The Scarborough Shoal Standoff Has Not Been About Oil

Despite the blaring headlines, the domestic equity market seems to have discounted the supposed impasse between China and the Philippines over the disputed Scarborough Shoal.

I think the market response over risks of a military confrontation of war seems justified.

Media’s report of the territorial contest between the Philippines and China has been rife with insinuations that the motivations of the kerfuffle has been about “ rich in oil and gas reserves as well as fish stocks and other commercially attractive marine life”[1].

Yet current developments have not been supportive of such oversimplified implications.

China as Major Beneficiary of the Shale Oil Revolution

First of all, the growth of China’s crude oil imports has been falling.

That’s because China’s slackening demand for crude oil has been substituted for soaring demand of cheaper natural gas. China’s natural gas imports are expected to balloon by 45% in 2012[2].

Next, media entirely overlooks the ongoing Shale gas boom where advancements in technology principally through hydraulic fracking and horizontal drilling—complimented by computer programs which simulates well development before drilling (which controls costs), advance fiber optics and even use of microphones to measure seismic events[3]—has enabled access to immense commercial quantities of shale based natural gas.

The shale gas revolution has not just been transforming the energy sector, but changes have been diffusing into a vast area of the global economy.

Author Matt Ridley explains[4],

Chemical companies, which use gas as a feedstock, are rushing back from the Persian Gulf to the Gulf of Mexico. Cities are converting their bus fleets to gas. Coal projects are being shelved; nuclear ones abandoned.

The shale gas revolution has become a key factor in bringing back many energy intensive manufacturing companies to the US such as steel, chemical and fertilizer companies[5].

So contrary to the claims of mercantilists, who blindly and wrongly sees protectionism through inflation or devaluation as means to regain competitiveness, access to abundant and cheap energy can be one avenue towards attaining competitive and comparative advantages.

Yet a deepening of the Shale gas revolution would benefit China too, since China has the largest technically recoverable resources of shale gas[6] in the world.

As proof the intensifying trend towards Shale gas revolution, just recently, French Total SA[7] and British Royal Dutch Shell PLC[8] have just forged deals to explore, develop and produce shale oil in China. There will be massive investment flows to develop Shale not only in China but around the world.

Mostly because of Shale, Natural gas around the world is expected to boom and has the biggest potential to replace crude oil.

In China, production of natural gas via shale, coal bed methane and tight gas are expected to explode[9]. This would mirror on the skyrocketing demand for natural gas[10].

With China’s shale oil boom having yet to ignite, it would seem a paradox for China to politically squabble over relatively meager oil and gas field as compared to the immense domestic reserves that has yet to be tapped. Besides China can do more by investing in other countries than trigger a shooting war.

Political Smoke and Mirrors over Scarborough Shoals and Spratlys

In addition, China’s political economy has now been highly dependent on international trade.

Merchandise trade (sum of imports and exports) is now about half of China’s economy. This means that since China has deeply been embedded to globalization, any military conflict or a war would be self-destructive not only to the average Chinese but to the China’s incumbent political institutions and leaders, as well.

Moreover, given that most of ASEAN nations has been “closely linked[11]” to the US, any military clash may be a magnet for the involvement of the US militarily.

And conventional warfare will be dissimilar from the way wars has been fought in the 20^th century, given the proliferation of nuclear armaments. Future wars will likely be more about technology based engagements (computer, robotic, biotech and nanotech along with nuclear and special ops[12]) than conventional warfare or guerrilla or terror tactics. Yet China has yet to reach such state of sophistication

And as I have mentioned in the past[13], the gunboat diplomacy would work against China’s attempt to establish the use her currency the yuan as the region’s currency reserve[14].

And given the above, China’s antagonistic foreign policy approach over the disputed islands hardly seems about the securing more “oil and gas reserves”, and seems patently contradictory to her overall interests.

This brings us again to the following postulates.

China has been buying less of US treasuries[15] or financing less the US. China has also been taking flaks from US politicians whom have used “blame China” (as well as “blame the rich”) to advance their political platforms in the coming elections.

And perhaps one way to placate US politicians has been for China to act as a complicit bogeyman in order to promote US arms sales to Asia. More arms sales could translate to more donations by US defense industry to candidates of both parties in the coming elections.

Notes the opensecret.org[16]

Although the defense sector contributes far less money to politicians than many other sectors, it is one of the most powerful in politics. The sector includes defense aerospace, defense electronics and other miscellaneous defense companies.

I have been repeatedly pointing out such a possibility[17].

Also another possible angle would be to use current territorial disputes as diversion to current internal political struggles in China. Last Thursday most websites in China became inaccessible[18]. Was the widespread internet blackout a result of Indonesia’s quake? Or has this been related to recently rumored coup attempt[19]? Appeal to nationalism via military conflicts or nationalism based controversies are frequently used by politicians as decoy or diversion to real (social, economic or political) problems.

China could also be testing the strength of ASEAN ties to the US, to ascertain or measure as to what extent growing trade relations have brought Chinese influence into the region’s politics.

Bottom line: Unless China political leaders have lost their minds, I find the unfortunate Scarborough Shoal affair (as well as Spratly’s incidents) as suspiciously more about political ‘smoke and mirrors’ maneuvering and more vaudeville than an issue about territorial claims.

---

[1] Inquirer.net 9 Chinese boats leave Scarborough shoal, April 15, 2012

[2] China.org.cn Oil imports to grow slower, February 3, 2012

[3] See Shale Oil Revolution: (Laissez Faire) Capitalism Deals Peak Oil a Fatal Blow, March 24, 2012

[4] Ridley Matthew Gas Against Wind, March 13, 2012 Rationaloptimist.com

[5] Wall Street Journal, Steel Finds Sweet Spot in the Shale, March 26, 2012

[6] Nextbigfuture.com Global shale gas boosts total recoverable natural gas resources by 40%, April 6, 2011

[7] Wall Street Journal Total Extends Its China Ties, March 18, 2012

[8] Wall Street Journal Shell Reaches Chinese Shale-Gas Deal March 21, 2012

[9] US Energy Information Administration INTERNATIONAL ENERGY OUTLOOK 2011, September 19, 2011

[10] The Energy Markets and Money blog China Shale Gas... The New Frontier, March 19,2012

[11] Xinhuanet.com Interview: ASEAN members may be manipulated by U.S. on South China Sea issue: analyst, November 11, 2011

[12] Casey Doug Learn To Make Terror Your Friend January 7, 2012 lewrockwell.com

[13] See China Deepens Liberalization of Capital Markets April 4, 2012

[14] See Why China’s Currency Regime Shift Is Bullish For The Peso, June 28, 2010

[15] Merk, Axel Falling Treasuries: A Currency Perspective, March 20, 2012 gold-eagle.com

[16] opensecret.org Defense

[17] See Has the Tensions over Spratly’s Islands been about US Weapons Exports? June 28, 2011

[18] Wall Street Journal Blog, Mystery Blocks Put China Internet on Edge, April 12, 2012

[19] See China’s Coup Rumors: Signs of the Twilight of Centralized Government?, March 22, 2012

Quote of the Day: How Different Policies Affect Entrepreneurs

1. In a nation with poor rule of law and weak protection of property rights, entrepreneurs are undermined in their efforts to innovate, expand, and create.
2. In a nation with bad monetary policy, entrepreneurs are hampered because the basic unit of account and medium of exchange is unstable.
3. In a nation with onerous fiscal policy, entrepreneurs are discouraged because government is misallocating resources and imposing punitive tax rates.
4. In a nation with protectionist trade policy, entrepreneurs are denied the ability to buy and sell in ways that enable the most productive use of labor and capital.
5. In a nation with interventionist regulatory policy, entrepreneurs are saddled with extra costs that make it more expensive to mix labor and capital in ways that most effectively satisfy consumer desires.

That’s from Cato’s Dan Mitchell.

North Korea’s Failed Missile Launch Reflects on Dire Economic Status

So it appears that I’ve partly been validated on my view that the much hyped threat from North Korea’s military might has been no less than media bubble that has apparently been pricked.

From USA Today

North Korea's much-touted satellite launch ended in a nearly $1 billion failure, bringing humiliation to the country's new young leader and condemnation from a host of nations. The United Nations Security Council deplored the launch but stopped short of imposing new penalties in response.

The rocket's disintegration Friday over the Yellow Sea brought a rare public acknowledgment of failure from Pyongyang, which had hailed the launch as a show of strength amid North Korea's persistent economic hardship.

For the 20-something Kim Jong Un it was to have been a highlight of the celebratory events surrounding his ascension to top political power. It was timed to coincide with the country's biggest holiday in decades, the 100th birthday of North Korean founder Kim Il Sung, the young leader's grandfather.

The United States and South Korea declared the early morning launch a failure minutes after the rocket shot out from the North's west coast. North Korea acknowledged its demise four hours later in an announcement broadcast on state TV, saying the satellite the rocket was carrying did not enter orbit.

The launch brought swift international condemnation, including the suspension of U.S. food aid, and raised concerns that the North's next move could be even more provocative — a nuclear test, the country's third

It would seem that the actions of North Korea’s political leadership deserves more the ridicule “for nearly $1 billion failure” than ‘condemnation’.

$1 billion lost on unproductive military spending from an impoverished nation is simply suicidal!

Here is what I wrote earlier,

Such totalitarian state has engendered massive poverty represented by rampant shortages of many goods and services which includes the rationing of electricity that has personified what “earth hour” truly means.

And in spite of the North Korea’s vaunted war machinery, wherein much of the misallocation of the nation’s resources had been directed, the North Korean army is in a state of dilapidation and obsolescence: they seem ostensibly good for parades and for taunting, but not for real combat.

The North Korean political economy has been so immersed in abject poverty such that the country has functioned as real life paradigm of the essence of the environmental politics of “earth hour”.

