We Owe it to Ourselves: US Federal Reserve buys as US Treasury Sells Debt

Well, the US government continues to indulge in self-financing her ballooning debts.

The Zero Hedge notes,

Same time, same place, One day later. After yesterday the Treasury engaged in nearly contemporaneous monetization in the 10 Year bond courtesy of the Fed, first buying then selling the paper, at a record low yield of course, so minutes ago the Treasury just sold $13 billion in 30 year paper at another fresh record low yield of 2.72%, down from 3.06% in April. Ignore that the Bid To Cover plunged from 2.73 to 2.40, the lowest since November 2011, and that Indirects were barely interested, taking down just 32.5%, it was all about the Directs, whose 24% take down soared, and as in yesterday's case, was one of the Top 5 highest ever. China? or Pimco? We will find out soon. Dealers were left with the balance, or 43.5% the lowest since October 2011. Something tells us that once the Fed extends Twist, or engages in more outright LSAPs, we will be seeing much more of this same day turnaround service as little by little all interest-rate sensitive instruments slowly grind down to zero.

As the great Ludwig von Mises wrote,

The most popular of these doctrines is crystallized in the phrase: A public debt is no burden because we owe it to ourselves. If this were true, then the wholesale obliteration of the public debt would be an innocuous operation, a mere act of bookkeeping and accountancy. The fact is that the public debt embodies claims of people who have in the past entrusted funds to the government against all those who are daily producing new wealth. It burdens the producing strata for the benefit of another part of the people.

Every action has consequences. These will be revealed in due time.

Talk Therapy boost US Markets

Again US stocks reportedly rose on chatters of the US Federal Reserve rescue.

From Bloomberg,

U.S. stocks advanced, erasing a weekly loss for the Standard & Poor’s 500 Index, amid reports policy makers may take steps to assist economies battered by Europe’s sovereign debt crisis…

Stocks extended gains today amid reports of plans by central banks. Bloomberg News reported that U.K. Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit. Reuters said that central banks are prepared to take action if needed to boost liquidity in financial markets if the Greek elections cause tumultuous trading, citing officials linked to the Group of 20 nations.

Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.

‘Good Stage’

“Good inflation data and weak employment is a good stage for a Fed policy response,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in an e-mail. “We are at the stage where bad news is good news in terms of a policy response. Jobs will be the critical factor that influences the Fed.”

Imagine “bad news-is-good news” because of the prospects of rescues? That’s how distorted markets are today. Yet until what point will the market simply imbue all talks, with no actions? This is simply addiction.

And because the Fed’s talk therapy (signaling channel) seems have accomplished more than the implemented policies of QEs or Operation Twist, indecision or policy procrastination maybe a (deliberate) decision.

Bloomberg columnist Caroline Baum explains, (bold emphasis mine)

All it took was a lousy employment report and news that Spain’s banks were in the ICU to slice the yield on the 10-year Treasury note to a record low of 1.43 percent on June 1, a 30-basis-point decline for the week. The market accomplished in a matter of days what the Fed couldn’t in nine months and $400 billion of curve-twisting operations.

I suspect we are two events away from a 1 percent yield on the 10-year note and a flatter curve. All it would take is another weak employment report and a Greek exit from the euro zone to send investors rushing for the safety and security of U.S. Treasuries. And no, those buyers aren’t expecting to earn a positive return during the next 10 years.

Compromised Compass

In the old days, the spread provided a timely reading on the economy’s health by juxtaposing a Fed-pegged short-term rate with a market-determined long-term rate. The market rate served as a kind of check on Fed policy.. Why would the Fed want to compromise a good compass and reduce the incentive for banks to lend?

The argument for additional curve-twisting rests on the idea that lowering long-term Treasury yields brings down mortgage rates and helps the ailing housing sector. Freddie Mac’s 30-year commitment rate fell to a record low of 3.67 percent last week. It’s not the rate that’s deterring home purchases; it’s the lenders, having wisely determined that a good credit score and a 20 percent down payment are important after all. Not to mention potential buyers’ fears that home prices may fall further.

If Bernanke isn’t convinced of the need for more QE just yet and twisting the yield curve is cosmetic, what else could the Fed do at the conclusion of the June 19-20 meeting? More talk therapy.

"Bad news-is-good news" because the FED believes or thinks that they can continually talk up the markets.

Yet promises alone cannot satisfy the cravings of addicts (of anything).

And rising markets based on talk therapy looks likely indeed a candidate for “two events away from a 1 percent yield on the 10-year note”, that’s euphemism for a crash.

The more the market rises on the FED’s talk therapy, the greater the risks of a Dr. Marc Faber event.

Be very careful out there.

Quote of the Day: Welfare Crisis Aggravated by Demographics

Demography is destiny. If so, then the future will be challenging in many countries around the world where fertility rates have dropped below the replacement rate. At the same time, people are living longer. So dependency ratios--the number of retirees divided by the number of earners--are destined to soar.

Why have fertility rates fallen around the world? There are a few plausible explanations. One of them stands out, in my opinion: Socialism may breed infertility! In the past, people relied on their children to support them in their old age. Your children were your old-age insurance policy. Over the past few decades, people have come to depend increasingly on social security provided by their governments. So they are having fewer kids.

That’s fine as long as the ratio of retirees to workers isn't so high that the burden of supporting our senior citizens crushes any incentive to work resulting from excessively high tax rates. The cost of increasingly generous and excessive entitlements has been soaring relative to taxable earned incomes even before dependency ratios are set to rise in many countries. Governments have chosen to borrow to finance social security and other entitlements, to avoid burdening workers with the extremely high tax rates that are necessary to balance entitlement-bloated budgets.

