Is the US Still the “Land of the Free”?

A law professor at the Washington Times enumerates incisively 10 reasons why the US has been losing its freedom. The law professor points out that despite such dynamics, paradoxically Americans still want to be seen as “the land of the free”.

Writes Jonathan Turley, which I quote in the entirety (bold emphasis mine; hat tip Bill Bonner)

Every year, the State Department issues reports on individual rights in other countries, monitoring the passage of restrictive laws and regulations around the world. Iran, for example, has been criticized for denying fair public trials and limiting privacy, while Russia has been taken to task for undermining due process. Other countries have been condemned for the use of secret evidence and torture.

Even as we pass judgment on countries we consider unfree, Americans remain confident that any definition of a free nation must include their own — the land of free. Yet, the laws and practices of the land should shake that confidence. In the decade since Sept. 11, 2001, this country has comprehensively reduced civil liberties in the name of an expanded security state. The most recent example of this was the National Defense Authorization Act, signed Dec. 31, which allows for the indefinite detention of citizens. At what point does the reduction of individual rights in our country change how we define ourselves?

While each new national security power Washington has embraced was controversial when enacted, they are often discussed in isolation. But they don’t operate in isolation. They form a mosaic of powers under which our country could be considered, at least in part, authoritarian. Americans often proclaim our nation as a symbol of freedom to the world while dismissing nations such as Cuba and China as categorically unfree. Yet, objectively, we may be only half right. Those countries do lack basic individual rights such as due process, placing them outside any reasonable definition of “free,” but the United States now has much more in common with such regimes than anyone may like to admit.

These countries also have constitutions that purport to guarantee freedoms and rights. But their governments have broad discretion in denying those rights and few real avenues for challenges by citizens — precisely the problem with the new laws in this country.

The list of powers acquired by the U.S. government since 9/11 puts us in rather troubling company.

1. Assassination of U.S. citizens

President Obama has claimed, as President George W. Bush did before him, the right to order the killing of any citizen considered a terrorist or an abettor of terrorism. Last year, he approved the killing of U.S. citizen Anwar al-Awlaqi and another citizen under this claimed inherent authority. Last month, administration officials affirmed that power, stating that the president can order the assassination of any citizen whom he considers allied with terrorists. (Nations such as Nigeria, Iran and Syria have been routinely criticized for extrajudicial killings of enemies of the state.)

2. Indefinite detention

Under the law signed last month, terrorism suspects are to be held by the military; the president also has the authority to indefinitely detain citizens accused of terrorism. While the administration claims that this provision only codified existing law, experts widely contest this view, and the administration has opposed efforts to challenge such authority in federal courts. The government continues to claim the right to strip citizens of legal protections based on its sole discretion. (China recently codified a more limited detention law for its citizens, while countries such as Cambodia have been singled out by the United States for “prolonged detention.”)

3. Arbitrary justice

The president now decides whether a person will receive a trial in the federal courts or in a military tribunal, a system that has been ridiculed around the world for lacking basic due process protections. Bush claimed this authority in 2001, and Obama has continued the practice. (Egypt and China have been denounced for maintaining separate military justice systems for selected defendants, including civilians.)

4. Warrantless searches

The president may now order warrantless surveillance, including a new capability to force companies and organizations to turn over information on citizens’ finances, communications and associations. Bush acquired this sweeping power under the Patriot Act in 2001, and in 2011, Obama extended the power, including searches of everything from business documents to library records. The government can use “national security letters” to demand, without probable cause, that organizations turn over information on citizens — and order them not to reveal the disclosure to the affected party. (Saudi Arabia and Pakistan operate under laws that allow the government to engage in widespread discretionary surveillance.)

5. Secret evidence

The government now routinely uses secret evidence to detain individuals and employs secret evidence in federal and military courts. It also forces the dismissal of cases against the United States by simply filing declarations that the cases would make the government reveal classified information that would harm national security — a claim made in a variety of privacy lawsuits and largely accepted by federal judges without question. Even legal opinions, cited as the basis for the government’s actions under the Bush and Obama administrations, have been classified. This allows the government to claim secret legal arguments to support secret proceedings using secret evidence. In addition, some cases never make it to court at all. The federal courts routinely deny constitutional challenges to policies and programs under a narrow definition of standing to bring a case.

6. War crimes

The world clamored for prosecutions of those responsible for waterboarding terrorism suspects during the Bush administration, but the Obama administration said in 2009 that it would not allow CIA employees to be investigated or prosecuted for such actions. This gutted not just treaty obligations but the Nuremberg principles of international law. When courts in countries such as Spain moved to investigate Bush officials for war crimes, the Obama administration reportedly urged foreign officials not to allow such cases to proceed, despite the fact that the United States has long claimed the same authority with regard to alleged war criminals in other countries. (Various nations have resisted investigations of officials accused of war crimes and torture. Some, such as Serbia and Chile, eventually relented to comply with international law; countries that have denied independent investigations include Iran, Syria and China.)

7. Secret court

The government has increased its use of the secret Foreign Intelligence Surveillance Court, which has expanded its secret warrants to include individuals deemed to be aiding or abetting hostile foreign governments or organizations. In 2011, Obama renewed these powers, including allowing secret searches of individuals who are not part of an identifiable terrorist group. The administration has asserted the right to ignore congressional limits on such surveillance. (Pakistan places national security surveillance under the unchecked powers of the military or intelligence services.)

