Quote of the Day: Shun the Non-Believers

When you do important work, work that changes things and work that matters, it's inconceivable that the change you're trying to make will be met with complete approval.

Trying to please everyone will water down your efforts, frustrate your forward motion and ultimately fail.

The balancing act is to work to please precisely the right people, and just enough of them, to get your best work out the door.

Shun the non-believers.

This is from my favorite marketing guru Seth Godin.

This powerful marketing message seems highly relevant to the struggle for liberty and to the advocacy of the unpopular economic truths.

Will this Week Highlight the Climax for the Euro Debt Crisis?

Will the Euro debt crisis see its climax this week? The head of the Eurogroup Jean Juncker thinks so…

From Marketwatch.com

The head of the Eurogroup, Jean-Claude Juncker, said the countries sharing the common currency, their rescue fund and the European Central Bank will soon act to save the euro, according to a pre-release of an interview to be published Monday by Sueddeutsche Zeitung.

"We will decide in the coming days which measures to take," Mr. Juncker is quoted as saying.

Mr. Juncker indicated the European Financial Stability Fund and the ECB will buy Spanish government debt to bring down yields after a summit of euro-zone leaders in late June had paved the way for sovereign-bond purchases by the bailout fund.

"I have no doubt that we will implement the decisions of the last summit," Mr. Juncker said, according to the newspaper.

His statements seem to be the first official confirmation of media reports that European leaders are drawing up a plan of purchases of Spanish and Italian government debt by the ECB and the rescue fund.

"The euro countries have reached a point at which we have to make clear with all available means that we are strongly determined to ensure the financial stability of the currency union," the German daily quotes him as saying.

"The world is talking about whether the euro zone will still exist in a few months," Mr. Juncker said, according to Sueddeutsche Zeitung.

Despite a gamut of bailouts, Euro’s debt crisis has lingered since 2008 and have been worsening,

The belief that a political solution will arrest the crisis, like in the recent past, will likely be just another delaying the day of reckoning, that would go against the central designs of the political masters—Messrs. Junker, Draghi, Hollande, Ms. Merkel and the rest, and this includes team Ben Bernanke of the US Federal Reserve, whom has been working closely with the ECB—to prop up the unsustainable political welfare-crony system.

But of course, real actions from central banks will have real effects in the marketplace and in the economy. And this is why the details of what they will do will greatly matter.

Global financial markets have priced in heavily the expectations of the coming massive bailout by the ECB.

So political actions will have to deal first with the market’s expectations. The failure of which may result to the magnified market tremors which could swiftly eviscerate gains we have seen in the recent days.

Next, financial markets have become extremely complacent and heavily dependent on steroids. Bad new has been interpreted as good news.

Growing signs of political desperation by Euro officials have only reinforced the market’s HOPE of a political fix from political narcotism (inflationism) even when unfolding events keeps us telling us the opposite.

Financial markets have been reduced to a branch of a grand casino according to ex-US President Reagan’s former budget director David Stockman

Not only will this mean sustained volatility of market pricing—out of the repeated price distortions from widespread interventions—such complacency amplifies the fat tail risks (or a market crash). Of course I hope that this won’t happen.But the risk environment or conditions says that this is a possibility.

But hope would not serve as a better guide for prudent investors, instead, we should prepare for the worst while hope for the best

Be very careful out there.

Video: I, Smartphone (Made Everywhere)

This is video is the modern day representation of Leonardo Read's must read classic I, Pencil.

Two points here:

One, nobody knows how to make a product on their own or the folly of self-reliance as peddled by politicians. This emphasizes the importance of the division of labor (or Prof. Kling's Patterns of sustainable trade and specialization).

Second, division of labor implies that products have been "made everywhere", which today, extrapolates to the global supply chain networks or "globalization"--which is why politically colored claims of "Made in China" have been utterly fallacious.

What Draghi’s Statement “The ECB is Ready to do Whatever it Takes to Preserve the Euro” Means

I pointed out that ECB President Mario Draghi delivered a magical statement last week which sent markets soaring (I think much had to do with the covering of short sales).

For Professor Gary North such statement has the following implications…

What he said was in fact a cry of desperation. He does not know what to do, other than to inflate. He knows he must break the Maastricht treaty that created the EU, but he does not have any choice. He has defined out of existence the treaty's limits on the ECB. He defines his mandate broadly. He knows that Spain is close to default. The ECB must buy Spain's bonds, or else provide funds for some other agencies to buy Spain's bonds. The weekend summit meeting less than a month ago has already broken down. Spain's ten-year bond rate went above the failsafe 7% figure.

The European banking system is being propped up by monetary inflation. There are signs that this cannot go on much longer, but the central bankers have enormous self-confidence. They believe that fiat money can delay any major crisis. They believe that fiat money is the ultimate ace in the hole. So do Keynesians. So do politicians. They really do believe that the exclusive government monopoly authority to supervise the creation of digits is the basis of prosperity.

Investors invest digits called money. They are convinced that the ability of central banks to create digits has created a failsafe for investors' digits. They believe that a prudent mixture of digit-generating investments will gain them a positive rate of return, as measured in digits, just so long as the total number of digits is always increasing. This is the key to every investment strategy that is tied to "digits invested now, more digits to invest later": an ever-increasing supply of digits.

You might think that investors would judge their success in investing by increased real income: stuff, not digits. But the vast majority of investors assume that stuff will inevitably take care of itself, if only the supply of digits is increasing. Here is the mantra of this generation: "The system of stuff production depends on a steady increase in the supply of digits."

This is why there is no resistance to central bank monetization. On the contrary, there is cheering. The journalists follow the economists. The economists have adopted the mantra of digits with the zealous commitment of any priesthood. Milton Friedman is their high priest.

Professor North sees depression or another crisis ahead, but this will either be through hyperinflation or through mass defaults. He thinks that defaults will be the most likely outcome because the incentives guiding the career of central bankers have been tied with large banks.

I think that the both scenario has a level 50-50 odds, as central bankers will most likely underestimate the impact of their actions.

Read the rest here

Fighting the Last War: Can the Philippines Beat China?

A video circulating in the cyberspace tries to whip up nationalist sentiment by using the Korean war experience to suggest that “the Philippines can beat China” should any military conflict arise from the recent territorial dispute.

Heard of the axiom “Generals are always prepared to fight the last war”?

Such expression applies to the video. The video has been framed in the assumption that future wars will be waged in the conventional sense and thus the vaunted Filipino mettle will matter.

Well this would not only be a big mistake but is patently myopic.

We are not only in the information age but in the age of weapons of mass destruction (WMD), not limited to nuclear warfare (but also to various types of chemical, biological and other evolving warfare such as computer, robotics and etc..).

[As a side note, I will not deal here with the moral issue of whether Filipino lives lost and taxpayer expenditures in the Korean war had been justified or not].

And China has been part of the states armed with substantial nuclear armaments (from Wikipedia.org)

China has also in possession of chemical and biological weapons. I will skip on the military tale of the tape, nevertheless I have shown them here earlier

This simply means that the risks of the employment of these dreadful killing machines or instruments increases once a shooting war have been initiated.

For many, getting social acceptance means to make a big issue out of things they hardly understand.

Political correctness also means stirring up nationalist fervor when they know that someone else will get to do the bloody part of the political violence, whose major beneficiaries will accrue to politicians at society’s expense. Of course this assumes a limited shooting war.

And in case of a full scale war, this will like result to mass destruction of the society (whose families and friends of these agitators will also suffer). Of course these people can’t think through their emotions enough to understand the consequences of their advocacies or are shills for the politicos.

I am reminded by distinguished historian Arnold Toynbee who claimed that people whom have not experienced the horrors of war have the tendency to become provocateurs (or the generational war cycle).

The survivors of a generation that has been of military age during a bout of war will be shy, for the rest of their lives, of bringing a repetition of this tragic experience either upon themselves or upon their children, and... therefore the psychological resistance of any move towards the breaking of a peace ....is likely to be prohibitively strong until a new generation.... has had the time to grow up and to come into power. On the same showing, a bout of war, once precipitated, is likely to persist until the peace-bred generation that has been lightheartedly run into war has been replaced, in its turn, by a war-worn generation.

And it is why agitators of war should get themselves enlisted in the military and request to get assigned in the frontlines so they can practice on what they preach.

[Updated to add: Here is a list of the death toll of 20th century wars, given the capacity of destruction of modern weaponry--assume the worst for the new age warfare]

Of course I am not convinced that the regional territorial controversy has solely been about superficial claims to property or about resources but more about the concealed political agenda such as the advancement of the military industrial complex, and or even perhaps a smoke and mirror encirclement strategy against Russia as China’s regional economic and military policies seem like Dr. Jekyll and Mr. Hyde.

The more important way to promote peace and social cooperation is none other than through expanded trade.

As the great Claude Frederic Bastiat once warned

if goods don’t cross borders, armies will

Even Olympic Medals have been “Debased”

While I am a fan of sports, I am not a fan of the Olympics.

Olympics, for me, represents the politicization of sports premised on feel good nationalism, which are largely financed by massive expenditures of taxpayer money.

The economics of Olympics suggests that the popular games, except for some instances (e.g. LA Olympics), have incurred losses for the hosts. At worst, financial losses extrapolated to higher taxes.

Professor David Henderson notes of the Canadian experience,

That view is understandable because losing money has been the norm. When the Olympics were held in Montreal in 1976, for example, the loss amounted to $2 billion, which was $700 per Montreal resident. And remember that that was in 1976 dollars. That loss resulted in a special tax on tobacco because, you know, smokers are such fans of the Olympics.

And proof of the politicization of sports via the Olympics can be further seen through the medallions for the winners—where the content of the London 2012 medals has been materially debased or devalued.

Image from BBC.

The Zero Hedge points out (bold original)

As every Olympic athlete knows, size matters. The London 2012 medals are the largest ever in terms of both weight and diameter - almost double the medals from Beijing. However, just as equally well-known is that quality beats quantity and that is where the current global austerity, coin-clipping, devaluation-fest begins. The 2012 gold is 92.5 percent silver, 6.16 copper and... 1.34 percent gold, with IOC rules specifying that it must contain 550 grams of high-quality silver and a whopping 6 grams of gold. The resulting medallion is worth about $500. For the silver medal, the gold is replaced with more copper, for a $260 bill of materials. The bronze medal is 97 percent copper, 2.5 percent zinc and 0.5 percent tin. Valued at about $3, you might be able to trade one for a bag of chips in Olympic park if you skip the fish.