North Korea’s command and control political economy cannot even afford to provide basic lighting services to their citizenry! (satellite images from my earlier post)

And this only implies that for most of North Korea’s army—except for Presidential units—have not only been poorly equipped, but they are famished, insufficiently trained and most importantly they could be mentally or psychologically unfit for any prolonged military skirmishes.

And in case the freshly installed North Korean political leadership of Kim Jong Un becomes whacko enough to openly engage in military conflagration, the administration's downfall will be underwritten by a coup d'état or a massive defections of North Koreans (both from the army and from the citizenry) more than from foreign military interventions.

A clue from Salon.com

Yet more and more North Koreans are prepared to take such risks as they flee hunger and oppression in search of a new life in South Korea, where their newfound freedom is clouded by discrimination, mental health problems and financial hardship.

At around 12 percent, the unemployment rate among defectors is far higher than the 3.4 percent among South Koreans. Those working earn significantly less than their southern counterparts, despite government subsidies and three months of mandatory resettlement training, according to the government-affiliated North Korean Refugees Foundation.

Even so, a recent government survey showed that seven out of 10 adult defectors are satisfied with life in the South; only 4.8 percent said they were dissatisfied or very dissatisfied, according to the unification ministry poll.

About half of those questioned left the North due to food shortages, while 31 percent said they came to the South in search of freedom. Just over a quarter fled because of the North’s political system.

They are among more than 23,000 North Koreans who have defected to the South since the Korean War ended in a truce — not a peace agreement — in 1953. The trickle of defectors through the 1990s rose dramatically about 10 years ago, the result of a prolonged famine in which more than 1 million people may have died.

Last year 2,737 people — one of the highest figures on record — defected to the South.

And the botched missile launch was apparently timed with the unveilment of the statues of Kim Il Sung (left) and Kim Jong Il. (from Business Insider)

And all these attention grabbing destabilization moves are most likely representative of attempts to diversify the public’s attention from the real rapidly deteriorating state of North Korea's economy, as well as, use these events as leverage to hand wring concessions from her neighbors, allies and other patrons or the geopolitics of blackmail.

North Korea should instead follow Myanmar’s reforms of gradually adapting economic freedom. Myanmar is slated to open a stock exchange by 2015, with the help of Tokyo Stock Exchange.

And reforms towards economic liberalization by closed economies has usually been initiated with the symbolical opening of stock exchanges.

For North Korea's despotism, what is unsustainable will not last.

Video: Economic Freedom is about Improving People's Lives

There is no alternative path to economic prosperity than through economic freedom. (hat tip Professor Bob Murphy)

Quote of the Day: The Essence of Tax Day

Investment guru and the maverick Doug Casey talks about the ethics of taxation (emphasis mine)

The first thing is to get a grip on who owns the moral high ground. The state, the media, teachers, pundits, corporations – the entire establishment, really – all emphasize the moral correctness of paying taxes. They call someone who doesn't do so a "tax cheat." As usual, they have things upside down.

Let's start with a definition of "theft," something I hold is immoral and destructive. Theft is to take someone's property against his will, i.e., by force or fraud. There isn't a clause in the definition that says, "unless the king or the state takes the property; then it's no longer theft." You have a right to defend yourself from theft, regardless of who the thief is or why he is stealing.

It's much as if a mugger grabs you on the street. You have no moral obligation to give him your money. On the contrary, you have a moral obligation to deny him that money. Does it matter if the thief says he's going to use it to feed himself? No. Does it matter if he says he's going to feed a starving person he knows? No. Does it matter if he's talked to other people in the neighborhood, and 51% of them think he should rob you to feed the starving guy? No. Does it matter if the thief sets himself up as the government? No. Now of course, this gets us into a discussion of the nature of government as an institution, which we've talked about before.

But my point here is that you can't give the tax authorities the moral high ground. That's important because decent people want to do the morally right thing. This is why sociopaths try to convince people that the wrong thing is the right thing.

If an armed mugger or a gang of muggers wanted my wallet on the street, would I give it to them? Yes, most likely, because I can't stop them from taking it, and I don't want them to kill me. But do they have a right to it? No. And every taxpayer should keep that analogy at the top of his mind.

More..

Taxation is force alloyed with fraud – a nasty combination. It's theft, pure and simple. Most people basically admit this when they call taxation a "necessary evil," somehow mentally evading confrontation with the fact that they are giving sanction to evil. But I question whether there can be such a thing as a "necessary evil." Can anything evil really be necessary? Can anything necessary really be evil?

Entirely apart from that, if people really wanted anything the state uses its taxes for, they would, should, and could pay for it in the marketplace. Services the state now provides would be offered by entrepreneurs making a profit. I understand, and am somewhat sympathetic, to the argument that a "night-watchman" state is acceptable; but since the state always has a monopoly of force, it inevitably grows like a cancer, to the extent that the parasite overwhelms and kills the host. That's where we are today.

I think a spade should be called a spade, theft should be recognized for what it is, and evil should be opposed, regardless of the excuses and justifications given for it. Ends do not justify means – and evil means lead to evil ends, as we see in the bloated, corrupt, dangerous governments we have all over the world.