8. Immunity from judicial review

Like the Bush administration, the Obama administration has successfully pushed for immunity for companies that assist in warrantless surveillance of citizens, blocking the ability of citizens to challenge the violation of privacy. (Similarly, China has maintained sweeping immunity claims both inside and outside the country and routinely blocks lawsuits against private companies.)

9. Continual monitoring of citizens

The Obama administration has successfully defended its claim that it can use GPS devices to monitor every move of targeted citizens without securing any court order or review. (Saudi Arabia has installed massive public surveillance systems, while Cuba is notorious for active monitoring of selected citizens.)

10. Extraordinary renditions

The government now has the ability to transfer both citizens and noncitizens to another country under a system known as extraordinary rendition, which has been denounced as using other countries, such as Syria, Saudi Arabia, Egypt and Pakistan, to torture suspects. The Obama administration says it is not continuing the abuses of this practice under Bush, but it insists on the unfettered right to order such transfers — including the possible transfer of U.S. citizens.

These new laws have come with an infusion of money into an expanded security system on the state and federal levels, including more public surveillance cameras, tens of thousands of security personnel and a massive expansion of a terrorist-chasing bureaucracy.

Some politicians shrug and say these increased powers are merely a response to the times we live in. Thus, Sen. Lindsey Graham (R-S.C.) could declare in an interview last spring without objection that “free speech is a great idea, but we’re in a war.” Of course, terrorism will never “surrender” and end this particular “war.”

Other politicians rationalize that, while such powers may exist, it really comes down to how they are used. This is a common response by liberals who cannot bring themselves to denounce Obama as they did Bush. Sen. Carl Levin (D-Mich.), for instance, has insisted that Congress is not making any decision on indefinite detention: “That is a decision which we leave where it belongs — in the executive branch.”

And in a signing statement with the defense authorization bill, Obama said he does not intend to use the latest power to indefinitely imprison citizens. Yet, he still accepted the power as a sort of regretful autocrat.

An authoritarian nation is defined not just by the use of authoritarian powers, but by the ability to use them. If a president can take away your freedom or your life on his own authority, all rights become little more than a discretionary grant subject to executive will.

The framers lived under autocratic rule and understood this danger better than we do. James Madison famously warned that we needed a system that did not depend on the good intentions or motivations of our rulers: “If men were angels, no government would be necessary.”

Benjamin Franklin was more direct. In 1787, a Mrs. Powel confronted Franklin after the signing of the Constitution and asked, “Well, Doctor, what have we got — a republic or a monarchy?” His response was a bit chilling: “A republic, Madam, if you can keep it.”

Since 9/11, we have created the very government the framers feared: a government with sweeping and largely unchecked powers resting on the hope that they will be used wisely.

The indefinite-detention provision in the defense authorization bill seemed to many civil libertarians like a betrayal by Obama. While the president had promised to veto the law over that provision, Levin, a sponsor of the bill, disclosed on the Senate floor that it was in fact the White House that approved the removal of any exception for citizens from indefinite detention.

Dishonesty from politicians is nothing new for Americans. The real question is whether we are lying to ourselves when we call this country the land of the free.

I would add that the increasing politicization of the lives of the average Americans and the curtailment of their civil liberties also covers much of commerce and the financial system where political concessions, bailouts, and inflationists policies seems to have become an imperative.

In short, the US has gradually been transitioning into a fascist state where repressive and arbitrary laws have been substituting the rule of law.

As the great Friedrich August von Hayek admonished in the classic "The Road to Serfdom"

It is one of the saddest spectacles of our time to see a great democratic movement support a policy which must lead to the destruction of democracy and which meanwhile can benefit only a minority of the masses who support it. Yet it is this support from the Left of the tendencies toward monopoly which make them so irresistible and the prospects of the future so dark.

AP Opens in North Korea: Signs of Coming Economic Liberalization?

The Associated Press (AP) recently opened in North Korea

Writes The Guardian

The Associated Press has opened its newest bureau here, becoming the first international news organization with a full-time presence to cover news from North Korea in words, pictures and video.

In a ceremony Monday that came less than a month after the death of longtime ruler Kim Jong Il and capped nearly a year of discussions, AP President and CEO Tom Curley and a delegation of top AP editors inaugurated the office, situated inside the headquarters of the state-run Korean Central News Agency in downtown Pyongyang.

The bureau expands the AP's presence in North Korea, building on the breakthrough in 2006 when AP opened a video bureau in Pyongyang for the first time by an international news organization. Exclusive video from AP video staffers in Pyongyang was used by media outlets around the world following Kim's death.

Now, AP writers and photojournalists will also be allowed to work in North Korea on a regular basis.

For North Korea, which for decades has remained largely off-limits to international journalists, the opening marked an important gesture, particularly because North Korea and the United States have never had formal diplomatic relations. The AP, an independent, 165-year-old news cooperative founded in New York and owned by its U.S. newspaper membership, has operations in more than 100 countries and employs nearly 2,500 journalists across the world in 300 locations.

