Shopping Mall Bubble: Will Manufacturing, Agriculture, Tourism and Infrastructure Cover the Supply-Demand Gap?

My concerns about the risks of a brewing shopping bubble has been fundamentally premised from basic economics: if supply grows more than demand then there will be an oversupply. The economic analogy can be applied to health, if a person smokes four packs a day, then that person has a high risk of contracting lung disease (emphysema or lung cancer). 

Notice that this is an “if, then” proposition. Since everyone’s actions have a consequence, then the risks of a shopping mall bubble is about prospective consequences from today’s economic actions.

So far, I have pointed out that from the supply side[1], at least 10% growth rate seem to function as the baseline rate by major mall developers-operators which I used as benchmark.

On the demand side, the average of 6% annualized growth rate in consumption as indicated by the NSCB suggest that there exist an imbalance which is likely to grow IF the current trends persist. This will also become a problem that could plague the industry and the economy overtime.

I have also pointed out that remittances and the informal economy will most likely be inadequate to fill in such deficiency, while BPO with current high optimistic projections may fall below expectations, or if does meet expectations, will be unable to provide marginal growth to cover the shortfalls of the other industries[2]. 

In a free market, current imbalances will likely correct itself. Unfortunately, the impact of a policy induced or extended artificially low interest rate environment has been to compound on such imbalances by distorting the mall developer’s economic calculation through the overestimation of demand and from the impetus to engage in competition to increase supply relative to other developers.

Also mall developers in sensing that low interest rates will continue to prevail, as well as, aggravated by the mistaken embrace of mainstream or the populist ideology of the sustainability of a consumption economy, have taken the path of expanding supply via credit lubrication that amplifies the supply side growth trend.

And the credit driven growth by the overall property sector, where shopping malls is a subset of, magnifies not only credit risks of these sectors, but includes the banking sector.

Again if today’s trend continues or even accelerates, then altogether this poses as systemic risks to a future property-banking crisis.

As Chair and Professor of Business and Economics at St. Louis University Madrid, David Howden writes[3],

The misallocation of resources along the temporal structure of production is a significant result of an Austrian business cycle. In the Austrian view, interest rates serve the important role of coordinating intertemporal consumption and production activities. By artificially lowering interest rates below their natural level, central banks skew the productive undertakings of firms, and facilitate the discoordination of the capital structure. Overinvestment in specific areas of the economy implies relative underinvestment in others. The bust requires these misallocations of capital to be reallocated to a more sustainable allocative mix.

I will continue to demonstrate why the boom will likely turn into a bust sometime in the future under the deductive “if, then” proposition through charts

The above represents Value added manufacturing which has been defined by tradingeconomics.com[4] as “industries belonging to ISIC divisions 15-37. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources.”

Manufacturing remains as the largest contributor[5] to the Philippine economy at 21% share. Unfortunately manufacturing growth has been erratic and seems unclear if the sector could spearhead consumption growth. That’s unless major reforms are made to reduce the hurdle rate of investing in the industry are dismantled.

One of the three industries cited by this administration as “rapidly growing sectors”[6] is agriculture

The agency’s statistics seem to contradict the executive pronouncement.

Based on two year growth trend, the Bureau of Agricultural Statistics[7] shows that most of the growth rate of the industry’s subsectors has been below 5% in 2011 and 2012. 

Although in my opinion since the agriculture economy has mostly been informal, the government bureau may have likely underreported its true growth rate. But I have no basis yet for this.

The other sunshine industry for this administration is tourism.

Philippine tourism reportedly grew by 9% in 2012 and hit a milestone of 4.3 million visitors in 2012 according to Department of Tourism[8].

While the growth rate has been impressive, it seems that tourism requires stronger growth ahead to at least keep up with the pace of shopping malls. Remember tourism has likewise been anchored on regional if not global productivity growth, or said differently, the industry’s risk profile has been associated with economic developments abroad.

The domestic tourism industry has a direct 2% contribution and indirect 8.5% contribution to the economy according to World Travel and Tourism Council[9]

Finally, the last of sunshine industry is infrastructure.

Perhaps infrastructure may deliver, since this looks like a pet project of this administration. But this will most likely depend on how the government will facilitate this. The devil is in the details.

So far, Philippine infrastructure spending in 2009 only accounted for a measly 2% to an advocacy paper by the Joint Foreign Chambers[10]. So mobilizing investors and logistics as well as going over regulatory obstacles will pose as major hindrance to infrastructure spending and such process will likely take time.

Of course, as said above what the government needs to do is to liberalize the economy, particularly from the byzantine regulatory environment for demand growth to surprise to the upside.

However, unless we see meaningful reforms towards economic freedom then  these supposed promising growth areas are likely to be more of soundbites than reality.

There has been a suggestion for me to look at electricity consumption.

Based on a per capita electric consumption[11] since 2000 until 2009 the average growth rate for the Philippines has been 1.78%.

Additionally with the National Capital Region as the main franchise area of Meralco, the monopoly electric distributor, the publicly listed firm sees 7% growth (actually 4-5%) for 2013 according to the Inquirer[12]. In short, there hardly has been ample evidence to back up the consumption growth story from the electricity consumption perspective.

