Video: Greenspan Says Stock Markets causes Economic Growth

In the face of US fiscal problems, former Fed chief Alan Greenspan says in the following video interview that only the stock market is truly important.

Quotable:

[3:40] data shows that not only are stock markets a leading indicator of economic activity, they are a major cause of it – the statistics indicate that 6% of the change in GDP results from changes in market values of stocks and homes.

This is just an example of experts who resort to statistics to misleadingly associate asset inflation with economic growth: a post hoc fallacy. This has been anchored on the so-called Wealth Effect myth which sees consumption as drivers of the economy.

As I previously explained real economic growth is about the acquisition of real savings or capital accumulation from production.

And that the real concealed reason for the promotion of the wealth effect has been to justify government intervention.

But of course the principal reason behind the populist consumption economy narrative has been to justify myriad government interventions via ‘demand management’ measures applied against the supposed insufficient “aggregate demand” from so-called “market failures”.

Moreover, the consumption story aims to buttress mostly indiscriminate debt acquisition as a means of attaining statistical rather than real growth based on value creation.

The central banks' serial blowing of asset bubbles is really an illusion that eventually will implode, thus the bubble cycles. 

Also a major reason for such undertaking has been to subsidize the crony banking system, who serves as agents for central banks and as financiers of the political class at the expense of the economy.

Nonetheless, inflating asset bubbles has become the de facto central banking standard adapted by the world monetary authorities, that has been articulated by Mr. Greenspan’s successor, the incumbent Ben Bernanke, as a “smart way” of protecting the economy.

Chart of the Day: Odds of Death

The Economist writes,

ON FEBRUARY 15th DA14, an asteroid 45 metres across, will sail past the Earth at 7.8km a second (4.9 miles a second). At just 27,700km away, it is well within the range of communication satellites. It will be the closest encounter on record with an asteroid this big. In 1908 an asteroid estimated to be around 100 metres in diameter destroyed 2,000 km² of forest in Siberia. Thankfully, such events are rare. NASA has identified 9,600 "near-Earth objects" since 1995, but just 861 with a diameter of 1km or more. The greatest threat to Earth is the 140-metre wide AG5; but it has just a 1-in-625 chance of hitting Earth, and not until February 5th 2040. More prosaic things are far more dangerous. According to data from America's National Safety Council, 27 people died in 2008 in America from contact with dogs (a one in 11m chance of death). The chart below compares the odds of dying in any given year from choking, cycling, being struck by lightning or stung by a bee.

While the odds of dying from a heart disease (467:1) may seem greater than dying from an asteroid impact (74,817,414:1) may be true, the basic problem with extrapolating statistics is that we really can’t determine or we simply DON’T know when that big ONE will arrive in whatever form to claim us.

Thus we can be lulled into complacency by the use of statistics from the risks of false negative errors, or specifically, result/s that appears negative when it should not. 

This reminds me of what author Nassim Taleb calls as the Black Swan Theory: the extreme impact of certain kinds of rare and unpredictable events (outliers) and humans' tendency to find simplistic explanations for these events retrospectively.

For instance, the NASA suspects that DA14’s whizzing past earth may trigger tremors on some parts of the world. Has the impact from such event been incorporated in the computation of the above probabilities? 

A meteor blast in Russia caused 400 injuries a day before DA14. The meteor incident was denied by officials as having been connected with DA14.

If the authorities are right, then this simply reveals how the Russian meteor incident can be construed as an “unpredictable-outlier event” but with limited impact. In short, no one saw this coming.  Yet the incident does not satisfy the ‘extreme impact’ conditions of the black swan model.

On the other hand, if authorities could have been wrong, then the statistical odds of death may have been underestimated, since the likely methodology in arriving at such probability may have been seen only from a direct impact from a meteor/asteroid collision and not from the ancillary events, such as Russia's meteor shower (as defined by CNN), which could have been the advance party of DA14, or from other potential ramifications from meteor or asteroid flybys.

The bottom line is that people tend to overestimate their knowledge of the world and or of the universe to the point that environmental jeremiahs or ecological-phobes use scare tactics to impose social controls on us in order to shape the world according to their false ideals. 

As discussed before the world is much larger than us, where various forms of potential black swans abound: 

While we have been made aware by media of these apocalyptic scenarios through a variety of science fiction movies that could or may occur; such as huge asteroid/s crashing on earth, super volcano eruptions, alien invasion, robot uprising and many more, there are other factors such as the black hole, gamma rays from an imploding star or the unleashing of a mighty wave of solar flares from our sun, that could send our world into oblivion, unpredictably and instantaneously.