The bureau puts AP in a position to document the people, places and politics of North Korea across all media platforms at a critical moment in its history, with Kim's death and the ascension of his young son as the country's new leader, Curley said in remarks prepared for the opening

This would appear like a watershed breakthrough. There appears to be a seminal trend among the remnants of communism as Burma and Cuba whom has already taken the inaugural route towards economic liberalization.

And I think North Korea could be headed this way too under the new regime. One event does not make a trend though which is why we have to keep vigil.

I am hopeful that structural changes could be underway. Having North Korea open up economically will not only reduce risks of a regional war, but importantly augment Asia’s role as an economic powerhouse.

Quote of the Day: Libertarian Values

Libertarians do hold that the right to individual liberty across the board is the prime political value but by no means the prime value. Politics for libertarians can be thoroughly derivative, meant mainly to secure the possibility for a full moral or ethical life. Why be free? Mainly to be able to choose right from wrong, that’s why…

The only thing libertarianism has to say about one’s moral convictions is that they may not include coercing anyone else to do anything. Coercion is using unprovoked force on people, ones who haven’t violated the rights of others. If you believe it is your moral duty or responsibility to rob Peter so as to help out Paul, that will not fly. It is like holding that one has the moral duty to rape or kidnap someone. Some may--and sadly some do--claim that this is what they ought to do but they are confused or vicious. Only vis-a-vis children or invalids could one have such moral duties or responsibilities, never toward intact adults.

Despite what we could call the thinness of libertarian politics--the opposite end of the thickness of any kind of totalitarian regime--it does not follow that libertarians hold “that only freedom matters.” That’s what matters politically but as far as how human beings should conduct themselves in their lives, a plethora of moral requirements will be on the agenda for everyone. Fathers, mothers, friends, colleagues, sports partners, farmers, engineers, doctors, and all others who occupy some such role in life have a list of virtues they ought to practice. Hence even college courses in medical, business, engineering and legal ethics, for example.

On top of it there is just the ethics for living one’s human life, ethics addressed by numerous philosophies and religions and nearly all libertarians embrace one or another of these in their personal, nonpolitical lives.

[italics mine]

That’s from Professor Tibor R. Machan who defends against stereotyped misrepresentations or on spurious (begging the questions) claims that for Libertarianism “only freedom matters” to the "exclusion of all other values".

CBS News: US Taxpayers Taking a Hit on Green-Renewable Energy Firms

Political supported green renewable energy companies have been sinking US taxpayer funds.


(hat tip: Mark Perry)

From CBS

It's been four months since the FBI raided bankrupt Solyndra. It received a half-billion in tax dollars and became a political lightning rod, with Republicans claiming it was a politically motivated investment.

CBS News counted 12 clean energy companies that are having trouble after collectively being approved for more than $6.5 billion in federal assistance. Five have filed for bankruptcy: The junk bond-rated Beacon, Evergreen Solar, SpectraWatt, AES' subsidiary Eastern Energy and Solyndra.

Others are also struggling with potential problems. Nevada Geothermal -- a home state project personally endorsed by Senate Majority Leader Harry Reid -- warns of multiple potential defaults in new SEC filings reviewed by CBS News. It was already having trouble paying the bills when it received $98.5 million in Energy Department loan guarantees.

SunPower landed a deal linked to a $1.2 billion loan guarantee last fall, after a French oil company took it over. On its last financial statement, SunPower owed more than it was worth. On its last financial statement, SunPower owed more than it was worth. SunPower's role is to design, build and initially operate and maintain the California Valley Solar Ranch Project that's the subject of the loan guarantee.

First Solar was the biggest S&P 500 loser in 2011 and its CEO was cut loose - even as taxpayers were forced to back a whopping $3 billion in company loans.

Nobody from the Energy Department would agree to an interview. Last November at a hearing on Solyndra, Energy Secretary Steven Chu strongly defended the government's attempts to bolster America's clean energy prospects. "In the coming decades, the clean energy sector is expected to grow by hundreds of billions of dollars," Chu said. "We are in a fierce global race to capture this market."

Economist Morici says even somebody as smart as Secretary Chu -- an award-winning scientist -- shouldn't be playing "venture capitalist" with tax dollars. "Tasking a Nobel Prize mathematician to make investments for the U.S. government is like asking the manager of the New York Yankees to be general in charge of America's troops in Afghanistan," Morici said. "It's that absurd."

My comment:

This represents the political economy of anthropomorphic climate change. Argue about the validity of global warming then divert taxpayers money on money losing projects that benefits only politically allied cronies and their political wards.

This is further proof that even with subsidized money, green or renewable energy can hardly take off simply because consumers don't see them as reliable alternatives (in spite of the global warming bugaboo).

This also proves that government picking out of 'winners' is no guarantee of success.

Even more, the issue of moral hazard applies as cronies are hardly motivated to see the success of these companies since they know government will absorb the losses on their behalf and even perhaps knew or anticipated that these companies would eventually fail, hence, became milking cows.

And corruption will signify another aspect here, since public-private partnerships naturally leads to the prioritization of the whims of the political masters rather than of consumers.

Also one can pretend to know about the future (as the energy secretary) when we really don't.

End of the day what is unsustainable won't last. What is a fraud or unnatural will be exposed for what they are. That's how events have been playing out as shown above.

