Video: Kyle Bass on Kuroda’s Doubling of Monetary Base; Japan’s Debt Trap

Fund manager Kyle Bass of Hayman Capital interviewed at the CNBC thinks that Japan has reached a critical zone and points to several important factors from the recent BoJ decision. (hat tip zero hedge)

He notes that “Increasing the monetary base by roughly 143 trillion yen is essentially doubling monetary base” which he shares with another expert that represents a “giant experiment” where “doubling monetary base is extremely experimental”

With Japan’s debt accounting for more than 20x tax revenue Japan is already "insolvent". Thus, policymakers have been prompted to “to do something big” 

He also adds that Japan is about to “implode under the weight of their debt”. And that BoJ’s recent aggressive stance also included the abandonment of the banknote rule*

*the Bank Note Rule was a self-imposed rule on the Bank of Japan upon its creation to make sure that the BoJ's balance sheet did not become over-leveraged. Effectively, the rule limits the amount of bonds the BoJ can hold to the amount of currency in circulation. However, by abolishing the rule, the BoJ can effectively lever itself up and buy more bonds. (Nasdaq)

Mr. Bass suggests that the bond markets will now play a crucial role in monitoring Japan’s transition: “what is important is to follow the bond market’s reaction”

He thinks that “central bankers live in a nirvana”, and that eventually “they will lose control of rates”

He advises resident Japanese to “spend all the yen you have, you need to go take it out of your country” to save their savings or their purchasing power. And for foreigners to do the yen carry trade by borrowing yen to buy productive assets in other countries

Investors “should not be long yen or not be long Japanese assets” even if equities have responded in Pavlovian fashion to BoJ’s policies.

Mr. Bass also notes that Japan has generally lost trade competitiveness, mostly to South Korea and that her industries been “hollowed out”. Add such predicament to the decline in population and debt rate cross out birth rate and of the coming tax increases. 

The forthcoming living tax increase "will pull forward some consumption so nominal gdp move slightly higher" but will be a drag over the long term.

He says that the popular focus on us dollar yen is a myopic view of trade competitiveness. And that mainstream’s expectation of BoJ policies “is not the pancea that everyone hopes that it will be”

Final point he says investing in a world of central banking inflationism has been difficult: “central bankers around the world are creating Potemkin villages, they are very difficult to invest around”

Below is another video inspired from Kyle Bass explaining Japan’s debt trap from Addogram;

Spanish Government’s Ponzi Financing Scheme

More signs why the European debt crisis is far from being over.

Spain’s pension fund has been loaded with debt from the Spanish government

From Bloomberg: (bold mine)

Spain’s pension reserve-fund ramped up its holdings of domestic debt last year, profiting from a rally across southern Europe and making it easier for Prime Minister Mariano Rajoy to raid the fund to finance his budget.

The so-called Fondo de Reserva de la Seguridad Social in 2012 increased its domestic sovereign debt holdings to 97 percent of its assets from 90 percent at the end of 2011, according to its annual report due to be presented to lawmakers today at 12:30 p.m. in Madrid and obtained by Bloomberg News.

The fund purchased about 20 billion euros ($26 billion) of Spanish debt last year, while it sold 4.6 billion euros of French, Dutch and German bonds. More than 70 percent of the purchases took place in the second half of the year, after European Central Bank President Mario Draghi pledged to do “whatever it takes” to defend the euro, boosting Spanish bonds.

Two insights from the above.

One, pension funds are subject to government’s predation, thus can’t be relied on.

Two, if the Spanish government defaults on their debt, pension fund beneficiaries will get cleaned out.

Yet more signs of increasing vulnerability of Spain’s welfare state. More from the same article: (bold mine)

Spain’s state-run social security system, also in charge of unemployment benefits, stopped registering surpluses in 2011. Its deficit was 1 percent of GDP last year, contributing to the nation’s total budget gap of 10.2 percent of GDP.

A recession is crimping contributions paid by workers and their employers. At the same time spending has increased due to a record jobless rate of 26 percent and a pensions’ bill, which has risen to 9 billion euros a month from 8 billion euros in 2004.

While the fund stopped receiving government contributions in 2010, its managers changed rules on July 17 to profit from returns from Spanish securities, according to the document.

The maximum amount that can be invested in a given security was increased to 35 percent of the total portfolio from 16 percent. At the same time, the fund raised to 12 percent from 11 percent its maximum share in the Treasury’s total outstanding debt. The Treasury’s debt stock was 634 billion euros in February, according to data on its website.

See why governments have used central bank inflationism to boost asset prices? Gains from asset arbitrages have been used to cover funding shortfalls!

This reminds me of Hyman Minsky’s Ponzi finance from his Financial Instability Hypothesis

Mr. Minsky defines Ponzi finance as (bold mine)

cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts.

In short, Ponzi finance depends on asset values from which is used either as collateral for borrowing or for funding purposes through asset sales.