Speaking of black holes, a science or Astrophysical journal recently asserted that black holes have been growing faster than expected and have grown beyond the sphere of traditional assumptions where black holes require “galaxy collisions”. 

Our knowledge of the environment has been incomplete and keeps changing.

Quote of the Day: The Right Minimum Wage: $0.00

But there's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market. A far better way to help them would be to subsidize their wages or - better yet - help them acquire the skills needed to earn more on their own.

An increase in the minimum wage to, say, $4.35 would restore the purchasing power of bottom-tier wages. It would also permit a minimum-wage breadwinner to earn almost enough to keep a family of three above the official poverty line. There are catches, however. It would increase employers' incentives to evade the law, expanding the underground economy. More important, it would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.

If a higher minimum means fewer jobs, why does it remain on the agenda of some liberals? A higher minimum would undoubtedly raise the living standard of the majority of low-wage workers who could keep their jobs. That gain, it is argued, would justify the sacrifice of the minority who became unemployable. The argument isn't convincing. Those at greatest risk from a higher minimum would be young, poor workers, who already face formidable barriers to getting and keeping jobs…

The idea of using a minimum wage to overcome poverty is old, honorable - and fundamentally flawed. It's time to put this hoary debate behind us, and find a better way to improve the lives of people who work very hard for very little

This stunning quote comes from the editorial of the New York Times whom have paradoxically been mostly “interventionists” (hat tip AEI’s blogger and Professor Mark Perry).

Video: Milton Friedman on the Minimum Wage Law

In the following video, the late illustrious economist and Nobel prize winner Milton Friedman eloquently explained of the nasty side effects of the minimum wage law: (hat tip AEI's scholar and Professor Mark Perry ) [bold mine]

The fact is, the programs labeled as being “for the poor,” or “for the needy,” almost always have effects exactly the opposite of those which their well-intentioned sponsors intend them to have.

Let me give you a very simple example – take the minimum wage law. Its well-meaning sponsors there are always in these cases two groups of sponsors – there are the well-meaning sponsors and there are the special interests, who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand, and the special interest on the other. The minimum wage law is as clear a case as you could want. The special interests are of course the trade unions – the monopolistic trade craft unions. The do-gooders believe that by passing a law saying that nobody shall get less than $9 per hour (adjusted for today) or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure, that people whose skills, are not sufficient to justify that kind of a wage will be unemployed.

The minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills. That’s what the law says. The law says that here’s a man who has a skill that would justify a wage of $5 or $6 per hour (adjusted for today), but you may not employ him, it’s illegal, because if you employ him you must pay him $9 per hour. So what’s the result? To employ him at $9 per hour is to engage in charity. There’s nothing wrong with charity. But most employers are not in the position to engage in that kind of charity. Thus, the consequences of minimum wage laws have been almost wholly bad. We have increased unemployment and increased poverty.

Moreover, the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by the minimum wage laws are the blacks. I have often said that the most anti-black law on the books of this land is the minimum wage law.

There is absolutely no positive objective achieved by the minimum wage law. Its real purpose is to reduce competition for the trade unions and make it easier for them to maintain the higher wages of their privileged members.

French GDP Shrinks Amidst Surging Stock Market

More signs of today’s financial market-real economy disconnect or the parallel universe.

I earlier posted about the "surprise" recession in Japan, in spite of the “Abenomics” (aggressive monetary and fiscal interventionism), which has bizarrely been viewed by media as justifying more stimulus; after all previous attempts failed.

Add to this the latest development: the contraction in the French economy

From Bloomberg.com

The French economy shrank in the fourth quarter as manufacturers slashed thousands of jobs and President Francois Hollande struggled to keep the nation from falling back into recession for the first time since 2009.

Gross domestic product dropped 0.3 percent in the fourth quarter from the previous three months when it climbed 0.1 percent, the national statistics office Insee in Paris said today in an e-mailed statement. Economists had forecast a 0.2 percent drop, according to the median of 28 estimates in a Bloomberg News survey. GDP fell 0.3 percent from a year earlier.

France, like others among the 17 nations using the euro, is suffering in the wake of the region’s sovereign debt crisis. Yet while neighboring Germany is showing signs of recovery in confidence, exports and manufacturing, Hollande is grappling with tens of thousands of job cuts in companies such as Renault SA and an economy that has barely grown in more than a year.