Quote of the Day: Origin of the State

The positive testimony of history is that the State invariably had its origin in conquest and confiscation. No primitive, State known to history originated in any other manner. On the negative side, it has been proved beyond peradventure that no primitive State could possibly have had any other origin.s Moreover, the sole invariable characteristic of the State IS the economic exploitation of one class by another. In this sense, every State known to history is a class-State. Oppenheimer defines the State, in respect of its origin, as an institution "forced on a defeated group by a conquering group, with a view only to systematizing the domination of the conquered by the conquerors, and safeguarding itself against insurrection from within and attack from without. This domination had no other final purpose than the economic exploitation of the conquered group by the victorious group."

Albert J. Nock, Our Enemy the State p.44-45

The genesis of government is from violence and plunder, and definitely not an outcome of attempts at resolving market imperfections.

Italian Government Restricts the Use of Cash

My wretched airport experience last year has a link to what’s going on in Italy.

Basically global governments have used money laundering as an excuse or as a front to compel the public to migrate their transactions into the politically privileged banking system so that these transactions can be monitored and subsequently bankrolled to finance the governments. I think this represents part of the financial repression.

From Bloomberg (hat tip Bob Wenzel) [bold emphasis mine]

Prime Minister Mario Monti, in office just over a month, wants landlords, plumbers, electricians and small businesses to stop conducting large transactions in cash, which critics say helps them evade taxes. The government on Dec. 4 reduced the maximum allowed cash payment to 1,000 euros from 2,500 euros.

“If they force us to use credit cards, prices will go up,” said d’Andrea, noting that many retailers offer discounts to customers who pay in cash and don’t demand a receipt, in effect splitting with them the savings from evading the country’s 21 percent sales tax. She may curtail future purchases if she’s unable to use cash, d’Andrea said.

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax collection agency. The country spends another 10 billion euros annually on security and labor for processing cash transactions, according to banking association ABI.

Debt Crisis

Monti is focusing on curtailing evasion as one way to reduce Italy’s 1.9 trillion-euro debt, which is bigger than Spain, Greece, Ireland and Portugal’s combined. Investor concern that Italy remains at risk of being overwhelmed by the region’s debt crisis pushed the country’s borrowing costs to euro-era records last month.

In Europe, Italy has a large shadow or informal economy (chart from the Economist) which implies that transactions are not being taxed and are usually done on cash basis and outside the banking system, thus the so-called “evasion”.

Yet in reality informal or shadow economies are symptomatic of the markets circumventing burdensome and stifling regulations, tax payments and social welfare contributions as previously discussed.

So essentially debt strapped governments like Italy has launched a war against their informal economy.

Such dynamic can be seen from the succeeding portion of the same article (bold emphasis mine)

The reform pits the government against some Italians who prefer to pay for everything from wedding receptions to home renovations with cash, allowing merchants to underreport or not declare the revenue, and gaining a discount in exchange. Many small companies pay salaries in cash, allowing employees to report less income, the Finance Ministry said last year.

“Businesses make us accomplices, because nobody wants to pay extra on a large transaction,” said Adele Costantini, a professor of medicine in the southern region of Abruzzo, who had to argue to get a receipt from a house painter. “I want them to pay the tax, not unload it on me.”

Italians are the euro region’s least-indebted consumers and among its biggest savers, according to data from the European Union’s statistics office, Eurostat. Their frugality may be at least partly linked to a distrust of paying with anything other than cash. Italian credit-card holders use their cards on average only 26 times per year, or five times less than in the U.K., according to the Bank of Italy.

‘Culture of Cash’

“The culture of cash is strongly ingrained in Italians, even those that don’t evade,” Deputy Finance Minister Vittorio Grilli said at a Dec. 5 press conference in Rome. The government initially wanted to set a 300-euro or 500-euro cash limit but decided against it, Grilli said, reasoning that citizens needed time to adapt to new rules.

These are manifestations of the welfare state-central banking-banking cartel facing continuing tremendous pressures to preserve the current unsustainable system.

Yet impositions like the above which goes against culture will naturally meet stiff resistance. And unintended consequences will likely be the ensuing order—perhaps the informal economy might resort to trading based on foreign cash currencies or local community currencies could emerge (like in some parts of the US) or even trading could be done in metallic coins or that such laws will simply be ignored or not complied with or that corruption will only swell. There are many variations that could arise in response to such repressive law.

Migration Trends: The Coming European Diaspora?

Past performance does not guarantee future results. This is not just about Wall Street, as long term trends do change in many aspects of social activities.

Take migration trends, what used to be popular—where citizens of emerging markets migrate to western nations—could now be in a process of reversal: Western people are leaving for Emerging Markets. 

After all, what usually drives social mobility is the search for greener pasture or about following the money.

We get this clue from this Wall Street Journal article (hat tip Bob Wenzel)

Economic distress is driving tens of thousands of skilled professionals from Europe, and many are being lured to thriving former European colonies in Latin America and Africa, reversing well-worn migration patterns. Asia and Australia, as well as the U.S. and Canada, are absorbing others leaving the troubled euro zone.

At the same time, an influx of Third World immigrants whose labor helped fuel Europe's growth over the past decade is subsiding. Hundreds of thousands of them, including some white-collar professionals, have been returning home.