Median ages are highest in advanced economies with large social welfare states. Among the 45 major countries, Japan has the highest median age (44.7), while the Philippines has the lowest (22.2). Advanced economies tend to have higher median ages than emerging ones because they provide more social welfare, which boosts longevity and depresses fertility.

Bond markets may be starting to shut down for countries that have accumulated too much debt. That’s creating a Debt Trap for debt-challenged governments. If they slash their spending and raise their tax rates, economic growth will tend to slow. If tax revenues fall faster than spending, their budget deficits will widen. There has recently been an outcry about the hopelessness of such “austerian” policies that perversely lead to higher, rather than lower, debt-to-GDP ratios.

The demographic reality is that people around the world are living into their 80s and 90s. Some of them believe that they are entitled to retire in their late 50s and early 60s even though they are living longer. Yet, they didn’t have enough children to support them either directly (out-of-pocket) or indirectly (through taxation). Instead, they expect that their governments will support them. So governments have had to borrow more to fund retirement benefits. That debt is mounting fast and will be a great burden for our children. The result can only be described as the Theft of Generations.

That’s from Dr Ed Yardeni at his blog. To “depend increasingly on social security” has not really been about socialism (government ownership of production) but about the welfare state that has played a significant role in driving today’s debt crisis. The Santa Claus principle is being unraveled.

How Tax Rates Affect Manufacturing

From the Business Insider (bold highlights original)

The theme of this year’s Technology Day at MIT was advanced manufacturing in the U.S. Kresge Auditorium was close to capacity with alumni from all reunion years.

Learned MIT faculty weighed in on the importance of proximity between engineers and factories. The Atlas Device story was initially an inspiring tale of can-do New England spirit, with engineers in Somerville and a machine shop in Woburn working together to make improvements on a weekly basis.

But then we found out that the main customer was the U.S. military and they really didn’t care how much it cost or how efficiently it was produced. Similarly, the solar cell talk was great until we learned that there are about 12 good reasons why solar cells must be manufactured in Asia.

In a panel discussion afterwards, the speakers were asked what it would take to make the U.S. more competitive for manufacturing.

The answer was that it was pretty much hopeless at current tax rates.

Big companies make a lot of money in foreign countries, but if they bring the profits back home they get hit with the world’s highest corporate tax rate. So they leave the money in China, for example, and then invest it there in research and development or a new factory. I.e., our own multinational companies are financing the new facilities around the world that are rendering the U.S. uncompetitive.

Globalization is not to be blamed for investors who straddle to take advantage of the variances of tax rates. Instead, tax competition should help keep a check on insatiable or greedy governments. And importantly, tax competition provides a channel for the old saw—”money flows where it is treated best”.

The lesson is that tax rates should be competitive as they signify as one of the key variable in determining resource allocations. Although I would prefer to abolish them all.

Philippine Overseas Workers Help Fuel Philippine Property Bubble

Again reports glorify political superficialities as supposedly fueling economic progress.

From Bloomberg,

Filipinos investing in the local property market with money earned overseas helped make the peso Asia’s best-performing currency of 2012, even as a global economic slump sapped demand for riskier assets.

Euliver Dizon, a web designer in the U.S., is scouting for a home in Manila, praising President Benigno Aquino for improving the economy. Rommel Adre, a software developer who worked abroad from 2000 to 2011, bought a home in the capital and some properties to rent. Aileen Respicio, a former domestic helper, opened a beach resort with her Scottish husband six years ago and is now buying more land.

The peso has gained 3.7 percent this year versus the dollar including interest. Capital inflows aid Aquino’s drive to win an investment-grade rating, which would allow the Philippines to attract pension money needed to build roads, bridges and airports. Central bank data shows remittances from overseas workers rose 5.4 percent in the first quarter from a year earlier to $4.8 billion, accounting for 10 percent of the economy. They don’t detail use of funds.

There seems hardly a meaningful correlation between the year on year changes of remittances AND the Philippine Peso. In other words, it would be misguided to allude a causal relationship between the Peso and Remittances. This would be a post hoc fallacy.

Moreover, in reality, the Peso has been appreciating prior to the current administration. So domestic politics has hardly been a big factor in the Peso’s advances.

Also, the Peso’s rise has not been in isolation, the Peso has risen ALONG with major ASEAN contemporaries. This means that the Peso’s rise, as well as the Phisix has been a regional if not global phenomenon as I previously discussed.

This is another validation of George Soro’s reflexivity theory which describes the feedback loop mechanism between the influences of price actions in the financial markets and perceptions affecting real actions.

This also shows how policies can be manipulated to promote political agenda: What is misread as progress has in reality, been an offshoot of negative real interest rate policies. This ongoing property boom has long been in my tarot cards.

Yet local officials can’t see bubbles.

More from the same article…

The peso rose 0.7 percent to a one-month high of 42.635 per dollar yesterday. The central bank, due to report April data tomorrow, predicts remittances will reach a record $21 billion this year. They are growing faster than the 5 percent target, helping to support the peso, Finance Secretary Cesar Purisima said. He said there is no evidence of hot money driving property prices higher.

“We are monitoring carefully the situation to make sure we don’t create problems down the road for us in terms of asset bubbles,” Purisima said in an interview at Bloomberg’s headquarters in New York on June 12. “We are very far from the situation.”

