War on Cash and Informal Economy: Russia to ban Transactions over $10,000

Since the financial crisis of 2008, governments around the world have taken financial repression to a higher level. 

Russia’s government plans to restrict cash transactions supposedly to increase bank reserves, as well as, to curtail her informal economy which allegedly has grown to at 50%-65% of national output.

From Russia Beyond the Headlines (hat tip Zero Hedge) [bold mine]

Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015. The move is expected to boost banks’ cash reserves and put a damper on Russia’s shadow economy. However, the middle class will most likely end up having to pay the price for the scheme.

Moscow is looking to kill two birds with one stone: Firstly, it wants to bring some of the population’s “grey” income out of the shadow; secondly, it wants to increase the volume of cash reserves in the banks. The government’s bill will introduce the new rule to the State Duma. The document was prepared by the Ministry of Finance and approved by the government.

The proposed transition, from the same article.

The restrictions on cash transactions will develop in two phases. In 2014, a ban on cash payments for purchases worth more than 600,000 rubles (about $19,500) will be introduced; the limit will then be halved to 300,000 rubles in 2015. Furthermore, the document introduces mandatory, cash-free, salary payments.

Smaller companies with fewer than 35 employees will be the only exception, and trade companies will be able to pay salaries in cash if they employ no more than 20 people on staff.

Informal economies are basically products of an anti-business regimes based on over-regulations and various forms of social and economic controls, bureaucratic morass, high taxes, rampant inflationism and high welfare economies or simply said a highly politicized economic environment. 

Informal economies are what I would call guerrilla capitalism. 

Yet the desire to simply restrict cash transactions will likely fail, and the produce outcomes opposite of the intentions. 

Such restrictions will likely provide a huge disincentive for Russian firms to expand beyond 35 employees (20 for trading firms) that would limit attaining competitiveness. 

Russian firms are also likely take advantage of such legal loopholes to maintain numerous small companies than to consolidate them. 

In short, more restrictions promote the incentives to remain in the informal or shadow economy.

More from the report:

Even now, cash withdrawals on payday account for around 85 percent of all ATM transactions. Moreover, in 2005–2011, cash flows more than quadrupled. According to Bank of Russia estimates, more than 90 percent of all commodity purchases in Russia are paid for in cash.

The government is now trying to bring the shadow economy into the light and increase money flows into the treasury, according to Investcafe analyst Yekaterina Kondrashova. In her words, as soon as the new rules come into effect, those using unofficial wage payment schemes will encounter certain difficulties, although there could be some ways to circumvent the law.

Governments are against informal economy simply because they defy political control and in so doing the private sectors retain their resources or savings, which the government desires to tap or to confiscate via taxation or various fees, so governments naturally come up with the usual excuses to justify their actions, such as money laundering…

The Ministry of Internal Affairs and the National Anticorruption Committee estimate the market for money laundering and cash conversions at somewhere between 3.5 and 7 trillion rubles ($113–230 billion) — about 60 percent of the Russian federal budget.

Rosstat reports that the volume of the shadow economy (“grey” money from tax evasion, compensations paid as “cash in envelopes” and violations of currency and foreign trade regulations) is at least 15 percent of the GDP, according to Ricom-Trust senior analyst Vladislav Zhukovsky.

Given the substantial criminal activity and illegal entrepreneurship, the grey and black economies account for 50–65 percent of GDP. Even former Central Bank Chief Sergey Ignatyev had to admit that about $50 billion was taken out of Russia illegally in 2012 alone.

Russia’s informal economy has been expanding during the post-USSR era, the informal economy grew from an estimated 23% in 1993 to 46.6% in 2006, and now 50-65% based on the above report.

Yuriy Timofeyev of the Frankfurt School in a a paper “The Effects of the Informal Sector on Income of the Poor in Russia” notes that Russia’s informal economy “played a significant role in stimulating the country’s  economic activities and in educating the new businessmen in many skills”. 

