Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions

Since I’ve already lain out my expectations and projections[1], and with little changes in the global political and economic landscape; all that is required is to simply monitor how my stated themes have been playing out.

Global Markets Still on a Bullish Juggernaut, Expect Profit Taking Anytime

The blazing start for the year 2012 for global equity markets continues.

So far, this has been a “free-for-all” environment for global equity markets as stock markets from developed to emerging to frontier markets seem to be furiously galloping for the top spot.

Argentina and the Philippines, whom were the early leaders[2] have fallen back and have been surpassed by newcomers Turkey, Vietnam, Greece and Venezuela. The latter have joined the recent leaders of the pack, particularly Egypt, Germany, Russia, India, Austria and Peru.

And six weeks into the year, based on nominal local currency returns, the gains have been an eye-popping 15% and more for the frontrunners!

While the local bellwether the Phisix racked up a fantastic 9.41% such advances has not been enough to keep in pace with the current pack of leaders. But this is understandable, the Phisix and ASEAN markets are trading at record highs or near record highs, whereas most of the leaders are coming off from the recent lows.

And another noteworthy observation is that the credit easing operations by the European Central Bank (ECB) at the Eurozone has led Greece and Germany and other European bellwether to outperform. But again, while the region has posted gains in general, the scale of advances has been variable. Again this seems to underscore the relative effects of monetary inflation.

For instance, Greece’s outperformance may be due to the market’s factoring in of the bailout deal[3]. For Germany, in spite of the ephemeral stabilizing effect brought by the ECB’s Long Term Refinancing Operations (LTRO) to the financial markets, investors have reportedly been stuck with placements to German bunds[4] due to lingering uncertainty over the success of the current bailout measures. My guess is that aside from the bund, part of the money from LTRO operations have percolated into Germany’s equities.

Local currency gains can be misleading too. While Venezuela posted 13.73% returns y-t-d, statistical inflation rate has been about or nearly double the returns (see chart[5]) which implies of negative real returns on equity investments.

This also infers that Venezuela’s stock market has mostly been reflecting on the state of their currency’s (Bolivar) chronic disorder, an outgrowth of socialist policies gone haywire, which of course can hardly be explained by either earnings or economic growth.

Going back to the global equity market backdrop, of the 71 bourses I track only 14% are in the red. Most of the issues that are NOT on my screen are from Middle East and North Africa (MENA) and from Central Asia, if time permits I will eventually include these benchmarks.

In Asia, aside from Vietnam, India and the Philippines, the other top gainers have been Hong Kong, Taiwan, Korea and Thailand where gains have ranged from 8-13% over the same period.

Among major ASEAN bourses, there has been a widening gap between the outperformers Philippines-Thailand and this year’s laggards Indonesia-Malaysia. The latter pair has registered measly gains of just over 2%. Such divergence would seem anomalous considering their previous tight correlations of the four bourses.

Yet if such tight correlations should continue, then we should expect either the latter pair to do some sizable catching up or for the former pair to retrace. Otherwise, current actions may signal a departure from the previous relationship.

Meanwhile, Vietnam’s recent surge can be traced to central bank policies too. Interest rates on local currency loans had been cut by 2%[6] which constitutes part of the series of cuts recently made by the Vietcombank. This is aside from recently granted subsidized rates for politically preferred industries made by state owned Bank for Investment and Development of Viet Nam (BIDV)

The big picture matters.

Looking at chart actions should give us a better handle on the current situation.

One does NOT need to rely on technical indicators to see how overbought global markets have been, given that price actions for the FTSE World (FAW), the US S&P 500 (SPX), Europe’s Stoxx 50 (Stox50) and Asia’s Dow Jones Asia Pacific Index (P1DOW) have risen nearly at an angle of 45 degrees with hardly any breathing spell.

The US equity markets, represented by the S&P, appears to have assumed the role of the du jour leader for global equity markets and now trades at the resistance levels (blue horizontal line).

On the other hand, the contemporary benchmarks of the Europe and of Asia remains way below their respective resistance levels.

Notice too how tightly correlated the major global markets have been when based on the seeming symmetry in the undulations of each of the chart actions above.

The point that requires emphasis is that while nominal gains accrued have been relatively diverse, price movements seems have been synchronized. These actions essentially serves as manifestations of the relative effects of inflation which magnifies on the inflationary boom being experienced by global equity markets and the ‘globalization’ of stock market price actions.

Divergent returns on convergent actions primed by a highly inflationary backdrop.

The supercharged and largely overbought global markets have yet to encounter a cyclical countertrend or a natural profit taking cycle.

So while the inflationary push on financial assets may continue over the interim, we should expect profit taking to take place anytime. And global markets will likely embrace any negative developments as an excuse to justify such actions.

However, any profit taking will likely be characterized by short term impact at a modest scale.

More Confirmation Signs of Phisix’s Inflationary Boom

Manifestations of the inflationary boom in global markets seem to be equally evident in the local Philippine Stock Exchange.

My hunch for a boom on capital intensive or capital goods industries (as seen in the property sector and energy sector, aside from the mining sector), as well as, in the banking and financial sector, as funding intermediaries, seem to come to fruition.

As I previously wrote[7],

I am predisposed towards what Austrian economics calls as the higher order stages of production or the capital goods industries, which are likely the beneficiaries of the business cycle, specifically, mining, property-construction and energy, as well as financials whom are likely to serve as funding intermediaries for these projects.

Also, market leadership seem to be rotating away from the former leader the mining sector. The levelling of gains through the broader market appears to be reinforcing the bi-annual outperformance of the mines as I previously noted[8].

Yet index watching may not tell of the entire story too.

The gains of the holding index, which placed third, have likely been due to exposure by the mother companies of Ayala Corporation and SM Investments to their sizzling hot subsidiaries in the property and or the financial sector, while the rest of the holding sector has lagged.

Also while price actions of the mining titans seem to have faltered which has led to the retracement of the mining index, the market’s attention has palpably shifted to the peripheral issues.

To cite some examples of mining component issues on a year-to-date basis, Manila Mining has been up 26.67%, Nickel Asia 17.6%, NiHao Mineral Resources 136% (!!!), Geograce Philippines 67.9% (!!), Apex Mining 37.5% (!), Omico Corporation 15.2%, Oriental Peninsula Resources 48.6% (!!) and oil issues Oriental Petroleum A 31.25% (!) and The Philodrill Corporation 45.45% (!!).

In short, the market’s attention for the mining issues remains intact except that the focus has shifted from the core to the periphery.

Going back to the internal market activities of the PSE, for 2012, through the week ending February 10^th, the Phisix has corrected only once in 6 weeks.

Since the last correction, which was about two weeks ago, the local benchmark has been in consolidation.

