Can the Phisix rise Amidst the Euro Crisis?

During the downturning segment of the cycle, the situation is such that credit for investment will be refused. With its supply of credit, the central bank will encounter a rejection of credit-taking by the economy. We have already given two reasons for this. On the one hand, the psychological conditions necessary for the investment of money into durable investments will not be present. There will be general unrest in the economy. On the other hand, the relationship of prices and the general tendency of price development will stand in the way of investment activity. The repudiation of credit will, however, not be general. Even in this stage of the cycle there is a very significant demand for credit, namely the demand by those who are forced to liquidate, to make emergency sales or to cease production due to a lack of capital—a demand for which any credit means at least the momentary avoidance of losses and perhaps even the potential for later improvements. However, satisfying this demand implies delaying the liquidation of the crisis, lengthening and strengthening it. For it is essential to this situation that a significant demand for credit by those who would like to work towards continuing the boom, that is, an “unhealthy” demand for credit, exists along with a significantly reduced demand for new sound investments- Richard Strigl, From Capital and Production (1934)

A local mainstream expert recently argued that for as long as the Euro crisis prevails, the Philippine Phisix won’t likely be able to carve out new highs. His argument has been mostly predicated on the deleveraging process being experienced by major developed economies, momentarily led by the Eurozone.

And given that the correlations of global markets has been intensifying as shown by the chart above[1], which means diversification among global markets have become a less appealing option to scrape for ‘Alpha’ returns, the Phisix will succumb to the same pressures being encountered by her contemporaries, and so it is held.

While part of such observation is true, as I have persistently maintained that an outright decoupling under financial globalization would be highly improbable, divergent outcomes would only become apparent under conditions where the risk of a global recession is low.

And most importantly, aggressive and sustained cumulative policies by global central banks to ease credit through zero bound rates and rampant injections of liquidity via asset purchases could defer the crisis from fully unwinding.

What You See Depends On Where You Stand: Charts

Many local mechanical chartists will see a foreboding road ahead with the bearish head and shoulder pattern looming over the Phisix (blue curves), aside from the extant death cross pattern[2]. Given this pattern searching impulse, these chartists would likely use the bleak events in the Eurozone as confirmation of their personal bias to argue for a pessimistic case.

US markets, as represented by the S&P 500, still trades significantly above the 2010 lows and whose present momentum could lead to an upside breakout above the 1,285 levels which would confirm her interim uptrend.

Moreover, both bellwethers of Europe (E1DOW) and Asia (P1DOW) seem to have bounced off the 2010 critical support levels. This could similarly be construed as either double or triple bottoms—a bullish pattern.

So even from the technical viewpoint, should the US, Europe and Asian equities continue to rebound from current levels then external pressures will imply for a rebound in local stocks more than what the Phisix chart patterns have been signaling.

In short, if global equity markets will retain the trend of high correlations, then external forces will likely influence activities in the local market. This will hold true unless there will be some dominant quirks in the local political economy that could influence the activities in the Philippine Stock Exchange, which thus far seems remote.

What You See Depends On Where You Stand: Liquidity Trap

On the other hand, mainstream economists, who premise their analysis on alleged ‘liquidity trap’, would say that ‘deleveraging’ would translate to a decline in ‘spending’, mainly seen through the credit channel and through consumers, which should translate to lower economic growth and subsequently lower asset prices.

Never mind if little of such assumptions have been proven to be accurately reflected by empirical data.

While US real personal consumption (lower window, red arrows) did fall along with credit conditions in 2008-2009 (upper window), consumer spending has recovered earlier and faster than the credit environment which presently treads at an all-time high.

Furthermore, US equity markets have been mixed year-to-date in spite of the European crisis.

As of Friday’s close, the Dow Industrial was up by 3.8%, the S&P 500 marginally down by 1.06% and the Nasdaq slightly down by .97%. These are hardly signs of deflation.

Moreover, deflationist arguments such as “Given the deflationary pressures that are the natural result of a recession and deleveraging/default, they can print a lot of money without igniting too much inflation[3]” is simply contorted and incorrect.

The excessive focus on the nominal yields of US government’s Treasuries, unemployment data and the CPI index used as basis to declare a supposedly deflationary environment blatantly ignores the composition of the CPI index[4] (which has been heavily weighted to housing), the manipulation of the yield curve via monetary policies and bank regulation, as well as the role of US dollar as the world’s premier reserve currency.

Of course “too much inflation” is a matter of semantics.

Nevertheless, even if US CPI index does not reflect on the actual state, US CPI inflation for October 3.5% has been higher than the 96 year average[5]. This applies to the Eurozone as well, where November’s inflation has been at 3%[6] vastly higher than the 19 year average at 2.24%[7]

Most importantly NONE of the crisis affected Eurozone crisis nations have shown disinflation. Only Greece’s inflation rate has shown some signs of decline, although the rate of growth has remained positive. Meanwhile Portugal, Spain and Italy’s inflation rate appear to be in an upswing in spite of the current crisis.

While it may be true that money supply has reportedly been contracting in Italy, the recent round of stepped up purchases by the ECB of Italian bonds are likely to offset this.

And given that inflation rates of the Eurozone and the US are above the average, this could be read as “too much inflation” in a relative sense.

No deflation here, move along.

And with gold prices drifting significantly above the $1,700 level and with oil prices at the $ 100 level, further inflationary actions by global central banks will imply for higher inflation figures ahead or that inflation rates will remain sturdily above their averages much to the contrary of the expectations of deflation proponents.

Lastly, the deflation perspective forgets that the deleveraging by the private sector are being substituted or offset by enormous increases in leveraging of major governments via their central banks. Yet all such actions will have consequences which most of them have been ignoring.

Misunderstanding Hyperinflation

Also those in the view that the “US is far from Zimbabwe” again represents deep denial based on the delusion the US can freely operate above or will be immune to the natural forces economics.

And importantly, these denials manifests blatant misunderstanding of the dynamics of inflation or the feedback loop mechanism between government controlled quantity of money and the public’s demand of money, as shaped by price influenced expectations, in the face of policies that leads to hyperinflation.

As a refresher let me quote the great Murray Rothbard[8] on how hyperinflation becomes a reality, (bold emphasis mine, italics original)

When expectations tip decisively over from deflationary, or steady, to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price. The people will then clamor for the government to issue more money to catch up to the higher price. If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more—thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races.

Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices “run away,” doing something like tripling every hour. Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.” A frantic rush ensues to get rid of money at all costs and to buy anything else. In Germany, this was called a “flight into real values.” The demand for money falls precipitously almost to zero, and prices skyrocket upward virtually to infinity. The money collapses in a wild “crack-up boom.”

Episodes of hyperinflation can be seen similar to a hockey stick—serial, gradual and incremental increases of inflation rates for long periods that eventually transitions into a sudden explosion or exponential rates of increases.

The Germany’s Weimar experience[9] exhibits this hockey stick-like transition process from muted inflation towards hyperinflation.

