Peter Schiff Interviews James Rickards on the Currency Wars

Peter Schiff recently had an interesting interview with author James Rickards author of the sensational Currency Wars: The Making of the Next Global Crisis.

Find below the interview along with my comments [bold italics]

Peter Schiff: You portray recent monetary history as a series of currency wars - the first being 1921-1936, the second being 1967-1987, and the third going on right now. This seems accurate to me. In fact, my father got involved in economics because he saw the fallout of what you would call Currency War II, back in the '60s. What differentiates each of these wars, and what is most significant about the current one?

James Rickards: Currency wars are characterized by successive competitive devaluations by major economies of their currencies against the currencies of their trading partners in an effort to steal growth from those trading partners.

While all currency wars have this much in common, they can occur in dissimilar economic climates and can take different paths. Currency War I (1921-1936) was dominated by a deflationary dynamic, while Currency War II (1967-1987) was dominated by inflation. Also, CWI ended in the disaster of World War II, while CWII was brought in for a soft landing, after a very bumpy ride, with the Plaza Accords of 1985 and the Louvre Accords of 1987.

What the first two currency wars had in common, apart from the devaluations, was the destruction of wealth resulting from an absence of price stability or an economic anchor.

Interestingly, Currency War III, which began in 2010, is really a tug-of-war between the natural deflation coming from the depression that began in 2007 and policy-induced inflation coming from Fed easing. The deflationary and inflationary vectors are fighting each other to a standstill for the time being, but the situation is highly unstable and will "tip" into one or the other sooner rather than later. Inflation bordering on hyperinflation seems like the more likely outcome at the moment because of the Fed's attitude of "whatever it takes" in terms of money-printing; however, deflation cannot be ruled out if the Fed throws in the towel in the face of political opposition.

[My comment:

At this point policy actions by global authorities do not seem to indicate of a currency war or competitive devaluation as the olden days (as per Mr. Rickards scenarios].

While major central banks have indeed been inflating massively, they seem to be coordinating their actions to devalue. For instance, the US Federal Reserve has opened swap lines to major central banks and to emerging market central banks as well. Japan’s triple calamity a year ago prompted a joint intervention in the currency markets, which included the US Federal Reserve.

Current actions partly resembles a modern day concoction of Plaza Accord and Louvre Accord]

Peter: You and I agree that the dollar is on the road to ruin, and we both have made some drastic forecasts about what the government might do in the face of the dollar collapse. How might this scenario play out in your view?

James: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote - so the dollar collapse scenario must be considered.

Few Americans are aware of the International Economic Emergency Powers Act (IEEPA)... it gives any US president dictatorial powers to freeze accounts, seize assets, nationalize banks, and take other radical steps to fight economic collapse in the name of national security. Given these powers, one could see a set of actions including seizure of the 6,000 tons of foreign gold stored at the Federal Reserve Bank of New York which, when combined with Washington's existing hoard of 8,000 tons, would leave the US as a gold superpower in a position to dictate the shape of the international monetary system going forward, as it did at Bretton Woods in 1944.

[my comment: the direction of current trends in policymaking is the destruction of the US dollar standard. The alternative would be the collapse of the banking system along with the welfare-warfare state. Policymakers are caught between the proverbial devil and the deep blue sea.]

Peter: You write in your book that it's possible that President Obama may call for a return to a pseudo-gold standard. That seems far-fetched to me. Why would a bunch of pro-inflation Keynesians in Washington voluntarily restrict their ability to print new money? Wouldn't such a program require the government to default on its bonds?

James: My forecast does not pertain specifically to President Obama, but to any president faced with economic catastrophe. I agree that a typically Keynesian administration will not go to the gold standard easily or willingly. I only suggest that they may have no choice but to go to a gold standard in the face of a complete collapse of confidence in the dollar. It would be a gold standard of last resort, at a much higher price - perhaps $7,000 per ounce or higher.

This is similar to what President Roosevelt did in 1933 when he outlawed private gold ownership but then proceeded to increase the price 75% in the middle of the worst sustained period of deflation in U.S. history.

[my comment: I don’t think current policymaking trends has entirely been about ideology, a substantial influence has been the preservation of the incumbent political institutions comprising of the welfare-warfare state, the politically privileged banking and the central banking system. True, the markets will eventually prevail over unsustainable systems]

Peter: You also write that you were asked by the Department of Defense to teach them to attack other countries using monetary policy. Do you believe there has a been an deliberate attempt to rack up as much public debt as possible - from the Chinese, in particular - and then strategically default through inflation?

James: I do not believe there has been a deliberate plot to rack up debt for the strategic purpose of default; however, something like that has resulted anyway.

Conventional wisdom is that China has the US over a barrel because it holds more than $2 trillion of US dollar-denominated debt, which it could dump at any time. In fact, the US has China over a barrel because it can freeze Chinese accounts in the face of any attempted dumping and substantially devalue the worth of the money we owe the Chinese. The Chinese themselves have been slow to realize this. In hindsight, their greatest blunder will turn out to be trusting the US to maintain the value of its currency.

[my comment: There are always two parties to a trade, if China would be “dumping” then there has to be a buyer. Question is who would be the buyer? If the world will join China in the US treasury dumping binge, then obviously the buyer of last resort would be the US Federal Reserve. If the US Federal Reserve does not assume such role, then there would be a freeze in the global banking system similar to 2008 or worst.

As to freezing of China’s account; that may happen after the US Federal Reserve consummates the transaction. This stage may not even be reached, unless the US will declare economic sanctions against China which would signify an indirect declaration of war.]

Peter: In your book, you lay out four possible results from the present currency war. Please briefly describe these and which one do you feel is most likely and why.

