The Likely Impact of US Presidential Elections on the Stock Markets

Thus elections, quite apart from who won them, performed a powerful cultural function for the elites. To the degree that -everyone had a right to vote, elections fostered the illusion of equality. Voting provided a mass ritual of reassurance, conveying to the people the idea that choices were being made systematically, with machine-like regularity, and hence, by, implication, rationally. Elections symbolically assured citizens that they were still in command—that they could, in theory at least, deselect as well as elect leaders. In both capitalist and socialist countries, these ritual reassurances often proved more important than the actual outcomes of many elections. Alvin Toffler, The Third Wave chapter 75

It’s the eve of the much awaited 2012 US national elections.

On November 6^th Tuesday many Americans will flock to their respective precincts to exercise their suffrage. The national elections will cover the executive (President-Vice President) and the legislative branches (Senate and House of Representatives) as well as some positions at the state level[1].

The Follies of Pattern Seeking Behavior

We are told that certain outcomes from the coming election may lead to specific results on the financial markets.

For instance, a Barclay’s survey on professional investors[2] proposed that a Romney victory would be good for stocks while Obama’s re-election will favor the bond markets.

Others suggested that the elected President’s political party matters. The median return for the S&P 500 favors a Democrat President over a four year period, as against a Republican President who may spur a short term rally. All these are based on statistics derived from historical data[3].

For me, surveys are hardly reliable measures of the tradeoffs between profits and risks.

What people say and what they actually do may be different. Many people talk to signal Social Desirability Bias or to say things in a matter that they will be viewed favorably[4]. 

People are also highly sensitive to changes in preferences due to many factors as new information, social pressures, and more. Besides, surveys can also yield distortive results based on the influence from how questions are framed by the pollster.

Further, candidness of the survey participants also account for as another important variable to be leery on.

On the other hand, statistical constructs based on historical events signify as veneer to people’s desire to seek patterns in order to deal with uncertainty or to simply tell stories again for social signaling purposes.

Yet historical events are complex phenomena that had been arrived at through multifarious causes. They cannot simply be oversimplified or seen or interpreted as homogenous replication of the current environment. Even Wall Street acknowledges this dynamic through the axiom: Past performance does not guarantee future results.

Thus assignment of numerical probabilities on partially similar episodes, are not only irrelevant in forecasting the future, but such accounts for a form of entertainment to its practitioners.

As I previously wrote[5],

numerical probabilities serve to gratify one’s cognitive biases which in essence is a form of self-entertainment rather than a dependable methodology for risk analysis

Pattern seeking behavior can also be representative of the gambler’s fallacy or the Monte Carlo fallacy, which Investopedia.com defines as[6]:

When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.

Yet there has been no precedent in terms of the scale of policymaking for any meaningful comparison to be made with past US national elections.

Such distinction even holds true in terms of other social phenomenon such as technological advances or innovation and of the diffusion of voluntary exchanges expressed as globalization

Yet social policies, which shape people’s incentives to save, invest, produce and consume, implemented and enforced through the political spectrum, have reached extraordinary proportions.

Regulatory growth has morphed into a large scale bureaucratic quagmire. Notes Mises Institute President Douglas French[7],

The Federal Register, a publication with all the country’s (federal, nonclassified) rules is now over 81,000 pages long. President Obama’s Affordable Care Act is 906 pages. The Dodd-Frank Act totals 849 pages. Once upon a time, in 1913, the Federal Reserve was created with only 31 pages. The U.S. Constitution required only six pages.

It would account for as a glaring mistake to construe neutral effects from these new-fangled edicts or rules or decrees on people’s economic and social activities.

Moreover, systemic debt has been ascending to unsustainable levels.

Chart from Dr. Ed Yardeni’s Flow of Funds[8]

Financial analyst and fund manager Doug Noland recently observed of the political imperative to keep the system afloat[9]

After beginning 1990 at $12.8 TN, Total System Marketable Debt ended June 2012 at $55.0 TN.  And Washington politicians and central bankers are now doing everything they can to sustain the Credit boom and avert the downside of an historic Credit cycle.  Similar efforts are afoot globally.  

The accelerating erosion of America’s productive dimensions has been due to the escalating welfare state, ballooning bureaucracy and other state based expenditures which transfers scarce and valuable resources to non-productive political based spending and entitlements, which has also been crowding out the private sector. Chart from Heritage Foundation[10]

America’s social policies have also led to the unparalleled deployment of the US Federal Reserve as chief provider of funds for the US government.

In 2011, more than half or 61% of US debts had been monetized by the US Federal Reserve. US Federal holding of US treasury debts of all maturities has surpassed $1.8 trillion (lower window).

This represents the highly fluid debt economics of the US government, where the Fed has stepped up the plate relative on the declining interests from the private sector, as well as, foreign public and private investors (upper window).