The devaluation of the Olympic medals just exhibits the natural or deep-seated impulse of governments to inflate, as well as, to break their own established rules or standards—sports or no sports.

China’s Sovereign Wealth Fund in the Red

Many think that government (central banking) surpluses should be ‘invested’ through loans or through financial markets as sovereign wealth funds. They solely look at the benefits of the supposed ‘investments’ while ignoring both the hidden and the visible costs.

The recent losses of China’s sovereign wealth fund should be an example.

From CNN,

China's sovereign wealth fund suffered its worst year ever in 2011, losing 4.3 per cent on its global investment portfolio.

In an annual report that has become the focal point of its efforts to portray itself as a transparent institution, China Investment Corp also confirmed that it had received a $30bn capital injection from the government at the end of last year, boosting its investment firepower.

CIC was established in 2007 with money carved out from China's foreign exchange reserves and given a mandate to make investments that would generate higher returns. However, it quickly ran into concerns about its government background and so has been at pains to demonstrate that it is a long-term investor focused on profits, not politics.

In its annual report CIC emphasised that point, noting that its board decided in 2011 to make rolling 10-year annualised returns a key measure of performance.

"As a long-term investor, we are well positioned to withstand short-term volatility in markets, to pursue contrarian investments and to build long-term positions that can capture the premium for less liquidity," it said.

There is no guarantee that government ‘investments’ will produce positive returns.

After all, government and central bank bureaucrats are human and suffer from the same knowledge problem, as well as, other human frailties (heuristics, biases, etc..) as with the rest.

The difference is that government actions has externality effects which unduly exposes taxpayers. Yes, central banks as government institutions are underwritten by taxpayers.

The other difference is that actions by government agents or bureaucrats are driven by legal technicalities and political priorities than from the profit and loss incentives.

Besides given the huge distortions of the marketplace financial assets are subject to immense volatility and boom bust cycles, which makes sovereign wealth funds highly susceptible to market risks.

The Magic of Central Banking Talk Therapy

The prospects of central banking inflation steroids bring hope to the forefront.

From Bloomberg,

The Dow Jones Industrial Average (INDU) climbed above 13,000, capping its longest weekly advance since January, amid speculation the European Central Bank will buy bonds to help lower borrowing costs and preserve the euro…

American stocks joined a global rally after two central bank officials said ECB President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases. German Chancellor Angela Merkel and French President Francois Hollande echoed yesterday’s pledge by Draghi that they will do everything to protect the euro.

Bad news is good news: economic slowdown signifies as fodder for central bank support. More from the same article

Chart from tradingeconomics.com

In the U.S., data showed that the economy expanded at a slower pace in the second quarter as a softening job market prompted Americans to curb spending. Consumer confidence in July dropped to the lowest this year, according to a separate report. Cooling growth makes it harder to reduce unemployment, helping explain why Federal Reserve Chairman Ben S. Bernanke has said policy makers stand ready with more stimulus if needed.

“Growth has decelerated sharply,” said Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees $355.9 billion. He spoke in a telephone interview. “We need something to reverse that downtrend and that ‘something’ is policy.”

Consumers are cutting back just as Europe’s crisis and looming U.S. tax-policy changes dent confidence, hurting sales at companies from United Parcel Service Inc. to Procter & Gamble Co. Sales at almost 60 percent of S&P 500 (SPXL1) companies which reported second-quarter results missed estimates, data compiled by Bloomberg show. Still, 72 percent beat profit forecasts.

US equity markets have also been climbing amidst falling growth of money supply...

chart from St. Louis Fed

...also amidst declining forecasts or expectations for corporate earnings...

Dr. Ed Yardeni notes

As a result, the 2012 and 2013 estimates are at new lows of $104.11 and $116.41, respectively. These numbers imply earnings growth rates of 6% this year and 12% next year. They may still be too optimistic since revenue growth is likely to be closer to 5% during 2012 and 2013, while profit margins are likely to remain flat over this period.

Well, all these goes to show how financial markets, desperately seeking yields, have become ‘dopamine addicts’.

Douglas French at the Laissez Faire Books explains,

…cheap money combined with the herding animal spirits is a certain cocktail to engender bubbles. Tragically, these booms are followed by the inevitable busts, creating regret that is the difference in investors minds between the value of what is and the value of what could have been.

This is important because of dopamine, which is a chemical in the brain that helps humans decide how to take actions that will result in rewards at the right time.

People don’t get a dopamine kick when they get what they expect, only when they make an unexpected windfall. So, as Jason Zweig writes in Your Money and Your Brain, drug addicts crave ever-larger fixes to achieve the same satisfaction and “why investors have such a hankering for fast-rising stocks with ‘positive momentum’ or ‘accelerating earnings growth’.”

Also, dopamine dries up if the reward you expected fails to materialize.