Whether seen from quarter on quarter…

or annualized…

the French statistical economy has been deteriorating since 2011. (both charts from tradingeconomics.com)

But the French equity benchmark the CAC 40 apparently sees things starkly different from main street. (chart above from stockcharts.com)

One cannot really expect any significant real economic recovery when the Hollande regime has been on an onslaught against capital via class warfare policies and via various economic interventionism. This means that much of the French asset inflation will depend on the continuing bubble blowing policies by Mr. Draghi and his team at the ECB.

Nonetheless if the economic contraction deepens this may lead to a French debt crisis that may spell doom for the ill-fated EU project.

Quote of the Day: Why Is Obama Such A Cheapskate?

Pres. Obama's proposal to raise the minimum wage to $9.00 per hour, reflects his contempt for lower-income people.  If a $9.00 minimum wage would help poorer people - and without any negative effects, as defenders of this form of price-fixing often pretend - why would he not have the state confer untold wealth on us all by raising the minimum wage to $9.00 per minute, or even higher?  Why is he such a piker? After all, wealth is just money, is it not?  And if providing every American with $100 billion in cash would make us all rich, why is he holding back?  If the government of Zimbabwe had the foresight - and generous intentions - to do this, why not America?

This is from Law Professor Butler Shaffer at the Lew Rockwell Blog

Despite Abenomics, Japan Still Mired in Recession

Despite the Bank of Japan’s (BoJ) ramping up of her balance sheet, statistical economic growth remains sluggish

From Bloomberg,

Japan’s economy unexpectedly shrank last quarter as falling exports and a business investment slump outweighed improved consumption, bolstering Prime Minister Shinzo Abe’s case for more monetary stimulus to end deflation.

Gross domestic product contracted an annualized 0.4 percent, following a revised 3.8 percent fall in the previous quarter, the Cabinet Office said in Tokyo today. The median forecast of 32 economists surveyed by Bloomberg News was for 0.4 percent growth. Nominal GDP shrank 0.4 percent on quarter.

An economy still mired in recession suggests a lag before Japan benefits from a weaker yen and rising stocks. Banks from Goldman Sachs Group Inc. to Nomura Holdings Inc. have raised their growth forecasts for this year on Abe’s plan to revive the economy through fiscal and monetary stimulus as central bank Governor Masaaki Shirakawa prepares to exit next month.

Let me be clear: I don’t deny that massive increases in monetary inflation could artificially boost the statistical economy. The issue is about intertemporal sustainability.

Yet one can’t help but notice that the despite the ballooning of the BoJ’s balance sheet from ¥ 10 Trillion in 2011 to a projected ¥ 80 Trillion or ¥ 40 Trillion realized (chart from Danske Bank), Japan’s statistical economic growth has been anemic or in a persistent state of stagnation. 

Chart from tradingeconomics.com

Add to this the recent recession update, which “experts” find excuse as having been a “pre-Abenomics” condition. PM Shinzo Abe regained the political stewardship as Prime Minister in December of 2012.

Whether Abenomics or pre-Abenomics, the solution has been all the same.  The difference has been in the magnitude applied. Politicians and their apologists expect magic from bigger doses of what has failed.

Such social policies can be characterized as “insanity”—doing the same thing over and over and expecting different results.

Rising stock markets in the face of sustained economic recession serve, not only as signs of parallel universe or of a distorted sense of reality, but importantly as symptoms of a deep seated monetary-economic disorder. They represent bubbles.

Japan’s economic minister even has the derring do to target the Nikkei at 13,000 as if inflationism can wish away structural political economic imbalances. Maybe Japan's officials have been covetous of Venezuela where the latter's stock market surged by 300% in 2012 but the people have been suffering from severe shortages of goods as consequence of shrinking supply of hard currencies due to inflationism.

To add, one would note how mainstream economists has wrongly forecasted Japan’s economy, most of them having been enthralled by the prospects of the supposed magic of inflationism.

The real reason for their optimism has been that the currency elixir via BoJ’s inflationism represents subsidies or transfers of wealth to the banking, insurance and finance industry at the expense of society.

Japan’s serial blowing of bubbles will surely end up in societal misery.

