Cartoon of the Day: Have You Thanked Your Central Banker Today?

Well, have ya? (hat tip Bob Wenzel)

Thank them for this…

Central banking balance sheets at levels never seen in history!

Economic Integration is a Function of Economic Freedom, not Planned Chaos

Cato’s Marian Tupy rightly points out that the much touted benefits from European Union’s integration has been overrated.

The European politicians love to talk about the “huge” benefits of membership in the European Union. It is certainly true that the “single” market between the EU member states has brought tangible benefits, but those have been declining in importance as technological change made access to services and capital cheaper and easier, and trade liberalization progressed world-wide.

Moreover, as the Brussels-based EU bureaucracy expanded, economic liberalization gave way to regulation that helped to strangle European growth (see the graph below). Consider the latest absurdity to emerge from Brussels—a poultry regulation, which aimed to increase the comfort of the egg-laying chickens, but resulted in a drastic cut in egg production and a 100% increase in the price of eggs.

The EU bureaucracy may not appreciate the problem of unintended consequences, but ordinary Europeans are beginning to realize that the EU no longer is what it used to be—a byword for prosperity and stability. In the Czech Republic, for example, a record number of citizens do not trust the EU (63 percent) and the EU Parliament (70 percent). If the EU elite persist in killing jobs and growth, it may bring about the ultimate unintended consequence—the break up of the EU.

The EU represents a political economic entity premised on incorrigible self-contradiction.

On the one hand, the purported mission has been to economically integrate EU’s diverse national economies. On the other hand, the direction of politics has been to centralize the system. Yet political centralization and economic decentralization are fundamentally incompatible.

Professor Ludwig von Mises called this Planned Chaos.

The market economy safeguards peaceful economic co-operation because it does not use force upon the economic plans of the citizens. If one master plan is to be substituted for the plans of each citizen, endless fighting must emerge.

And this is why the ongoing EU debt and welfare crisis has been symptomatic of the friction from the clashing forces of centralization and decentralization. The result of which has been underperformance. [The declining growth in EU, in spite of the 12 year old union, is mostly a result of capital consumption from the EU's welfare state and from various distortive regulations exemplified by the above.]

In reality, EU’s economic integration serves merely a cover for covert plans to establish political fantasyland. Eventually the path towards centralization will lead to unnecessary violence and the self-implosion of an unsustainable and unviable political system

If people in Brussels hold economic integration as their primary goal, then all they should do is voluntarily drop their political ambitions and allow the individual market economies in Europe to flourish with little or no political baggage attached.

But of course, this would mean that EU bureaucrats would be out of jobs and vested interest groups would lose their politically endowed privileges.

So this is not going to happen until the cumulative effects of “planned chaos” becomes totally unwieldy. Yet they seem headed in that direction.

Quote of the Day: Fatal Conceit

Once again my favorite heretic, Black Swan author Nassim Taleb does a Hayek like zinger—against the intellectuals—at his Facebook page but at a much unpretentious, bland or even brutal fashion.

Many of the so-called intellects bear the chutzpah to call or recommend the use of force to impose on their overestimated or bloated sense of understanding of the world, which in reality constitutes no more than fatal wishful thinking or deadly utopian fantasies.

Markets in Everything: Prison Cells, Car Pool Lane and More…

It is inherent in us to trade.

From the Atlantic

THERE ARE SOME THINGS money can’t buy—but these days, not many. Almost everything is up for sale. For example:

• A prison-cell upgrade: $90 a night. In Santa Ana, California, and some other cities, nonviolent offenders can pay for a clean, quiet jail cell, without any non-paying prisoners to disturb them.

• Access to the carpool lane while driving solo: $8. Minneapolis, San Diego, Houston, Seattle, and other cities have sought to ease traffic congestion by letting solo drivers pay to drive in carpool lanes, at rates that vary according to traffic.

• The services of an Indian surrogate mother: $8,000. Western couples seeking surrogates increasingly outsource the job to India, and the price is less than one-third the going rate in the United States.

• The right to shoot an endangered black rhino: $250,000. South Africa has begun letting some ranchers sell hunters the right to kill a limited number of rhinos, to give the ranchers an incentive to raise and protect the endangered species.

• Your doctor’s cellphone number: $1,500 and up per year. A growing number of “concierge” doctors offer cellphone access and same-day appointments for patients willing to pay annual fees ranging from $1,500 to $25,000.