So even as the bulls appear to be in a temporary lull, the daily Peso volume traded (averaged on a weekly basis) which has meaningfully improved, appears to have peaked.

In the meantime, advance-decline spread (averaged weekly) seems to be narrowing, following a lopsided surge which has favored the bulls.

Also for the first time this year, foreign trade posted a net selling last week.

I would see these as potential signs of a coming profit taking mode.

But there is an important caveat. In a bullmarket, overbought conditions can remain extended for a certain period of time. Therefore predicting short term moves can be tricky.

Although we can’t discount and should expect a normal countercyclical trend or a correction anytime, any profit-taking shouldn’t be seen as an end to the current momentum, as these would again, likely signify a short-term event with a modest impact (unless external factors will sharply deteriorate)

Besides, as recently exhibited by the market’s internal dynamics, corrections may imply a decline of the benchmark heavyweights but not necessarily reflecting the motions of the overall markets.

To the contrary, the rotational dynamic may likely continue; whether the market’s attention will shift in distributing gains among sectors or among issues within a particular sector.

At the end of the day, easy money policies in the Philippines and abroad will likely lend support to the cause of the bulls.

Inflationary Boom in the Real Economy

I’d further add that the inflationary boom can be seen in in the real economy as systemic credit growth has surged remarkably where the rate of growth of commercial bank lending in the Philippines has doubled in 2011 from 2010.

According to the Manila Bulletin[9]

The total outstanding loans of commercial banks went up by 19.3 percent at the end of 2011, higher than 2010 growth of 8.9 percent and reflecting a robust growth in the real sector.

Growth in commercial loans was across the board. All posted double digit growth led by mining/quarrying loans (60.1%), wholesale and retail trade (57.8%), electricity/gas/water (54.2%), real estate/rending/business services loans (25.2%), construction (22.3%) and financial intermediation (16.8%).

Statistical categorization can’t be relied on though. As in the latest Bangladesh experience[10], many loans labeled as ‘industrial’ were rechanneled to other undertaking, particularly to the stock market. The monetary tightening by the government put an end to yield chasing activities which prompted for last year’s crash that even spawned a political turmoil.

The next very crucial point is policy induced negative real rates seem to be driving the public to take on more credit driven activities. What the mainstream and the media sees as ‘healthy developments’ are in reality nascent indications of malinvestments and the implicit promotion of consumption activities.

As German economist and honorary professor Thorsten Polleit[11] explains (italics original)

The artificial lowering of the market interest rate induces additional investment. At the same time, savings decline and consumption increases. As a result, the economy starts living beyond its means. The boom is inflationary: all that has increased is the amount of money, not the supply of the means of production, such as labor and land.

The boom is economically unsustainable, because the policy-induced deviation of the market interest rate from the neutral interest rate causes malinvestment. Firms embark upon capital-intensive investment projects, and production becomes more time consuming, or roundabout.

The lengthening of the production structure implies a rise in the production of capital goods at the expense of consumer goods. The artificially suppressed market interest rate thus induces firms to engage in a kind of production that does not correspond to actual demand. As soon as this is revealed, the money-driven boom turns into bust.

Again piecing up the pieces together, we are seeing more evidence of an inflationary boom or the Austrian business cycle or the boom bust cycle at work which has been influencing the actions in the financial markets, as well as, in real economic activities.

Expect More Monetary Inflation Ahead

Central banks of developed economies have continued to telegraph aggressive expansions of their balance sheets directly or indirectly.

The Bank of England (BoE) announced a £50 billion increase[12] of their bond purchases over the next 3 months.

The European Central Banks will be offering the second tranche of their Long Term Refinancing Operation (LTRO) by the end of February[13] where ECB President Mario Draghi urged banks to avail of this facility.

The ECB may be adapting more eligible form of collateral to accommodate more banks in the upcoming LTRO.

According to the Danske Research[14],

The ECB has approved proposals relevant for acceptance of additional credit claims as collateral in the credit operations put forward by seven central banks, namely Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank and Banco de Portugal (see national central banks for further details). The other national central banks are working on preparing similar proposals for temporary approval of credit claims as collateral. The broadening of the collateral base can potentially increase the usage of the second LTRO substantially compared with the first one.

Draghi refrained from giving any estimate on the expected usage of the upcoming threeyear LTRO. It was clear that Draghi was comfortable about the substantial market relief following the introduction of the three-year LTRO. We expect banks to take around EUR300-600bn at the 3Y LTRO. According to Reuters, forecasts now range from EUR75bn to EUR800bn and there is still talk of EUR1tr. We expect banks to take around EUR300-600bn

LTRO’s serve not only as free money, but as opportunities for the banking system to offload toxic assets to the ECB. The banking system will oblige on Draghi’s call.

Next politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law[15] in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

Acting chairman of the Swiss National Bank, Thomas Jordan, also vowed to continue with currency intervention[16] through quantitative easing if deemed required by the technocracy.

Moreover, a purported $26 billion foreclosure deal[17] by the US government with various states and the 5 biggest banks appear to be parcel to US Federal Reserve chairman Ben Bernanke’s repeated pronouncements of QE 3.0 targeting mortgages[18] which could serve as a backdoor bailout of the privileged “too big to fail” banks[19].

Around the world this week, three central banks slashed rates (Belarus and Indonesia[20] as well as Vietnam). This further adds to the negative real rates environment that should be supportive of the asset markets.

Commodity prices have risen but returns have varied. Gold has led the recovery followed by the industrial metals (DJAIN) and the energy index (GJX). Agriculture prices have trailed (GKX). Nonetheless, world food prices have reportedly reached the highest level in 11 months[21].

With commodity prices not as responsive relative to gains of financial asset markets, this will be seen by central bankers as windows of opportunities for the deployment of more credit easing programs.

So any correction must be seen as an opportunity to accumulate as all these money printing will have to flow somewhere.

Finally while I have been emphasizing that interest rates will serve as a major gauge on monetary conditions, interest rates won’t be a one-size-fits all solution in predicting cyclical inflection points.

As I have pointed out in the past[22],

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.

Plainly put, different circumstances will influence interest rate prices distinctly. This also means varying impacts on the financial markets. Thus identifying the cause of interest rate conditions will matter. The yield curve will matter. Actions in several credit markets (CDS, TED Spread, Libor-OIS) will matter. The correlations with other interconnected markets will also serve as other pivotal factors.

Since markets represent human actions, they are a complex dynamic. Thus aggregate based analysis or heuristics paraded as economic reasoning can be fatal.

