Quote of the Day: Power is the root of corruption; other aspects are its symptoms

The  following insightful but lengthy quote references China’s political economy, as written by Professor Weiying Zhang in "The Logic of Markets" (courtesy of and thanks to Mao Money, Mao Problems) [bold mine] 

I once used a mathematical equation to analyze and show that the increase in actual corruption has a few origins. One is that with the increase in the degree the Chinese economy has monetized; the economic value of power has increased. The second is that the complexity of economic relations has caused supervision to become more and more difficult. The third is the growth in market opportunity caused government officials to “preserve utility” (the utility they would receive if they were forced out of the government as punishment for corruption). The fourth is the level of punishment has been reduced (such as the amount embezzled to receive the death penalty was increased significantly). The fifth is the formal salaries of government officials are relatively low. 

The five factors described above are all related to power. Power is the root of corruption; other aspects are its symptoms. Anti-corruption measures must address both the symptoms and its root, but direct action would cure the root. That direct action is to reduce the power of government officials. Some have proposed “high salaries to encourage honesty,” which makes a bit of sense. In a situation where the power of government officials is excessive, honesty cannot be encouraged with high salaries. If officials’ salaries are too high, the masses will not accept it. The key issue here is that government departments in our country have monopolized many rights that belong to private citizens and businesses in other countries with a market economy. Examples include starting a business and engaging in investment activities, which require government approval. Individuals and businesses have no option but to “buy out” by means of corruption rights to engage in normal economic activity that should belong to them in the first place. In connection with anti-corruption measures at present that only cure the symptoms without curing the cause, I said in 1994 that if we do not change the fundamentals of our government controlled economic system, and reduce the government’s administrative approval authorities, corruption of private goods (according to the definition in economics, without exclusiveness) is instead a “sub-optimal” choice. My meaning is that to stop corruption we must cure its root, not its symptoms. On the one hand stressing anti-corruption measures without wanting to reduce government power on the other hand is self deception. Not only can it not succeed, or even if it succeeds in the short term, it comes at the price of a huge impairment to society. A prerequisite for high economic growth without corruption is the abolition of the government’s monopoly over the power to allocate resources. Some say that I am defending corruption, but actually this is a misunderstanding of my views. Penetrating discussion of issues is the responsibility of scholars. In 1999, at the High Level Forum on Chinese Development, I said, “Government control needs to be given up just as drugs need to be given up,” and added, “If government examination and approvals were abolished, corruption could be reduced by at least 50%.” This message had a large impact on the proceeding system of examination and approvals reform. Ten thousand good wishes cannot match one effective action!

As shown above, corruption is a byproduct of a raft of arbitrary statutes, regulations and edicts, that bequeaths unnecessary political power to political agents which incentivizes abuse or what public sees as immoral 'corrupt' actions.

And when the media and credit rating agencies pontificate on political ascendancy from so-called anti-corruption reforms by merely persecuting ‘corrupt’ officials, pay heed or be reminded of the reverberating words of Professor Weiying Zhang 

stressing anti-corruption measures without wanting to reduce government power on the other hand is self deception.

In other words, never confuse substance with form, or symptoms with the cause.

By the way here, is a short comical skit depicting "Too Much power" culled from a 1957 movie called "A King in New York City" played by the late British comedian icon Charlie Chaplin and his son Michael. (hat tip Prof Bob Murphy)

Free Market’s Response to Government Drone Spying: The Drone Shield

The US government has been foisting the legitimization of the use of drones (as many as 30,000) to patrol the skies to allegedly to maintain ‘public safety’. 

While there may be emergent anti-drone technology such as the laser weapon system, the free markets seems to have a cheaper response to the threat of UAV government surveillance or of the intrusion to privacy: the Drone Shield 

From the USNews.com (hat tip EPJ)

Worried about drones spying on you? Soon, a device might be able to send you text and email alerts that let you know when a drone is nearby.