• The right to emit a metric ton of carbon dioxide into the atmosphere: $10.50. The European Union runs a carbon-dioxide-emissions market that enables companies to buy and sell the right to pollute.

• The right to immigrate to the United States: $500,000. Foreigners who invest $500,000 and create at least 10 full-time jobs in an area of high unemployment are eligible for a green card that entitles them to permanent residency.

Read more here

Quote of the Day: Entrepreneurs as Political Force

Entrepreneurship is clearly becoming a global movement, one that is in its infancy, but whose ultimate power is sure only to grow over time. It will take that power to remove many of the obstacles that governments in many countries put in the way of their entrepreneurs.

That’s from Robert Litan of the Kaufmann Foundation describing the success of the Global Entrepreneurship Congress.

Entrepreneurship will be the hallmark of the information age.

Graphic: Has Facebook been Reconnecting Past Colonial Ties?

Interesting observation from the Economist

The Economist writes

EIGHT years ago Facebook launched as an online social network connecting a small college community from a dorm room at Harvard University. Today the company has 845m active users across the globe and a wealth of data. One aspect of these data, which Facebook has shared with The Economist, shows a rough correlation between current global Facebook friendships and the old boundaries of once-mighty European empires.

The maps below rank 214 countries according to the strength of their ties to Britain, France, Spain and Portugal respectively. The darker the blue the higher the fraction of foreign Facebook connections with the imperial power in question. (Facebook has not shared the underlying percentage data, just the ranking.) These closely correspond to countries or territories which were, whether wholly or in part, at one point under British, French, Spanish or Portuguese rule, as seen in the bottom set of maps.

Australia, New Zealand and swathes of east Africa hold the strongest ties to Britain. West African Facebookers have most connections with France. Spanish-speaking Latin America is most strongly tied to Spain. Brazilians remain firmly linked to Portugal, as do people in Mozambique, Angola and Guinea-Bissau.

For the complete view of the graph, proceed to the Economist original site here

iPhone Shows How Trade Statistics are Flawed

I earlier pointed out that statistics hardly captures the realities of the swiftly shifting trade dynamics brought about by globalization as exemplified by the iPhone.

Here’s an update. From the Wall Street Journal Blog

The iPhone provides a good example of the problems with the way trade is currently calculated. The Apple device features hardware from all over the world, but because it’s manufactured in China that country gets credit for the entire wholesale export cost. According to research from Kenneth L. Kraemer of the University of California, Irvine, Greg Linden of University of California, Berkeley, and Jason Dedrick of Syracuse University, each iPhone sold in the U.S. adds $229 to the U.S.-China deficit. Based on 2011 cellphone activations from AT&T, Verizon and Sprint, Apple sold around 30 million iPhones in the U.S. last year — accounting for about $6.83 billion of the U.S.’s $282 billion 2011 trade deficit with China.

But the researchers note that such estimates overstate China’s contribution. Though the iPhone is assembled in China, most of its component parts come from elsewhere. Separate research by Yuqing Xing and Neal Detert for the Asian Development Bank Institute noted that for the iPhone 3G just about 3.6% of the wholesale price came from China, the rest could be attributed to inputs from companies in Japan, Germany, Korea and even the U.S. (Read more about that study here.)

The iPhone is just one example. This same phenomenon is happening all over the world in products ranging from cars to children’s toys. In an attempt to better gauge which countries are benefiting or losing the most through trade, the Organization for Economic Co-operation and Development and the World Trade Organization announced that they will be working on a project that identifies where value-added flows are coming from.

More confirmatory evidence where human action cannot be quantified.

This only validates Professor Ludwig von Mises who wrote

The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. If it were only caused by technical insufficiency, at least an approximate estimation would be possible in some cases. But the main fact is that there are no constant relations. Economics is not, as ignorant positivists repeat again and again, backward because it is not "quantitative." It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation.

To add, the deepening of the information age will further complicate trade dynamics as commerce will become increasingly more about niches and specialization or decentralization.

Lastly, the other implication is that using flawed trade statistics to argue for political actions (such as protectionism) is like shooting oneself in the foot.