And that “In some sense, the shadow economy has been a place where many economic entities have gained initial experience and entrepreneurial skills and have accumulated the initial capital needed for a transfer into the official sector. The shadow economy, to some extent, has played a positive role, stimulated overall economic activities, and has generated employment and additional income, which is especially important for the poor part of the population”. 

In other words, restricting cash flows will prevent productive "informal" enterprises from flourishing and from transferring to the official sector. Such policies would only defeat its purpose.

So the Russian government will squeeze wealth from productive sector and transfer them to the politically privileged banking system via building up of cash reserves. Of course, the Russia's banking system serves as main intermediaries to the funding needs of the government (foreign ownership of Russian bonds are low), aside from direct financing.

I would also like to add that the informal economy is not necessarily "free". They principally include informal arrangements with many authorities via bribery or other forms of business easing concessions or popularly known as "corruption". 

If measured from Transparency International, Russia ranks as one of the most 'corrupt" countries in the world (133 out of 176 in 2006). Bribes accounted for 20% of GDP as of 2005. 

So "corruption" is tightly linked with the informal economy.  In short, "corruption" represents as another offshoot to economic repression, aside from the informal economy.

Yet more politicization and cronyinsm from the same article:

There is another side to the move toward plastic, however. Cash-free payments will result in higher prices for some goods and services. The middle class will suffer the most, because the “risk group” includes property and automobile transactions. The luxury segment will also be affected, including customized tours.

The problem is that Russian banks charge commissions ranging from 2–4 percent of the total amount of cash-free transfers. Sberbank charges up to 2 percent, says Irina Tyurina, spokesperson for the Russian Union of Travel Agencies.

Well so much for the bullishness in emerging market economies who punishes productive activities.

BBC on Bitcoin

The spike in the public's interests over bitcoins, particularly during the latest Cyprus crisis, have been generating much publicity, albeit mostly negative.

In the following video, the British media outfit the BBC tries to balance the views between users and advocates against detractors. Nonetheless BBC seems troubled by the rise of  "stateless virtual money". (hat tip lew rockwell blog)

Income Inequality: The Austrian Perspective

Roger Koppl at the Thinkmarkets blog explains the controversial issue of income inequality from the Austrian school perspective;

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

Liberal political theory tells us to expect that sort of thing as a sort of disease to which the body politic is subject under representative democracy. Our presumption, then, should be that much of the inequality of any epoch is produced by tariffs, licensing restrictions, bailouts, and other specific acts of governments. Most of the time the game is rigged more or less. (The trick of constitutional design is to minimize this evil bathwater without tossing out freedom or democracy.) The more a society’s income distribution is determined by politics and not markets, the more it will be skewed away from whatever pattern would emerge in a less fettered market economy. And in general, that skew will be toward greater inequality. As the political component grows, we can expect power to be concentrated in fewer and fewer hands and income distribution be more and more unequal. If political power is growing, we should strongly suspect that some of the rich are using the state to squeeze money from most of the poor.

Mr. Koppl identifies four ways governments create such inequality: Privatizing profits and socializing losses, Regulation, Collapse of the rule of law and Public Schools

Pls read the rest here

Quote of the Day: The Roots of the Too Big To Fail Doctrine

For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

(italics original) 

This is from Austrian economics professor Joseph Salerno at the Mises blog

Cancer treatment that kills every kind of cancer tumor

The information age will continue to bring about massive technological breakthroughs in various aspects of life. 

The “one drug that rules them all” in terms of cancer treatment may have just been discovered

From NY Post (hat tip EPJ)

Researchers might have found the Holy Grail in the war against cancer, a miracle drug that has killed every kind of cancer tumor it has come in contact with.

The drug works by blocking a protein called CD47 that is essentially a "do not eat" signal to the body's immune system, according to Science Magazine.

This protein is produced in healthy blood cells but researchers at Stanford University found that cancer cells produced an inordinate amount of the protein thus tricking the immune system into not destroying the harmful cells.

With this observation in mind, the researchers built an antibody that blocked cancer's CD47 so that the body's immune system attacked the dangerous cells.

So far, researchers have used the antibody in mice with human breast, ovary, colon, bladder, brain, liver and prostate tumors transplanted into them. In each of the cases the antibody forced the mice's immune system to kill the cancer cells.