A Washington, D.C.-based engineer is working on the "Drone Shield," a small, Wi-Fi-connected device that uses a microphone to detect a drone's "acoustic signatures" (sound frequency and spectrum) when it's within range.

The company's founder, John Franklin, who has been working in aerospace engineering for seven years, says he hopes to start selling the device sometime this year. He is using the Kickstarter-like Indiegogo to finance the project.

The device will cost $69 and will be about the size of a USB thumb drive. It will use Raspberry Pi – a tiny, $25 computer – and commercially available microphones to detect drones. He says he imagines that people will attach the Drone Shield to their fences or roofs to protect their home from surveillance.

"People will get the alert and then close their blinds," Franklin says.

Every attempt by governments to establish a police state through technology will eventually be met by a pushback from the markets.

In the future, drones will likely be used more by the markets.

ECB Cuts Rates, Mulls Negative Deposit Rates

Central banks are reinforcing their assumed roles as superheroes for the global political economy.

Justifying a weak regional economy, the ECB has once again pared down interest rates…

From Bloomberg:

The European Central Bank cut its key interest rate to a record low as the 17-nation euro region struggles to emerge from recession.

Policy makers meeting in Bratislava today lowered the main refinancing rate to 0.5 percent from 0.75 percent, a move predicted by 45 of 70 economists in a Bloomberg News survey. The ECB kept the deposit rate at zero and reduced the marginal lending rate to 1 percent from 1.5 percent to preserve a symmetrical rate corridor. President Mario Draghi holds a press conference in the Slovakian capital at 2:30 p.m.

Since Draghi said last month that he stood ready to act if Europe’s economic outlook worsened, inflation plunged, economic confidence slumped and unemployment rose. Today’s cut, the first since July last year, takes the ECB closer to exhausting its conventional policy tools, raising the prospect of a negative deposit rate or new non-standard measures.

I have been expecting bolder and more aggressive experiments or tinkering with the financial system from central bankers. Central bankers will push using central banking (inflationism) tools to the limits.

The ECB has mulled on negative deposit rates since 2012, then I wrote:

Central banks have only one thing in mind: That is to expand to credit (inflationism) to supposedly boost aggregate demand which is reality serves as an academic cover for the true purpose—finance extravagant governments.

Unfortunately the world isn’t that simple. People refuse to take on more credit for several reasons: They have been drowning in debt, they have been tarnished by bad or blemished credit scores, they could be suffering from lower income or unemployment is high due to the recession, business environment has been hampered by politics banking institutions have been clogged and for many other reasons which reduces their incentives to do so.

What negative deposit rates will likely do is to destabilize allocation of resources and spawn more malinvestments and fuel frenetic speculation that leads to boom-bust cycles and worsen the situation

At the press conference following the announcement of the cutting of rates, the Financial Times’ Person of the year ECB’s Chief Mario Draghi has remarkable comments on the negative deposit rate and on the direction of ECB policies which deserves some comments. (bold mine)

On negative deposit rates:

We said in the past we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and stand ready to act if needed.

Unintended consequences, which are likely to be systemic, will be suffered, not only by the taxpayers, but by the regional economy that may affect the world. This is because centralization of risk taking, which assumes simplicity and homogeneity, goes against the reality of a complex world.

Central bankers have been revealed as having no qualms using the economy as guinea pigs for their grand designs.

And for whose benefit?

Mr. Draghi on the direction of ECB policies:

I would use the word frustrated, yes. We view improvements in financial markets. We think financial markets are the only and the necessary channel for the transmission of monetary policy. You don’t go around with helicopter money, throwing money. In Europe, you go through banks. You don’t have capital markets as you have in the U.S. We have to go via the banking system. That is why in my press conference I try to give you a very detailed reading of different indicators because it shows how closely we are trying to examine and analyze reality to see whether these impulses that we’ve been transmitting to the economy get translated into better welfare, lower unemployment, better economic activity.

So there you have it folks, no helicopter money, ECB’s policies will mainly be directed at the rescues of the crony banking system.