The exodus is raising concern about a potential long-term cost of the economic crisis—a talent drain that could hinder the euro zone's weakest economies as they struggle to climb out of recession.

Talk about talent drain or brain drain is utter nonsense.

As the WSJ reports, the principal reason for the reversal of migration trends has been because of the lack or absence of economic opportunities. And this has been because of excessive welfare state, interventionism, bailouts of pet industries of politicians and boom bust policies which has been consuming capital and diverting resources to non-productive activities.

In short, brain or talent drain are symptomatic of failed government policies. 

More account of people in Europe voting with their feet, again from the same article.

During a prosperous decade that ended in 2008, Spain welcomed one of the world's biggest waves of immigrants. Foreign workers poured in at a rate of 500,000 per year to boost its construction and service industries, making the country Europe's prime destination for new arrivals.

Last year, with unemployment topping 20%, Spain became a net exporter of people for the first time since 1990, according to Spain's National Statistics Institute. Some 55,626 more people left the country in the first nine months of last year than arrived, the institute said.

Spaniards are scattering to better-off European countries and beyond, particularly to Latin America. Of the estimated 37,000 Spanish citizens who left the country in 2010, nearly 60% emigrated to countries outside the European Union.

At least 100,000 of Portugal's 11 million citizens moved abroad in 2011, after a decade of anemic growth and rising debt in Western Europe's poorest nation. In Africa, Angola's burgeoning economy has absorbed 70,000 Portuguese since 2003, according to the government-backed Emigration Observatory in Lisbon.

The number of Portuguese in Brazil on work-related visas shot up by 52,000 in the 18 months through June 2011.

Brazil is profiting from Europe's decline. It is wooing foreign engineers and other construction-related specialists to help carry out housing, energy and infrastructure projects for which the government has budgeted $500 billion through 2014, more than double Portugal's annual gross domestic product.

As one can observe what seems as a talent drain for Europe is now a talent gain for emerging markets.

People respond to changes in the environment and the political economy without directions from the government. Instead they are reacting to failed policies.

And allowing for social mobility will only force governments to compete for the most productive members of any society, as well as, force governments to become more competitive by embracing economic freedom. But of course this would be bad news for politicians, their cronies and their media cohorts..

Finally, the north south migration trends could just be the beginning

More from the same article…

With Europe's crisis and Brazil's boom, migration patterns are shifting again.

Brazilians are coming home in epic numbers. The government estimates that nearly half the country's émigrés have returned—from more than 3 million Brazilians living abroad in 2007 to fewer than 2 million today.

Again more evidence of the deepening wealth convergence dynamic borne out of globalization and the ballooning forces of decentralization relative to the baneful effects from the decadent welfare state.

Interesting times indeed.

I Told You Moment: Philippine Phisix At Historic Highs!

This is the fundamental problem with relying on macro-accounting tautologies; people often bring in causal arguments from economic theories without realizing they are doing so. Robert P. Murphy

The Philippine Phisix posted a blistering start for 2012, which also seems as a lucky initiation for me. That’s because the performance of the local composite benchmark has been realizing what I have been saying especially last December where I pounded the table on the likelihood of this occurrence.

Even better, the Philippine Phisix closed the week to take on the second spot as the best performer[1], based on nominal local currency, among global equity benchmarks (of 78 nations).

Where we had been told by an establishment analyst in a conference that the Phisix will NOT break into NEW highs unless the Euro crisis will get resolved, I argued otherwise.

As I wrote last December[2],

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.

Of course the other point is that charts patterns, as I previously noted, will not fulfill its gloomy portent which again validated my projections.

Charting theory says that long term patterns should have a stronger effect[3] than the short term, yet the 15 month bearish head and shoulder (blue arcs) has clearly been neutralized by the shorter 5 month reverse head and shoulder (red arcs).

In short, the limits of using chart patterns as an investing guide can clearly be observed in the above.

Breaking Out Amidst the Euro Crisis; Refuting Some Euro Crisis Bunk

The Phisix breakout DOES NOT come amidst the resolution of the Euro crisis.

Instead, as I have been repeatedly pointing out, aggressive ECB intervention will work to defer the impact of the crisis and give the pretext for the bulls and for the yield chasers to push up the markets.

Again as from the same article I wrote,

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 exactly is what has been happening as provided by the charts from Danske Bank[4],[5].

So far yields of Spain and Italy has positively responded to such ‘back door’ intervention[6] by the ECB, as debt auctions were reportedly oversubscribed as Euro banks took advantage of subsidized cheap loans from the ECB to acquire sovereign debt of Italy and Spain. Essentially the subsidized rates give EU banks breathing room to earn from the yield spreads and at the same time helps to finance government funding requirements.

Also, the above debunks the mainstream claims that Eurozone policy operates on a quasi “gold standard”. We won’t see monetary inflationism of such magnitude being conducted on a gold standard as this would result to capital flight or a massive outflow of gold reserves.