As the great Austrian economists and professor Ludwig von Mises warned,

It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits. If the annual depreciation quotas are determined in such a way as not to pay full regard to the fact that the replacement of worn-out equipment will require higher costs than the amount for which it was purchased in the past, they are obviously insufficient. If in selling inventories and products the whole difference between the price spent for their acquisition and the price realized in the sale is entered in the books as a surplus, the error is the same. If the rise in the prices of stocks and real estate is considered as a gain, the illusion is no less manifest. What makes people believe that inflation results in general prosperity is precisely such illusory gains. They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital. It does not matter who these spenders are. They may be businessmen or stock jobbers. They may be wage earners whose demand for higher pay is satisfied by the easygoing employers who think that they are getting richer from [p. 550] day to day. They may be people supported by taxes which usually absorb a great part of the apparent gains.

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

The illusions of inflationism as a path to prosperity will likely be unmasked either by a debt crisis-debt default or by hyperinflation or even by war.

Video: F. A. Hayek Distinguishes Rule of Law and Arbitrary Laws

In the following video the great F. A Hayek distinguishes between the rule of law (general rule) vis-a-vis arbitrary laws (source liberty pen, hat tip Prof Peter Boettke)

Hayek quotes from the video:

Any redistributive policy requires a discriminating treatment of different people. You cannot so long as you treat all the people according to the same formal rules—forcing them to act only to observe the same rules—bring about any distribution of incomes. Once you decide that government is entitled to take from some people in order to give it to others, this is automatically discrimination of a kind for which there can be no general rule. They are purely arbitrary.

After long discussion in jurisprudence, it has come out that the essential point about general rule is you cannot predict who will profit from it and who will suffer from it. Any rule where you know beforehand who will be gainers and who will be the suffers is, in that sense, not a general rule

Once you authorize government to act arbitrarily there is no limit to it.

Not acting to a general rule is arbitrary. It is the only way in which you can define arbitrary.

You distinguish between the people whom you want to have more and the people whom you want to have less

The distinction is between (I can only say) a general rule which applies equally to all and a rule which distinguishes between different groups

Has Private Security Scuppered the Somali Piracy?

Incidences of Somali piracy has significantly declined. The main reason: Private security contractors

From Yahoo.com (bold mine) [hat tip Bob Wenzel]

In truth, the Queen Mary 2 - carrying 2,500 passengers and 1,300 crew from Southampton to Dubai on the first leg of a world cruise - is not particularly at risk.

Some 345 metres long and 14 stories high, even its promenade deck is seven floors above the sea. The liner is fast, hard to board and - on this passage at least - moderately well armed.

Like many merchant vessels, the QM2 now carries armed private contractors when passing through areas of pirate risk.

Cunard will not discuss precise security arrangements. But contractors on other vessels routinely carry M-16-type assault rifles and sometimes belt-fed machine guns, often picked up from ships acting as floating offshore armouries near Djibouti and Sri Lanka…

More from the same article:

Most vessels passing through the area - container ships, tankers, cruise liners and dhows - now register daily with UKMTO. If they believe they are in danger, they will contact the British team to request military support.

"We've had calls when you could hear gunfire and rocket propelled grenades in the background," says Lieutenant Commander Simon Goodes, the current officer in charge. "But lately, the phones are ringing much less."

The only confirmed attack this year, Goodes said, was on a merchant vessel in early January as it sailed towards the Kenyan port of Mombasa. On-board private security guards repelled the assault after a 30 minute firefight…

For many in the shipping industry, the fall in attacks is a vindication of the decision to massively ramp up the use of armed guards.

So far, not a single ship with armed guards has been taken by pirates - although naval officers and other piracy specialists say hired guards can be excessively trigger-happy and have fired on innocent fishermen from India, Oman and Yemen.

The above shows how the private sector can effectively provide security services.

Quote of the Day: The Failure of Leadership

That’s what leadership is all about — solemn and pompous lying. The greatest leaders are those who do it most grandly. Abraham Lincoln, for example. Without his leadership, the US would have probably split apart, which is to say the southern states would have been permitted to exercise the right laid out for them in the Declaration of Independence. They merely demanded to do what the 13 colonies had done before them — to misgovern themselves rather than have it imposed on them by others.

Lincoln — at Gettysburg — told the biggest lie in American history. He said they were fighting to preserve the promise of the revolution, and that the war was a test of whether “any nation, so conceived…can long endure.” In the end, his generals, Grant and Sherman, decided the matter in the negative.

The next greatest leadership debacle came in 1917. That was when Woodrow Wilson launched the US into someone else’s war on the basis of a breathtaking deceit. It was a “war to make the world safe for democracy,” he said. But if that were so, the US went in on the wrong side. Specifically, Britain and France ruled hundreds of millions of people — in Africa, Ireland, India, Southeast Asia — with no votes allowed! Germany, in comparison, was a model of democratic humbug.

