Ron Paul: Federal Reserve Blows More Bubbles

From the great Ron Paul at the Free Foundation.org 

Last week at its regular policy-setting meeting, the Federal Reserve announced it would double down on the policies that have failed to produce anything but a stagnant economy. It was a disappointing, but not surprising, move.

The Fed affirmed that it is prepared to increase its monthly purchases of Treasuries and mortgage-backed securities if things don’t start looking up. But actually the Fed has already been buying more than the announced $85 billion per month. Between February and March, the Fed’s securities holdings increased $95 billion. From March to April, they increased $100 billion. In all, the Fed has pumped more than a half trillion dollars into the economy since announcing its latest round of “quantitative easing” (QE3) in September 2012.

Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion.

With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt. The national debt is fast approaching $17 trillion, with the Fed monetizing most of the newly issued debt. The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.

In the meantime, real families are suffering. While Wall Street and the government take advantage of access to the Fed’s new “free” money, the Fed claims there is no inflation. But who hasn’t paid higher prices at the grocery store, the gas pump, for tuition, for insurance? It’s bad enough that household incomes have stagnated, but real purchasing power has declined so much that one in seven Americans, 47.3 million people, are on food stamps. Five million are collecting unemployment insurance with 21.5 million afflicted by unemployment according to the government’s own figures. That’s 13.9 percent -- close to double the 7.5 percent unemployment number reported last week.

We are certainly not in a recovery. We don’t see the long unemployment and soup kitchen lines like in the Great Depression, but that’s just because the lines are electronic now.

It is not surprising the Fed has decided to hand the American people more of the same failed policies. But it is disappointing. We know what the real solution is: allow the marketplace to work. Allow entrepreneurs the chance to create instead of stifling innovation with arbitrary regulations. Allow interest rates to rise to equal the risks in the economy. Allow bad debts to be liquidated so we can build on a firm foundation. Stop printing money to benefit the government and big banks. Restore sound money to the economy and the American people. Sound money is the bedrock for prosperity and the best check on big government and crony capitalism.

There is no such thing as an “exit”. The US political economy is hooked on the inflation drug.

Worst, Fed policies are not only harming Americans but everyone else in this world, as bubbles have become a global phenomenon.

Yet the Fed and central banks will keep blowing bubbles until the markets pricks them or until there will be a run on paper money.

Phisix 7,200: Up, up and away! The Illusions of Comfort

I said quoted Superman last week on the Phisix: Up, up and away!

And so it seems. 

This week, the Phisix soared by a whopping 2.7%. Woot! This adds to the accrued year to date gains now at a mammoth 24%. Woot! This comes amidst a seeming return of the “Risk On” environment in the global equity markets. 

If the current rate of returns at 5-6% a month will be sustained, this means that Phisix 10,000 will be reached by this yearend. Woot!

The Phisix Ascendancy. Malaysia as Periphery to Core?

The Philippine stock market has now assumed the role of the undisputed leader of Southeast Asia as three of our neighbors stumbled over the week.

In contrast to the Philippines, Indonesia’s downgrade by the S&P[1] has been attributed to this week’s modest decline. I am confident that such downgrade will unlikely to deter the Indonesia’s mania phase from unfolding.

But developments in Malaysia seem interesting and may have diverged from other ASEAN economies.

Since the year’s start, Malaysia’s equity benchmark, the KLCI, has been zigzagging between positive and negative territory. This could partly be due to the pre-elections uncertainty which culminates today, or could be due to signs of puffing on her homegrown property bubble.

Charts from global property guide[2] indicate that based on year on year changes, Malaysia housing prices have begun to materially decelerate (left). Malaysia’s home price index has ramped up as the global central banks flushed the world with a tsunami of money in 2008. 

Malaysia has also cut policy interest rates[3] from about 3.5% in 2008 to 2% in 2010, but raised them back to the 3% level in 2011. Nonetheless the banking system’s average lending rates are at the lowest levels (chart not included).

Housing loans now have grown to account for 25% of the GDP. Part of the slowdown could be due to recent anti-speculation or anti-bubble policies. But the fastest growth segment of both commercial and Islamic banks has been from unsecured loans or loans based on borrowers creditworthiness rather than backed by collateral as previously discussed[4].

Yet these mostly represent the demand side of Malaysia’s housing market. Housing is just a segment of the property markets which also includes office and commercial properties. I also lack data on the supply side to make further comments.

Yet it would seem that should Malaysia’s economy substantially slow, this heightens the risk of a regional bubble bust.

Are developments in Malaysia’s housing signs of the periphery to core dynamics?

We will see.

Nonetheless major global equity benchmarks have been reenergized by more central bank actions, particularly the ECB’s interest rate cut aside from plans to adapt a negative deposit rate policy[5].

Notice that the announcements of easing policies from central banks of developed economies have become more bolder and more frequent.

The Reflexivity Theory Nearly in Full Circle

The escalating vibrancy of the Phisix only continues to prove my point: we are in manic phase of a bubble cycle.

The 3-year chart (top) of the Phisix depicts of the 3 phased transition of the current uptrend which appears to be accelerating. A closer look via the six-month chart shows of renewed signs of parabola or the steepening of the price trend slope or what seems as a transition to a vertical ascent. Such price actions reveal of the rapidly expanding risk appetite and of the growing aggressiveness of market players to bid up equity prices.

So who says markets are about the conventional wisdom called “valuations”? Who says that there is such a thing called “expensive” in an environment where the public has decisively determined that there is no other way but up for Philippine assets?

The mainstream apparently doesn’t get it. Such dynamics has not been about statistics or about chart patterns. Instead all these have been about incentives and actions, where incentive drives people’s actions.

Why should the 5-6% statistical economic growth and supposed “fiscal discipline”, which are, in reality, masked by credit boom-embellished-growth data, justify a sustained upside trajectory of asset prices?

The domestic market has apparently lost its function as discounting mechanism and has transformed been into an object of speculative frenzy, underpinned by the prevailing bias of new paradigm, new order or “this time is different” mindset.

By prevailing bias, this means a self-reinforcing trend which tends to not only to influence market psychology channelled or expressed through prices but also through “fundamentals”[6]. 

Rising prices reinforce the belief of ‘good governance’ economics and “controlled deficits” meme. The deepening of public’s conviction has led bolder, more audacious and more adventurous moves from market players. Their actions raise the price levels of equity securities, most especially the popular ones.

Rising price levels has also prompted for the trifecta upgrades from the big three US credit rating agencies. This, in turn, boosts the craving for more equity market speculations. Thus, high prices will rationalize actions that will lead to even higher prices or the deepening of the price chasing or yield chasing dynamics: the mania phase.

Such two-way feedback loop mechanism between one, expectations, which are shaped by prices, and two, by the outcome, as signified by people’s responses and actions to the changes in prices, represent as the “reflexivity theory” as introduced by George Soros. The “reflexivity theory” essentially takes into account the sequential transformation of people’s psychology during the bubble cycle.

Yet the two way reflexive feedback loop that runs from expectations to outcome and from outcome to expectations “gives rise to initially self-fulfilling but eventual self-defeating prophesies and process”[7] and thus the boom bust cycles. 

The crucial psychological features[8] of boom bust sequence can identified as

-The Unrecognized trend

-The beginning of a self-reinforcing process

-The successful tests

-The growing conviction resulting in a widening divergence between reality and expectations

-The flaw in perception

-The climax

-A self-reinforcing process in the opposite direction

Today’s actions suggest that the Phisix operates anywhere between “the flaw in perception” to “the climax”

Credit markets are equally affected by the reflexive bubble behavior, again Mr. Soros, “when people are eager to borrow and when banks are willing to lend, the value of the collateral rises in a self-reinforcing manner and vice versa”[9]

In short, the reflexive feedback loop mechanism also works between markets and credit.

Phisix at 7,200 likewise means another month of significant expansion of credit growth.

The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP) correctly notes that overall credit growth moderated in March[10]

Loans for production activities—which comprised more than four-fifths of banks’ aggregate loan portfolio—grew at a slower pace of 14.2 percent in March from 15.1 percent (revised) in February. Similarly, the growth in consumer loans eased to 10.8 percent in March from 11.9 percent in February due mainly to the slowdown across all types of household loans.

The expansion in production loans was driven primarily by increased lending to the following sectors: real estate, renting, and business services (25.2 percent); financial intermediation (28.8 percent); transportation, storage and communication (26.2 percent); wholesale and retail trade (10.4 percent); and, electricity, gas and water (15.4 percent). Meanwhile, lending to agriculture, hunting, and forestry (-10.3 percent) continued to decline in March.

But looking at the average omits the specifics. I would call this as hiding beneath the statistical averages. 

Financial intermediation and real estate loans, critical areas of the property stock-market bubble remains at same levels or even slightly higher. These sectors have been expanding by more than 25% even when statistical economic growth has only been 5-6%.

While growth in loans to the wholesale and retail trade shrunk in March, construction loans surged at still an astonishing rate of near 50%. I use wholesale and retail trade as gauge on the shopping mall bubble.

A better picture can be seen in the changes in the sectoral share of loans by the banking system.

By the end of 2012, the construction, trade, financial intermediation and real estate loans constituted 45.97% of all the production loans issued.

By March, this figure has swelled to 47.79%. In short, the growth of loans of these bubble sectors has been outpacing the rate of growth of loans from the other non-bubble sectors. And if such rate of growth will be sustained, by the yearend, the share of loans by the banking system on these bubble sensitive sectors will easily become the dominant force and will expose the banking system to unnecessary credit risk.

This despite all the blarney about the banking system as having adequate “capital” ratios. Banks in Cyprus supposedly passed the banking stress test held in 2011. The Bank of Cyprus also received many awards in 2011-2012[11]. Today, bank depositors in Cyprus will see large haircuts on their money.

Easy money from bank lending has also been reflected on liquidity conditions. Again the BSP on March activities[12].

Domestic liquidity (M3) increased by 11.4 percent year-on-year (y-o-y) in March to reach  P5.1 trillion. This growth was faster than the 9.4 percent (revised) expansion recorded in the previous month. On a monthly basis, seasonally-adjusted M3 also expanded at a faster pace of   1.5 percent compared to the 0.2 percent (revised) month-on-month growth in February.

The growth in money supply was driven largely by the sustained expansion in net domestic assets (NDA). NDA increased by 20.4 percent y-o-y in March from 16.5 percent (revised) in the previous month due largely to the continued increase in credits to the private sector, reflecting the robust lending activity of commercial banks. Claims on the private sector increased by 12.7 percent in March. Similarly, claims on the public sector increased by 12.3 percent in March, reversing the 6.5 percent decline (revised) in the previous month, a result of the increase in credits to the National Government (NG) and the decline in NG deposits.

Yield chasing tends to gravitate on the most popular sectors. Foreign money via portfolio investments has also participated in them. Again from the BSP[13]

Capital inflows went to PSE-listed securities (US$2.0 billion or 84.2 percent), Peso GS (US$351 million or 15.0 percent) and Peso time deposits (US$18 million or 0.8 percent). For PSE-listed securities, the main beneficiaries were holding firms (US$510 million), property companies (US$454 million), banks (US$333 million), telecommunication firms (US$185 million), and food, beverage and tobacco companies (US$183 million).

The biggest beneficiaries from the combined credit growth, portfolio flows and yield chasing activities can be seen mainly in the property, holding and financial sectors.

So we have the reflexivity theory running nearly in full circle.

The Concentrated Economy: Economic Boom and Booming Joblessness

When the S&P’s upgrade of the Philippines hit the headlines on Thursday, ironically, at the lower section of the same front page, I saw an article saying that domestic unemployment continues to swell.

From the Inquirer.net[14]

Joblessness in the country worsened in the first quarter of the year, the latest Social Weather Stations (SWS) survey found, with an economist tracing the rise in unemployment rate to fresh graduates joining the labor pool.

Filipino adults without jobs numbered 11.1 million, up 10 percent from the 10.1 million recorded at the end of 2012, results of the survey that SWS conducted from March 19 to 22 showed.

Wow a “boom” in joblessness.

Looking at the statistical unemployment figures[15], one would note that the biggest improvement came during 2005 where jobless rate fell from 14% to current levels, which paradoxically was prior to this booming regime.

Yet from 2006-2012, unemployment seems to have fluctuated in a range of 6.9 to 8%.

I do not trust surveys and unemployment data for the simple reason that significantly more than 40% of the Philippine economy has been informal or shadow or underground[16]. So if informal economies can hardly be measured, then the likelihood of substantial errors from statistical estimates.

Nonetheless what arouses my curiosity is that the much ballyhooed economic boom tagged as the “Rising Star of Asia”[17] seems to have been “concentrated” on few sectors of the economy. And this is most likely the reason behind the supposed “boom” in joblessness, as pointed out by the survey.

Even the government’s statistics has not shown any material improvement in joblessness, despite Phisix at 7,200, the Peso at 40s or 6.6% GDP growth in 2012.

Of course, such adverse information has been and will be ignored by the brainwashed gullible public. Hardly any of domestic media seems to have carried the recent warnings of ASEAN asset bubbles by the IMF[18] or from a report by the CNBC[19]. 

Apparently real world developments have been vacuumed into a vortex. People with rose colored glasses will think that all these signify as mere political rant, or that such systemic threats will not be enough to undermine today’s blissful nirvana, or political authorities will ride like the knight to save the damsel in distress in time, or that bad events will hardly befall on them (denigration of history).

Yet all these suggest that people openly embrace illusions in order to escape reality. As Nobel laureate psychologist and author Daniel Kahneman explains[20],

The illusion that one understands the past feeds further illusion that one can predict and control the future. These illusions are comforting. They reduce the anxiety that would experience if we allowed ourselves to fully acknowledge the uncertainties of existence. We all need for the reassuring message that actions have appropriate consequences, and that success will reward wisdom and courage. Many business books are tailor-made to satisfy this need.

Ironically despite the credit upgrade, which has been anchored mostly on strong external position and on the supposed improvement of debt burden, the credit rating agency S&P underscored what seems as the same theme of “concentrated growth”

From the Inquirer[21]:

S&P estimated that the country’s per capita income (the total value of the economy’s output divided by the population) would settle at $2,850 this year, a level lower than those of most countries with the same credit rating.

“The Philippine economy’s low income level remains a key rating constraint. The concentrated nature of the economy, infrastructure shortfalls and restrictions on foreign ownership, which deter foreign investment, are factors that hamper growth,” S&P said.

The good part is that in order to attract investments, the S&P recommended liberalization of the “regulatory environment in a manner that allows easier entry of foreign investors, according to S&P.” The S&P also recommends more infrastructure spending.

The S&P likewise acknowledges of the fundamental shortcomings of the Philippine political economy but bizarrely rewards or subsidizes such via a credit upgrade. By doing so, there will be lesser incentives for the incumbent officials to embrace real economic reform via liberalization.

Think Europe. