The Politics of Climate Change

Analyst Martin Spring gives a concise but trenchant description or explanation of the politics of climate change.

Writes Mr. Spring (bold emphasis added)

Following the resignation of Nobel Prize-winning physicist Ivar Glaever from the American Physical Society because of its insistence that the evidence of human-caused global warming is “incontrovertible,” 16 eminent scientists have published an attack on “the oft-repeated claim that nearly all scientists demand that something be done to stop global warming.”

They say that’s “not true.” Indeed, a large and growing number of distinguished scientists and engineers disagree, recognizing that there is much contrary evidence.

Such “heretics” are persecuted, one example being the campaign to fire Dr Chris de Freitas, editor of the journal Climate Change, for daring to publish a peer-reviewed, factually-correct article that recent warming has not been unusual in the context of what happened over the past thousand years.

Many young scientists say they have serious doubts about the global-warming message, but “they are afraid to speak up for fear of not being promoted – or worse.”

The reason such savage efforts are taken to suppress contrary opinion and inconvenient facts is that “alarmism over climate is of great benefit to many, providing government funding for academic research and a reason for government bureaucracies to grow.

“Alarmism also offers an excuse for governments to raise taxes, taxpayer-funded subsidies for businesses that understand how to work the political system, and a lure for big donations to charitable foundations promising to save the planet.”

The scientists argue that even if one accepts the “inflated climate forecasts,” aggressive policies to control emissions of greenhouse gases are not justified economically.

“A recent study of a wide variety of policy options by Yale economist William Nordhaus showed that nearly the highest benefit-to-cost ratio is achieved for a policy that allows 50 more years of economic growth unimpeded by greenhouse gas controls.

“This would be especially beneficial to the less-developed parts of the world. And it is likely that more CO2, and the modest warming that may come with it, will be an overall benefit to the planet.”

The anthropomorphic global warming or climate change dogma has mostly been about the expansion of political power or control over the marketplace (via mass indoctrination and propaganda through government influenced institutions and media outfits), crony capitalism and covert socialism.

After 5,000: What’s Next for the Phisix?

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. Ludwig von Mises

Phisix breaks 5,000!

As I previously wrote[1], we should expect this soon. But this happened much sooner than I expected. I was looking at 2 weeks to a month as my window for this projection to materialize.

I am hardly indulgent towards crafting short term predictions, however the slew of events combined with momentum seemed too compelling, as the popular idiom goes, “The writing was on the wall”.

Nevertheless Friday’s breach of the psychological threshold signifies as another fulfilment or “I told you so moment”.

I even thought that I might be operating with overconfidence such that Monday turned sharply in the opposite direction from my expectations—the Phisix fell nearly 2%!

However with lady luck on my side, what I thought could be signs of falsification of my thesis turned out to be a springboard instead. The local benchmark expunged the one-day loss and carved a hefty 2.52% gain over the week to close at 5,016.3! That’s a full 4.5% swing.

Well, riding on a bullish momentum, market participants have palpably been looking for some events to nudge them into a buying spree. And they found one in BSP’s [Bangko Sentral ng Pilipinas] lowering of key policy rates, the second time this year.

Misleading Focus to Justify Low Policy Rates

Local central bank authorities justified their actions based on the crisis in the Eurozone.

From the Inquirer.net[2]

“Global economic conditions are expected to stay subdued as fiscal and banking sector headwinds in advanced economies affect global output growth and as market confidence remains fragile,” BSP Governor Amando Tetangco Jr. said in a statement Thursday.

The unfavorable global factors Tetangco was referring to included the prolonged debt crisis in the eurozone that would likely to continue dragging export earnings of the Philippines and other countries that have been exporting goods to the Western region. The crisis is also seen dampening outlook on the global economy, thereby dragging appetite for investments even in countries outside the eurozone.

Apparently many mainstream institutions also see events in the lens of political authorities as the chart above from Danske Bank showed[3]

But how valid has this view been?

The problem that haunts the mainstream is the same problem that plagues political authorities. In behavioural finance, this is called as the focusing effect. People tend to focus on some aspects which they construe as a generalized phenomenon. This is really a fallacy of composition.

Why?

Outside the Eurozone crisis, global events don’t support this view.

The CPB Netherlands Bureau for Economic Policy Analysis in its recent monthly report indicates that both world trade volume and world industrial output ended last year or December 2011 at record highs[4].

In reality, in spite of the Eurozone crisis, world industrial production and exports soared to new record highs which should hardly have been a drag on local exports or the local economy.

This means that whatever slowdown that has afflicted Philippine exports has little to do with global DEMAND but has been mostly about relative competitiveness and relative productivity.

As always what is available and visible will be used as cover, or in this case, the Eurocrisis has been used as scapegoat to justify the redistributionist policies via interest rates interventions.

Psychological Disorientation from Low Interest Policies

The local inquirer article continues

“Cut in interest rates is seen boosting demand for loans, which in turn support increase in consumption and investments. However, since lower rates spur demand, it has the tendency to accelerate inflation.”