Leaders lie. And their leadership — founded on lies — typically brings disasters. WWI was a disaster. Then came an economic disaster — the Great Depression. In the previous depression, 1920-1921, US president Warren Harding and Treasury Secretary Andrew Mellon, simply ignored it. No leadership was provided. Two years later the depression was over.

This is from Agora publishing editor Bill Bonner at the Daily Reckoning.

War on Gold: India’s Smuggling Soars, Vietnam Charges Fees on Deposits, Turkey’s Gold Deposits

What happens when governments think that they can legislate away people’s preferred activities? Well, the obvious outcome has been to shift such activities underground. This applies to social activities like vices e.g. gambling, drugs, alcohol and etc..., security (e.g. guns) or even to money (via gold ownership).

In the case of the Indian government which has recently slapped higher import taxes on gold, the consequence has been that of the explosion of gold smuggling.

Notes the Mineweb: (bold mine)

Cases of smuggled gold entering India are coming in thick and fast. Almost as fast as gold coins and jewellery pieces are flying off retail shelves…

Despite India's best efforts to curb illegal gold imports, which included a boost to the nation's customs in 2012, gold smuggling has been rather rampant.

According to the All India Gems and Jewellery Trade Federation, India imported 950 tonnes in 2012. Of this, 250 tonne has come into the country through the illegal channel.

``In 2011, India imported over 900 tonnes of gold and none of it came through smuggling. The hike in customs duty has not stopped the import of gold into the country. It has only changed the route as smugglers earn a profit of around $3,719 (Rs 200,000) on every kilogram of gold smuggled into the country,'' said Federation Chairman Bachhraj Bamalwa.

The duty rate hike has not dampened demand, it has just enhanced the profit margin of smugglers, he added.

Finance ministry data shows $175 million (Rs 9.4 billion) worth of gold was seized from more than 200 cases of smuggling during April to July 2012. This was a 272% rise from the level of the previous year. Moreover, between 2006-07 and 2010-11, gold seizure was almost nil, data from the directorate of revenue intelligence shows.

In the first 10 months of 2012-13, India's Directorate of Revenue Intelligence seized gold worth $11 million (Rs 601 million) which is some 200kgs at the current price, and cracked 36 cases of smuggling.

The Directorate of Revenue Intelligence is an agency that monitors economic offences. Officers said the incidence of gold smuggling in the current fiscal year has grown by more than eight times as compared to the corresponding period in the previous year.

They added that spot gold prices in India are 5.7% higher than in Dubai. Typically, gold is smuggled into India from neighbouring Dubai and Thailand.

So the implicit gold prohibition via taxation has only been rewarding the smugglers (who are most likely the politically connected), but failing in its goal to “dampen demand”. Talk about policy failure. 

Besides even the relatively higher prices which the average Indians pay for has not curtailed demand.

The Indian government’s war on gold has been premised on all sorts of red herring. They blame gold for contributing to trade deficits, in as much as, supposed risks posed by gold to the banking system. 

For instance for countries who carry cultural affinity for gold, the Business Insider notes that “where gold is a popular investment, those financial institutions which carry large gold deposits, lend cash against gold or offer interest-bearing gold deposit accounts, can pose a risk to the financial system if commodity prices suddenly shift.”

This simply hasn’t been true.

The reality is that the war on gold is about passing the blame on people for what truly has been about government profligacy and policy failure. This has been the case with India which I pointed out in the past.

Aside from cultural legacy, the average Indians value gold for as hedge against currency debasement, again from the Business Insider

Many Indians use gold to hedge investments against inflation. But a working group convened by India’s central bank recently advocated a range of alternative investment products which could be used by the public as an alternative to gold for inflation hedging. Gold-linked savings accounts, bonds and certificates that entitle a holder to physical gold could help reduce demand and quickly move more liquid assets into the country’s banking system, the group suggested.

Gold priced in rupee has skyrocketed by 115x from about 800 INR in 1973 to 93k INR in 2013. (chart from gold.org). The realization of such collapse in real currency value makes the average Indians want to own gold for savings.

However the Indian government essentially wants to arbitrarily transfer people’s savings to the government, channeled through inflation, from which the average Indians have balked at. And so the rampant smuggling.