---

[1] See What To Expect in 2012, January 9, 2012

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

[3] Reuters.com Greece set to agree bailout as Germany demands action, February 12, 2012

[4] Bloomberg.com ECB Cash Fails to Wean Investors Off German Debt: Euro Credit, February 10, 2012

[5] Tradingeconomics.com Venezuela Inflation Rate

[6] Vietnamnews.com Banks flirt with low interest rates February 11, 2011

[7] See Phisix-ASEAN Equities: Awaiting for the Confirmation of the Bullmarket, November 13, 2012

[8] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[9] Manila Bulletin Loans Grow 19.3% In 2011 February 9, 2011 mb.com.ph

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

[11] Polleit, Thorsten The Cure (Low Interest Rates) Is the Disease, April 5, 2011, Mises.org

[12] See Bank of England Adds 50 billion Pounds to Asset Buying Program (QE), February 9, 2012

[13] Reuters.co Euribor rates fall after ECB urges banks to tap LTRO, February 10, 2012

[14] Danske Research Flash Comment ECB meeting: looking intensively at credit tightening risk, February 9, 2012

[15] Reuters.com BOJ may consider action next week as political pressure mounts, February 10, 2012

[16] Financial Times Jordan vow to continue SNB intervention, February 2, 2012

[17] New York Times, States Negotiate $26 Billion Agreement for Homeowners, February 8, 2012

[18] Bloomberg.com Bernanke Doubles Down on Fed Bet Defied by Recession: Mortgages, January 20, 2012 Businessweek.com

[19] Newsmax.com David Stockman: Obama Mortgage Refinance Plan is 'Crony Socialism' February 8, 2012

[20] Centralbanknews.info Monetary Policy Week in Review - 11 February 2012, February 10, 2012

[21] See Inflation Watch: World Food Prices Jump Most in 11 Months February 9, 2011

[22] See I Told You Moment: Philippine Phisix At Historic Highs! January 15, 2012

Quote of the Day: Real Knowledge versus Pretentious Knowledge

People who know what they're talking about...

Almost always talk like they know what they're talking about. That's why it pays to invest more time than you might imagine on the vocabulary, history and concepts of your industry.

Insider language, terms of art, the ability to use technical concepts... it matters.

On the other hand, sounding like you're smart doesn't mean you are.

Necessary but not sufficient.

My favorite marketing guru Seth Godin says it best.

Admitting to ignorance is a fundamental way to acquire knowledge. On the other hand, the presumption of possessing superlative knowledge exposes one's ignorance. Filtering one from the other matters.

Online Interactive Learning: Flipped Classrooms

I have been predicting that the information age or digital economy will be driving radical changes in many aspects of social life especially in education.

Peer based instruction seems as another frontier for innovation in education.

From Harvard (bold emphasis mine)

Researchers at Harvard University have launched the Peer Instruction (PI) Network (www.peerinstruction.net), a new global social network for users of interactive teaching methods.

PI, developed by Eric Mazur, Area Dean for Applied Physics and Balkanski Professor of Physics and Applied Physics at the Harvard School of Engineering and Applied Sciences (SEAS), is an innovative evidence-based pedagogy designed to improve student engagement and success.

Mazur, famous for his talk titled "Confessions of a Converted Lecturer," developed the method after realizing in the 1990s that his physics lectures at Harvard, while popular, were not helping students to master the basic concepts.

The PI technique relies on the power of the "flipped classroom." Information transfer (i.e., a teacher transferring knowledge to students) takes place in advance, typically through online lectures. In short, students study before rather than after class.

As a result, the classroom becomes a place for active learning, questions, and discussion. Instructors spend their time addressing students' difficulties rather than lecturing.

While originally developed for Mazur's introductory physics courses, PI is now used across multiple disciplines, from the sciences to the humanities.

The Peer Instruction Network will serve as a hub for educators around the world to connect and share their PI experiences, submit questions, and engage with other PI users.

Most of the changes will gravitate towards personalized or individual based learning rather than from the current mass based ‘classroom’ education. Online education will bridge the geographical distance and competition should drive down costs. Online learning will drive the knowledge revolution.

Video: Comparing Effective Tax Rates of Corporations

In the following video, the Tax Foundation demonstrates how US companies have been losing their competitive edge, due to the relatively high tax burden from effective tax rates on the corporate level compared to the world.

It is important to point out that aside from tax policies, the policies that constitute the monetary, political, legal, bureaucratic and regulatory regimes also contributes to the economy's level of competitiveness.

Overall, the lesser involvement by the government, the more competitive the economy. In other words, economic freedom is the key to prosperity.

Understanding America’s Debt Culture

Writes The End of the American Dream

When most people think about America's debt problem, they think of the debt of the federal government. But that is only part of the story. The sad truth is that debt slavery has become a way of life for tens of millions of American families. Over the past several decades, most Americans have willingly allowed themselves to become enslaved to debt. These days, most of us are busy either going into even more debt or paying off the debt that we have accumulated in the past. When your finances are dominated by debt, it makes it really hard to ever get ahead. Incredibly, 43 percent of all American families spend more than they earn each year. Even while median household income continues to decline (now less than $50,000 a year), median household debt continues to go up. According to the Federal Reserve, median household debt in America has risen to $75,600. Many Americans spend decades caught in the trap of debt slavery. Large numbers of them never even escape at all and die in debt. It can be a lot of fun to spend lots of money and go into lots of debt, but it can be absolutely soul crushing to toil and labor for years paying off those debts while making others wealthy in the process. Hopefully this article will inspire many people to try to escape the chains of debt slavery once and for all.

Because the truth is that the American people need a wake up call. Consumer borrowing rose by another $19.3 billion in December. Right now it is sitting at a grand total of $2.5 trillion according to the Federal Reserve.

Overall, consumer debt in America has increased by a whopping 1700% since 1971.

We always criticize the federal government for going into so much debt, but we rarely criticize ourselves for our own addiction to debt.

Debt slavery is destroying millions of lives all across this country, and it is imperative that we educate the American people about the dangers of all this debt.

The following are 30 facts about debt in America that will absolutely blow your mind....

Credit Card Debt

#1 Today, 46% of all Americans carry a credit card balance from month to month.

#2 Overall, Americans are carrying a grand total of $798 billion in credit card debt.

#3 If you were alive when Jesus was born and you spent a million dollars every single day since then, you still would not have spent $798 billion by now.

#4 Right now, there are more than 600 million active credit cards in the United States.

#5 For households that have credit card debt, the average amount of credit card debt is an astounding $15,799.

#6 If you can believe it, one out of every seven Americans has at least 10 credit cards.

#7 The average interest rate on a credit card that is carrying a balance is now up to 13.10 percent.

#8 According to the credit card calculator on the Federal Reserve website, if you have a $10,000 credit card balance and you are being charged a rate of 13.10 percent and you only make the minimum payment each time, it will take you 27 years to pay it off and you will end up paying back a total of $21,271.