Overseas Filipinos account for about 30 percent of residential sales, as many workers have already satisfied the food and clothing needs of their families, said Alex Pomento, head of research at Macquarie Group’s Manila unit. About 100,000 housing units have been added per year since Aquino took office in 2010, up from about 60,000 in 2007, he said.

Of course, it would be self defeating for politicians to curb the bubble which has been part of their image building or in projecting of their “success”. Public opinion is easily swayed by actions with short term impact.

Let me add that such news tend to overrate the 30%, which account for the residential sales by Filipino overseas buyers, but has been silent on the 70%--the local buyers. Media, mainstream experts and politicians panders to OFWs because the latter has gained political clout.

With the rate of real estate projects mushrooming over the metropolis, one would wonder where all the buyers and tenants would come from to fill up coming supplies.

Metro Manila has nearly 12 million population with a annual growth rate of around 2%. I don’t have data on the per capita growth of the metropolis, but construction activities suggest of expectations of immense (unrealistic) growth or an unsustainable boom.

Besides unlike Hong Kong and Singapore which has lack of land space to build on, the Philippines has vastly wide areas for residents especially if one considers the adjacent outskirts.

A little observation will help. Go out at night and observe the existing condos. I estimate that occupancy level, based on lights, has been less than 50% for most condo buildings especially on business districts. So more supplies will improve occupancy?

Overseas hot money may not (at the moment) be the drivers of the current property bubble but local money from easy money policies will. This will be compounded by money from Filipino Overseas Workers whom will be impelled by monetary policies abroad and seduced by political fiction.

I’d rather be picking on the wreckage of a bubble bust, than be a victim of political hysteria.

Italy’s Pro-Growth Tax Increases Backfires

Economic reality flies in the face of the “pro-growth” policies prescribed by politicians and which has been endorsed by mainstream experts.

Italians join Greeks in dodging tax increases, which demonstrates their refusal to feed big government through the strangulation of the private sector.

From Bloomberg,

Italian Prime Minister Mario Monti is facing signs that tax increases are beginning to backfire as his new levy on real estate goes into effect.

Value-added tax receipts have declined since Monti’s predecessor, Silvio Berlusconi, raised the rate by 1 percentage point in September as the economy was slipping into recession,government data released June 5 showed. The amount collected fell in the 12 months ended April 30 to the lowest since 2006.

Finding the right deficit-reduction mix as Monti fights to meet budget targets is critical for Italy to avoid becoming the biggest victim yet of Europe’s financial crisis. A slump that is driving up welfare spending is adding urgency to Monti’s effort to make the economy more competitive amid a growing backlash across Europe against austerity.

“This government has raised taxes too much,” said Alberto Alesina, a professor of political economy at Harvard University. “It would be much, much better to lower spending.”…

The decline in VAT revenue figures may bolster the government’s efforts to postpone a further increase in the rate after October by 2 percentage points to 23 percent. That would put Italy on par with Greece.

The emperor has no clothes. Pretentious knowledge has been exposed via the law of unintended consequences

Again from the same Bloomberg article, (bold emphasis added)

Monti planned to tap more than 4 billion euros of projected savings from a government spending review to put off the VAT increase, which his deputies acknowledge may deepen the recession.

“The economy shows signs of strong deterioration,” Finance Undersecretary Gianfranco Polillo told the Senate in Rome on June 6. “In light of the fall in domestic demand, betting on a further VAT increase would be incomprehensible and even wrong.”…

Under Monti, Italy’s tax burden, the ratio of tax revenue to economic output, will rise to 45.1 percent this year from 42.5 percent in 2011, and won’t start falling until 2015.

Monti, a former university president and Goldman Sachs Group Inc. (GS) adviser, was brought to power in November to rein in bond yields and bring down debt. His 20 billion-euro austerity package raised retirement ages and was followed by measures to ease firing rules and promote competition. Increased rates on gasoline were enacted in December and on luxury goods earlier this year, while the first property tax payments are due next week.

“I don’t want to deny that we could have done more and better,” Monti said in a June 7 speech. Still, his reforms have produced results, he said.

Dodging Tax

The government had 99.8 billion euros in VAT receipts in the 12 months ended April 30 tied to internal trade, or transactions among domestic counterparties. That compares with 100 billion euro in the 12 months ended March 31 and 101.3 billion euros in the period ended April 30, 2011.

“VAT revenue does depend on growth in domestic consumption,” said Ian Roxan, director of the Tax Programme at London School of Economics and Political Science. “It is also not immune to evasion. It is certainly possible that in a time of austerity people become less willing to pay VAT.”

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax-collection agency. The country retrieved 12.7 billion euros from the fight against evasion in 2011, up 15.5 percent from 2010.

This also exposes the propaganda that the public has been “anti-austerity” which is nothing more than media's manipulation of people’s minds. Because if Italians have indeed been anti-austerity, they would have rushed to the tax collection agencies to pay their share. Duh. Or maybe Italians came to realize they are NO free lunches.

The harsh lesson from reality is “If you tax something, you get less of it.”

Millionaire’s Portfolio: Collectibles are the Rage

From the CNBC

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

Reasons for the growth of collectibles as a share of the portfolio of the millionaires, according to Barclay: Emotions, Hidden Cost, Opaque Markets, Correlation and illiquid.

Yet it would seem misguided to lump arts, wines, precious metals and jewelries as a single asset ‘collectible’ class, as the utility and reservation demand functions of these items are different.

Some of the wealthy people will buy because of aesthetics, enjoyment and or for social status.