The brain has 100 billion neurons and only one-thousandth of one percent produce dopamine, but “this minuscule neural minority wields enormous power over your investing decisions,” cautions Zweig.

Dopamine takes as little as a twentieth of second to reach your decision centers, estimating the value of an expected reward and more importantly propelling you to action to capture that reward. “We’ve evolved to be that way,” explains psychologist Kent Berridge, “because passively knowing about the future is not good enough.”

The effect of all this is what Zweig refers to as “the prediction addiction.” Humans hate randomness. We want to predict the unpredictable, which originates in the dopamine centers of the reflective brain, according to Zweig, leading humans to see patterns where none really exist…

The attempt to satisfy the dopamine which has been evoked by central bank policies, leads people to become increasingly more dependent on heuristics based thinking

More from Mr. French

We all tend to constantly feed our confirmation biases, seeking out experts that confirm our view of the world. We read writers that we agree with so that we can feel smarter, while ignoring or dismissing opinions different from our own.

Our brains are great for keeping us alive in the jungle. We look for patterns and motion. These instincts kept the cavemen alive, not to mention Wall Street’s technical analysts, but wreck the portfolios of investors.

Investors love a good story, but are vulnerable to anecdotes that mislead us, says Ritholtz.

No wonder markets are not sources of information, but instead sources of misinformation, according to resource investing guru Rick Rule…

“The information that people derive from markets is spectacularly wrong,” says Rule, a devotee of legendary investor Benjamin Graham. Like Graham, Rule looks for undervalued stocks and only wants to buy them when they are on sale. Quoting Graham, Rule says, “markets in the short term are voting machines, while in the long term they are weighing machines.”

Housewives are much more rational buying groceries than investors are in buying stocks. While a housewife will turn her nose up at expensive tuna fish, she will load up on it once it goes on sale. Conversely, her investor husband, in Rule’s story, is happy when the share price of his favorite stock goes up and he buys more. When the share price falls, he doesn’t buy more, as his wife does with tuna fish, but instead sells out in disgust.

In short, stock markets (and the financial markets) have been in disconnect with reality. Promises have been taken as facts.

Equity markets have mostly priced in prospective central banking support via QEs…

chart from Zero Hedge

The question now is how sustainable will this talk therapy rally be? Will talk therapy be enough to reinforce the current reanimated 'animal spirits' and filter into economic reality? What if central banks don't deliver as the markets expect?

P.S. I won’t be making my regular stock market commentary tomorrow.

3D Printer Milestone: World’s First 3D-Printed Gun

The 3-D printing technology has been advancing at an incredibly swift pace.

Now it seems that parts of the gun can be 3-D printed

The Nextweb.com writes

Gun enthusiast “HaveBlue” has documented in a blog post (via the AR15 forums) the process of what appears to be the first test firing of a firearm made with a 3D printer.

Credit: HaveBlue.org

Before you go about locking yourself in your closet, you should know that the only printed part of the gun was the lower receiver. But, according to the American Gun Control Act, the receiver is what counts as the firearm.

HaveBlue reportedly used a Stratasys 3D printer to craft the part, assembled it as a .22 pistol and fired more than 200 rounds with it.

The tester then attempted to assemble a rifle with the part and a .223 upper receiver but had “feed and extraction issues.” The problem may not in fact be with the 3D-printed part, though, as the issues remained when a standard aluminum lower was used.

3D printer gun designs have been floating around the Internet for some time now, but HaveBlue seems to be the first to take it to the next level.

Click here for a nice infographic of 3-D Printing also from Nextweb.com.

Graphic of the Day: Red Tape and Small Business

In the mainstream, hardly has there been any meaningful discussions about how red tape, costs of regulatory compliance and the costs of leviathan bureaucracy contributes to unemployment or how politicization of the economy via the bureaucracy and arbitrary rules (regime uncertainty) takes its toll on the economy, particularly on small business, which have been the major source of the employment in the US (and elsewhere).

The chart from the Joint Economic Committee Republicans exhibits the astounding maze of regulations.

So when the politicians deceivingly assert that the success of entrepreneurs has been due to the government, in truth this relationship has been in reverse: many business failures, stillborn and or unrealized businesses have been products of government interference in various forms.

Cato’s Dan Mitchell (where the chart above has been sourced) gives us some numbers on the onus of the bureaucracy to the US economy:

Americans spend 8.8 billion hours every year filling out government forms.

The economy-wide cost of regulation is now $1.75 trillion.

For every bureaucrat at a regulatory agency, one study estimated that100 jobs are destroyed in the economy’s productive sector.

As the great Ludwig von Mises pointed out,

The trend toward bureaucratic rigidity is not inherent in the evolution of business. It is an outcome of government meddling with business. It is a result of the policies designed to eliminate the profit motive from its role in the framework of society’s economic organization.

Elimination of the profit motive means a declining trend in a society’s standard of living.

The Economist has an article about “The parable of the four-engined planes” which nicely demonstrates of the failure of bureaucratic rigidity.

Updated to add:

Another worthwhile example is this article about a 13 year old aspiring entrepreneur whose business got shut down by local regulators. (pointer to Professor Gary North)

Has the US Government been Spying on All Americans?