Thus the consideration of negative deposit rates or of the charging financial institutions for the money they deposited with the central bank which once again will penalize savers.

Today’s derring-do rock star central bankers hardly understands why centralization will mostly fail to accomplish its goals.

As the great Nobel laureate Austrian economist Friedrich von Hayek warned of Fatal Conceit by political authorities 

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account

Video: Ron Paul and Jim Rogers on bankrupt governments: They will use intimidation, force and guns

At the recent Sovereign Man Workshop, former US congressman Ron Paul together with the legendary investor Jim Rogers talks about what to expect from desperate bankrupt governments 

Some noteworthy quotes: (video courtesy of the Sovereign Man)

Ron Paul: I would expect that there would a lot more chaos to come and it will not be limited to Europe. I think it will be a worldwide phenomenon 

Jim Rogers: They won’t take our bank accounts…they will take our retirement accounts.

Ron Paul: They will do what I think is necessary, they will use force and they will use intimidation, they will use guns because you can’t challenge the state’s right to control the money

Bank of Israel Buys Equities and Foreign Currencies

As I have been pointing out, inflationism has now become a central banking standard.

The Bank of Israel has reportedly bought $200 million of foreign currencies

From Ynet News.com

The Bank of Israel bought an estimated $200 million of foreign currency on Tuesday in a bid to weaken the shekel after it hit a 19-month high, although the move had little effect.

With exports comprising 40% of Israeli economic activity, the central bank has made it clear it will not allow a steep rise in the shekel.

So nearly every country have been attempting to “devalue” against another, which should provoke a competition or a race to the bottom. Some call this the currency wars.

This also shows how global central bankers will put to test the current paper money standard to the limits. Current developments have made them believe that they have attained a policymaking nirvana or where money printing bears no consequences to the real economy.

Also Bank of Israel is one example of countries supposedly diversifying into equities.

From Bloomberg:

The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time.

The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said.

Aside from the political motive, central bank operations seem to have transitioned into hedge fund operations but underpinned by the “guns and badges” institutions.

Bank of Israel’s equity exposure on the European and US equities could be interpreted as providing support on the equity markets of the US and Eurozone.

Ironically, this comes as the shekel is deliberately being devalued by them.

Bank of Israel’s actions thus appears to be tweaking profits via foreing currency-foreign equity arbitrages through policies. 

Are these not insider trading or manipulations? At whose expense? Market players and the economy?

I am not sure whether Bank of Israel’s equity purchases has been entirely foreign.

Nonetheless Israel’s TA-25 appears to be on mends following a downdraft in 2011. (chart from tradingeconomics.com)

Bank of Israel’s recent actions are examples of implicit guarantees on asset prices that only balloons the global pandemic of asset bubbles.

More Poker Bluffs: FED will Cut QE by Yearend

Since 2010, each time the US economy showed some signs of strength, Fed officials talk about “exit” strategies or the communications strategy proposing policy changes by the reduction on the amount of stimulus applied to the economy. Such farcical routine I have repeatedly called as “poker bluffing”. 

Recent record stock market highs, a conspicuous rebound in the housing markets and some indications of economic “recovery” has again prompted Fed officials to blather anew about paring down stimulus.

From Bloomberg

Chairman Ben S. Bernanke will probably reduce the Federal Reserve’s monthly bond buying in the fourth quarter to $50 billion from $85 billion as he begins to unwind record stimulus, economists said in a Bloomberg survey.

Policy makers must find a way to slow the pace of purchases enough to signal confidence the economy is strengthening without prompting a sudden rise in interest rates, said former Fed economists Michael Feroli and Joseph LaVorgna. They said that probably means the Fed, which concludes a policy meeting today, will follow a three-step strategy to wind down bond buying.

How it seems so simple.

Yet since 2010, each exit blarney has led to the opposite outcome. The US Federal Reserve’s stock holding of US treasuries for instance continues to balloon. The recent jump includes QEternity.