It would further be foolish to assume that hyperinflation signifies as a desired policy outcome. Hyperinflation mostly represents an unintended consequence from repeated and intensifying doses of inflationism. This process eventually results to a critical mass or a tipping point where inflation morphs into hyperinflation. Yet again this will be decided by policymakers who control the money supply.

And stopping hyperinflation, says author of When Money Dies and witness to Weimar Germany’s hyperinflation, Adam Fergusson[10], would require

“the kind of courage that politicians cannot have”

As a caveat, I am not saying that a global hyperinflation is imminent, but hyperinflation could be one of the two possible major extreme outcomes that should NOT be written off.

Again all this would greatly depend on the underlying actions by the global political stewards.

Dollar Swaps, Lehman Comparison and Central Bank Activism

Overtime, a binge of debt defaults should be expected[11], although the political path or approach to such crisis has yet to be determined. And such defaults may be channeled anew through inflation (which risks hyperinflation) or restructuring (repudiation, e.g. Greece 50% haircut[12]) or a mixture of both. All of these aforementioned scenarios would bring about different sets of market outcomes, but assured volatility.

And given the way politicians have been loading up on taxpayer liabilities for the benefit of the bondholders and the banking class, aside from the massive interventions in the economy, growing out of the debt mess economically will be next to impossible.

Yet inflationism seems to be the de facto or preferred path as exhibited by the exhaustive policy efforts to prop up the asset markets.

This week’s joint or coordinated action by 5 major central banks have been targeted to ease credit conditions by lowering of interest rates on dollar swaps and by the creation of bilateral swaps[13]. Such actions has been complimented by China’s lowering of reserve requirements[14]—the first time in 3 years—appears to be symptomatic of major economy’s central banks in a panic mode.

But instead of a panicky market, global equity markets zoomed.

The essence of these swaps would be to facilitate funding flows, in case of a cataclysmic banking run or an abrupt capital flight from the Eurozone.

This week’s EU summit will be critical as they will be dealing with the prospects of treaty changes (that may possibly allow ECB), the proposed fiscal union and the committee’s proposal for Eurobonds[15].

As Professor Gary North incisively writes about the purpose of the swaps[16],

…this was an action preliminary to (1) Angela Merkel's December 2 speech to the German parliament, which is preliminary to (2) the next Eurozone summit, scheduled for the weekend of December 9, which is preliminary to (3) a coordinated violation of the two treaties that created the European Union, which is hoped will (4) pressure the European Central Bank to buy newly created Eurobonds issued illegally by the EU, in order to (5) raise enough euros fast enough to buy Italian government bonds before (6) the Italian government misses interest payments, which may (7) bankrupt the largest French banks, which could (8) trigger a worldwide financial panic.

In short, Bernanke and his peers are in a pre-panic panic.

And failure to reach an agreement may trigger such panic, which is probably why these major central banks led by the US Federal Reserve may have coordinated their actions to institute preventive measures against possible funding stops or a gridlock that may lead to sharp market fluctuations and to ensure accessibility of funds.

And given the state of interdependence of the global banking system, the worsening troubles for the Eurozone would severely hurt US the banking system, an event which the US Federal Reserve may see as urgent which requires their participations.

Writes the Economist[17],

According to data from the Bank for International Settlements, American banks had just $47 billion in exposure to Italian institutions (including the sovereign) as of June. That's a digestable amount. France, on the other hand, has $416 billion in exposure to Italy. That's very bad news for France, but it's also very bad news for America; American banks have a total exposure to France of some $271 billion. Trouble in Italy is manageable, from an American perspective. Trouble in France makes Americans nervous. But that's not where it ends. British banks have a total of $305 billion in total exposure to France. And American exposure to Britain is close to $800 billion.

There are more ties to worry about, of course. If France and Italy get into serious trouble, then German, Swiss, and Dutch banks will also be in very serious trouble, and British and American exposure to those countries is also enormous. And so the full scope of the danger begins to become clear. It was very important for the euro zone to limit trouble to Greece, Ireland, and Portugal. Europe could handle big losses on Greek, Irish, and Portuguese investments, but Italy is too-big-to-fail and, for everyone but the ECB, too-big-to-save. As far as Britain is concerned, trouble in Spain and Italy is worrisome, but problems in France are devastating. And in America, a sinking France is a big headache, but a crash in Germany and Britain is simply gutting.

And by backstopping the Eurozone, the US Federal Reserve will be conducting a global bailout through swaps as another form of quantitative easing most likely on a scale far larger than in 2008.

This chain of prospective bailout, like the footsteps of Germany and France, will likely drag the US deeper into the crisis which would further diminish her status as foreign reserve currency.

The likely difference will be a more liberal US Federal Reserve in terms of lending that could buy the affected parties some time, but would risk heightened inflation.

Nonetheless dealing with the unfolding Euro debt crisis has increasingly become dependent on central banks.

I would further add that comparing today’s dollar swap facility with that of 2008 would seem misleading.

The accounts where the foreign central bank dollar swaps with the US Federal Reserve did not prevent the US equity market from further deterioration in 2008 were true. But one must be reminded that conditions of 2008 has far been different than today.

Today has seen an unparalleled scale of the ramping up of major central banks’ balance sheets even prior to the dollar swap interest rate cuts.

The US Federal Reserve opened dollar swap access to specific central banks, namely the ECB and the SNB in March of 2008. The FED gradually expanded the amount involved as the US recession deepened.

However immediately after the Lehman bankruptcy, the US dollar swap facility was expanded to cover more central banks, which came along with increased amout of lending (see chart above from the New York Federal Reserve[18]).

As one would note, the first signs of the current EU crisis has already been manifested in 2008 where the ECB was the largest borrower. As I have been saying, today’s crisis has been a continuation of the 2007-2008 bust phase. This means most of what we see as “recovery” represents artificial boosters from the extensive use of the central bank’s balance sheets to shore up the financial system first and the economy second.

And seen from the actions of the US equity markets, the S&P 500’s trough in February 2009 coincided with the culmination of US dollar swap facility borrowings.

To reiterate, the difference then from today has been global central banks actively revving up on their asset purchases.

In fact, not only seen from asset purchasing perspective, today’s global interest rate environment has been the lowest since 2009[19]. In short, even emerging markets have joined the bandwagon of reflating the system through open market operations[20] which also employs asset purchasing.

At the end of the day, the understanding that the policy of inflationism via activist central banking remains as the dominant path in managing of the unfolding debt crisis is what sets our view apart from the mainstream.

Conclusion: Can the Phisix rise amidst the Euro crisis?

So going back to the original premise, can the Phisix rise amidst the Euro crisis?

Again this will critically depend on the feedback loop mechanism from the prospective political actions of global authorities in response to the unfolding conditions.

If global central bankers will inflate massively, far more than the market’s expectations from the adverse effects of the crisis then the answer should be a conditional “yes”. This week’s EU summit could serve as an implicit license for more asset purchases by the ECB.

And there can be no stronger evidence of the abovestated dynamic than the recent showing of ASEAN bourses.