The US government has reportedly been indiscriminately spying on their citizens according to whistleblowers

From the RT.com (hat tip Sovereign Man) [italics original]

In an interview broadcast on Current TV’s “Viewpoint” program on Monday, former NSA Technical Director William Binney commented on the government’s policy of blanket surveillance, alongside colleagues Thomas Drake and Kirk Wiebe, the agency's respective former Senior Official and Senior Analyst.

The interview comes on the heels of a series of speeches given by Binney, who has quickly become better known for his whistleblowing than his work with the NSA. In their latest appearance this week, though, the three former staffers suggested that America’s spy program is much more dangerous than it seems.

In an interview with “Viewpoint” host Eliot Spitzer, Drake said there was a “key decision made shortly after 9/11, which began to rapidly turn the United States of America into the equivalent of a foreign nation for dragnet blanket electronic surveillance.”

These powers have previously defended by claims of national security necessity, but Drake says that it doesn’t stop there. He warns that the government is giving itself the power to gather intel on every American that could be used in future prosecutions unrelated to terrorism.

“When you open up the Pandora’s Box of just getting access to incredible amounts of data, for people that have no reason to be put under suspicion, no reason to have done anything wrong, and just collect all that for potential future use or even current use, it opens up a real danger — and to what else what they could use that data for, particularly when it’s all being hidden behind the mantle of national security,” Drake said.

Although Drake’s accusations seem astounding, they corroborate allegations made by Binney only a week earlier. Speaking at the Hackers On Planet Earth conference in New York City earlier this month, Binney addressed a room of thousands about the NSA’s domestic spying efforts. But in a candid interview with journalist Geoff Shively during HOPE, the ex-NSA official candidly revealed the full extent of the surveillance program.

“Domestically, they're pulling together all the data about virtually every U.S. citizen in the country and assembling that information, building communities that you have relationships with, and knowledge about you; what your activities are; what you're doing. So the government is accumulating that kind of information about every individual person and it's a very dangerous process,” Binney said.

Drake and Binney’s statements follow the revelation that law enforcement officers collected cell phone records on 1.3 million Americans in 2011. More news articles are emerging every day suggesting that the surveillance of Americans — off-the-radar and under wraps — is growing at an exponential rate.

If true, then the US has progressively been marching into a police state.

China’s Hunan Province May Get Steroids, China’s Tax Revenues Drastically Fall

The intensifying urge for government’s opium has been palpable everywhere.

A slowing economy in China has prompted for more babbles of government spending stimulus.

Reports the Reuters

The government of Changsha, the capital of central China's Hunan province, has launched an 829 billion yuan ($130 billion) investment stimulus program to bolster the local economy, state media has reported.

The money would be spent on 195 projects, including airport, subway and urban infrastructure facilities, as well as developing energy efficient industries, said a report by the official China News Service on Wednesday.

The government of Changsha, a city known for its machine-making and non-ferrous metal industries, would also speed up financial reform and innovations, said the report, which provided no details about how the program would be financed.

The China News Service paraphrased Chen Runer, the Communist Party secretary of Changsha, saying that economic pressure on the city could not be ignored, despite relatively stable growth in the face of global headwinds, and it was time for initiative.

There was no reference to the program's existence on the government of Changsha's website on Thursday.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, calculates that the headline number on the stimulus plan is worth 147 percent of Changsha's nominal GDP in 2011, or 1.8 percent of China's national economic output.

Even if spread over five years, Zhang says the implied investment would be equivalent to 46 percent of total annual fixed asset investment in Changsha.

FINANCING QUESTIONS

Skeptics say a program on that scale is implausible and could not be properly financed with China's banks still nursing bad loans worth an estimated 2-3 trillion yuan after local governments racked up debts of 10.7 trillion yuan in the wake of Beijing's nationwide stimulus program unveiled in 2008.

The mixed signals or tentativeness being shown by Chinese authorities reveal of the ongoing political discord.

Yet the Shanghai index continues with its slomo descent, which seems to have been discounting all the inveigles of inflationism

Also China’s tax revenues has been posting a marked decline

Writes Dr. Ed Yardeni (chart also from Dr. Yardeni)

The data confirm a significant slowdown in Chinese economic growth during the first half of this year:

(1) Tax revenues rose only 9.8% y/y during H1-2012, down from 29.6% over the same period a year ago. Growth rates were down across all 11 major revenue sources.

(2) Personal income taxes actually declined 8.0%. A year ago, they rose 35.4%. Corporate income taxes rose 17.3%, but that was down from 38.3% a year ago.

(3) Revenues from property transactions took a hit. The ones from “Land Value Increment” rose 14.7% vs. 91.1% a year ago. “Deed” revenues fell 9.9% after rising 27.5% a year ago.

Dr. Marc Faber lays out the contagion risks from China’s economic slowdown (start at 5:20)

HOT: ECB’s Draghi: ECB Will Do What’s Needed To Preserve Euro

Steroid starved financial markets suddenly found life from promises of more inflationism.

From Bloomberg,

European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”

Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds. Spanish politicians have called on the ECB to do more after yields on the country’s bonds soared to euro-era records this week.