As Mr. Lawrence Goodman, president of the Center for Financial Stability wrote at the Wall Street Journal early this year

The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit.

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction.

The point being: The current state of imbalances borne out of America’s political dynamics has been unmatched in scale and depth. This only means that America’s future will depend on the actions of political authorities which will either deepen systemic fragility or take remedial but highly painful measures.

Risk Reward analysis, thus, requires a focus on the actions of policymakers.

Campaign Promises Hardly Are Reliable Measures of Projecting Future Policies

It would be conceivably naïve to rely on political rhetoric of competing candidates as basis for examining and projecting prospective policies.

Politicians usually appeal to the views the median voter to ensnare votes. In other words, politicians, who are running for office, are predisposed to say what the public wants or expects to hear.

On the obverse end, people hardly vote for policies but for symbolisms which these candidates represent. Thus aspiring politicians work hard to project themselves as symbols to reinforce people’s biases.

And this is why politicians usually end up with unfulfilled promises or have usually gone against their rhetorical assurances made during the campaign sorties.

Voters become useful only to politicians when election season arrives.

Take for instance, the Reason Magazine enumerates[11] some of the unmet campaign pledges by presidential candidate Barack Obama in 2008:

1. Creating five million green jobs.

Unfortunately President Obama’s green energy industry has been suffering from a string of high profile bankruptcies[12], which includes the controversial Solyndra scandal.

The highly influential think tank Council of Foreign Relations recently noted that Obama’s creation of green jobs from the green energy sector have penalized taxpayers heavily relative to the other non-renewable energy industries[13]

2. Balance the budget

As of Monday October 29^th, the US is on path to reach its debt limits before 2013. According to the Reuters[14], the U.S. Treasury was $235 billion below the $16.4 trillion statutory ceiling on the amount it can borrow.

3. Refusing to raise taxes on the Middle class

The passage of Obamacare translates to 21 new taxes or tax increases affecting the middle class too.

4. Reforming Immigration 

The Reason.com says that the Obama administration has been deporting illegal immigrants like crazy, leaving Hispanic Caucus Democrats in the awkward position of changing the subject to health care, and otherwise blaming Republicans.

5. Restoring America’s moral standing in the world

President Obama has been expanding the theatre of warfare to include Pakistan, Yemen and Libya and from the backdoor, Syria[15].

So whether Obama or Romney, there will unlikely be any radical changes in the political structure to headoff the looming debt crisis.

This goes to show that elections have mainly been used to justify policies which benefit many entrenched power blocs operating behind the scenes.

Given the above conditions, the pricing dynamics of the markets will, thus, represent expectations from the feedback loop mechanism between policies and market responses to them.

The late illustrious French American mathematician Benoit Mandelbrot in his book The Misbehavior of Markets[16] dealt with the difference of economics with natural science.

Finance is a black box covered by a veil. Not only are the inner workings hidden, but the inputs are also obscured, by bad economic data, conflicting news report or outright deception…And then there is the most confounding factor of all, anticipation. A stock price rises not because of good news from the company, but because the brightening outlook for the stock means investors anticipate it will rise further, and so they buy. Anticipation is a feature unique to economics. It is psychology individual and the mass—even harder to fathom than the paradoxes of quantum mechanics. Anticipation is the stuff of dreams and vapors.

Anticipation is part of human action. People’s divergent expectations, anticipations, and responses are what differentiate economics from natural sciences.

Yet anticipation of the prospective polices, the actual policies, and of its attendant effects on the marketplace will most likely anchor on market dynamics post-election season.

Unlikely Change of Direction for Fed Policies in case of a Change of Administration 

A good test of these will be to assess the scenario of a Romney victory (Although I have big doubts of a Romney win. In a close battle, the incumbent have the edge. This is because they hold the political machinery which can be used to their advantage through whatever means).

Yet under a Romney victory, would the new President discharge on his vows to replace the incumbent chairman US Federal Chairman Ben Bernanke at the expiry of the latter’s term? Will Mr. Romney spearhead through his appointee a massive overhaul to the US Federal Reserve’s current policies? I don’t think so.

Given the reality or the fact that the US government’s huge budget deficits heavily depend on the US Federal Reserve for financing, it is unlikely that the Romney appointee to rock on the establishment’s boat.

I have predicted in the past[17] and have been validated that Fed Chairman Ben Bernanke would work to ensure Obama’s re-election through “stock market friendly” policies. This places an ethical issue of the agency problem or conflict of interests between Mr. Bernanke and his policies which affects the average Americans on the political table. 

To downplay the political bias from his recent action, Ben Bernanke has floated to media the possibility of his retirement even if Obama wins[18]. Of course, the re-elected President Obama can always “persuade” Mr. Bernanke to change his mind. 