Read the rest here

China’s Tiger by the Tail

Apparently China’s policymakers remain staunch devotees of Keynesian economics and promoters and practitioners of boom bust cycles.

The Bloomberg reports,

Policy makers have cut the amount banks must keep in reserves twice since November to free up cash for lending, in a bid to insulate the world’s second-largest economy from the effects of a global slowdown. Interest rates haven’t been reduced since 2008.

New local-currency lending was 1.01 trillion yuan ($160.1 billion) in March, the People’s Bank of China said on its website after the market closed. That compared with the median 797.5 billion yuan estimate in a Bloomberg News survey of 28 economists and 710.7 billion yuan the previous month. M2 money supply climbed 13.4 last month, accelerating from a 13 percent growth in February, the central bank said.

Instead of allowing the markets clear on the outstanding imbalances brought about by previous policies, China’s policymakers have decided to keep riding the tiger's tail.

According Mises Institutes Vice President Joseph Salerno,

It has now become clear that the Chinese government has made its choice to avoid a “hard landing” by attempting to ride the unloosed inflationary tiger for as long as it can. But its strategy of massviely expanding fictitious bank credit unbacked by real savings will cause added distortions and exacerbate unsustainable imbalances in China’s real economy. As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate a “crash landing” that may well shatter China’s burgeoning market economy. This would be a tragedy of the first order for the entire global economy.

As pointed out many times here, the recourse towards inflationism by China’s political authorities has been seen as necessity for the survival of the incumbent command-and-control structure of China’s political institutions. A financial and economic bust will only magnify the growing forces of malcontents which Chinese authorities have fervently been trying to contain.

And given the enormous scale of malinvestments, like her Western contemporaries, China’s authorities will likely push for more inflationism until economic realities prevail or until real savings get depleted.

Reports the Wall Street Journal,

China’s real-estate sector is enormous—accounting directly for 12% of gross domestic product, according to estimates by the International Monetary Fund—and changing fast. To capture developments in the sector, data are collected from more than 80,000 real-estate developers and reported up through the county, city, and province statistical system….

A key concern for investors is China’s overhang of unsold property. A trip around virtually any Chinese city reveals hosts of half-finished tower blocks waiting to be completed and sold. Analysts fear that excess supply could put a dent in prices, and reduce the real-estate investment that is a key contributor to China’s domestic demand.

Official data show 2.98 billion square meters of residential property under construction at the end of February. Wall Street Journal calculations show that is more than two square meters for every person in China and enough to satisfy demand for almost the next three years without a single extra apartment being built.

So unproductive grand projects already highlighted by ghost cities and malls as seen in the video below (hat tip Bob Wenzel) will mount, as scarce resources will continue to get funnelled into projects that consumes capital.

Bottom line: A Tiger by the Tail by the great Friedrich von Hayek represents an allegory of the allures of inflationism

An excerpt from the synopsis of Hayek’s work by Professor Salerno,

In brief, Hayek argues that all depressions involve a pattern of resource allocation, including and especially labor, that does not correspond to the pattern of demand, particularly among higher-order industries (roughly, capital goods) and lower-order industries (roughly, consumer goods). This mismatch of labor and demand occurs during the prior inflationary boom and is the result of entrepreneurial errors induced by a distortion of the interest rate caused by monetary and bank credit expansion. More importantly, any attempt to cure the depression via deficit spending and cheap money, while it may work temporarily, intensifies the misallocation of resources relative to the demands for them and only postpones and prolongs the inevitable adjustment.

The policies of permanent quasi booms or ‘extend and pretend’ policies will eventually get exposed for the fiction they sell—through a colossal bust or “a tragedy of the first order for the entire global economy”.

For now, profit from political folly.

Nonetheless it would be best keep vigilant over developments in China.

The Myth of ‘Safe Assets’

The IMF is concerned about the potential shortage of supply of “safe assets”

Writes the Wall Street Journal Blog

Worries about nations’ fiscal health could cut the world’s supply of “safe” government debt by 16% in the next four years, the International Monetary Fund said Wednesday.

The diminishing supply comes even as demand rises for safe assets such as high-quality corporate bonds and sovereign debt, which many banks and investors need amid market uncertainty and regulatory changes.

The shrinking pool of safe assets could create more worries about financial stability, the IMF said.

“Safe asset scarcity will increase the price of safety and compel investors to move down the safety scale as they scramble to obtain scarce assets,” the fund said in its Global Financial Stability Report. “It could also lead to more short-term spikes in volatility, and shortages of liquid, stable collateral that acts as the ‘lubricant’ or substitute of trust in financial transactions.”

The notion of ‘safe assets’, which rest on the assumption of ‘intrinsic value’, is really an illusion. It has been a myth repeatedly peddled, inculcated and propagandized for the public to accept the falsehood of the necessity of the welfare-warfare state. The power to tax does not guarantee economic and financial feasibility and consequently ‘security’.

