Philippine Mining Index: Will The Divergences Last?

In my view, a very significant divergence unfolding within the Philippine Stock Exchange over the past few weeks could highlight a pivotal development.

A Southbound Philippine Mining Index

While the local benchmark, the Phisix continues to drift at the near record highs, the biennial market leader, the mining sector, appears to have substantially weakened.

I say biennial because as I have pointed out in the past, the mining index outperformance-underperformance has been rotating every other year[1].

Year-to-date, the mining sector has plummeted by about 10%.

Yet more than half or 5.8% of such losses accrued only from this week. This makes the mining sector a dismal laggard relative to the others.

The mining sector has fundamentally spearheaded the “rising tide” or the broad based rally of the Philippine Stock Exchange since 2002. This can be seen via nominal returns. Measured by the sector’s index trough in 2002 as against recent peaks, the mining sector produced an astounding 26x as against 4x for the Phisix.

Nevertheless, the ebbs and flows or the undulations of the Phisix (green line chart) have been for most of the time, highly correlated with the mining sector (black candle) throughout this duration.

In other words, even during years where the mining sector trailed the others, the former flowed along with the rest to reflect on the same (positive or negative) directions of returns. The nuances have only been in the degree.

The correlation has not been perfect though, as there had been accounts of divergences.

This can be seen in the colored ovals in the above charts. In 2010, the Phisix outperformed (orange) as the mining index hibernated. In 2011, the mining index sprinted miles ahead (red) as the Phisix wavered. However eventually, these anomalies got smoothed out and both moved towards the same path.

In short, the rotating market leadership meant that as one index stagnated, the other index advanced.

The Mining Sector’s Divergence From the Phisix

Today there appears to be a different type of divergence; the Phisix and the Mining sector has moved in opposite directions.

Technically speaking, the mining index has already infiltrated into the bear market territory (20% loss). Based on Friday’s close and from the recent top this May, this translates to about 22% decline. Thus the year-to-date figure understates the true extent of the losses. As always, the point of reference matters.

Yet the last time the mining index fell into a bear market, which came in conjunction with a bear raid on the Phisix and on global equity markets as the public’s heavy expectations for QE 3.0 had been frustrated by the politically shackled US Federal Reserve chair Ben Bernanke[2], the mining index lost 33% peak-to-trough before recovering.

I do not expect a repeat of the same pattern as the major influence will emanate from external forces.

Besides, the technical picture likewise exhibits a bearish ‘double top’ which may only exacerbate the current negative sentiment.

There has been imputation that the recent declines have been due to issue specific related incidents. For instance, some people have speculated that political authorities may initiate investigations on an innuendo of alleged malfeasances committed by a firm as exposed by a blind item article in a popular broadsheet. This, they think, has been an important factor in the recent price declines.

It is interesting to see that many people fall prey to such scuttlebutts.

Yet it is dangerous to believe that all hearsays require government intervention. If this becomes reality then serial witch-hunting would only mean severely politicized and convoluted markets and a bloated government which only would extrapolate to chronic economic and political imbalances. Think Greece.

People seem to forget that many accounts of the financial market improprieties have operated in the shadows of the underhand of politics.

The infamous Dante Tan led BW Scandal sets a shining example of the political complicity and the failure of insider trading regulations[3]. The accused Mr. Tan has been absolved of two criminal cases for violation of The Revised Securities Act by the Supreme Court in August of 2010[4]. How about the US property-mortgage bubble crash of 2008[5]?

Worst, people seem to have developed impression of entitlements, such that the only politically correct direction for the stock market has been UP. Thus, falling markets become objects for political interventions. The unfortunate Calata episode serves an example[6].

And this is why central banking inflationist interventions have become so popular, it gives a boost to the gambling appetite and to the serotonin, all at the expense of personal accountability and responsibility.

I don’t have a clue to the truth or validity of such allegations. But as Black Swan author Nassim Taleb points out from his upcoming book[7] we easily get hooked to sensationalism.

There was even more noise coming from the media and its glorification of the anecdote. Thanks to it, we are living more and more in virtual reality, separated from the real world, a little bit more every day, while realizing it less and less. Consider that every day, 6,200 persons die in the United States, many of preventable causes. But the media only reports the most anecdotal and sensational cases (hurricanes, freak incidents, small plane crashes) giving us a more and more distorted map of real risks. In an ancestral environment, the anecdote, the “interesting” is information; no longer today. Likewise, by presenting us with explanations and theories the media induces an illusion of understanding the world.

Yet from the big picture perspective, the appeal to innuendos represents the cognitive fallacy of availability heuristic[8] or judgment based on information that can easily be remembered. This may even the account as the logical Post Hoc “after this therefore because of this” fallacy which mistakes coincidences as causes[9].

How do I say so? Because of the synchronized actions of the mining issues.

From the one year chart, we can note that the Phisix and the mining index suffered from the recent post-Operation Twist and Euro crisis selloff this May.

However in contrast to the broader markets, which piggybacked on the swift resumption of the RISK ON environment primed by serial promises by major central banks of interventions, the rally in the domestic mining index have faltered.

What is in front of us or have been self-evident we have frequently overlooked in favor of those narrated, the tangible or the personal.

Again some behavioral lessons from Nassim Taleb[10]

people tend to concoct explanations for them after the fact, which makes them appear more predictable, and less random, than they are. Our minds are designed to retain, for efficient storage, past information that fits into a compressed narrative. This distortion, called the hindsight bias, prevents us from adequately learning from the past.

Yes coincidentally, a day AFTER Philippine president Benigno Aquino III affixed his signature on the much ballyhooed Mining-Tourism compromise via Executive Order 79[11], stock prices of MOST of the mining issues began to deteriorate.

Except for Semirara Corporation [PSE:SCC, black candle] prices of the mining heavyweights—Philex Mining [PSE: PX, blue], Lepanto Consolidated [PSE:LC, light green], Atlas Mining [PSE:AT, orange] and Manila Mining [PSE: MA violet]—have all been suffering from synchronized decline.

Such seemingly coordinated downturn have been no different from the second tier issues, whose string of losses has exceeded the majors: Nihao Minerals [PSE: NI black candle] Nickel Asia [PSE: NIKL, green] Geograce Resources [PSE:GEO, blue] and Oriental Peninsula [PSE:ORE, red].

Oil issues, whether as component of the mining index or not, have not been spared: Oriental Petroleum [PSE:OPM, black candle] and PetroEnergy [PSE:PERC, red] seem to have stagnated while The Philodrill Corporation [PSE:OV, green], and Philex Petroleum [PSE: PXP, blue] have exhibited signs of contagion based selling pressures.

Yet current infirmities in the domestic mining-oil sector may represent a belated response to the falling prices of products which underpins the operations of these companies: Gold, copper and industrial metals (GYX) have been on a slump for at least a last year. Oil (WTIC) on the other hand, still trades below the May 2011 high.