But it isn’t a ‘fairy tale’ when wealthy investors say that they had opted for ‘collectibles’ out of “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Bluntly put, 'collectibles' represents as insurance against counterparty risks and are ‘real’ assets for the millionaires.

What truly will be exposed as fairy tale are the colossal financial claims at the fractional reserve banking system. The euro debt crisis signifies an ongoing manifestation of such a process.

Thus, the increased exposures by millionaires on 'collectibles' reflect on the present economic and financial realities.

Quote of the Day: The First Nation to use Cyberwar weapons

As for the malware, or Stuxnet virus, introduced into Natanz, was it wise to use this powerful and secret weapon against a plant that is under international inspection and enriches uranium only to 5 percent?

We may have disrupted Natanz for months, but we also revealed to Iran and the world our cyberwar capabilities. And we became the first nation to use cyberwar weapons on a country with which we are not at war.

If we have a right to attack Iran's nuclear facilities like Natanz and Bushehr that are under U.N. supervision, does Iran have a right to attack our nuclear plants, like Three Mile Island, with cyberwar viruses they create?

We have now alerted technologically advanced nations like Russia and China to our capabilities and impelled them to get cracking on their own cyberwar weapons, both offensive and defensive.

That’s from Patrick J. Buchanan author and co-founder and editor of The American Conservative at the lewrockwell.com on the moral, strategic and legal issue of the recent secret U.S-Israeli cyberwar strike on Iran's uranium enrichment plant at Natanz.

Welcome to the information age.

The Coming Age of Capital Controls?

Bureaucrats in Brussels have been floating trial balloons on capital controls

The Daily Mail reports

EU finance chiefs today admitted holding contingency ‘discussions’ about possibly putting limits on Greek cash machines to stop mass withdrawals if Greece quits the euro.

European Commission officials also discussed imposing border checks and capital controls in a bid to stop a possible flight of funds.

‘There are indeed discussions, and we are asked to clarify what is foreseen in EU treaties,’ said Commission spokesman Olivier Bailly following a raft of press reports claiming this had happened.

He refused to reveal the precise details of the talks but admitted some of these ideas had been discussed under ‘disaster scenarios’.

He said the commission is ‘providing information about EU laws regarding treaties,’ that mean capital ‘restrictions are possible’ on the grounds of ‘public order and public security.’

However, he stressed that the commission was not planing on the basis that Greece would leave the euro depending on the outcome of elections on Sunday.

More from Simon Black at the Sovereign Man

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawls, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being releived of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions.

Simon Black lucidly explains the nitty gritty and the moral issue of capital controls,

capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

- Setting a fixed amount for bank withdrawals, or suspending them altogether

- Forcing citizens or banks to hold government debt

- Curtailing or suspending international bank transfers

- Curtailing or suspending foreign exchange transactions

- Criminalizing the purchase and ownership of precious metals

- Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders.

This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

The thing about capital controls is that they’re like airine baggage fees; ultimately, all governments want to do it, they’re just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame ‘industry standards’.

Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It’s been a long time coming for governments to return to that model.

A return to capital controls would extrapolate to deglobalization and protectionism whose likely outcome would be the Great Depression of the 21st century. I hope and pray that these parasites will not succeed.

Pavlovian Markets Rise on ECB’s Proposed Deposit Guarantees

US and European stocks went back into a Risk ON mode last night while Asian stocks climb again today on another report of a planned stimulus: Deposit Guarantees.

From Reuters

European Central Bank Vice-President Vitor Constancio made a fresh push for the bank to become the supervisor of the euro zone's biggest banks on Tuesday, saying the wording of Europe's founding treaty meant it would be an easy change to make.

The ECB is the driving force behind a three-pillar plan for a euro zone banking union, consisting of central monitoring of banks, a fund to wind down big lenders and a pan-European deposit guarantee.

As previously pointed out, ‘guarantees’ signify as the politician’s and mainstream’s travesty where the public has been made to believe that government’s stamp or edicts can simply do away with the laws of economics. Everyone is made to look at the intended goal, while ignoring the reality of who pays for such guarantees and how to get there. Yet the crisis, since 2008, continues to worsen. These guarantees are really meant to pave way for massive inflationism

Nevertheless the past few days has seen an incredible surge in volatility

Monday, the US S&P had a fantastic rollercoaster 2% ride. The major US benchmark was initially up on the news of Spain’s bailout, but the day’s gains had been reversed where the S&P closed sharply down 1.14%. Last night was another huge 1.13% upside close which offset Monday’s decline.

The Risk ON-Risk OFF landscape has obviously been intensifying, all premised on government’s Pavlovian classic conditioning. I worry that these huge swings could become a dangerous precedent that could ominous of, or increase the risk of a ‘crash’, which I hope it won’t.

Financial markets has been transformed into a grand casino.

Caveat emptor

Chart of the Day: US Money Supply Hits Wall, Points to Trouble Ahead

I pointed out last Sunday that in response to the ongoing capital flight from crisis affected European nations, the US Federal Reserve have resorted to the contraction of its balance sheet which may further prompt for a decline in money supply. This may have been compounded by the culmination of Operation Twist.

Chart and the following quote from goldmoney.com

Simply put: the more sluggish money supply growth is, the more likely it is that we see a stock market and broader economic crash that would make 2008 look like child’s play.

Since US Federal Reserve is likely to respond forcefully to any material convulsions in the financial markets, a “crash” does not seem inevitable (yet). But this should NOT be discounted.

