The Emergence of Capitalist Cuba?

I previously pointed out that the post-Fidel Castro Cuba has broken the proverbial ice of electing to take the road of economic liberalization.

Eric Margolis at the lewrockwell.com examines and predicts Cuba’s future…

Thanks to Raul’s recent reforms, small private enterprise is bubbling up everywhere. Aid and oil from Venezuela has kept the island afloat. People are more outspoken, a little less wary of the secret police and informers. One feels growing energy pulsating into Havana’s delightful old city. With its beautiful buildings, friendly, attractive people, and little music bars with their electrifying salsa bands, Havana is poised to resume its role of 50 years ago as the most fun – and perhaps wickedest city – in the world. All it needs are more hotels, better food, and waves of young Yankee partyers. Already, some 100,000-200,000 Americans sneak into forbidden Cuba each year.

America’s Great Satan, Fidel Castro, is sidelined by age and illness, but Cubans still love their national papa figure. Brother Raul, now pushing 81, has gained respect for his leadership. But once the Castro era is over, what will happen?

Either a power grab by the military and old guard, or the half million Miami-based Cubans will return and rebuild Cuba. A tsunami of US money will swamp Cuba, washing it into the modern world but erasing much of its austere charm and sense of community. Many friends of Cuba do not look forward to this change, though Cubans desperately need relief from their threadbare existence.

More evidence of Cuba’s reforms from Kansas City.com (bold emphasis added)

Across Cuba, there are entrepreneurs like Suarez and Hidalgo, striking out on their own as locksmiths, plumbers, electricians and the like. They've always existed, but operated on a smaller scale, illegally, in the informal economy.

"I can make more money," Suarez said, comparing his take with the official government monthly salary of $20.

In the past 24 months, Cuba's communist government has announced a series of economic openings intended to ease its announced plan to trim the country's bloated government payroll by 1 million jobs and to buy time as the country transitions away from the reign of the two Castro brothers who've ruled since 1959 but now are in their 80s.

The reforms include expanded self-employment, a liberalization of rules for family-run restaurants, more flexibility for Cuban farmers to sell their products, and even creation of fledgling real estate markets in big cities such as Havana and Santiago.

Most of the 181 newly allowed self-employment categories involve menial labor, and services such as beauty salons, barber shops and plumbers. The government says it has granted 371,000 licenses.

The reforms, however, remain far from free-market capitalism. Not included among the openings are medicine, scientific research and a range of technical jobs that the government has kept under its control. There are no wholesale businesses to provide goods and services to entrepreneurs.

What Cuba’s gradualist reforms has done so far has been to legitimize parts of her huge informal economy.

And the direction of Cuba’s reform will likely deepen and accelerate overtime as political leaders realize that their survival will depend on a wealthier citizenry from economic freedom.

Perhaps like Myanmar, whom has been slated to open a stock exchange by 2015, Cuba may even consider reviving the Havana Stock Exchange which was closed in 1960.

Bottom line is that globalization vastly aided by the internet, or the information age, have begun to pry open formerly closed economies. Forces of decentralization have swiftly been diffusing across the world.

And given the huge potentials of the reformist nations of Cuba and Myanmar, especially coming from a depressed level, investors ought to keep an eye on these prospective frontier markets.

Lessons from the Roman Era Devaluations

Writes Simon Black at the Sovereign Man

In his 1958 work State and Currency in the Roman Empire to 300 A.D., Sture Bolin outlines the systematic (and almost constant) debasement of the silver denarius coin of ancient Rome, which I have reproduced below:

Subsequent emperors became even more clever at debasing the currency; Caracalla (reign 211-217 AD) created a new coin, the Antoninianus, which had a face value far greater than its weight and metal content.

Under Gallienus (reign 260-268 AD), the Antoninianus was composed of less than 5% silver. By the time of Aurelian in 270 AD, further debasement was essentially impossible… though they kept trying.

Such debasement led to rampant inflation in the empire. A slave under the reign of Commodus that cost 500 denarii was five times as expensive under Septimius Severus. A second century modius of wheat (about 1/4 bushel) sold for 1/2 denarius. By the time of Diocletian’s price fixing in 301 AD, the nominal price was 200 times more expensive.

In Roman Egypt, where the best documentation on pricing has survived, a measure of wheat which sold for 200 drachmae in 276 AD increased to more than 2,000,000 drachmae in 334 AD, roughly 1,000,000% inflation in a span of 58-years.

In his 1960 work Roman Coins, historian Harold Mattingly remarked about Roman inflation that “[t]he Empire had, in all but words, declared itself bankrupt and thrown the burden of its insolvency on the citizens.”

Other historical examples abound, but Mattingly’s assessment sums it up the best.

Any government that resorts to debasing the currency is making a conscious decision to stick the people with the consequences of its insolvency.

The short of this is one of the history or the cycles of inflationism and financial repression, where political authorities repeatedly transferred the burden of their policy mistakes to their subjects. Put bluntly, politicians plundered the resources of their constituents through inflationism and financial repression to pay for their profligate ways. All of them, ex-post eventually, failed.

Today’s “unprecedented” pace of inflationism via the massive expansion of the balance sheets by global central bankers has been no different than the eon of the doomed Roman empire. The principle has been the same, but the application has been different.

In Roman times, inflationism had been about coin debasements, today’s inflationism has been coursed through central banking mostly based on digital computer keyboard inputs.

Remember, world governments today have fervently been attempting to put a rein on cash transactions from which they intend to gain wider control and greater access to the resources of the private sector—for the same intent as their Roman era peers.

History does not repeat itself, said Mark Twain, but it does rhyme. Alternatively, those who cannot remember the past, warned George Santayana, are condemned to repeat it.

The rhyme of condemnations beckons.

How Capitalism Brought about Modern Marriage

Contractual rights is the foundation of modern (monogamist) marriage which has been traced to the capitalist roots.

The following excerpt from an article by the great Ludwig von Mises seems as a compelling narrative of the evolution of modern marriage (bold emphasis mine)

Where the principle of violence dominates, polygamy is universal. Each man has as many wives as he can defend. Wives are a form of property, of which it is always better to have more than few. A man endeavors to own more wives, just as he endeavors to own more slaves or cows; his moral attitude is the same, in fact, for slaves, cows, and wives. He demands fidelity from his wife; he alone may dispose of her labor and her body, himself remaining free of any ties whatever. Fidelity in the male implies monogamy. A more powerful lord has the right to dispose also of the wives of his subjects. The much discussed jus primae noctis was an echo of these conditions, of which a final development was the intercourse between father-in-law and daughter-in-law in the "joint family" of the Southern Slavs.

Moral reformers did not abolish polygamy; neither did the church at first combat it. For centuries, Christianity raised no objections to the polygamy of the barbarian kings. Charlemagne kept many concubines. By its nature, polygamy was never an institution for the poor man; the wealthy and the aristocratic could alone enjoy it. But with the latter it became increasingly complex according to the extent to which women entered marriage as heiresses and owners, were provided with rich dowries, and were endowed with greater rights in disposing of the dowry.

Thus monogamy has been gradually enforced by the wife who brings her husband wealth and by her relatives — a direct manifestation of the way in which capitalist thought and calculation has penetrated the family. In order to protect legally the property of wives and their children a sharp line is drawn between legitimate and illegitimate connection and succession. The relation of husband and wife is acknowledged as a contract.

As the idea of contract enters the law of marriage, it breaks the rule of the male, and makes the wife a partner with equal rights. From a one-sided relationship resting on force, marriage thus becomes a mutual agreement; the servant becomes the married wife entitled to demand from the man all that he is entitled to ask from her. Step by step she wins the position in the home which she holds today. Nowadays the position of the woman differs from the position of the man only in so far as their peculiar ways of earning a living differ. The remnants of man's privileges have little importance. They are privileges of honor. The wife, for instance, still bears her husband's name.

This evolution of marriage has taken place by way of the law relating to the property of married persons. Woman's position in marriage was improved as the principle of violence was thrust back, and as the idea of contract advanced in other fields of the law of property it necessarily transformed the property relations between the married couple. The wife was freed from the power of her husband for the first time when she gained legal rights over the wealth which she brought into marriage and which she acquired during marriage, and when that which her husband customarily gave her was transformed into allowances enforceable by law.

Thus marriage, as we know it, has come into existence entirely as a result of the contractual idea penetrating into this sphere of life. All our cherished ideals of marriage have grown out of this idea. That marriage unites one man and one woman, that it can be entered into only with the free will of both parties, that it imposes a duty of mutual fidelity, that a man's violations of the marriage vows are to be judged no differently from a woman's, that the rights of husband and wife are essentially the same — these principles develop from the contractual attitude to the problem of marital life.

No people can boast that their ancestors thought of marriage as we think of it today. Science cannot judge whether morals were once more severe than they are now. We can establish only that our views of what marriage should be are different from the views of past generations and that their ideal of marriage seems immoral in our eyes.

When panegyrists of the good old morality execrate the institution of divorce and separation they are probably right in asserting that no such things existed formerly. The right to cast off his wife which man once possessed in no way resembles the modern law of divorce. Nothing illustrates more clearly the great change of attitude than the contrast between these two institutions.

And when the church takes the lead in the struggle against divorce, it is well to remember that the existence of the modern marriage ideal of monogamy — of husband and wife with equal rights — in the defense of which the church wishes to intervene, is the result of capitalist, and not ecclesiastical, development.

Why Do People have Faith in Politicians?

Professor Don Boudreaux is puzzled and saddened by people’s unwavering faith in reprobate politicians,

Successful politicians – and particularly those who are successful on national stages – are, with exceptions too few to matter, master con artists.

Whatever is the reason why so many grown people respect holders of political office is, as it has always been, beyond my comprehension. I just don’t get it. Practitioners of no other profession are accorded more honor, respect, and (most importantly) power while at the same time being held to such low standards of ethical behavior. Actions that, when committed by the family dog, properly elicit scolding or muzzling or even eviction from the premises are, when committed by an elected official, greeted with oohs, aahhs, applause, and re-election to powerful office.

I share the same frustrations too.

Thanks to the principles of liberty, I have been enlightened that people who mattered most are those who put to risks their personal savings and capital and commit tremendous efforts to serve the consumers. Such people represent genuine public service.

Yet these wealth generating class of people are often unfairly painted as immoral or unethical by politicians, by their lackeys and their media mouthpieces.

Moreover, there has been little realization that while there will always be crooked people, corrupt and perverted behaviour are often an offshoot to arbitrary laws, excessive interventionism and burdensome taxes. Many unscrupulous actions are consequences of stifling regulations. And these have been the primary reasons for the proliferation of informal economies or black markets.

And in contrast, politicians who live by the forcible appropriation of people’s efforts, have ironically, been portrayed as having the moral high ground over the productive economic class.

Many don’t understand that the precept of “it is not what you know but who you know” has been grounded on the politicization of the marketplace. Where entrepreneurs, business people and corporate managers have been frequently harassed or intimidated by onerous regulatory and tax requirements, political “connections” become a byword for the protection of one’s properties and the facilitation one’s economic interests.

And analogous to Stockholm Syndrome, where hostages develop personal attachments with their captors, the populace yield or surrender to the “realities” of interventionism. Thus, the popularity of those who possess social and political control over others—or the politicians and the political class because of the unwarranted dependency relationship built from oppressive politics.

Of course the indoctrination factor through mass media, and the state captured private (crony) institutions have been party to the promotion of interventionism, the latter serves as a reason for the existence of revolving door relationships with crony institutions.

In the Philippines many aspire to be lawyers, that’s because lawyers are perceived to be a heartbeat away from politics. And politics has been seen by many, if not most, as a paragon of public service and career success which is entirely a popular delusion.

People hardly understand the system of ethics from which democratic politics operates on.

Basically, in arguing for the protection of society’s welfare, politicians take away people’s freedom, which is used as basis for the second step, the arrogation of people’s property. Then, the state through incumbent political leaders redistributes plundered resources to their wards and gives some of the plundered resources back to the taxpayers (e.g. welfare, public infrastructures) and claim the moral high ground of being ‘compassionate’. Yet most of such actions have been meant at securing votes to keep them in office.

I am reminded by the pungent Bennett Cerf quote in Nathaniel Branden’s book Judgment Day: My Years With Ayn Rand

You have to throw welfare programs at people — like throwing meat to a pack of wolves — even if the programs don't accomplish their alleged purpose and even if they're morally wrong.

And of course, the rest of the taxed resources are kept for themselves in the form of salaries, perks, perquisites and other benefits (such as junkets), not to mention income from under the table transactions.

People hardly realize too that the political office have been magnet to people with sinister motivations. The great Friedrich von Hayek said the worst people usually get to the top of the political world.

Writes Doug French at the Mises Blog, (bold emphasis mine)

F.A. Hayek famously argued in The Road to Serfdom, that in politics, the worst get on top, and outlined three reasons this is so. First, Hayek makes the point that people of higher intelligence have different tastes and views. So, as Hayek writes, “we have to descend to the regions of lower moral and intellectual standards where the more primitive instincts prevail,” to have uniformity of opinion.

Second, those on top must “gain the support of the docile and gullible,” who are ready to accept whatever values and ideology is drummed into them. Totalitarians depend upon those who are guided by their passions and emotions rather than by critical thinking.

Finally, leaders don’t promote a positive agenda, but a negative one of hating an enemy and envy of the wealthy. To appeal to the masses, leaders preach an “us” against “them” program.

“Advancement within a totalitarian group or party depends largely on a willingness to do immoral things,” Hayek explains. “The principle that the end justifies the means, which in individualist ethics is regarded as the denial of all morals, in collectivist ethics becomes necessarily the supreme rule.”

The bottom line is that ignorance, indoctrination, propaganda, the belief in the politics of heaven (abundance) on earth (scarcity), the seduction of easy life from political redistribution, dependency on political relations as means to preserve one’s property, the popularity of social control or political power, traditionalism, peer pressures, and the Stockholm syndrome applied to political relations, among many others more, may have contributed to people’s undeserving faith in politicians.

Quote of the Day: Spending Illusion

The gist of the argument of these luminaries of modern macroeconomics is that an increase in the inflation rate, say to 3 to 4 percent, will stimulate the economy in two ways. First, higher inflation will “help the process of deleveraging” by eroding the real value of debt, thereby reducing the burden of debt payments and encouraging spending. And second, an increase in the inflation rate will arouse expectations of future depreciation of the dollar and thus panic businesses and households into spending their hoarded cash. This argument is rooted in what might be called the “spending illusion,” the simplistic and deeply fallacious doctrine that the spending of money drives the economy. This doctrine originated in the writings of John Law, the notorious early eightenth century gambler, financial schemer–and central banker. Law’s doctrine inspired the monetary cranks of the nineteenth century as well as the founders of modern macroeconomics in the twentieth century, Irving Fisher and John Maynard Keynes. It remains deeply entrenched in the macroeconomic thought of the twenty-first century.

That’s from Professor Joseph Salerno at the Mises Institute.

The spending illusion represents the de facto ideology embraced by the mainstream.

The reason for this is that the fallacious spending-drives-the-economy doctrine implicitly promotes the interests of the ‘crony’ banking system through debt based spending and central bank interventions mostly through inflation, where the latter has been engineered to backstop the banking system.

Yet policies which emanates from this doctrine also includes other forms of spending based government interventions or ‘boondoggles’ (think public works, welfare state, warfare state, pork barrel or earmarks, bureaucracy) which incidentally has been financed, not only by taxes, but through government debt papers intermediated through the banking system, and indirectly, the central bank.

The spending illusion is really about upholding political interests of a few, which has been disguised as ideology, and advocated by experts whose personal interests have been aligned with, or captured by, the interests of the establishment.

Phisix Up on Negative News: A Bullish Sign

Last week was marked by a string of bad news from local and international fronts, particularly geopolitical tensions with China over the disputed Scarborough Shoal, rolling Brownouts in Mindanao, record earthquake in Indonesia[1] and also a major earthquake in Mexico and reemergent concerns over the unraveling debt crisis in Spain.

Rotation to the Blue Chips

Yet the local equity benchmark, the Phisix, seemed to have defied the adverse developments by posting a modest weekly gain of 1.16%

Most of these gains were driven by this year’s sectoral leaders; specifically the property, the financial and holding companies.

And in reinforcing this year’s rotational trend, the mining and the service sectors continued to lag.

The actions of the Phisix seem to have departed from the actions of the broader market where there had been more declining issues than advancing issues. The graph above exhibits that market breadth has been tilted towards profit taking.

Aside from sectoral performances, the gains of the Phisix have mostly emanated from select issues mostly the biggest market caps or the blue chips.

Holiday blues from an abbreviated trading week or extended vacation seem to characterize last week’s market actions. Peso volume (averaged on a weekly basis) materially slackened on the account of this week’s gains. The decline in the Peso volume adds to the evidence of a profit taking mode.

Foreign trades have also been sluggish with paltry changes over the last two weeks. Yet, despite the marginal actions by foreign investors, the Philippine Peso posted modest advances.

So essentially, last week’s action suggest of a rotation away from second and third tier issues back into the blue chips.

Yet I expect to see normalization of trading activities in terms of Peso volume which should undergird either the current consolidation phase or a fresh attempt to break away into new highs.

When the markets to defy the spate of bad news that signifies as a bullish signal.

Catechism of Inflation

It is important to note too that the Phisix and the major US benchmark, the S&P 500, has seen a tightening of correlations since March of last year.

Nonetheless tight correlation does not imply of causation.

Both charts have even spelled out the failed bearish head and shoulders pattern and the accompanying rally that had been fueled by collaborative central bank actions.

However, one would note that the difference between them has been in the degree of the rebound. The Phisix blitz past the consolidation range whereas the S&P 500 has just been drifting above the breakout zone. And one would further observe that both the Phisix and the S&P 500 seem as in a consolidation phase.

The actions of the Phisix and the S&P 500 are intertwined through the policies of the US Federal Reserve, where a slew of credit easing measures from artificially suppressed interest rates, bond purchases, interest on excess reserves, and foreign currency swaps have also influenced policy making in the Philippines and elsewhere through policy induced negative real rates regime and partly from the acquisition of dollar foreign exchange reserves in the domestic economy.

I may add that in the near future, policy induced carry trades will become more pronounced[2].

While events in the Eurozone could pose as somewhat a drag to US markets, this should be viewed as temporary, as the money supply growth in the US continues to balloon.

And part of the substantial growth in money supply exudes from Quantitative Easing (QE) programs or bond purchases which have partly been designed to inject money to the economy which bypassed the banking system through stock payments.

German Economist and Professor Thorsten Polleit explains[3],

However, it may also be due to the Fed's purchases of bonds from so-called nonbanks (for instance, private households, pension funds, and insurance companies). Under such operations the Fed increases the means of payments directly; it is a policy of increasing money by actually circumventing bank credit expansion.

The marked increase in the stock of payments in recent years is an unmistakable sign of what can be called, economically speaking, inflation, a view held by the Austrian School of economics.

And given the series of massive short covering and yield chasing actions that has translated into a gigantic “boom” over a very short period, a reprieve or profit taking process or a countercyclical trend would account for as a natural order, current events nothwithstanding.

The short of it, is that no trend moves in a straight line.

It is innate upon us to rely on heuristics and cognitive bias to scour for descriptive explanations to market outcomes, whether these events are truly relevant or not.

Moreover, should stress levels over Spain or Italy’s debt intensify (left window), the European Central Bank (ECB) would most likely resuscitate its recently mothballed bond purchases (Securities Markets Programme-SMP; right window[4]) despite isolated rhetoric in opposition to its revival[5].

A poll recently noted that experts unanimously expect the ECB to intervene[6] mostly through SMP, and like Pavlov’s experimental dogs, the financial marketplace has been conditioned to expect that any market pressures would be counteracted by interventions after interventions.

Such feedback loop mechanism, which I previously pointed out[7], between market actions and political responses and vice versa, has not only become the central banker’s main tool in dealing with the crisis, but now represents the catechism of inflation.

Faced with increasing risks of a hard landing, the People’s Bank of China (PBoC) cut reserve requirements for select banks anew[8] yesterday. Moreover, China’s lending and money supply has substantially jumped in response to earlier policy accommodation[9]. As one would note, whether China or Western central bankers, the operating procedure has been the same.

And for as long as the public remains unaware of the abstruse nature of central banking in manipulating and gaming the system to the benefit of the cronies and the welfare-warfare state, and importantly for as long as the effects or impacts on the markets by such policies remain mild and nonthreatening, central bankers will continue to resort to such measures.

Profit from political folly.

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[1] Reuters.com Indonesia quake a record, risks for Aceh grow, April 12, 2012

[2] See Will Japan’s Investments Drive the Phisix to the 10,000 levels?, March 19, 2012

[3] Polleit Thorsten The Worst of All Monetary Policies April 4, 2012, Mises.org

[4] Danske Research Q&A on Spain April 12, 2012

[5] Bloomberg.com Knot Says ECB ‘Very Far’ From Resuming Bond-Purchase Program April 13, 2012

[6] Business Standard, ECB favours buying bonds over bank loans April 14, 2012

[7] See Chart of the Day: The Inflation Cycle April 5, 2012

[8] China Daily China cuts reserve requirements for county lenders April 14, 2012

[9] See China’s Tiger by the Tail, April 13, 2012

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.

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[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.