about dollar-funding tensions in market amid the turmoil related to the euro zone's sovereign debt crisis

Here is what I wrote a few days back

And it wouldn’t signify a farfetched idea that a grand coordinated QE project or credit easing measures by major central banks something similar to the Plaza Accord as predicted by Morgan Stanley’s analysts could be in the works too. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Global central banks and politicians have, in increasing signs of desperation, been intensifying the use of the nuclear option. Such concerted move is likely one of the many to come. Expect to see amplified market gyrations as consequence to the boom-bust policies of global central banks.

I told you so.

Video: Economic and Political Roles of Chain Stores

LearnLiberty.org presents another great educational video. Professor Art Carden explains the economic and political roles of chain stores to our society.

From Learn Liberty,

Are chain stores good or bad? According to prof. Art Carden, there are reasons to both like and dislike chain stores. The reasons to like chain stores include their ability to lower prices, increase variety, and reduce uncertainty. However, chain stores also do things to dislike such as pursuing special government privileges like subsidies and eminent domain.

Essentially, when chain stores respond to the incentives of the market, they create wealth for society. On the other hand, when chains stores respond to the incentives of the political process, they often produce detrimental effects for society.

With the Philippines hosting 3 of the top 10 largest malls in the world (2009), the above discussion seem quite apropos

Video: Differentiating Natural Rights from Legal and Constitutional Rights

The educational video below from LearnLiberty.org, explains the differences of rights.

From Learn Liberty,

Individuals have rights. But are they natural? And how do they compare and contrast with legal or constitutional rights? Are legal or constitutional rights similar to those inalienable rights mentioned in the Declaration of Independence? Professor Aeon Skoble distinguishes such constitutional rights, such as the right to vote, from the rights protected by governments and constitutions—natural rights not actually granted by governments themselves. He concludes that legal systems should create rights that are combatable with natural rights.

Media Bias and the REAL US Small Business Sentiment Survey

The reason I do NOT trust mainstream media has been due to their innate tendencies to manipulate information to dovetail to their political biases.

The recent survey of US small businesses which exhibited signs of declining optimism is just one good example.

Writes the Wall Street Journal Blog, (bold emphasis added)

“Nobody knows the trouble I’ve seen.” That’s the song small-business owners around the U.S. are singing. But it isn’t regulation, tax policy or credit constraints causing the woes. It’s the lack of customers.

The widely watched survey of small businesses done by the National Federation of Independent Business shows optimism in August was the lowest since July 2010 when the recovery last hit a soft patch. The drop to 88.1 was the sixth consecutive decline — a record string of declines in the index.

What the author would like to present is that the woes of small businesses has been due to the lack of aggregate demand (lack of customers). Because from the Keynesian perspective this means that government intervention should take the place of the private sector, thus justifying more stimulus.

But it’s a totally different story when seen from the actual National Federation of Independent Business report.

Here is the NFIB Economic Trend Report for September 2011 with commentary from William C. Dunkelberg and Holly Wade (bold emphasis mine)

The August survey was mailed out as Congress and the Administration reached their “deal” to curb spending and reduce the debt/deficit problems. Had this been a convincing one to “Main Street,” confidence would have improved and, likely, also spending and hiring. But, NFIB’s confidence measure took a dive as did the University of Michigan’s consumer confidence Index which produced its lowest reading since 1980. In particular, it was expected real sales gains and expected business conditions in 6 months that plummeted in the NFIB report. These two components by themselves lowered the Index 2.1 points versus the total loss from all 10 components of 1.8 points. With such a dim outlook, owners are not going to do a lot of hiring or expanding.

Business expansion, the purchase of new equipment and vehicles and even hiring are “long term” investments. Most important to the decision process is the sales forecast, but against expected sales over the life of an asset, the owner must figure in labor costs, taxes, the cost of new regulations, financing costs and the like to decide whether or not an “investment” will pay off. This is one reason why “short term” stimuli don’t work. The planning horizon for the private sector is longer than the time to the next election!!! At this point, no one knows what their tax rate will be 6 months from now; no one knows what the health care will do to labor costs. Higher for sure, but by how much? Yes, the President suspended costly EPA rules that were going into effect, but you know that they will be back after the election if he wins

The NLRB is pushing the union agenda, card check, mandating owners to post notices of the right to unionize, interfering with Boeing’s business decision making (and the President’s Chief of Staff was on Boeing’s board when the South Carolina project was approved). Supporters of the Administration are pushing for another hike in the minimum wage and the new CEA chairman favors and wants a national sales tax to be imposed. It would take a book to itemize it all. Short-term fixes will not help, private sector decision makers think longer term – they do and they don’t like what they see, there is little clarity or certainty. Consumer spending is still a key factor and 9 of 10 people who want a job still have a job and would spend more if they were more confident about the future

And here is the NFIB’s press release calling for President Obama to repeal employer mandates (bold emphasis mine)

The National Federation of Independent Business is again pushing to repeal the employer mandate in the Patient Protection and Affordable Care Act (PPACA) on the heels of President Obama’s ask for bipartisan job creation. There is currently legislation in Congress to repeal the employer mandate, and the NFIB has long-supported and championed this important initiative.

“At the same time that President Obama is asking small-business owners to create jobs, his very health care law is preventing them from doing so,” said Susan Eckerly, Senior Vice President of Federal Public Policy at NFIB. “In fact, small-business owners will tell you that they are suffering a crisis of confidence right now that prevents them from expanding and hiring; how do they move forward with job creation when the unknown costs stemming from the policies of the past few years continue to stand in their way?

“Instead of advocating for more Washington spending bills that do little to help the situation that small-business owners are currently drowning under, Congress should immediately review and repeal some of the policies of the past few years that stand between an employer and an employee. Simply put, the repeal of the employer mandate is an important step toward sound, long-term job creation.”

Provisions of the health care law, such as the employer mandate, have left many small-business owners unable to expand operations as they brace for new costs and taxes coming out of Washington. The health care law requires that employers with 50 or more full-time equivalent employees offer “affordable, minimum essential [healthcare] coverage” beginning in 2014.

Lastly NFIB economist William Dunkelberg says in this video that in order to raise capital we need savings and not stimulus.

This has NOT been an issue of tax policy or government regulation? Duh!

So the Wall Street article either did not the read the report and instead arbitrarily replaced their conclusions over the NFIB's context, or has equivocated on the survey result of NFIB.

Nonetheless the biggest problem weighing on US small businesses, whom signifies as the largest employers of the US economy, generally can be described as “regime uncertainty” or the assault to private property rights through the legal and regulatory channels which heightens the economy’s risk climate and which subsequently reduces the incentive by entrepreneurs and business people to spend on investments required for job growth.

Regime uncertainty, best defined and enunciated by economist Robert Higgs, (as previously posted) as having to do (bold emphasis mine)

with widespread inability to form confident expectations about future private property rights in all of their dimensions. Private property rights specify the property owner’s rights to decide how property will be used, to accrue income from its uses, and to transfer these rights to others in various voluntary arrangements. Because the content of private property rights is complex, threats to such rights can arise from many different sources, including actions by legislators, administrators, prosecutors, judges, juries, and others (e.g., sit-down strikers, mobs).

Because of the great variety of ways in which government officials can threaten private property rights, the security of such rights turns not only on law “on the books,” but also to an important degree on the character of the government officials who administer and enforce the law.

Thanks to the internet we can weed out prevarications and or political propaganda.