The state of the commodities has apparently been replicated on the benchmarks of global mining issues. These can be seen in the performance of US mining stocks [XME—SPDR S&P Metals & Mining Index], global mining stocks [CMW.TO—iShares S&P/TSX Global Mining Index Fund], emerging market mining stocks [EMT—emerging global shares dow jones emerging markets metals/mining titans], and US oil stocks [$DJUSEN Dow Jones US Oil & Gas Index]

In short, falling commodity prices may have been interpreted as crimping on the operating leverage[12] of these resource companies, thereby reducing profitability[13] whose consequence has been the year-long torpor of global mining equities.

Ironically, however, global mining and oil issues seem to have staged a rally despite the languid state of commodity prices.

This perhaps could have been prompted by snowballing anticipations of the possible “grand bazooka” to be launched by the European Central Bank and or the US Federal Reserve.

Implications of Divergences and of Philippine Mining Political Trends

There are several insights from the above: In defying global market trends, domestic mining and oil equities may have overextended gains. Perhaps current the correction phase exhibits the market process of regression to the mean or similarly defined in psychological terms[14] or in finance[15] as the tendency of the markets to average out.

Yet one cannot discount that such valuations overreach may also represent symptoms of excessive speculations or the unwinding of mini-bubbles.

Add to these the elements of political and regulatory uncertainty introduced by the new executive order by the President and on the suggestion by the IMF for the Philippine government to hike taxes on the mining industry[16].

Reports say that a tax increase in the mining industry for President Aquino may momentarily not be a priority “for the next year or two”. But prospects of it may have also compounded on the current uncertainties considering the proposed doubling of excise taxes from “the current 2% to a range of 5-7%”, as well as “a 5% royalty in future mining contracts and areas to be declared as mineral reservations”[17].

Of course given that the mining sector has been one of the industries that have the biggest potential to boost President Aquino’s obsession with approval ratings through statistical economic growth, I believe the political burdens of the mining industry will likely be mitigated.

The compromise between mining and tourism industry via EO 79 and tax deferment seems like evidences of these. I might add that the same instances also serve as wonderful proof public choice theory at work, where vested political interest groups have a significant sway or influence or logrolling on policymaking[18]. Yes tourism industry has their share of political concentrated group interest too.

While the Executive Order has been meant to placate on these squabbling groups, the major beneficiary here is the Philippine government whose attendant edict extrapolates to more control and discretion of choosing winners and losers and bigger budgets for the bureaucracy for the supervision and enforcement of such fiat, all at the expense of society through prospective higher taxes and politicized distribution of economic opportunity.

Of course another major beneficiary will be the cronies who will get the gist of the license to explore and operate mines.

This means that the increased politicization of the mining industry will favor the entrenched groups at the expense of small scale miners and other professional miners.

Yes despite the massive scale of regulations by the Philippine government, the informal gold mining sector has fundamentally become the dominant contributor to the nation’s gold production output.

Such statutory compromise will hardly bring such informal sector to the surface for the reasons stated above.

And yet part of the growth of the informal sector, ironically, has been facilitated by the Bangko Sentral ng Pilipinas (BSP), through their gold buying program.

As the World Gold Council notes[19]

Looking at informal production, it is understood that the bulk of this is sold at buying stations maintained by the central bank. This is due to the fact that gold is normally bought on a noquestions-asked basis, and on very attractive terms. Nevertheless, there remains a small portion of informal production, mainly from the province of Mindanao, that is not sold to the central bank.

It is important to impress to readers that mining per se has not been responsible for environmental degradation. If such allegations were true then Chile, the US, Australia, Canada would have been transformed into howling wilderness.

In reality, environmental preservation and optimizing revenues from the mining industry are strongly associated with the resource curse dilemma[20], that which is the politicization of the resource industry.

As the World Bank a 2002 study notes[21],

Fighting corruption, self-interested rent-seeking, and a general deterioration in the quality of governance in the face of large revenue streams is no doubt a challenge for countries with otherwise short histories of sound and competent institutions. There is no easy panacea to managing this challenge. At the same time, there is simply no other way to manage a mining sector successfully, and indeed a successful economy in general, than to engage in the challenging task of building effective political and economic institutions and finding competent individuals to run them. This is the essence of the development process.

Informal economy, corruption, rent seeking and a general deterioration in the quality of governance are symptoms or are products of asphyxiating regulations, bureaucracy, high burdens from taxes and the cost of compliance[22], insecure property rights and involuntary exchanges or the intense politicization of the industry.

Nevertheless also do expect more massive illegal and wildcat mining in the 78 areas that has been prohibited from mining which should lead to environmental degradation. The people who will undertake the fly by night mining operations will likely be wards of politicians.

In the realm of politics, natural laws of economics simply vanish or will submit to the will of politicians.

Short Term Bearish, Long Term Bullish

Have recent events signaled the end for the bullmarket in Philippine mining? I guess not. This looks more cyclical than structural as explained above. The momentum suggests that the ongoing retrenchment phase could or may likely continue.

Although I also think, over the interim, the mining industry’s divergence signals two major routes:

One, the leveling out of the divergences through

A. A sustained rally in the global equity markets or a prolonged RISK ON environment that will eventually percolate to prices of general commodities and thus would likely truncate the current correction phase of the local mines or

B. The Mining sector’s bear market could spillover to the general market.

Second, that the divergence becomes a lasting feature. This eventually paves way for stagflation. In such scenario, I expect the mines to go opposite ways with the general stock market. But this will likely become a global phenomenon too. So actions in the local markets should be in sync with the world. So far there has been little evidence on this.

I lean on condition (B) or where the bear market of the mining sector will likely percolate into the general market, due to growing risks of contagion.

However everything really depends on how and what future policies will be conducted, especially in the US, as previously discussed.

So far, gains from the global equity markets have emerged from intensifying hopes and prayers of rescue (if not narcotics) from central banks. The Bank of America estimates that the markets has already priced or factored in a humungous 80% of QE 3.0[23] which implies of the enormous pressure on policymakers to deliver. And market now becomes highly sensitive or susceptible to changes in expectations which may be swift and dramatic.

Central banking stimulus continues to exhibit diminishing returns[24].

This also suggests that in order to have a meaningful effect, central bank steroids would need to have a “shock and awe” in scale or a far larger than the current dosage. Failure to satisfy the markets could switch sentiment to a RISK OFF volatility.

This is why current environment seems so uncertain and so vulnerable to instability.

Yet given that political election season approaches in the US, one cannot discount that markets may be boosted by political authorities for political goals[25].

But at the same time, market risks from a global slowdown contagion have continuously been escalating.

Trade cautiously.