Writes Joseph Salerno[7],

Briefly, according to the Currency School, if commercial banks were permitted to issue bank notes via lending or investment operations in excess of the gold deposited with them this would increase the money supply and precipitate an inflationary boom. The resulting increase in domestic money prices and incomes would eventually cause a balance-of-payments deficit financed by an outflow of gold. This external drain of their gold reserves and the impending threat of internal drains due to domestic bank runs would then induce the banks to sharply restrict their loans and investments, resulting in a severe contraction of their uncovered notes or “fiduciary media” and a decline in the domestic money supply accompanied by economy-wide depression.

Also this refutes the masquerade about the alleged deleterious effects of austerity. There has hardly been a meaningful austerity (reduction of government expenditures or debt) taking place whether in Europe or the US.

This certainly has not the case in the US, where government debt has been replacing the deleveraging process being experienced by the private sector components as shown in the chart from PIMCO[8]

What has been happening instead in the Eurozone has been a transfer of resources mainly from the welfare state and the real economy into the highly politically privileged and protected banking sector and even to the arms or weapons industry (!), where the latter seems to be part of a quid pro quo agreement[9] with crisis affected PIIGS in return for bailouts.

And it is also absurd or simply false to claim that a dysfunctional banking system will aggravate current economic conditions in the Eurozone, which are premised on faulty assumptions that credit only drives growth.

Fact is, like Japan’s experience in the 1990s, as the bust phase deepened, credit supply flowed from the impaired banking system to the non-banking sector[10].

In Italy today, organized crime groups or the Mafia has taken over credit provision in many parts of their economy and was even reported as having assumed the “number 1 bank”[11]. So we seem to be seeing the same dynamics of having non-bank sectors taking over.

And this certainly has NOT been true with the US, where despite falling business loans, the US recession cycle ended in 2009. Credit conditions only bottomed out during the late 2010 way after the US economy have convalesced. Today, improving commercial and industrial loans seem to augmenting the current momentum fuelled by an inflationary boom.

Yet the mainstream gives us false choices premised on accounting tautologies premised on “400 years of accounting understanding”[12].

Try applying this to the stateless Somalia (or failed state as per media’s lingo) to see if such appeal to math and aggregates has been valid. Since there is no state (ergo government spending) such statistics becomes irrelevant. [Perhaps this could be the likely reason Somalia has been excluded in many statistics]

Yet the false dilemma being presented is that Europe’s policy option has been limited to a choice from the following: private sector leverage or public sector leverage or adjusting trade balances. The focus on accounting leads to a solution that requires MORE government intervention by acquiring MORE debt or by inflationism.

The fact is, what prompts for massive trade deficits and deficiencies in trade competitiveness has been brought about by the capital consumption effects of government spending and the boom bust cycles. Political, legal, bureaucratic and regulatory risks also contributes to the business environment uncertainties which put a shackle on entrepreneurship that drives competitiveness.

And proof to this assertion is that despite cheaper wages compared to their developed counterparts, as previously pointed out[13], the crisis affected PIIGS has been least competitive in terms of labor efficiency mainly due to bureaucratic and regulatory impediments. Most of the PIIGS rank nearly (except for Ireland) at the bottom relative to their counterparts in terms of Doing Business.

As for consumption effects of government spending let me quote the great Murray Rothbard[14], [italics original]

All government expenditure for resources is a form of consumption expenditure, in the sense that the money is spent on various items because the government officials so decree. The purchases may therefore be called the consumption expenditure of government officials. It is true that the officials do not consume the product directly, but their wish has altered the production pattern to make these goods, and therefore they may be called its “consumers.”

And boom bust policies likewise alters time preferences of consumers and producers that encourages consumption and misdirection of investments

Writes Professor Robert P. Murphy[15]

The low interest rates of the boom period mislead entrepreneurs into borrowing too much, but they also mislead consumers into borrowing too much and saving too little. This is physically possible because resources that otherwise would have gone into replenishing the capital structure are instead devoted to new projects or additional consumption goods.

Also the great Ludwig von Mises[16]

The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment. The entrepreneurs employ the available supply of r + p1 + p2 as if they were in a position to employ a supply of r + p1 + p2 + p3 + p4. They embark upon an expansion of investment on a scale for which the capital goods available do not suffice. Their projects are unrealizable on account of the insufficient supply of capital goods. They must fail sooner or later. The unavoidable end of the credit expansion makes the faults committed visible. There are plants which cannot be utilized because the plants needed for the production of the complementary factories of production are lacking; plants the products of which cannot be sold because the consumers are more intent upon purchasing other goods which, however, are not produced in sufficient quantities; plants the construction of which cannot be continued and finished because it has become obvious that they will not pay.

In other words, what the mainstream cannot see as the principal cause of a society’s orientation towards consumption, hence the trade deficits, are government interventionism and the welfare state. The crisis affected Euro economies look as great examples of these policy induced imbalances.

And even worse is the reverential awe towards statistics as an accurate measure of the functioning economy, particularly via the GDP. Little do many understand that such spending biased statistics has been designed towards looking at the economy from the Keynesian perspective, and which in corollary, would lead to Keynesian policy prescriptions.

The fact is the GDP is a highly flawed metric.

Professor Bryan Caplan explains[17],

Gross Domestic Product is staunchly atheoretical. If someone spends money on X, X is GDP - even if "someone" is Congress, and X="a bridge to nowhere."