Mr. Bernanke seems to be applying the same communications signaling strategy to the public for his personal affairs. This leaves a bad taste on the mouth for Bernanke apologists.

As an aside, all the blarney about “QE forever” designed as monetary policy to supposedly aid the economy through the spending transmission channels of the wealth effect, has really been a diversion, if not a subordinated priority, to the real or primary objective: the FED as contingent financier to the US government’s intractable US budget deficit as expressed through surging debt levels.

Yet candidates floated by the mainstream[19], particularly Glenn Hubbard, Greg Mankiw and John Taylor, to replace Mr. Bernanke have mostly been “dovish” or in favor of the Fed’s contemporary policies (This is with the exception of John Taylor, of the Taylor rule fame, whom I don’t think stands a chance). 

In addition, the composition of voting members of the FOMC has been, and will be, most likely leaning towards the “doves” or conformists.

Such would include the previously vacant seats which were recently filled (Jeremy Stein and Jerome Powers), aside from the replacement of the 4 voting regional Federal Reserve Presidents, as part of the customary rotational process, which again favors the “doves”[20]

At the end of the day, regardless of whoever wins, US policies will remain embedded to the interests of the political economic establishment. Changing personalities who runs the same show hardly accounts for a change in the system.

And as such policies will likely remain accommodative primarily to shield the US government from interest rate and credit risks, which should for the meantime, benefit the financial markets, particularly stocks, bonds and commodities (yes despite last Friday’s shakeout) whom have been the secondary beneficiaries.

After all, the main risks I believe will emanate from the market’s ventilation of the unsustainable imbalances from the welfare-consumption-debt based political system, which eventually will render politicians utterly helpless in the face of market-economic chaos. But it is unclear if the day of reckoning is sooner or will surface later.

For the highly interconnected and interrelated global stock markets, including the Philippines, the actions of the US Federal Reserve will have very important transmission implications, and this will be backed by the actions of other major central banks, as well as, from the auxiliary effects of domestic policies. As far as the Philippine BSP is concerned they have aligned their policies to ease along with the US and with most of the major central banks.

---

[1] Wikipedia.org United States elections, 2012

[2] CSMonitor.com Stocks rise if Romney wins; bonds, if Obama does October 29^, 2012

[3] Frank Holmes Who Will Lead America Over the Next Four Years? US Global Investors November 2, 2012

[4] Wikipedia.org Social desirability bias

[5] See Numerical Probabilities as Metaphorical Expressions October 24, 2011

[6] Investopedia.com Gambler's Fallacy

[7] Douglas French Democracy Is a Terrible System, Period Laissez Faire Books

[8] Yardeni.com US Flow of Funds, October 29, 2012

[9] Doug Noland Sandy, Bernanke And Money November 2, 2012

[10] Heritage Foundation Entitlements and Interest Are Crowding Out Other Spending October 16, 2012

[11] Reason.com 5 Broken Democratic Promises from 2008, September 4, 2012

[12] See US President Obama’s Green Energy List of Failures October 26, 2012

[13] See CFR: US President Obama’s Renewable Energy Jobs Comes at High Cost to Taxpayers November 3, 2012

[14] Reuters.com UPDATE 3-U.S. gov't poised to hit debt limit before 2013 October 31, 2012

[15] Anthony Gregory America’s Unique Fascism Lew Rockwell.com September 6, 2011

[16] Benoit Mandlebrot and Richard L. Hudson The (MIS) Behaviour of Markets p.28

[17] See Phisix: The Correction Cycle is in Motion August 27, 2012

[18] Yahoo.com Bernanke probably won't stand for third term at Fed - NYT October 23, 2012

[19] New York Times Presidential Election Weighs on the Federal Reserve October 22, 2012

[20] Axel Merk and Yuan Fang Monetary Cliff? Merk Investments October 24, 2012

Graphic of the Day: Price Ceiling Means Shortages

Laissez Faire Books publisher and executive editor Jeffrey A. Tucker lambasts price anti-price gouging laws

There is no real distinction between responding to economic conditions and so-called gouging. A law against gouging is a law against economic behavior. Merchants need to raise prices — not to reflect higher costs (though costs could rise), but to reflect changing conditions of supply and demand. A higher price would signal consumers to conserve. A higher price would also call forth greater supply — without having to have the government intervene with special shipments. A higher price would also settle the crowds down a bit and stop the insane attempt to stockpile as much as possible at the low price.

Price controls are causing human suffering — yet again. And this time, the toll is very high, even if it will always remain somewhat invisible.

Politicians barely have comprehended that despite four centuries of repeated attempts to subvert the law of economics, price controls have always failed. Yet such blatant failures has never been an obstacle for politicians aspiring to acquire or expand more power and control over society. Pretentious moralism results to economic decay.