---

[1] see Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[2] see Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms September 22, 2011

[3] See Insider Trading: What is Legal isn’t Necessarily Moral, November 17, 2011

[4] Supreme Court of the Philippines SC Clears Dante Tan of BW Charges

[5] See 2008 US Mortgage Crisis: The US Federal Reserve and Crony Capitalism as Principal Causes, May 31, 2011

[6] See Phisix: Managing Through Volatile Times August 6, 2012

[7] Taleb Nassim Nicolas NOISE AND SIGNAL Facebook (May 21)

[8] changingminds.org, Availability Heuristic

[9] nizkor.org Post Hoc Fallacy

[10] Taleb Nassim Nicholas Learning to Expect the Unexpected, New York Times April 8, 2004

[11] ABS-CBN News PNoy's Mining EO No. 79, July 9, 2012

[12] Investopedia.com Operating Leverage

[13] Wikipedia.org Investment vehicles, Gold as an Investment

[14] Alleydog.com Regression Toward the Mean Psychology Glossary

[15] Wikipedia.org Mean reversion (finance)

[16] Abs-cbnnews.com Mining companies in PH not paying enough taxes: IMF August 9, 2012

[17] Abs-cbnnews.com Raising taxes on mining not a priority: Aquino July 18, 2012

[18] See Public Choice in Action: Logrolling in the Philippine Mining-Tourism Policy, June 21, 2012

[19] World Gold Council Central Bank case studies: The Philippines

[20] Wikipedia.org Resource curse

[21] World Bank Treasure or Trouble? MINING IN DEVELOPING COUNTRIES, WORLD BANK AND INTERNATIONAL FINANCE CORPORATION 2002 p.14

[22] See Does The Government Deserve Credit Over Philippine Economic Growth? May 31, 2010

[23] Real Time Economics Blog, BofA Sees 80% Chance of QE3 Priced Into Markets Wall Street Journal, August 10, 2012

[24] Zero Hedge It's A Centrally-Planned World After All, With Ever Diminishing Returns August 11, 2012

[25] See Has Ben Bernanke Been Working to Ensure President Obama Re-election, February 5, 2012

Quote of the Day: Political Insanity

It is easy to prescribe improvement for others; it is easy to organise something, to institutionalise this-or-that, to pass laws, multiply bureaucratic agencies, form pressure-groups, start revolutions, change forms of government, tinker at political theory. The fact that these expedients have been tried unsuccessfully in every conceivable combination for six thousand years has not noticeably impaired a credulous unintelligent willingness to keep on trying them again and again. This being so, it seems highly probable that the hope for any significant improvement of society must be postponed, if not forever, at any rate to a future so far distant that consideration of it at the present time would be sheer idleness.

This is from Albert Jay Nock from Memoirs of a Superfluous Man p.308 (pdf)

Olympic Medals and Economic Health

The state of a nation’s economy seem to have a tight correlationship with the score of Olympic medals acquired.

As New York University’s William Easterly points out: (charts from Mr. Easterly too)

“what determines Olympic medals?” The answer is income per capita and population, or in other words total GDP.

But such correlationship may not be perfect.

Mr. Easterly notes of the outliers and of the lessons:

The big underachievers are (in order of underachievement) India, Mexico, Indonesia, Turkey, Saudi Arabia.

The big overachievers are Belarus, Ukraine, Kazakhstan, Romania, Iran, , and Jamaica.

The lessons seem to be:

(1) World Bank national development strategies in key emerging markets have failed miserably in the Olympics sector.

(2) a history of Communism may not have been so awesome for development and liberty, but it’s still amazing for Olympic medals.

(3) Islamist ideology is a mixed medal producer (Saudi Arabia no, Iran yes).

(4) if nothing else works, just run really fast.

Interesting.

The Major Risk from Currency Union Breakups: Hyperinflation

At the Peterson Institute for International Economics, Mr. Anders Aslund has an interesting paper on the historical aftermaths of the dissolution of currency unions.

Mr. Aslund opens with a refutation of the Nirvana fallacy of the Keynesian prescription on the currency devaluation elixir. Here Mr. Aslund rebuts Nouriel Roubini. (all bold highlights mine)

While beneficial in some cases, devaluation is by no means necessary for crisis resolution. About half the countries in the world have pegged or fixed exchange rates. During the East Asian crisis in 1998, Hong Kong held its own with a fixed exchange rate, thanks to a highly flexible labor market. The cure for the South European dilemma is available in the European Union. In the last three decades, several EU members have addressed severe financial crises by undertaking serious fiscal austerity and reforms of labor markets, thus enhancing their competitiveness, notably Denmark in 1982, Holland in the late 1980s, Sweden and Finland in the early 1990s, all the ten post communist members in the early 1990s, and Germany in the early 2000s. Remember that as late as 1999, the Economist referred to Germany as “the sick man of the euro.”

More recently, the three Baltic countries, Estonia, Latvia, and Lithuania, as well as Bulgaria have all repeated this feat (Åslund 2010, Åslund and Dombrovskis 2011). Among these many crisis countries, only Sweden and Finland devalued, showing that devaluation was not a necessary part of the solution. The peripheral European countries suffer in various proportions from poor fiscal discipline, overly regulated markets, especially labor markets, a busted bank and real estate bubble, and poor education, which have led to declining competitiveness and low growth. All these ailments can be cured by means other than devaluation.

Mr. Aslund on the currency union dissolution during the gold standard eon.

It was rather easy to dissolve a currency zone under the gold standard when countries maintained separate central banks and payments systems. Two prominent examples are the Latin Monetary Union and the Scandinavian Monetary Union. The Latin Monetary Union was formed first with France, Belgium, Italy, and Switzerland and later included Spain, Greece, Romania, Bulgaria, Serbia, and Venezuela. It lasted from 1865 to 1927. It failed because of misaligned exchange rates, the abandonment of the gold standard, and the debasement by some central banks of the currency. The similar Scandinavian Monetary Union among Sweden, Denmark, and Norway existed from 1873 until 1914. It was easily dissolved when Sweden abandoned the gold standard. These two currency zones were hardly real, because they did not involve a common central bank or a centralized payments system. They amounted to little but pegs to the gold standard. Therefore, they are not very relevant to the EMU.

“Abandonment of gold standard” simply suggests that some members of these defunct unions wantonly engaged in inflationism which were most likely made in breach of the union’s pact that had led to their dissolution.

Mr Aslund tersely describes on one account of “successful” post gold standard breakup…

Europe offers one recent example of a successful breakup of a currency zone. The split of Czechoslovakia into two countries was peacefully agreed upon in 1992 to occur on January 1, 1993. The original intention was to divide the currency on June 1, 1993. However, an immediate run on the currency led to a separation of the Czech and Slovak korunas in mid-February, and the Slovak koruna was devalued moderately in relation to the Czech koruna. Thanks to this early division of the currencies, monetary stability was maintained in both countries, although inflation rose somewhat and minor trade disruption occurred (Nuti 1996; Åslund 2002, 203). This currency union was real, but thanks to the limited financial depth just after the end of communism, dissolution was far easier than will be the case in the future. In particular, no financial instruments were available with which investors could speculate against the Slovak koruna

It seems unclear why the Czech and Slovak experience had been the least worse or had the least disruption compared to the others.

Yet considering that inflation is a monetary phenomenon with political objectives, “limited financial depth” seems unlikely a significant factor the “success”. Instead it may have been that political authorities of the Czech and Slovak experience, aside from the “early division of currencies” which may have given a transitional time window, may have likely implemented some form of monetary discipline which lessened the impact.

Mr Aslund finds that the the incumbent European Union seems more relevant with three recent accounts of currency disintegration which had cataclysmic results.

The situation of the EMU is very different from these three cases. It has no external norm, such as the gold standard, and it is a real currency union with a common payments mechanism and central bank. The payments mechanism is centralized to the ECB and would fall asunder if the EMU broke up because of the large uncleared balances that have been accumulated. The more countries that are involved in a monetary union, the messier a disruption is likely to be.

The EMU, with its 17 members, is a very complex currency union. When things fall apart, clearly defined policymaking institutions are vital, but the absence of any legislation about an EMU breakup lies at the heart of the problem in the euro area. It is bound to make the mess all the greater. Finally, the proven incompetence and slowness of the European policymakers in crisis resolution will complicate matters further.

The three other European examples of breakups in the last century are of the Habsburg Empire, the Soviet Union, and Yugoslavia. They are ominous indeed. All three ended in major disasters, each with hyperinflation in several countries. In the Habsburg Empire, Austria and Hungary faced hyperinflation.

Yugoslavia experienced hyperinflation twice. In the former Soviet Union, 10 out of 15 republics had hyperinflation. The combined output falls were horrendous, though poorly documented because of the chaos. Officially, the average output fall in the former Soviet Union was 52 percent, and in the Baltics it amounted to 42 percent (Åslund 2007, 60).

According to the World Bank, in 2010, 5 out of 12 post-Soviet countries—Ukraine, Moldova, Georgia, Kyrgyzstan, and Tajikistan—had still not reached their 1990 GDP per capita levels in purchasing power parities. Similarly, out of seven Yugoslav successor states, at least Serbia and Montenegro, and probably Kosovo and Bosnia-Herzegovina, had not exceeded their 1990 GDP per capita levels in purchasing power parities two decades later (World Bank 2011).

Arguably, Austria and Hungary did not recover from their hyperinflations in the early 1920s until the mid-1950s. Thus the historical record is that half the countries in a currency zone that breaks up experience hyperinflation and do not reach their prior GDP per capita as measured in purchasing power parities until about a quarter of a century later, which is far more than the lost decade in Latin America in the 1980s.

The causes of these large output falls were multiple: systemic change, competitive monetary emission leading to hyperinflation, collapse of the payments system, defaults, exclusion from international finance, trade disruption, and wars. Such a combination of disasters is characteristic of the collapse of monetary unions.

Why hyperinflation poses as the greatest risk for the disintegration of the fiat money based currency unions?

A common reflex to these cases is to say that it was a long time ago, that things are very diferent now, and that other factors matter. First of all, it was not all that long ago. Two of these economic disasters occurred only two decades ago. Second, hyperinflation was probably the most harmful economic factor, and it is part and parcel of the collapse of a currency zone, regardless of the time period. About half of the hyperinflations in world history occurred in connection with the breakup of these three currency zones. The cause was competitive credit emission by competing central banks before the breakup. Third, monetary indiscipline and war are closely connected. The best illustration is Slovenia versus Yugoslavia. In the first half of 1991, the National Bank of Yugoslavia started excessive monetary emission to the benefit of Serbia. On June 25, 1991, Slovenia declared full sovereignty not least to defend its finances. Two days later, the Yugoslav armed forces attacked Slovenia (Pleskovic and Sachs 1994, 198). Fortunately, that war did not last long and Slovenia could exit Yugoslavia and proved successful both politically and economically

Again since inflationism essentially represents monetary means to attain political ends, previous accounts of hyperinflation in post currency union dissolution may have been a result of policy miscalculations from political leaders trying to attain the illusory positive effects from devaluation.

Or most importantly or which I think is the more relevant is that in absence of access to local and foreign savings through banking or financial markets, political authorities in pursuit of their survival have resorted to massive money printing operations.

Also since hyperinflation means the destruction of division of labor or free trade, one major consequences have been to seek political survival through plunder, thus the attendant war. Inflationism, according to great Ludwig von Mises has been “the most important economic element in this war ideology”.

Looking at history has always been deterministic. We look at the past in the account of how narrators describes the connections of the facts in them. But we must not forget of the importance of theory in examining these facts.

As Austrian economist Hans Hermann Hoppe explains,

There must also be a realm of theory — theory that is empirically meaningful — which is categorically different from the only idea of theory empiricism admits to having existence. There must also be a priori theories, and the relationship between theory and history then must be different and more complicated than empiricism would have us believe.

I concur that hyperinflation could likely be the outcome for many European countries once a breakup of the Eurozone becomes a reality. This will not happen because history will merely repeat itself, but because the preferred recourse by politicians has been to resort to inflationism. Theory and history have only meshed to exhibit the likelihood of such path dependent political actions.

War on Short Selling: Price Controls Fail

Prohibition in terms of market transactions or via short selling fails.

From Wall Street Journal’s Real Time Economics Blog

New research supports the notion that instituting temporary short-selling bans during stock market downturns doesn’t do any good.

This might not seem like shocking news to those who believe you have to let market forces play themselves out, even in volatile times, and to those who distinguish between the impact of short selling, the borrowing of shares with the expectation of buying them later at a lower price, and flat-out selling.

Nonetheless, the regulatory bans go on. Just last month, temporary short-selling bans of sorts were put in place in Italy and Spain.

In this latest look at short-selling bans, Federal Reserve Bank of New York economist Hamid Mehran teamed with Robert Battalio and Paul Schultz, both of whom are finance professors at the University of Notre Dame.

Harkening back to the dark days of the financial crisis in the U.S., they studied the two-week ban on short selling of financial stocks that was imposed in 2008 in a futile attempt to stop the massive sector bleeding.

“The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly…and stabilized once it [the ban] was lifted,” the economists wrote in the latest issue of the New York Fed’s Current Issues in Economics and Finance.

And lest you think this tilting at windmills by banning short sales is a harmless sort of regulatory exercise by perplexed officials in the midst of a crisis, the trio begs to differ.

“If anything, the bans seem to have unwanted effects of raising trading costs, lowering market liquidity and preventing short sellers from rooting out cases of fraud and earnings manipulation,” the economists write.

The real goal of the trading bans is to establish price controls.

Regulators pass the proverbial hot potato (shift the blame) of policy failures or has been scapegoating the markets.

Regulators want to project of “do something” actions, no matter how these would only make the matters worse through “unwanted effects”.

“The regulatory bans go on”, is an example where in the world of politics, doing the same thing over and over and expecting different results has been the convention. That’s because political agents don’t get sanctioned for their decision mistakes which has widespread longer term implications.