DESPITE the crisis, the Phisix has been down by only about 5.75% from its August peak.

Yet on a year-to-date basis, the Phisix and the Indonesia’s JCI has been UP by about 2%, while Thailand’s SET and Malaysia’s KLSE has been marginally lower. ASEAN’s performance goes in contrast to the returns of major equity markets, whom are down or negative in the range of 10-25%, except for the United States.

True, past performance may not guarantee future outcome. However, for as long as global central banks remains on an inflationary path in support of the asset markets, then we should see divergent or relative price actions which are likely to benefit the Phisix and ASEAN bourses.

And even more, any hiatus from the perceived worsening of the EU crisis, which will likely be treated with the band-aid approach most likely emanating from massive ECB purchases and possibly from the US Federal Reserve, will likely lead to ASEAN bourses outperforming the region or the world.

This means that contra mechanical chartists and consistently wrong mainstream deflationists, my bet is for the Phisix to breach the August highs perhaps sometime within the first quarter of 2012. Again, all these are conditional or subject to the premise where global central banks will continue to unleash waves and waves of inflationism. Otherwise all bets are off.

---

[1] US Global Investors Investor Alert - Are Stars Aligned for a Year-End Rally?, December 2, 2011

[2] See Phisix Should Outperform as Global Markets Improve, November 6, 2011

[3] Mauldin John Time to Bring Out the Howitzers December 3, 2011, HoweStreet.com

[4] See US CPI Inflation’s Smoke and Mirror Statistics, May 18, 2011

[5] Tradingeconomics.com United States Inflation Rate

[6] Reuters.com UPDATE 1-Euro zone inflation holds at 3 pct for third month, November 30, 2011

[7] Tradingeconomics.com Euro Area Inflation Rate

[8] Rothbard, Murray N. The Mystery of Banking, 2^nd Edition, p.71-72 Mises.org

[9] Nowandfutures.com Germany, during the Weimar Republic & the hyperinflation

[10] See Video: Adam Fergusson: Inflationism is Playing with Fire November 15, 2011

[11] See The Coming Global Government Debt Default Binge, June 20, 2011

[12] See Global Risk Environment: The Transition from Red Light to Yellow Light, October 30, 2011

[13] See Hot: Major Central Banks Coordinate Easing On Dollar Swaps, November 30, 2011

[14] Bloomberg.com China Reserve-Ratio Cut May Signal Slowdown December 1, 2011

[15] Guardian.co.uk Angela Merkel vows to create 'fiscal union' across Eurozone, December 2, 2011

[16] North Gary French Fried Banks, December 2, 2011 Lewrockwell.com

[17] R.A Run, run, run, The Economist, Free Exchange, December 1, 2011

[18] Goldberg Linda S., Kennedy Craig, Miu Jason Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs FRBNY Economic Policy Review / May 2011

[19] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[20] Wikipedia.org Open market operations

Video: Jon Stewart on the Bailout Ripoff

World Corruption Perception Index Charts

The following charts from Transparency International

Of the 183 countries surveyed, two thirds have been seen as “corrupt”.

Meanwhile the Philippines has been ranked 129^th with a score of 2.6, an ‘improvement’ from last year’s score of 2.4 and from the 134^th spot. Although I have yet to ascertain on the aspects where the Philippines have made ‘improvements’ on.

One more observation: Given that Somalia’s transitional government has just been a little over 1 year old, it would signify an oddity to include her in the index.

At the end of the day, Transparency International corruption perception index represents merely ‘perception’ or estimates from surveys, which could likely be off from the reality.

Forbes America’s Most Promising Companies: Technology Firms Leads

From Forbes.com

The companies on our AMPC list hail from 22 industries, with software-and-services taking the biggest slice (35%). Some fast facts: 90 have raised outside capital; 70 have a CEO who is also one of the founders; 12 have one younger than 35 years old; 7 have yet to generate revenue; and one sells a burger topped with pastrami. None of these outfits may blossom into the next Google or Apple, but all, it appears, have bright futures.

Read the rest and see the list here

Technology companies taking the lead represents as more signs of the evolving transition to the information age.

Video: JP Auclair Street Skiing Segment

Amazing music video

JP Auclair Street Segment (from All.I.Can.) from Sherpas Cinema on Vimeo.

Audio: Property Rights, Land Titling in the India

From NPR (hat tip divisionoflabour.com)



Notable quote from Corey Flintoff:

The plot of land is tiny, barely large enough for a small house and a backyard garden for fruits and vegetables. But it's an address, and if you have an address that belongs to you, you can get political identity papers, access to credit, and eligibility for government help programs. Without an address, you literally don't count.

Quote of the Day: Trade Spreads Culture

Every increase in trade facilities aids in the spreading of cultural values; and, contrariwise, every interference with trade results in a corresponding retardation of cultural progress. In other words, the freer the trade, the greater the advance in civilization, and the more restrictions there are on trade, the surer will be the retrogression of civilization.

That’s from the great Frank Chodorov in the 1940 essay “Civilization or Caveman Economy?” (source Café Hayek’s Don Boudreaux)

Zimbabwe’s Gideon Gono Hearts the Chinese Yuan

Below is an interesting article about the eccentric Gideon Gono of Zimbabwe.

From New Zimbabwe (bold emphasis mine)

RESERVE Bank governor Gideon Gono has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis.

Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value.

Speaking in Gweru last Saturday, Gono said: “The extraordinary happenings in Europe where economic power houses in the Euro-zone have been hit by a debt crisis deserves extraordinary measures, especially here in Zimbabwe where we have adopted the U dollar as the major currency in our multi-currency regime.

"With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse.

“As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy.”

China is now Zimbabwe’s biggest trading partner, with the Asian giant absorbing most of the country’s mineral and agricultural produce.

Vice President Joice Mujuru first raised the possibility of adopting the yuan in September last year, saying it would be a “logical step” and could help solve some of the country’s liquidity constraints.

The multiple currency regime announced in January 2009 has been fraught with difficulties. Retailers are supposed to accept the Euro and the British pound but those two currencies have never caught on, with most transactions being conducted in United States dollars, the South African rand and the Botswana pula.

This serves as a noteworthy example of the pot calling the kettle black.

Mr. Gono, who ironically engineered the death of Zimbabwe’s currency, the Zimbabwe dollar, has not given up on his conceit of supposedly knowing what is best for their country, yet has the chutzpah to bash the US dollar when Ben Bernanke has simply been mimicking Mr. Gono's policies.

Zimbabweans rejected Mr. Gono’s hyperflated dollar following years of hyperinflationary depression which eventually led to its ‘abandonment’.

Yet Zimbabwe’s post hyperinflation transition exhibits a socio-economic phenomenon of spontaneous order from politically induced chaos.

One would note that following the demise of the Zimbabwe dollar, the market CHOSE or expressed preference for the US dollar, the South African rand and the Bostwana pula over the Euro and the British pound as alternative replacements for medium of exchange.

And another interesting facet is that this serves as evidence that markets are dominant over politics or that people will adjust to the conditions even outside of government’s influence.