James: Yes, I lay out four scenarios, which I call "The Four Horsemen of the Dollar Apocalypse."

The first case is a world of multiple reserve currencies with the dollar being just one among several. This is the preferred solution of academics. I call it the "Kumbaya Solution" because it assumes all of the currencies will get along fine with each other. In fact, however, instead of one central bank behaving badly, we will have many.

The second case is world money in the form of Special Drawing Rights (SDRs). This is the preferred solution of global elites. The foundation for this has already been laid and the plumbing is already in place. The International Monetary Fund (IMF) would have its own printing press under the unaccountable control of the G20. This would reduce the dollar to the role of a local currency, as all important international transfers would be denominated in SDRs.

The third case is a return to the gold standard. This would have to be done at a much higher price to avoid the deflationary blunder of the 1920s, when nations returned to gold at an old parity that could not be sustained without massive deflation due to all of the money-printing in the meantime. I suggest a price of $7,000 per ounce for the new parity.

My final case is chaos and a resort to emergency economic powers. I consider this the most likely because of a combination of denial, delay, and wishful thinking on the part of the monetary elites.

[my comment:

I am less inclined to think of a global money (or second) scenario.

I think that the incumbent currency system may transform or morph into a regime of multipolar currencies and or with possible gold/silver participation.

Since I don’t believe that the world operates in a vacuum, even if a global hyperinflation does become a reality, people, communities, states or even governments will act to substitute a collapsing currency incredibly fast.

The currency crisis hasn’t happened, yet we seem to see signs of nations already taking steps towards self-insurance, partly by engaging in bilateral trade financed by the use of local currencies (Brazil-Argentina, China-Japan), and partly by increasing gold’s role in trade: Some US states have begun to promote the use of gold and silver coins also as insurance.

So the seeds to a transition of monetary standards are being sown]

Peter: What do you see as Washington's end-game for the present currency war? What is their best-case scenario?

James: Washington's best-case scenario is that banks gradually heal by making leveraged profits on the spreads between low-cost deposits and safe government bonds. These profits are then a cushion to absorb losses on bad assets and, eventually, the system becomes healthy again and can start the lending-and-spending game over again.

I view this as unlikely because the debts are so great, the time needed so long, and the deflationary forces so strong that the banks will not recover before the needed money-printing drives the system over a cliff - through a loss of confidence in the dollar and other paper currencies.

[my comment: debts are symptoms of prior government spending both from welfare-warfare state and rescues/bailouts of crisis affected institutions including governments]

Peter: I don't think this scenario is likely either, but say it were... would it be healthy for the American economy to have to carry all these zombie banks that depend on subsidies for survival? Wouldn't it be better to just let the toxic assets and toxic banks flush out of the system?

James: I agree completely. There's a model for this in the 1919-1920 depression, when the US government actually ran a balanced budget and the private sector was left to clean up the mess. The depression was over in 18 months and the US then set out on one of its strongest decades of growth ever. Today, in contrast, we have the government intervening everywhere, with the result that we should expect the current depression to last for years - possibly a decade.

[my comment: indeed]

Peter: How long do you think Currency War III will last?

James: History shows that Currency War I lasted 15 years and Currency War II lasted 20 years. There is no reason to believe that Currency War III will be brief. It's difficult to say, but it should last 5 years at least, possibly much longer.

[my comment: past performance may not guarantee future outcomes]

Peter: From my perspective, what is unique about a currency war is that the object is to inflict damage on yourself, and the country often described as the winner is actually the biggest loser, because they've devalued their currency the most. Which currency do you think will come out of this war the strongest?

James: I expect Europe and the euro will emerge the strongest after this currency war by doing the most to maintain the value of its currency while focusing on economic fundamentals, rather than quick fixes through devaluation. This is because the US and China are both currency manipulators out to reduce the value of their currencies. In the zero-sum world of currency wars, if the dollar and yuan are both down or flat, the euro must be going up. This is why the euro has not acted in accord with market expectations of its collapse.

The other reason the euro is strong and getting stronger is because it is backed by 10,000 tons of gold - even more than the US This is a source of strength for the euro.

[my comment:

I don’t think the ex post gold holding under current monetary system will significantly matter.

Some countries (like crisis affected Europe) may sell gold while others (such as emerging markets) may buy gold. So gold ownership will be in a state of continued flux.

The crux would revolve around the following issues

-control of debt build up from government spending

-allowing markets to clear

-what governments does with their gold holdings or will governments reform their currency system by eliminating policy induced bubble cycles? How?]

Peter: You and I both connect the Fed's dollar-printing with the recent revolutions in the Middle East. This is because our inflation is being exported overseas and driving up prices for food and fuel in third-world countries. What do you think will happen domestically when all this inflation comes home to roost?

James: The Fed will allow the inflation to grow in the US because it is the only way out of the non-payable debt.

Initially, American investors will be happy because the inflation will be accompanied by rising stock prices. However, over time, the capital-destroying nature of inflation will become apparent - and markets will collapse. This will look like a replay of the 1970s.

[my comment: the $64 trillion question is inflate against who? Every major central banks seem to be engaged in synchronous-coordinated inflation.]

Peter: How long do you think China's elites will put up with the Fed's inflationary agenda before they start dumping their US dollar assets?

James: The Chinese will never "dump" assets because this could cause the US to freeze their accounts. However, the Chinese will shorten the maturity structure of those assets to reduce volatility, diversify assets by reallocating new reserves towards euro and yen, increase their gold holdings, and engage in direct investment in hard assets such as mines, farmland, railroads, etc. All of these developments are happening now and the tempo will increase in future.

[my comment: Dumping isn’t going to happen unless there would be a buyer. See my earlier comment above]

Peter: In your view, what is the best way for investors to protect themselves from this crisis?

James: My recommended portfolio is 20% gold, 5% silver, 20% undeveloped land in prime locations with development potential, 15% fine art, and 40% cash. The cash is not a long-term position but does give an investor short-term wealth preservation and optionality to pivot into other asset classes when there is greater visibility.

[my comment:

I would adjust portfolio according to the evolving circumstances.

Taking a rigid stance under current heavily politicized conditions could bring about huge market risks. For example, if hyperinflation occurs which Mr. Rickards sees as a “more likely outcome at the moment”, then cash and bond holdings will evaporate]

Quote of the Day: Why Business is (partly) Purer than Academia

One of the most recent post by my favorite iconoclast Nassim Nicolas Taleb on his Facebook wall.

I have made my case on why local elite private schools are predisposed to the political philosophy of social democracy

And here is the great Friedrich von Hayek on why Intellectuals are prejudiced to socialism

And here is the nexus between the US Federal Reserve and the Economic Profession

Global CDS Update: The Risk ON Environment

One substantial driver of the direction of interest rates would be the financial market’s perception of credit risks as measured on the credit standings of each nation.

The fierce start of the year rally seen in equity markets have likewise mirrored the actions in Credit Default Swap (CDS) markets

Writes Bespoke Invest (charts their too)

every country except one (Portugal) has seen its default risk decline in 2012. European countries have mostly seen the biggest drops in default risk, with Belgium leading the way with a drop of 31.6%. Greece -- while it still has by far the highest default risk -- has seen its default risk fall the third most in 2012 with a decline of 25.5%. (France ranks second at -25.7%.) The US currently has the lowest default risk out of all the countries shown by a wide margin.

Additional observations

The concerted accelerated massive credit easing programs undertaken by central banks of developed economies has so far soothed or bought off unsustainable debt concerns. Much of the deluge of liquidity apparently has diffused into the global equity and commodity markets through intensified yield chasing actions by market participants.

The easing environment has been complimented by central banks of emerging markets whom has been mostly slashing interest rates too.

The global financial markets have been heavily politicized and greatly relies on sustained central bank support. Given the heavy dependence on central bank steroids, we should expect sharp volatilities in both directions for the marketplace.

I wouldn’t read through the current façade as lasting. That’s because central banks would need further rationalization to pursue current policies. And the only pretext to do more of the same is to see markets undergo spasms anew.

I wouldn’t also interpret the low default risk of the US as sustainable. The US Federal Reserve has been expanding their balance sheet and has been running massive fiscal deficits which means current sanguine conditions are artificial and manipulated and most likely related to the coming US presidential elections.

One interesting observation is that ASEAN CDS are on the lower half of the table and has shown resiliency compared to many major emerging markets contemporaries and even to some developed economies (e.g. France).

If you are counting on a potential ‘decoupling’ by ASEAN relative to developed economies, the CDS markets will likely be the first area to emit such signals. So far, the CDS markets has been manifesting the same dynamics driving other financial markets--the rising tide lifts (almost) all boats.

Mercantilism: Economic Theories Founded on Biases of Special Interest Political Groups

In a recent quote of the day examining political virtues, I asked

Does 'mistaken theories' cause political "value and ideas" or the other way around (or biased "value and ideas" of special interest groups use the cover of mistaken theories to promote their policies)?

In terms of mercantilism Murray Rothbard has the answer

The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favored high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favored alliances with nobles and with cartelizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries.

Neither did the cartelizing companies need much of a theory to come out in favor of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles, or favored business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles, and monopoly export companies. And who does not want the supply of money in their pockets to rise?

Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist "theory" was a set of rationales designed to uphold or expand particular vested economic interests.

Graphic: “Fear Always Springs From Ignorance”

Another wonderful diagram made by the highly imaginative Ms. Jessica Hagy at the Indexed.

The diagram encapsulates one of my favorite quotes from Ralph Waldo Emerson “Fear always springs from ignorance”

The whole excerpt is from Mr. Emerson’s On the American Scholar, (bold emphasis mine)

In self-trust all the virtues are comprehended. Free should the scholar be—free and brave. Free even to the definition of freedom, “without any hindrance that does not arise out of his own constitution.” Brave; for fear is a thing which a scholar by his very function puts behind him. Fear always springs from ignorance. It is a shame to him if his tranquillity, amid dangerous times, arise from the presumption that, like children and women, his is a protected class; or if he seek a temporary peace by the diversion of his thoughts from politics or vexed questions, hiding his head like an ostrich in the flowering bushes, peeping into microscopes, and turning rhymes, as a boy whistles, to keep his courage up. So is the danger a danger still; so is the fear worse. Manlike, let him turn and face it. Let him look into its eye and search its nature, inspect its origin—see the whelping of this lion which lies no great way back; he will then find in himself a perfect comprehension of its nature and extent; he will have made his hands meet on the other side and can henceforth defy it and pass on superior. The world is his who can see through its pretension. What deafness, what stone-blind custom, what overgrown error you behold is there only by sufferance—by your sufferance. See it to be a lie, and you have already dealt it its mortal blow.

I don’t think this just applies to scholars but to anyone who undertakes the task of research and investigation.

Importantly, I would add passion to being ‘free and brave’ as ideal virtues.

My favorite marketing guru Seth Godin has a timely advice

Fear is the dream killer, the silent voice that pushes us to lose our passion in a vain attempt to seek safety.

While you can work hard to dream smaller dreams, I think it's better to embrace the fear and find bigger goals instead.