CFR: US President Obama’s Renewable Energy Jobs Comes at High Cost to Taxpayers

The highly connected and the alleged most influential think thank, the Council of Foreign Relations (CFR) on their blog says that US President Obama’s subsidies to green energy industry comes at the great cost to US taxpayers.

The Joint Committee on Taxation estimates that energy-related tax preferences will cost Americans $5.4 billion this year. Half of this, $2.7 billion, will benefit green sectors: $1 billion in nuclear subsidies, $1.3 billion in wind-energy credits for electricity production, and $400 million in solar-energy property credits.

So-called “section 1603” renewable energy grants, part of the 2009 fiscal stimulus package, will cost taxpayers a further $5.8 billion. If we assume that the grants are awarded across sectors in the last five months of this year as they were in the first seven, then the nuclear, solar, and wind energy sectors will receive $4 billion of this, boosting total green-sector subsidies to $6.7 billion this year.

Taxpayers will also provide $700 million in energy-efficient property credits. The credits apply mainly to solar, though we don’t know the precise allocation – so we leave it out of the figure, which therefore understates the cost of solar-backed jobs.

Dividing the total wind, solar, and nuclear subsidies by the number of Americans employed in these sectors (252,000), they are currently generating jobs at an average annual cost to taxpayers of over $29,000. Wind jobs cost taxpayers nearly $47,000 per job per year.

By way of comparison, the coal, oil, and gas sectors receive $2.7 billion in subsidies annually, and employ about 1.4 million Americans. The taxpayer-cost per job in these sectors is therefore just over $1,900.

The bottom line is that green-energy jobs cost taxpayers, on average, 15 times more than oil, gas, and coal jobs. Wind-backed jobs cost 25 times more.

That’s how cronyism works; taxpayers subsidize political pet projects operated and maintained by allies and friends. In return, the benefactors reciprocate through generous campaign donations, silent partnerships and other unscrupulous means of compensation.

This dynamic will hardly change no matter who wins next week in the presidential elections.

ECB Says Bitcoin’s Origin is from the Austrian School

The information age has really began to affect even the state of money.

Digital money outside the ambit of government through the Bitcoin system has been on the rise.

chart from the Economist

The proliferation of Bitcoin has even gotten the attention of the European Central Bank (ECB)

Bitcoin represents a decentralized web based Peer to Peer (P2P) currency system or as defined by Wikipedia.org 

decentralized digital currency created by the pseudonymous entity Satoshi Nakamoto. It is subdivided into 100-million smaller units called satoshis.

It is the most widely used alternative currency, with the total money supply valued at over 100 million US dollars.

Bitcoin has no central issuer; instead, the peer-to-peer network regulates Bitcoins' balances, transactions and issuance according to consensus in network software. Bitcoins are issued to various nodes that verify transactions through computing power; it is established that there will be a limited and scheduled release of no more than 21 million coins, which will be fully issued by the year 2140.

Internationally, Bitcoins can be exchanged and managed through various websites and software along with physical banknotes and coins.

A short video explaining the bitcoin system below:

While skeptics allude to “anonymity” which comes with the innuendo of “illegal” transactions, as attraction to Bitcoins, the ECB in the following paper counters that the genesis of Bitcoins has been from the framework of the Austrian school of economics

Two influences on the Bitcoin says the ECB (See Virtual Currency Schemes October 2012).

First the Austrian Business Cycle.

The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation.

One of the topics upon which the Austrian School of economics, led by Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich A. Hayek, has focused is business cycles.

In short, according to the Austrian theory, business cycles are the inevitable consequence of monetary interventions in the market, whereby an excessive expansion of bank credit causes an increase in the supply of money through the money creation process in a fractional-reserve banking system, which in turn leads to artificially low interest rates.

In this situation, the entrepreneurs, guided by distorted interest rate signals, embark on overly ambitious investment projects that do not match consumers’ preferences at that time relating to intertemporal consumption (i.e. their decisions regarding near-term and future consumption). Sooner or later, this widespread imbalance can no longer be sustained and leads to a recession, during which firms need to liquidate any failed investment projects and readapt (restructure) their production structures in line with consumers’ intertemporal preferences. As a result, many Austrian School economists call for this process to be  abandoned by abolishing the fractional-reserve banking system and returning to money based on the gold standard, which cannot be easily manipulated by any authority.

Second is the Austrian concept of depoliticization of money through competitive free markets

Another related area in which Austrian economists have been very active is monetary theory.  One of the foremost names in this field is Friedrich A. Hayek. He wrote some very influential publications, such as Denationalisation of Money (1976), in which he posits that governments should not have a monopoly over the issuance of money. He instead suggests that private banks should be allowed to issue non-interest-bearing certificates based on their own registered trademarks. These certificates (i.e. currencies) should be open to competition and would be traded at variable exchange rates. Any currencies able to guarantee a stable purchasing power would eliminate other less stable currencies from the market.