On the contrary, regulators use market’s volatility as excuses to curb on people’s property rights, and importantly, to expand their control over the marketplace. This is why the idea that crises may have been premeditated cannot be discounted because political agents see these as “opportunity to do things you think you could not do before”

Political authorities also fantasize about using edicts to banish the natural laws of demand and supply to oblivion. Theories, history and or experience seem to have no relevance in the world of politics.

Importantly the tactical “do something” operations have barely been about the “public goods” but about saving their skins and of their cronies.

Of course, price controls can also come in indirect forms like central bank’s zero bound rates, quantitative easing and the operation twist (manipulation of the yield curve) and or other forms of interventionism (e.g. changing of the rules).

Even the classic Pavlovian mind conditioning communication strategies (signaling channel) employed by political institutions have had distortive effects on the marketplace.

The popular attribution of today’s recovery in the US equity markets looks like a nice example.

From Bloomberg,

The Standard & Poor’s 500 Index (SPX) rose for a sixth day, the longest rally since 2010, amid speculation the Federal Reserve will pursue more stimulus measures. Treasuries rose and commodities fell as Chinese and French data added to signs the global economy is slowing…

“The weaker the data, the higher the likelihood of stimulus from central banks,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion. “The weakness in China is likely to prompt a move there,” he said. “While the Fed has been clear it will do anything to support growth, some people tend to think it’s inevitable.”…

“Whilst markets have recently been rallying on bad news -- in the expectation that it will lead to further stimulus from the central banks -- the deterioration in the fundamentals is becoming a bit harder to ignore,” said Jonathan Sudaria, a trader at Capital Spreads in London. “Traders may be disappointed if their thirst for stimulus isn’t satiated as soon as they expect.”

See bad news is once again good news.

The public’s mindset has continually been impressed upon or manipulated to expect of salvation from political actions.

Central banks of major economies have more than doubled the size of their balance sheets (chart from cumber.com) yet the global debt crisis has not only lingered but has been worsening.

Interventionism through price controls have basically reduced the financial markets into a grand casino, which has tilted to benefit cronies while at the same time has vastly reduced or narrowed people's time orientation.

All these merely validates what the great professor Ludwig von Mises warned, (italics original)

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.

At the end of the day, economic reality will expose on the quackery of interventionism.

Quote of the Day: A Fair Exchange is an Unequal Exchange from which All Parties Expect To Gain

Value is the significance a good has for the well-being of a human being or beings. The value of a good is determined by the importance attached to the utility of the marginal unit in satisfying some human want.

All life is change. For men, life is a series of choices by which we seek to exchange something we have for something we prefer. We know what we prefer. No other man or bureaucrat is capable of telling us what we prefer. Our preferences are our values. They provide us with the compass by which we steer all our purposeful actions. And last but not least, a fair exchange is not an equal exchange. A fair exchange is an unequal exchange from which all parties expect to gain.

Barring force, fraud, or human error, every free market transaction provides all parties with a psychic profit or higher value, according to their own scale of values. Anything that raises cost or hinders the free and voluntary transactions of the market place must keep human satisfactions from reaching their highest potential. Today the greatest obstructions to the attainment of higher human satisfactions are the well-meaning but futile political interferences with the mutually beneficial transactions of a free market economy.

This is the summary from must read speech made by the late economist Percy L. Greaves, Jr. (1906–1984)

Contagion Risks: China Export Growth Collapses, Other Signs of Economic Slowdown

I have been repeatedly saying that the contagion risks should be seen as clear and present danger in spite of the recent hope-based surge from global stock markets.

And in contrast to mainstream expectations, it appears that most recent China’s trade data, aside from other economic figures, reveals of an unfolding substantial deterioration.

From Bloomberg, (bold added)

China’s export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening and raising the odds the government will step up measures to support expansion.

Outbound shipments increased 1 percent from a year earlier and imports rose 4.7 percent, the customs bureau said today in Beijing. New local-currency lending was 540.1 billion yuan ($85 billion), the central bank said, lower than all 30 estimates in a Bloomberg News survey, after 919.8 billion yuan in June…

“Monetary policy easing has to be more aggressive in the remainder of the year,” said Liu Li-Gang, Hong Kong-based head of Greater China economics at Australia & New Zealand Banking Group Ltd. He said there’s a risk of a “hard landing” and the government may lower banks’ reserve requirements as soon as today…

Separate reports showed industrial output growth unexpectedly slowed last month to 9.2 percent from a year earlier and retail sales rose 13.1 percent, trailing analysts’ forecasts…

New yuan lending in July compared with the median estimate of 700 billion yuan in a Bloomberg survey. It was the lowest monthly figure since September 2011. Growth in M2, the broadest measure of money supply, was 13.9 percent last month, compared with the median forecast for a 13.8 percent gain.

The growth in July exports compared with the 8 percent median estimate in a Bloomberg News survey and 11.3 percent in June. Analysts estimated a 7 percent gain in imports after a 6.3 percent increase in June.

The trade surplus was $25.1 billion in July compared with $31.5 billion a year earlier. The median projection was $35.1 billion.

Excluding distortions caused by the timing of the Lunar New Year holiday, it was the worst export growth since 2009. The figures put China further at risk of missing its 10 percent goal of trade expansion for the year. China is still “confident” of achieving the target, Gao Hucheng, a vice commerce minister, said at a briefing today.

As one would note growth of exports, bank lending, industrial output and even retail sales have all exhibited marked declines.

Of course, hardly any mainstream news today has been without the promises of government rescue (“bad news is good news”), the above has been no different. This typifies the proof by assertion fallacy based on Lenin’s famous aphorism on propaganda “A lie told often enough becomes the truth”.

Chart from The Wilder View

Nevertheless with the growth rate of exports by major Asian exporters (China, South Korea and Taiwan) encroaching on the negative zone, we should expect a hefty slowdown in world trade to be transmitted to the global economy. This essentially elevates the risks of a global recession.

Recently China’s Shanghai Index has posted a modest rally. These may yet represent an oversold bounce or a dead cat’s bounce or whose sustainability has to be established.

Be careful out there.

China’s Spontaneously Driven Economic Reforms

Paul Gregory, research fellow at the Hoover Institution, says that China’s economic miracle has been a product of spontaneous order.

At the Econolog Mr. Gregory writes,

China's private enterprise reforms began first in agriculture in 1978 and spread from there. Agriculture accounted for most of Chinese output and most of the labor force when Mao died in 1976 and the reform period could begin. The freeing of agriculture from collective farms is the most important untold part of the Chinese growth story.

Agricultural reforms began spontaneously from below, even before the "Reform" Party Congress of 1978 that installed reformer Deng Xiaping in power. A Chinese reform official later admitted: "In fact, reform wasn't discussed. Reform wasn't listed on the agenda, nor was it mentioned in the work reports." What became known as the "contract responsibility system" was sparked spontaneously by eighteen peasants from Xiaogang village in Anhui province. They secretly divided communal land in November 1978 and agreed to farm their plots individually, each contributing their share of the state quota. The state got its due and the peasants kept what was left over. The peasants' separation of their land from the collective farm was illegal, highly dangerous, and done without the approval of regional officials. Why did they take the chance?