Bottom line: Unless the above statistics has been tarnished by significant errors, or that informal economy should surprise to the upside or that substantial reforms will be undertaken to promote a business friendly environment by relaxing regulations, taxes and other forms of government interventions, the above industries and electricity consumption story seem insufficient to bridge on the chasm of the asymmetric growth pace between demand and supply of shopping malls.

Final word: I don’t deny that I can be wrong, which I hope I am. But what if I am right, as I have been most of the time?

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[1] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[2] See Shopping Mall Bubble: Will Remittances, BPOs and the Informal Economy Save the Day? January 21, 2013

[3] David Howden A New Year's Resolution for Macroeconomists January 24, 2013 Mises.org

[4] Tradingeconomics.com Manufacturing Value Added The Manufacturing; value added (annual % growth) in Philippines was last reported at 1 in 2011, according to a World Bank report published in 2012. Annual growth rate for manufacturing value added based on constant local currency. Aggregates are based on constant 2000 U.S. dollars. Manufacturing refers to industries belonging to ISIC divisions 15-37. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3.This page includes a historical data chart, news and forecasts for Manufacturing; value added (annual % growth) in Philippines.

[5] Malaya.com Manufacturing remains biggest GDP contributor, November 22, 2012

[6] Inquirer.net The Philippine story: ‘Sick man of Asia’ now transforming, revitalized, dynamic, January 26, 2013

[7] Bureau of Agricultural Statistics Performance of Philippine Agriculture January to December 2012

[8] Tourism.gov.ph Visitor Arrivals to the Philippines Reached Record-High 4.3 Million in 2012

[9] World Travel and Tourism Council Travel & Tourism Economic Impact 2012 Philippines

[10] ARANGKADA PHILIPPINES 2010: A BUSINESS PERSPECTIVE Investphilippines.info

[11] Tradingeconomics.com ELECTRIC POWER CONSUMPTION (KWH PER CAPITA) IN PHILIPPINES The Electric power consumption (kWh per capita) in Philippines was 593.46 in 2009, according to a World Bank report, published in 2010. Electric power consumption measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losses and own use by heat and power plants.This page includes a historical data chart, news and forecasts for Electric power consumption (kWh per capita) in Philippines.

[12] Inquirer.net Meralco sees 7% sales growth

Thailand’s Credit Bubble

This passage from a report on Thailand’s monetary policy caught my eye; from Bloomberg

Daily minimum wages have risen as much as 89 percent after two increases in the past year. Most factories are located in an area where wages rose to 300 baht per day last April, an average increase of 38 percent, according to the industry ministry.

89 percent in one year wow!

Using the National Capital Region (NCR) as benchmark for the Philippines, minimum wage grew by 7% in 2012, according to the National Wages and Productivity Commission. Here is the history of minimum wages of the Philippines

The implication is that Thailand’s economy must either be experiencing a productivity miracle or in an advance stage of an inflationary boom, which in mainstream terminology will read as risk of “economic overheating”

Thailand’s economy according to the tradingeconomics.com has averaged 3.6% from 1994 until 2012

Yet Thailand’s credit markets represented by loans to the private sector (data provided by the Bank of Thailand again through tradingeconomics.com) shows that since December 2001 until November of 2012, the average growth rate has been 7.94%.

And it would appear 2010 served as the springboard for the rapid ascent of Thailand’s loan growth to the private sector.

Loan growth spiked as the Bank of Thailand floored interest rates in 2010. But the low point of 2010 in interest rates was second only to the record set in 2003 at 1.25%, according to tradingeconomics.com

Again one would notice that loan growth picked up in 2003 but the acceleration of the growth rates commenced in 2010, even as the Bank of Thailand negligibly raised interest rates in 2011. The Bank of Thailand eventually cut rates anew in 2012.

The above evidence suggest that Thailand’s economic growth seems mainly fueled by unsustainable credit expansion or a credit boom that has resulted to increases in input prices such as minimum wage.

And this has not just been a private sector concern.

Thailand’s government appears to have also used low interest rates and a lower US dollar to expand foreign denominated external debt tradingeconomics.com.

From 2005 until 2012 external debt by the government has grown at an average of 15.8%. Yet the average does not tell the accurate picture. The Thai government’s external debt resonates with the rate of growth in the private sector both of which has been intensifying since 2010. 

While the external debt picture, as per cent to the GDP, seems far from the danger zone it reached in 1997 (tradingeconomics.com), no crisis are exactly similar.

A unique but troubling feature of today’s Thai debt build up is that short term debt as % of the total external debt has reached record levels (tradingeconomics.com), topping that of 1997. Ghost of 1997?

This makes the Thai economy highly vulnerable to sudden interest rate spikes where Thai’s interest rate fragility may originate or be triggered from internal or external sources.

I earlier mentioned that the strengthening Thai baht and low domestic interest rates have incited these intensifying debt build up from both the private and public sectors.

The chart above shows the USDTHB has been in going down since the advent of the new millennium- from tradingeconomics.com

External easing by the majors economies, as well as globalization, have also contributed to portfolio flows in bonds (topmost pane) and in equities (middle pane) and in foreign direct investments (FDIs—lower pane). These capital flows have provided finance to Thailand’s trade deficit (not shown) and strong financial markets. Thai’s SET beat the Philippine Phisix by a head’s length at the finish line in 2012, up 35.76% against 32.95% in nominal domestic currency terms.

The bottom line is that when debt rises far more than income, then trouble lies ahead. 

Thailand’s Finance Minister Kittiratt Na-Ranong gripes about the lack of investment which the Thai government proposes to bridge, from the same Bloomberg article,

Another legacy of the 1997 crisis is a lack of investment due to concerns over the country’s debt levels, which has led to persistent current-account surpluses, Kittiratt said. Thailand has had a current-account deficit only once since 1997, according to data compiled by Bloomberg…

Over the long term, the government plans to invest in infrastructure to increase imports and reduce pressure on the currency, Kittiratt said. He has proposed spending 2 trillion baht ($67 billion) over seven and a half years on projects such as a railroad network to accelerate investments and put the current account into a deficit.

Given the steepening rate of debt build up, the question is where has all these money been flowing?

A property bubble perhaps?

From the Bangkok Post in October of 2012

The Bank of Thailand is keeping a close watch for any indication of a pending collapse in the housing bubble after prices of housing estate units recently sharply increased, Mathee Supapong, a senior director at BoT, said on Friday.

Housing loans provided by financial institutions were also substantially up and this was a case to concern, said Mr Mathee.

Officials say there has been no bubble. But no one can establish a bubble until after the fact (ex-post). The above only serves as clues to where the economic and social risks lies.

Why the Neo-Malthusian Premise of “Peak Resources” are Misguided

Writing at the Daily Reckoning, Chris Mayer, managing editor for several newsletters has a rejoinder to neo-Malthusians led by GMO’s Jeremy Grantham.

Yet whether it is oil or copper or iron ore or whatever resource, people insist on relying on the same faulty reasoning that “the easy stuff is gone.” They continue to make the same tired case for chronic natural resource shortages and a decline in our standard of living.

The great economist Joseph Schumpeter’s (1883-1950) criticism of the Malthusian position still holds. On Malthus and his ilk, he wrote: “The most interesting thing to observe is the complete lack of imagination which that vision reveals. Those writers lived at the threshold of the most spectacular economic developments ever witnessed.” Yet they missed it.

So here is my prediction: I believe we are on the cusp of even greater levels of innovation and development — another industrial revolution is in progress right now. So ignore the gloom and doom on natural resources. Contra Grantham, the days of abundant resources and falling prices are far from over.

Mr. Mayer is basically right.

But today’s high prices of commodities hasn’t just been a function of market prices operating from a laissez faire environment but importantly represents interventionism on a massive scale, particularly from central banks, whose inflationism has resulted to severe economic distortions that has been reflected on market prices. In short, prices of commodities may also represent monetary dislocations. 

Also the mining-energy industry, for instance, are tightly regulated, where regulations serve to inhibit supplies. There is also a political bias for green energy that has caused economic disruptions at the costs of taxpayers.

Nonetheless, despite these interventions, I would add that trends towards improving the supply side, buttressed by technology, are on the way. In the world of commodities, notably deep sea mining and asteroid mining are great examples.

On deep sea mining from wired.com

Deep-sea mining is poised as a major growth industry over the next decade, as large developing-world populations drive consumer demand for metal-containing products, climate change makes previously inaccessible regions like the Arctic Ocean seabed attainable, and improved extraction technologies turn previously uneconomical rock into paydirt.

Cindy Van Dover is a Professor of Biological Oceanography at Duke University and a leading voice in the development of policy and management strategies for deep-sea extraction activities.  Van Dover has studied the ecology of hydrothermal vents for years, and she takes a measured, pragmatic approach to the coming industrialization of her study sites.  If mining is going to happen – a event that the more strident faction of the environmental movement will no doubt contest – “we need to work with industry to make sure we do it right,” says Van Dover.

Taking a leaf out of deep sea mining, asteroid mining seems also in the pipeline. From Mining.com

A newly launched asteroid miner is looking to the history of deep sea mining as it attempts to navigate laws governing exploitation of space.

Deep Space Industries, which rolled out its plan for space mining today at a news conference in the Santa Monica Museum of Flying in California, said the laws regarding resource mining beyond the earth are largely unformed, and the company will rely on co-operation between the main players. (Video embed of the press conference is below.)

"If you look at parallels, like deep sea mining, that went forward without a global treaty. The companies that wanted to do deep sea mining shook hands: 'We won't interfere with you if you don't interfere with us', that was the general approach going forward," said David Gump, Deep Space's chief executive officer.

Gump said the company will be relying on the 1967 space treaty, which he says will give the company the right to utilize space resources but will not grant the right to claim any sovereign territory.