 

How Ponzi schemes implode, again from Mr Minsky

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.

Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.

The difference here is that Mr. Minsky refers to capitalist economies or private finance units as practitioners of Ponzi financing, whereas today it has been governments that rely on Ponzi finance via asset bubbles to sustain their welfare states.

And Spain’s Ponzi finance scheme shows why debt laden governments will unlikely resort to the “exorcise inflation by monetary constraint”, since this will “lead to a collapse of asset values”, thus extrapolates to the collapse of Spain's welfare state.

At the end of the day, what is unsustainable will simply not last, like all ponzi finance schemes, they will fail.

Happiness: A Worthwhile Purpose in Life

Experts would like to make us believe that there are objective standards in attaining happiness. From such premise, they come with all sorts of math-psychology based models or methodology, e.g. Happiness economics, to ascertain happiness. They attribute happiness mostly to well-being and wealth, from which they justify institutional coercion to supposedly attain such goals.

The fact is that happiness is subjective. Happiness comes from within us, as individuals. Happiness is distinct from person to person. As a state of mind, Happiness revolves around our preferences, value scales and ideals as expressed through expectations, goals and corresponding actions.

This means that happiness have not just been about material things, or about social acceptance or social status but of having a worthwhile purpose in life.

Libertarian author Robert Ringer explains at the Early to Rise 

Happiness has been defined in myriad ways over the centuries by some of the world’s greatest thinkers.  Aristotle described happiness as a condition rather than a destination.  Ralph Waldo Emerson referred to it as a journey.

But I think Viktor Frankl got to the heart of the matter even better when he explained that if there is a reason for happiness, happiness ensues.  Happiness, said Frankl, is a side effect of having a purpose in life.

In his book Man’s Search for Meaning, Frankl explained, “What man needs is not a tensionless state, but rather the striving and struggling of some goal worthy of him.”  In other words, man’s purpose in life is not to achieve goals, but to constantly strive toward them…

Why people look for issues to represent them:

Regardless of whether protest marches have to do with world peace, eradicating poverty, or saving whales from extinction, the reality is that they do not fill the void inherent in a meaningless life.  If man were to succeed in ridding the world of all disease, poverty, pestilence, famine, and war, what then would be the purpose of his existence?

As the struggle for man’s day-to-day survival has increasingly subsided, an important question has emerged:  survival for what?  In other words, just having the means to live is not enough; a person must have something to live for…

Finding your life’s purpose:

And if there is no purpose to an individual’s life — no meaning — then there’s no reason even to get out of bed in the morning, no reason to be alive.  In the words of the great Albert Einstein, “The man who regards his life as meaningless is not merely unhappy, but hardly fit for life.”

The more I reflect on the question, and the more I draw from my own experience and the experiences of others, the more convinced I am that striving toward goals is not a means to an end; striving is an end in itself.  Those who wish their lives away in anticipation of achieving some long-awaited goal do themselves a grave disservice…

The fact is that it’s possible to achieve all your goals in life, yet miss out on life itself.  And the best insurance policy against that happening is to have a worthwhile purpose in life and live in the present.

Read the full article here

Quote of the Day: The Whole Banking Business is Corrupt

The whole banking business is corrupt from top to bottom today. Part of the problem is that banks are no longer financed by the individuals who start them, putting their personal net worth on the line. Now, they are all publicly traded entities – just like all brokerages – playing with Other People's Money. Management has no incentive to do anything but pad their wallets, so they pay themselves gigantic salaries and bonuses, and give themselves options. These people aren't shepherding their money and that of clients they know personally. They've got zero skin in the game. 

This is true all over the world, not just in the US and Europe. All these banks are going to blow up, and not just in far-off, little countries.

This quote is from investing guru and philosopher Doug Casey at his eponymous website Casey Research 

China’s Cheap Drones: A Threat to Whom?

This article is worried that China’s cheap clones may end up in the wrong hands, or could be owned and used by the adversaries of the US government.

From Technewsdaily.com

Cheap drones made in China could end up arming potential U.S. foes such as North Korea, Iran and terrorist organizations.

China already makes drones that don't quite match up to U.S. military drones, but for a fraction of the cost. The Chinese military envisions such unmanned autonomous vehicles (UAVs) scouting out battlefield targets, guiding missile and artillery strikes, and swarming potential adversaries, such as U.S. carrier battle groups…

China has built a huge military-industrial complex to support its growing drone fleet, which consisted of about 280 military drones as of mid-2011, according to a report released by the Project 2049 Institute on March 11. Chinese manufacturers supplying the military and state agencies also have begun seeking foreign buyers in a global drone market that aerospace and defense market research firm Teal Group estimates to be worth $89 billion over the next 10 years…

The idea of cheap, China-made drones may not tempt countries such as Japan, South Korea, Taiwan, Australia or NATO allies that want to buy the best U.S. or Israeli drone hardware. Instead, China is seeking buyers in the Middle East and Africa at glitzy expositions such as China’s biennial Zhuhai Air Show.