Kate Zhou explains that the peasants had seen their parents and children die from starvation during the 1958-1961 famine of the Great Leap Forward. They understood they had to take care of themselves. The contract responsibility system spread like wildfire from village to village and from province to province, notably without endorsement by or encouragement from regional or national authorities.

As agricultural production soared, Deng Xiaping and his CPC realized that they should not resist something that was working. By 1982, more than 90 percent of rural dwellers worked under the contract responsibility system, but they were allowed only one- to three-year contracts on their land. It was only in 2003 that the state gave out longer-term leases.

The spontaneous reforms in agriculture meant that new supplies of food products needed markets and that markets needed infrastructure. Rural dwellers created a private trade network, and, within one year, most state food stores were out of business. Rural entrepreneurs then created new businesses, such as hotels, services, private restaurants, and small-scale manufacturing, through the three Fs (friends, family and fools). They bribed local officials to register their companies as "township and village enterprises." They created fake "red hat" enterprises, that is, private companies masquerading as state companies, and sham collective enterprises, or they used state enterprises to issue receipts and open bank accounts. Large private manufacturing firms developed first in predominantly agricultural provinces. China's largest agribusiness was founded by brothers who left the city to found their company in rural Sichuan. Rural entrepreneurs built the largest refrigeration and air-conditioning companies in China.

Read the rest here

That was then. Today’s conditions have been different.

Further in the article, Mr. Gregory points out some very important factors

-Today Chinese economy has been roughly split 50-50 between state owned and privately owned enterprises

-State companies use political means of “higher taxes, stricter regulation, and bureaucratic meddling” to “drive out private competitors”

-State banks discriminate in terms of lending where “only four percent of their loans to private businesses”. Thus, the recourse of private businesses has been through the informal or shadow banking systems. Ironically, transacting with unofficial credit markets “can be a criminal offense punished by long jail terms or worse”

The implication of the above is that much of China’s present day economy remains influenced by political forces. This means we cannot trust statistical figures to show real economic growth as they may likely be manipulated for immediate political goals.

This also means that a substantial segment of the nation’s resources have been utilized inefficiently which entails of massive wastages and of capital consumption.

Ghost cities, empty malls and stadiums are evidences of these.

While it may true that the private sector may have been outperforming the state owned companies, the latter’s substantial share extrapolates to the crowding out of the private sector.

Also, political authorities through state owned enterprises have used politics to undermine their private sector counterparts.

And in order for the private sector enterprises to survive and compete they have gone beyond the ken of authorities through the underground/informal economy (e.g. shadow banking). But doing so means having to take upon greater legal and regulatory risks.

All these goes to show how China has been discriminating against the private sector while favoring state owned enterprises.

Ever wonder why China has been a hotbed for 'fake' and or inferior goods?

Apparently globalization has been a key dynamic in forcing the reluctant hands of China's political authorities to liberalize.

And so far the good news has been that political trends appear to signal the emergence of the entrepreneurs as a political force.

This seems evident in the realm of China’s financial markets.

Over the past few months China authorities has undertaken a flurry of liberal oriented reforms; particularly China has recently eased on restrictions on Exchange Traded Funds (ETFs), has lowered transaction fees on share trading, has proposed to ease delisting rules, and seeks to increase the participation of foreign investors into China’s equity markets by expanding the Qualified Foreign Institutional Investors (QFII).

Nonetheless political trends will determine if China’s economic miracle will continue, put to a halt or reverse. All these will rest on China's appetite for economic freedom.

10 Advantages of Austrian Economics

This is wonderful post citing the advantages of Austrian economics relative to the mainstream, authored by Jakub Bożydar Wiśniewski (Original link here) and published by Daniel Sanchez at the Mises Circle Bastiat Blog.

I wish I had written this. (bold added)

1. Austrian economists make it their priority to make sure that the theorems they formulate are derived from self-evident axioms and constructed according to the proper rules of logical deduction. These considerations are at best of secondary importance to their mainstream colleagues.

2. Austrian economists make it their priority to make sure that the assumptions they base their theorems on are thoroughly realistic, i.e., corresponding to the state of the world as it is. Mainstream economists, on the other hand, admit that their hypotheses are based on deliberately false assumptions.

3. Austrian economists make it their priority to make sure that the theorems they formulate elucidate exact causal connections between economic phenomena, rather than deliberately assuming away their existence or importance by falling back on the physics-inspired notion of mutual determination.

4. The predictive track record of Austrian economists is incomparably superior to that of their mainstream counterparts (see, e.g., here and here).

5. The theorems and conclusions of Austrian economics are perfectly comprehensible to every intelligent layman, which cannot be said about the mathematical puzzles of mainstream economics.

6. In terms of their views on the method and aims of economic theorizing, Austrian economists have a much better claim than their mainstream colleagues to being the heirs and successors of the classical economists, such as Smith, Hume, Say, and Bastiat.

7. Austrian economists never tire of emphasizing the strictly value-free character of their discipline. Thus, unlike their mainstream counterparts, they never presume that the existence of any non-voluntary extra-market institution is justified, and, a fortiori, never make any “public policy recommendations” based on such presumptions. On the contrary, they confine their scholarly research to investigating the logical origins and outcomes of various economic processes and phenomena as they are, not as they would like them to be.

8. Identifying the concept of demonstrated preference as the keystone of economic analysis allows Austrian economists to avoid the twin pitfalls of behaviorism and psychologism, which their mainstream colleagues cannot navigate in any principled and methodologically robust manner.

9. Austrian economists reject academic and professional hyperspecialization in their discipline, thus stressing the holistic, integrated nature of the science of economics. In the words of F. A. Hayek, “the physicist who is only a physicist can still be a first-class physicist and a most valuable member of society. But nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger”.

10. Austrian economists cannot retreat into the safe haven of epistemological nihilism when the logic of their arguments turns out to be faulty. Mainstream economists, on the other hand, when the facts fail to correspond to their hypotheses, can always claim that “this time things are different”, which is a straightforward implication of the fact that any given set of sufficiently complex empirical data is compatible with a number of mutually exclusive empirical (but not logical) interpretations.

Wealthy French Mull Exodus in Response to Class Warfare Policies

“Soak the rich” socialist policies of French President François Hollande has been prompting many wealthy French citizens to consider the exit option

Reports the New York Times

The call to Vincent Grandil’s Paris law firm began like many others that have rolled in recently. On the line was the well-paid chief executive of one of France’s most profitable companies, and he was feeling nervous.

President François Hollande is vowing to impose a 75 percent tax on the portion of anyone’s income above a million euros ($1.24 million) a year. “Should I be preparing to leave the country?” the executive asked Mr. Grandil.

The lawyer’s counsel: Wait and see. For now, at least.