Like the shale gas boom which has exposed the major flaws in the economic interpretation of “peak oil theory”, neo-Malthusians always mistakenly construe the causal link of prices as signifying a fixed pie for the supply side while downplaying the importance of human capital in providing innovation that contributes to the rebalancing of the economics of commodities.

Professor Don Boudreaux aptly quotes the great Julian Simon from his 1996 book The Ultimate Resource 2 

“[N]atural resources are not finite in any meaningful economic sense, mind-boggling though this assertion may be.  The stocks of them are not fixed but rather are expanding through human ingenuity.”

Tina Turner Renounces US Citizenship: A Tax and Privacy Issue?

Well, it would seem that the curse of the Laffer Curve and the welfare state has not only affected the French, American celebrity Tina Turner has reportedly renounced her US citizenship to become a Swiss.

From the International Man,

Pop legend Tina Turner has announced that she will give up her US citizenship and become a citizen of Switzerland.

The most interesting part of this story is that she is renouncing her US citizenship even though she was not required to. Both Switzerland and the US allow dual citizenship.

It was her choice to renounce, and that choice has serious costs.

Turner, whose net worth likely meets the criteria to be stuck with the so-called US Exit Tax (for those with a net worth of more than $2 million.) This means that upon expatriation, all of her worldwide assets will be taxed as if they were sold at fair market value – a steep price indeed.

Other factors must have played a role in her decision to renounce and incur such costs when she was not otherwise forced to.

Turner has not explicitly explained why she is renouncing her US citizenship – nor would she be wise to, which would only attract even more scrutiny. She probably weighed the pros and cons of keeping her US passport, which offered her limited benefits and immense liabilities.

It probably was not tax related, Switzerland itself is a high tax environment for its citizens.

Perhaps an important feature of Switzerland for her is its respect for privacy.

Contrast that to the US government's blatant disdain for privacy. Under the pretexts of the various never-ending "wars" (drugs, terrorism, organized crime, tax evasion, etc.) the US government has essentially destroyed privacy and often treats its citizens as if they were prison inmates.

Tina Turner’s apparent quiescence on the reasons for her actions has obviously meant to suppress controversies from the politically correct crowd.

She perhaps learned from the recent experience of golf superstar, Phil Mickelson, who publicly hinted of leaving California for another state, due to tax reasons, that has drawn unnecessary ruckus from the sanctimonious left.

Obviously these would seem as symptoms of the developing social strains from partly from tax hikes brought about by Obamacare, the Fiscal Cliff deal and others, where media only sees the actions of the ‘celebrities’.

Yet all these politicization; expanded intrusions and expropriation of private property, increases the risks of political instability, artificially booming financial assets from inflationism, notwithstanding

Biofuels Aggravates Food Price Inflation, Promotes Hunger

One product of environmental politics has been to promote the politically privileged taxpayer supported, green energy industry.  Biofuels is part of the renewable green energy.

Yet the unintended effects of biofuels has not only been cronyism, but importantly, biofuels contributes to the constrains in food supplies that has led to higher prices and thus food shortages.

Here is the New York Times,

In the tiny tortillerias of this city, people complain ceaselessly about the high price of corn. Just three years ago, one quetzal — about 15 cents — bought eight tortillas; today it buys only four. And eggs have tripled in price because chickens eat corn feed.

Meanwhile, in rural areas, subsistence farmers struggle to find a place to sow their seeds. On a recent morning, José Antonio Alvarado was harvesting his corn crop on the narrow median of Highway 2 as trucks zoomed by.

“We’re farming here because there is no other land, and I have to feed my family,” said Mr. Alvarado, pointing to his sons Alejandro and José, who are 4 and 6 but appear to be much younger, a sign of chronic malnutrition.

Recent laws in the United States and Europe that mandate the increasing use of biofuel in cars have had far-flung ripple effects, economists say, as land once devoted to growing food for humans is now sometimes more profitably used for churning out vehicle fuel.

In a globalized world, the expansion of the biofuels industry has contributed to spikes in food prices and a shortage of land for food-based agriculture in poor corners of Asia, Africa and Latin America because the raw material is grown wherever it is cheapest.

Nowhere, perhaps, is that squeeze more obvious than in Guatemala, which is “getting hit from both sides of the Atlantic,” in its fields and at its markets, said Timothy Wise, a Tufts University development expert who is studying the problem globally with Actionaid, a policy group based in Washington that focuses on poverty.

With its corn-based diet and proximity to the United States, Central America has long been vulnerable to economic riptides related to the United States’ corn policy. Now that the United States is using 40 percent of its crop to make biofuel, it is not surprising that tortilla prices have doubled in Guatemala, which imports nearly half of its corn.

At the same time, Guatemala’s lush land, owned by a handful of families, has proved ideal for producing raw materials for biofuels. Suchitepéquez Province, a major corn-producing region five years ago, is now carpeted with sugar cane and African palm. The field Mr. Alvarado used to rent for his personal corn crop now grows sugar cane for a company that exports bioethanol to Europe.

Aside from biofuels, on the supply side, agricultural subsidies, agricultural protectionism and various forms of (regulatory) interventionism have all contributed to higher prices.