Quote of the Day: Central Banking Crony Capitalism

The second point made in the classic video is that open market operations are a handout to the dealer banks. Suppose the government is going to spend an extra $100 that it does not have, and it will finance this by printing $100. In practice, it borrows $100 from "the Goldman Sachs" by issuing a bond, prints the $100, then pays "the Goldman Sachs" to get its bond back. This second method of funding the deficit is costlier to the government, but yields profits to "the Goldman Sachs." It also yields profits to the Fed, because the Fed is the agency printing the money, while the Treasury is the agency issuing the bonds. However, from a taxpayer's point of view, the Fed's profits are a wash (all of the Fed's gains come at the expense of the Treasury), and the only net impact is the income transfer to "the Goldman Sachs."

The Fed's response to the financial crisis was to massively increase the size of its balance sheet, thereby massively increasing the income transfer to private financial institutions. In addition, in order to keep this additional money from leaking to businesses or consumers in the form of loans*, the Fed introduced a policy of paying interest to banks on reserves. This increased the value of the transfer from taxpayers to financial institutions.

That’s from Professor Arnold Kling.

Will Japan’s Investments Drive the Phisix to the 10,000 levels?

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.-Ludwig von Mises

Last week I noted that a broad based strengthening Philippine Peso against major currencies could likely fuel carry trades and arbitrage opportunities ahead that may push the Phisix towards the 10,000 levels.

I wrote[1],

What this means is that the Philippines (and our ASEAN contemporaries) is likely to lure spread arbitrages or carry trades from US, Japanese, Swiss and European investors or punters that is likely to kick start a foreign stimulated boom in the local assets including those listed on the Philippine Stock Exchange.

It has barely been a week since I penned this observation. However today’s news headlines seem to provide clues in the direction which may confirm my long held thesis.

The headline says that Japanese investors are bullish the Philippines and would likely commit more investments[2].

In a survey, JETRO, the Japanese government’s trade and investment outfit, said that the Philippines has the ‘the least problematic’ factors for investments among ASEAN neighbors. And this would serve as the impetus for Japanese investments.

Rationalization Process of the Reflexivity Theory

First of all, I would say that this represents the rationalization phase of the current bullmarket.

By rationalization, I mean that price signaling channel exerts influence to the real world (or economic) developments, which at present, are being extrapolated with rose colored glasses. And developments in the real world eventually reinforces the thrust to further bid up of stock market prices paving way to a reflexive feedback loop or the reflexivity theory at work.

Writes the Billionaire (and crony) George Soros[3],

The underlying trend influences the participants' perceptions through the cognitive function; the resulting change in perceptions affects the situation through the participating function. In the case of the stock market, the primary impact is on stock prices. The change in stock prices may, in turn, affect both the participants' bias and the underlying trend.

The essence of the reflexivity theory is the dynamics of the bubble psychology as reflected on people’s expectations and their consequent actions expressed through the price mechanism and through real world actions.

Going back to the politically colored Pollyannaish article, it has been rightly pointed out that the wide scale dislocation or disruption from Japan’s total shutdown of the entire nuclear power industry (except for the two remaining plants)[4], which has been prompted for by last year’s catastrophic earthquake-tsunami disaster, has served as one of the primary reasons for their proposed investments here.

Japan’s nuclear industry previously contributed to about 30% of the nation’s energy requirements. Now the Japanese has to import 84% of their energy requirements[5]; this has partly led to the recent record trade deficits.

Also note the phrase ‘least problematic’ instead of ‘best potential returns’ as basis for attracting Japanese investments from which several criterion has been enumerated supposedly to the advantage of the Philippines, particularly “increasing financial costs”, “rising prices or shortage of land or office”, “skyrocketing payroll costs”, aside from labor conditons of “recruiting general staff”, “recruiting executives”, “low rate of employment retention”, “problems in workers competency”, “difficulty in quality control” and the “the least problems in salary base rate”.

So in a shade of schadenfreude, the Philippines may benefit from the adverse developments in Japan. With seemingly limited options, least problematic becomes a significant variable and has been equated with competitiveness in attracting Japanese investments.

Déjà vu, Asian Crisis 2.0? Phisix 10,000

Yet the article’s projections have been based on Jetro’s survey. Surveys or polls are predicated only from opinions which may or may not reflect on the real motivations or values of surveyed actors. And because there are no stakeholdings involved in surveys, they are fluid, ambiguous, and volatile, ergo, unreliable.

Whereas demonstrated preferences or the actual choice taken by the economic agents represents the more important of the two, since this signifies actual voting or expression of preferences or values.

As the great Professor Murray N. Rothbard wrote[6],

The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action

Since Japan’s calamity struck last year, it should be of note that Indonesia has been the largest recipient, in terms of percentage, of Japan’s outward Foreign Direct Investment (FDI) flow[7].