China’s increasing trade with Zimbabwe may possibly lead to more use of the yuan, but this would depend on Zimbabweans than from Mr. Gono. The hyperinflationary episode has eroded much of the political capital of Zimbabwean government which will need to rebuilt before the marketplace will regain their trust on them.

For now, spontaneous order governs the Zimbabwean marketplace, which has impelled for a "nascent recovery" of the ravaged economy of Zimbabwe.

Mr. Gono can keep talking, but little of what he says will be taken seriously.

Stanford University Expands Free Online Courses

I’ve been pointing out how the information age will reconfigure and transform almost every aspect of our lives including education. (see here here and here).

Education’s evolving online platform will put a lot of pressure to the incumbent school models designed out of the industrial age. And today’s high cost of tuition will eventually crumble, not only from online competition but also from globalization--where education will become less dependent on local or territorial access, and instead, will increasingly be facilitated by distance learning.

From ZDNET

A couple of months back, we reported on how some IT professors at Stanford University were opening up their courses for the world to participate, with no tuition cost. This fall, courses onIntroduction to Artificial Intelligence, Introduction to Databases and Introduction to Machine Learning were launched, all delivered between October and December. (I have been participating in the AI course, it’s really extremely well presented and informative.)

Three million people have checked out the AI course page since it was announced (now doubt driven by my blog post here), and course co-professor Peter Norvig reports that 35,000 students have stuck with the course and exams. There are also 135 students taking the course onsite, Norvig is quoted as saying in the Good News site,

Now it is being reported that due to the great success of the program, Stanford plans to offer eight more computer science classes beginning in January, including Software as a Service,Computer Science 101, Machine Learning, Cryptography, Natural Language Processing, Human Computer Interaction, Design and Analysis of Algorithms I, and Probabilistic Graphic Models.

Here is the write-up on the SaaS course:

“This course teaches the engineering fundamentals for long-lived software using the highly-productive Agile development method for Software as a Service (SaaS) using Ruby on Rails. Agile developers continuously refine and refactor a working but incomplete prototype until the customer is happy with result, with the customer offering continuous feedback. Agile emphasizes user stories to validate customer requirements; test-driven development to reduce mistakes; biweekly iterations of new software releases; and velocity to measure progress. We will introduce all these elements of the Agile development cycle, and go through one iteration by adding features to a simple app and deploying it on the cloud using tools like Github, Cucumber, RSpec, RCov, Pivotal Tracker, and Heroku.”

Being in the heart and brains of Silicon Valley, Stanford professors will also be offering two online courses on entrepreneurship. The entrepreneurship courses include Technology Entrepreneurship—a class on how to launch a successful startup, and The Lean Launchpad, which will teach how to turn “a great idea into a great company.”

At zero bound tuition costs, education will eventually become democratized worldwide, will not require or justify taxpayer funding and will become increasingly specialized.

The Orwellian Approach of Mainstream Media

From Lew Rockwell.com

Today, mainstream media coverage uses programmed distortion, confusion, even outright lying when its Money Power masters order it to support the “official story” on any major political, economic or financial process. When looked at closely, however, the “official story” of things can be seen to be inaccurate, misleading, often hardly believable if not downright stupid.

Examples of this: Iraq’s inexistent WMD’s leading to the invasion and destruction of that country; global mega-banker bail-outs with taxpayer money; irrational US diplomatic, military, financial and ideological alignment to Israeli objectives; “we-killed-Osama-Bin-Laden-and-dumped-his-body-into-the-sea”; and the wide array of “whodunits” surrounding 9/11 in New York and Washington, 7/7 in London, the AMIA/Israeli Embassy attacks in Buenos Aires in 1992/1994, and – of course – that all time favorite: who shot JFK…?…

How they do it…

The Seven Step Mainstream Media Country Destruction Guide

1. First, they start by targeting a country ripe for “Regime Change”, and brand it a “rogue state”; then…

2. They arm, train, finance local terrorist groups through CIA, MI6, Mossad, Al-Qaeda (a CIA operation), drug cartels (often CIA operations) and call them “freedom fighters”; then…

3. As mock UN Security Council Resolutions are staged that rain death and destruction upon millions of civilians, they call it “UN sanctions to protect civilians”; then…

4. They spread flagrant lies through their “newsrooms” and paid journalists, and call it "the international community’s concerns expressed by prestigious spokespeople and analysts…” then…

5. They bomb, invade and begin to control the target country and call it “liberation”; then…

6 As the target country falls fully under their control, they impose “the kind of democracy that we want to see” (as Hillary Clinton before visiting Egypt and Tunisia on March 10, 2011), until finally…

7. They steal appetizing oil, mineral and agricultural reserves handing them over to Global Power Elite corporations, and impose unnecessary private banking debt and call it “foreign investment and reconstruction.”

Their keynotes are: Force and Hypocrisy, which they have used time and again to destroy entire countries, always in the name of “freedom”, “democracy”, “peace” and “human rights”. Utmost force and violence is used to achieve their ends and goals.

Read the rest here

Mainstream media has served as traditional and conventional channels for political interests to broadcast propaganda, even in the Philippines.

Here, the local theme may be different from the above, but the objective has been the same: to justify the use or expansion of political control over the populace--mostly done through abstractions.

As George Orwell wrote,

The inflated style is itself an kind of euphemism. A mass of Latin words falls upon the facts like soft snow, blurring the outlines and covering up all the details. The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish squirting out ink. In our age there is no such thing as "keeping out of politics." All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia.

Seth Godin Explains On the Margin

Products and services succeed one person at a time, as the word slowly spreads. Customers defect one person at a time, as hearts are broken and people are disappointed. Doors open, sure, but not all at once. One at a time.

One at a time is a little anticlimactic and difficult to get in a froth over, but one at a time is how we win and how we lose.

Another effusive quote from my favorite marketing guru Seth Godin.

I may add that the the ideological war for liberty will be won or lost one at a time.

Swap Facility Backdoor for Quantitative Easing

Writes PIMCO’s Tony Crescenzi at the CNBC… (bold emphasis original) [hat tip Bob Wenzel]

Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed’s liquidity swap line in late 2008 was the main cause of a surge in the Fed’s monetary base at that time. The peak for the swap line was about $600 billion in December 2008. Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing .

So there you have it, the foundations of QE 3.0 has been put in place. QE 3.0 seems now a matter of formality.

Hot: Major Central Banks Coordinate Easing On Dollar Swaps

Wow. Now we are seeing some real heavy weightlifting! The world’s major central banks have embarked on a major coordinated credit easing operation.

This should be another "I told you so moment". As I earlier wrote

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.

From Bloomberg, (bold emphasis mine)

The Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent’s sovereign-debt crisis.

The interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the program, which was also joined by the Bank of Canada, Bank of England, Bank of Japan (8301), and Swiss National Bank (SNBN) are involved in the coordinated action.

The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they’d failed to boost the region’s bailout fund as much as planned….