Safety does not emerge out of government decree, as the recent crisis or as history shown whether applied to government bonds or to money.

Instead, valuations are subjectively determined by acting man or by individuals.

The great Professor Ludwig von Mises explained

Value is the importance that acting man attaches to ultimate ends. Only to ultimate ends is primary and original value assigned. Means are valued derivatively according to their serviceableness in contributing to the attainment of ultimate ends. Their valuation is derived from the valuation of the respective ends. They are important for man only as far as they make it possible for him to attain some ends.

Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.

Neither is value in words and doctrines. It is reflected in human conduct. It is not what a man or groups of men say about value that counts, but how they act. The oratory of moralists and the pompousness of party programs are significant as such. But they influence the course of human events only as far as they really determine the actions of men.

Put differently, to paraphrase a popular axiom, safe assets are in the eyes of the beholder.

Take for instance gold.

Gold was essentially an ignored asset at the start of the new millennium, however following 11 consecutive years of price increases, the public’s perception has substantially changed. Now gold has been incorporated as part of the safe asset list of the IMF.

Through history, gold’s perceived safety arises from the money attributes it possesses compared with, or relative to, fiat currencies.

As I previously wrote,

paper currencies are basically IOUs issued and stamped by governments as “legal tender” and backed by nothing but FAITH in the issuer. Because paper money is an IOU, it bears counterparty risks.

Where money as a medium of exchange requires these characteristics: durability, divisibility, scarcity, portability, uniformity and acceptability, unlimited issuance of paper money essentially diminishes the moneyness quality of paper currencies. As we cited earlier given the massive and full scale deployment of the printing press globally, such the raises the risk of a potential of disintegration of the present financial architecture.

However gold may not permanently be a refuge asset either. A serendipitous discovery of a process that enables gold to be produced abundantly would lead to a loss of the current attributes and thereby the subsequent loss of gold’s moneyness. And in the world of rapid advances in technology this is something we cannot discount.

To quote Dr. Frank Shostak

If the increase in the supply of gold were to persist, people would likely abandon gold as the medium of exchange and adopt another commodity.

Bottom line: Safety is matter of subjective individual valuations and definitely not decreed by politicians and or the bureaucracy.

Chart from Dr. Ed Yardeni

To the contrary, what government declares as “safe” are likely to be the riskiest assets. A good example is the ongoing crisis in the Eurozone where toxicity has surfaced out of supposed “safe” debt instruments.

It has been the nature of the state to abuse on their powers, by plundering their citizenry through arbitrary laws, or policies of financial repression (includes inflationism), that ultimately undermines the quality of government issued papers.

In short, self-destructive actions cannot be reckoned as ‘risk free’ which serves as a paradoxical, or must I add absurd, proposition.

Quote of the Day: The Incompatibility of Innovation and Governments

It seems that as a general rule, then, the weaker the government, the better it is for innovation. With some notable exceptions, autocratic rulers have tended to be hostile or indifferent to technological change. The instinctive need for stability and the suspicion of nonconformism and shocks usually dominated the possible gains that could be attained from technological progress.

That’s from Joel Mokyr’s 1990 book, The Lever of Riches: Technological Creativity and Economic Progress (page 180) as excerpted by Professor Don Boudreaux

The fundamental objective of any government is the preservation of their political power through the sustainment of their political base.

And any activities that has the tendency to undermine this position will always be viewed as a threat. Thus government’s role, as pointed above, has mostly been about imposing conformity through control, and instituting dependency through political measures—such as safety nets or the welfare state—to shield against “shocks” (resistance to change) and or guard against social failure (fear of loss) through redistributive “stability” policies.

All these have been built upon the platform of centralized political institutions.

Meanwhile innovation stands at the opposite end. Innovation embraces the virtues of failure or losses through repeated trial and errors or experimentation or through the encouragement of bottom up based risk activities, which mainly operates on change-oriented and or highly competitive environments. Since innovation is about dynamism and diversity, they are usually products of decentralized institutions.

So governments approve of innovation only if it benefits them. Governments become “hostile” to innovation, if change threatens their power (this has been evident by repeated attempts to control the internet which has been counteracted by digital activists), and are “indifferent to technological change ” when innovation is seen as having neutral effects on them.

The bottom line is that innovation and the current welfare based governments represent as diametrically opposing forces, and therefore, incompatible with each other.

Vietnam Banks Pay Gold Owners for Storage

Here is an enlightening piece from Tim Staermose of the Sovereign Man.

Here’s something you don’t see every day: Banks in Vietnam will actually pay YOU to store your gold in one of their safe deposit boxes. I was pretty surprised to find this out for myself; neither Simon nor I have seen it anywhere else in the world except here.

This is actually how banking used to be. The original bankers were goldsmiths– big burly guys who worked with gold on a daily basis. They had the security systems already established, and, for a fee, they were willing to let you park your gold in their safes.

Eventually, goldsmiths got into the moneylending business; instead of charging a security fee, they would pay depositors a rate of interest for the right to loan out the gold at a higher rate of interest.