The same dynamic applies to Vietnam

From the same Business insider article (bold mine)

Vietnam’s government is trying to tackle a similar problem through aggressive intervention in the local gold market. More than 31 percent of Vietnamese households keep some of the shiny stuff on hand, according to a survey by a government finance committee cited in a recent Credit Suisse note. High inflation levels and a weakening Vietnamese currency have made Vietnamese investors even more eager to snap up gold.

The Vietnamese government has intervened to mitigate the resulting spread between local and international gold prices. After temporarily suspending interest-bearing gold deposit accounts and certificates in 2011, the government has told banks and credit facilities to phase out gold deposits and loans for good. The government has also taken over the country’s largest gold refinery, and the State Bank of Vietnam is rolling out a new set of licenses allowing traders to buy and sell gold bars only if they meet strict requirements.

As noted above, the Vietnam government’s attack on gold not only has forced the banking system to charge fees on gold deposits but importantly has used gold as an instrument for controlling banks.

As Kel Kelly at the Mises Canada notes, (chart above his, italics original)

Recently, however, the government-run Vietnamese central bank disallowed loans in gold. Now, it is preventing banks from paying interest to customers on their gold. Instead, it is forcing banks to charge customer to store their gold, and requiring banks to regularly report on their transactions with account holders.

What’s happening is that the government wants to prevent citizens from using alternatives to its own quickly devaluing currency. This, way, the government can continue to steal purchasing power from its citizens through inflation.

Taxing the citizenry for holding gold has been just one approach. The other more conciliatory approach has been to migrate the gold held by the households to the government controlled banking system for the banks to use them.

Notes the Mineweb: (bold mine)

"Gold-based deposit accounts [in Turkey] surged 15% this year through the end of July," explained BusinessWeek back in October, "three times the increase in standard savings accounts."

"Although much criticised for its use of 'unconventional measures'," the Financial Times added in December, "few would argue that the decision last year by Turkey's central bank to allow the country’s banks to buy gold was anything less than a roaring success."

Buying gold isn't quite right. Starting in October 2011, the central bank began allowing commercial banks to hold a portion of their "required reserves" – needed to reassure depositors and other creditors they had plenty of money to hand – in physical gold bullion. Starting at 10%, that proportion was then raised to 30%.

Private citizens were similarly encouraged to hold their gold on deposit with their banks. That gold was thus transferred to the central bank's balance sheet. Et voila! Privately-owned gold now backed the nation's finances. A smart idea, which has coincided with Turkey's currency rising, interest rates falling, huge current-account shrinking, and government bonds regaining "investment grade" status.

Publicly targeting some of Turkey's estimated 2,200 tonnes of "under-the-pillow" gold, currently worth some $119 billion, the CBRT's governor Erdem Basci has meantime been awarded The Banker magazine's prestigious "Central Banker of the Year 2012" award.

Turkey’s government may be more successful in trying to take advantage of people preference for gold by synthesizing gold with banks through gold deposits, relative to the  antagonistic approach by India and Vietnam. 

Yet Turkey's accommodation may be linked to her gas-for-gold trade with Iran where the latter have been slapped by an economic embargo by the US along with her allies.

But Turkey’s gold integration with the banking system can be seen with suspicion. Banks who currently hold gold deposits may become agents of confiscation in the future when the government would have a change of heart.

The US did so in April 5, 1933 via Executive Order 6102 signed by then US President Franklin Delano Roosevelt

The bottom line is that governments disdain competition particularly with money, such that they will resort to taxation or outright confiscation. But all these will not stop people from protecting their savings through hard currencies such as gold.

Russia’s Putin Turns Black Gold into Gold

Prices of gold has been falling but Russia’s Vladmir Putin keeps buying, converting proceeds of Russia’s oil exports to gold.

From the Bloomberg, (hat tip Mises Blog)

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

Gold, coveted by Russian rulers including Tsar Nicholas II and the Bolshevik leader whose forces assassinated him, Vladimir Lenin, has soared almost 400 percent in the period of Putin’s purchases. Central banks around the world have printed money to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.

In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold, data compiled by Bloomberg show. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5 -- less than half what it is now -- the president told the central bank to buy.

Read the rest here

Has the Pope’s Resignation Been About Vatican’s Controversies?

Pope Benedict XVI took the Catholic world by surprise by announcing his resignation at the end of the month allegedly "because of advanced age." (CNN)

While it may be true that part of his calling it quits may be due to health, where the Vatican confirmed that Benedict has had a pacemaker for years, which may have been an aggravating factor, pressure from the Vatileaks scandals could have been the trigger (Huffington Post).