At the end of 2012, 90% of US treasuries issued were bought by the US Federal Reserve.

As explained before, the exit talk is likely a sham because there are hardly enough savings (domestic or foreign) that the US government can tap to finance her spendthrift ways. 

Whatever recovery seen in the US economy are symptoms of inflationary boom rather than a genuine economic growth. Yet another economic bust would mean more debt from more bailouts and more inflationism.

Besides, US financial markets have become almost entirely dependent on government support which signifies as a byproduct of the wealth effect theory that undergirds such easing policies.

The removal or even a reduction of such stimulus essentially would “pull the rug from under” the inflationary boom and undermine the current government debt financing mechanics that would stir such massive market and economic disorder and volatility. This would raise the spectre of the “deflation”, a market phenomenon which incumbent authorities have a rabid phobia on, as well as, raise the risks of a default.

Also such policy reversals would undermine the interests of the political class and those dependent on them, which is why incumbent political officials aren’t likely to resort to them, except as trial balloon or as part of the manipulation scheme for the continued suppression of gold prices

Nevertheless, Simon Black of the Sovereign Man eloquently enunciates why US Federal Reserve has been TRAPPED by their own actions on financing the US government or the monetization of US treasuries.

Now, bear in mind that US debt already exceeds 100% of GDP.

Even using the US government’s own ridiculous budget projections (which assume 3.5% REAL GDP growth) Uncle Sam will still accumulate over $5 trillion in debt over the next decade.

But here’s the thing– the current $16.75 trillion of US debt has an average maturity of just 65 months. This means that the US government will be on the hook to repay a huge chunk of its debt within the next 5 1/2 years.

So in addition to issuing $5 trillion (optimistically) in new debt, they’ll also have to re-issue trillions more in existing debt.

Someone is going to have to mop up all that debt. The question is… who?

The Chinese are actually REDUCING their Treasury exposure as a percentage of total US debt (see chart). This is consistent with their objective to strengthen the renminbi.

The story is the same with Japan at the moment, whose nominal US debt holdings have actually been decreasing.

The US Social Security trust fund is also a major holder of US debt. Yet, according to the Washington Post, roughly 10,000 people EACH DAY become eligible to receive Social Security pension benefits.

Given the increased outflows and high level of US unemployment (fewer people paying into the system), it’s doubtful that the Social Security trust fund will have sufficient cash to bail out the Federal government.

This leaves the US Federal Reserve as the lone player to mop up all this debt. There simply are no other options; the US government will default in all likelihood, unless the Fed continues debauching the currency to buy Treasuries.

Yet the recent flash crash in gold has been used to justify calls from some quarters to indulge more rather than less inflationism.  

Fed officials and their apologists will continue with their blandishments of steroid withdrawals but real political economic conditions suggests that all these represent as mere bluffs.

How Tax Distortions Contribute to the Boom Bust Cycles

I recently posted about the glaring disconnect between stock market pricing and earnings expectations in the US. 

Aside from the US Federal Reserve’s easing policies and from the implicit guarantees also from the same agency, there is another very significant factor that adds to the serial blowing of asset bubbles: massive distortions from a tax regime which promotes share buybacks financed by leverage.

Philip Coggan under the pen name Buttonwood at the Economist articulates Apple as an example

WHAT a crazy world. Apple, a company with $145 billion of cash, is issuing some $17 billion of debt to buy back its own shares. Why doesn't it just use its cash to do the same thing? First, because a lot of that cash is overseas, and bringing it back to America would incur a tax charge. Second, because interest rates are low and debt interest is tax-deductible, making this look a great arbitrage.

But think of it from the point of view of the hard-working American taxpayer. Apple's money will still sit overseas and not be invested at home to create jobs. Apple's tax bill will fall, as it offsets the interest payments against its profits. The buy-back will probably push up the share price in the short term*, boosting the value of executive options; profits from those options will probably be taxed at the long-term capital gains tax rate of 15%, lower than the rate many workers pay. Organising a bond issue, rather than using a company's own cash, incurs costs in the form of fees to bankers on Wall Street; the same bankers taxpayers helped support five years ago

In short, the incumbent complex tax structure basically rewards debt accumulation and the principal-agent problem.