Goldsmiths’ reputations lived and died based on the quality of their loan portfolios, and their consistency of paying back depositor savings.

Today that’s all but a footnote in history. Except in Vietnam.

Read the rest here.

Interesting to note that despite technical political restrictions to do so by Vietnam’s authorities, whom sees gold as a constriction to their activities, paying fees to gold depositors seem to have become an ingrained practice by Vietnamese bankers. The simple reason for this is that gold ownership has been the main preference of the average Vietnamese over fiat money or the dong.

Yet perhaps, today’s exception will become the tomorrow’s norm. Stated differently, perhaps Vietnam’s banking ‘archaic’ banking system could become the banking system's paradigm of the future.

Add to this Malaysia’s desire for a gold standard, India’s cultural attachment to gold and the growing appetite for gold by the Chinese as evidenced by surging imports (see chart above from US Global Funds), I’d say that these evolving trends in Asia could serve as clues to the direction of the prospective reforms of the global monetary system.

Chart of the Day: The Computing Trend that Will Change Everything

The progress of computational power is the essence of the the information age which will serve as the backbone for the most of technological innovation (whether in big data, smart manufacturing and wireless revolution).

From technologyreview.com

The performance of computers has shown remarkable and steady growth, doubling every year and a half since the 1970s. What most folks don't know, however, is that the electrical efficiency of computing (the number of computations that can be completed per kilowatt-hour of electricity used) has also doubled every year and a half since the dawn of the computer age.

Laptops and mobile phones owe their existence to this trend, which has led to rapid reductions in the power consumed by battery-powered computing devices. The most important future effect is that the power needed to perform a task requiring a fixed number of computations will continue to fall by half every 1.5 years (or a factor of 100 every decade). As a result, even smaller and less power-intensive computing devices will proliferate, paving the way for new mobile computing and communications applications that vastly increase our ability to collect and use data in real time…

How long can this trend continue? In 1985, the physicist Richard Feynman calculated that the energy efficiency of computers could improve over then-current levels by a factor of at least a hundred billion (10¹¹), and our data indicate that the efficiency of computing devices progressed by only about a factor of 40,000 from 1985 to 2009. In other words, we've hardly begun to tap the full potential…

The real life impact of the Moore’s law applied to electrical efficiency of computing, from the same article…

The long-term increase in the energy efficiency of computing (and the technologies it makes possible) will revolutionize how we collect and analyze data and how we use data to make better decisions. It will help the "Internet of things" become a reality—a development with profound implications for how businesses, and society generally, will develop in the decades ahead. It will enable us to control industrial processes with more precision, to assess the results of our actions quickly and effectively, and to rapidly reinvent our institutions and business models to reflect new realities. It will also help us move toward a more experimental approach to interacting with the world: we will be able to test our assumptions with real data in real time, and modify those assumptions as reality dictates.

The Booming Global Islamic Finance

From the Economist (bold emphasis added)

THE global market for Islamic finance at the end of last year was worth around $1.3 trillion, according to the UK Islamic Finance Secretariat, part of the CityUK lobby group. The total value of sharia-compliant assets has grown by 150% since 2006. Globally, banks hold over 90% of Islamic assets, and together with funds are big investors in sukuk, a type of bond. According to the latest quarterly report from Zawya, a business information firm, global sukuk issuance in the first quarter of this year was $43.3 billion, almost half the total for the whole of 2011. The withdrawal of European banks lending to the Gulf Co-operation Council (GCC) region is thought to have contributed to this rise. Total issuance could reach $126 billion this year, continuing the growth trend (aside from a brief decline in 2008 associated with the global economic slowdown). Malaysia, which dominates the global sukuk issuance market, is over 60% Muslim, and Islamic banking assets make up around a quarter of the country’s total. Globally, perhaps 12% of Muslims use Islamic financial products, but with other countries (predominately Muslim or with large Muslim populations) expressing interest in increasing services, the market seems likely to continue to grow.

My observations

The unfettered market always evolves according to the people’s demand. In today’s deepening of the information age, market trends have increasingly been based on niches or custom designed products and services. And this applies to the fast growing modern Islamic financing.

The terse article also shows how the world does not operate on a vacuum. The European crisis may have even bolstered the demand for sukuk issuance, as Muslim investors seek alternative options or safe havens.

Yet, Islamic finance has not been limited to the Muslims, as seen by the over 90% holding of Islamic assets by global banks, along with other countries “expressing interest in increasing services”. The point is that integration represents as natural consequences of free trade. In other words, the booming Islamic finance has been representative of the deepening of financial globalization.

Lastly, it is should also be pointed out that Malaysia being the largest sukuk issuer in 2011 has been a key proponent of the reintroduction of the Islamic gold standard, or the Islamic gold dinar since 2002.

While there seems hardly any traces of connection between sukuk issuance and the gold dinar yet, perhaps further inflationism by the developed nations may prompt for wider usage of the gold dinar in Muslim states as Malaysia, and also perhaps sukuk issuance could be backed by gold or denominated in the gold dinar. A combination of the two would likely incite greater demand for sukuk bonds and the dinar.