In working to attain our dreams, this means that we should become passionate with the pursuit of knowledge for us to overcome the barriers of fear and procrastination, as well as, in filtering out pretensions or politically slanted theories masquerading as reality.

More US States Seek New Gold and Silver Currencies

From the CNN,

A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System ... the State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make "gold and silver Coin a Tender in Payment of Debts."

The world does not operate on a vacuum. People act based on purported ends, or that people responds to incentives shaped by perpetually changing conditions—impelled by the environments, the markets, political policies or social relationships or on a blend of these [certainly not based on mathematical variables and equations].

If national governments continue to relentlessly debauch their currencies, then people will seek refuge in alternative currencies that would preserve their hard earned savings.

The function of money can be seen even in the prison environment where in absence of conventional money, exchanges takes place through spontaneously designated commodity medium by the inhabitants (not authorities).

Returning coins to circulation have even reached mainstream US politics as 2 senators have introduced a bill that would replace dollar bills with coins.

And this aligns with the actions of 13 US states above, who seems to realize of the growing fat tail risks of inflationism.

Swelling grassroots recognition of such risks seems to prompt for noteworthy changes on the fringes of the mainstream political spectrum.

Perhaps we will reach a tipping point where the periphery transforms into the popular. And this should apply not only to the US but importantly to the world.

Quote of the Day: Pedestrian Economics

Keynesianism is itself adorned in magnificent scientific costume and make-up, and its practitioners have built for themselves elaborate games to play that cause them to think that they’re engaged in something more than pedestrian economics. They can shift IS-LM curves, as well as aggregate-demand curves; they can calculate multipliers (“balanced budget” and otherwise); they can impress hoi polli with mysterious terms such as “liquidity trap,” “marginal efficiency of capital,” and “marginal propensity to consume.” But through it all, they – at least when doing Keynesian economics – ignore the very heart of the economy, namely, the goo-gob-gillions of daily adjustments that individuals make to changes in their knowledge, and the smaller – yet still large – number of creative acts that people do daily in hopes of improving their economic prospects. Paying far too little attention to these micro-level matters (or – what is the same thing – assuming these micro-level matters to be fixed and given in ways that, by assumption, leave demand as the only available variable to affect the economy), Keynesians of course can build impressive models that show how exogenous changes in demand will do this or that to the economy.

But these models miss 99 percent of the relevant action – and they miss all of the action that pedestrian economists never become aware of. No pattern of sustainable specialization and trade was ever created by aggregate demand. And no such pattern can be explained or understood by using a method of analysis that focuses only on what, in the final analysis, are largely the consequences of people’s success or failure at establishing patterns of sustainable specialization and trade.

Professor Donald J. Boudreaux expounds on the structural flaws of the Keynesian methodology.

I’d further add that pedestrian economics is in reality, heuristics (mental short cuts) paraded as economic reasoning that has been clothed with math models (mostly used or intended to justify an underlying uneconomic political belief.)

Has Ben Bernanke Been Working to Ensure President Obama Re-election?

Following the closure of the QE 2.0, the US Federal Reserve’s monetary aggregate M2 has ironically been reaccelerating

Part of this may be due to actions undertaken by team Bernanke to erect a firewall to protect the US banking system that has been vulnerable to a contagion from the Euro crisis.

And perhaps another very important interpretation could be to insidiously promote the probability of President Obama’s re-election.

Chart from Bespoke (green superimposed arrows mine)

An ascendant S&P 500 has so far coincided with President Obama’s improving re-election odds. That’s because a rising S&P 500 has been projecting an ‘economic recovery’, albeit a manipulated one, viz., flooding the system with enormous liquidity to engineer an artificial boom that eventually leads to a bust.

Whatever the underlying reason/s, we are seeing the business (boom-bust) cycle in progress.

Incredible Facebook Statistics

From the Economist,

AFTER eight years, scores of lawsuits and a blockbuster movie, Facebook is going public. It is seeking to raise $5 billion from its initial public offering, which would give it an estimated market capitalisation of $80-100 billion—similar to that of fast-food chain McDonald’s. The social network employs only around 3,000 staff, giving it an average revenue of $1.2m per person in 2011. Analysts are quick to point out that the site’s users effectively act as employees, adding content and value for others. Its actual staff and private investors stand to make a small fortune from the floatation. Mark Zuckerberg, the company’s founder and CEO, owns a 28% stake, which will be worth about $28 billion. Facebook’s value is largely derived from its ability to hone adverts to the specific interests of its users. Someone who posts a lot of comments about, say, an engagement, can expect to see more ads for caterers and wedding dresses.

Facebook’s penetration level has been swiftly growing and now approaches the population of India—a manifestation of the snowballing uptake of the internet.

The company’s dynamic advertising based business model—particularly “site’s users effectively act as employees, adding content and value for others” or interactive commerce, exhibits how technology has been changing the business landscape. In the advertising arena, we are clearly witnessing a transformation from mass advertisements to custom based advertisements.

Lastly, you can see the remarkable difference of social media based business in term of employees. Technology companies (Facebook, Google, Amazon and Apple) shows how innovation can bring about the “small means big” impact/value.

Emblematic of the decentralization dynamic from technological advances, information age companies, whom caters to niche markets, have been highly specialized.

These companies provides us a clue of how organizations will be structured overtime. Also these are indications of how technology will continue to put pressure on vertical based organizations, like governments. Such organizations would need to streamline and adapt a flatter structure or go out of business.

Weekend Blogging Lite

I will be spending this weekend (in-town) with my very special friends. So I’d be blogging lite.

Thanks for your patronage and enjoy your weekend.