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

The dollar swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5…

Separately, China two hours earlier cut the amount of cash that banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

The Frankfurt-based ECB, which says it is up to governments to stem the two-year-old debt crisis, unexpectedly cut its benchmark interest rate Nov. 3 as the turmoil threatens to drag the euro area into recession.

Refinancing Operation

Yesterday the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros. The ECB offers unlimited funding to euro- area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

Well, central banks are defying Walter Bagehot’s rule of lending freely but at penalty rate. Major central banks have currently been lending freely and promoting moral hazard which eventually will backfire.

The Fed will essentially be printing money to support the Euro through the ECB, as well as other major central banks.

Again central bankers are dabbling with Pandora’s Box of inflationism

No wonder gold prices, European and US stocks have been surging as of this writing.

Again profit from folly.

How Money Dies: The Bulgarian and Romanian Experience

From the EU Observer, (bold emphasis mine)

Fifteen years ago, both Bulgaria and Romania went through rampant inflation linked to a financial crisis. Bucharest narrowly avoided the collapse, but Sofia was less fortunate and experienced a meltdown of the sort Greece is currently trying to prevent.

"Those were very bad times. Every day my salary was worth less and less, and there were fewer things I could buy with it," says Krassimira Komneva from the Sofia-based Most Foundation, an employment and education outfit.

Back in 1996, Komneva was doing office work in a construction company. She recalls how the salary was late when the currency collapsed. "When I received it one month later, it was worth much less than expected. We all hurried to buy food, bread, oil. The prices were just crazy," she recalls.

According to the International Institute of Finance, inflation in Bulgaria hit 174.4 percent in 1996 and a record of 1,077.5 percent the next year. Its curency, the lev, went from 500 per US dollar in late 1996 to 2,200 per US dollar in February 1997.

Food shortages and a harsh winter drove people to despair, with mass rallies ultimately forcing out the post-Communist government largely blamed for the disastrous policies that led to the currency collapse.

"For the average people, it was just terrible. Nobody really understood what happened, the only thing we could see was that it all ended in disaster," says Komneva.

The central bank was subsequently stripped of its powers as the country entered in a "currency board" agreement with the International Monetary Fund (IMF) and other international lenders in July 1997, with the lev being pegged to the German D-Mark. Aimed at lowering inflation, boosting national reserves and restoring market confidence in the country, the currency board nevertheless seriously dented Bulgaria's sovereignty.

Romania only narrowly avoided a similar fate in the same period.

According to former President Emil Constantinescu, elected to power in November 1996 as the first non-Communist leader of the country, the country's national reserves when he took over had just 600 million US dollars, compared to current levels of €20 billion. At the same time, Romania had taken up some 5 billion US dollars in loans, which had to be paid back during his mandate.

"All of this led the IMF to suggest Romania should declare default on its debt. The second day after Parliament had confirmed my mandate, I received international envoys who told me this and gave it to me in writing," Constantinescu said in a 2006 interview with Gardianul newspaper.

Like Bulgaria, Romania was struggling with failing banks - both state and private-owned. Taxpayers' money was poured into the ailing state giants to help save them after they had lent billions to former regime protegees and their respective companies.

Meanwhile, most so-called private banks were in fact pyramidal schemes "designed to steal the money from regular citizens, set up by the mafia of the former Securitate (Communist secret police)" Constantinescu recalled.

Inflation peaked at 150 percent in 1997 and Romania had to seek an IMF loan of 500 million US dollars. It also had to privatise and profoundly restructure its state enterprises. But it avoided the embarrassment of having its central bank replaced with a currency board.

Not everyone was miserable during those years in Romania. To 41-year old trader Paul Marian, those were lucrative times in Bucharest. He remembers people flocking to his exchange office to get rid of the quickly depreciating lei and turn them into more stable D-Marks, US dollars or Swiss francs.

Some observations;

The Bulgarian and Romanian experience exhibits similar dynamics which characterizes today’s crisis: Crony or State capitalism and the welfare state has allowed State Owned and politically privileged private banks to profit from and game the political order. The ensuing massive fiscal imbalances from rescuing these banks eventually got funded by respective central banks which stoked hyperinflation.

Hyperinflation ravages an economy (destroys the division of labor) and fuels political unrest or destabilization.

Fiscal and monetary discipline ended these hyperinflationary episodes.

Yet the mainstream cannot seem to read through or imbue on these lessons and mainly prescribes inflation to the current set of parallel political economic problems

As the great Professor Ludwig von Mises wrote,

But the administration does not want to stop inflation. It does not want to endanger its popularity with the voters by collecting, through taxation, all it wants to spend. It prefers to mislead the people by resorting to the seemingly non-onerous method of increasing the supply of money and credit. Yet, whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public.

With inflation as well as with taxation, it is the citizens who must foot the total bill. The distinguishing mark of inflation, when considered as a method of filling the vaults of the Treasury, is that it distributes the burden in a most unfair way, overcharging those who are least able to bear it.

Prescribing inflation is like playing with fire. Eventually most of us risks getting burned.

Video: The Rocketeer Goes Live

I recall a 1991 film the Rocketeer which, according to Wikipedia.org,

tells the story of stunt pilot Cliff Secord who discovers a jet pack that enables him to fly. His heroic deeds attract the attention of Howard Hughes and the FBI, as well as sadistic Nazi operatives.

Two decades later, a modern day ‘Rocketeer’, monikered the Jetman, is shown in the video below flying along with jet fighters…

The accelerating pace of technological innovation has simply been amazing.

Blaming Technology to Justify Tobin Tax

The Economist writes, (bold emphasis mine)

MOORE'S Law, an observation that the "number of transistors incorporated in a chip will approximately double every 24 months", has held broadly true since the creation of the first transistor in 1947. Computing power has increased some 600-fold over the past 15 years; 2.6 billion transistors can now be crammed onto a single computer chip. This advancement has facilitated the ability to trade ever-larger volumes of shares. During the 1960s, just under 17 billion shares were traded on the New York Stock Exchange. That amount was surpassed over just four average trading days in September 2011. And while the number of shares listed has increased by some 50-fold, annual share turnover has increased from an average of 17% in the 1960s to nearly 300% between 2008 and 2011. In theory all this activity ought to lead to more accurate pricing of stocks and more efficient allocation of capital. In practice there is a lot of tail-chasing going on. That has led to calls for a tax on financial transactions, the Tobin tax, which advocates argue would be a painless way of boosting government finances.

While it may be true that technological innovations may have boosted stock market trading volumes via widespread dispersion of information, deepening connectivity, algorithm based and real time trades, growing array of trading instruments and others, it doesn’t follow that “a lot of tail chasing” or market volatilities can be blamed on technology enhancements.

This seems to be a non-sequitur used to justify taxes on financial transaction which will only lead to more government spending based debt accumulation which ironically has been the root of today’s crisis and the consequent market volatilities.

The article also excludes the effects of the intensive politicization of the marketplace which leads to massive price distortions, malinvestments and business cycles.

Beware of politically biased commentaries veiled as expert opinions.