There are exceptions; most notably, the stats supposedly exclude "intermediate goods" to avoid double counting. I say "supposedly" because the list of "intermediate goods" is so inconsistent. Insofar as police protection and the military protect firms from harm, aren't the police and military intermediate goods? But despite these tensions, a big part of the philosophy of GDP is to eschew philosophical arguments about what's "really productive."

On reflection, though, the standard approach is anything but agnostic. Official stats tacitly make an extreme assumption: waste does not exist. Astrology counts, even though astrologers can't predict the future. Every penny of health care counts - regardless of its efficacy. The whole defense budget counts - even if it's provoking war rather than deterring it. Indeed, if two countries' militaries mutually annihilate, both countries count the cost as a benefit.

So the mainstream case has immensely been pockmarked by half-truths and by reading effects as the cause, all dedicated to the promotion of the status quo whose policies paradoxically constitutes the roots of the current crisis.

And more ironically is that their prescribed policies seem to signify as political insanity—doing the same actions and expecting different results—or as similar to engaging the mythical beast Lernaean Hydra[18] which Greek legendary hero Hercules fought as part of his second labor[19], where for each head that had been cut off from the hydra, two grows in replacement.

The crux of the matter is that current interventionist policies being applied by EU authorities have been contrived at bolstering asset prices in order to keep the balance sheets of the banking sector afloat, and in tandem, to ensure access to financing for the unsustainable welfare state.

So essentially, the tight interdependence of the banking sector and governments can be analogized as two drunks trying to prop each other up by consuming more alcohol which is continually being provided by the bartender (the ECB abetted by the FED).

And this has not been limited to the Eurozone. Mr. Ben Bernanke, the chairman of the US Federal Reserve, has reportedly been itching for QE 3.0, but this time, the Bernanke led FED appears to have changed tactic to focus on providing support to the mortgage industry[20] which may reduce political opposition than from the previous QE which concentrated on acquiring US treasuries.

Analyst and portfolio manager Doug Noland thinks the FED will make a go on a mortgage based QE3.0[21],

Fed is quite worried about Europe, global de-risking/de-leveraging, and the strengthened dollar. Especially if the euro faces additional selling pressure, the Fed will talk – and at some point implement- additional quantitative ease in hopes of dampening dollar bullish sentiment. With more Treasury purchases posing significant political risk, they’re cleverly building a case for buying MBS.

And I would add that since the mandated debt ceiling by the US congress has already been breached[22], there seems to be a big likelihood for another accord to hike the debt ceiling levels, of course after some vaudeville opposition acts.

This means that we should expect the US Federal Reserve to actively but perhaps indirectly facilitate the financing of these liabilities possibly through the banking system in exchange for the Fed’s buying of mortgages.

So the ECB and the FED will work to overcome political obstacles by resorting to legal loopholes. They who make the rules, break it.

The bottom line is that we will likely see intensification of central bank actions in 2012. Although I share the view that such conditions are unsustainable and represent as boom bust cycles, it is unclear that any unwinding will happen anytime soon.

As explained last week[23], interest rates will most likely determine the popping of this bubble where interest rates may be driven by any of the following dynamics, changes in: 1) inflation expectations 2) state of demand for credit relative to supply 3) perception of credit quality and or 4) of the scarcity/availability of capital.

And as interest rate levels remain benign, this should mean more upside for global equity markets including the Phisix perhaps until the end of the first quarter. It would be best to assess issues periodically and see how politicians respond to market developments.

The Permanence of Change Represents the Endgame

I might add that it is utter poppycock to talk about any grand finale or Mayan type Armageddon—usually heard from mainstream jeremiads—as outcomes for the current imbalances.

In reality, the ultimate outcome we should expect is the permanence of change.

For instance, the collision of the forces of decentralization with forces of the relics of the industrial era via 20^th century political institutions, legal framework and current top-down policies and mindset will likely intensify and may increase social tensions that may lead to some upheavals. Because of the many entrenched groups, profound changes will not be seamless. But eventually people will adapt.

As for inflationism, these have signified as boom bust CYCLES throughout the ages, with the worst consequence leading to death and the eventual birth, or if not, drastic reforms of the monetary system or through defaults. But again people learn to live or move on.

We must realize that in over 200 years, despite 2 major world wars and the grand but botched wretched experiments of communism, aside from pandemics[24] (e.g. Swine Flu) which resulted to massive losses of human lives and large swath of property destructions, world living standards has remarkably spiked[25].

Internal Market Conditions Supports The Phisix’s Breakaway Run

As I wrote in my last major article on the stock market for 2011[26]

Any sustained rally in the Phisix which may come during the yearend or during the first quarter of 2012 will likely translate to a broad market rally.

The 2012 rally has largely been supported by substantial advances in market internals.

The weekly averaged advance decline-spread has decisively swung to the side of the bulls.

Average daily trades have also sprung higher. This means more participation (possibly from neophytes) or more churning from existing participants or both. The spike in the trading activities exhibits snowballing confidence.

This is where the recent breakout seems amiss though, while average daily volume has improved this has not been as extensive as the intensity of the breakout would suggest.

Finally foreigners appear to be more bullish as net foreign buying averaged on a weekly basis has been on the upside.