Quote of the Day: Importance of Human Capital

How important is this human capital? According to recent estimates, the stock of human capital is over $750 trillion. According to a research report from JP Morgan called “U.S. Recession and Repression Are Only in Our Minds,” this is much greater than the roughly $70 trillion of physical and financial assets owned by American households.

As important as human capital is to economic success, it is not evenly distributed around the world. There is ample human capital already in the United States, but there are also enormous stocks of human capital—and potential capital—found overseas.

That’s from Nick Schulz who argues for the opening of skilled immigration in the US. [hat tip Professor Arnold Kling]

The way to enhance human capital is through economic freedom.

Economic freedom is not just about trade freedom, but also of freedom of movements (or social mobility)—where people can choose places on where to live and work or do business.

A liberal migration environment provides greater chances for people to discover on their abilities and to work on these for them to realize their fullest potentials as productive citizens.

And increasing human capital translates to a deepening society’s division of labor which should mean better chances to attain economic prosperity, as well as, social stability.

Also a liberal migration environment that would allow people to vote with their feet, would compel governments to become competitive and increasingly foster receptiveness to civil liberties which likewise reduces repressive political actions.

Information Age: The Rise of 3D Printers

Casey Research’s Chris Wood writes of the prospects of 3D which is “already a $1 billion+ business”,

3D printing is simply too useful across a wide spectrum of applications to be compared to VR. It is here to stay. Going forward, the technology will displace conventional manufacturing techniques in some instances and complement them in others. Consumers will increasingly adopt it. The technology will continually be refined, while the range of usable materials will broaden. These advancements should allow us to start printing electronics in a few years… and perhaps even body parts someday down the road.

This is an industry barely into its infancy. It's a situation not unlike that with the personal computer thirty years ago, when only Steve Jobs, Bill Gates, and a few other visionaries foresaw that the PC could become an essential household appliance.

I earlier posted a video of 3D Printing here

As part of the “smart manufacturing” or one of the 3 forces that will underpin the information age, I’d conjecture that 3D printing will herald the evolving trend of mass customization or the emergence of Prosumers where 3D printing will likely bring some, if not many, aspects of (personalized or custom based) manufacturing to the households. In short, some things will be produced at home, when or as needed. [possibly even body parts as pointed out, e.g. printing of kidney]

Again forces of decentralization driving structural changes in the way we live at work.

Mainstream Analysts Capitulates on Bear Market Views

From Bloomberg,

Strategists at the biggest banks are capitulating on their bearish forecasts after the best start to a year for global stocks since 1994 and gains of more than 7 percent in emerging-market currencies.

Just two weeks after saying that investors should “remain cautious,” Larry Hatheway, the chief economist at UBS AG (UBSN), raised his recommendations on global shares and high-yield bonds in a Jan. 23 note to customers entitled, “Wrong, but not too late.” Royal Bank of Scotland Group Plc (RBS), and Benoit Anne, the global head of emerging-markets strategy at Societe Generale (GLE) SA, said their estimates for developing nations were proven wrong.

The MSCI All-Country World Index (MXWD) climbed 5.7 percent in January, surprising strategists at Bank of America Corp. (BAC),Goldman Sachs Group Inc. (GS) and Barclays Plc (BARC) who had forecast first-half losses because of Europe’s debt crisis. JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C), which predicted the rally in stocks, say it will continue as the U.S. housing market rebounds and China eases lending restrictions to bolster economic growth.

Another instance where the mainstream admits to have gotten their analysis, and subsequently their predictions, all so wrong. Independent (usually contrarian) thinking pays. And most important is adhering to the methodology taught by Professor Ludwig von Mises.

There is only one way of dealing with all problems of social organization and the conduct of the members of society, viz., the method applied by praxeology and economics. No other method can contribute anything to the elucidation of these matters.

Quote of the Day: World War II Did Not End the Great Depression

Unemployment fell during the war entirely because of the buildup of the armed forces. In 1940, some 4.62 million persons were actually unemployed (the official count of 7.45 million included 2.83 million employed on various government work projects). During the war, the government, by conscription for the most part, drew some 16 million persons into the armed forces at some time; the active-duty force in mid-1945 numbered in excess of 12 million. Voila, civilian unemployment nearly disappeared. But herding the equivalent of 22 percent of the prewar labor force into the armed forces (to eliminate 9.5 percent unemployment) scarcely produced what we are properly entitled to call prosperity.

Yes, officially measured GDP soared during the war. Examination of that increased output shows, however, that it consisted entirely of military goods and services. Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946. The privately owned capital stock actually shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)

It is high time that we come to appreciate the distinction between the government spending, especially the war spending, that bulks up official GDP figures and the kinds of production that create genuine economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, “war prosperity is like the prosperity that an earthquake or a plague brings.”

That’s from the economist Robert Higgs who debunks the popular myth.

Common sense tells us that it would be foolish to ever think that society prospers from death and destruction, despite what statistics say. Yet many fall for sloppy generalizations, which has been founded on the post hoc fallacy and the broken window "war prosperity" myth.

Again Professor Art Carden on the Broken Window Fallacy

Video: Statistical Trickery on US Wage Stagnation

Professor Don Boudreaux exposes on how statistics can be subject to analytical prestidigitation. Statistical legerdemain has frequently been used to mislead the public in order to justify certain policy preferences. In the following video, Professor Boudreaux rebuts the twisted use of statistics to argue the case of US wage stagnation. (hat tip: Dan Mitchell)

Statistics are frequently used as an intellectual cover to what are truly (political or economic) biases founded on heuristics.

PIMCO's Bill Gross Endorses Ron Paul

In politics you should expect the unexpected.