#9 There is one credit card company out there, First Premier, that charges interest rates of up to 49.9 percent. Amazingly, First Premier has 2.6 million customers.

Auto Loan Debt

#10 The length of auto loans in America just keeps getting longer and longer. If you can believe it, 45 percent of all new car loans being made today are for more than 6 years.

#11 Approximately 70 percent of all car purchases in the United States involve an auto loan.

#12 A subprime auto loan bubble is steadily building. Today, 45 percent of all auto loans are made to subprime borrowers. At some point that is going to be a massive problem.

Mortgage Debt

#13 Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago.

#14 Mortgage debt as a percentage of GDP has more than tripled since 1955.

#15 According to the Mortgage Bankers Association, approximately 8 million Americans are at least one month behind on their mortgage payments.

#16 Historically, the percentage of residential mortgages in foreclosure in the United States has tended to hover between 1 and 1.5 percent. Today, it is up around 4.5 percent.

#17 According to Dylan Ratigan, 46 percent of all mortgaged properties in Florida are underwater, 50 percent of all mortgaged properties in Arizona are underwater and 63 percent of all mortgaged properties in Nevada are underwater.

#18 Overall, nearly 29 percent of all homes with a mortgage in the United States are underwater.

#19 If you can believe it, the mortgage lenders now have more equity in U.S. homes than the American people do.

Medical Debt

#20 Medical debt is a major problem for a growing number of Americans. One study discovered that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.

#21 Sadly, the number of Americans that are protected by health insurance continues to decline. An all-time record 49.9 million Americans do not have any health insurance at all right now, and the percentage of Americans covered by employer-based health plans has fallen for 11 years in a row.

#22 But even if you do have health insurance, there is still a good chance that you could end up with huge medical debt problems. According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that actually did have health insurance.

Student Loan Debt

#23 Total student loan debt in the United States is rapidly approaching 1 trillion dollars.

#24 If you went out right now and starting spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#25 In America today, approximately two-thirds of all college students graduate with student loan debt.

#26 The average student loan debt load is now approximately $25,000.

#27 After adjusting for inflation, U.S. college students are borrowing about twice as much money as they did a decade ago.

#28 One survey found that 23 percent of all college students actually use credit cards to pay for tuition or fees.

#29 The student loan default rate has nearly doubled since 2005.

#30 Student loans made to directly to parents have increased by 75 percentsince the 2005-2006 academic year.

At this point, most Americans are up to their eyeballs in debt. According to a recent study conducted by the BlackRock Investment Institute, the ratio of household debt to personal income in the United States is now 154 percent.

Our entire economy has become based on credit.

Read the rest here

You’d hear or read of many adverse or negative imputations as “consumerism”, “not producing enough”, “spendthrift behavior”, “squanderville” and etc… from the mainstream, as if it has been the nature of Americans to be prodigal.

Lost on the real causation for the present circumstances, the politically popular theme has been to shift the blame on China for “currency manipulation” and or for financing US “profligacy”. In short, China bashing has served as a convenient political scapegoat for politicians and their allies.

Yet there have hardly been significant mainstream inquiries on what forces or variables may have influenced or motivated Americans to adapt on such consumption debt-financed based lifestyles.

In terms of government policies, a black hole emerges from mainstream thinking.

While the mainstream fixates on the moral aspects of the debt-consumption dynamics, they gloss over the effects of government policies that have vastly skewed people’s behavior to take on debts at the expense of savings and equity.

For instance, the credit fueled 2008 housing bubble has largely been policy driven. The speculative environment was entwined with debt based consumption activities.

Tax deductions on interest for corporations, and similarly for individuals—tax deductibility on mortgage interest and government subsidies on mortgages—encouraged debt take up and over-leveraging.

Another, capital regulations discouraged traditional mortgage lending and incentivized securitization, which has been abetted by the conflict of interest role played by credit rating agencies, whom ironically have been tightly regulated by the US government.

Also, public policy to promote housing or homeownership provided the moral hazard aspects via commitment by government to various housing subsidies. Thus, American’s penchant for McMansions. (My source Professor Arnold Kling: THE FINANCIAL CRISIS: MORAL FAILURE OR COGNITIVE FAILURE?)

Importantly, the zero bound interest rate policies, or formerly known as the Greenspan Put, favored debtors at the expense of savers. The Greenspan Put had also functioned as a conventional tool used against past crisis which has successfully kicked the proverbial can down the road.

Policies implemented by team Bernanke today have been NO different from the past, ergo the eponymous Bernanke Put.

Artificially suppressed interest rates thereby increases people’s time preference to consume at the expense production.

As the illustrious Ludwig von Mises explained,

The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

Thus, alternative to consumption activities from boom bust policies would be to entice short term speculation; ergo today’s speculative inflationary boom.

The ‘innovative’ and unparalleled Quantitative Easing (QE) approach also shields the banking system from having to face the harsh reality of the required market adjustments, from the massive malinvestments accumulated, brought upon by past policies.

QEs labeled as credit easing by central banks, have likewise been designed to promote debt by alleviating the conditions of the accounting books of the banking and financial industry.

In addition, America’s debt culture signifies a product of mainstream ideology

I previously wrote,

The culture of debt signifies symptoms of accrued policies shaped by the dominant economic ideology which sees spending as the key force for promoting prosperity or keeping society “permanently in a quasi-boom”.

The war against savings, which is being channeled through policy-based low interest rates (“The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last”-General Theory) punishes savers and rewards speculative activities which benefits the wards of central banks—added profits for the banking industry cartel and expanded government spending for politicians.

Never mind the law of diminishing returns on debt to an economy

Past ephemeral successes [plus sustaining a debt based political economy] will lead global authorities towards path dependent policy choices (which is why I think that global QEs will continue)

Besides, politicians and the bureaucracy sees such policies as even more beneficial to them even if the markets suffer from the convulsions of debt overdose: people will be more captive to them which expands their control over the society.

Put differently, the cartelized political institutions made up of the triumvirate of the central bank, the welfare state and the politically privileged “too big to fail” banks represents as the major beneficiaries of a debt driven society, and thus, the incumbent political agents will continue to focus on maintaining the status quo founded on policies, laws and regulations that rewarded debts.

Sad to say, the laws of economics has been catching up with the artificiality of such political arrangement.

Quote of the Day: The Arbitrariness of Taxation

the very existence of taxation – any taxation – opens the door wider to those who wish to use the state to butt further into other people’s business. It’s true that we can marshall theories and arguments about the analytical primacy of the private; the analytical (and in some cases also temporal) primacy of private property; and the analytical (and also sometimes temporal) primacy of social order. That is, we can (in the tradition dating back at least to the Scottish Enlightenment and running up through recent scholars such as Mises, Hayek, Bruno Leoni, Milton Friedman, Vernon Smith, Harold Demsetz, Robert Ellickson, Deirdre McCloskey, Anthony de Jasay, and Bruce Benson) offer evidence and argument that the state is not the prime mover of society and, therefore, that the state does not deserve the widespread modern presumption that bestows upon it an open-ended claim – one bounded only by its own choices – on society’s wealth and resources.