Like it or not, expect further turbulence and volatility ahead.

Be careful out there.

Aftermath of Boom Bust Policies: US Family Net Worth Fell Nearly 40% Between 2007-2010

From the Wall Street Journal Blog (bold emphasis mine)

Families’ median net worth fell almost 40% between 2007 and 2010, down to levels last seen in 1992, the Federal Reserve said in a report Monday.

As the U.S. economy roiled for three tumultuous years, families saw corresponding drops in their income and net wealth, according to the Fed’s Survey of Consumer Finances, a detailed snapshot of household finances conducted every three years.

Median net worth of families fell to $77,300 in 2010 from $126,400 in 2007, a drop of 38.8%–the largest drop since the current survey began in 1989, Fed economists said Monday. Net worth represents the difference between a family’s gross assets and its liabilities. Average net worth fell 14.7% during the same three-year period.

Much of that drop was driven by the housing market’s collapse. Families whose assets were tied up more in housing saw their net worth decline by more. Among families that owned homes, their median home equity declined to $75,000 in 2010, down from $110,000 three years earlier.

Between 2007 and 2010, incomes also dropped sharply. In 2010, median family income fell to $45,800 from $49,600 in 2007, a drop of 7.7%. Average income fell 11.1% to $78,500, down from $88,300. That was a departure from earlier in the decade. During the preceding three years, median income had been constant, while the mean had climbed 8.5%.

Family incomes also dropped the most in regions of the country hardest hit by the housing market tumble. Median family income in the West and South decreased substantially, while those in the Northeast and Midwest saw little change.

This serves as evidence of how interest rate policies (zero bound rates) which attempts to induce a “permanent quasi boom” essentially impoverishes a society.

The market’s fierce backlash from Keynesian snake oil policies, serves as another validation or the realization of admonitions from the great Ludwig von Mises.

He who wants to "abolish" interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.

Capital consumption indeed.

Postscript:

Policymakers instead has been shifting the blame on China than accepting their mistakes and has further pursued similar set of policies. This means we should expect the same results overtime. Yet part of the imbalances caused by the boom phase of bubble cycles has been to overvalue a currency.

As a side note, politicians and mercantilists have long blamed China for alleged currency manipulation. The US Treasury recently avoided a direct confrontation by refusing to label China as one. That's because the US Treasury has become beholden to China, as evidenced by the privilege of direct access. This represents the another case where the mythical pot calls the kettle black.

Why Spain’s Bailout may NOT Work

Author and derivatives analyst Satyajit Das at the Minyanville.com has an insightful dissection of why Spain’s bailout will not likely succeed (all bold emphasis mine)

1. Spain’s bailout package overlooks the requirements of larger banks

The amount -- 100 billion euros or more depending on the independent assessment of the needs of Spanish banks -- may not be enough. On the surface, the amount appears around three times the 37 billion euros the International Monetary Fund says is needed. The capital requirements of Spanish banks may turn out to much higher -- as much as 200 billion to 300 billion euros.

The IMF assumes only the smaller Spanish savings banks (the Cajas) will need help. In reality, the larger Spanish banks may also require capital.

Spain’s banks have over 300 billion euros in exposure to the real estate sector, mostly through loans to developers. Around 180 billion euros of this exposure is considered “problematic” by Spain’s central bank.

Estimates suggest that there are about 700,000 vacant newly built homes, but including repossessed properties the total could be as high as 1 million or even higher. At current sales levels, it will take many years to clear the backlog, which will be compounded by more properties being completed and coming onto the market. Housing prices have fallen by 15% to 20% but are forecast to fall eventually by as much as 50% to 60%. A severe recession and unemployment of 25% means that losses on Spain’s over 600 billion euros of home mortgages loans are likely to also rise.

2. The bailout excludes sovereign debts

The proposed amount also does not include any provision for write-downs on holding of sovereign debt. Local banks are estimated to hold over 60% of outstanding Spanish government bonds.

3. The conditions of Spain’s bailout may prompt for a domino effect or demand for changes in the conditions or covenants of existing bailouts by other crisis affected EU nations.

The bailout will be provided with no conditions, which creates its own problems. The lack of conditions may lead to Greece, Ireland, and Portugal seeking relaxation of the terms of their assistance packages. The lack of conditions also prevented the IMF from contributing.

4. The bailout lacks the discipline of keeping the house in order, unlike crisis affected Asian economies during the 1997 Asian Crisis.

In an opinion piece in the Financial Times, Jin Liqun, chairman of the supervisory board at the China Investment Corporation, pointedly noted the contrast between the treatment of European and Asian countries.

Viewed from China, the management of the eurozone debt crisis offers a stark contrast to the handling of the 1997-98 east Asian crisis. In that episode, Thailand, South Korea and Indonesia were all forced to implement tough austerity programmes imposed by the International Monetary Fund.... Unlike many of today’s Europeans, the people of east Asia did not have the luxury of large relief funds from outside their countries. The people had to tolerate hardship...In a poignant case, the Korean people contributed gold and household foreign exchanges to the government to help ease fiscal pressure.

Amen to that.

Western politicians think that they can elude the laws of nature. Markets will eventually prevail.

5. The bailout overestimates on the sources for funding.

Future international support, either bilateral or through the IMF, may be difficult.