Pimco's chief honcho Bill Gross, a Keynesian who previously seemed like an avid fan of Paul Krugman surprisingly endorses Ron Paul.

Here is the CNN interview

Confusing Corporatism with Capitalism

Bashing capitalism has been the chic thing to do for people who bear ideological spite on it or for those who advance statism as solution to social ills.

Yet in reality, current crisis has not been laissez faire capitalism but about the nefarious relationship of the welfare-warfare state, their private sector allies and their behind-the-scene guarantors or backers, the central banks. Such political arrangement comes in various nomenclature: state capitalism or corporatism or crony capitalism or economic fascism.

Professors Edmund S. Phelps and Saifedean Ammous at the Project Syndicate explains the difference, (bold emphasis added) [hat tip Peter Boettke]

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.

In short, capitalism essentially is about serving consumers (or the needs of the masses), while corporatism is about fulfilling the interests of political masters.

Critics of capitalism have been engaged in equivocation by deliberately mangling the definitional context of capitalism.

Nevertheless, pushing for the same state based political solution will bring about the day of reckoning, as the Professors conclude,

The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then “capitalism” would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it.

I am with the professors that given the current direction of policymaking, the top-bottom or centralization based political economic system is likely headed for self-implosion.

And I am hopeful too that capitalism will emerge from their ashes, especially backed by accelerating advances in technology. But as caveat, nothing in life operates in a straight line or that the transition towards a decentralized-capitalist political economy could be messy.

Mercantilistic US Monetary Policies Has Political Implications

The conduct of ‘imperialist’ US foreign policies somewhat resembles US monetary policies: mercantilism channeled through currency wars.

Writes Professor Steve Hanke at the Financial Post, (bold emphasis mine)

The United States has a long history of waging currency wars in Asia. We all know the sad case of Japan. The U.S. claimed that unfair Japanese trading practices were behind the ballooning U.S. bilateral trade deficit.

To correct the so-called problem, the U.S. demanded that Japan adopt an ever-appreciating yen policy. The Japanese complied and the yen appreciated against the greenback, from 360 in 1971 to 80 in 1995 (and 77, today). But this didn’t close the U.S. trade deficit with Japan. Indeed, Japan’s contribution to the U.S. trade deficit reached almost 60% in 1991. And, if that wasn’t enough, the yen’s appreciation pushed Japan’s economy into a deflationary quagmire.

Today, the U.S. is playing the same blame game with China. And why not? After all, China’s contribution to the U.S. trade deficit has surged to 45%.

Above is the USDollar Japan Yen chart since 1970 (St. Louis Federal Reserve)

Yet in spite of the massive appreciation partly from US behests, Japan’s trade balance remained positive until last year (for the first time in 31 years; chart from the Economist)

Well, Professor Hanke points out that a currency war with China has had a precedent.

To appreciate just how dangerous currency wars can be, let’s lift a page from the U.S. government’s old currency war playbook. During his first term, President Franklin D. Roosevelt delivered on his Chinese currency stabilization “plan.” China’s yuan was pegged to the price of silver, and it was asserted that higher silver prices would benefit the Chinese by increasing their purchasing power. Congress granted the Roosevelt Administration the authority to buy silver in massive quantities. The administration pushed the price of silver up by 128% in the period between 1932 and 1935. As the dollar value of silver went up, so did the value of the yuan.

America’s “plan” worked like a charm, but it had consequences that Washington had not quite advertised. The rapid appreciation of the yuan threw China into the jaws of the Great Depression. Between 1932 and 1934, its gross domestic product fell by 26% and wholesale prices in the capital city, Nanjing, fell by 20%. China officially abandoned the silver standard on Nov. 3, 1935. This spelled the beginning of the end for Chiang Kai-shek’s Nationalist government.

Every political policy has designated winners and losers, which means that monetary policies too have political dimensions. And perhaps anytime the US government sees a serious contender to their economic tiara, their political-bureaucratic stewards intuitively resort to what seems as bullying or intimidation or “beggar thy neighbour” policies: currency war. [Brazil in 2010 raised the spectre of an escalation of a currency war or competitive devaluation.]

Yet such political stratagem of scapegoatism seems contrived to divert the attention of the average Americans from the policy mistakes committed by the US government (boom bust cycles, fast expanding welfare state, war on terror policies and etc…).

We can even fuse together monetary and US foreign policies—the EU’s recent sanction on Iran seems parceled into the US Federal Reserve’s bailout.

Also, the US has even been selling China as a military threat to advance US military’s exposure in Asia, simultaneously while the Obama administration has been criticizing China’s trade and currency policies. All these seem to be part of the psywar operative.

Never mind if the US seems on path towards internal policy induced decadence.

For what seems intended is the preservation of the status quo, or the entitlements of the entrenched patrons—the political class and their clients—the banking and military industrial complex—all at the expense of everyone else.

The philosophy of mercantilism or protectionism, once wrote Ludwig von Mises,is indeed a philosophy of war.

Model Failure: Unreliable Statistical Index (LEI)

More testament of the glaring failures of statistical aggregates or econometrics from Dr. Ed Yardeni, (bold emphasis mine)

I’m not a big fan of leading economic indexes (LEIs). They can be quite misleading. They are constructed by well-intentioned economists with the intention of providing an early warning that a recession is coming in a few months or assurance that the economy is likely to expand in coming months. These man-made indexes combine a bunch of indicators that purportedly lead the business cycle. When they fail to do so, the men and women who made these indexes recall them, retool them, and send them back out for all of us to marvel at how well these new improved versions would have worked in the past. I can accurately predict that when they fail in the future, they will be recalled and redesigned yet again.