Spanish yields slumped after Draghi’s remarks, with the rate on the 10-year bond dropping 32 basis points to 6.98 percent at 1:26 p.m. in Madrid. It touched a record 7.69 percent on July 22. The euro jumped and stocks rose. The single currency climbed as high as $1.2285 after trading at $1.2118 before Draghi spoke. The Stoxx Europe 600 Index (SXXP) gained 1.6 percent.

Bad news once again is read as good news…that’s until markets wakes up to the reality of either empty promises or real action—meant to buy time before the day of reckoning arrives.

Quote of the Day: Austrian Economics and the Courage to say the Unpopular Thing

The Austrian account of economic depression requires thinking on more than one level to arrive at the truth, whereas economists these days are more likely to be looking for obvious explanations and even-more-obvious solutions, even when these neither explain nor solve anything.

This puts the Austrians in an interesting position within the intellectual culture of any time and place. They must go against the grain. They must say the things that others do not want to hear. They must be willing to be unpopular, socially and politically. I'm thinking here of people like Benjamin Anderson, Garet Garrett, Henry Hazlitt, and, on the Continent, L. Albert Hahn, F.A. Hayek, and, above all, Ludwig von Mises. They gave up career and fame to stick with the truth and say what had to be said.

Later in life, when speaking before a group of economics students, Hayek bared his soul about this problem of the moral choices economists must make. He said that it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in his experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.

(bold emphasis added)

This is from Llewellyn H. Rockwell, Jr. from Economics and Moral Courage

Deepening Information Age: In the US, Public Education is being Undermined by the Internet

The internet seems on path to unravel 20th century welfare state institutions partly through the public education model.

Professor Gary North explains,

Parents are pulling their children out of the government schools. This is happening across the USA.

In city after city, enrollment is declining. This is not a recent development. It has been going on for a half a decade. It has taken place in half of the nation’s largest districts.

The trend looks irreversible.

As the Web offers better programs free of charge, the public schools cannot compete. The inner city schools are catastrophic. They are getting worse. As whites ans Asians flee the cities, the inner-city schools get worse.

The tax base shrinks. The teachers union demands more pay and smaller classes. The city governments are trapped. Solution: cut programs, fire teachers, and enlarge classes back to (horror!) 1959?s 33 students.

Nobody is supposed to talk about this. It is time to talk about it. Public education will not recover. The longer the decline takes place, the more parents will conclude that there is only one solution: pull their kids out.

At some point, voters will not pass any more bond issues. They will not consent to higher property taxes. They will let the public schools sink.

Read the rest here

Democratization (and the de-politicization) of education will become a global phenomenon as educational platform will mostly migrate to the internet.

One example:

Coursera a free internet educational platform that offers high quality courses from the top universities recently announced that 12 universities — including three international institutions — will be joining them particularly, the Princeton University, Stanford University, University of Michigan, and University of Pennsylvania in offering Coursera classes (Coursera Blog)

On Coursera, you will now be able to access world-class courses from:

• California Institute of Technology
• Duke University
• École Polytechnique Federale de Lausanne
• Georgia Institute of Technology
• Johns Hopkins University
• Princeton University
• Rice University
• Stanford University
• University of California, San Francisco
• University of Edinburgh
• University of Illinois at Urbana-Champaign
• University of Michigan
• University of Pennsylvania
• University of Toronto
• University of Virginia
• University of Washington

For traditional schools, it would be adapt or perish.

The salad days of the education bubble in the US or even in the Philippines have been numbered.

The Coming Global Debt Default Binge: Japan’s Pension Fund Sells Japanese Government Bonds (JGB)

The era of Japan’s low interest rates may be at an inflection point.

From San Francisco Chronicle/Bloomberg,

Japan’s public pension fund, the world’s largest, said it has been selling domestic government bonds as the number of people eligible for retirement payments increases.

“Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash,” said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). “To boost returns, we may have to consider investing in new assets beyond conventional ones,” he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63 percent of its assets, in domestic bonds as of March, according to the fund’s financial statement for the 2011 fiscal year. That compares with 13 percent in domestic stocks, 8.7 percent in foreign bonds and 11 percent in overseas equities.

Again the above represents the unintended consequences of the unsustainable welfare state. These could be incipient signs of the liquidation of Japan’s Santa Claus political institutions.

The lack of internal financing (from resident savings) means that Japan’s enormous debts will need to be financed by external (foreign) savings. This also means that Japan will be in tight competition with the Eurozone and the US to attract financing from the world. The nuclear option is that the Bank of Japan (BoJ) will become the financier of last resort.

Neo-Keynesians and Fisherians who claim that the world will undergo prolonged episodes of low interest rates based on historical experiences and from the prospects of deflation, fail to see that this has NOT just been about banking financial crisis, but about the crises of governments manifested through unsustainable debts.

Most of their analysis has been moored to historical banking-financial crisis, e.g Great Depression and Japan’s lost decade, rather than government debt crises.

It is dangerous to read the recent past as roadmap of the future. The above chart from the Economist shows that interest rates of major economies (US Germany Spain and Italy) had their volatile chapters.