The Vatileaks scandal, according the the Huffington Post in 2012, exposed alleged corruption that “cost the Holy See millions of euros (dollars) in higher contract prices”

Further the article added that this revelation “laid bare power struggles inside the Vatican over its efforts to show greater financial transparency and comply with international norms to fight money laundering. There was even a leak of a memo claiming that Benedict would die this year.”

I guess in lieu of death, resignation may have been the outcome. I blogged about this scandal last year.

Add to this other controversies that has plagued Pope Benedict’s reign.

From Reuters

The child abuse scandals hounded most of his papacy. He ordered an official inquiry into abuse in Ireland, which led to the resignation of several bishops…

Benedict confronted his own country's past when he visited the Nazi death camp at Auschwitz. Calling himself "a son of Germany", he prayed and asked why God was silent when 1.5 million victims, most of them Jews, were killed there.

Ratzinger served in the Hitler Youth during World War Two when membership was compulsory. He was never a member of the Nazi party and his family opposed Adolf Hitler's regime.

Of course most of mainstream media has been silent about this.

Yet in support of Occupy Wall Street, the Pope has spoken, if not ranted, against alleged “greed”, which he mistakenly had attributed to laissez faire capitalism. 

Obviously, he had most likely been utterly confused or deliberately misled (by influence peddlers) in associating cronyism or corporatism for free markets. 

And even more bizarre is that the Vatican has even endorsed the ECB’s inflationism! Redistribution from society (or transfer of wealth) to rich bankers and the political class has been by the Vatican as moral??!!

On the other hand, the Pope’s foray into politics by misreading and distorting economics could have been that capitalism served as convenient smokescreen from the internal controversies, wrangling, and power struggles that put pressure on the Pope and the Vatican.

As I previously wrote,

Is it not that the Bible warned that “He that is without sin among you, let him first cast a stone”? (John 8:7)

Does this not apply to the Vatican too?

Whether due to health or political controversies or both, this shows that Pope Benedict is just human, and thus subject to the frailties of humanity as shown whether in health, moral, organizational or even political economic issues.

Japan’s Economic Minister: We Will Print Money to Boost the Stock Market

Japan’s economic minister announced a target for their stock market.

From the Business Insider

it appears that the Japanese government is trying to talk up stock prices in the same way it's talking down the yen.

Take a look at what Japan's economy minister Akira Amari said on Saturday, via The Japan Times:

“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech...“We want to continue taking (new) steps to help stock prices rise” further, Amari stressed, referring to the core policies of the Liberal Democratic Party administration — the promotion of bold monetary easing, fiscal spending and greater private sector investment.

The 13,000 index target implies around 17 percent upside in February and March. The pace may sound ambitious, but then again, Japan is one of the hottest momentum trades in the world right now.

Well such announcement resonates with what I call as the Bernanke doctrine.

The following was written by incumbent US Federal Reserve Chairman Ben Bernanke when he was still in the academia. (I have posted this numerous times here)

From ForeignPolicy.com

There's no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

In short, the de facto character of social policies today has been to inflate asset bubbles. A policy assimilated by global political authorities as embodied by Ben Bernanke’s theories.

Don’t forget that debasing of the currency or the yen in support of the stock market implies for a redistribution of resources from the main street or the real economy to stock market investors. 

Japan’s banking and insurance industry are said to be heavily exposed to the stock market (Takeo Hoshi and Anil K Kashyap 2004) 

Contradicting the supposed intent sold to the gullible public as promoting competitiveness, debasing the yen to boost the stock market seems more of a concealed form of redistribution scheme that benefits Japan’s version of Wall Street.

Yet at the end of the day, unsustainable bubbles will pop.

Again as I said last Sunday, policymakers hardly ever learn, which is why bubble cycles exist.

Curse of the Laffer Curve: Why Manny Pacquiao Prefers His Next Fight Outside the US

Boxing legend Manny Pacquiao seems to have joined the list of celebrities in implicitly denouncing class warfare policies by voting with their feet. 

More signs of the curse of the Laffer curve (elasticity of taxable income) in motion.

From Yahoo.com

Manny Pacquiao's chief adviser insisted Monday that the Filipino superstar's preference is for his next bout – a fifth fight against Juan Manuel Marquez – to take place away from Las Vegas, with the off-shore Chinese gambling resort of Macau emerging as the "favorite."