"We showed that even after the tumor has taken hold, the antibody can either cure the tumor or slow its growth and prevent metastasis," said biologist Irving Weissman of the Stanford University School of Medicine in Palo Alto, California.

Fitch Credit Upgrade: Phisix Mania Phase in Full Throttle

(no stock market commentary this weekend)

Contrary to mainstream expectations, the US credit rating agency Fitch Ratings’ upgrade of the Philippines to “investment status” only reveals of the deepening of the manic phase of  Philippine asset bubbles.

Financial markets are supposed to function as discounting mechanisms. This means that when expectations have been heavily anchored on a specific factor to influence the market, usually when such event occurs, markets do the opposite. Such serves as the typical force behind the axiom “buy the rumor, sell the news”

But local markets seem to be saying “this time is different”.

The local market has been expecting such an upgrade. As I wrote during at the end of the year:

Many factors have been rationalized for Phisix 6,000 and beyond for 2013; among them, strong economic growth, election spending, strong corporate earnings, reforms by the PSE to become Sharia compliant or open to Muslim investors, potential credit upgrades, bulging interests from residents, potential capital flows from foreign investors due to the above and etc…

The domestic financial market became delirious when the news broke out. The Philippine equity benchmark, the Phisix zoomed by 2.74% Wednesday, while the Peso reversed losses and advanced from yesterday’s 41.07 to 40.8 or a .6% gain.

Yesterday’s move, plus the gains from the last two days add up to 5.04% returns for the holiday abbreviated week. The Phisix essentially erased two weeks of profit taking and has swiftly recovered its latest highs. This extrapolates to the Phisix 10,000 for 2013 is back in play.

I anticipated that the recent correction would likely be short-lived, a week back I wrote,

This week’s correction mode in the Phisix may possibly continue, perhaps headed towards a 5-10% level from the recent peak. However, such retrenchment phase is likely to be one of a short duration.

The upgrade report from Bloomberg

An exit from so-called junk status bolsters Aquino’s drive to transform the nation into one of the region’s fastest-growing economies 15 years after the Asian financial crisis of 1997-98. The upgrade may also boost capital inflows and complicate the job of the central bank as it tries to rein in an appreciating peso and curb asset bubbles.

Curb asset bubbles?

I also noted that the lowering of interest rate of special deposit accounts (SDA) will help fuel this rebound.

And the manic phase will be accompanied by an intensive accumulation of systemic credit which will most likely be supplemented by last week’s easing of the 1.86 trillion peso Special Deposit Accounts (SDA) by the BSP.

Remember, the BSP explicitly desires that the banking system’s money deposited at the BSP be “withdrawn” and “circulated” in the economy, since according to them SDA money will hardly extrapolate to inflation risks.

In other words, the BSP’s recent SDA policies will account for as providing implicit support to the domestic asset markets, in addition to its current record low interest rates.

This doesn't seem to be "reining" asset bubbles. Instead the BSP has been providing fuel to the combustion.

 

And since mania, for me, signifies as the yield chasing phenomenon that have been rationalized by voguish themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion

Well the so-called upgrade on local debt only means MORE debt and MORE yield chasing.

Here is the latest debt figures from the Bangko Sentral ng Pilipinas (BSP):

Loans for production activities—which comprised more than four-fifths of banks’ aggregate loan portfolio—grew at a slower pace of 15.2 percent in February from 16.0 percent (revised) in January. Similarly, the growth in consumer loans eased slightly to 12.0 percent in February from 12.4 percent (revised) in January due mainly to the slowdown in credit card receivables and other household loans.

The expansion in production loans was driven primarily by increased lending to the following sectors: real estate, renting, and business services (25.1 percent); financial intermediation (27.2 percent); wholesale and retail trade (14.2 percent); manufacturing        (7.3 percent); and, electricity, gas and water (12.7 percent). Meanwhile, declines were observed in lending to agriculture, hunting, and forestry (-13.3 percent) and in other community, social and personal services (-3.9 percent).