In reality what the lowering of interest rates below market levels does is to increase people’s time preferences or magnifies people’s time orientation towards present consumption activities than of the future.

Again to quote Professor Roger W. Garrison[5],

Time preference is simply a summary term that refers to people's preferred pattern of consumption over time. A reduction in time preferences means an increased future-orientation. People willingly save more in the present to increase the level of future consumption. Their increased saving lowers the natural rate of interest and releases resources from the final and late stages of production. Simultaneously, the lower natural rate, which translates directly into reduced borrowing costs, makes early stage production activities more profitable. With the reallocation of resources from late to early stages of production, the preferred temporal pattern of consumption gets translated into an accommodating adjustment of the economy's structure of production.

This means, yes, consumption activities will increase, enhanced by more borrowings (credit cards, home, car chattel loans and personal loans etc…), but this will also reflect on a shift in the balance of people’s savings and investment patterns with a bias for consumption.

Borrowings accrued from artificially lowered interest rates does not distinguish between productive and consumption demand. They are seen as homogenous when they are not. This is misleading. That’s because consumption activities are not growth inducing for the simple reason that they are not productive.

As Dr. Frank Shostak explains[6],

We suggest that an individual's effective demand is constrained by his ability to produce goods. Demand cannot stand by itself and be independent — it is limited by production. Hence what drives the economy is not demand as such but the production of goods and services. The more goods an individual produces, the more of other goods he can secure for himself.

In short, an individual's effective demand is constrained by his production of goods. Demand, therefore, cannot stand by itself and be an independent driving force.

And as I earlier pointed out[7], bank lending growth in the Philippine has surged by 19% in 2011 according to the BSP. The BSP assumes the categorization of loan disbursement is accurate, I believe it is not. In many occasions loans can be redirected to other uses.

And since savings are penalized from such policies, people will be induced to take on high risks activities in order to generate profits (search for yield), such as intensive speculation and gambling, to sustain their consumption activities.

As I have repeatedly been pointing out[8], negative real rate environment has been instrumental for the record rise of the local stock market.

Local investors has lorded it over foreign investors for this cycle which incepted in 2009. The chart above shows that foreign investor’s share of total trade has been below 50% since 2011. This is in contrast to the 2003-2007 cycle, where foreigners were dominant. This should serve as evidence to the policy impact of a negative real rate environment to the stock market. While today’s actions look pleasant, we must keep in mind that the obverse side of a (inflation driven) boom phase is a (deflation driven) bust.

Euthanasia of the Rentier: The Greatest Ponzi Scheme

Since fixed incomes will also suffer from interest rate manipulations, many will fall victim or get seduced to dabble with Ponzi schemes marketed by scoundrels who would use the current policy induced environment as an opportunity to exploit a gullible public.

In the US, Ponzi schemes skyrocketed as the US Federal Reserve has taken on a zero bound interest rate environment in response to the recent crisis in 2008.

“Bad times” have been attributed as pretext to such incidences[9]. In reality, US Federal Chair Ben Bernanke’s zero bound rates have altered people’s value scales and time preferences such that they became vulnerable to high risks yield chasing actions as exemplified by large accounts of people being duped by fraudsters.

And despite declining incidences, Ponzi schemes remain outrageously high compared to the 2003-2007. Of course, the chart omits one major critical factor: 2003-2007 highlighted the property boom phase that morphed into a worldwide crisis where huge number of Americans (and foreign bankers and financial houses) got sucked into the bubble.

What this means is that Fed policies have transformed many Americans to become inveterate gamblers who jump from the proverbial frying pan to the fire by motivating them to plunge into every unsustainable booms in search of the elusive Holy Grail.

In other words, policies of the US Federal Reserve, which have been embraced or imbued by the central banking class all over the world—including the Philippines—seem to be the grandest Ponzi scheme ever hatched, except that central bank policies have been politically mandated.

Negative interest rate environment will also adversely affect financial companies dependent on fixed income such as life and non life insurance, pre-need, HMOs and pension companies. If their revenues (premiums, fixed income placements and investments) do not grow enough to match the increase in liabilities (where the latter will be affected by price inflation), then these companies will be tempted or motivated to undertake adventurous risk matching portfolios for survival, that may lead to future bankruptcies. So do exercise discretion in selecting your insurer.

Serial Bubble Blowing from Negative Real Rates Policies

Further, below market interest rates will encourage capital intensive “early stage production” ventures.

As I have been pointing out, even the activities in the domestic stock markets have been validating this concept.

This week, the property sector has dominated the field. Led by Ayala Land (+5.21%), the property indiex has risen above the weekly gains of the Phisix, which means that the breach of the 5,000 level has been mostly due to the property index.

Year to date, the property and the financial indices have running nose to nose for the leadership.

And in contrast to what the news article says, demand alone does not accelerate inflation, it is the bank-circulation credit (fiduciary media) and or direct central bank asset purchases which manifested through the expansion money supply that spawns inflation.

Yet the silence of media and political authorities in dealing with the truth has been tainted by political goals.

As the great Ludwig von Mises observed[10],

The hindrance that the monetary or circulation-credit theory had to overcome was not merely theoretical error but also political bias. Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation.