Meanwhile, Thailand and Vietnam has substantially bested the Philippines. The Philippines only ranked 6^th in Asia.

A better perspective of Japan’s OUTWARD FDI long term trend in ASEAN can be seen above. The trumpeted competitiveness framed by media hardly reveals on the reality.

Of course, these charts represent ex post actions and that ex ante could translate to vital changes as proposed. But I doubt so.

Yet there are several very important things of note from here.

One, as pointed above, the Philippines has not been grabbing the biggest pie of Japanese FDI. There have been little signs of any radical changes into the direction as broached by the headlines.

So far, Thailand has been the biggest magnet in attracting Japanese FDIs. Thailand has the largest nominal dollar based flows at $7.1 billion, signifying 54% share of Japan’s outward FDI flows into ASEAN in 2011.

The Philippines, despite recent material gains, has the smallest inflows.

Two, the growth trend of nominal US dollar based investment flows exhibits that even Vietnam ($1.8 billion) has far outclassed the Philippines ($1.0 billion).

Three, ALL of the ASEAN majors have registered substantial Japan based FDI gains. ASEAN has basically surpassed their regional Newly Industrial Country (NIC) contemporaries in attracting Japanese money.

In short, Japan’s investments in ASEAN do not seem to be country specific, but more of a regional dynamic. Or that the Japanese probably hedge their ASEAN exposure by spreading their investments throughout the region.

Well the past, according to Mark Twain, does not repeat itself, but it rhymes.

Today’s FDI flows eerily resonates or resembles on the time window[8] of the 1985 Plaza Accord to the post Japan bubble in 1990s until the climax, the 1997 Asian Crisis.

The Business Insider quotes author and former Deputy Chief of the Hong Kong Monetary Authority Andrew Sheng[9] in the latter’s book From Asian to Global Financial Crisis

… shift production to countries that not only welcomes Japanese FDI but also had cheap land and labour… By the late 1980s, Japan had become the single largest source of FDI for the fast-growing emerging Asian economies. This trend was particularly clear when another surge of Japanese FDI into Asia took place between 1993 and 1997, with Japanese FDI rising nearly twofold from US$6.5 billion to US$ 11.1 billion during this period…

… banks followed their manufacturing customers into non-Japan Asia in earnest… From 1985 to 1997 Japanese banks supplied over 40 percent of the total outstanding international bank lending to Asia in general… The massive expansion in Japanese bank lending, in both yen and foreign currency, created huge capital flows globally.”

So could we be experiencing a déjà vu, Asian Crisis 2.0?

Let me be clear: bubbles or business cycles account for as policy induced processes, fuelled by monetary injections, marked by transitional stages.

FDI’s are by itself not the source of the disease but are symptoms or the ramifications of manifold political actions.

This is NOT to say that ASEAN faces the risks of an imminent bust soon. Instead this is to say that if these flows continue at a pace similar to 1985 to the mid-1990s then they could evolve into a full pledge bubble.

Yet there are many other indicators which will converge to give evidence to the maturing phase or the climax of a domestic business cycle. These may include the current account balances, state of banking credit, the yield curve, financial innovation, currency values and the state of the stock market.

And speaking of the stock market in the 1986-1997, Japan’s investment flows pumped up the region’s stock markets including the Phisix.

The 11 year bull market phase (green circle) of the local benchmark had two interruptions marked by two botched coup d'état attempts in 1987 and 1989, but nonetheless went to climax at 3,300+ levels. Remember, in 1986 the Phisix was at about only 150.

Put differently, if a similar Japan based investment flow dynamic should swamp into the region, then the Phisix is likely to put to realization my 10,000 level target first, before the structural implosion would occur. Again, trends don’t go in a straight line, and there can be substantial medium term obstacles or counter cycles or bear markets, like 2007-2008, before my targets could be fulfilled.

I would like to repeat, money flows won’t likely be limited to a Japan dynamic but from major western economies as well. This is the wealth convergence in motion.

Capital Flight Camouflaged as FDIs and Portfolio Flows

The recent surge in Japan’s FDI could just be the beginning.

The far more important or the major driver of Japan’s coming FDI and portfolio flows into ASEAN has already been manifested in the region’s currency markets.

Since the advent of 2012, the long term price appreciation of the Japanese Yen relative to ASEAN markets (Peso, Rupiah, Baht and Ringgit, the order from the top left to bottom right) seems to have been reversed.