The result of this process of competition and profit maximisation would be a highly efficient monetary system where only stable currencies would coexist.

The following ideas are generally shared by Bitcoin and its supporters:

– They see Bitcoin as a good starting point to end the monopoly central banks have in the issuance of money.

– They strongly criticise the current fractional-reserve banking system whereby banks can extend their credit supply above their actual reserves and, simultaneously, depositors can withdraw their funds in their current accounts at any time.

– The scheme is inspired by the former gold standard.

But Austrians have objected to a complete connection for other theoretical reasons.

Although    the    theoretical    roots    of    the    scheme can   be    found    in    the    Austrian    School of   economics,    Bitcoin    has raised serious   concerns among    some    of    today’s    Austrian    economists.  Their    criticism    covers   two     general     aspects:

a)    Bitcoins     have     no    intrinsic     value    like gold;    they     are   mere     bits    stored    in    a computer; and  

b)    the    system    fails    to   satisfy the    “Misean  Regression   Theorem”,    which explains    that    money    becomes    accepted    not because    of    a   government    decree    or    social convention,  but because    it    has    its    roots    in a    commodity    expressing    a certain    purchasing    power.

The world does not exist in a vacuum.

The information age will provide alternatives not only to capital markets (e.g. P2P Lending and Crowd Funding) but to money as well.

Bitcoin or not, the incumbent political system’s sustained policies of debasement will only accelerate and intensify the search for currency alternatives premised on the burgeoning forces of “decentralization”.

On the Central Planner’s Forecasting Failures

Do central planners have detailed or accurate knowledge about the workings of the markets and the economy? 

From Bloomberg,

The Bank of England’s forecasting capabilities have deteriorated in the past five years, resulting in “large” errors, and officials should investigate the reasons for such shortcomings, an independent review said today.

The report by David Stockton, a former Federal Reserve official, sets out options including encouraging “more assertive” staff to challenge the central bank’s “house view” and incorporating financial-stability risks into forecasts. It said the latter should be “high on the agenda.”

The review is one of three commissioned by the central bank’s governing body following a lawmaker push for an inquiry as the BOE prepares to take on unprecedented powers to regulate the financial system. The bank also released reports on its framework for providing liquidity to the financial system and its emergency support to banks.

“The Monetary Policy Committee’s recent forecast performance has been noticeably worse than prior to the crisis, and marginally worse than that of outside forecasters,” Stockton said. “The bank and the MPC need to introspect more deeply and more systematically about the lessons that can be gleaned from episodes of large forecast errors.”

Even a recent study from the US Federal Reserve of St. Louis questioned the debt and deficit forecasting capabilities of the Congressional Budget Office (CBO) whose “projections for longer horizons are considerably worse than those for shorter horizons”

Of course one can’t resist pointing out the astounding blindness of US Federal Reserve Chairman Ben Bernanke’s to the onset of the crisis of 2008 which continues to linger or haunt the US and world economies, today.

The central planner’s fundamental mistake emanates from the dependence on the supposed accuracy of the substitution or the simplification of knowledge through numerical aggregates based on econometric-statistical models for what in real life is a complex world operating on decentralized knowledge from human action from a combination of localized knowledge or “particular circumstances of time and place”, the individual’s unique and immeasurable preferences and value scales, economic calculation and the dynamic stimuli-response/action-reaction to the ever changing environment.

In accepting the Nobel Prize, the great F.A. Hayek explained of the pretense of knowledge by so-called experts

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

If central planners have been blatantly, consistently and pathetically wrong with their economic forecasting—stemming from erroneous assumptions, premises, theories or models—then what more should we expect of the consequences derived from policies grounded on these wrong projections?

Black Swan theorist and author Nassim Taleb warns about mistaking centralization for stability (Foreign Affairs):

Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to "Black Swans" -- that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.

Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability or, in some cases, ending up far worse than they were in their initial volatile state. Indeed, the longer it takes for the blowup to occur, the worse the resulting harm in both economic and political systems.

Seeking to restrict variability seems to be good policy (who does not prefer stability to chaos?), so it is with very good intentions that policymakers unwittingly increase the risk of major blowups. And it is the same misperception of the properties of natural systems that led to both the economic crisis of 2007-8 and the current turmoil in the Arab world. The policy implications are identical: to make systems robust, all risks must be visible and out in the open -- fluctuat nec mergitur (it fluctuates but does not sink) goes the Latin saying...

Social policies aimed at ‘suppressing volatility’ which ultimately ends up with ‘massive blowups’ signifies as bubbles in motion are the risks we all envisage considering the path towards centralization (for instance, EU’s political union, bank supervision, expansive financial regulation)  undertaken by most developed economies.

Bottom line: I would not trust an iota of what central planners say.

Quote of the Day: If Democracy Isn’t Working, It’s Not Democracy’s Fault

The idea of democracy is sacrosanct. To question it implies that you are in favor of despotism and tyranny. Democracy fans conveniently ignore the fact that despots and tyrants are freely elected every year.

President Hugo Chavez retained power in Venezuela this year, winning comfortably despite running his country’s economy into the ground with his socialist revolution of nationalizing key industries, tight exchange controls, and price controls on certain basic goods.

As the European economy continued to lurch toward meltdown, French voters elected Francois Hollande in 2012. The first three things Hollande did were raise the minimum wage, reduce the retirement age from 62 to 60, and raise the top tax rate to 75%. A conspiracy theorist would assume Hollande is deliberately trying to demolish what’s left of the French economy with these policies.

In Moscow, Vladimir Putin was again elected president of Russia. Despite police repression and the thuggery of the previous Putin regime, pro-Putin rallies were much more popular than anti-Putin rallies. “This is the time to build a bridge to Putin, before the most talented people move out of Russia,” said curator Marat Gelman.

As the United States elections draw near, the incumbent president is leading or tied in the polls. In his four years, he has not really deviated from his predecessor’s policies that were generally reviled by those in his party. He has presided over the largest expansion in public debt in world history, with the result being economic growth that is the weakest since the Great Depression. And this guy is likely to win. If he doesn’t, his opponent will govern just as he (and the ones before him) did.

Those of us paying attention are left to merely sigh and roll our eyes, reminded of H.L. Mencken’s line, “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”

Meanwhile, democracy continues on unquestioned. The politicians may be crooked, the taxes ruinous, the bureaucracy unwieldy, and the regulations outrageous, but the source of these outcomes is never questioned. The hope of democracy depends on the idea that all we need is the right people in power.

If democracy isn’t working, it’s not democracy’s fault. The problem is only that the right people have not been elected yet. This theory has been tested for hundreds of years and the results are the same, yet people still hope and believe. The worst rise to the top in politics, F.A. Hayek explained. To be elected, politicians must appeal to the least intelligent and most gullible. And because democracy makes politics and power available to everyone, it attracts those seeking status, fame, glory, recognition, attention, appreciation, dignity, and even dominance. The right people will never be attracted to politics, only the wrong people will.

This is from Mises Institute President Douglas French at the Laissez Faire Books on the popular delusion of the democratic utopia.

How Despotism Promoted Ignorance in Myanmar

Many people nurture the mystical impression that noble intentions drive actions of governments pertinent to social welfare concerns.

Well, not in Myanmar’s case, where the former rulers opted for policies that resulted to a massive black hole in education.

From Wall Street Journal, (bold emphasis mine)

The University of Yangon was once one of Asia's best colleges. Today, abandoned buildings rot away on its overgrown campus, with some walkways deserted except for dogs.

Its state of affairs embodies a crucial challenge for leaders as Myanmar opens to the outside world. The military junta that dominated the country for five decades all but destroyed the university system after a series of student protests convinced its leaders that schools were breeding grounds for dissent.

But now that the lifting of most Western sanctions has paved the way for an expected wave of investment, companies are finding a nation largely bereft of skilled workers. Doctors and lawyers often lack up-to-date training, and other professions are desperately short of qualified staff with even basic critical-thinking skills, employers say.

The lack of expertise in the country was sometimes used by military leaders as a justification for handing big business contracts to associates of the regime. A small number of Myanmar students went overseas to study. Only over the past year, since the military regime stepped down, has the government actively encouraged those educated abroad to return and share expertise.

Of course such policies reflected on the “rule of thumb” for politicians where the principal concern of politics has been about political control or political power.

The difference lies in the nature of political institutions in Myanmar. The ruling military junta relied on a regime whose power has been rooted on ignorance and fear rather than from getting the consent of the governed. So the curtailment of dissent was then seen as a political imperative.

In addition, the past regime profited from society’s ignorance through the “justification for handing big business” or by awarding economic opportunities to favored network of families, friends or allies: cronyism in socialist clothing.

But all these have backfired.

Compounded by the snowballing opposition to the military junta, eventually the military junta was forced into a referendum that transformed Myanmar’s politics into a presidential republic with a bicameral legislature. 

And thus, the pronounced turnaround in Myanmar’s political economy, through economic reform policies of liberalization.

The political and economic developments in Myanmar seem to be confirming the position held by the great Professor Ludwig von Mises (Liberalism p.46),

Only a group that can count on the consent of the governed can establish a lasting regime. Whoever wants to see the world governed according to his own ideas must strive for dominion over men's minds. It is impossible, in the long run, to subject men against their will to a regime that they reject. Whoever tries to do so by force will ultimately come to grief, and the struggles provoked by his attempt will do more harm than the worst government based on the consent of the governed could ever do. Men cannot be made happy against their will.