This just happened to the US LEI. The Conference Board has made the first major overhaul of the components of the LEI since it assumed responsibility of the index in 1996. It replaced real money supply with its proprietary leading credit index, and the ISM supplier delivery index with the new orders index. In place of the Thomson Reuters/University of Michigan consumer expectations measure, it will now use an equally weighted average of its own consumer expectations index and the current measure. Also, the nondefense capital goods gauge was tweaked to exclude commercial aircraft.

The impact of these changes has been shocking, and really questions the credibility of constructing LEIs.

As shown above, econometricians and statisticians laboriously attempt to fit evidence into models in the hope that calibrating them would increase their predictive capabilities. Unfortunately, they don’t. That’s because social sciences isn’t physics.

As the great Friedrich von Hayek wrote,

the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."

Differentiating Phony Rights from Real Rights

In a letter to a newspaper, Professor David Henderson refutes what the mainstream and leftists call as “rights”

A real right is, say, my right not to be murdered. The only responsibility that imposes on you and others is not to murder me. In other words, it's a responsibility not to do something. The "right" to good housing, though, is a phony right because it implies that someone else has a positive duty to provide it. And let's not hide behind government. The only way government can provide things is by forcibly taking from others.

Except for the preservation of the natural rights to life, liberty, and property, I’d be very leery of anyone claiming for (positive) “rights” (which are disguised grants to state power) as such would extrapolate to more taxes, restriction of civil liberties and inflation.

Quote of the Day: Political Virtues from the Public Choice Perspective

Faced with the argument that politics is a game where self-interested businesses, labour unions and government bureaucrats use the state to enrich themselves at public expense, some left-wingers respond by denying that this is so. Politics they say is motivated by ‘values’ and this is something that the economistic focus of public choice theory simply doesn’t take account of. I for one have a good deal of sympathy with this line of argument. It seems far too simplistic to maintain that every public policy that exists is there because of special interest forces. To suggest otherwise is to be guilty of a sort of ‘right-wing Marxism’. The problem for left-wingers who make this sort of response to public choice, however, is that it implies that many of the quasi- conspiracy theories that are often their most important mobilisation tactic have to be abandoned as well. Might it just be that that central banks and financial regulators who pursued a policy of loose money and the lowering of lending standards did so because they believed it was the ‘right thing to do’ and not because they were in the pockets of corporate bankers? If politics is really about values and ideas then perhaps we should look to the power of ‘mistaken theories’ (such as Keynesianism and Monetarism) as the cause of government failure rather than the corrupt dealings of the ‘top 1%’.

From Mark Pennington.

Does 'mistaken theories' cause political "value and ideas"or the other way around (or biased "value and ideas" of special interest groups use the cover of mistaken theories to promote their policies)?

China Bubble: A Blossoming Mania on ‘Himalayan Viagra’?

China’s bubble policy and the severely constrained capital markets appears to be driving people to look for objects in which to speculate on.

From the Wall Street Journal

For generations, Chinese men looking for a dose of vigor have sworn by a traditional remedy: fungus harvested from dead caterpillars, known in some quarters these days as Himalayan Viagra.

Now Chinese investors are using the rare fungus to try to boost something else—their investment returns. The fungus has doubled in price over the past two years and the top grade now fetches more than $11,500 a pound, according to Fuzhou-based brokerage firm Industrial Securities…

The problem for Chinese investors is that returns have evaporated from more traditional markets. Real estate was once China's favorite investment, but government efforts to contain price increases and keep housing affordable have led to price stagnation and even declines in some cities. China's major stock exchange in Shanghai is down almost 20% since the beginning of 2011. Bank deposit rates are lower than the pace of inflation, meaning savers effectively pay banks for the privilege of handling their money…

China's central government is less than intoxicated by the investment party. It said in November it would tighten oversight of Chinese asset exchanges, warning of "serious speculation and price manipulation" among some and adding that some "managers have run off with clients' funds."…

Some of the biggest boom-and-busts have taken place at art exchanges.

"Roaring Yellow River," a traditional landscape painting by the late artist Bai Gengyan, was the first work listed last year by the Tianjin Cultural Artwork Exchange. Within two months of the offering, shares were trading at nearly $3 each, up from about 15 cents, valuing the painting at about $18 million. The previous auction high for the artist's work was a bit more than $600,000.

About two months after the offering, the Tianjin city government suspended trading in "Roaring Yellow River" and another painting, and the exchange imposed limits on daily and monthly price changes. Shares of "Roaring Yellow River" now trade at about 20 cents, down more than 90% from their peak.

China’s government has been applying a whack-a-mole approach to contain emergent bubbles in her economy, which so far she has managed to kick the proverbial can down the road.

Yet this reminds me of the Dutch Tulip mania in the 17^th century (Dutch Golden Age), where tulips once a social status symbol became the fixation of massive speculation which led to one of the first ever well-known financial panics. But of the course the dynamics today and then has been different.

The point is people respond to the incentives generated by policies.

Nevertheless all these chasing for yields are symptomatic of boom bust cycle at work.

Graphic: How Sustainable is Unsustainable

From xkcd.com (hat tip Mark Perry)

Information Age will be Driven by Three Major Forces

Writing at the Wall Street Journal physicist-entrepreneur Mark P. Mills and Dean of McCormick School of Engineering and Applied Sciences at Northwestern University Julio M. Ottino sees a dramatic reconfiguration of the US economy that would likely be driven by 3 major forces: big data, smart manufacturing and the wireless revolution.

They write, (bold emphasis mine)

In January 2012, we sit again on the cusp of three grand technological transformations with the potential to rival that of the past century. All find their epicenters in America: big data, smart manufacturing and the wireless revolution.