While such concern could partially be true, considering the estimated $89 billion market, my guess is that China’s cheap drones will likely threaten politically connected US drone providers/suppliers more than terrorists or US foes having access to them. 

Besides, anti-drone laser weapon system has already been developed. Foes of the governments are likely to use them than use drones.

Yet demand for commercial drones has been estimated to reach 10,000 according to the US Federal Aviation Administration (FAA). 

Many of such demand come from hobbyists.

A good example of the growing commercial use of drones has been in photography or cinematography particularly in the covering of field events. The Golf Channel used a drone to film a recently held tournament, according to the Business Insider.

The point is commercialization of drones will likely mean more price competition, more innovation, more applications and an increasing use of them by the markets. China's cheap drones may be one factor in driving the commercialization of drones.

BoJ’s Kuroda’s Opening Salvo: 7 trillion yen ($74 billion) of Bond Purchases a Month

In pursuit of Shinzo Abe’s parlous economic policies popularly known as Abenomics, Bank of Japan’s new chief, former ADB head Haruhiko Kuroda’s began his term with a baptism of fire.

From the Bloomberg;

Bank of Japan (8301) Governor Haruhiko Kuroda began his campaign to end 15 years of deflation by doubling monthly bond purchases in a bid to reach 2 percent inflation in two years.

With Kuroda presiding over his first meeting since taking the helm last month, the board today streamlined its asset purchase programs, temporarily suspended a cap on some bond holdings and dropped a limit on debt maturities. The BOJ will buy 7 trillion yen ($74 billion) of bonds a month, the central bank said in a statement.

Be careful what you wish for. 

This applies to Abenomics whose scale of purchases is just $11 billion short of the $85 billion a month equivalent by the US Federal Reserve

While Abenomics may create a short term boom, this will be equivalent to an economic Hara-Kiri in the fullness of time as Abenomics magnifies the risks of a debt, or if not a currency crisis.

The worst is that the BoJ’s inflationism amplifies the risks of war.

As I pointed out in the past this hasn’t been about the strong yen (or deflation), which Japanese officials use as smokescreen, but “about saving the banks and financial institutions who constitutes as the major financiers or creditors or owners of Japan’s Government Bonds (JGBs)”

Nonetheless the aggressive deployment of asset purchasing will bring BoJ’s balance sheet to the levels of her western counterparts.

As fund manager Axel Merk of Merk Investment warned,

BOJ governor Kuroda will unveil which tools from his toolbox he may deploy. We refer to it as monetary madness because we don’t see how this can have a good ending for Japan, the yen, or the world. Japan has a $6 trillion economy, more than 200 times that of Cyprus. Should the market express its discomfort with Japan’s policies, there will be ripple effects to global markets. For now, the most direct implication is that we are rather negative on the yen. But don’t kid yourself: there may not be a place to hide, there may not be such a thing anymore as a safe asset. We have long argued that investors may want to take a diversified approach to something as mundane as cash.

Given precarious Japan’s debt position, Mr. Kuroda’s embrace of “Abenomics” is like playing with fire...where everyone gets burned.

Bill Gross: Past Performance in the Age of the New Normal

In the age where central banks have been propping up asset prices via the “wealth effect” as a way to lubricate “aggregate demand”, generating returns from investments requires unorthodox or unconventional or methodological templates.

So says Bond guru Pimco’s Bill Gross.

From Bloomberg (bold mine)

Bill Gross, manager of the world’s largest mutual fund, said the most renowned investors from Warren Buffett to George Soros may owe their reputations to a favorable era for money management as expanding credit fueled gains in asset prices across markets.

The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer, Gross, 68, wrote in an investment outlook published today entitled “A Man in the Mirror,” named after a song by Michael Jackson.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah - me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” Gross wrote. “Perhaps it was the epoch that made the man as opposed to the man that made the epoch.”

Gross, one of the co-founders in 1971 of Newport Beach, California-based Pacific Investment Management Co., is examining his legacy as the bond shop he built over four decades is seeking to adapt to an environment that looks very different from the bull market that fueled Pimco’s growth to one of the largest money managers in the world. The prospect of elevated market volatility, an aging population and climate change could make investing far more challenging in the coming decades, Gross said.

Bottom line: Past performance does not guarantee future outcomes.

Relying on historical data or statistics will unlikely be of a big help in the era founded on the deepening frictions from market distorting central banking inflationism and politicization of the financial markets via financial repression relative to changes in demographics, globalization and the information age.

To quote from the investing sage of Omaha (now crony) Warren Buffett,

If past history was all there was to a game, the richest people will be librarians.

Air India’s Failure: Epitome of Bureaucratic Enterprises

Massive infusion of taxpayer money has failed to revive the viability of government owned airline carrier, Air India

From a Bloomberg report,

Indian taxpayers gave Air India Ltd. $1.7 billion as bailout funds in the past four years. The airline now says it lacks cash to purchase spare parts.