Putting it in perspective:

The BSP omitted (purposely or accidentally) in their press release the construction debt data, which skyrocketed by 57% year on year. 

But both financial intermediary and real estate loans are above 25%, which has been more than 3x statistical economic growth. 

Household leverage (demand) has also been ballooning but at a much slower pace than the supply side. But again growth in household debt essentially is double the rate of economic growth.

And the jump in debt figures has translated to a substantial growth in money supply, again from the BSP (bold mine)

Domestic liquidity (M3) grew by 9.9 percent year-on-year (y-o-y) in February to reach P5.0 trillion. This growth was slightly slower than the 10.2 percent (revised) expansion recorded in the previous month. On a monthly basis, seasonally-adjusted M3 expanded at a slower pace of 0.6 percent compared to the 0.8 percent (revised) month-on-month growth in January.

The growth in money supply was driven largely by the expansion in net domestic assets (NDA). NDA grew by 19.7 percent y-o-y in February from 21.9 percent (revised) in the previous month following the sustained increase in credits to the private sector, buoyed by the robust lending activity of commercial banks. Claims on the private sector increased by 14.9 percent in February. By contrast, claims on the public sector contracted at a slower pace of 4.3 percent in February compared to the decline of 4.6 percent (revised) in the previous month, as the growth of National Government deposits continued to slow down.

Move along, nothing to see here. No asset bubbles according to the government and their apologists.

 

Of course the upgrade will also inspire more debt, not only from the private sector but also from the government. As I recently pointed out

I may add that credit rating upgrades by international credit rating agencies will further whet on the appetite of domestic political authorities to wantonly engage in more public spending that may indeed help propel an artificial boom but at the bigger cost to the society in the future through an economic bust, higher taxes and higher costs of living.

So you have debt growing a lot faster than the economy. Also supply side debt has been outpacing the demand side.

The Philippine credit bubble has likewise been reflected on the Philippine Stock Exchange via sectoral performance.

This week’s action reveals that the main beneficiary of sharp bounce has been the property sector.

On a year to date basis, the property-financial-holding sectors remain as the biggest winners.

One must be reminded that the troika of US credit rating agencies (Fitch, Moody’s and S&P) not only failed to see the US crisis, but were part of the problem; they played a significant role in advancing economic and financial imbalances that led to the crisis.

The credit rating upgrade just shows how the mania phase of Philippine asset bubbles has been running on full throttle. 

It also suggests of more miseries ahead. As I previously wrote,

Remember massive government spending means more debt or higher taxes or higher consumer prices in the future. And credit upgrades only add to this incentive to borrow rather than to institute real reforms.

Instead of a blessing, such development represents a blight. It is a Trojan horse.

Why Entrepreneurship is an Art

Marketing guru Seth Godin says it best

Studying entrepreneurship without doing it...

...is like studying the appreciation of music without listening to it.

The cost of setting up a lemonade stand (or whatever metaphorical equivalent you dream up) is almost 100% internal. Until you confront the fear and discomfort of being in the world and saying, "here, I made this," it's impossible to understand anything at all about what it means to be a entrepreneur. Or an artist.

That’s why you don’t learn entrepreneurship in classrooms.

Stagflation will Add to Cyprus, Eurozone woes

Contra to the mainstream meme that the world has been faced with deflation*, stagflation has been the current problem. 

*the definition of inflation and deflation has been mangled to mean alot of different things.

That’s according to Zero Hedge (bold and italics original)

Even more bad news for Cyprus, which now has not only a depression to look forward to but a depressionary stagflation to boot. Bloomberg has ranked countries based on their risk of stagflation based on the following methodology: First, the average real Gross Domestic Product and average Consumer Price Index was calculated for each country from 2012 to 2014. Then the Stagflation Score was determined by multiplying average real GDP by average CPI if the average real GDP was negative or by dividing average real GDP by average CPI if the average real GDP was positive. The lower the score, the greater the risk of stagflation. The winner, or loser at the case may be? Cyprus was found to be most at risk of stagflation with a Stagflation Score of -4.733, followed by Portugal (-2.671), Italy (-2.133), Spain(-1.745) and Greece (-1.366). Switzerland was ranked least at risk with a score of (7.560), followed by China (2.612) and Japan (2.446).

If stagflation becomes a real menace, then this will impact the “risk ON” phase of global financial markets.  And gold and commodities will recapture the public’s attention

Example of the Mania Phase: Awards Received by the Bank of Cyprus

Euphoric sentiment is one principal trait of the manic phase; particularly the feeling of overconfidence, grandeur,invincibility and or infallibility. 

As I previously pointed out it had been no different in Cyprus whose banking system thought they were “immune” or "decoupled" to the euro crisis such that they even passed the “stress test” conducted by the European Banking Authority in 2011.

Chris Rossini at the Economic Policy Journal enumerates the string of awards that Bank of Cyprus received during their heyday or the pinnacle/climax of the bubble cycle.

The Bank of Cyprus, which is stealing up to 40% of deposits from those with more than 100k Euros, had quite a veil of legitimacy. 

Check out the prestigious awards that the bank recently earned:

Feb 25 2011 - The Banker magazine ranked the Bank of Cyprus amongst the leading banks of the world.

Apr 4 2011 - The prestigious Global Finance financial magazine honours the Bank of Cyprus with the title of Best Bank in Cyprus.

Jun 15 2011 - The Bank of Cyprus has succeeded in being included in the category of «Best Banking Organizations» worldwide at the annual World Finance Banking Awards of the internationally acclaimed financial magazine World Finance.

Sept 13 2011 - In the framework of its annual “Awards for Excellence 2011”, the Bank of Cyprus was named Best Bank in Cyprus by the international financial magazine EUROMONEY.

Nov 1 2011 - The Bank of Cyprus was awarded the ‘JP Morgan Chase Quality Recognition Award’ for its funds transfer operations for the eleventh consecutive year.

Dec 1 2011 - The Bank of Cyprus was named “Bank of the year 2011” in Cyprus by the prestigious international financial affairs publication The Banker, during its annual “Bank of the Year Awards 2011.”

Feb 9 2012 - Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY.

Mar 23 2012 - The international financial magazine ‘Global Finance’ has named the Bank of Cyprus the best banking institution in Cyprus in the Developed Markets category of “World’s Best Banks Awards”.

Sep 26 2012 - Bank of Cyprus has been awarded the ‘2011 Citi Performance Excellence Award’ by the world-renowned financial organization Citibank, for global electronic payments leadership and excellence.

Notice that the accolades flowed from 2011 until September of 2012, which was only a few months back.

Then events unhinged or unglued pretty fast.

It has been part of the mainstream’s propaganda to say that current system based on fiat money has been hunky dory and functioning well. The reality is that it hasn’t.

Yet when aura of superiority, augustness and opulence have been propped up by a credit bubble, watch out. 

This applies to any country or region, Asia and the Philippines notwithstanding.

Quote of the Day: Invoking Democracy to Destroy Freedom

People are taught that, thanks to democracy, coercion is no longer dangerous because people get to vote on who coerces them. Because people are permitted a role in choosing who will be in charge of the penal code, they are free. Being permitted to vote for politicians who enact unjust, oppressive new laws magically converts the stripes on prison shirts into emblems of freedom. But it takes more than voting to make coercion benign.

The fiction of majority rule has become a license to impose nearly unlimited controls on the majority and everybody else. The doctrine of “majority rule equals freedom” is custom-made to turn mobs of voters into spoiled children with a divine right to plunder the candy store. The only way to equate submission to majority-sanctioned decrees with individual freedom is to assume that individuals have no right to live in any way that displeases the majority.

The more confused people’s thinking becomes, the easier it is for rulers to invoke democracy to destroy freedom. The issue is not simply Lincoln ‘s, Roosevelt’s, Clinton’s or Bush’s absurd statements on freedom but a cultural–intellectual smog in which politicians have unlimited leeway to redefine freedom. If politicians can redefine freedom at their whim, then they can raze limits on their own power.