Under pressure from politicians[10], the Bank of Japan (BoJ) has aggressively been ramping up its balance sheet[11] to allegedly support the economy by making ‘exports’ competitive.

Thus ASEAN-4 currencies along with the US dollar relative to the Yen have recently spiked!

If Japan’s basic problems today have primarily been due to a dysfunctional nuclear energy sector, then it would represent a logical error to see money printing as replacing the idled nuclear energy sector. Money is just a medium of exchange. Money doesn’t produce energy.

In reality, Japan’s banking system has been stuffed with loans to electric utility companies, many of them nuclear based. The industry’s risk profile has previously been viewed as almost at par with government debt, thus has been part of the banking system’s portfolio. Syndicated loans to the electric power companies had reportedly tripled to 1.16 trillion yen in 2011 from 448.8 billion in 2010[12]. Thus, with a crippled energy sector, Japan’s banking system, which has still been nursing from the scars of the last bubble bust, is once again confronted with heightened risks of defaults. Thus the BoJ rides to the rescue!

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

As the great Ludwig von Mises wrote[13],

The holders of ready cash try as far as possible to avoid the dangers of devaluation which today threaten in every country. They keep large bank balances in those countries in which there is the least probability of devaluation in the immediate future. If conditions change and they fear for these funds, they transfer such balances to other countries which for the moment seem to offer greater security. These balances which are always ready to flee-so-called “hot money”—have fundamentally influenced the data and the workings of the international money market. They present a serious problem in the operation of the modern banking system.

The bottom line is that YES we should expect Japanese FDI and portfolio investments into the Philippines and the region to swell.

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

And under the political climate that induces yield chasing dynamics, YES we should expect these flows to translate to a vastly higher Phisix and ASEAN bourses overtime, largely depending on the degree of inflows. This will be further augmented by the response of local investors to such dynamic as well as to local policies.

Although NO the Philippines will not decouple from events abroad and the pace of FDIs and investment flows will largely be grounded on the general liquidity environment.

And finally NO, the incumbent political leadership has a smidgen of responsibility for today’s dynamic. The current global negative real rate environment has mainly been driven by collective central bank actions. Profit from folly.

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[1] See Phisix: The Journey Of A Thousand Miles Begins With A Single Step, March 12, 2012

[2] Inquirer.net Japan to pour more investments in PH, March 18, 2012

[3] Soros George The Alchemy of Finance p.53 John Wiley & Sons

[4] New York Times, Japan’s Nuclear Energy Industry Nears Shutdown, at Least for Now, March 8, 2012

[5] World Nuclear Energy Nuclear Power in Japan, Updated March 2012

[6] Rothbard Murray N. Toward a Reconstruction of Utility and Welfare Economics, July 6, 2008

[7] Jetro.go.jp FDI flow (Based on Balance of Payments, net), Japan's Outward and Inward Foreign Direct Investment Japanese Trade and Investment Statistics

[8] Thomsen Stephen SOUTHEAST ASIA: THE ROLE OF FOREIGN DIRECT INVESTMENT POLICIES IN DEVELOPMEN 1999 OECD.org

[9] Sheng Andrew From Asian to Global Financial Crisis Japan's Role In Asian Financial Crisis 1997, March 17, 2011 Business Insider

[10] See Bank of Japan Yields to Political Pressure, Adds $128 billion to QE, February 14, 2012

[11] Danske Bank No real easing from Bank of Japan this time Flash Comment March 13, 2012

[12] Reuters.com Japan utilities may return to bonds as $19 bln debt matures, January 25, 2012

[13] Mises, Ludwig von 4. The Flight of Capital and the Problem of “Hot Money” III. INFLATION

Global Stock Markets: Will the Recent Rise in Interest Rates Pop the Bubble?

The natural tendency of government, once in charge of money, is to inflate and to destroy the value of the currency. To understand this truth, we must examine the nature of government and of the creation of money. Throughout history, governments have been chronically short of revenue. The reason should be clear: unlike you and me, governments do not produce useful goods and services that they can sell on the market; governments, rather than producing and selling services, live parasitically off the market and off society. Unlike every other person and institution in society, government obtains its revenue from coercion, from taxation. In older and saner times, indeed, the king was able to obtain sufficient revenue from the products of his own private lands and forests, as well as through highway tolls. For the State to achieve regularized, peacetime taxation was a struggle of centuries. And even after taxation was established, the kings realized that they could not easily impose new taxes or higher rates on old levies; if they did so, revolution was very apt to break out.-Murray N. Rothbard

The rampaging bullmarket here and abroad has raised concerns that recent increases in nominal interest rates could put a kibosh to the current run.