That’s grounded 16 aircraft for the nation’s oldest carrier. Without the funds, the airline is also unable to refurbish some of the idled planes before returning to lessors.

“Some are just empty shells standing,” Air India Chairman Rohit Nandan said about the grounded aircraft. “We are in the process of returning some leased planes.”

The grounded planes add to the struggles of the former monopoly carrier saddled with about $8 billion of debt and six straight years of losses. Air India has also lost market share as discount carriers that started flights less than a decade ago lure passengers with the latest fleet and cut-rate fares.

Inability to fully utilize the fleet means Air India, the nation’s largest by number of aircraft, will operate fewer local flights than smaller rivals. The flag carrier won approval to operate 1,788 departures a week in the six months through September compared with IndiGo’s 2,821 and SpiceJet Ltd.’s (SJET) 2,467, according to the Ministry of Civil Aviation.

“It’s a criminal waste of public money,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “With all this funds pumped in, what’s stopping Air India from spending on aircraft? They have to deploy fleet, expand network, increase frequency and go for market share.”

Since the Indian government liberalized the airline industry via the repeal of the Air Corporation Act of 1953 in 1994, privately owned firms dominated the market share. Air India’s share, from a monopoly, had been reduced to an estimated 18% of the domestic market.

The merger between Air India and Indian airlines, hobbled by labor unions, have reportedly been a factor in Air India’s continued losses.

Another important variable has been high prices of jet fuel which emanates from high taxes, around 32% of aviation fuel comes from a combination of sales tax, excise tax and freight related costs, as well as, from the inefficiencies of state owned oil marketing companies. High fuel prices has made domestic airlines less competitive relative to international counterparts. As of 2011, 5 of the top 6 major airlines were in the red.

Air India’s case is a classic example of the difference between bureaucratic firms and private companies which boils down to economic calculation.

As the great Ludwig von Mises explained:

A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors…

Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.

In short, political enterprises are operated mainly from political goals, whereas the free market runs under the discipline of profit and losses. 

One should also make a distinction between private companies operating under the influences of politics or rent seeking “crony” firms.

Belgravia: London’s Ghost Village?

Central bank inflationism has only been fueling excessive speculation on global property markets. And the emergence of ghost communities, which are symptoms of bubbles, may not confined to China.

Belgravia, known as one of the wealthiest districts in the world, located at central London in the City of Westminster and the Royal Borough of Kensington and Chelsea, seem to be transforming into a ghost community largely due to foreign buyers.

From CNBC:

An odd thing was happening, or rather not happening, as dusk fell the other day across Belgravia, home to some of the world's most valuable real estate: almost no one seemed to be coming home. Perhaps half the windows were dark.

It seems that practically the only people who can afford to live there don't actually want to. Last year, the real estate firm Savills found that at least 37 percent of people buying property in the most expensive neighborhoods of central London did not intend them to be primary residences.

"Belgravia is becoming a village with fewer and fewer people in it," said Alistair Boscawen, a local real estate agent. He works in "the nuts area" of London, as he put it, "where the house prices are bonkers" — anywhere from $7.5 million to $75 million, he said.

The buyers, increasingly, are superwealthy foreigners from places like Russia, Kazakhstan, Southeast Asia and India. For them, London is just a stop in a peripatetic international existence that might also include New York, Moscow and Monaco.

Bank of England’s QE

Rampant property speculation has partly been abetted by the weakening of the British pound relative to emerging markets currencies, largely brought about by the balance sheet expansion by the Bank of England.

Except for India’s rupee, China’s yuan, the Philippine peso, and Russia’s ruble have mostly firmed against the British pound since 2008.

Yet prospects of a “triple dip” recession have only spurred political pressure on the Bank of England to pursue more quantitative easing which may add more fuel to more speculative frenzies.

Of course aside from sheer speculation, political money (e.g. slush funds) looking for overseas shelter could also play part in exacerbating speculative activities.

Ghost communities can be seen also in the US.

From the same CNBC article:

London is not the only city where the world's richest people leave their expensive properties vacant while they stay in their expensive properties someplace else; the same is true in parts of Manhattan. But the difference is that so many of them here are foreign, and that they look to be buying up entire neighborhoods.

"Many areas of central London have become prohibitively expensive for local residents," a recent report by the Smith Institute, a research group in London, said recently.

Worst, central bank fueled property bubbles incite social divisions or political chasms between haves and the have-nots epitomized by the politically correct terminology called “inequality”.

Again all these are symptoms of the global pandemic of bubbles.

Quote of the Day: “Crazy” Anarcho-Capitalism

The lesson: "Crazy" is relative to expectations.  A thousand years ago, everyone was used to despotism.   No one expected a defeated incumbent to voluntarily hand over power.  As a result, refusing to hand over power didn't seem crazy.  Since it didn't seem crazy, incumbents who refused to hand over power after losing an election probably would have managed to retain power.  In modern Sweden, in contrast, everyone is used to democracy.  Everyone expects a defeated incumbent to voluntarily hand over power.  Refusing to hand over power seems crazy.  As a result, refusing to hand over power would end not democracy, but the incumbent's career.

Why bring this up?  Because like the democrat of a thousand years ago, I advocate a radical political change: anarcho-capitalism.  After we've privatized everything else, I think we should privatize the police and courts, and abolish the government...

Since we've never had anarcho-capitalism, this peaceful equilibrium sounds like wishful thinking.  But it's no more wishful thinking than stable democracy.  Both systems sound crazy when first proposed.  Neither can be stable as long as people expect them to be unstable.  But both can be stable once people expect them to be stable.

You could object: The expectations necessary to sustain anarcho-capitalism are highly unlikely to ever arrive.  But the same was true for democracy a thousand years ago.  Yet somehow, expectations radically changed and stable democracy arrived.  How did expectations change so dramatically?  It's complicated.  But can expectations change dramatically?  Absolutely.

This is from author and professor Bryan Caplan at the Library of Economics and Liberty blog (Econolog)

More Signs of Asia’s Credit Bubble: Soaring Wages

I have pointed out that Thailand’s minimum wages surprisingly polevaulted by 89% in 2012. This led me to discover a massive build up in systemic debt, particularly weighted on the short term which makes the Thai’s economy highly sensitive or vulnerable to a spike in interest rates. 

Well soaring wages have not been limited to Thailand but a symptom evident throughout Asia.

From the Bloomberg,

Average pay in Asia almost doubled between 2000 and 2011, compared with a 5 percent increase in developed countries and about 23 percent worldwide, according to the International Labour Organization in Geneva. The gain was led by China, where average remuneration more than tripled during the period. Southeast Asia is catching up, with new minimum pay levels in at least five nations eroding companies’ ability to make cheap toys, clothes and furniture.

“Producers are no longer able to absorb rising wage costs and ultimately will have to jack up prices for consumers in the West,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong and a former consultant on Asian economics and politics to the World Bank. “It’s the manufacturing hub of the world, and if prices rise here, then inevitably the global price level will have to rise as well.”

The threat of inflation prompted Pacific Investment Management Co., which runs the world’s biggest bond fund, to plan Asia’s first fund to protect against it. The investment will aim to return at least 2 percentage points more than the average consumer-price gains in Singapore and Hong Kong, Michael Thompson, head of Pimco’s wealth-management group for the region excluding Japan, said in a March 7 interview in Singapore.

Unfortunately this comes amidst falling labor productivity and deteriorating balance of payments.

More on Southeast Asia’s wage gains.

In Jakarta, the capital of Indonesia and home to 10 million people, Governor Joko Widodo last year approved a 44 percent increase in minimum pay for workers, to 2.2 million rupiah ($226) a month. The national government is considering extending the plan across the country, which has the world’s fourth-largest population, after China, India and the U.S.

Thailand raised its national daily minimum wage to 300 baht ($10) in January. Malaysia introduced a base salary last year, benefitting about 3.2 million workers before elections that must be held within three months. A similar tactic helped Taiwanese President Ma Ying-jeou, who won a second term in 2012 after increasing the lower limit on earnings by 5 percent.

Credit booms, which will be compounded by public works or government spending, will mean competition for scarce resources. Such dynamic will be expressed through higher costs of factors of production or input prices for industries experiencing such boom.

As I previously wrote,

we should expect that pressures to build on either relative input prices (wages, rents, and producers prices), particularly on resources used by capital intensive industries experiencing a boom, and or, but not necessarily price inflation.

Such dynamics would exert an upside pressure on interest rates that would eventually put marginal projects, including margin debts on financial assets operating on leverage, on financial strains which lay seeds to the upcoming bust.

The bottom line is that unless Asia’s central banks desist from her current engagement in accommodative policies, which signifies an attempt to align with policies of developed economies (yes central banks collaborate with each other), malinvestments will eventually unravel in the fullness of time. 

Yes, Asia’ bubble cycle is in progress.

Quote of the Day: Market Failures Does Not Justify Government Interventions

Market failure is a tricky topic even for professional economists. And when non-economists raise the examples of market failure that we discussed here, matters become even trickier. Not only do all of these terms have technical meanings that often do not match what the non-economist thinks the terms mean, but most non-economists also are unaware of the various criticisms that have been raised in the literature on these topics. Most important, non-economist critics of the market are frequently unaware of the comparative institutional analysis that public choice theory has made a necessary part of thinking about the role of government in the economy. Pointing out imperfections in the market does not ipso facto justify government intervention, and the only certain way that market "failures" are "failures" is by comparison to an unreachable theoretical idea. Market imperfections are not magic wands that make market solutions and government imperfections disappear. Real understanding of comparative political economy begins rather than ends with the recognition that markets are not always perfect.

This is the conclusion of Professors Art Carden and Steve Horwitz at the Econolog in discussing why so-called market failures in the context of externalities, public goods, asymmetric information, and market power (or monopolies) represent as “necessary—but insufficient—conditions for intervention to be justified”.

Thanking Business Mirror’s John Mangun

I was surprised by the gush of traffic to this blog from the website of the leading local business daily, the Business Mirror. 

And I found out that the prolific business columnist John Mangun had quoted me.

Here is a snippet:

One of the sharpest macroeconomic analysts I know is Benson Te, who writes at prudentinvestornewsletters.blogspot.com. This Maundy Thursday morning, he wrote that the rating upgrade “only reveals the deepening of the manic phase of Philippine asset bubbles.” He argues that the recent stock-market rise should have been factored into the prices. Instead, the market explodes on the news and ignored the common “buy the rumor, sell the news” idea.

Thank you very much for your compliment and endorsement, John. 

Bitcoins Goes Past $100, Doubles Since Cyprus Crisis

Bitcoin, the virtual or digital currency, has been generating substantial public interest. Bitcoin prices has practically doubled since the outbreak of the Cyprus crisis.

Notes the Zero Hedge, (bold emphasis original)

From a January 2nd price of $13.16, the price of a Bitcoin in USD had risen to $46 on March 16th - right before the Cyprus 'solution' was announced. Since then, in two short weeks, the price of a Bitcoin has more than doubled, reaching $101 today. This 'exuberance' in non-fiat currency, should perhaps warrant caution as we noted here, the US is now not only actively monitoring but has commenced regulating the Bitcoin market and those who participate should be well aware that when uncle Sam is involved, things tend to have an unhappy ending for pretty much everyone involved.

Events in Cyprus seem to be prompting people to look for currency alternatives to safeguard their savings from the predations of government, and thus Bitcoin's newfound popularity. 

I would even suspect that some of the interest in gold and precious metals may have been diverted to bitcoins.

[Note: I am not in anyway promoting bitcoins. I have no exposure in bitcoin yet. But considering how political events have been unfolding, the search of safehaven means bitcoins as an alternative should be explored]

Neverthelesss here is an insightful audio interview of Erik Voorhees of Bitinstant who spoke with Austrian economist Tom Woods on the basics of bitcoins.

CNN: 3D Printed Assault Weapons Available by End of April

The technology is there and continues to improve, so applications will also continue to expand to cover wide ranges of products, including controversial guns.

Assault weapons from 3-D Printing will be available by the end of April according to this report from CNN (hat tip lewrockwell.com)

Firearms 3D printer Cody Wilson of Defense Distributed and the Wiki Weapon project has been making wave after wave with every one of his statements, updates, videos and blog posts. He’s been making the circles, with an interview with Vice Magazine and now CNN.

His most recent proclamation is will alarm many, bring hope to a few, but leaves us with our heads scratching. Wilson has said that they will have the technology to 3D print a firearm by “the end of April.”

“Well to have a printable gun — it’s my intention to have that done by the end of this month and we’re at the end of March now so it’s my intention to have it done by April,” he said. This would, in theory, prompt a new era in personal firearm manufacturing and a new paradigm for gun control.

“The assumption is one day the technology will become more ubiquitous and widespread,” Wilson said on “The Lead with Jake Tapper.”

“It will fall in price, and materials will be developed in a better place than they are now, so yes, if you were to have one in your home and you have the gun file, you can just click print and have the gun.”

The rate of advance of 3D technology will only render prohibition and other regulatory statutes obsolete. Of course, we expect government eventually to attempt to "regulate" 3D. But again such measures are bound to lag and thus fail.

3D technology in combination with others (mobile computing, nanotech and etc...) will change the way we do things and force us to specialize. A wider adaption of the 3D technology also means the path towards social decentralization.

Chart of the Day: Unintended Effects of Currency Devaluation

The unique political economic structure of each nation will extrapolate to different effects from the du jour trend of central banking inflationism (mainstream terminology: currency devaluation or depreciation). The above chart shows of the interplay between three forces: imports as % of GDP, year on year change of price inflation and the weight of the indicated developed economy relative to the world.

 

Notes the politically influential US think tank the Council of Foreign Relations CFR,

Currency depreciation is likely to have a much more adverse effect on inflation in the UK than in the United States, the eurozone, or Japan, owing to much higher imports relative to GDP. UK consumer price inflation is already running at a relatively high 2.8%, and the Bank of England’s own analysis suggests that a 20% sterling depreciation risks pushing the price level up 6 percentage points higher than it would otherwise be.

Of course, the degree (intensity and time period of implementation) of such inflationist policies will matter too. And so with other incumbent and prospective policies such as capital/currency controls, wage and price controls, taxes, bureaucratic regulations, and others.

Nonetheless, the long term impact from the latest creed of “something for nothing” policies from global central banks will be the opposite of the expectations or the goals of policymakers. 