Michael Koncz told Yahoo! Sports that the 39.6 percent tax rate Pacquiao would face if he were to fight again in the U.S. makes a fall bout in Las Vegas "a no go."

Promoter Bob Arum is hopeful of arranging a fifth match between Pacquiao and Marquez in the fall, potentially on Sept. 14. Arum's preference is for the fight to be at the MGM Grand in Las Vegas, which is his company's home base.

But Arum and Koncz say Pacquiao is balking at the additional money he'd lose to the government if the fight were held in Las Vegas. Arum said Pacquiao would not have to pay taxes if the fight takes place in casinos in either Singapore or Macau.

"Manny can go back to Las Vegas and make $25 million, but how much of it will he end up with – $15 million?" Arum said. "If he goes to Macau, perhaps his purse will only be $20 million, but he will get to keep it all, so he will be better off."

Mr. Pacquiao appears to have learned his lessons from his domestic experience.  

Philippine tax authorities has continually been pressuring, if not harassing, by filing criminal charges against him for "failing to present his tax records"in 2012. 

The persecution of Mr. Pacquiao may have been politically motivated. This can be traced to his previous endorsement of the opposition in the 2010 presidential elections, as well as having joined the opposition political party of led by vice president Jejomar Binay (PDP Laban) in 2012.  Mr. Pacquiao has also been known ally of the ex-President GMA.

Nonetheless international celebrities opting to vote with their feet, which serves as an implicit tax protest, signifies as more bad news for the welfare-warfare state.

Quote of the Day: The Social Costs of Regulations

Rahm’s Rule is a useful accessory to a body of theory that seeks to explain the political economy of regulation. The rule tells us that major crises can provide cover for distributing benefits to targeted special interest groups. The greater the magnitude of a given crisis and the shorter the interval for forming legislation to deal with it, the larger the spread of pork that can be packed into the final legislation. Rahm’s Rule is a guarantee that efforts to resolve a deadline-based crisis will go on to the very last minute. We might keep this in mind for the next deadline-driven crisis.

In today’s economy, regulation is found at every meaningful margin. Politicians set and rearrange prices for important services and products for consumers nationwide. They open and close market entry and give advantage to favored groups by altering taxes, depreciation schedules, and other regulatory schemes. Doing all this in the full light of day and with full and open debate would be a challenge. But then there are crises to serve the politicians’ interests. Some arise spontaneously and some are created or magnified consciously by the politicians themselves. The sequestration element in the fiscal cliff story is an example. The shouts of crisis and the end of western civilization that preceded TARP are another. In all cases, Rahm’s Rule applies: “You never want a serious crisis to go to waste.”

This is from Professor Bruce Yandle at the FEE, discussing the social costs of regulations, as well as, the concentration of benefits from arbitrary regulations that are funneled into political power blocs, which are especially pronounced during the implementation of crisis management measures.

One can't help but suspect that much of the ongoing and past crises may have been engineered or concocted by politicians and their cronies as part of advancing their interests.

Quote of the Day: How Devaluations Make Difficult Economic Calculation

Governments in countries like the United Kingdom have destroyed much of their manufacturing industry through currency depreciation, while Germany contrasts with a history of engineering excellence and a firm currency. The German business owner in the post-war years had relative certainty of economic calculation, allowing him to build up his productive wealth; while the British business lobby resorted to encouraging successive governments to keep costs down by devaluing the pound, rather than investing their own resources in more efficient production.

Reducing costs by managing the currency is, to put it less politely, all about robbing the workforce of the purchasing power of its wages. But the workforce is, in economic terms, made up of individual entrepreneurs selling their skills and labour to employers. They are the unconscious victims of devaluation as indeed are small businesses, but at least in the short-term the central planners manipulating fiat money congratulate themselves that jobs have been saved.

The cost comes later, as consumers – who in turn are also entrepreneurs and savers – pay the bill through higher prices and lose on their savings through lower interest rates and monetary value. So where’s the benefit?

None. The history of nations whose governments respect sound money, such as Germany and Japan in the post-war years, has been one of persistent economic progress, despite otherwise economically incompetent governments. This is in contrast with the UK and some European countries, whose continual devaluations were always accompanied by economic underperformance. Since then all governments have increased their currency debasement efforts. Nevertheless, it is striking that businesses do better with a stable currency in the long run than with the supposed benefits of these continual devaluations.

This is from GoldMoney’s Alasdair Macleod on the Impossibility of Economic Calculation in a fiat world