As I used to point out, once foreigners become bullish their tendency is to push up major Phisix components or the heavyweights (largest market caps which are most liquid). The consequence is to amplify the gains of the Phisix.

Such bullishness may have filtered into the Philippine Peso, which almost in line with the Phisix was unchanged in 2011, but eked out .8% gain for this week. The Peso was at 44.11 last week compared to this week’s close at 43.75 per US dollar.

Given the strong move by the Phisix which seems to have significantly outraced our neighbors, there is a possibility that interim profit taking would be the order of the coming sessions. Yet even if profit taking mode occurs, the likelihood would be rotational activities—where previous winners may take a recess while the laggards gain the market’s attention—than a broad based decline.

However in a bullmarket, overbought conditions usually may extend.

Overall, since the market is likely to move higher overtime, the short term bias is likely to reflect on a positive sentiment despite interim volatilities.

And for as long as markets remain politicized and highly dependent on actions of policymakers, our task is to monitor their activities and assess and project the possible impacts from such actions on the markets.

---

^[1] See Global Equity Markets: Philippine Phisix Grabs Second Spot, January 14 2012

[2] See Can the Phisix rise Amidst the Euro Crisis? December 4, 2011

[3] Learntechnicaltrading.com Buying signals using trend lines

[4] Danske Bank FX Top Trades 2012 December 14, 2011

[5] Danske Bank Weekly Focus, January 13, 2012

[6] Reuters.com UPDATE 3-Yields fall sharply at Spanish, Italian debt sales, January 12, 2012

[7] Salerno Joseph T. Money and Gold in the 1920s and 1930s: An Austrian View, thefreemanonline.org

^[8] Gross William H. Towards the Paranormal, January 2012

^[9] See Greece Bailout: The Military Industry as Beneficiaries, January 12, 2012

^[10] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism, July 6, 2010

^[11] Reuters.com Mafia now "Italy's No.1 bank" as crisis bites: report, January 10, 2012

[12] Mauldin John The End of Europe? January 14, 2012 Goldseek.com

^[13] See Euro Debt Crisis: The Confidence Fairy Tale and Devaluation Delusion, November 28. 2011

[14] Rothbard Murray N. 1. Introduction: Government Revenues and Expenditures Man, Economy & State Mises.org

[15] Murphy Robert P. Correcting Quiggin on Austrian Business-Cycle Theory, Mises.org

[16] Mises Ludwig von 6. The Gross Market Rate of Interest as Affected by Inflation and Credit Expansion, XX. INTEREST, CREDIT EXPANSION, AND THE TRADE CYCLE, Human Action Mises.org

[17] Caplan Bryan Real Real GDP, Library of Economics and Liberty, January 14, 2012

[18] Wikipedia.org Lernaean Hydra

[19] Wikipedia.org Labours of Hercules

^[20] Bloomberg.com, Bernanke Doubles Down on Fed Mortgage Bet, January 11, 2012

^[21] Noland Doug, The Year Of The Central Bank Credit Bubble Bulletin January 13, 2012 Prudent Bear.com

^[22] See US Debt Ceiling Breached, President Obama to Seek Increase, January 12, 2012

^[23] See What To Expect in 2012, January 9, 2012

^[24] CNN.com Deadliest pandemics of the 20th century April 27, 2009

^[25] See BBC’s Hans Rosling: 200 Years of Remarkable Progress and a Converging World, December 3, 2010

^[26] See Phisix: Primed for an Upside Surprise, December 11, 2011

Quote of the Day: Why Government is Not Private Business

From Professor Arnold Kling,

In business it is actually really hard to get people to do what you want. In fact, understanding that fact is exactly what sets CEOs apart from policy wonks. Policy wonks think that you write a law and that solves a problem. They think that you promulgate regulations and people do not figure out how to game those regulations.

Someone with business experience would never announce a mortgage loan modification program and expect it to be implemented in a matter of weeks (remember, a mortgage is a legal document that is somewhat antiquated with procedures that differ by state and local jurisdiction; remember that, prior to 2008, mortgage servicers had very few staff with any experience at all in loan modification; remember that when you introduce entirely new parameters into a highly computerized business process, somebody has to determine which systems are impacted, gather requirements, redesign databases, develop logic to protect against data input errors, develop a test plan,...). Someone with business experience would not enact a program that fines companies for failing to use a fuel that does not yet exist. Someone with business experience, I dare say, would understand that chaotic organization has consequences.

The fundamental difference between private business and government is the use of force.

To survive or to thrive, businesses must persuade consumers that their products or services offered are worth the use, the consumption or the ownership, in order for consumers to conduct voluntarily exchanges. Failing to do so means that these private sector providers would lose out to the competitors.

On the other hand government, operating as mandated or legislated monopoly, forces people to comply with their edicts or regulations under the threat of penalty (incarceration, fines and etc.) for non-compliance.

In other words, for businesses, the distribution of power to allocate resources is ultimately decided by the consumers, whom are guided by price signals and where the consumer represents as the proverbial 'king'. Whereas for government, it is the politicians and bureaucrats who decides, whom act based on political priorities rather than by price signals.

Social power, thus, is distinguished between market forces relative to political forces.

Yet there are many other significant differences.

So comparisons of “government run as business” is not only patently misguided but a popular fallacy which needs to be straightened out.