This is from libertarian author and lecturer James Bovard at the Freeman.

It is important to distinguish constitutional/liberal democracy with that of social democracy and of mob rule (Ochlocracy)

Classroom-less World: The World is your Classroom

The information age will be more about disruptive innovations or reconfiguring specific social activities via decentralized platforms. 

This should apply to education where online classes may be a transition towards a more decentralized paradigm: ‘Socialstructed learning’ or the world as your classroom.

Socialstructed learning as defined by Ms. Marina Gorbis writing at fastcoexist.com “is an aggregation of microlearning experiences drawn from a rich ecology of content and driven not by grades but by social and intrinsic rewards. The microlearning moment may last a few minutes, hours, or days (if you are absorbed in reading something, tinkering with something, or listening to something from which you just can’t walk away). Socialstructed learning may be the future, but the foundations of this kind of education lie far in the past.”

How the possible transition will go about, again Ms. Gorbis

Today’s obsession with MOOCs is a reminder of the old forecasting paradigm: In the early stages of technology introduction we try to fit new technologies into existing social structures in ways that have become familiar to us.

MOOCs today are our equivalents of early TV, when TV personalities looked and sounded like radio announcers (or often were radio announcers). People are thinking the same way about MOOCs, as replacements of traditional lectures or tutorials, but in online rather than physical settings. In the meantime, a whole slew of forces is driving a much larger transformation, breaking learning (and education overall) out of traditional institutional environments and embedding it in everyday settings and interactions, distributed across a wide set of platforms and tools. They include a rapidly growing and open content commons (Wikipedia is just one example), on-demand expertise and help (from Mac Forums to Fluther, Instructables, and WikiHow), mobile devices and geo-coded information that takes information into the physical world around us and makes it available any place any time, new work and social spaces that are, in fact, evolving as important learning spaces (TechShop, Meetups, hackathons, community labs).

We are moving away from the model in which learning is organized around stable, usually hierarchical institutions (schools, colleges, universities) that, for better and worse, have served as the main gateways to education and social mobility. Replacing that model is a new system in which learning is best conceived of as a flow, where learning resources are not scarce but widely available, opportunities for learning are abundant, and learners increasingly have the ability to autonomously dip into and out of continuous learning flows.

The good news is that the radical decentralization of the educational process will translate to its democraticization. With learning resources becoming more “abundant”, this means prices will fall towards zero bound— yes free education. And this means that education will span to cover greater number of people who will have access to specialized learning. This will also mean lesser politicization of the industry.

On the other hand, education service providers will have to discover other sources of revenues.

Also traditional education institutions will need to redraw their business models in order to adapt with the current changes otherwise face extinction.

Quote of the Day: Currency/Capital Controls: A decisive advance on the path to totalitarianism

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

This is from the great Austrian economist Friedrich von Hayek in his 1944 classic The Road to Serfdom

How Earth Hour Policies (Green Energy) Hurt Consumers: UK Edition

In UK, the push for green energy has only been prompting for higher energy bills.

The editorial of UK’s news outfit the Telegraph decries on the political obsession for green energy (hat tip AEI’s Professor Mark Perry)

With the worst snow conditions in the country since 1981, it’s worrying, to say the least, that gas supplies are running low. A month ago, The Sunday Telegraph warned in this column of the problems of an energy policy that puts expensive, inefficient green power before coal-fired and nuclear power. There have been a few signs that the Coalition is at last turning its attentions to the issue but, still, not nearly enough has been done. Now we are reaping the consequences. Because of a misguided faith in green energy, we have left ourselves far too dependent on foreign gas supplies, largely provided by Russian and Middle Eastern producers. Only 45 per cent of our gas consumption comes from domestic sources. All it takes is a spell of bad weather, and the closure of a gas pipeline from Belgium, to leave us dangerously exposed, and to send gas prices soaring. Talk of rationing may be exaggerated, but our energy policy is failing to deal with Britain’s fundamental incapacity to produce our own power.