For as long as economic liberalization will be the premier thrust, Myanmar looks like a promising compliment to ASEAN, whom likewise needs to have more economic freedom.

Post Hurricane Sandy: Signs of Spontaneous Order in New York City

Observes Jaltcoh (hat tip Econolog’s Professor David Henderson)

The traffic in the blackout areas of Manhattan is lawless in the most literal sense: the traffic lights aren't working, so the law cannot be applied as usual. But "lawless" doesn't seem to be a fitting description; the driving seems better-behaved than usual. We're so used to seeing people act under a system of government rules that it's easy to assume that without the rules, everything would descend into chaos. But perhaps free people are generally capable of acting decently on their own. Of course, that's never going to be universal; but then, people break the law too. In fact, a dense set of rules tempts people to see how close to (or how far across) the borderline of legality they can go without being penalized. In the absence of governmental laws, people might focus more on other kinds of laws: social norms and ethics.

Contra Hobbes, these serve as anecdotal evidence that people are hardly endemically nihilistic.

Video: Should Voting Be Mandatory? 13 More Reasons Not to Vote

The following video explains why mandatory or coercing people to vote will not be constructive for a society

From Learnliberty.org (thanks to Tim Hedberg for the video):

Professor Jason Brennan offers several reasons for not making voting mandatory. 

-Political scientists find that most citizens are badly informed. 

-Citizens appear to make systematic mistakes about the most basic issues in economics, political science, and sociology. People who would fail econ 101 should not be required to make decisions about economic policy. 

-People who tend to abstain from voting are more ignorant than people who vote. Forcing them to vote would lead to a more ignorant pool of voters, which leads to political candidates who reflect voters’ misperceptions. The end result is bad public policy. 

One objection to this argument is that the disadvantaged, the poor, the unemployed, and the uneducated are less likely to vote than other groups. Some argue that people should be forced to vote so the disadvantaged won’t be taken advantage of. Professor Brennan says this objection relies upon the false assumption that people vote for their own interests. In contrast, political scientists have found over and again that people tend to vote for what they believe to be the national interest. We don’t need to worry about protecting nonvoters from selfish voters. Instead, we should worry about whether voters will invest the time to learn which policies really serve the public good.

According to Brennan, bad decisions in the voting booth contribute to bad government; needless wars; homophobic, sexist, and racist legislation; lost prosperity; and more. While all citizens should have an equal right to vote, someone who wants to abstain from voting because he doesn’t feel he knows the right answers—or for any other reason—should be allowed to do so. Brennan concludes that mandatory voting guarantees high turnout but not better government.

 

If mandatory voting would not helpful, then refraining from voting could should be seen as an alternative. [See my previous posts here, and here.]

EPJ's Bob Wenzel has 13 quotes to justify non-voting:

1. If voting changed anything, they'd make it illegal. --Emma Goldman 

2. The difference between a democracy and a dictatorship is that in a democracy you vote first and take orders later; in a dictatorship you don't have to waste your time voting. --Charles Bukowski 

3.Perhaps the fact that we have seen millions voting themselves into complete dependence on a tyrant has made our generation understand that to choose one's government is not necessarily to secure freedom.--Friedrich August von Hayek 

4. Why do the people humiliate themselves by voting? I didn't vote because I have dignity. If I had closed my nose and voted for one of them, I would spit on my own face. --Oriana Fallaci 

5. Voting for the lesser of two evils is still voting for evil. Next time, go all out and write in Lucifer on the ballot --Jarod Kintz, 99 Cents For Some Nonsense 

6. Democracy is a pathetic belief in the collective wisdom of individual ignorance. ― H.L. Mencken 

7. Don't vote, it only encourages them. - - Old anarchist saying 

8. Democracy means simply the bludgeoning of the people by the people for the people. - - Oscar Wilde 

9.Representative government is artifice, a political myth, designed to conceal from the masses the dominance of a self-selected, self-perpetuating, and self-serving traditional ruling class. ― Giuseppe Prezzolini 

10. Individual rights are not subject to a public vote; a majority has no right to vote away the rights of a minority; the political function of rights is precisely to protect minorities from oppression by majorities (and the smallest minority on earth is the individual). --Ayn Rand 

11. I have never voted in my life...I have always known and understood that the idiots are in a majority so it's certain they will win. --Louis-Ferdinand Celine 

12. No matter whom you vote for, the Government always gets in. --Unknown 

13. You want to know about voting. I'm here to tell you about voting. Imagine you're locked in a huge underground night-club filled with sinners, whores, freaks and unnameable things that rape pitbulls for fun. And you ain't allowed out until you all vote on what you're going to do tonight. You like to put your feet up and watch "Republican Party Reservation". They like to have sex with normal people using knives, guns, and brand new sexual organs you did not even know existed. So you vote for television, and everyone else, as far as your eye can see, votes to fuck you with switchblades. That's voting. You're welcome. --Warren Ellis, Transmetropolitan, Vol. 3: Year of the Bastard

I would add a 14th reason: It's not worth to risk one's life or limb to engage in a charade where the risk of political violence is high during election day.