Canada Deepens Free Market Policies

It’s time to be bullish Canada. Here is why.

From Reuters (hat tip Mark Perry)

Canadian Finance Minister Jim Flaherty said on Sunday the government would eliminate tariffs on dozens more products used by Canadian manufacturers, aiming to lower their costs and encourage more hiring.

The initiative would scrap custom duties on 70 items used by businesses in sectors such as food processing, furniture and transportation equipment.

Flaherty, who estimated the tariff cuts would save Canadian businesses C$32 million ($30.5 million) a year, said the cuts were part of the Conservative government's overall free trade policy.

"We believe in free trade in Canada," Flaherty said on CTV's "Question Period" program. "Some of these old-fashioned tariffs get in the way. So we're getting rid of them."

As part of its Economic Action Plan to pull Canada through the global slowdown of 2008-09, the government has eliminated more than 1,800 tariff items, providing about C$435 million a year in tariff relief. Its stated goal is to make Canada a tariff-free zone for manufacturers by 2015.

The tariff move comes as Canada and the European Union negotiate a deal to knock down trade barriers on goods and services and boost two-way trade by 20 percent.

Cheers Mr. Flaherty!

Again, free markets seem to be gaining political headway at the margins.

Video: Ron Paul's Plan for Monetary Freedom

In the following interview with Judge Andrew Napolitano, Ron Paul discusses the possible transition process towards 'sound money' or monetary freedom from the current fiat standard.

Video: Milton Friedman: Abolish the Fed!

From Liberty Pen : Excerpts from an interview with Hillsdale College President Larry Arnn on May 22, 2006, in which Milton accurately forecasts the dangers of big government and advocates abolishing the FED (Hat tip Don Boudreaux)

The illustrious Mr. Friedman, who advocated activist monetary policy for most of his life, seemed to have a change of heart during the last moment.

President Obama Job Approval Ratings: Worst US President

From US News

President Obama's slow ride down Gallup's daily presidential job approval index has finally passed below Jimmy Carter, earning Obama the worst job approval rating of any president at this stage of his term in modern political history.

Since March, Obama's job approval rating has hovered above Carter's, considered among the 20th century's worst presidents, but today Obama's punctured Carter's dismal job approval line. On their comparison chart, Gallup put Obama's job approval rating at 43 percent compared to Carter's 51 percent.

Back in 1979, Carter was far below Obama until the Iran hostage crisis, eerily being duplicated in Tehran today with Iranian protesters storming the British embassy. The early days of the crisis helped Carter's ratings, though his failure to win the release of captured Americans, coupled with a bad economy, led to his defeat by Ronald Reagan in 1980.

According to Gallup, here are the job approval numbers for other presidents at this stage of their terms, a year before the re-election campaign:

-- Harry S. Truman: 54 percent.

-- Dwight Eisenhower: 78 percent.

-- Lyndon B. Johnson: 44 percent.

-- Richard M. Nixon: 50 percent.

-- Ronald Reagan: 54 percent.

-- George H.W. Bush: 52 percent.

-- Bill Clinton: 51 percent.

-- George W. Bush: 55 percent.

What's more, Gallup finds that Obama's overall job approval rating so far has averaged 49 percent. Only three former presidents have had a worse average rating at this stage: Carter, Ford, and Harry S. Truman. Only Truman won re-election in an anti-Congress campaign that Obama's team is using as a model.

Change we can believe in? I guess not.

The US Federal Reserve is Corrupt

Café Hayek’s Professor Robert Russell is right: The US Federal Reserve is Corrupt

From Bloomberg, (bold emphasis mine)

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger…

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

This serves as more proof of a political economic system gamed by special interests groups along with the political class. That's because vested interest groups represented by the banking class serves as the principal intermediaries for the welfare-warfare state and whom have been protected or bankrolled by the US Federal Reserve as shown above.

I might add that since the FED is an integral part of the complicit political arrangement then this implies that the incumbent political system is corrupt.

Ron Paul is right. End the FED. Abolish the welfare state. Reinstate sound money.

Philippines as Call Center Capital of the World Has Not Been about Wages

If markets are to function freely, we are likely to see division of labor and competition based competitive advantage as the main force driving economic growth.

One such remarkable evidence has been the booming call center industry of the Philippines which has recently been enthroned as “A New Capital of Call Centers” by the New York Times.

And contra Keynesians, who see economics as operating in a homogenous dynamic, the local boom HAS NOT BEEN about wage LEVELS.

From the New York Times (bold emphasis mine)

Over the last several years, a quiet revolution has been reshaping the call center business: the rise of the Philippines, a former United States colony that has a large population of young people who speak lightly accented English and, unlike many Indians, are steeped in American culture.

More Filipinos — about 400,000 — than Indians now spend their nights talking to mostly American consumers, industry officials said, as companies like AT&T, JPMorgan Chase and Expedia have hired call centers here, or built their own. The jobs have come from the United States, Europe and, to some extent, India as outsourcers followed their clients to the Philippines.

India, where offshore call centers first took off in a big way, fields as many as 350,000 call center agents, according to some industry estimates. The Philippines, which has a population one-tenth as big as India’s, overtook India this year, according to Jojo Uligan, executive director of the Contact Center Association of the Philippines.

The growing preference for the Philippines reflects in part the maturation of the outsourcing business and in part a preference for American English. In the early days, the industry focused simply on finding and setting up shop in countries with large English-speaking populations and low labor costs, which mostly led them to India. But executives say they are now increasingly identifying places best suited for specific tasks. India remains the biggest destination by far for software outsourcing, for instance.

Executives say the growth was not motivated by wage considerations. Filipino call center agents typically earn more than their Indian counterparts ($300 a month, rather than $250, at the entry level), but executives say they are worth the extra cost because American customers find them easier to understand than they do Indian agents, who speak British-style English and use unfamiliar idioms. Indians, for example, might say, “I will revert on the same,” rather than, “I will follow up on that.”…

In addition to language skills, the Philippines has better utility infrastructure than India — so companies spend little on generators and diesel fuel. Also, cities here are safer and have better public transportation, so employers do not have to bus employees to and from work as they do in India.

The Philippine call center boom has been about serving the needs of consumers, where consumers perceive that the Philippine preference for American English has been providing her the comparative edge, and of the more superior utility infrastructure investments made by local companies.

Quoting David Ricardo (Mises Wiki) [bold emphasis mine]

Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labor most effectively and most economically: while by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.

ASEAN to Join Credit Easing Cycle Bandwagon, Philippines Launch Stimulus

As pointed out in my earlier blog, global central banks are on path to an interest rate easing cycle anew. Asian-ASEAN central bankers will also be joining the bandwagon.

From Bloomberg,

Asian central banks from Thailand to the Philippines may be preparing to cut interest rates in coming weeks as an escalating impact from Europe’s debt crisis prompts economists to scale back growth forecasts for the region.

Thailand will cut its benchmark one-day bond repurchase rate tomorrow, all 16 economists surveyed by Bloomberg News predict. Pakistan’s central bank may add to its previous rate cuts or refrain from raising borrowing costs, a separate survey showed. Two analysts expect the Philippines to cut its key rate on Dec. 1, the first predictions for an easing since August 2009 based on Bloomberg surveys.

Morgan Stanley lowered its Asian economic estimates this week as the region that led the rebound from the 2009 global recession sees export demand impaired by Europe’s sovereign-debt turmoil. Asia’s currencies and stocks have fallen in the past month as investors shun emerging-market assets and the faltering growth outlook prompts companies including Philippine Long Distance Telephone Co. to cut profit forecasts….

The last time Asia went into an interest rate easing spree was during the immediate post Lehman crisis in the last quarter of 2008 until 1^st quarter 2011

And to reminisce on what had happened to ASEAN equity markets…. (chart from the World Bank)

…that cycle stoked the seeds of the boom phase in ASEAN equity markets (chart from Bloomberg).

The Philippine Phisix (red), Malaysia’s KLSE (yellow), Indonesia’s JCI (green) and Thailand’s SET (orange) have all been substantially up (only Malaysia has been up by less than 100%, Indonesia has more than doubled)

While I think that this may spark a similar boom…

…one must be reminded that this cycle will be different. ASEAN’s inflation rate has been substantially elevated compared to 2008 (chart from World Bank). This means that the easing cycle via the interest rate channel will be limited. And that any further easing may fuel the risks of accelerated inflation.

And because of the constrained latitude of interest rate maneuvering, governments will be resorting to other forms of stimulus such as fiscal spending.

From the same Bloomberg article,

Bangko Sentral ng Pilipinas may consider easing its policy rate, Economic Planning Secretary Cayetano Paderanga said after the report. Twelve of the 14 economists surveyed expect the central bank to keep the benchmark at 4.5 percent, with two predicting a cut to 4.25 percent.

President Benigno Aquino unveiled a 72 billion-peso ($1.6 billion) fiscal stimulus package in October, joining neighbors including Malaysia and Indonesia in seeking to protect growth. Bank Indonesia unexpectedly cut rates by half a percentage point to a record low this month to 6 percent.

Fiscal stimulus essentially represents a tradeoff between future growth and current growth, as government spending borrows from future to finance the present.

The goal is to boost Keynesian constructed (spending based) statistics rather than to generate long term jobs as determined by the market.

Think of the irony, if economic growth is generated by government spending why not make spending infinite. Yet spending will have to be financed by taxes (also borrowing) or inflation which leads to either default or hyperinflation and political upheavals.

In reality, government spending will be directed to non-market or political (mostly vote generating, e.g. infrastructure) activities which will signify as 72 billion peso worth of wastage and a 72 billion peso window for corruption.

Thus, the "protection of growth" should be seen in the light of protecting the growth of politicians, allies and cronies rather than the public, as taxpayer money will be diverted into non productive engagements. Also this implies higher taxes ahead which again will increase the burden for investments and competitiveness and more unemployed workers.

So even as the current administration prosecutes the former administration for alleged misconduct, the fiscal spending program signifies a huge room for the same set of malfeasant actions.

Thus, politics is about grabbing credit (to get ratings approval or generate votes) by stepping on someone else’s toes, but at the same time providing opportunities for the same set of inappropriate actions.

And the best way to do this is to divert public’s attention so as to camouflage their actions in the name of "protecting economic growth" and of "anti corruption" measures through public arraignment or trial-by-publicity of political adversaries. In this context, personality based politics in the shadow of welfare-pork barrel politics as explained by Professor Robert Higgs seems fitting.

Nonetheless all those credit creation and spending will have to flow somewhere.

Once the interest rate reductions and the stimulus are activated, the fuse to the next leg of the bubble cycle would have been lit.

Profit from folly.

Global Central Banks Ease the Most Since 2009

Here is what I wrote last night

Yet what sets the today’s markets apart from the 2008, Japan’s stagnation and or the Great Depression has been the central bank activism which as I have been reiterating has been navigating on uncharted treacherous waters.

Artificially manipulated interest rate together with money printing results to relative pricing of assets, which all comprises the inflation cycle.

For a little validation of my observations, here’s the latest Bloomberg article with the particulars, (bold emphasis mine)

Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europe’s sovereign-debt turmoil.

The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. Six more countries, including Mexico and Sweden, probably will cut benchmark interest rates by the end of March, JPMorgan Chase & Co. forecasts.

With national leaders unable to increase spending or cut taxes, policy makers including Australia’s Glenn Stevens and Israel’s Stanley Fischer are seeking to cushion their economies from Europe’s crisis and U.S. unemployment stuck near 9 percent. Brazil and India are among countries where easing or forgoing higher interest rates runs the risk of exacerbating inflation already higher than desired levels.

“We’ve seen central banks that were hawkish begin to turn dovish” against a “backdrop of austerity” in fiscal policy, said Eric Stein, who co-manages the $6.6 billion Eaton Vance Global Macro Absolute Return Fund in Boston. “You could debate how bad it will be for growth, but it can’t be good,” he said of the challenges facing the world economy.

Global Rate

Monetary easing will push the average worldwide central bank interest rate, weighted for gross domestic product, to 1.79 percent by next June from 2.16 percent in September, the largest drop in two years, according to data and projections from JPMorgan, which tracks 31 central banks. The number of those banks loosening credit is the most since the third quarter of 2009, when 15 institutions cut rates, the data show…

While central banks in Australia and Indonesia have reduced borrowing costs and the Bank of Japan increased asset purchases in October, other countries in Asia may be slower to ease policy.

The People’s Bank of China has raised its main interest rate three times this year to fight inflation. India’s central bank lifted rates on Oct. 25 by a quarter of a percentage point, while signaling it was nearing the end of its record cycle of increases as the economy cooled.

“Most central banks will wait and see how the situation develops in Europe,” said Joseph Tan, Singapore-based chief economist for Asia at Credit Suisse Group AG’s private-banking division. “If we do have a continuation of the political impasse in Europe and that leads to a recession in Europe, and the U.S. economy starts to slow again, then Asian central banks will cut interest rates.”…

Europe’s turmoil has led Australia, Brazil, Denmark, Romania, Serbia, Israel, Indonesia, Georgia and Pakistan to reduce interest rates since late August. Chile, Mexico, Norway, Peru, Poland and Sweden are also forecast by JPMorgan Chase to lower borrowing costs by the end of the first quarter, while Australia, Brazil, Indonesia, Israel and Romania may cut rates further.

In the U.S., Federal Reserve Chairman Ben S. Bernanke is considering further actions to lower borrowing costs in the world’s biggest economy. He vowed in August to keep the benchmark interest rate close to zero through at least mid-2013. The central bank in September decided to replace $400 billion of short-term securities it holds with longer-term debt to reduce rates on extended-maturity debt.

The article doesn't say it but global central bank asset purchases have been unprecedented, although in terms of interest rate rates--yes, they are 2009 lows.

Yet given the above, there will be NO deflation coming as central banks continue to aggressively ease. I even expect more coming from the ECB

On the other hand, prepare for a boom bust cycle in parts of the global economy and nasty inflation ahead.

New Zealand’s John Key’s Victory, A Win for Free Markets

Despite all the troubles confronting the world today, forces of globalization and economic freedom appear to be getting some headway in the realm of politics.

From Bloomberg,

New Zealand Prime Minister John Key’s re-election with his party’s biggest mandate in 60 years will strengthen a government push for free-market policies as he pursues welfare cuts and asset sales to balance the budget.

Key’s National Party won 48 percent of the vote on Nov. 26, up from 45 percent three years ago, allowing him to form the next government with support from political allies in parliament. Electricity companies Mighty River Power Ltd. and Genesis Power Ltd. may be among the first considered for share sales, the prime minister signaled today, as his administration focuses on divesting some state assets.

A second term allows Key to expand policies aimed at reducing the economy’s reliance on government spending, an effort that was slowed in the past three years by the need to help the country recover from the global financial crisis and New Zealand’s deadliest earthquake in 80 years. The leader, whose popularity survived a credit-rating downgrade, has pledged to return the budget to surplus by 2014-15 or sooner as soaring borrowing costs imperil indebted European nations.

Information and education are the only means where free market/classical liberalism forces can generate political following. Nevertheless today’s technology enabled connectivity platforms (social media) should help facilitate the campaign for liberty.

John Key’s win plus the recent defeat of the Socialist government or a victory by Conservatives in Spain are refreshing examples of marginal changes in the political sphere that has been happening across the world.

Quote of the Day: Welfare State and Personality Based Politics

As the ranks of those dependent on the welfare state continue to grow, the need for the rulers to pay attention to the ruled population diminishes. The masters know full well that the sheep will not bolt the enclosure in which the shepherds are making it possible for them to survive. Every person who becomes dependent on the state simultaneously becomes one less person who might act in some way to oppose the existing regime. Thus have modern governments gone greatly beyond the bread and circuses with which the Roman Caesars purchased the common people’s allegiance. In these circumstances, it is hardly surprising that the only changes that occur in the makeup of the ruling elite resemble a shuffling of the occupants in the first-class cabins of a luxury liner. Never mind that this liner is the economic and moral equivalent of the Titanic and that its ultimate fate is no more propitious than was that of the “unsinkable” ship that went to the bottom a century ago.

From Professor Robert Higgs.

Oh, this very much applies to the Philippine political setting. Think Pork Barrel politics and the 250 political dynasties. And that's why the search for the elusive efficacious leader who is supposed to deliver us from hardship will always be just that: a constant source of frustration. People don't realize that the much sought after miracle of effectiveness and justice from the nanny patriarch state will always be a mirage.

More Signs of the Coming Inflation Tsunami from the ECB

Desperate times call for desperate measures.

In politics, supposed principled stance frequently gives way to convenience, as I have been predicting here and here.

From Reuters

France and Germany are planning a quick new pact on budget discipline that might persuade the European Central Bank to ramp up its government bond purchases, Welt am Sonntag reported on Sunday.

Echoing a Reuters report on Friday from Brussels, the Sunday newspaper said the French and German leaders were prepared to back a deal with other euro countries that might induce the ECB to intervene more forcefully to calm the euro debt crisis.

The newspaper report quoted German government sources as saying that the crisis fighting plan could possibly be announced by German Chancellor Angela Merkel and French President Nicolas Sarkozy in the coming week.

In an advance release before publication, Welt am Sonntag said that because it would take too long to change existing European Union treaties,euro zone countries should just agree among themselves on a new Stability Pact to enforce budget discipline - possibly implemented at the start of 2012.

At the end of the day, this will all be about defending the political syndicate of the welfare state-central bank-banking cartel.

Watch gold fly.

UK Prepares for Euro Collapse

From the Telegraph

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.

Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

“It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.

Greece has seen several outbreaks of civil disorder as its government struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses.

Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash.

I don’t trust how politicians and bureaucrats assess and analyze events. Usually more planning extrapolates to the extension of political control over the citizenry under the guise of sundry crises.

In the memorable words of the great Libertarian H.L. Mencken

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

On the other hand, could this signify as more signs of a crowded trade?

Video: Andrew Napolitano: What If Freedom's Greatest Hour of Danger Is Now?

A rousing message of Freedom from Judge Andrew Napolitano.


(hat tip Bob Wenzel)

Steve Leuthold: ‘I’m Scared to Death of the Markets’, but He’s Buying

This stuff caught my eye. Star Tribune’s Kara MCGuire quotes the veteran investor Steve Leuthold:

I'm scared to death of the market.

Here’s why Mr. Leuthold is scared.

"I've been scared to death of the market before and it's been the time to buy," he said, pointing out that the hundreds of data points the Leuthold investment team use to make buy-and-sell decisions have turned positive. Their core portfolio is now half invested in stocks -- up from 30 percent earlier this year.

"You do have pretty good valuations here, and we do think the economy is OK. We're not expecting a double dip -- we're probably going to see 2.5 to 3 percent GDP growth next year." He also expects a "Band-Aid" solution in Europe to address the uncertainty coming from Greece, Italy and Spain.

But several alarming issues loom: gridlock in Washington, the U.S. deficit and concerns about the long-term value of the U.S. dollar, to name three on the top of Leuthold's mind.

He said the last time individuals faced an economic crisis of this magnitude was in the 1970s. But investors who lost faith in the market back then could invest in Treasury bills and earn 15 percent in interest.

"Now there is nowhere to go with safety where you can get a decent return on your money," said Leuthold, who thinks the policy of keeping interest rates low is really hurting average investors, who are in over their heads to begin with.

Not far from how I see current developments.

Yet he shares some tips: (bold original)

"Opinions are for show; numbers are for dough." In other words, don't make investment decisions based on emotions, news reports or cocktail talk. Do your research. If you have a tendency to make emotional decisions, consider an asset allocation fund made up of a mix of stocks and bonds with a manager paid to worry for you.

Be conservative. Save more, spend less because the idea that the future will always be better, well, "That's not necessarily true."

Don't follow the herd. Although being in the middle of the herd is the most comfortable place to be, consider getting out of your comfort zone. "When you see everybody go one way, look at why they may be wrong."

Go global. Investors should work toward having 50 percent of their portfolio based outside the United States, particularly in Asia. "The U.S. was the economic king of the world after World War II," Leuthold explained. "We had this huge wave behind the U.S. that gave us superior growth for 30 years. Then all of a sudden [other countries] started catching up. ... We go along like we're still the kings and can afford deficits as far as the eye can see and something is going to happen magically to support all these retired people with Social Security and Medicare. And it's a pipe dream."

Remember that investing isn't about the warm fuzzies. It can be downright unnerving. One short-term, tactical play is to consider investing in European stocks with global earnings. He mentioned Nestlé, Siemens and Unilever.

In short, use your common sense and don’t follow your confidence fairy or ‘animal spirits’.