Ed Davey, the Energy Secretary, may have granted planning permission this week to a new nuclear power station, Hinkley Point in Somerset. But one nuclear power station, with two new reactors, isn’t nearly enough. Moreover, it will take a decade to build and, even then, will only provide seven per cent of the country’s energy needs.

It is time for the Coalition to tear up its energy policy before the lights really do go out. The first priority must be to repeal the Climate Change Act of 2008, with its brutal, punishing targets: reducing carbon emissions by 80 per cent by 2050, and 26 per cent by 2020. These targets have already had a disastrous effect, forcing the closure of coal-fired power stations, and increasing tax-funded subsidies on wind power. Next month, electricity bills will soar even higher, thanks to a new tax on carbon dioxide produced by coal-fired and gas-fired power stations.

There are good intentions behind a green energy policy, and no one would wilfully want to damage the environment. But green technology – in its current incarnation, anyway – is just too inefficient and expensive to meet our energy needs. In some of the worst weather for more than 30 years, green power still only provides a tiny fraction of our energy needs. Solar power is of limited use in our cold, dark, northern climate. And wind power isn’t much better – cold weather doesn’t necessarily mean windy weather.

As previously pointed out, earth hour/green energy policies are essentially misanthropic for such policies promote economic hardship and even death. The above is just an example.

Popularity or popular themes don’t make ideas valid or sound. Take it from Albert Einstein: 

What is right is not always popular and what is popular is not always right

How Money Oozed out of Cyprus during Negotiation of Bailout Deal

And almost everyone thought that the public’s money froze in Cyprus as ATMs went out of cash and banks were officially closed while local politicians haggled with unelected eurocrats for a bailout deal which was concluded right before the deadline.

Well, reports say that money had oozed out of Cyprus during the weekend.

From Reuters: (bold mine) 

In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned... on a daily basis was much less than it was in reality," the source said.

Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 percent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece - it is heavily exposed to the euro zone's first bailout casualty.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

Chris Pavlou, who was vice chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Two angles here. 

One, people always search for alternatives by exploiting on legal or regulatory loopholes. As indicated above, some took advantage of the London branches of Cyprus banks to withdraw their money.

On the other hand, aside from the controversy where the Cyprus president warned his friends of the imminence of the crisis, in the world of politics, there will always be exceptions to the rule. This applies most especially in favor of the politically connected. What would be needed are "valid" justifications for such actions.

As George Orwell once wrote in Animal Farm: All animals are equal, but some animals are more equal than others

BRICs Mull Bank to Bypass World Bank and IMF

Developing economies represented by the BRICs or Brazil Russia India and China, a popular acronym coined by Goldman Sach analyst Jim O’Neill, have been reported as intending to establish their own multilateral bank to bypass or breakout from the clutches of the influences of the US and the World Bank-IMF cabal. 

From Bloomberg:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The growing role of emerging markets suggests of a commensurate expansion in geopolitical clout. From the same article:

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe…

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. 

But such plans are still on the drawing board…

While BRICS leaders may approve the creation of a development bank in principle at the summit, there’s still disagreement on how it should be funded and operated.

There is more than meets the eye from this development.

 

The BRICs has been expressing apprehension over central bank 'credit easing policies' adapted or imbued by developed economies led by the US Federal Reserve. 

Russia’s Putin calls Bernanke’s QEs as “hooliganism”. Brazil has blamed the Fed for inciting a currency war, and so with China’s censure of QE. 

And partly in response and also in part to promote advancing her geopolitical role, China has been promoting the yuan, via bilateral trade arrangements to the BRICs and the ASEAN.

BRICs along with other emerging markets have been major buyers of gold

Emerging markets led by the BRICs dominated buying in 2012 according to the Bullion Street:

Central bank buying lifted gold last year and is likely to do so this year as more and more emerging market central banks have become first time buyers in recent years.

Observers said central banks across the globe collectively bought more gold than they had previously over 40 years. The buyers were not the usual central bank suspects among the old world European nations, but emerging economies.

And also in 2011 (chart from Reuters)

And recent events in Cyprus only exhibits of the rapidly deteriorating state of the current central bank based fiat money system. 