This means that gambits of policymakers to preserve current political economic systems will eventually translate to our suffering, whether via boom bust cycles (financial crises) or stagflation.

Australia to Embrace China’s Yuan

Australia may use China’s Yuan more for international trade and finance than the US dollar.

From the Australian 

BUSINESS groups and economists have welcomed the prospect of direct convertibility of the Australian dollar and Chinese yuan, which would cut foreign exchange costs and bolster Australia's growing trade with China.

The Coalition also said yesterday it supported a proposal by Julia Gillard, revealed in The Weekend Australian, to secure the currency deal with the Chinese.

The Prime Minister is expected to put forward the plan, to make the Australian dollar and Chinese yuan freely convertible, when she visits China this weekend, an outcome that would save Australian and Chinese businesses from having to deal in US dollars or Japanese yen when trading with each other.

Greg Evans, director of policy at the Australian Chamber of Commerce and Industry, said "direct convertibility is expected to provide a practical business benefit for both small and large companies doing business with China". He said closer currency arrangements made sense as trade with China, which exceeded $120 billion last year, continued to grow…

Australia would become the third country, after the US and Japan, to secure such an arrangement from China, for which Australia is the fifth-biggest source of imports.

At present, companies doing business with China must pay the added cost of converting their Australian dollars into US dollars or yen, and then again from there into yuan. Fortescue director and former Australian ambassador to China Geoff Raby has called for Australia to become more involved in the internationalisation of the yuan and to make Sydney a trading centre for the currency.

Internationalization or convertibility of the yuan would require more trade, finance and currency/capital liberalization, factors which China’s government needs to address than just via bilateral agreements.

Nonetheless, Australia’s move to embrace the yuan serves as writing on the wall for the US dollar standard.

Quote of the Day: EU’s Market Destroying Institutions

As the EU moved from a free trade zone to a political system after the ratification of the Maastricht Treaty in 1992, it also (among many other things) progressively collectivized the risks associated with public spending. Until the euro came along, countries with bad public policies would simply devaluate their currencies. The French government, for instance, devaluated the franc twice (in 1981 and 1982) under Mitterrand’s presidency and in 1983 the Deutsche mark and the florin were reevaluated against all the other European currencies. Under this system the consequences of bad public policies are internalized to a large extent. The euro changed that. Bad policies are now either kept in check at the country level because no currency devaluation is possible (that’s the positive scenario), or the consequences of bad policies are born by the entire system. This, of course, is only if EU authorities want to keep the euro zone intact, otherwise they could simply let Greece and Cyprus out of the euro zone, but this would be to admit the failure of their grandiose currency plan. This is why the European Central Bank is resorting to Stalinist methods to make sure the government in Cyprus does what the EU wants it to do…

The EU today is a case in point of “market-destroying” federalism. As Barry Weingast pointed out in a series of great papers on federalism (The Economic Role of Political Institutions, Federalism as a Commitment to Preserving Market Incentives), the institutions of federalism lead to political competition and the weeding out of bad policies (it is “market preserving”). But if this mechanism is attenuated through transfers from the federal state to lower jurisdictions, the incentives to maintain one’s fiscal house in order disappear. Ultimately the entire system collapses as a result of collectivized risks. This has been slowly happening in the United States throughout the 20^th century, but it is taking place at an even bigger level in the EU because the EU is a hybrid federal system. This is why many want to centralize political and policy powers in the EU so as to make the place more like the US (a European banking union would be a first step in that direction according to the defenders of greater centralization).

It is likely, however, that greater centralization would fail because at the end of the day, EU institutions are not geared towards market-preserving federalism. The dominant thinking is one of indicative planning, regulation, and neo-mercantilism. In my opinion, the only course of action to save the EU would be to return to the original free-trade zone agreement of the 1950s and 60s. Trade zones enable political competition, which leads to virtuous outcomes such as lower taxes and lower public spending. Moreover, free trade zones with freely competing currencies, even if they remain government produced (one could adopt the Deutsche mark anywhere in the zone for instance), would bring vast positive benefits to Europeans. This would imply a complete reversal of policies, which shows how far we are from solving the problems in Europe. Ultimately, of course, governments should get out of money production, but that’s maybe for another century.

(bold mine)

This is from Austrian economist Frederic Sautet at the Coordination Problem Blog

Family of Cyprus President Moved Money Out; Politicians Benefit from Loan Write offs

Previously I posted about how money leaked out of Cyprus during the bank bail-in negotiations and of the Cyprus president having ”warned” his friends of imminence of the crisis.

It turns out that money has been flowing out of Cyprus even earlier or 2 months prior to the crisis. (chart from Zero Hedge)

And part of such outflows could have been made by the family of the president of Cyprus.

From the RT:

A company owned by in-laws of Cypriot President Nicos Anastasiades wired €21 million from Laiki Bank to London days before the Eurogroup’s crisis-triggering levy proposal, claims a Cypriot newspaper. The president demands an investigation.