In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether.

All present-day governments are fanatically committed to an easy money policy.

Gosh, how relevant this has been today.

Said differently present day governments are fanatically committed to serially blowing bubbles.

So far, bank lending growth has not yet reached alarming levels in the Philippines and in the region.

So in spite the recent surge in bank lending, the low base of lending growth (relative to the past and relative to the ASEAN peers) seem to have provided BSP authorities the confidence to take the gambit of further lowering interest rates.

Despite the highly visible construction boom, which should serve as empirical evidence, growth in the loan category to the property sector as percentage of total loans has hardly improved over the last three years. Both charts from ADB[11]

We must understand that bubble cycles function as a process which means they develop overtime and undergo several stages.

Thus, it takes constant vigilance to identify or guess estimate on the whereabouts of which particular stage we could be in.

How the Credit Fuelled Boom Unfolds

What this implies is that the BSP’s move will fuel more upside to the Phisix where the prospective gains will be bankrolled mainly by the substantial expansion of domestic bank credit. Although auxiliary markets equities and bonds will tapped, most likely price expression of the bubbles will become apparent or ventilated in these markets too.

Importantly this credit boom will also filter into the real economy most likely to the property and the mining sector.

Such dynamics represents the business cycle at work.

The credit boom will be highlighted by a reflexive feedback mechanism between prices of securities and collateral values.

When people are eager to borrow, as George Soros writes in the Alchemy of Finance[12], and the banks are willing to lend, the value of the collateral rises in a self-reinforcing manner. High prices of securities extrapolate to higher collateral values which encourages more borrowings that eventually feed into higher prices which reinforces the feedback loop.

However the growth in lending based on artificial price signals through the interest markets, whether in the asset markets or in the real economy, will lead to the accretion of misdirected allocations of resources since artificial interest rates will skew the economic coordination process

As Professor Steve Horwitz[13] writes,

Once that bad interest rate signal is in place, intertemporal discoordination will result. The nature of money and the time-ladenness of production mean that we don't see that discoordination at first, as it is masked by the boom. The increased activity at both the higher orders of goods and the consumption level looks like growth until the fact that there is insufficient real savings to support the increased (now "mal") investment at the highest orders makes itself known.

Nonetheless, the phases of the bubble will run in conjunction with credit cycles (based from post Keynesian economist Hyman Minsky’s hypothesis[14]) which transitions from the current state of hedge financing (income flows will meet interest and principal liabilities) to speculative financing (income flows will meet interest payments only) and ultimately to Ponzi financing (income flows will not cover both interest and principal liabilities but will depend on asset prices which today has been very evident in the sovereign debts of western nations and which subsequent actions by central banks has been engineered to keep propping these up by zero interest rates, asset purchasing programs and direct interventions in the marketplace). Israel’s central bank buying into US stocks can be seen as direct intervention although cloaked as “investments”[15].

Actions in the external environment actions will substantially affect returns in the local markets too. As developed economies intensify their credit easing policies, these could lead to heightened capital inflows, partly through yield arbitrages or carry trades and partly through portfolio flows, into emerging markets as the Philippines which should amplify the domestic credit boom. Of course a credit boom will also occur in the international that would finance these carry trades and portfolio flows.

Given these interconnectedness of world markets, the Philippines will remain highly sensitive to the international risk environment.

The Ponzi dynamics of government debt markets, as well as the heavily politicized financial markets assures of outsized volatilities in both directions for financial markets.

The seeming epiphany of global stock markets on the side of the bulls have been underpinned by actions of major central banks who recently has jumpstarted the next wave of asset purchases such as Bank of Japan and Bank of England and indirectly through the ECB’s LTRO facilities which as predicted had an overwhelming reception[16].

The continuity of the current boom conditions has been principally dependent on liquidity conditions which emanates from feedback loop of market’s reactions to policy responses and vice versa.

For the recent past years, stock markets tend to experience amplified downside volatility when policy programs approached their maturity (such as in the US).

Yet given the rabid fear of another episode of recession or deflationary scare, the mechanistic response by central bankers has been to reflate the system with more credit easing programs. Thus we should expect mini-bubble cycles amidst a larger bubble framework.

Also, we cannot discount any upsurge in consumer price inflation given the scale of monetary injections. This will have repercussions on the market too. This is why markets will be volatile.

After 5,000: What’s Next for the Phisix?

Interim profit taking following the recent breakout of the Phisix from the 5,000 threshold level should be expected, given the partially overbought conditions.

But any retracements are likely to be minor and will not exhibit large scale broad market deterioration in the strict condition that the current domestic and international markets remains on a RISK ON mode.

Instead we should expect rotations among sectoral performances or issues within specific sectors.

The recent interest rate cut by the BSP will provide more fuel to the bulls. Given the relatively less leverage financial system, the booming Phisix will be augmented by a surge in domestic bank credit and possibly credit driven portfolio flows and carry trades from overseas investors.

Yet returns in the Phisix will be subject to the highly fluid conditions abroad.

Lastly the mercantilist goal of “promotion of exports” through low interest rate policies won’t work. What this will do is to foster an unsustainable domestic boom that will become evident in the stock market and in the real economy through specific sectors, that leads to an eventual bust in the fullness of time.

Moreover domestic inflation will undo any ephemeral cost advantage from policies that have been designed to undermine a currency’s purchasing power.

What I believe is that the real goal by the BSP has not been to promote export growth (which is in itself is a very bad mercantilist-protectionist idea). The economy has always been used as a veneer to promote certain unstated or unpublicized political agenda.

I believe that the BSP has been working in conjunction or in collaboration with other global central banks to enforce the Keynesian doctrine of “the euthanasia of the rentier” or to keep interest rates permanently low, not just to promote permanent quasi-booms, but also to assist in the rehabilitation of an unsustainable welfare based political, which plagues many developed economies today, along with their banking cronies.

Yet we can expect a blowback from such actions overtime.

For now profit from folly.

---

[1] See Phisix: Expect A Breakout from the 5,000 level Soon, February 26, 2012

[2] Inquirer.net BSP cuts interest rates to 4% for overnight borrowing, 6% for lending, March 1, 2012

[3] Emerging Market Weekly Global monetary easing is helping sentiment, February 22, 2012 Danske Bank

[4] Perry Mark, Dec. 2011 Sets Record for the Highest-Ever Volume of Global Trade and Global Output in History mjperry.blogspot.com February 28, 2012

[5] Garrison Roger W. Natural and Neutral Rates of Interest in Theory and Policy Formulation April 21, 2007 Mises.org

[6] Shostak Frank, It's Not Really about the Debt, March 1, 2012 Mises.org

[7] See Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions February 13, 2011

[8] See Investing in the PSE: Will Negative Real Rates Generate Positive Real Returns?, November 20, 2011

[9] Economist.com, Fleecing the flock, January 28, 2012

[10] Mises, Ludwig von The Monetary or Circulation-Credit Theory of the Trade Cycle, June 11, 2010 Mises.org

[11] ADB.org Asia Economic Monitor December 2011

[12] Soros George The alchemy of finance, p 23 John Wiley & Sons

[13] Horwitz Steve Austrian Cycle Theory is Not a Morality Play, March 3, 2011 CoordinationProblem.org

[14] Wikipedia.org Understanding Minsky's financial instability hypothesis, Hyman Minsky

[15] See Applying Bernanke’s Doctrine: Central Banks ‘Invests’ in Stock Markets, March 2, 2012

[16] See Record Bank Borrowing from ECB’s Second Round LTRO, March 1, 2012

Japan’s Speech-jamming gun and Censorship

From My Fox Orlando, (hat tip Bob Wenzel)

Japanese researchers have invented a speech-jamming gadget that painlessly forces people into silence.

Kazutaka Kurihara of the National Institute of Advanced Industrial Science and Technology, and Koji Tsukada of Ochanomizu University, developed a portable "SpeechJammer" gun that can silence people more than 30 meters away.

The device works by recording its target's speech then firing their words back at them with a 0.2-second delay, which affects the brain's cognitive processes and causes speakers to stutter before silencing them completely.

Describing the device in their research paper, Kurihara and Tsukada wrote, "In general, human speech is jammed by giving back to the speakers their own utterances at a delay of a few hundred milliseconds. This effect can disturb people without any physical discomfort, and disappears immediately by stopping speaking."

Question is who benefits from this invention, will it be the public or political authorities? Since National Institute of Advanced Industrial Science and Technology is a public research institution and Ochanomizu University is a public national university for women, round 1 goes to the politicians.

For Iceland, Canadian Loonie is Better than the US Dollar

From Globe and Mail (hat tip Zero Hedge)

Iceland’s newfound love for the loonie is sparking a wave of controversy, from Reykjavik to Ottawa.

For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.

But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.

Canadian ambassador to Iceland Alan Bones had planned to deliver remarks to a conference on the future of the Icelandic Krona, making it clear that if Iceland decided to adopt the Canadian dollar, with all its inherent risks, Canada was ready to talk.

The actual adaption to non-US Dollar reserves for the banking system represents as more evidence of the ongoing erosion of the foundations of the US dollar standard.

For now, intentions to shift signify as just that--proposals to act. Nevertheless, anxiety over the untenable state of the today's currency platform appear to be snowballing. Once a tipping point has been reached, then the decline will be pronounced.

Quote of the Day: Why Intellectuals are Predisposed to Socialism

Intellectuals who consider inequalities in wealth evidence of injustice often seek political remedies. These take the form of legislation and, more often, regulation. In the process, of course, they are able to portray themselves as heroic opponents of injustice. If they have sufficient support, they are also able to acquire significant power, wealth and status. We know from experience, however, that these intellectuals rarely consider their own wealth evidence of injustice.

That’s from Patrick Cox at the Daily Reckoning. In the above passage, substitute intellectuals with politicians, we get the same outcome.

Murray Rothbard’s 86th Birthday

Murray Rothbard, the late dean of the Austrian School of Economics, had his 86th birthday yesterday. [hat tip Bob Wenzel]

My favorite quote from Professor Rothbard,

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Quote of the Day: Ideas Grow on Blogs

Social networks, like real life, are driven by influencers—not necessarily those with the most friends or followers, but those whose thoughts, ideas and opinions have the biggest impact. Mr. Collegio notes that for political action committees "to seed opinion makers, Twitter is the ultimate platform. Ideas grow into stories on blogs and eventually in the mainstream media." Not the other way around.

That’s from author and former hedge fund manager Andy Kessler in an Op Ed column at the Wall Street Journal. The flow of ideas seem to be reversing; from the mainstream media to the public and now from the public--through social media networks as blogs--to the mainstream.

How the Web Nurtures Underground Economies

Through Anonymous Web Proxy Servers.

From author Bill Rounds (howtovanish.com), [hat tip Charleston Voice]

Communist Cuba is a great example of how this is being done. It has a thriving market for goods and services, even though strict regulations prohibit entrepreneurship, because the citizens find ways to exercise their enterprising minds. A site similar to Craigslist, called revolico.com, allows Cubans to exchange everything from baseball equipment to their place in line and they love their hawaladar. For the good of the people, the site is blocked by the government. But the site thrives nonetheless. How do the Cubans get around the repressive and immoral policies of their overbearing government? They use anonymous web surfing practices.

Anonymous web surfing is generally done by using proxy servers. Proxy servers allow the proxy computer, outside of Cuba and not subject to Cuban government regulations, to do the web surfing for the Cubans. The ISP registers that they have visited the proxy server, not the sites visited by the proxy server on their behalf. And, because there are many thousands of servers available at any moment, some of which have never been used before as a proxy, it is far more difficult to restrict access to proxy servers than to individual websites. This way, the web surfing activity of individual Cubans is made anonymous to those who are watching them.

Cubans using anonymous proxy servers for anonymous browsing which don’t disclose their IP address to the websites that they visit, nor the fact that the proxy server is even surfing for someone else, make it that much harder for a repressive government, like Cuba, to discover which citizens are visiting a site and then prevent them from visiting the site.

Cuba is not the only example. China, Iran, and many other countries have seen their citizens utilize proxy servers to spread information and ideas. I am sure that governments are not done trying to prevent their citizens from accessing information, sharing information, or associating with others through the internet, but I am also sure that there will always be those who circumvent limitations placed on them through the use of anonymous web surfing techniques. Some people might want to seek residency in another country that is more free and allows for more privacy.

Rapid innovation and accelerating diffusion of technology usage has been eroding the political framework of the 20th century. Also these have been fostering economic activities that goes beyond the clutches of political authorities.

And this means that the greater the penetration levels of technology, the bigger the informal economy, as well as, greater pressures applied to existing vertical structured political institutions. Put differently, closed door political economies are incrementally being pried open by the globalization through technology.

The relationship between markets and regulations can be analogized to a “cat and mouse” game which Wikipedia.org defines as “a contrived action involving constant pursuit, near captures, and repeated escapes” where the interrelationship exists via a feedback mechanism: the markets always discovers means to skirt political shackles, and the political response to innovation would be to introduce new regulations.

Nonetheless the markets are always way ahead of and smarter than politicians, which is one fundamental reason to be optimistic despite the many challenges posed by the incumbent political agents and their lackeys.

Applying Bernanke’s Doctrine: Central Banks ‘Invests’ in Stock Markets

Ben Bernanke’s crash course for central bankers has become the mainstream creed in approaching risks of economic downturn or prospective crises.

To refresh your memories here is what Mr. Bernanke wrote in 2000

There's no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Zero bound rates and QEs has been the du jour indirect means of supporting the stock market. But there seems to be more…

From Bloomberg,

The Bank of Israel will begin today a pilot program to invest a portion of its foreign currency reserves in U.S. equities.

The investment, which in the initial phase will amount to 2 percent of the $77 billion reserves, or about $1.5 billion, will be made through UBS AG and BlackRock Inc. (BLK), Bank of Israel spokesman Yossi Saadon said in a telephone interview today. At a later stage, the investment is expected to increase to 10 percent of the reserves.

A small number of central banks have started investing part of their reserves in equities. About 9 percent of the foreign- exchange reserves of Switzerland’s central bank were invested in shares at the end of the third quarter, the Swiss bank said on its website.

So central bankers now collaborate with each other to prop up the stock markets.

Central bankers like to keep the “animal spirits” in continued vigor with the hope of instituting permanent quasi booms through 'investments' (which in reality are euphemism for interventionism).

In short, by increasing people’s time preferences, central bank policies have been encouraging monumental speculations, arbitrages, distorting price signals (stimulating 'greed') and prod for consumption activities at the expense of production and savings. Unfortunately, there is an obverse side of quasi perma booms, they are known as economic busts or crisis.

Video: Peter Diamandis: Abundance is our future

Peter Diamandis, Founder and Chairman of the X PRIZE Foundation, an educational non-profit prize institute whose mission is to create radical breakthroughs for the benefit of humanity, in a talk at the TED explains why he thinks the world is headed for abundance.