On the demand, aside from demand from China and emerging markets, global central banking relentless pumping of money have also pumped up prices of food. 

And given the acceleration of balance sheet expansions by global centrals in order to "promote aggregate demand" (in reality buoy asset prices to save the distressed too big to fail politically connected banking system and insolvent welfare states), the risks of food crisis, from the cumulative effects of interventions, cannot be discounted.

Environmentalism Hysteria: Cats are Evil

The ultimate goal of environmentalism has been to restrain people’s activities. 

Not content with man-made global warming, environmental hysteria have now spread to targeting pet ownership in order to allegedly save wildlife.

From Slate.com

You know what animal makes a good pet? No animal.

Dogs will bite you to death and then eat your corpse. Snakes will asphyxiate you, escape, infest the Everglades, and eat all its mammals. Pet parrots perpetuate a trade that upends ecosystems, and hamsters pass you dangerous zoonotic diseases. But perhaps the worst pet of all, environmentally speaking, is a cat.

Domesticated cats started out as parasites on human civilization. Unlike other species, and admittedly to their credit, they domesticated themselves. When humans started growing grain, the crops attracted rodents that attracted cats. Wild cats evolved into housecats, and they were quite useful for thousands of years, killing disease-ridden rats and mice and protecting our food stockpiles. But now that we have industrial farming, reliable food storage, and mostly mouse-proof houses, cats are mere parasites again. Playful and often affectionate parasites, sure, and adorable when young, but a scourge on the landscape.

An economist in New Zealand named Gareth Morgan has made the logical and quite correct case that his island nation should eliminate its cats in order to protect its endangered birds. He means “elimination” in the most humane way possible: Existing pets should be spayed and neutered and allowed to live out their lives, but no new cats should be allowed to be born or imported. He is not advocating that people poison feral cats, as a former researcher at the Smithsonian National Zoo was convicted of doing a few years ago. Nor does he say people should shoot them, as particularly avid birdwatchers have done. That would be really wrong.

Morgan points out that your cat “is actually a friendly neighborhood serial killer.” He may sound like some wretched, obsessed Jonathan Franzen character, but his Cats To Go project isn’t meant as a caricature of environmentalism. He’s asking people to pledge to neuter their cats, keep them indoors, and not get any new ones.

Some people like or have pets, many don’t. 

For those who fancy non-commercial ownership of pets, the benefits are subjective, mostly psychological and emotional, perhaps manifested through desire for companionship, leisure or amusement or as outlet or from peer pressure or for many other reasons.

The global pet industry has been estimated at $49 billion in 2012 with pet food sales accounting for 37.8% according to Mintel. That’s how much some people will pay for products and services for their pets. Pet ownership thus is a human activity.

Of course, there are consequences to every action.

The article has framed pet ownership, particularly cats as threat to the ecosystem. Cats have been cited as having been responsible for some bird extinction in some areas, for instance. There are more. But these are referenced to stray cats.

The article has been quiet about the policy implications.

But the intent seems to be the implied use of force to make cat owners “pledge to neuter their cats, keep them indoors, and not get any new ones”.

Such environmental hysteria would eventually lead to social policies that will restrict cat ownership. Eventually this will spread to other forms of pets.

This translates to the expansion of the bureaucracy for the enforcement of these new legislations of keeping in check people’s pet activities.

Yet people will have to pay more taxes to sustain such bureaucracy.

Moreover, people will be fined or see prison terms for infringements of pet laws. Violence may even be an outcome from enforcing such rather seemingly trivial laws.

For me, the means (regulatory restrictions) to the attain the end (environment) is like using bazookas to kill rats, where the costs (financial, regulatory and civil liberties) to attain pet controls will largely exceed the supposed benefits (environment).

Ultimately the beneficiaries of environmental politics will be the government, who will now have despotic powers not only to pick more resources from people’s pockets, but importantly, to invade on people’s properties and privacies in order just to enforce pet laws.

This is socialism camouflaged as environmentalism

Sri Lanka’s Government to Ban Maid Exports

Here is an example of a knee jerk political reaction on what has been a lurid but seemingly isolated development. 

Writes the AFP (bold mine)

Sri Lanka said on Thursday it would bar women of all ages from travelling abroad to work in menial jobs, following an international outcry over the beheading of a young nanny in Saudi Arabia.

Information Minister Keheliya Rambukwella announced that women under 25 were now banned from going to the Arab state to work as maids, adding that it was the first step towards a worldwide travel ban for low-paying jobs. 

The move was in response to the execution earlier this month at a prison in Riyadh of Sri Lankan maid Rizana Nafik, who was only 17 when she was charged with smothering a four-month-old baby in Saudi Arabia in 2005.

"As a first step we are raising the age limit to 25. We will gradually move towards a total ban on our women going abroad to do low-paying jobs," Rambukwella told reporters.

An infraction committed by a single person has been used as justification to ban the entire female OFW deployment. This policy has been premised on plain fallacy of composition.