As I pointed out before, the actions in the interest rates markets will be shaped by different circumstances[1] which means it is not helpful to apply one size fits all analysis to potentially variable scenarios that may arise.

Interest rates may reflect on changes in consumer price inflation, they may also reflect on the perception of credit quality and they may reflect also on the state of demand for credit relative to the scarcity or availability of savings or capital[2].

Since the current interest rate environment has been mostly manipulated by political actions, where the political goal has supposedly been to whet aggregate demand by bringing interest rates towards zero, then we are dealing with a policy based negative real rates economic environment.

So the crucial issue is, has the recent selloff in treasury bonds neutralized the negative real rates regime? The answer is no.

First of all, current environment has not been reflecting concerns over deterioration of credit quality as measured through credit spreads[3], which seem to have eased.

Also, milestone highs reached by global stock markets, led by the US, have encouraged complacency through a reduction of volatility[4].

Second, the yield curve of US treasuries despite having flattened (perhaps due to policy manipulations) still manifests opportunities for maturity transformation trade or lending activities.

Thus, we are seeing signs of recovery in business and commercial lending in the US.

Some of the banking system’s excess reserves held at the US Federal Reserve seem to be finding its way into the economy.

Lastly, many are still in denial that inflation poses a risk, despite rising Treasury Inflation Protected Securities (TIPS).

TIPs are government issued treasury securities indexed to the consumer price index (CPI) with maturity ranging from 5 to 30 years which are usually considered as inflation hedges. (That’s if you believe on the accuracy of the CPI index. I don’t)

TIPs seem to have converged with the S&P 500.

Financial markets could be pricing in a risk ON environment and real economic activities, calibrated by the current negative real rates regime, combined with signs of escalating consumer price inflation.

The reality is that mainstream and the political establishment will continue to deny that inflation exists, when the US Federal Reserve has already been rampantly inflating.

Monetary inflation is inflation. However the public is being misled by semantics of inflation by pointing to consumer price inflation.

As Professor Ludwig von Mises wrote[5],

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase

They put the responsibility for the rising cost of living on business, This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices. While the Office of Stabilization and Price Control is busy annoying sellers as well as consumers by a flood of decrees and regulations, the only effect of which is scarcity, the Treasury goes on with inflation.

That’s because any acknowledgement of inflation would put to a stop or would prompt for a reversal of the Fed’s accommodative policies. And considering that the banking system has been laden with bad loans, and that welfare based governments have unsustainable Ponzi financing liabilities, then tightening money conditions, expressed through higher interest rates, means the collapse of the system.

Underneath the seeming placid signs of today’s marketplace have been central banking steroids at work as the balance sheets of major economies have soared to uncharted territories[6].

The US Fed and the ECB, as well as other central banks, including the local BSP, will work to sustain negative interest rates environment, no matter any publicized rhetoric to the contrary. There may be some internal objections by a few policy makers, but all these have signified as noises more than actual actions. The politics of the establishment has drowned out any resistance as shown by central banks balance sheets.

One must remember that the US Federal Reserve was created out of politics[7], exists or survives through political money and will die through politics. And so with the rest of central banks.

Thus there is NO way that central bankers will not be influenced[8] by political leaders, their networks and by the regulated. Political power always has corrupting influences.

A good example can be gleaned from Independent Institute research fellow Vern McKinley’s comments[9] on U.S. Treasury secretary Mr. Timothy Geithner’s recent Op Ed[10]

He recounts how the CEO of Bear, with his firm on the brink of bankruptcy, came to him looking for a shoulder to cry on. From his then leadership perch as president of the New York Fed, the bank ultimately extended nearly $30 billion for a bailout, the first in a series of such interventions.

Central bankers are human beings. Only people deprived of reason fail to see the realities of government’s role.

And since the FED has unleashed what used to be a nuclear option, other central banks have learned to assimilate the FED’s policy. This essentially transforms what used to be a contingency measure into conventional policymaking.

As been said before, inflationism has produced an unprecedented state of dependency

And that such state of dependency can be seen through the dramatically expanding role of non-market forces or the government.