During two days, 12 and 13 of March, the company A.Loutsios & Sons Ltd., co-owned by Loutsios John, the husband of Nikos Anastasiadis’ daughter, Elsa, took five promissory notes worth €21 million from Laiki Bank. The money was then transferred to London, reported Cypriot newspaper Haravgi, affiliated to the communist-rooted AKEL party.

The withdrawal was fulfilled just three days before the Eurogroup meeting when euro finance ministers agreed a 10 billion euro ($13 billion) bailout for Cyprus.

The company, however, has firmly denied the reports.

So many people "knew" or anticipated the crisis.

 

Yet the report says that the President demands an investigation of his family’s action? Unless there is a feud, this would be like proverbial fox guarding the henhouse.

It also figures that the alleged beneficiaries of the recent loan write-offs have been the political class and their cronies.

From the Telegraph:

Lawmaker Mavrides, meanwhile, confirmed that a committee appointed by President Nicos Anastasiades would investigate a list published by Greek media of Cypriot politicians who allegedly had loans forgiven.

The Bank of Cyprus, Laiki and Hellenic Bank reportedly forgave millions of euros in loans over the past five years to lawmakers, companies and local company authorities, newspapers in Greece said.

The allegations would likely be discussed in parliament next week, Mavrides added.

Developing events in Cyprus just reveals that while the public gets squeezed, it pays to be a part of the insider or the political class, the well connected and the cronies.

The Bible and the Austrian Business Cycle

 From Luke 14:28-33 (Biblegateway.com)

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?  For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, ‘This person began to build and wasn’t able to finish.’

The great Ludwig von Mises on the consequences of cheap money or the Austrian Business cycle

The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to construct a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He overbuilds the groundwork and the foundations and discovers only later, in the progress of the construction, that he lacks the material needed for the completion of the structure. This belated discovery does not create our master builder's plight. It merely discloses errors committed in the past. It brushes away illusions and forces him to face stark reality.

Happy Easter!

Video: Gary North on the World's Transition to the Modern Economy

Via BBC's Hans Rosling, I have previously posted a video showing the modern economy's dramatic growth transformation which begun during the 18th century, from the agricultural age to the industrial era to today's post industrial information/digital epoch.

In the following video, Austrian economist Gary North expounds on Deidre McCloskey's theme that "ideas" or "rhetoric" or the "Bourgeois Dignity or Virtue" as the major force behind such monumental progress. 

As per Mr. North, Ms. McCloskey's theme signifies as, 

a change of attitude regarding entrepreneurship, and a change in attitude regarding innovation and personal wealth derived from innovation and entrepreneurship...

The argument is people’s attitude for the first time radically changed on the question of the legitimacy of personal wealth through entrepreneurial activities 

Mr. North adds two additional factors to the ideas or virtues of the pursuit of self-interests: one is ethics (view of right and wrong), which may have played a significant shift in the public's opinion, where acquisition of personal wealth became legitimate. Second is a shift of the view of the future (based on religious influences or what Mr. North calls as the "post millennialist eschatology"). 

In short, people's values and beliefs evolved overtime to reflect on the marginal changes on the course of actions undertaken which compounded to manifest on such progress.

War on Drugs: Mexican Vigilantes Takeover Town, "Arrest" Police

When the citizens are fed up with the incumbent political system, they take things into their own hands. Mexico’s war on drugs seem to have produced such an effect.

From New York Post (hat tip EPJ)

Hundreds of armed vigilantes have taken control of a town on a major highway in the Pacific coast state of Guerrero, arresting local police officers and searching homes after a vigilante leader was killed. Several opened fire on a car of Mexican tourists headed to the beach for Easter week.

Members of the area's self-described "community police" say more than 1,500 members of the force were stopping traffic Wednesday at improvised checkpoints in the town of Tierra Colorado, which sits on the highway connecting Mexico City to Acapulco. They arrested 12 police and the former director of public security in the town after a leader of the state's vigilante movement was slain on Monday…

The vigilantes accuse the ex-security director of participating in the killing of vigilante leader Guadalupe Quinones Carbajal, 28, on behalf of local organized crime groups and dumping his body in a nearby town on Monday. They reported seizing several high-powered rifles from his car, and vigilantes were seen toting a number of sophisticated assault rifles on Wednesday, although it was not clear if all had been taken from the ex-security director's car.

"We have besieged the municipality, because here criminals operate with impunity in broad daylight, in view of municipal authorities. We have detained the director of public security because he is involved with criminals and he knows who killed our commander," said Bruno Placido Valerio, a spokesman for the vigilante group…

The groups say they are fighting violence, kidnappings and extortions carried out by drug cartels, but concerns have surfaced that the vigilantes may be violating the law, the human rights of people they detain, or even cooperating with criminals in some cases.

Sensitive over their lack of ability to enforce public safety in rural areas, official have largely tolerated vigilante groups.