People go abroad for work because of their perceived cost-benefit trade off. Despite the various forms of risks (away from the family, potential relationship problems with employer, risks from cultural conflicts, risks of failing to adapt with regulations of the employing country, political instability and etc…) which they are willing to endure, OFWs look for employment (income), if not, better economic opportunities. 

Through ‘boil the frog slowly’ policies, the Sri Lankan minister would like to see ‘maids’ starve at home instead.  

[This seems to be logic of Sri Lankan policy: prohibition of OFW deployment eliminates such controversies. Unfortunately economic deprivation is likely to incite more domestic violence]

 

The minister’s pretentious adaption of paternalistic supposedly moral high ground policies will likely wilt in the face of economic reality: remittances accounted for 47% of foreign exchange earnings, according to the Sri Lanka 2009 Bureau of Foreign employment

In addition, the female share of OFW deployment accounts for 51.73%, which has more than doubled from 24% in 1986-87. 

Sri Lanka’s slippery slope of OFW prohibition will only exacerbate her already fragile current account conditions, which shows of the Sri Lankan governments’ desperate need of foreign exchange. 

Such pressure are presently being ventilated on a depreciating Sri Lankan rupee vis-à-vis US dollar (charts above all from tradingeconomics.com)

Bans only create black markets too

The Philippines should be an example.

The ban on Philippine OFW deployment in Afghanistan has been partially lifted in 2011. In reality, such ban failed to curb the incidences of backdoor flows of Filipino OFWs into Afghanistan. By lifting the ban, the administration tried to grab credit via PR stunt on what has truly been a policy failure—essentially political objectives has not been attained. The Philippines still maintains an OFW ban on 19 countries.

So we should expect maid exports from Sri Lanka to become a backdoor or informal economy phenomenon.

Also, discrimination against particular countries on what signifies as labor (trade) relations risks retaliation in different forms. Protectionism fuels geopolitical enmities.

Bottom line: a ban on OFW deployment equates to economic hara kiri for Sri Lanka, or that Sri Lanka’s government will have reverse to her impulse based policies soon.

Shale Gas Boom: Australia’s Potential $20 Trillion Discovery

The shale gas boom continues to percolate around the world, this time Australia may have hit on a jackpot.

From the Herald Sun

SOUTH Australia is sitting on oil potentially worth more than $20 trillion, independent reports claim - enough to turn Australia into a self-sufficient fuel producer.

Brisbane company Linc Energy yesterday released two reports, based on drilling and seismic exploration, estimating the amount of oil in the as yet untapped Arckaringa Basin surrounding Coober Pedy ranging from 3.5 billion to 233 billion barrels of oil.

At the higher end, this would be "several times bigger than all of the oil in Australia", Linc managing director Peter Bond said.

This has the potential to turn Australia from an oil importer to an oil exporter.

Technology brought about by free markets has enabled people’s access to shale as alternative fuel. 

Importantly, since Shale gas has been said to be abundant, where reserves are which scattered or distributed around the world, cheap and abundant energy should translate to lower prices and help spur economic growth. Of course there are other benefits of Shale: as previously mentioned environmental friendliness is one. Another is that since shale gas has been mostly driven by free markets this should translate to less onus for taxpayers. Additionally, the dispersed distribution of shale will likely alter geopolitics by reducing dependence on producers governed by despots and the kleptocracy. Finally Shale gas operates on safe technology.

For Asian investors, the impact of Shale so far has been an onrush to Shale related investments in the West, most probably aimed at, not only to profit from the ongoing Shale boom, but likewise to assimilate the technology required for domestic shale exploration.

The Australian discovery may just be one of the latest discoveries not limited to Asia, which recently includes Israel, Japan,  India and even China.

I expect the shale boom to inspire transformative innovation on people's wellbeing. 

Quote of the Day: The Necessary is Not to be Confused with the Causal

A drivers license is something binary: Pass/Fail. Nobody is foolish enough to try to get high scores in it to improve his CV with a "drivers license from the prestigious center X, summa cum laude". We understand the nonlinearity there; and we get the point that failing the test makes one a bad driver on the road, but better grades at the test won't necessarily make one a better driver. It is an entirely via negativa statement; failing (the negative) is where the information resides, where school knowledge may map to reality. The necessary is not to be confused with the causal.

Now try to translate the idea into other areas of education. The statement "failing to get a degree is bad for you" does not necessarily mean that "better grades are good". It may even mean that higher grades might indicate a sick mind. This is the difference between SATISFICING and OPTIMIZING. An ecologically calibrated person, aware of the fuzziness of the mapping betwen education and skills, should be able to aim for just pass, and not be penalized by the nerd wasting time on fitting his brain cells to the exam at the expense of other skills and activities, such as street fights, reading Montaigne, or meditating under a tree. Given that university knowledge does not map to true knowledge, to protect people from themselves, university degrees should never be anything but binary, without the fluff "honors, shmonors", etc.

This is from Nassim Nicolas Taleb on Facebook expanding his thoughts from Book IV of his latest book, ANTIFRAGILE.

Satisficing and optimizing has been likewise a dilemma to most participants in the financial markets where the mainstream mostly adheres to conventional tools and methodology to satisfy accepted social norms rather than investigating unorthodox perspectives to attain the optimal.