As Harvard’s Carmen Reinhart observed in her Bloomberg column[11],

In the U.S. Treasury market, the increasing role of official players (or conversely the shrinking role of “outside market players”) is made plain in Figure 3, which shows the evolution from 1945 through 2010 of the share of “outside” marketable U.S. Treasury securities plus those of so-called government-sponsored enterprises, such as the mortgage companies Fannie Mae and Freddie Mac.

The combination of the Federal Reserve’s two rounds of quantitative easing and, more importantly, record purchases of U.S. Treasuries (and quasi-Treasuries, the government-sponsored enterprises, or GSEs) by foreign central banks (notably China) has left the share of outside marketable Treasury securities at almost 50 percent, and when GSEs are included, below 65 percent.

These are the lowest shares since the expansive monetary policy stance of the U.S. regularly associated with the breakdown of Bretton Woods in the early 1970s. That, too, was a period of rising oil, gold and commodity prices, negative real interest rates, currency turmoil and, eventually, higher inflation.

This is not an issue involving economics alone. This is an issue involving the survival of the current state of the political institutions.

Bottom line: Rising interest rates will pop the bubble one day. But we have not reached this point yet.

Again, the raft of credit easing measures announced last month will likely push equity market higher perhaps until the first semester or somewhere at near the end of these programs. Of course there will be sporadic shallow short term corrections amidst the current surge.

However, the next downside volatility will only serve as pretext for more injections until the market will upend such policies most likely through intensified price inflation.

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

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

[3] Danske Bank, The US bond market finally surrendered, Weekly Focus March 16, 2012

[4] See Graphics: The Risk On Environment March 14, 2012

[5] Mises, Ludwig von 19 Inflation Economic Freedom and Interventionism Mises.org

[6] Zero Hedge, Is This The Chart Of A Broken Inflation Transmission Mechanism? March 13, 2012

[7] See The US Federal Reserve: The Creature From Jekyll Island, July 3, 2009

[8] See Paul Volcker Warns Ben Bernanke: A Little Extra Inflation Would Backfire, March 16, 2012

[9] McKinley Vern Timothy Geithner's Bailout Legacy Not One To Be Proud Of, Investor’s Business Daily March 15, 2012

[10] Geithner Timothy Op-Ed: ‘Financial Crisis Amnesia’ Treasury.gov March 1, 2012

[11] Reinhart Carmen Financial Repression Has Come Back to Stay, Bloomberg.com March 12, 2012

Graphic: Spending Patterns of Americans Over Time

Below is a sample from a deck of graphs depicting the intertemporal changes in the spending habits of Americans

Writes the Business Insider

HS Dent, an economic forecasting firm, compiled Census data spending behavior and presented them as demand curves, which measure average annual expenditure for a given product over age.

HS Dent's charts couldn't be more simple, but we can't stop looking at them. They offer an elegant glimpse into how spending really evolves over time.

Among the graphs, I like this…

…this seems true on my part (as the urge is there)

You can see the rest here or here

Quote of the Day: Hidden Cost of Regulations

The truth is that there is no way to calculate the real cost of more regulations, more taxes, and more government control. It’s sort of like Obama insisting that his policies have “saved jobs.” How in the hell does anyone prove he saved jobs? He can’t. It’s a statement carefully crafted for idiots. No rational person with an IQ above 60 would take seriously such an absurd claim.

Likewise, you can’t prove what the cost of a government monstrosity like Obamacare will cost, because it’s impossible to know how many companies it will put out of business, how many jobs will be lost, how much it will destroy the economy, how high interest rates will go, and how bad the coming hyperinflation will be.

The truth is that the cost could be in the trillions of dollars, but no one can ever know for sure because most of the costs are hidden. And the biggest cost would likely be the loss of what is left of our freedom and of the country that was once known as the United States of America.

From libertarian author Robert Ringer

War on Drugs: Richard Branson Asked President Obama for a Weed

Writes the Politico,

When you go to a White House state dinner and you’re lucky enough to get some face time with the president, what do you ask the president?

“I asked him if I could have a spliff,” businessman and Virgin Group honcho Richard Branson told a crowd gathered at The Atlantic’s Washington offices Thursday, the day after attending the dinner for British Prime Minister David Cameron.

“But they didn’t have any,” Branson continued, according to a video of the event as he recalled his effort to procure weed the night before at the White House.