Information technology has entered a big-data era. Processing power and data storage are virtually free. A hand-held device, the iPhone, has computing power that shames the 1970s-era IBM mainframe. The Internet is evolving into the "cloud"—a network of thousands of data centers any one of which makes a 1990 supercomputer look antediluvian. From social media to medical revolutions anchored in metadata analyses, wherein astronomical feats of data crunching enable heretofore unimaginable services and businesses, we are on the cusp of unimaginable new markets.

The second transformation? Smart manufacturing. This is the first structural shift since Henry Ford launched the economic power of "mass production." While we see evidence already in automation and information systems applied to supply-chain management, we are just entering an era where the very fabrication of physical things is revolutionized by emerging materials science. Engineers will soon design and build from the molecular level, optimizing features and even creating new materials, radically improving quality and reducing waste.

Devices and products are already appearing based on computationally engineered materials that literally did not exist a few years ago: novel metal alloys, graphene instead of silicon transistors (graphene and carbon enable a radically new class of electronic and structural materials), and meta-materials that possess properties not possible in nature; e.g., rendering an object invisible—speculation about which received understandable recent publicity.

This era of new materials will be economically explosive when combined with 3-D printing, also known as direct-digital manufacturing—literally "printing" parts and devices using computational power, lasers and basic powdered metals and plastics. Already emerging are printed parts for high-value applications like patient-specific implants for hip joints or teeth, or lighter and stronger aircraft parts. Then one day, the Holy Grail: "desktop" printing of entire final products from wheels to even washing machines.

The era of near-perfect computational design and production will unleash as big a change in how we make things as the agricultural revolution did in how we grew things. And it will be defined by high talent not cheap labor.

Finally, there is the unfolding communications revolution where soon most humans on the planet will be connected wirelessly. Never before have a billion people—soon billions more—been able to communicate, socialize and trade in real time.

The implications of the radical collapse in the cost of wireless connectivity are as big as those following the dawn of telegraphy/telephony. Coupled with the cloud, the wireless world provides cheap connectivity, information and processing power to nearly everyone, everywhere. This introduces both rapid change—e.g., the Arab Spring—and great opportunity. Again, both the launch and epicenter of this technology reside in America.

I think that this will not just be a feature that would influence the US economy, but also of the world, as the significance of political borders trends towards irrelevance.

Said differently, the above forces will likely underpin the accelerating influence of decentralization to the political economic sphere throughout the world.

Japan to Ease Requirements for Foreign Workers

I’ve been saying that the current unsustainable demographical trends in Japan will require the liberalization of migration policies which would allow inflows of foreign workers to offset the nation’s swiftly declining fertility rate (negative population growth).

Chart from Wikipedia.org

So far, rigid bureaucratic requirements has posed as a stumbling block, but this seems likely to change.

From Japan Times,

Non-Japanese applicants hoping to become certified nurses could see the government's notoriously rigorous exams get easier with the inclusion of English-language tests and a new set of communication exams based on basic Japanese.

Non-Japanese hoping to become care workers took the certification test for the first time Sunday, while those aspiring to become certified nurses have been applying for the exam since fiscal 2008.

But the low pass rate is prompting the Health, Labor and Welfare Ministry to consider changing the system.

As I wrote last year

I’d bet cultural inhibitions extrapolated through politics will eventually pave way to embracing reality.

And reality check translates to policy changes.

Chart of the Day: The US Federal Reserve Laughed Their Way to the Bubble Bust

The Daily Stag Hunt tabulated the laughs of the officials of US Federal Reserve, led by ex-chairman Alan Greenspan, from the transcripts of their committee meetings. (hat tip Patrick Ella)

Proof of how clueless they had been of the disaster that was about to shock them.

How Democracy Represents a Form of Socialism

Advancing socialist agendas (like welfare, warfare state and other policies of redistribution, prohibition, taxation and others) by invoking the mob rule (tyranny of the majority) signifies a form of socialism.

Ben O'Neill at the Mises Institute explains, [bold emphasis mine, italics original]

Democracy, of the unlimited kind lauded today, is a form of socialism, in the sense that it arrogates ultimate power over all decisions to the government. Implicit in the notion of people's present love affair with mob rule is the assumption that government, through the collective "will of the people," should have the prerogatives of ownership of all resources in society, should it choose to exercise these. The democrat brooks no limitation on the legitimate powers of government and hence gives total ownership over all of society to this institution. The only limitation in his mind is the limitation of democracy itself — that the rulers in control of the government apparatus must guard against being displaced by another set of rulers, at the behest of the demands of the mob.

The socialistic nature of democracy is true regardless of the size of governments elected under a democratic order or their particular policies. It is true even when a democratic government chooses policies that are relatively liberal and purportedly support the ownership of private property. For such property ownership is regarded as conditional. Supporters of the system of democracy assert their right to forcibly interfere in the lives of others whenever they have sufficient support from the mob to do so, or are otherwise capable of capturing political power. By supporting the existence of a democratic order they implicitly sanction an arrogation of ultimate ownership of all society to the government, whether decisions over particular resources are exercised by government or not.

Any private property or personal autonomy allowed under democracy exists only with the permission of the government, and under the constant threat of the whims of the mob, rather than existing as a recognized enforceable moral right against the government. The ideal of democracy dictates that a person's private rights are always subject to being overruled by the government, and so it is actually the government that is the implicit owner of all the resources (and people) in its territory. Such a society is implicitly socialist in character, unless and until people reject the legitimacy of government power over their resources, a view which requires the rejection of mob rule as a governing principle.

Read the rest here.