When there will be inadequate or scant access to private sector savings, then the chances for a full blown debt crisis becomes a clear and present danger.

Once interest rates rises—out of the lack of financing and or from BoJ’s inflation financing—higher rates would mean higher interest rate payments which is likely to swell the existing debts.

Yet given the Japan's insufficient economic growth from growing political interventionism, surging interest rates will negatively impact both Japan’s banking and financial system as the largest holders of JGBs and Japan’s government—a self-reinforcing spiral.

So the debt crisis, which has already been ravaging the Eurozone, may likely be transmitted to Japan. Unfolding events have been so fluid which means conditions may deteriorate swiftly beyond the public's expectations.

Be careful out there.

The Deepening Gold Markets of Asia: Hong Kong Opens New Gold Storage

Gold markets in Asia will get a huge boost from the opening of Hong Kong’s largest gold storage

From Bloomberg,

Hong Kong’s largest gold-storage facility, which can hold about 22 percent of the bullion now in Fort Knox, will open in September to meet rising demand from banks and the wealthy, according to owner Malca-Amit Global Ltd.

The facility, located on the ground floor of a building within the international airport compound, has capacity for 1,000 metric tons, said Joshua Rotbart, general manager for the Hong Kong-based company’s Malca-Amit Precious Metals unit. Two of the vaults may hold assets, including gold, for banks and financial institutions, and others will be used for diamonds, jewelry, fine art and precious metals, said Rotbart.

The move in Hong Kong reflects increased demand for gold in Asia even as the commodity struggles to sustain its rally into a 12th year. Gold-demand growth in China, the world’s second- largest user after India last year, is slowing, according to the World Gold Council. Vault charges will depend on each customer’s operations, according to Rotbart, who declined to give a figure for the venture’s cost beyond millions of dollars.

Reports attribute this to the growing wealth in Asia, from the same article…

Asia-Pacific millionaires outnumbered those in North America for the first time last year, according to Capgemini SA and Royal Bank of Canada’s wealth-management unit. The number of individuals in the region with at least $1 million in investable assets rose 1.6 percent to 3.37 million, helped by increases in China and Indonesia, according to the firms’ World Wealth Report, released last month. So-called high-net-worth individuals in North America dropped 1.1 percent to 3.35 million.

Gold markets in Asia will likely become more competitive, from the same article…

The new storage facility will compete with services offered by the Airport Authority Hong Kong, which began storage operations at a 340 square meter site in 2009 for government institutions, commodity exchanges, bullion banks, refiners, wealthy individuals and exchange-traded funds. Capacity is reviewed on a regular basis to ensure there is adequate storage over the medium term, the authority said in a statement.

Singapore’s Push

Singapore is also among economies in Asia vying for a greater share of the bullion trade. In February, the government announced a plan to exempt investment-grade gold, silver and platinum from a goods and services tax, starting from October. The aim is to raise the city-state’s share of the global gold trade to as much as 15 percent in five to 10 years from about 2 percent, according to IE Singapore, the external trade agency.

Competitive gold markets are signs of the burgeoning free markets in Asia.

Besides, gold has been embedded in the culture for many Asian nations (e.g. India, Vietnam, Malaysia, China, etc…), which I think is why the “gold as money” theme will be more receptive to Asians.

Yet this seems to exclude the Philippines, where much of the public still cling to the romanticized notion that the US dollar represents as THE ultimate currency—this seems tied to the popular social democratic mindset which gives mandate to the political economy of state (crony) capitalism.

I believe that the Asia’s blossoming gold market has been more than just about the showcase of wealth, but about gold as insurance…which essentially may pave way for gold to reclaim its role as money.

Perhaps this may signal that Asia may lead the world towards the restitution of sound money.

War on Terror: Inflation of Security Bureaucracy and Spending

Either terrorism has brought upon government paranoia or terrorism has been a product of foreign policies to justify the expansion security institutions, none the less war on terror has brought one sure thing: inflation in security expenditures.

Writes Tom Engelhardt at the Asia Times, (hat tip Sovereign Man)

Are you, for instance, worried about the safety of America's "secrets"? Then you should breathe a sigh of relief and consider this headline from a recent article on the inside pages of my hometown paper: "Cost to Protect US Secrets Doubles to Over $11 Billion."

A government outfit few of us knew existed, the Information Security Oversight Office or ISOO, just released its "Report on Cost Estimates for Security Classification Activities for Fiscal Year 2011" (no price tag given, however, on producing the report or maintaining ISOO). Unclassified portions, written in classic bureaucratese, offer this precise figure for protecting our secrets, vetting our secrets' protectors (no leakers please), and ensuring the safety of the whole shebang: US$11.37 billion in 2011.

That's up (and get used to the word "up") by 12% from 2010, and double the 2002 figure of $5.8 billion. For those willing to step back into what once seemed like a highly classified past but was clearly an age of innocence, it's more than quadruple the 1995 figure of $2.7 billion.

And let me emphasize that we're only talking about the unclassified part of what it costs for secrets protection in the National Security Complex. The bills from six agencies, monsters in the intelligence world - the Central Intelligence Agency, the Defense Intelligence Agency, the National Security Agency, the National Reconnaissance Office, the National Geospatial-Intelligence Agency, and the Office of the Director of National Intelligence - are classified. The New York Times estimates that the real cost lies in the range of $13 billion, but who knows?