The funds will come from either the European Financial Stability Fund or the still to be approved European Stability Mechanism. Since 2010, the eurozone has committed 386 billion euros to the bailout packages for Greece, Ireland, and Portugal. In theory, the EFSF and ESM can raise a further 500 billion euros, beyond the commitment to Greece, Ireland, and Portugal, allowing them to contribute the 100 billion euros for the recapitalisation of the Spanish banking system. The EFSF/ESM also assumes that it “can leverage resources." The reality may be different.

For a start, Finland has indicated that it may seek collateral for its commitment, an extension of its position on Greece which the European Union ill-advisedly agreed to.

As Spain could not presumably act as a guarantor of the EFSF once it asks for financing, Germany’s liability will increase further from 29% to 33%. France’s share also increases from 22% to 25%. The liability of Italy, which is in poor shape to assume any additional external financial burden, rises from 19% to 22%.

The EFSF’s AA+ credit rating may now be reduced. Irrespective of the rating, the EFSF and ESM will have to issue debt to finance the bailout. Support for any fund raising by these instrumentalities is uncertain.

Commercial lenders have been reducing European exposure. Emerging market members with investible funds lack enthusiasm for further European involvement. Lou Jiwei, the chairman of China Investment Corporation, the country’s sovereign wealth fund, has ruled out further purchases of European debt: “The risk is too big, and the return too low."

6. Spain’s bailout will worsen Spain’s financial ratios which could likely dissuade participation from the private sector.

The bailout also does not address fundamental issues.

The funds will be lent to the Spanish government, probably its bank recapitalisation agency Fondo de Reestructuracion Ordenada Bancaria (FROB), rather than supplied directly to the banks because of legal constraints. This will add 11% of GDP to Spain’s debt level. The transaction will do nothing to reduce the country’s overall debt level -- over 360% of GDP before this transaction.

Spain’s access to capital markets or its cost of debt is not addressed. The last auction of Spanish government bonds saw yield around 6.50% per annum with the bulk of bonds being purchased by local banks. Spain and its banks also face pressure on their own ratings, which are now perilously close to becoming non-investment grade.

The bailout may actually adversely affect the ability of Spain and its banks to funds. Commercial lenders are now subordinated to official lenders. Based on the precedent of Greece, this increases the risk significantly, discouraging investment.

The European Union has stated that it believes that these measures will help the supply of credit to the real economy and assist a return to growth. This optimism is unlikely to be realised.

Restoring the bank’s solvency will not result in an increase in credit. The capital will allow existing bank debts to be written off. Spanish banks have limited access to funding. They are heavily reliant on the European Central Bank for money, a position which the assistance does not address.

Interventionism begets more interventionism which substantially deepens the distortions of the markets, through more misallocations or malinvestments and which consequently aggravates the problems.

Policymakers do NOT have the KNOWLEDGE and the RESOURCES to deal with the worsening crisis.

The basic 'commonsense' solutions are to keep the proverbial house in order through fiscal discipline “austerity”, allow unsustainable institutions to fail or for the markets to clear and to induce competitiveness by removing structural political and regulatory obstacles (e.g. labor market reforms).

Yet commonsense has been disregarded for wishful thinking.

The current path of policies of sustained bailouts only increases the risk of MORE inflationism which serves as the fundamental reasons to be bullish on gold and commodities.

Quote of the Day: Economics is a Display of Abstract Reasoning

Economics, like logic and mathematics, is a display of abstract reasoning. Economics can never be experimental and empirical. The economist does not need an expensive apparatus for the conduct of his studies. What he needs is the power to think clearly and to discern in the wilderness of events what is essential from what is merely accidental.

That’s from the great Ludwig von Mises from his magnum opus Human Action. (hat tip Mises Blog).

As Oil Prices Slump, China Imports Record Amount of Oil

China has not just been buying RECORD amounts of gold, it seems that China has also been gobbling up RECORD amounts of crude oil.

From Bloomberg,

China, the world’s second-biggest oil consumer, increased crude imports in May to a record high as refineries raised processing rates and oil prices declined.

The country bought a net 25.3 million metric tons, or 5.98 million barrels a day, more than it exported last month, according to data published today on the website of the Beijing- based General Administration of Customs. That compares with the previous high of 5.87 million barrels a day in February.

The jump in oil purchases helped spur a 12.7 percent gain for the nation’s imports last month, exceeding economists’ estimates. Refineries boosted processing rates last month as some facilities resumed operations after scheduled maintenance while Brent oil in London entered a so-called bear market on June 1 after sliding more than 20 percent from this year’s peak.

“International crude oil prices have been falling in the past two months, so more crude was probably shipped in to fill commercial and state emergency stockpiles” as prices could rise again, Gong Jinshuang, a Beijing-based senior engineer at China National Petroleum Corp., the nation’s biggest oil company, said by telephone.

Purchases cost an average $120 a barrel, compared with about $123 in April, Bloomberg calculations from the customs data showed. China’s imports of crude were 25.48 million tons in May, while exports were 180,000 tons

A chart of soaring oil imports from Zero Hedge who rightly points out that this means China seemingly has not been hoarding the USD

Gold and oil functions as benchmark commodities or as lead commodities.

And as I recently pointed out

It could also be possible that China’s quickening pace of gold hoarding could be as insurance against a potential cataclysmic currency crisis that could be unleashed from political responses by major central banks to avert a global recession.

Add oil to the insurance factor or “flight to real value” on the increasing risk of a crack-up boom (currency crisis)

As the great Ludwig von Mises explained

with the progress of inflation more and more people become aware of the fall in purchasing power. For those not personally engaged in business and not familiar with the conditions of the stock market, the main vehicle of saving is the accumulation of savings deposits, the purchase of bonds and life insurance. All such savings are prejudiced by inflation. Thus saving is discouraged and extravagance seems to be indicated. The ultimate reaction of the public, the "flight into real values," is a desperate attempt to salvage some debris from the ruinous breakdown. It is, viewed from the angle of capital preservation, not a remedy, but merely a poor emergency measure. It can, at best, rescue a fraction of the saver's funds.

By the way, I have been reiterating the point that financial markets will be faced with sharp volatilities in both direction but with a downside bias.

Yesterday oil spiked up on the news of Spain’s bailout, but got smashed at the end of the trading session.

Clearly boom bust dynamics at work.

China’s New Loans Unexpectedly Surged in May

Some good news in China.

From Bloomberg,

China’s new loans exceeded estimates in May and more money went into longer-term lending, signaling support for investment projects that may help to prevent a deeper economic slowdown.

Local-currency lending was 793.2 billion yuan ($125 billion), the People’s Bank of China said on its website yesterday. That was the most on record for the month of May and more than analysts’ 700 billion yuan median forecast. Loans extended for a year or more accounted for 34 percent of the total, up from 28 percent in April.

Premier Wen Jiabao’s efforts to engineer a resurgence in the world’s second-biggest economy may be aided by the jump in lending and signs of resilience in exports. At the same time, industrial-output growth was close to the lowest since 2009 in May, indicating additional measures will still be needed after last week’s interest-rate cut.

“Over the past several months, investors have been concerned that a large share of loans was for short-term financing, and hence would not help boost growth as much as large investment projects,” said Zhang Zhiwei, the Hong Kong- based chief China economist at Nomura, who previously worked for the International Monetary Fund. “The rising share of medium and long-term loans in May helps address this concern.”

HSBC Holdings Plc (5) said new loans may surge to as much as 1 trillion yuan this month. Nomura’s Zhang said the proportion of longer-term lending remains “relatively low” and has room to rise as banks lend more to infrastructure projects.

‘More Impressive’

M2 money supply grew 13.2 percent last month from a year earlier, compared with an estimate of 12.9 percent, yesterday’s report showed. The gain was 12.8 percent in April. New lending was up from 681.8 billion yuan in April.

“The lending figures are all the more impressive because loan growth in the first half of the month was reportedly extremely weak,” said Mark Williams, an economist at Capital Economics Ltd. in London who formerly advised the U.K. Treasury on China. “These figures point to a sharp rebound in lending in late May and suggest that banks and borrowers have responded rapidly to the government’s new emphasis on supporting growth.”

The nation’s top economic planning agency, the National Development and Reform Commission, is speeding approvals for investment projects. Baosteel Group Corp. and Wuhan Iron & Steel Group last month secured permission to build factories after previous delays caused by overcapacity concerns.

Efforts to bolster growth also include reductions in bank reserve requirements and delays in tightening rules for lenders’ capital. China has no plan to introduce stimulus on the scale unleashed during the global crisis in 2008, according to the state-run Xinhua News Agency.

While this may put a floor on the current downdraft, it is not clear where the bulk of the longer-term lending is coming from.

Since there has been NO declared fiscal stimulus (YET) while the private sector seems on a lull, signs are that most of these growth emanates from state owned companies (SOEs), such as Baosteel Group Corp. and Wuhan Iron & Steel Group.

If this is true then China’s stealth stimulus have been redirected to SOEs.

Up to what extent will this covert stimulus be? That should be the main question.

China’s shadow banking system from SOEs, local and regional government agencies have already been faced with huge loans of questionable quality to the tune of $1.7 trillion. The implication is that China’s government will either tolerate further inflation of her existing bubble or that such dramatic (but desperate) moves may be symbolic—engineered to spur a bandwagon effect to fire up ‘confidence’ or perk up the ‘animal spirits’—and thus be limited.

Like how global financial markets initially responded to announcement of Spain’s bailout, where embattled bulls surged out of the gate but whose rally eventually foundered as reality sunk in, short term spikes—from bailouts or as the above account—should be reckoned as knee jerk reactions rather than sustainable trends.

Further vigilance is required. Pay close heed to the Shanghai index, the yuan and the commodity markets/currencies.

Quote of the Day: An Inevitable Unity to Market Phenomena

And it was realized that there is an inevitable unity to market phenomena that even power cannot undermine. It was discovered that in the social arena there is something at work that even the one holding power cannot bend and to which, in achieving his ends, he must conform no differently than in submitting to the laws of nature. In the entire history of human thought and the sciences, there has never been a greater discovery.

That’s from the great Ludwig von Mises, The Myth of the Failure of Capitalism in Volume 2 of the Selected Writings of Ludwig von Mises (sourced at the Mises Blog)

Many people carry the insane notion that they can defeat the laws of nature whether in sports, the financial markets, economics or socio-political policies. And the crowd just loves them. Unfortunately nature eventually prevails and exposes the fabled emperor has really no clothes.

At the end of the day, the market system conforms best to the laws of nature.

Does your Philhealth Contribution Help the Poor?

There has been this politically correct idea which attempts to rationalize private sector contribution to the Philippine national health universal coverage as having a charity effect of helping the underprivileged or the needy.

Let us examine if this claim is valid.

First what is PhilHealth?

From Wikipedia.org, (bold original)

The Philippine Health Insurance Corporation (PhilHealth) was created in 1995 with the aim of placing a renewed emphasis on achieving universal coverage. It is categorized as a tax-exempt, government-owned and government-controlled corporation (GOCC) of the Philippines, and is attached to the Department of Health. It states its goal as insuring a sustainable national health insurance program for all.

So the essence of Philhealth’s function is supposedly a “national health insurance program”

But does Philhealth’s concept of insurance match with the real definition of insurance?

Here is the defintion of Insurance from Wikipedia.org (bold original)

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

So the concept of insurance is the EQUAL transfer of risk from contributors in exchange for payments called as Premium.

If I do not make a claim today on my insurance coverage funded by my accrued premium payments, then my share of my claim to the company’s resources gets transferred to OTHER premium payers who are in demand of the use of resources for one reason or another. Insurance thus is a transfer of risk from ONE premium payer to OTHER premium payer/s where the insurer tries to profit from matching the distribution of assets and liabilities over time.

Let us find out if there is an EQUAL transfer of risk based on how Philhealth is funded?

Again Wikipedia.org, (bold original, italics mine)

Funding for the scheme varies based on the population covered, although the majority of funds flow from general taxation. Premiums for the formal sector are set by law to be up to 3% of monthly income. Premiums for both the poor and the informal sector are 1,200 pesos annually (about 25 USD). However, the cost of insurance for the poor is fully subsidized by the central and local governments. National government allocate more than 9 billion pesos annually to meet its three-year target.

Funding by population is as follows:

-Formal sector: Employer and the employee split the required premium 50/50%.

-Indigents: Central and local governments fully subsidize, with local governments contributing (on average) 25% of the premium and national government contributing (on average) 75% of the premium.

-Retirees: Lifetime free membership for those who are 60 years old and older and have paid 10 years worth of premiums during employment in the formal sector.

-Non-poor, Overseas Filipino Workers (OFWs), and others not eligible for other three categories: Premiums paid by individuals, referred to as the individual paying program (IPP).

Apparently there is NO equal transfer of risk as “premium” payments are mostly paid for or subsidized by taxes.

Who are covered by Philhealth’s programs? (italics mine)

PhilHealth coverage is theoretically available to the entire population. The enrollment process differs based on the population group. For example, all formal sector workers must enroll at the start of employment. The poor are identified and enrolled by the local government.

The population is tagged to one of the four major population categorizations:

-Formal sector

-Indigents that are financed by central and local governments

-Retirees (non-paying members) who have already paid 120 months of membership

-The individual paying program (IPP) for those not eligible for the other three categories

The benefits package is essentially the same for each population group. The exception is for indigents and the Overseas Filipino Workers (OFWs) who have additional outpatient primary care benefits (with the providers paid by capitation) however these benefits are available only through public providers.

However, the enrollment process for each population category differs. For the formal sector, employees are enrolled upon the start of employment. It is mandatory that all employees enroll in health insurance. No exceptions are allowed for the size of the company. For the poor, the local government determines “poorness” and enrolls those who are determined poor. For the rest of the population there is open enrollment—one can walk into a local enrollment office anytime to enroll.

Is Philhealth an insurance company?

No it isn’t. There is NO equal sharing of risk and thus is NOT qualified as an insurance company in the conventional terms.

Instead, Philhealth is a health coverage WELFARE program (verbally embellished by the term "insurance") funded mainly by taxpayers and complimented by an employment MANDATE (or as a form of tax on BOTH the employer and the employee).

So taxpayers get an additional whammy from a barrage of existing taxes: VAT, income, capital gains, estate tax, inflation tax among the many others. Of course, this is aside from Philhealth contributions which has been put in place in the name of universal health coverage.

The impression that taxes help the poor is deceptive. Taxes help the politicians and the bureaucracy which uses the poor as justification for coercive extraction of resources from the private sector. Taxes also serve as redistribution from productive use of resources towards consumption which diminishes investment and employment opportunities.

Aside, the welfare state promotes the culture of dependency and entitlement, as well as, reckless behavior which do not alleviate the position of the poor.

In reality, taxes help keep the “poor” poor

Does your contribution to Philheath fund the needy?

If we based this claim on coverage, then the rich, middle-class and most importantly the OFWs, whom has special treatment through “additional outpatient primary care benefits” have likewise been beneficiaries of everyone’s contribution.

So the claim that Philhealth benefits the poor is a BLATANT MISREPRESENTATION as the health welfare program’s coverage has been asymmetrically distributed, with a bias towards OFWs.

In fact, benefits are skewed AGAINST the poor based on access to Philhealth, let me repeat the last paragraph,

However, the enrollment process for each population category differs. For the formal sector, employees are enrolled upon the start of employment. It is mandatory that all employees enroll in health insurance. No exceptions are allowed for the size of the company. For the poor, the local government determines “poorness” and enrolls those who are determined poor. For the rest of the population there is open enrollment—one can walk into a local enrollment office anytime to enroll.

Because of the employment mandate, the formal sector has automatic enrollment-access while the “poor” will have to be screened by local politicians.

In short, access to Philhealth has been politicized and largely depends on the interests of local officials who may use Philhealth as means to secure votes or for other personal agenda.

The “poor” is, thus, not privileged under this TRANSFER or REDISTRIBUTION program.

Bottom line: Based on the above, the claim that private sector’s contributions to Philhealth have the “charitable” consequences to the poor is unfounded and baseless or propaganda from mouthpieces of the government.

Postscript: Accounts of corruption or malversation of funds or dipping on the coffers of the welfare institution aggravates the plight of the poor which underscores the waste and inefficiencies from such programs.