In short, crowd thinking versus critical thinking.

Quote of the Day: Selfishness, via Profits, Guides People to Serve the Need of Others More Effectively

making money honestly means creating something other people value, not necessarily what you value. The more money I want, the more I have to think about what other people want, and find better, faster, cheaper ways of delivering it to them. The reason someone is poor – and, yes, I know all the excuses for poverty – is that the poor do not produce more than they consume. Or if they do, they don’t save the surplus…

Selfishness, in the form of the profit motive, guides people to serve the needs of others far more reliably, effectively, and efficiently than any amount of haranguing from priests, poets, or politicians. Those people tend to be profoundly anti-human, actually.

This is from investing guru and philosopher Doug Casey at the Casey Research on the morality of money.

Gary North on Irving Fisher: The Most Influential Economic Crank in American history

Austrian economist Gary North on a smackdown of the late Irving Fisher. (hat tip Bob Wenzel) 

Fisher was the most influential economic crank in American history. Fisher offered a simple formula that supposedly enables economists to understand the complexities of monetary policy and its effects on the price level: MV=PT. It relies on an intellectual construct, namely, the price level. This must be created by statisticians and economists. The formula does not explain cause-and-effect in terms of the transmission and spread of newly created money throughout the economy. It is totally an aggregate concept. It ignores individuals who make decisions: in government, central banks, commercial banks, and specific markets.

Ludwig von Mises' theory of money begins with real central banks, real borrowers, and the spread of fiat money over time: none of which is considered by Fisher or Friedman.

Fisher proved in 1929 that he was the most highly educated economic fool in the world. He went public with two predictions.

"There may be a recession in stock prices, but not anything in the nature of a crash." (i>New York Times, Sept. 5, 1929)

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." (Oct. 17, 1929)

http://www.gold-eagle.com/editorials_01/seymour062001.html

Then, over the next four years, he lost his own personal fortune. He was so poor in 1933 that Yale University had to subsidize housing for him. Yet this consummate fool, whose economic theories not only led to a catastrophic personal error, but which to a great extent were responsible for the original monetary policies of the Federal Reserve, which it pursued in the late 1920s, is now heralded as some kind of economic genius. Friedman regarded him as "the greatest economist the United States has ever produced." (Money Mischief, p. 37).

Fisher was a crank, and Mises exposed him as a crank within a year of the publication of Fisher's 1911 book. If you want to get an idea of how different their theories are, read Mark Thornton's article. Fisher believed that we can safely trust the government or its central bank to formulate monetary policy. He opposed the gold coin standard, because he thought it is inefficient. That was also true of Friedman. Neither of them ever understood that the free market is capable of providing a sufficient quantity of money, by means of gold mining, for a market economy. Supply and demand for goods and services are regulated by means of a private currency system that itself is created by market processes. Neither Fisher nor Friedman ever believed this. They both believed that the government must intervene in order to create a reliable monetary system, so that there can be economic growth, market clearing processes, and individual liberty. They both believed in the wisdom and power of the state with respect to the central commodity in an economy, namely, the money supply.

Ironically Irving Fisher has been regarded as the “greatest economist of the last century” by some.

Nonetheless, I find Mr. Fisher’s sequential description of debt deflation as useful

Mr. North also points out that Mr. Fisher was also a eugenics crank

Read the rest here.

Tax Exodus: Former French President Nicolas Sarkozy Mulls Move to London

The curse of the welfare state and the Laffer Curve continues to haunt French politics. Aside from the controversial self-imposed exile by French actor Gérard Depardieu, the former French President Nicolas Sarkozy has been revealed as having plans of emigrating to London to dodge French “soak the rich” policies

From the Daily Mail,

Suddenly a handshake from David Cameron probably seems an awful lot more inviting.

Former president Nicolas Sarkozy could become the next wealthy Frenchman to flee to Britain over his country’s looming tax hikes on the rich.

Mr Sarkozy – who famously snubbed the Prime Minister’s attempt to shake his hand after Mr Cameron vetoed changes to the EU treaty in 2011 – is reportedly planning to move to London to set up a £800million investment fund.

The 57-year-old, who was ousted from office last June, has amassed a fortune from £150,000-an-hour public speaking engagements and is now said to be trying to raise capital from investors.

If the move goes ahead, the controversial Frenchman will become the latest to escape a potential top tax rate of 75 per cent in his home country.

He and his former supermodel third wife Carla Bruni-Sarkozy would be likely to settle in an affluent district like South Kensington – so becoming the most high profile Gallic celebrity couple in the city.

But the former president is under investigation for corruption in France, and if he does cross the Channel there will be outrage.

The bizarre thing is that politicians and public officials themselves are looking to shelter their assets elsewhere. The case of the top French taxman who is under investigation for stashing money overseas is another.