To put things in perspective, the transmission letter from Director John P Fitzpatrick that came with the report makes it utterly clear why your taxpayer dollars, all $13 billion of them, are being spent this way: "Sustaining and increasing investment in classification and security measures is both necessary to maintaining the classification system and fundamental to the principles of transparency, participation, and collaboration." It's all to ensure transparency. George Orwell take that! Pow!

Now let's try the line again, this time with more gusto: That makes no sense!

On the other hand, maybe it helps to think of this as the Complex's version of inflation. Security protection, it turns out, only goes in one direction. And no wonder, since every year there's so much more precious material written by people in an expanding Complex to protect from the prying eyes of spies, terrorists, and, well, you.
The official figure for documents classified by the US government last year is - hold your hats on this one - 92,064,862. And as WikiLeaks managed to release hundreds of thousands of them online a couple of years ago, that's meant a bonanza of even more money for yet more rigorous protection.

You have to feel at least some dollop of pity for protection bureaucrats like Fitzgerald. While back in 1995 the US government classified a mere 5,685,462 documents - in those days, we were practically a secret-less nation - today, of those 92 million sequestered documents, 26,058,678 were given a "top secret" classification. There are today almost five times as many "top secret" documents as total classified documents back then.
Here's another kind of inflation (disguised as deflation): in 1996, the government declassified 196 million pages of documents. In 2011, that figure was 26.7 million. In other words, these days what becomes secret remains ever more inflatedly secret. That's what qualifies as "transparency, participation, and collaboration" inside the Complex and in an administration that came into office proclaiming "sunshine" policies. (All of the above info thanks to another of those ISOO reports.) And keep in mind that the National Security Complex is proud of such figures!

So, today, the "people's" government (your government) produces 92 million documents that no one except the nearly one million people with some kind of security clearance, including hundreds of thousands of private contractors, have access to. Don't think of this as "overclassification," which is a problem. Think of it as a way of life, and one that has ever less to do with you.

Now, honestly, don't you feel that urge welling up? Go ahead. Don't hold back: That makes no sense!

How about another form of security-protection inflation: polygraph tests within the Complex. A recent McClatchy investigation of the National Reconnaissance Office (NRO), which oversees US spy satellites, found that lie-detector tests of employees and others had "spiked" in the last decade and had also grown far more intrusive, "pushing ethical and possibly legal limits." In a program designed to catch spies and terrorists, the NRO's polygraphers were, in fact, being given cash bonuses for "personal confessions" of "intimate details of the private lives of thousands of job applicants and employees ... including drug use ... suicide attempts, depression, and sexual deviancy." The agency, which has 3,000 employees, conducted 8,000 polygraph tests last year.

McClatchy adds: "In 2002, the National Academies, the nonprofit institute that includes the National Academy of Sciences, concluded that the federal government shouldn't use polygraph screening because it was too unreliable. Yet since then, in the Defense Department alone, the number of national-security polygraph tests has increased fivefold, to almost 46,000 annually."

Now, think about those 46,000 lie-detector tests and can't you just sense it creeping up on you? Go ahead. Don't be shy! That makes no sense!

Or talking about security inflation, what about the "explosion of cell phone surveillance" recently reported by the New York Times - a staggering 1.3 million demands in 2011 "for subscriber information ... from law enforcement agencies seeking text messages, caller locations and other information in the course of investigations"?

From the Complex to local police departments, such requests are increasing by 12%-16% annually. One of the companies getting the requests, AT&T, says that the numbers have tripled since 2007. And lest you think that 1.3 million is a mind-blowingly definitive figure, the Times adds that it's only partial, and that the real one is "much higher." In addition, some of those 1.3 million demands, sometimes not accompanied by court orders, are for multiple (or even masses of) customers, and so could be several times higher in terms of individuals surveilled. In other words, while those in the National Security Complex - and following their example, state and local law enforcement - are working hard to make themselves ever more opaque to us, we are meant to be ever more "transparent" to them.
These are only examples of a larger trend. Everywhere you see evidence of such numbers inflation in the Complex. And there's another trend involved as well. Let's call it by its name: paranoia. In the years since the 9/11 attacks, the Complex has made itself, if nothing else, utterly secure, and paranoia has been its closest companion. Thanks to its embrace of a paranoid worldview, it's no longer the sort of place that experiences job cuts, nor is lack of infrastructure investment an issue, nor budget slashing a reality, nor prosecution for illegal acts a possibility.

A superstructure of "security" has been endlessly expanded based largely on the fear that terrorists will do you harm. As it happens, you're no less in danger from avalanches (34 dead in the US since November) or tunneling at the beach (12 dead between 1990 and 2006), not to speak of real perils like job loss, foreclosure, having your college debts follow you to the grave, and so many other things. But it matters little. The promise of safety from terror has worked. It's been a money-maker, a stimulus-program creator, a job generator - for the Complex.

The above only reminds me of the great H.L. Mencken whose prescient warnings seem relevant today…

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.