But the fact remains that there is no method of taxation that avoids significant arbitrariness in its application and consequences. (“If X is taxed, why not tax Y, too?!”) It’s this arbitrariness – which is practically inseparable from the fiat that is legislation – that opens the door wider to those who claim, in one breath, not to wish to mind other people’s private business but, in a second breath, insist that much of what looks to non-”Progressives” as private is, alas, really public and, therefore, the business of us all.

That’s from Professor Donald J. Boudreaux.

Quote of the Day: Justifying the Bureaucracy’s Existence

The task of government in this enlightened time does not extend to actually dealing with problems. Solving problems might put bureaucrats out of work. No, the task of government is to make it look as though problems have been solved, while continuing to keep the maximum number of consultants and bureaucrats employed dealing with them

From Bob Emmers, Orange County Register (Liberty Quotes)

Which Country Has Been The Most Aggressive Inflationist?

Not the US.

In terms of expanding the central bank's balance sheet, the answer is China. Writes Dr. Ed Yardeni,

The Keynesians have spread fiscal recklessness throughout the world, and want to make sure that China participates. In any event, the Chinese are better at monetary than fiscal policy recklessness. No central bank on earth has pursued quantitative easing for as long or on a bigger scale as has the People’s Bank of China (PBoC). The PBoC’s assets have increased by 170% over the past five years to a record $4.44 trillion in December. That compares to $2.87 trillion at the Fed and €2.74 trillion at the ECB. The PBoC accomplished this feat by accumulating foreign exchange reserves, which accounted for a record 83% of the central bank’s assets at the end of last year, up from 40% at the start of 2002.

From Bianco Research

It’s why China’s economy is highly vulnerable to a systemic bust.

The Essence of True Charity

The Wall Street Journal’s Wealth Report writes,

The 50 top philanthropists last year gave away a total of $10.4 billion – up by more than three-fold from 2010. The Chronicle of Philanthropy says that 29 people gave away more than $50 million each in 2011.

The strange thing is, you’ve probably never heard of most of them…

But what’s striking about the pantheon of top American givers is how little we know about any of them. They’re not in the news for buying giant homes, yachts or planes. They’re not funding Super-PACSs or spouting off about how they would run the country. And they don’t have reality shows.

The top rich givers are quiet, small-town patriarchs who made their riches in unglamorous industries like steel, natural gas and metal frames. They carry their wealth quietly and they honor the responsibilities that come with great wealth. They care about creating opportunities for others, not just for themselves.

My comment:

Real charity is about anonymity. So has it been written in the Bible (Matthews 6:2 New International Edition)

So when you give to the needy, do not announce it with trumpets, as the hypocrites do in the synagogues and on the streets, to be honored by men. I tell you the truth, they have received their reward in full.

And importantly, true charity emanates in the absence of coercion

As libertarian economist Floyd Arthur Harper wrote,

True economic charity has three characteristics:

1. Charity requires the transfer of ownership from one person to another of something having economic worth. The receiver must get a clear title to it, or it cannot be charity. The giver must have had clear title to it, or the giving is like a gift of stolen property — which is not an act of charity. Private ownership at both ends of the transfer, never public ownership, is therefore required.
2. The transfer must be voluntary with both parties. If forced upon the receiver against his will, it is not charity. If taken from the source against the prior owner's will, it is theft rather than an act of charity.
3. True charity requires anonymity. This is difficult to attain, to be sure. But if the conditions of the transfer result in a personal obligation in any form or degree, it is a grant of credit and not an act of charity. Devices other than anonymity usually fail to prevent the creation of a personal obligation.

May the tribe of genuine philanthropists increase!

Warren Buffett versus his Dad Howard Buffett on Gold

Warren Buffett has long been averse to gold as an investment (and as part of his political philosophy), focusing on the polemics that gold does not account for a productive asset.

In a recent Fortune article he continues with this line of rant. (bold emphasis mine)

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while…

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

It’s bizarre to see Mr. Buffett argue about the non-productive role of gold yet imply of gold’s potential as a currency or as money.

Mr. Buffett ignores that, money, to quote the great Murray N. Rothbard, forges the connecting link between all economic activities. This only means that any massive debasement of the currency, which again is used as link to all economic activities, will undermine the division of labor which thereby erodes the productive capacity of an economy (and specifically Mr. Buffett’s or anyone’s investments or ‘capacity to deliver milk’).

In short, it would be a serious gaffe to think that economic activities can be isolated from the ever changing conditions of money. Thus, his objection that gold represents a non-productive asset is essentially a non-sequitur.

And obviously Mr. Buffett admits to such spurious reasoning through some of his actions in his flagship Berkshire Hathaway: (bold emphasis added)

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be.

So Mr. Buffett holds non-gold currency based investments in spite of his reluctance to incorporate them as part of his portfolio. So Mr. Buffett practices a deny but apply strategy.

And finally, here is another blatant inconsistency in his letter

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks

The folksy Mr. Buffett is not being candid at all.

Today, his investments have not been about taking on first-class ‘efficiently deliver goods and services wanted by our citizens’ but rather on businesses that heavily relies on government’s support. For instance Mr. Buffett has profited from Obama’s anti-competition energy policies such as the Keystone pipeline controversy, and earlier, Mr. Buffett also profited immensely by participating in the various bailouts conducted by the US government in the US financial system.

In short, Mr. Buffett has morphed from value investor to a political entrepreneur or a crony. This hardly represents the ideals Mr. Buffett has been preaching about.

And importantly the sage of Omaha’s actions runs to the contrary against the virtues espoused by his venerable father Mr. Howard Buffett, the staunch ‘old right’ libertarian.

My guess is that Mr. Buffett’s antipathy towards gold has really nothing to do with economics (which he uses as a flimsy cover or camouflage) but could most likely represent a personal issue—specifically based on an implicit division with his father (for whatever reasons)

Here is an excerpt on Mr. Howard Buffett’s celebrated treatise on “Human Freedom Rests on Gold Redeemable Money”

Far away from Congress is the real forgotten man, the taxpayer who foots the bill. He is in a different spot from the tax-eater or the business that makes millions from spending schemes. He cannot afford to spend his time trying to oppose Federal expenditures. He has to earn his own living and carry the burden of taxes as well.

But for most beneficiaries a Federal paycheck soon becomes vital in his life. He usually will spend his full energies if necessary to hang onto this income.