Essentially Mr.Diamandis is banking on the explosive growth of human capital facilitated by technology (information age) through the following media

Technologies riding Moore’s Laws:
1. Infinite Computing
2. Sensor and Networks
3. Robotics
4. 3D Printing
5. Synthethic Biology
6. Digital Medicine
7. Nanomaterials
8. Artificial intelligence

Here are some noteworthy quotes

When I think about creating abundance, it is not about creating a life of luxury…it is about creating a life of possibilities. It is about taking that which was scarce and making it abundant. You see scarcity is contextual and technology is a resource liberating force. 6:34

It is not about being scarce it’s about accessibility. 8:17

By the way the biggest protection against population explosion is making the world educated and healthy 12:26

3 billion new minds would never been heard before are connecting to global conversation. What do these people want? What would they consume? What do they desire? Rather than having an economic shutdown we are about to have is the biggest economic injection ever. These people represent tens of trillions of dollars injected in the global economy 12:47

In spite of the restrictive role of governments, I share his optimism that people will find ways and means to circumvent them mostly through technological innovations.

(hat tip Professor Mark Perry)

Record Bank Borrowing from ECB’s Second Round LTRO

Here is what I wrote last Sunday,

Despite talks of ‘stigmatization’ or the reluctance to avail of European Central Bank facilities by several banks, I expect the reopening of the second three year Long-term Refinancing Operations (LTRO) facility will be utilized to the hilt.

Apparently there had been no signs of stigmatization as European banks flocked to the ECB to borrow in record numbers.

From the Bloomberg,

The number of financial institutions flocking to the European Central Bank’s three-year loans soared to 800 and borrowing rose to a record in an operation that may boost the euro-area economy.

The Frankfurt-based ECB said it will lend banks 529.5 billion euros ($712.2 billion) for 1,092 days, topping the 489 billion euros handed out to 523 institutions in the first three- year operation in December. Economists predicted an allotment of 470 billion euros in today’s tender, according to the median of 28 estimates in a Bloomberg News survey.

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy at Barclays Capital in London. “So the impact may be bigger than with the first one.”

Two factors here:

This is about the preservation of the debt based welfare political system and thus the gargantuan subsidies to the banking system, the chief financiers of the welfare state.

Second, “who the heck would refuse free money???!!!” Certainly bankers will take them and did so.

As for yesterday’s 5% crash in gold prices, rumors have it that cartel operations could have been responsible for the bear raid for unspecified reasons. If true, my guess is that the manipulation gold-silver market must have probably been aimed at dampening the effect of the record ECB borrowings by Euro banks. Nothing to see here, move along.

Yet the inflationism (currency debasement policies) seen above represents a fundamental reason to remain bullish on gold.

Video: Ron Paul to Bernanke: The Fed is Going to Self Destruct Eventually

Fed Chair Ben Bernanke receives a tongue lashing from Ron Paul. (hat tip zero hedge)



Some note worthy quotes

System designed to pyramid debt. We have a debt based system. The more debt we have, the more debt the Federal Reserve buys, the more currency they can print. And they monetize this debt. No wonder we are in debt crisis, it’s worldwide. I think this something we have never experienced before 2:48

The Fed is going to self destruct eventually anyway when the money is gone 6:42

By the way in confirmation to Mr. Paul's statement here is a fresh news report from Bloomberg anent China's slowdown in US treasury acquisition in 2011.

The Fed remains the top holder of U.S. debt with $1.66 trillion on its balance sheet.

Gold’s near $100 Price Drop Hardly has been about Bernanke’s Stimulus Statement

Media attributes the slump in gold prices to the US Federal Reserve chair Ben Bernanke’s statement last night.

From Bloomberg,

Gold futures fell as much as $100 to below $1,700 an ounce on signs that that the Federal Reserve will refrain from offering more monetary stimulus to bolster the U.S. economy.

In testimony before Congress today, Fed Chairman Ben S. Bernanke gave no signal that the central bank will take new steps to boost liquidity. The dollar rose as much as 0.8 percent against a basket of major currencies, eroding the appeal of the precious metal as an alternative investment. Yesterday, gold reached $1,792.70, a three-month high, even as coin sales by the U.S. mint slumped in February

I am not persuaded that the the reaction in the gold market has entirely been about “refrain from offering more money stimulus”, this seems more like the available bias or post hoc fallacy

That’s because the sell-off seems to have been limited to gold and silver prices. Oil prices seems to have shrugged off the stimulus issue (No, oil prices has hardly been about Iran). The US stock markets too which closed modestly lower has hardly reflected on the the scale of gold’s collapse.

Any concerns over ‘stimulus’ which extrapolates to 'liquidity' would bring about an across the board selling pressure similar to September of 2011

While Mr. Bernanke’s statement may have served as aggravating circumstance, I’d say that either profit taking (yes gold market looked for an excuse and found one in Bernanke) or some unseen developments over the past 24 hours may have led to a crash in gold’s prices.

Nevertheless this is likely to be a temporary episode which means gold prices will recover...soon.

Another important issue to bring up is how mainstream now associates policy stimulus to gold prices. When the public gets to realize that money debasement (inflationist) policies have been the principal cause of price inflation in the asset markets which eventually diffuses into the real economy, the political heat against central banking or central banking policies will intensify.

So far central banks can still afford to hide underneath the cover of esoteric econometrics which the public does not comprehend--a tenuous cover which will eventually be unmasked.

End the Fed, abolish central banking.

I Told You Moment: Phisix Hits 5,000

chart from technistock.net

Much ahead of my expectations, nevertheless fulfilled. Next should be the confirmation of the psychological level breakout.

Putting Into Perspective Brazil’s Ban on Outdoor Billboards

Since 2006, São Paulo, Brazil has eliminated billboard ads

Image from Smartplanet.com

From Newdream.org

Imagine a city of 11 million inhabitants stripped of all its advertising. It’s nearly impossible when the clutter and color of our current urban landscapes seem inextricably entwined with the golden arches of McDonald’s or the deep reds of Coca-Cola.

Yet for the residents of São Paulo, Brazil, this doesn’t require imagination: city dwellers simply have to walk down the street and look around to see a city devoid of advertisements.

In September 2006, São Paulo’s populist mayor, Gilberto Kassab, passed the so-called “Clean City Law," outlawing the use of all outdoor advertisements, including on billboards, transit, and in front of stores.

Before being enacted, the law triggered grave alarm among city businesses and other economic constituents. Critics worried that the advertising ban would entail a revenue loss of $133 million and a net job loss of 20,000. Fears that the city would look worse without the mask of the media alarmed residents. Despite the concerns, the law passed and the 15,000 billboards cluttering the world’s seventh largest city were taken down.

Five years later, São Paulo continues to exist without advertisements. But instead of causing economic ruin and deteriorating aesthetics, 70 percent of city residents find the ban beneficial, according to a 2011 survey. Unexpectedly, the removal of logos and slogans exposed previously overlooked architecture, revealing a rich urban beauty that had been long hidden.

Articles like this like to paint the world as operating in a vacuum. The idea is once a law has been imposed, what you see is what you get.

In reality, there is much beyond what has been stated above. Part of the consequence of the Clean City Law has been to bring Brazil’s advertisement industry underground.

According to the Financial Times

Advertising creatives and marketing directors were forced quickly to find new ways to spend money that had been earmarked for outdoor advertising, especially since the law came into effect almost immediately. “Usually in Brazil it takes a little time for laws to get set up,” says Marcello Queiroz, an editor at Propaganda and Marketing newspaper in São Paulo. “It was really dramatic how quick things changed. Big companies had to change their focus and strategies.”

Marketing directors had to find a place to spend the money they previously put into billboards. The result, they say, was a creative flowering of new and alternative methods – including indoor innovations such as elevator and bathroom ads – but primarily in digital media.

“The internet was the really big winner,” says Mr Oliveira. In 2007, there was already a move towards the internet, digital media and social networking marketing worldwide, but the Cidade Limpa law gave Brazilians an extra push, he says.

So advertisements have shifted from the outdoor to the indoor and mostly to the web.

Second, Brazilian companies realized that billboard ads were hardly as effective or as feasible as they were, such that even those with advertisement licenses diverted their money elsewhere.

Again from the same FT article,

Anna Freitag, marketing manager of Hewlett-Packard Brazil, says a realisation came that outdoor advertising is less effective than these newer strategies. “A billboard is media on the road. In rational purchases it means less effectiveness . . . as people are involved in so many things that it makes it difficult to execute the call to action,” she says.

“HP decided to go deeper and understand consumer behaviour – the path to purchase, and place media in this direction . . . The internet and social media are the big trends associated with point of sale presence.”…

The law is now so popular that some companies that were able through legal action to maintain some outdoor presence chose not to, so as not to be seen as flying in the face of Cidade Limpa.

And considering that Brazilians were hooked into the web, the local advertisement industry followed the money…

Again from the same FT article

It also helped that Brazilians were extremely active in social media. The country has one of the highest percentages of active Twitter users in the world and Brazilians are avid social networkers.

Lalai Luna, co-founder of Remix, a new agency specialising in digital and social media strategies, often focusing on music culture, says this opened up opportunities and cash flow for young creatives with experimental models to develop their craft.

“Companies had to find their own ways to promote products and brands on the streets,” she says. “São Paulo started having a lot more guerilla marketing [unconventional strategies, such as public stunts and viral campaigns] and it gave a lot of power to online and social media campaigns as a new way to interact with people.”

The point is that people incentives, or in this case the advertising industry's incentives, adjusts or responds to regulations.

Since consumer’s preferences in Brazil have already been shifting (even prior to the law), the outdoor ban only expedited the transitional process, thus giving the impression of the positive externality from the said regulation.

Another very important point to stress has been the radical impact of digital media to the advertisement industry.

Nevertheless Brazil’s politics have their idiosyncrasies too.

Politicians got rid of outdoor ads, but decriminalized graffiti (which for me is a good thing).