The latter or conflict of interest dilemma means that the same tax policies induces a fissure between the economic interests of the shareholders and of the option holders, held mostly by corporate officers.  Such has mostly been channeled through the tilting of the balance of incentives that encourages short term outlook and actions at the expense of the long term.

Buybacks and dividend issuance has accounted for a substantial share of the gains in the S&P.

Dr. Ed Yardeni notes that both has totaled “$2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012--has been driving the bull market since it began”.

Yet the distortions from tax incentives that promotes debt funded buybacks has not only been a bane via a conflict interest in corporate relationships particularly between between shareholders and corporate managers, but has also been materially affecting the real economy through the diversion of resources to speculation rather than to investments.

Notes analyst Martin Spring in his latest outlook (no link)

One reason why prices continue to rise despite sluggish growth in corporate profits is the contractionary impact on supply from share buybacks, which are rising towards to levels last seen in 2007.

“The motivation,” reports CLSA Asia-Pacific’s Christopher Wood, “appears to be primarily to boost earnings per share – a formula on which so many corporate executives’ remuneration is based.”

He adds: “The pick-up in commercial and industrial lending in America over the past two years has been primarily driven by the desire to finance financial engineering exercises such as share buybacks, rather than to fund new investment.”

Essentially, the money bubble is being used primarily for speculation rather than stimulating economic activity, its supposed intention.

Government policies whether via taxes or central bank policies or administrative policies (e.g. homeownership) have all been synched or engineered to promote leveraging and debt accumulation.  

Debt is the essence of the paper money system.

Since the world’s monetary system shifted away from the gold standard, debt has increasingly been a tool to promote statistical “growth”.

Thus the increasing recourse to debt also means the increasing frequency of financial-banking crises.

Going back on how tax distortions promote systemic fragility, again Mr. Coggan

In short, the whole deal is linked to tax distortions; the treatment of repatriated cash, debt versus equity and capital gains versus income. The ideal tax system, as we have argued many times, is neutral between sources of income. The tax deductibility of interest played its part in creating this mess, both in the corporate and mortgage markets. Why should the taxpayer want to encourage higher leverage, when high leverage is the root of financial crises?

Well, the answer to that is that debt or leverage mainly works to the interest of the banking-welfare warfare state-central banking cartel, who use debt to finance their intertwined interests. The incumbent political architecture in turn gives voters and taxpayers access to debt, via the above policies. Thus, the boom bust cycles.

That which is unsustainable, won’t last.

CME Chairman on Gold: People don’t want Paper gold. They want the real product.

I have pointed to the fundamental difference between Wall Street “Paper” gold and physical “individual real” gold, where the former  serves the interests of Wall Street as against the latter which accounts for the real economics (demand and supply) of gold.

This quote from Terrence Duffy, President and Executive Chairman of CME Group Inc,. on Bloomberg TV (April 29, 2013) strongly reinforces my observations

What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real  gold.  That’s going to show you, people don’t want certificates, they don’t want anything else.  They want the real product.

Zero Hedge on the CME Chairman’s comment (bold mine)

I’m actually still in a state of shock that the head of the CME Group would make such an observation and in such blunt terms.  I mean the guy admits that volume on his exchanges suck, yet basically claims paper gold (one of their marquee products) is becoming irrelevant.  In my mind there are two likely explanations for this.  1) This is how he has started to feel personally and he is loading up on physical gold rather than his company’s paper products and would like some cover if that is ever unearthed. 2) This is what people close to the gold market are telling him and he’d rather make it clear he understands that paper is paper and gold is gold and that there is a big difference.  So “caveat emptor” if you are hanging around the COMEX.