The taxpayer is completely outmatched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren't run according to his idea of soundness he had an individual right to protect himself by obtaining gold.

With a restoration of the gold standard, Congress would have to again resist handouts. That would work this way. If Congress seemed receptive to reckless spending schemes, depositors' demands over the country for gold would soon become serious. That alarm in turn would quickly be reflected in the halls of Congress. The legislators would learn from the banks back home and from the Treasury officials that confidence in the Treasury was endangered.

Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending.

I have only briefly outlined the inability of Congress to resist spending pressures during periods of prosperity. What Congress would do when a depression comes is a question I leave to your imagination.

I have not time to portray the end of the road of all paper money experiments.

It is worse than just the high prices that you have heard about. Monetary chaos was followed in Germany by a Hitler; in Russia by all-out Bolshevism; and in other nations by more or less tyranny. It can take a nation to communism without external influences. Suppose the frugal savings of the humble people of America continue to deteriorate in the next 10 years as they have in the past 10 years? Some day the people will almost certainly flock to "a man on horseback" who says he will stop inflation by price-fixing, wage-fixing, and rationing. When currency loses its exchange value the processes of production and distribution are demoralized.

For example, we still have rent-fixing and rental housing remains a desperate situation.

For a long time shrewd people have been quietly hoarding tangibles in one way or another. Eventually, this individual movement into tangibles will become a general stampede unless corrective action comes soon.

Mr. Warren Buffett is being exposed for his rhetorical sophistry. Besides, the markets will eventually expose on his equivocation, which apparently he has taken on some 'deny and apply' insurance. He should instead pay heed to his Dad's wisdom, if not at least follow his Dad's legacy of honesty.

Inflation Watch: World Food Prices Jump Most in 11 Months

And speaking of markets forcing the hands of central bankers, current developments in the commodity markets seem to be providing us some clues.

From the Bloomberg,

Global food prices rose 1.9 percent in January, the biggest gain in 11 months as the cost of oilseeds, dairy and grains increased, the United Nations Food and Agriculture Organization said.

An index of 55 food items climbed to 214.3 points from a restated 210.3 points in December, the Rome-based FAO said on its website today. All commodity groups in the index advanced, according to the UN agency.

Costlier food is driving up living costs in China, home to about a fifth of the world population. Chinese inflation unexpectedly accelerated in January on the back of food prices, which rose 10.5 percent last month compared with a year earlier, up from 9.1 percent in December, the country’s National Bureau of Statistics reported today.

“International prices of all major cereals with the exception of rice rose in January,” the FAO wrote. “Prices of all the commodity groups that compose the index registered gains, with oils increasing the most.”

Despite the 2008 crisis which has proven to be a reprieve and the temporary hiatus from last year’s slowdown, FAO’s food index (chart from Bloomberg) has resumed its ascent as global central banks embark on a negative real rate environment while central banks of major economies rev up on quantitative easing measures.

And it is not just in food, in the pump prices in the US has also began to inch higher.

(From Wall Street Journal Blog)

Consumer price inflation has already been staring in the faces of the mainstream experts and authorities, mostly of the Keynesian-Fisherian 'deflation' persuasion, who remain in deep denial……perhaps until CPI index goes berserk.

Bank of England Adds 50 billion Pounds to Asset Buying Program (QE)

Again as predicted, central banks of major economies has been accelerating policies of inflationism with more asset purchases or Quantitative Easing (QE).

The Bank of England (BoE) adds £ 50 billion to her existing program

The Bloomberg reports,

Bank of England officials pumped another 50 billion pounds ($79 billion) into the U.K. economy to protect a nascent recovery from the threat posed by Europe’s debt crisis.

The nine-member Monetary Policy Committee raised the target for bond purchases to 325 billion pounds, more than a quarter of current outstanding gilts, according to a statement in London today. The increase was forecast by 34 of 50 economists in a Bloomberg News survey. Fifteen economists forecast a 75 billion- pound increase and one no change. The MPC also held its benchmark interest rate at a record-low 0.5 percent.

“A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy,” the central bank said. “But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.”

The stimulus expansion suggests policy makers remain concerned that Europe’s failure to stem its debt turmoil poses a risk to Britain. While U.K. services, manufacturing and construction all showed growth in January, the government’s budget squeeze and rising unemployment are acting as a drag on growth and officials forecast that inflation will slow to below their 2 percent target by the end of this year.

What allegedly has been meant for the economy is in reality a policy booster or protection for the beleaguered banking industry. Global central bankers will push inflationism to the limits until the markets forces their hands.

Doug Casey on the Morality of Selfishness

Investing guru Doug Casey on the morality of selfishness and money

let me say one more thing about the issue of selfishness – the virtue of selfishness – and the vice of altruism. Ayn Rand might never forgive me for saying this, but if you take the two concepts – ethical self-interest and concern for others – to their logical conclusions, they actually are the same. It's in your selfish best interest to provide the maximum amount of value to the maximum number of people – that's how Apple became the giant company it is. Conversely, it is not altruistic to help other people. I want all the people around me to be strong and successful. It makes life better and easier for me if they're all doing well. So it's selfish, not altruistic, when I help them.

Read the rest here

Graph of the Day 2: The Iranian Threat

From Lew Rockwell Blog

Quote of the Day: Redistributional Effects of Bernanke’s Monetary Policies

One of the direct results of the Federal Reserve’s zero interest rate policies has been a massive reduction in interest income going to households. Since 2008, household interest income has fallen by about $400 billion annually. That’s $400 billion each year that families have not had to spend.

Now of course you can also argue that families interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one’s person expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate.

As interest income/expense is not the only item on the household balance sheet, the Fed does try to make us feel richer via changes in asset prices. The problem, however, is that the change in many asset prices can also have little more than distributional effects. If owners feel richer because their house prices have gone up, or not fallen as much as they would have otherwise, then renters are poorer as they need to save more to by the same house. The same holds for commodity prices. Monetary driven increases in the price of food might be great for farmers, or speculators, but it makes households poorer by the same amount it increases the wealth of commodity holders. If the Fed truly wished to help our economy get back to “normal” then it would allow the free choices of individual borrowers and savers to determine the interest rate. It would also end its implicit practice of picking winners and losers in our economy. Unlike Fed driven changes in asset prices and interest payments, voluntary exchange between savers and borrowers increases the welfare of all parties involved.

From Mark Calabria at the Cato Blog.

In short, driving people towards speculative activities is not the same as encouraging production.

Ben Bernanke’s policies essentially represents boom bust cycles.

Video: World Bank Promotes Africa's Trade Liberalization

Something to cheer at: The World Bank, along with the African Union, promotes trade liberalization in Africa.