What’s he smoking? Well, Branson is a longtime advocate for the legalization of marijuana — and an admitted recreational pot puffer — and spoke at an Atlantic Exchange panel discussion titled “Benchmarching the War on Drugs.” Branson appeared alongside The Atlantic’s Washington Editor-At-Large Steve Clemons and Ethan Nadelmann, the executive director of the Drug Policy Alliance.

The Atlantic crowd guffawed mightily, which is appropriate: Branson was quick to note that he was joking.

It’s presidential election season, so President Obama’s state dinner has likely been about raising campaign funds. Here we can see how the political leadership can be swayed (or captured) by the interests of big businesses--you scratch my back and I'll scratch yours.

But the most important point here is that even through a joke, the Mr. Branson seems to have undauntedly delivered the incisive message of legalizing drugs.

Ironically, President Obama has admitted to have used drugs in his youth. (hat tip Business Insider)

War on Gold: India Raises Import Duties

So the Indian government will make good their threat to inhibit gold imports.

Writes the Mineweb,

Gold eased on Friday, caught up in its largest weekly decline in three months, after top consumer India said it would double import duties on bullion and upbeat U.S. data this week fed optimism over the global economy, boosting risk appetite.

The bullion market relies heavily on Indian jewellery demand. Last year, the country imported a record 969 tonnes of metal and in January, raised the import duty by 90 pecent. Finance Minister Pranab Mukherjee said the strong growth in imports had played a key role in widening India's current account deficit…

Investors hold a near-record amount of gold now in exchange-traded products and have stepped up their holdings of gold through U.S. futures so far in 2012, meaning the market could be subject to steeper sell-offs by disenchanted players, at least in the near term…

Gold imports to India, the world's top importer, are likely to fall significantly in 2012 as the government's decision to double import duty to four percent is seen squeezing local demand, especially for jewellery, industry officials said.

Gold imports as the cause of India’s trade deficit are in reality just an excuse for its true driver: insatiable government spending.

And the belief that people’s demand for gold will be curtailed, as governments around the world ramp up the printing press, is an illusion

The likely response as captured by the same Mineweb article,

Bombay Bullion Association President Prithviraj Kothari said the increase would prompt a rise in smuggled gold and impact the jewellery sector more than the investment sector.

Yes a gold black market in India will mushroom

Also politicization of markets translates to more corruption.

Nevertheless whatever price weakness gold has recently been faced with should be temporary.

Paul Volcker Warns Ben Bernanke: A Little Extra Inflation Would Backfire

For the second time, Paul Volcker, the predecessor of the incumbent US Federal Reserve chief Ben Bernanke takes the latter’s policies to task.

From Newsmax,

The U.S. economy is recovering "pretty well" and trying to juice it up by allowing a little extra inflation would be disastrous, said Paul Volcker, the former Federal Reserve chairman known for successfully reining in double-digit inflation.

"I think that is kind of a doomsday scenario," Volcker told an economic summit when asked if the Fed should foster higher inflation to stimulate faster growth.

Higher inflation would backfire by causing interest rates to rise. "You are not going to get any stimulus and you are going to make it much harder to restore price stability," Volcker told the Atlantic magazine conference.

I candidly don’t believe that Mr. Ben Bernanke is entirely clueless on the risks of the policies he has implemented. While part of these may have been ideology based, I don’t think this tells the entire story.

Mr. Bernanke, as an insider, may not just be working around economic and financial theories. My guess is that the directions of policymaking may have been substantially influenced by pressures from entrenched powerful interests group.

While Paul Volcker’s reputation has been built from his inflation fighting stance, I am not sure he would depart from adapting Bernanke’s policies if he is in the latter’s shoes today.

Circumstances during Mr. Volker’s time have immensely been different than today. There has been a vast deepening of financialization of the US economy where the share of US Financial industry to the GDP has soared. In short, the financial industry is more economically (thus politically) important today than in the Volcker days. Seen in a different prism, the central bank-banking cartel during the Volcker era has not been as embedded as today.

This is not to defend Bernanke, but to exhibit the divergence in the degree of political ties between US Federal Reserve and Wall Street.

Bailouts, Quantitative Easings, currency swaps and zero bound rates only reveals of the priorities of team Bernanke which have mostly been designed to protect the banking and financial industry.

And the only way to eradicate these cozy crony relationship which thrives upon policies that “privatize profits, socialize losses” is to end the Federal Reserve and the central banking system.

Video: The Ideas Behind the Ron Paul Revolution

(hat tip Lew Rockwell Blog)