As Tim Price at the Sovereign Man aptly commented

It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

So the BRICs dissension over the current system has been prompting them to "diversify" (euphemism for acquiring insurance through gold purchases), as well as, to work on creating an alternative system that would circumvent the US dollar standard, possibly with their own bank. 

Perhaps BRICs officials are becoming more aware of the warning given by the French historian and philosopher François-Marie Arouet, popularly known by his nom de plume Voltaire: Paper money eventually returns to its intrinsic value--zero.

Video: Robert Wenzel on the Collapse of the Soviet Union: Facts versus Myths

At the recent Austrian Economics Research Conference held in the Mises Institute, Economic Policy Journal's Robert Wenzel gives an excellent speech examining the real factors that led to the collapse of the Soviet Union.

Central Bank Fractional Banking System: Bank Runs or Inflation

The incumbent central bank fractional banking system means a choice between bank runs and price inflation.

The great dean of Austrian school of economics Murray N. Rothbard explained. (bold mine)

1. Why fractional reserve banks are uninsurable

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.

2. Money Printing as camouflage. The political choice of inflation over bank runs.

What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government--and not the states or private firms--can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.

Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

But now bank runs--at least for the overwhelming majority of banks under federal deposit insurance--are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.

The political choice of inflation over bank runs can be seen via the loss of US dollar’s purchasing power.

Since the establishment of the US Federal Reserve in 1913, one US dollar in 1913 has an equivalent of buying power of $23.45 today according to the BLS inflation calculator. This means the US dollar have lost nearly 96% of their purchasing power. Chronic and unlimited inflation indeed.

The other implication is that the choice of inflation over bankruns means a subsidy to banks at society's expense.

 

3. Abolish the central banking system and ancillary regulators. Restore sound money

Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.

Cyprus, Troika Reach Bailout Deal

So a midnight deal was struck between the Cyprus government and the “troika” consisting of unelected bureaucrats before the deadline.  

From Bloomberg:

Cyprus agreed to the outlines of an international bailout, paving the way for 10 billion euros ($13 billion) of emergency loans and eliminating the threat of default.

The accord between Cyprus and the “troika” representing international lenders was reached in overnight talks in Brussels and ratified by finance ministers from the 17-nation euro area.

“It’s in best interest of the Cyprus people and the European Union,” Cyprus President Nicos Anastasiades told reporters.

It’s really in the best interests of those in the seat of power and connected to them. and not for Cyprus

The content of the deal, again from Bloomberg:

The agreement calls for Cyprus Popular Bank Pcl (CPB) to be shut down and split. The Bank of Cyprus Plc would take over the viable assets of the failed bank along with 9 billion euros in central bank-provided emergency liquidity aid, according to three EU officials who asked not to be named because talks are ongoing.

Deposits below the EU deposit-guarantee ceiling of 100,000 euros will be protected, and a loss of no more than 40 percent will be imposed on uninsured depositors at the Bank of Cyprus, two EU officials said. Uninsured depositors at Cyprus Popular would largely be wiped out, two other officials said.  

Wow. 40% losses for uninsured deposits above 100,000 euros for Bank of Cyprus while total losses uninsured deposits for Cyprus Popular!

Who determines this? The eurocrats from the troika. They will play "god" here. They will ascertain whose assets are “viable” or assets that would be taken over by Bank of Cyprus, and whose assets will be condemned for total losses. They will decide on who are the winners and the losers. They will play the judge, jury and executioner.

I wonder how much under the table deal is going on right now for deposit accounts of 100,000 euro and above? There will a lot of grease money out there to bargain for survival.

And I also wonder how the Russians will be taking this.

Ah but while deal is reached this is subject to approval.

Again from Bloomberg:

It was the second time in nine days that Cyprus struck a deal with European creditors and the IMF. The first accord, reached in the early hours of March 16, fell apart three days later when the Cypriot parliament rejected a tax on all bank accounts on the island.

Perhaps we should pay heed to the advice of Mises Institute's founder, Lew Rockwell:

Your money is not safe in a bank..If the bank is in trouble the government will take your money…Mattress will be a better place to keep your money