Dr Maxwell Mkwezalamba, Commissioner African Union Commission:

Trade is actually an engine of growth (2:24)

More signs of bullish prospects on Africa

Arbitrary Laws: ex US President John F. Kennedy on Cuban Cigars

Here is an example of how politicians make use of, or arbitrage regulations to their advantage.

From the Daily Mail, (hat tip Professor Russ Roberts)

President John F Kennedy ordered an aide to buy him as many Cuban cigars as he could just hours before he authorised the U.S. trade embargo - which subsequently made them illegal.

Kennedy asked his head of press and fellow cigar smoker Pierre Salinger to obtain '1,000 Petit Upmanns' on February 6, 1962, so he could have them in his hands before they were deemed contraband.

Then, seconds after he was told the next morning that 1,200 of Cuba's finest export had been bought for him, he signed the decree to ban all of the communist state's products from the U.S.

As Edmund Burke once said

Law and arbitrary power are at eternal enmity

Graphic of the Day: Share of World Market Cap by Country

From Bespoke Invest

Just a reminder: The state of today’s global equity markets have substantially been dependent on central bank steroids, especially for major economies. This means that rankings of the share of market cap can drastically change when major shifts will be made in central bank policies. Of course, given the huge margin, US equity markets will remain the leader for sometime. The important point to observe will be the change in variance .

False Choice from US Military Presence: US or China?

In the realm of politics, the public is being hoodwinked with a false choice.

From the Bloomberg,

Obama is realigning Asia-Pacific forces as his administration moves to blunt China’s expanding influence in an area that accounts for half the world’s economy. At the same time, the Pentagon is seeking to cut about $490 billion from projected spending over a decade.

“The U.S. is shifting its projection of power to the Pacific region amid China’s rise,” said Tomohiko Taniguchi, a former Foreign Ministry official and a visiting professor at Keio Universityin Tokyo. The revised agreement is a “logical consequence” from the Futenma deadlock, he said.

False dilemma or false choice, according to Wikipedia.org, is a type of logical fallacy that involves a situation in which only two alternatives are considered, when in fact there are additional options (sometimes shades of grey between the extremes).

Today we are presented with having to choose between two supposedly opposing sides—either with the US or with China. Obviously a false choice.

Instead, the world should be asked to trade than to instigate war.

Yet, the world and the Philippines can do without having to indulge with confrontational (brinkmanship) politics, or worst, go into actual combat.

And as previously pointed out, except for Spratly’s and Senkaku, China has largely maintained a foreign policy based on trade, investments and non-aggression whether in Africa or in Asia.

China has been aggressively expanding trade in the region and has even been selling the idea of the yuan as the region’s reserve currency. Such actions does not square with supposed aggressive policies. Perhaps unless provoked.

China also knows she can’t win a conventional military war with the US which makes any militant actions senseless.

And as previously argued, China has been using these controversial islands mainly to extract geopolitical leverage. Other reasons may include flexing her military muscles or response to encirclement strategy or testing the region’s reaction.

Thus, the China threat seem more like a strawman.

On the other hand, the US has been engaged in a series of illegitimate wars—which have not been approved by US Congress—such as in Libya, Afghanistan, Iraq and others, has been saber rattling on Iran, and now, on China.

As Judge Andrew P. Napolitano writes,

In the last 50 years, the United States has seen a parade of wars that don’t serve our interests. We fought the Korean war at the behest of the United Nations. We fought in Vietnam because the French wouldn’t. We entered the First Gulf War because of the United Nations and of course that led to the Iraq War. Even in Afghanistan, while we entered under the pretext of hunting down the masterminds of 9/11, that war soon became an imperial exercise akin to the Soviet or British occupations of Afghanistan. The Constitution gives the power of declaring war to the Congress. But today in America, that power is effectively the President’s. President Obama has waged war in Iraq, in Afghanistan, in Libya, in Pakistan, in Somalia, and in Uganda; all without a declaration of war. The last time Congress declared war was December 8th 1941.

So it isn’t a choice between China or the US but a choice being rammed on our throats for the benefit of those in Washington [who may partly be diverting public’s attention from the problems of the real economy, the mounting unwieldy fiscal deficits, the unsustainable welfare-warfare state and from the Federal Reserve’s inflationist policies], Washington’s military industrial clients and for local imperial lapdogs or sycophants who would use the war scare to exercise more political control over society.

Yet for a political economy considerably dependent on the war industry, there will always have to be an adversary to be invented as US advisor and diplomat George F. Keennan once warned

People who are egging for war should get enlisted and be brought to the front lines along with their families to prove their worth than to senselessly bluster. President Obama can do the honor.

Other than the above, invented wars are required to justify the preservation of the warfare state along with their huge budgets.

Revolutionary 3D Printing Technology: Jawbone Replacement

The speed of technological advances is just amazing and 3D printing technology seems to be showing the way.

From Discoverynews.com (hat tip Mark Perry; bold emphasis mine)

When surgeons replaced the infected lower jawbone of an 83-year-old woman, they needed a fast replacement tailored to fit the patient's existing bone structure, nerves and muscles. That medical dilemma inspired a world-first achievement -- creating a customized jawbone from scratch with 3D printing technology.

The "printing" process used a laser to heat and melt metal powder in the shape of the jawbone. That process, carried out by Belgian manufacturer LayerWise, allowed the 3D printer to sculpt and build up the patient's medical implant layer by layer. A bioceramic coating ensured that the patient's body would not reject the implant.

"The new treatment method is a world premiere because it concerns the first patient-specific implant in replacement of the entire lower jaw," said Jules Poukens, a surgeon at the University Hasselt in Belgium

Poukens led the team of surgeons that implanted the new jawbone during a four-hour operation at a hospital in Sittard-Geleen in the Netherlands last June, according to the Dutch newspaper De Pers. The elderly patient made a rapid recovery.

"Shortly after waking up from the anesthetics, the patient spoke a few words, and the day after, the patient was able to speak and swallow normally again," Poukens said.

3D printing has already helped many DIY innovators create everything from robots to household items on demand based upon digital designs. But the combination of precise designs and rapid manufacturing could have even greater potential for creating customized body parts for medical patients -- especially when transplanted bone structures and organs suffer from short supply.

The revolutionary 3D printing technology reinforces the secular trend towards decentralization. But this won’t come smoothly as many politically entrenched groups or interests will figure out ways (from environmentalism to health regulations and others) to forestall 3D technology’s fabulous advances.

Also the political battlefield will shift from nations (with no more China or Japan to blame on) to technology. In short expect anti-free market politics to shift from mercantilism to neo-Luddism.

The illustrious Julian Simon once remarked about the growth of human capital

The essence of wealth is the capacity to control the forces of nature, and the extent of wealth depends upon the level of technology and the ability to create new knowledge

Politicians Spend Government’s Money to their Benefit

In the Philippines these are called Pork Barrel. In the US, these are known as earmarks.