“We’re getting a lot of calls from high earners who are asking whether they should get out of France,” said Mr. Grandil, a partner at Altexis, which specializes in tax matters for corporations and the wealthy. “Even young, dynamic people pulling in 200,000 euros are wondering whether to remain in a country where making money is not considered a good thing.”

A chill is wafting over France’s business class as Mr. Hollande, the country’s first Socialist president since François Mitterrand in the 1980s, presses a manifesto of patriotism to “pay extra tax to get the country back on its feet again.” The 75 percent tax proposal, which Parliament plans to take up in September, is ostensibly aimed at bolstering French finances as Europe’s long-running debt crisis intensifies.

But because there are relatively few people in France whose income would incur such a tax — an estimated 7,000 to 30,000 in a country of 65 million — the gains might contribute but a small fraction of the 33 billion euros in new revenue the government wants to raise next year to help balance the budget.

The French finance ministry did not respond to requests for an estimate of the revenue the tax might raise. Though the amount would be low, some analysts note that a tax hit on the rich would provide political cover for painful cuts Mr. Hollande may need to make next year in social and welfare programs that are likely to be far less popular with the rank and file.

And class warfare politics has negatively affected business sentiment as well. Again from the same article,

Many companies are studying contingency plans to move high-paid executives outside of France, according to consultants, lawyers, accountants and real estate agents — who are highly protective of their clients and decline to identify them by name. They say some executives and wealthy people have already packed up for destinations like Britain, Belgium, Switzerland and the United States, taking their taxable income with them.

They also know of companies — start-ups and multinationals alike — that are delaying plans to invest in France or to move employees or new hires here.

Politicians and their apologists fail to realize that they are dealing with people who will respond adversely to their foolish repressive measures.

That's why there such a thing called the law of unintended consequences, or as per Wikipedia.org, used as an adage or idiomatic warning that an intervention in a complex system tends to create unanticipated and often undesirable outcomes

So far the concurrent panic in the peripheral crisis stricken Euro nations have been prompting for a stampede into French 10 year bonds. This despite the deteriorating fiscal conditions of the French government.

The French equity bellwether, the CAC, has also been in a rally mode since ECB President Draghi’s promise to do whatever it takes to save the Euro

Given the fluidity of events, current market actions may swiftly and drastically change.

And once the exodus of the wealthy French transforms into reality, then we should expect a selloff in both the bond and the equity markets.

Class warfare politics through taxing or soaking the rich serves only as camouflage to the real consequences—taxing everyone else including the poor, except for the political class—or myth of the Santa Claus Fund.

As the great Ludwig von Mises explained, (bold emphasis mine)

High surtax rates for the rich are very popular with interventionist dilettantes and demagogues, but they secure only modest additions to the revenue. From day to day it becomes more obvious that large-scale additions to the amount of public expenditure cannot be financed by "soaking the rich," but that the burden must be carried by the masses. The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will themselves have to foot the bill. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population. [p. 858]

The situation in the employer-employee nexus will be analogous. The popular doctrine contends that wage earners are reaping "social gains" at the expense of the unearned income of the exploiting classes. The strikers, it is said, do not strike against the consumers but against "management." There is no reason to raise the prices of products when labor costs are increased; the difference must be borne by employers. But when more and more of the share of the entrepreneurs and capitalists is absorbed by taxes, higher wage rates, and other "social gains" of employees, and by price ceilings, nothing remains for such a buffer function. Then it becomes evident that every wage raise, with its whole momentum, must affect the prices of the products and that the social gains of each group fully correspond to the social losses of the other groups. Every strike becomes, even in the short run and not only in the long run, a strike against the rest of the people.

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

French class warfare politics essentially serves as the death warrant for the Euro.

In Zimbabwe, Coin Shortages can mean Life or Death

The scars from the ravages of Zimbabwe’s recent episode of hyperinflation has been evident through the effects of coin shortages.

From the AFP

Shouting matches and even physical fights break out each time a mini-bus pulls up in downtown Harare as passengers battle to ensure they are not short-changed in coin-starved Zimbabwe.

Hyperinflation forced Zimbabwe to trash its worthless local currency three years ago in a move that brought much needed relief to the crippled economy but created a surprising new headache: a lack of coins.

"Change is a big problem, and at the same time passengers are impatient with us. I have been slapped a few times for not having change for them," said a bus conductor Walter Chakawata.

The US dollar and the rand from neighbouring South Africa are Zimbabwe's main adopted currencies. The dollar, however, is preferred and all prices are pegged to it.

But there is not enough US small change in circulation. The result is that prices are either rounded off -- making goods and services more expensive -- or customers brace themselves for a fight to get their change.

The average city commute costs 50 cents. But the dearth of coins means passengers -- handing over bills -- are always owed change. Some bus drivers pair the passengers, handing them a dollar bill in change and leaving the two riders to sort the rest out themselves.

Often their only alternative is to buy an item worth a dollar that they can then share -- a packet of cookies, a pie or anything they agree to.

But that has not gone down well with many, who feel obliged to make an unnecessary purchase. Others complain it forces them to spend time with a total stranger. Or what if one is in a hurry? And in a country where many live on less than $2 a day, 50 cents still remains a decent sum, not to be wasted.

The fights have at times turned deadly. Last year, independent papers reported that a state security agent pulled out a pistol and shot dead a bus conductor after he failed to give him change.

Markets don’t operate on a vacuum however. From the same article…

Not all merchants buy coins, however. Ice-cream and yoghurt vendor Locadia Chimimba conceded that "the situation is better these days because you can buy change if you want" but she herself does not and still asks customers to buy more to make up the difference.

In supermarkets, when the grocery bill does not add up neatly to a round figure shoppers are offered sweets, match boxes, chewing gum and even condoms to compensate.

So markets grope to find a substitute on such coin shortages. This should mark a transition phase.

But why the coin shortages?

Authorities considered importing US coins but the idea was dropped when shipping costs proved too expensive -- costing two dollars for a batch of coins worth one dollar, experts said.

Bottom line:

People’s psychology and behavior are materially influenced by changes in monetary conditions.

Monetary disorders spawns disruptions in the division of labor which incites violence.

Coins function as insurance against the corruption of money. This is why some of the political authorities have considered a ban on coin collection.

Video: The Difference between Free Markets and Pro-Business Policies

Free markets or laissez faire capitalism has frequently been mistaken as being "pro-business"

In the following video from LearnLiberty.org, Professor Steve Horwitz explains their differences (thanks to Learn Liberty's Tim Hedberg for sending the video)

The following digest from LearnLiberty.org

In this video, Professor Steve Horwitz advocates for free market economic policy. He refutes the often recited claim that "What is good for General Motors is good for America" by explaining that pro-business legislation encourages behavior that is not beneficial to society or the business itself. He suggests that, in a free market, factors such as profit and competition encourage behavior that ultimately benefits society. Professor Horwitz illustrates that pro-business legislation restricts progress and therefore caters to the interests of industry rather than to consumers, whereas "supporters of free markets are ultimately pro-human and pro-people because it is through markets that we get the most innovation and we get the most goods and the cheapest prices."