From Untappedcities.com (image theirs too)

In March 2009, the Brazilian government passed law 706/07 which decriminalizes street art. In an amendment to a federal law that punishes the defacing of urban buildings or monuments, street art was made legal if done with the consent of the owners. As progressive of a policy as this may sound, the legislation is actually a reflection of the evolving landscape in Brazilian street art, an emerging and divergent movement in the global street art landscape. In Brazil, there is a distinction made between tagging, known as pichação, and grafite, a street art style distinctive to Brazil.

Perhaps the defining line between “street art” and “advertisement” may converge or may become a gray area.

St. Louis Fed Economist Warns of Inflation Inferno

Well this seems unusual—a Fed economist demonstrated tenacity to challenge the position of his bosses and of the establishment.

From the Wall Street Journal blog, (bold emphasis mine)

New research from the Federal Reserve Bank of St. Louis warns there is more than enough kindling to start an inflation inferno.

The paper, written by staff economist Daniel Thornton, stands in opposition to the views of key central bank officials like Chairman Ben Bernanke and others, who argue that even as the Fed has pumped liquidity into the financial system, it has the tools it needs to control the inflationary potential of those actions.

In his paper, Thorton bases his warnings on the interaction between Fed liquidity actions and growth in the money supply. He acknowledges that in focusing on what happens with money supply, he is standing apart from the current view of many economists. Also, Thorton isn’t asserting the inflation environment has turned sour, only that central bank policy has created conditions for trouble, and that problems could develop quickly.

“Both economic theory and historical experience suggest that a significant and persistent expansion in the money supply will be associated with a significant increase in the longer-run inflation rate,” Thornton writes.

He indicates current rates of inflation could suffer should money supply start to expand quickly: “The recent acceleration in the growth of the money supply is of particular concern because the year-over-year consumer price index inflation for December 2011 is 3.0% and the year-over-year personal consumption expenditures inflation for November is 2.5%, both of which are already above the [Federal Open Market Committee's] implicit inflation target of 2%.”

Thorton’s worry is rooted in the massive and ongoing liquidity the Fed has provided the economy since 2008. Much of that money actually hasn’t made it out into the economy, with banks parking the funds back at the Fed in the form of excess reserves.

The study seems to take the central banking dogma of inflationism to task (I have not read it but am basing from the above account).

It’s a wonder if Mr. Thornton has been closet Austrian or if the mainstream has now been “infiltrated” by the Austrian School analysis.

Moreover, it would be doubtful if his warnings will ever be heeded. My guess is that Mr. Thornton may have signed away his resignation letter through this study.

Nevertheless, broaching echoes of truth from a potential reformer from the US Federal Reserve is a refreshing development.

Quote of the Day: Life is More than Math…

"It's not prime enough"

"That number is too even... can you make the next one even odder?"

The thing about math is that it's right or wrong, on or off, yes or no. Seven is a prime number, there's no improving it.

The thing about life/business/culture and the things we make and do is that they are not math.

From my favorite marketing guru Seth Godin. Indeed, life is about human actions.

Video: Murray Rothbard on Insider Trading

Insider trading regulations are regulatory shields used by the elites to prevent competition (source: Lew Rockwell blog).

Why The Gold Standard was NOT Responsible for the Great Depression

Rebutting critics of the Gold Standard, monetary economist George Selgin writes,

This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone.

Postwar sentiments ran strongly in favour of restoring gold payments. Countries that had inflated, therefore, faced a stark choice. To make their gold reserves adequate to the task, they could either permanently devalue their currencies relative to gold and start new gold standards on that basis, or they could try to restore their currencies’ pre-war gold values, though doing so would require severe deflation. France and several other countries decided to devalue. America and Great Britain chose the second path.

The decision taken by Winston Churchill, then Britain’s chancellor of the exchequer, to immediately restore the pre-war pound, prompted John Maynard Keynes to ask, “Why did he do such a silly thing?” The answer was two-fold: first, Churchill’s advisers considered a restored pound London’s best hope for regaining its former status – then already all but lost to New York – as the world’s financial capital.

Second, Britain had other cards to play, aimed at making its limited gold holdings go further than usual. Primarily, it would convince other countries to take part in a gold-exchange standard, by using claims against either the Bank of England or the Federal Reserve in place of gold in international settlements. It would also ask the Fed to help improve Great Britain’s trade balance by pursuing an easy monetary policy.

The hitch was that the gold-exchange standard was extremely fragile: if any major participant defected, the British-built house of cards would come tumbling down, turning the world financial system into one big smouldering ruin.

In the event, the fatal huffing and puffing came then, as it has come several times since, from France, which decided in 1927 to cash in its then large pile of sterling chips. The Fed, in turn, decided that pulling back the reins on a runaway stock market was more important than propping-up the pound. Soon other central banks joined what became a mad scramble for gold, in which Britain was the principal loser. At long last, in September of 1931, the pound was devalued. But by then it was too late: the Great Depression, with its self-reinforcing rondos of failure and panic, was well under way.

So the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it.

The typical ruse employed by anti-gold standard proponents have been to misinterpret effects as causes.