If Japan has a declining population due to fertility rates, France may soon join Japan as more people move away from repressive tax policies. Otherwise, France may soon experience a tax revolt

And as pointed out events today has been validating the warnings of the great French economist Frederic Bastiat

Japan’s Finance Minister to Aging Citizens: Hurry Up and Die

The redistributionist welfare state has been justified as an alleged necessity predicated on ‘social justice’ and ‘compassion’. 

But when pseudo-idealism is confronted with reality, where the dependency culture eventually strains on the government finances, politicians reveal of their disdain for social welfare.

Recently the Japanese finance minister Taro Aso candidly uttered a controversial statement censuring aging citizens who depend on the government to “hurry up and die”. 

From the AFP Google 

Japan's finance minister Taro Aso said Monday the elderly should be allowed to "hurry up and die" instead of costing the government money for end-of-life medical care.

Aso, who also doubles as deputy prime minister, reportedly said during a meeting of the National Council on Social Security Reforms: "Heaven forbid if you are forced to live on when you want to die. You cannot sleep well when you think it's all paid by the government.

"This won't be solved unless you let them hurry up and die," he said.

Mr. Aso reportedly retracted this statement a few hours after.

Politicians use the public for their personal and political interests, yet when the welfare state and other political mechanisms backfire, the political class will renege on their commitments and abandon their people.

Mr. Aso’s sentiments already reflects on this, which serves as a blueprint of the future, and will be magnified on the imminence of the debt crisis.

In the world of politics, promises are habitually made to be broken. And the illusions of the welfare state will eventually be shattered.

Bank of Japan Goes Unlimited QE; Will Abenomics Be a Replay of the Takahasi-Model?

As anticipated, the Bank of Japan (BoJ) has formalized her assimilation of the policies embraced by her contemporaries, the US Federal Reserve and the ECB

The Bloomberg reports,

The Bank of Japan (8301) set a 2 percent inflation target and said it will shift to Federal Reserve-style open-ended asset purchases in its strongest commitment yet to ending two decades of deflation.

The central bank will buy about 13 trillion yen ($145 billion) in assets per month from January 2014, including about 2 trillion in Japanese government bonds and about 10 trillion yen in treasury bills. The BOJ previously said it would ease until 1 percent inflation is “in sight.”

Like all inflationism, the initial impact has been to trigger an artificial boom whose price will paid overtime via an eventual bust (most likely triggered by the return of bond vigilantes) or from a currency crisis.

Nonetheless Mark Twain once said that history does not repeat itself but it may rhyme. Telegraph’s Ambrose Evans Pritchard suggests that Abenomics could be a replay of "Japan’s Keynes" Korekiyo Takahasi:

Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.

This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who "brilliantly rescued" his country from the Great Depression.

Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran "Keynesian" budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.

He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity.

He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan's textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow -- and there lies the rub, you might say.

Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation.

Then Takahasi’s adaption of inflationism signified as mostly resource transfers to the military, the latter of which became the dominant force in her domestic policy affairs, which as noted above, was epitomized by Takahasi’s assassination.

And instead of reducing deficit spending, the Wikipedia.org notes that, the military influenced government "introduced price controls and rationing schemes that reduced, but did not eliminate inflation, which would remain a problem until the end of World War II". 

And like Germany, the Takashi inspired inflationism resulted to the massive build up of Japan's military might, which thus critically contributed to materialization of World War II.

Yet Japan eventually succumbed to a post war hyperinflation (JapanReview.net).

Things are different today than in the 1930-1945. Japan has the largest debt in the world as % of GDP, where a breakaway of consumer price inflation could easily trigger a debt crisis. Moreover increasing monetization of her debt risks an inflation spiral.

Contrary to mainstream's expectations, once the inflation genie gets out of the bottle it will be hard to contain them, especially with politically influential power blocs resisting them. As in the case of Takashi, the military resisted spending cuts that led to Takashi's fatality.

Although we already seem to be seeing typical symptoms of geopolitical strains from inflationism through the Senkaku Island dispute. 

About a week ago, both the Japanese and Chinese government reportedly scrambled jet fighters over the contested island nearly resulting to a direct confrontation (RT.com). Yesterday, 3 Chinese patrol ships reportedly entered Japanese territorial waters (Japan Daily Press).

The bottom line is that the effects of inflationism will ultimately be destabilizing for both the economy and in societal affairs, as depicted by the unfolding geopolitical developments.

Quote of the Day: GDP Fetish

"GDP fetish"—the belief that increases in GDP are good whether or not they represent increased production of things that people actually value. If the government spends $100 billion digging holes and then filling them back up, then GDP can rise by $100 billion or more even if the $100 billion is totally wasted.

This is from Professor, Econlog blogger, and research fellow at Stanford University’s Hoover Institution David R. Henderson in a book review of former Federal Reserve of vice chairman Alan Binder’s “After the Music Stopped” at the Wall Street Journal (hat tip Mises Blog).

The fetish for GDP is really a statistical illusion

Graphic of the Day: A Weapon Guide for the Uninformed

This is from Michael Ramirez of the Investor’s Business Daily (hat tip Lew Rockwell Blog)

By applying selective attention based on the media’s account (which serves as stimulus), supposedly intelligent people fall for the sensational.