China’s War against the Informal Economy or the Shadow Banks

From the Bloomberg, (bold emphasis added)

When a Chinese court sentenced 28- year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China’s top leadership.

Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. (IHS) in Beijing. That’s the size of the 2011 U.S. government deficit.

Operating outside the banking system or government regulation, the informal networks provide an important source of economic growth, capital for private companies and return for investors seeking to beat inflation. Premier Wen Jiabao, in an unusual move, weighed in on the case at a March 14 news conference. His comments highlighted a public debate over the importance of shadow banking to the Chinese economy, government efforts to bring it under control -- and whether capital punishment is an effective means to do so.

“Chinese companies, especially small ones, need access to funds,” Wen said when asked about Wu’s case. “Banks have yet to be able to meet those companies’ needs, and there is a massive amount of idle private capital. We need to bring private finance out into the open.”

This is just an example of the abominable repercussions from arbitrary laws or how arbitrary laws are used as instruments for oppression.

Here, the private sector, clearly acting in response to government’s policies as evidenced by “seeking to beat inflation”, have been driven to become “criminals”. Yet China’s “criminal” shadow banks, which is no more than regulatory arbitrage practiced by grassroots entrepreneurs, has grown to an “estimated to total $ 1.3 trillion” or about 1/5 of the economy.

The conviction of the “Rich Sister” looks like another futile exercise at political symbolism to project the illusions of “virtuous” government or “government in action”. Nevertheless exposes on how arbitrary laws are used as instruments for oppression.

Of course, shysters and manipulators will always exist in every society and deserve punishment for the violation of the property rights of their victims.

However, Ponzi schemes, which these scoundrels frequently employ, are magnified in an environment where money have been debauched as I earlier pointed out here.

That’s because the anti-savings policies by governments through central banks, encourages or incentivizes such behavior by narrowing the public’s time orientations or increasing the public’s time preferences.

So instead of savings, inflationism leads the public to chase for yields, speculate, gamble, increase debt loads and to consume at the expense of production. This policy induced shifts in people’s incentives make the public vulnerable to skullduggery and knavery.

And that’s why the biggest Ponzi schemers and ultimate insider traders are no more than central bankers and political authorities who use financial repression to plunder wealth from people.

In reality, the China’s informal economy has been emblematic of dynamic market forces at work, viz, filing the gap of the “need access to funds”, since state sanctioned or regulated private banks, as well as, state owned banks “have yet to be able to meet those companies’ needs”.

So Premier Wen’s statement and the actions of China’s government represents the proverbial “left hand doesn't know what the right hand is doing” or a patent self-contradiction.

The truth is that the Chinese government has virtually been exercising the same decorum as their Western counterparts—the promotion of the interests of politically privileged rent seekers or crony bankers who finances the activities of political authorities.

China’s war against informal economy serves as another indicator of the growing political fissures from a command and control political structure against the forces of decentralization or the “marginal revolutions”, as evidenced by the expanding political clout of entrepreneurs in and out of the ambit of China’s government.

China’s war against the informal economy or the shadow banks is bound for failure.

Information Age Politics: The Rise of the Pirate Party

As I have been saying, the information age will usher in radical and dramatic changes in the way we do things. And corollary to these, we should see the snowballing forces of decentralization percolate into the field of politics as digital activists congregate to defend against government’s repeated attempts to control the internet through coercive means (mostly via censorship) by bringing the confrontation into the political arena.

Internet activism has turned what used to be a defensive evasion strategy into offense—via voters.

I am gradually being validated by developing events abroad as digital activists appears to have emerged as a potent third party political force, first in Sweden and now in Germany.

From the Wall Street Journal, (bold emphasis added)

The Pirate Party, a loosely organized group of digital activists, is dropping anchor in state legislatures here, shaking up Germany's staid political establishment.

The Pirates believe in file-sharing, online privacy and digital democracy, but their platform lacks policies on major issues of the day, such as the euro-zone debt crisis. That isn't holding them back.

Around 10% of German voters support them, according to opinion polls. They are expected to win seats in two important state legislatures in early May, including in Germany's most populous state, North Rhine-Westphalia. A strong result in those regional elections could set the course for the Pirates' real breakthrough: seats in the German federal parliament in next year's national elections.

"The tremors will be felt all the way to Berlin" if the Pirates enter the North Rhine-Westphalia legislature, says Joachim Paul, the party's lead candidate in the region.

The rise of the upstart movement is complicating life for Germany's established parties, which could struggle to form their usual ruling majority coalitions at state and national level if the Pirates' popularity proves durable.

The Pirates represent "a new style" in German politics, Mr. Niedermayer says. Their professed aim is to bring the digital revolution to politics, making government more transparent and accessible. They have caught the imagination of the Facebook generation, as well as of less tech-savvy voters disenchanted with bland politicians in Germany's mainstream parties.