Quote of the Day: God is a Vulgar Keynesian Just Trying to Help

After every disaster, someone says, “This will be good in the long run for the economy. Think of all the homes and infrastructure that must be rebuilt. Think of all the new cash that will come out reserves and go into circulation. This is just the stimulus we need.”

To those who genuinely believe this, I have a modest proposal. Instead of waiting patiently for hurricanes to fix our economy, why don’t we just manufacture our own disasters? For instance, the government could order a mandatory evacuation of California. We could then bomb the hell out of the state. Think of the stimulus this would create to the hotel, oil, military manufacturing, and ailing construction industries. Indeed, we could require Californians to leave their cars at home (to be bombed), and thus help the American auto industry as well. I understand insurance doesn’t cover acts of war, but surely this doesn’t count as war, does it?

At any rate, if you really believe this kind of stuff, it sort of solves the problem of evil, doesn’t it? Hurricanes aren’t apparent divine evil in need of explanation. Rather, God is a vulgar Keynesian just trying to help.

This is from Professor Jason Brennan at the Bleeding Hearts Libertarian sarcastically refuting the “Broken Window fallacy” popularized by vulgar Keynesians.

For these vulgar Keynesians, whose purview of the world emanates entirely from “spending-drives-everything” perspective, humanity have been subordinated to statistical aggregates—or people are merely just about numbers.

Quote of the Day: Demand and Supply are Two sides of the Same Coin

It’s not that “supply creates its own demand,” but rather that supply is demand. One produces a good either to consume it oneself or, more commonly, to trade it for another good. Demand and supply are two sides of the same, well, coin—which reminds me to add that Say’s Law holds not just in a barter economy but a monetary one also—a freed one, that is, unlike the corporate state we all occupy.

True, someone might sell a good and not spend the money received. But this would lead to idleness only if the economy did not consist in a time structure of production coordinated by interest rates. In other words, money not spent is saved and available for investment (that is, payments for producer goods and labor, which will be spent on consumer goods) at stages remote from the consumer-goods level; that is, long-term investment in production for future consumption…

Given our insatiable demand for goods, in a freed market a general glut couldn’t happen; if prices were free to fluctuate in response to changed conditions or entrepreneurial error, the price of goods plentiful relative to demand would fall, while the price of goods deficient relative to demand would rise. Entrepreneurs would then adjust their plans, but since change is the rule, the market would never reach a state of rest. Say’s Law is about a (free) process through time, not general equilibrium.

This is from American political writer and libertarian Sheldon Richman at the Reason.com refuting progressives who deliberately misstate the great proto Austrian Frédéric Bastiat’s “Broken Window fallacy” or the fallacious economic doctrine which sees, from the perspective of spending, net benefits from destruction (e.g. natural calamities or wars).

Bank of Japan’s Back to Back Stimulus

I was supposed to post this yesterday. Unfortunately my DSL provider was not able to make a timely response to the line breakdown in our area. So I was inaccessible to the internet for nearly two days and had been compelled to take a vacation. 

Just a few days after the announcement of additional stimulus, the Bank of Japan (BoJ) found that this may have been insufficient and declared a back to back expansion of monetary steroids.

From SFGate/ Bloomberg

The Bank of Japan expanded its asset-purchase program for the second time in two months, a move that failed to cheer investors as stocks slumped amid mounting evidence that the economy contracted last quarter.

The fund will increase by 11 trillion yen ($138 billion) to 66 trillion yen while a separate credit loan program will stay at 25 trillion yen, the bank said in Tokyo, acting hours after data showed the biggest decline in industrial output since last year’s earthquake. The BOJ will also offer unlimited loans to banks to boost credit demand

Chart from Danske Research

Part of such action undertaken by the BoJ has reportedly been due to political pressure

From another Bloomberg article

Economy Minister Seiji Maehara attended his second BOJ meeting yesterday, highlighting political pressure for action from the central bank. The joint statement he issued with Shirakawa and Finance Minister Koriki Jojima after the meeting was the first of its type, Maehara said. It said that the government “strongly expects” powerful easing until deflation is overcome.

This is further proof that “independent” central banks are a fiction.

Desperate times calls for desperate measures.

Like their developed economy counterparts, Japan’s politicians and bureaucrats have increasingly been resorting to monetary measures meant at shoring up an unsustainable political economic system anchored on debt. 

Japan’s default is on the horizon, this is not a matter of IF but WHEN.