This simply means that if the CME chairman understands the real drivers of the gold markets, then those (mainly the gold bears) who opt to ignore, downplay and or even discredit developments in the the real physical gold markets are making a colossal mistake.

CNBC: The Growing Risks from ASEAN’s Asset Bubbles

EVEN mainstream media appears to have caught up with my warnings. This lone nut's insights have began to spread. 

Here is the CNBC:

The risk of asset bubbles in Southeast Asia's fastest-growing emerging economies is rising, warn economists, pointing to red flags including surging domestic credit growth and rapidly rising property prices.

"We have long argued that monetary policy has been kept too loose for too long in Indonesia, but the policy authorities in the Philippines, Thailand and Malaysia are in significant danger of making the same mistake. In our view, evidence of overheating is set to become more obvious," said Robert Prior-Wandesforde, head of India & Southeast Asia economics at Credit Suisse.

Prior-Wandesforde, who expects central banks in the region will start tightening monetary policy in late 2013 or 2014, says policymakers are getting a false sense of security from benign inflation levels, and ignoring the excesses being built elsewhere in their economies.

"We expect interest rates to move higher and it is at that point that history suggests we should worry about possible bubbles turning to bust," he said.

The mix of U.S. monetary policy and relatively low levels of inflation have led many ASEAN nations to adopt "inappropriately" low interest rates, according to economists.

The World Bank and the IMF has recently recommended that easy money policies be reversed.

As I noted yesterday on the IMF’s prescription:

This means that putting a brake or policy tightening would also expose on the mirage brought about by statistical growth pillared from "strong credit growth". Doing so would effectively takes away the foundations of the “defied” status from which the political class and central bankers have been piggybacking on.

In short, reversing the “easy financing conditions” would go against the political and personal interests of those involved, particularly the political class and their cronies, and therefore will most likely be rejected or dismissed or ignored.

Easy money conditions will likely be pushed to the limits until the markets expose on them.

Developing events seem to be upholding my theory. 

Thailand’s government will likely address the rising baht mostly perhaps by paring down interest rates.

This is fresh from the Bangkok Post

The MPC is under pressure from the Finance Ministry and exporters who want it to implement measures to weaken the baht. The Federation of Thai Industries (FTI) chairman Payungsak Chartsutthipol has called on the MPC to cut its policy interest rate from 2.75% by 1% to weaken the baht.

He said the central bank will use foreign exchange and capital inflow management as the main instruments to keep the baht from rising too high.

Translation: Risk of bubbles? Who cares. Blow more of them.

Video: Nigel Farage on the Europe and the EU: Wholesale, Violent Possibly even Revolution

British politician and the “Ron Paul” of Europe, libertarian Nigel Farage in  the following speech at the Sovereign Man workshop gives two very important advice:

My fear is that in the end what will breakup the euro isn’t the economics of it, it will be wholesale, violent possibly even revolution that we see in the Mediterranean. But what I hate about this is that it is all so unnecessary.

He also says that Slovenia will bailed out in 2-3 months and that the EU governments will increasingly resort to confiscations of savings. The next advice

If you have investments, if you have money based on the Eurozone banks then my advice to you is get your money out of those banks and of those jurisdictions as quickly as you can, because next, when the next phase of the disaster come they will come for you 

Ever wonder why Berlin has transformed into a haven for bitcoins and why the furious assault on gold?

Implied Government Guarantees on BRIC Banking system

Even in the BRICS, there has been an implied guarantee by their respective governments on their banking system, as indicated on their credit ratings.

From Reuters:

The ability of Brazil, Russia, India and China to support their leading banks is tightly correlated to the credit rating on the banks, according to ratings agency Moody’s. The agency compares the ratings of four of the biggest BRIC banks which it says are likely to enjoy sovereign support if they run into trouble…

In a self-perpetuating cycle, ratings will be higher because governments are prepared to provide high levels of support to the banks, reflecting the lenders’ systemic importance and in some cases government ownership.