From an investigative report by the Washington Post

A U.S. senator from Alabama directed more than $100 million in federal earmarks to renovate downtown Tuscaloosa near his own commercial office building. A congressman from Georgia secured $6.3 million in taxpayer funds to replenish the beach about 900 feet from his island vacation cottage. A representative from Michigan earmarked $486,000 to add a bike lane to a bridge within walking distance of her home.

Thirty-three members of Congress have directed more than $300 million in earmarks and other spending provisions to dozens of public projects that are next to or within about two miles of the lawmakers’ own property, according to a Washington Post investigation.

Under the ethics rules Congress has written for itself, this is both legal and undisclosed.

The Post analyzed public records on the holdings of all 535 members and compared them with earmarks members had sought for pet projects, most of them since 2008. The process uncovered appropriations for work in close proximity to commercial and residential real estate owned by the lawmakers or their family members. The review also found 16 lawmakers who sent tax dollars to companies, colleges or community programs where their spouses, children or parents work as salaried employees or serve on boards.

In recent weeks, lawmakers have acknowledged the public’s growing concern that they appeared to be using their positions to enrich themselves. In response, the Senate last week passed legislation that would require lawmakers to disclose mortgages for their residences. The bill, known as the Stop Trading on Congressional Knowledge (Stock) Act, would also require lawmakers and executive branch officials to disclose securities trades of more than $1,000 every 30 days. At the same time, the Senate defeated an amendment, 59-40, that would have permanently outlawed earmarks.

The House is scheduled to vote on the Stock Act on Thursday.

Read the rest here (hat tip Russ Roberts)

Whether in the Philippines or in the US or elsewhere we get the same behavioral dynamics by politicians within the political spectrum.

Most if not all of the decisions made by politicians and bureaucrats have (concealed or indirect) self-serving interest within the ambit of circumstances adjudicated.

The above represents legal but subtle (immoral) ways of using political means to wangle for personal economic benefit. In short, use laws for personal benefits or discreet corruption.

Lofty ideals where governments are seen as supposedly selfless and moral or virtuous represent a popular myth meant to promote the welfare state. People hardly realize that governments are populated by humans who are perpetually vulnerable to mortal influences.

I am reminded by this stirring quote by the great libertarian H. L. Mencken in Notes on Democracy

His business is never what it pretends to be. Ostensibly he is an altruist devoted whole-heartedly to the service of his fellow-men, and so abjectly public-spirited that his private interest is nothing to him. Actually he is a sturdy rogue whose principal, and often sole aim in life is to butter his parsnips. His technical equipment consists simply of an armamentarium of deceits. It is his business to get and hold his job at all costs. If he can hold it by lying he will hold it by lying; if lying peters out he will try to hold it by embracing new truths.

Cartoon of the Day: People Power

‎”I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.” -Étienne de La Boétie

(source Daniel Sanchez Mises Blog)

Japan’s Bubble Legacy: Airports Bleeding Taxpayers Dry

Japan’s financially floundering airports represent as classic examples of Keynesian policy of “socialization of investments” gone awry intertwined with the dynamics of a busted bubble.

From the Japan Times

Japan has 98 airports, and most of them are operating in the red as a result of exaggerated demand forecasts and rampant, costly and arguably pork-barrel construction projects.

The transport ministry hopes to mitigate the problem by selling off the management rights to 27 state-owned airports as soon as 2014. The ministry also plans to issue an airport reform blueprint by summer

And guess which among Japan’s airport business remains profitable?

Again from the same Japan Times article, [bold emphasis mine]

In most cases, the central and local governments manage the runways, aircraft aprons and other regulated facilities while private companies or joint public-private ventures run the terminal buildings and parking lots. Of the 98 airports, 28 are run by the central government and 67 by local governments…

Not all but most facilities specifically linked to flight operations are running at a loss, even though most terminal buildings and parking lots are turning profits.

Most of the income to cover the operations of runways, aprons and other aircraft-related facilities, however, comes from landing fees, which have suffered for years at airports nationwide amid the sluggish economy and lack of passengers.

And how the losses came about? [bold emphasis mine]

One key reason is overcapacity. The government built too many airports based on overrated demand projections, experts say.

Because airports are considered public infrastructure, profit is not the only consideration taken into account when building them.

The nation has many remote islands whose only transportation link to the outside world is by air, even when demand for travel is minimal and steers aviation operations into the red.

But the situation was compounded in large part by politics, with decisions made to build airports in rural, virtually no-traffic areas where turning a profit was never a realistic proposition but just a way to get voters government-backed jobs from more pork-barrel projects.

Another drawback has been the "pool system" of state budgetary allocation, a one-size-fits-all policy for financing airport operations that did little to clarify which airports were at risk of habitually losing money, experts say.

The more or less blanket operations of all state-run airports provided little incentive for individual hubs to seek more efficient operations, Sayuri Hirai, a senior consultant at Daiwa Institute of Research, told The Japan Times.

The easiest way to spend money is to spend other people’s money. Since politicians and their bureaucracy are not held accountable and are not disciplined by profits and losses and lack stakeholdings for their decisions, miscalculations, inefficient allocations and wastages are the common or typical outcome. This is exactly what has transpired with Japan’s airports which have been bleeding Japanese taxpayers dry. Hence the recent thrust to privatize parts of these.

Besides, political actions have mostly been about short term vote enhancing considerations, hence the proclivity to undertake on grand projects regardless of their feasibility such as “build airports in rural, virtually no-traffic areas”.

Not included in the report are the influences by vested interest groups on the decisions of policymakers, which again makes government spending sensitive to the allures of venality.

Moreover, politicians have not been incented to acquire or don't possess the knowledge to take upon viable projects for the same reasons—they are not subject to market forces. There hardly has been any efforts on these, as evidenced by “one-size-fits-all” financing.

Another reason for such massive scale of miscalculation and malinvestments had been that the real estate boom days may have influenced the decision of policymakers. Japan's bubble had been fueled by a credit boom that had been designed to offset the US dictated Japan's policy to appreciate the yen that gave the artificial impression of lasting prosperity which eventually was unmasked.

Also I would surmise that many of these projects had been from the pump priming or fiscal stimulus undertaken by the government to offset the economic decline. This again tells us how government dictated efforts results to resources mostly going down the drain.

As the great Ludwig von Mises wrote,

The fashionable panacea suggested, lavish public spending, is no less futile. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from commercial banks, it means credit expansion and inflation. Then the prices of all commodities and services must rise, whatever the government does to prevent this outcome.

Apparently Japan fell for the enticements of interventionism and still endures the consequences for their sins.