Inflation Targeting Fails: Thailand’s Central Bank Chairman Admits

The Chairman of the central bank of Thailand says that inflation targeting has no longer been effective.

From Businessweek/Bloomberg,

Bank of Thailand Chairman Virabongsa Ramangkura comments on inflation targeting. He made the remarks during a speech late yesterday in Bangkok.

Thailand’s central bank has used inflation targets since 2000 and aims to keep core inflation, which excludes fresh food and fuel prices, between 0.5 percent and 3 percent.

“Central banks should change their ideas. Inflation targeting is no longer effective because inflation has been globalized. The world is more open and we are a member of the World Trade Organization. Commodity prices are driven by global supply and demand, not policy of a particular country.

‘‘So monetary policy shouldn’t be used to deal with inflation because we can’t do anything. Monetary policy should be used to support economic growth and reduce unemployment, which we call inclusive growth.”

“The source of instability for emerging countries is foreign exchange, not inflation. The stability of the foreign exchange rate depends on capital movements. If our interest rates are higher than dollar rates, that will open a loophole for attackers. This creates financial instability. So, monetary policy should take care of this, not inflation.”

Virabongsa says his views run counter to those of Governor Prasarn Trairatvorakul.

Ineffective, here, represents euphemism for failure

In truth, central bank inflation targeting has failed and will continue to fail, not because of asymmetric levels of “foreign exchange rates that depends on capital movements”—which accounts for a verbal sleight of hand in order to shift the blame to the capital markets—but rather from the following:

1. Central banks don’t know where and how their interventions—via money printing—will end up.

2. Central banks cannot ascertain where exactly is the so-called invisible “equilibrium price level”.

3. Because they don’t know both 1 and 2, central bank inflationism leads to excesses which produces boom-bust cycles and raises the risks of intractable (consumer price) inflation

4. Most importantly, inflationism has always been about promoting the political interests of the political authorities and their cronies.

And political goals principally conflicts with economic reality. Example: repeated bailouts of crony firms end up consuming the capital of the economy. Long term has been sacrificed for the short term. Productive capital wasted on unproductive politically supported undertakings.

Yet bailouts, has been, and will be justified through the camouflage of economic technical gobbledygook called “aggregate demand”.

To quote economic professor Antony P. Mueller,

Inasmuch as central banks dominate the discourse about monetary policy, there is almost no debate going on about the thesis that inflation targeting is not only defective in guaranteeing monetary stability but that it also provided the conditions for the current financial crisis to happen.

The episode that was praised as the great moderation was a great delusion, which has become the nightmare of a long stagnation.

There is a vital need to establish a sound monetary system. Its consequence would be moderate deflation and the avoidance of extreme booms and busts.

The main barrier against sound money is neither intellectual nor practical but political. The resistance comes from the public sector because the chief casualty of an institutional change to sound money would be the modern inflated government along with its warmongers, debt pushers, and all the rest of the spin doctors of deceitful promises who form part of this kingdom.

Yes inflationism or “something from nothing” policies via central banks has essentially been grounded on the politics of the Santa Claus principle.

So whether viewed from the knowledge problem of centralized institutions or from political dimensions or incentives guiding the political authorities, inflation targeting have been destined to fail.

Resource Curse: Rare Earths bankroll North Korea’s Despotism

Abundance of natural resources can serve as deterrent to economic development, a phenomenon which has widely been known as the resource curse.

That’s because plentiful resources provides the wherewithal to the political class to thrive on a politically repressive system without the need for economic liberalization reforms.

Thus the tendency for resource rich nations has been concentrate wealth on the politicians and their cronies at the expense of the nation.

Apparently rare earth exports may have bankrolled North Korea’s isolated economy which has so far allowed the regime to survive.

From the Asia Times Online,

In fact, North Korea is sitting on the goldmine. The northern side of the Korean peninsula is well known for its rocky terrain, with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals, of which deposits of coal, iron ore, magnesite, gold ore, zinc ore, copper ore, limestone, molybdenum, and graphite are the largest and have the potential for the development of large-scale mines.

After China, North Korea's magnesite reserves are the second-largest in the world, and its tungsten deposits are almost the world's sixth-largest. Still the value of all these resources pales in comparison to prospects that promise the exploration and export of rare earth metals.

Rare earth metals are a group of 17 elements found in the earth's crust. They are essential in the manufacture of high-tech products and in green technologies, such as wind turbines, solar panels or hybrid cars.

Known as "the vitamins of high-tech industries," REMs are minerals necessary for making everything that we use on a daily basis, such as smartphones, flat-screen TVs, and notebook computers. Some rare earth metals, such as cerium and neodymium, are crucial elements in semiconductors, cars, computers and other advanced technological areas. Other types of REMs can be used to build tanks and airplanes, missiles and lasers.

South Korea estimates the total value of the North's mineral deposits at more than US$6 trillion. Not surprisingly, despite high political and security tensions, Seoul is showing a growing interest in developing REMs together with Pyongyang.

In 2011, after receiving permission from the Ministry of Unification, officials from the Korea Resources Corp visited North Korea twice to study the condition of a graphite mine. Together with their counterparts from the DPRK's National Economic Cooperation Federation they had working-level talks at the Kaesong Industrial Complex on jointly digging up REMs in North Korea. An analysis of samples obtained in North Korea showed that the type of rare earth metals could be useful in the manufacture of liquid crystal display (LCD) panels and optical lenses.

The joint report also revealed that there are large deposits of high-grade REMs in the western and eastern parts of North Korea, where prospecting work and mining have already begun. It also reported that a number of the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors. The North built a REM reprocessing plant in Hamhung in the 1990s but has been unable to put the plant into full operation due to power and supply bottlenecks.
Rare earth minerals are becoming increasingly expensive, as China, the world's largest rare earth supplier, puts limits on its output and exports. In February, China's exports of rare earth metals exceeded the price of $1 million per ton, a nearly 900% increase in prices from the preceding year.

China, which controls more than 95% of global production of rare earth metals, has an estimated 55 million tons in REM deposits. North Korea has up to 20 million tons of REM deposits but does not have the technology to explore its reserves or to produce goods for the high-tech industry. Nevertheless, in 2009 the DPRK's exports of rare metals to China stood at $16 million, and as long as someone invests, exports will continue to expand.

This growing rise in REM prices and strong demand gives the young leader Kim Jong-Un a good chance to improve the economic standing of North Korea without actually reforming its economy.

Any “improvements of North Korea’s economic standing” “without reforming its economy” will likely reflect on statistically chicanery rather than from real economic growth.

Real productivity gains through trade and capital accumulation, and not from overdependence on finite resources and redistribution, are the way to lasting economic progress.

The idea that resources will function as a wealth equalizing elixir will be exposed as a socialist’s dogmatic fantasy as it has always been.