Bailouts on the politically privileged banking system have become a global standard. And this encourages the moral hazard behavior where banks take unnecessary risks because they know they will be supported once "they run into trouble". This adds to the yield chasing phenomenon that increases systemic fragility.

Moreover this implies that the public's savings, even in emerging markets, will continue to be under duress from indirect and direct confiscations in favor of the banking system.

IMF to Asia: Put a Brake on Credit Bubbles!

Interesting developments. 

Asia has to put a brake from her asset bubble blowing policies, this has been the latest prescription by the IMF who joins the World Bank in the call to curtail asset bubbles

First the implicit advice as reported by the Bloomberg:

Asian policy makers must be ready to respond “early and decisively” to overheating risks in their economies stemming from rapid credit growth and rising asset prices, the International Monetary Fund said.

Growth is set to pick up gradually during the year and inflation is expected to stay within central banks’ comfort zones, the Washington-based lender said in a report today. Greater exchange-rate flexibility in the region would play a “useful role” in curbing overheating pressures and coping with speculative capital inflows.

Asian economic growth that the IMF estimates will be almost five times faster than advanced nations this year, and increasing investor appetite for risk have spurred capital inflows into the region. The Bank of Japan this month joined counterparts in the U.S. and Europe in unleashing monetary stimulus, which may fuel further currency gains in developing markets such as the Philippines, where policy makers have stepped up efforts to cool appreciation.

As a reminder all bubbles are homegrown or have domestic origins. The mainstream’s popular strawman or scapegoat, capital flows, which usually gets blamed for bubbles, may or may not add to the bubbles in progress. While many crises indeed involved capital flow dynamics, correlation is not causation.

Now the kicker:

Financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several Asian economies,” the IMF said. “Policy makers in the region face a delicate balancing act in the near term: guarding against the potential buildup of financial imbalances while delivering appropriate support for growth.

Translating the economic gibberish to the layman: Bubbles have become widespread "in several Asian economies", and could morph into a clear and present danger "face a delicate balancing act"!

Well readers here would be familiar with my constant admonitions on these. Now many, including multilateral institutions, appear to be recognizing on such developing risks. So I am no longer a “lone nut”.

But the IMF or the World Bank seem clueless on what appears as a good counsel of curbing bubbles. They ignore the economic and political implications of their “delicate balancing act” recommendations.

Since all the cumulative  “strong credit growth” have been a consequence of “easy financing conditions”, then “early and decisively” policy restraints would represent as financial losses on the manifold entities or borrowers (private, public, or hybrids e.g. PPPs) that contracted them with their corresponding creditor/s.  Remember all these  “strong credit growth” had been consummated based on expectations of a sustained or prolonged “easy financing conditions”. Now the IMF (and the World Bank) wants to reverse them.

This also means that if “strong credit growth” has metastasized into a systemic debt issue then policy tightening would translate into a sharp slowdown in economic growth (best case scenario), if not a recession or a crisis (worst case scenario).

Thus the “delicate balancing act” reveals that the IMF doesn’t seem to have a good grasp on such ramifications, or most possibly, refuses to candidly divulge of the true nature of their risks expressed via evasive opaque statements.

Moreover credit rating upgrades will whet the appetite for more debt which has been the case for the Philippines, aside from adding to the veneration of political ascendancy from current policies that undergirds today's manic phase

This means that putting a brake or policy tightening would also expose on the mirage brought about by statistical growth pillared from "strong credit growth". Doing so would effectively takes away the foundations of the “defied” status from which the political class and central bankers have been piggybacking on. 

In short, reversing the “easy financing conditions” would go against the political and personal interests of those involved, particularly the political class and their cronies, and therefore will most likely be rejected or dismissed or ignored. 

Easy money conditions will likely be pushed to the limits until the markets expose on them.

The Parallel Universe: Asian Edition

From Bloomberg:

Japanese and South Korean industrial output was less than estimates in March and Taiwan’s first-quarter growth was half the forecast pace as weakness in global demand limits recoveries in Asian economies.