"What we all have in common is the desire to be active in grass-roots democracy," says Kai Hemsteeg, a 30-year-old police detective. He used to be a local official for Chancellor Angela Merkel's conservative Christian Democratic Union, but says he likes the Pirates' greater openness to participation.

The Pirates were founded in late 2006 in an underground Berlin nightspot called C-Base, a hangout of the local digerati. They are part of an international movement that began in Sweden, whose main aim is the free sharing of information online, including through looser copyright laws. Of the roughly 50 Pirate parties around the world, none has had the electoral impact of the German wing.

As the information age deepens, compounded by the crisis of the welfare states (which should implode sometime soon), global political trends will increasingly shift in favor of digital or internet activism and of the entrepreneurs (China’s media suppressed political upheaval have indicated signs of the latter’s development). In the US, the rise of Ron Paul as a serious political contender against establishment politics seem as further evidence of such a formative trend shift. This should accelerate overtime.

Chart of the Day: Capital Accumulation is Key to Economic Prosperity

Professor Steve Landsburg posted on his blog a graph from a textbook of his colleague exhibiting the tight correlations between the increase in capital and economic prosperity.

Professor Landsburg writes,

But the overall picture is clear: More capital per worker means more output per worker, and more output per worker means more income per worker. This relationship — in fact, the nearly linear relationship that you see on the graph — is just what standard economic theory predicts. It’s nice to see that prediction so powerfully confirmed.

Capital here refers to physical capital — the machinery, factory space and office equipment that allows workers to be more productive. A garment worker with a sewing machine produces more blouses per hour than a garment worker with a needle and thread; therefore the garment worker with a sewing machine earns higher wages. (A good rule of thumb is that workers are paid about 2/3 the value of what they produce.) If you want rich garment workers, you need a lot of high-quality sewing machines. If you want rich farm workers, you need a lot of high-quality tractors…

As a caveat, it isn’t just the capital that is important, instead it is the political economic environment which allows the citizenry to accumulate capital that matters most.

Professor Landsburg explains further, (bold emphasis mine)

Do not, however, jump to the conclusion that if, say, Nigerians had access to Japanese levels of capital, then Nigerian wages would rise to Japanese levels. Part of the reason Nigerians have so little capital is that capital is used less efficiently in Nigeria, so people choose to accumulate less of it. To move up this ladder, you need to do more than just accumulate capital — you’ve got to be the sort of country where capital is worth accumulating. What that entails will be a topic for a future post.

As the great Ludwig von Mises wrote in 1955, (bold emphasis mine)

It is the insufficient supply of capital that prevents the rest of the world from adjusting its industries to the most efficient ways of production. Technological "know how" and the "passion for productivity" are useless if the capital required for the acquisition of new equipment and the inauguration of new methods is lacking.

What made modern capitalism possible and enabled the nations, first of Western Europe and later of central Europe and North America, to eclipse the rest of mankind in productivity was the fact that they created the political, legal, and institutional conditions that made capital accumulation safe. What prevents India, for example, from replacing its host of inefficient cobblers with shoe factories is only the lack of capital. As the Indian government virtually expropriates foreign capitalists and obstructs capital formation by natives, there is no way to remedy this situation. The result is that millions are barefoot in India while the average American buys several pairs of shoes every year.

America's present economic supremacy is due to the plentiful supply of capital. The allegedly "progressive" policies that slow down saving and capital accumulation, or even bring about dissaving and capital decumulation, came later to the United States than to most European countries. While Europe was being impoverished by excessive armaments, colonial adventures, anticapitalistic policies, and finally by wars and revolutions, the United States was committed to a free enterprise policy. At that time Europeans used to stigmatize American economic policies as socially backward. But it was precisely this alleged social backwardness that accounted for an amount of capital accumulation that surpassed by far the amount of capital available in other countries. When later the New Deal began to imitate the anticapitalistic policies of Europe, America had already acquired an advantage that it still retains today.

Wealth does not consist, as Marx said, in a collection of commodities, but in a collection of capital goods. Such a collection is the result of previous saving. The anti-saving doctrines of what is, paradoxically enough, called New Economics, first developed by Messrs. Foster and Catchings and then reshaped by Lord Keynes, are untenable.

If one wants to improve economic conditions, to raise the productivity of labor, wage rates and the peoples' standard of living, one must accumulate more capital goods in order to invest more and more. There is no other way to increase the amount of capital available than to expand saving by doing away with all ideological and institutional factors that hinder saving or even directly make for dissaving and capital decumulation. This is what the "underdeveloped nations" need to learn.

Bottom line, economic prosperity can only be attained through a market economy (economic freedom or laissez faire capitalism). Interventionism or politicization of the allocation of scarce resources can only result to the opposite—capital consumption.

Quote of the Day: The Road to Serfdom

Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 301 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. ‘In every large town,’ we are told, ‘the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.’ When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

The task of controlling men in economic detail proved too much for Diocletian's expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.

(bold emphasis added)

That's from Will and Ariel Durant from the The Lessons of History, quoted in an article by fund manager David Kotok of the Cumberland Advisors.

Same lessons apply today.