In Japan, production climbed 0.2 percent from the previous month, the trade ministry said in Tokyo today. That was less than the median 0.4 percent forecast in a Bloomberg News survey of 27 economists. South Korea’s output fell 2.6 percent, a separate report showed. Taiwan’s gross domestic product rose 1.54 percent.

Today’s data add to signs of a cooling global economy after U.S. gross domestic product rose less than forecast in the first quarter and China reported an unexpected slowdown. While Japan is already rolling out unprecedented monetary easing, the latest numbers may fuel calls for South Korea’s central bank to cut interest rates.

The following charts should tell of the impact of the current direction of policies. 

All charts are from tradingeconomics.com and starts with reference point of the year 2008. The reason for this is to exhibit trends in Asia, or the relationship and developments between stock markets and industrial output emanating from the post-US crisis.

Taiwan’s Industrial production and Taiwan’s Stock Market have been headed in opposite directions.

Taiwan’s TWII has been marginally up by about 4% from Friday’s close year to date

South Korea shows of the same conspicuous divergences between stock markets and industrial production.

The Korea’s equity benchmark, the KOSPI has been marginally down by 2.63% as of Friday’s close year to date. Nevertheless the general trend has been up since 2008.

Japan’s stock market as seen from the Nikkei has been consolidating in 2009-2012.

"Abenomics" has recently spurred a stock market price blitzkrieg. The Nikkei 225 has been up by a stupendous 33.5% y-t-d as of Friday's close. 

Ironically, industrial production continues to wobble and has even worsened with the recent announcement of doubling of the nation’s monetary base.

Worshipers of Abenomics selectively focus on rising stocks, which they see as 'signs of progress'. Yet they ignore that the sputtering of the real economy seem to be accelerating in the face of Abenomics.

Rising stocks in Japan are really yield chasing boom-bust cycles from policy steroids, whose major beneficiaries are the politically privileged financial institutions.

Yet such grand reckless “doing the same things over and over again and expecting different results” experiment are bound to bring to the fore a crisis, perhaps sooner than later.

Meanwhile media wants to portray that the weakness in Developed Asian economies as requiring more support from central banks. They seem blinded to the recent developments.

They fail to see that all such cumulative easing policies signifies as one of the major causes of the decline in the real economy. Price instability or volatility from inflationism and various forms and degrees of interventions have only clouded economic calculations and thus has incented people to go yield chasing instead of investing in productive enterprises.

This is aside from the implied and direct central bank ‘PUT’ or "guarantees" on financial markets which has also meaningfully contributed to the public’s preference to speculate on financial markets than to invest in the real economy.

Such parallel universe dynamics are signs of bubbles or illusions caused by the massive distortions of the marketplace from growing political desperation as seen through the deepening of interventions. 

Nevertheless, rest assured that what is unsustainable, because they are founded on superficialities, won’t last. Worst, the longer this goes on, the greater the harm when imbalances, built up from such environments, unravels.

Video: Berlin is a Bitcoin Haven

Many people in Berlin has adapted virtual currency, the Bitcoin as means of payment.

The following video from the Guardian explains why: 

 

You may read more from the Guardian here

Charts of the Day: More Signs of Parallel Universe

Fantastic charts of the growing disconnect between the real economy and financial markets courtesy of central banking heroic policies.

All charts from Zero Hedge

Surging Global Stock Markets (MSCI) amidst statistical economic growth (GDP) lethargy

Since employment conditions are part of economic conditions, the detachment between equity price actions and unemployment rate has been especially elaborate in Europe.

 

Again the seeming irrelevance between earnings (via revisions) and stock market price actions in the US.

And who says rising Non Performing Loans (NPL) equals higher rates? Not in Spain (and Italy) where banking system has been loading up in government debt. (zero hedge)

Such parallel universe or the glaring disconnect are really bubbles or illusions which are symptoms of monetary disorder (dictionary.com definition: destroy the order or regular arrangement of; disarrange) brought about by unsound central banking policies.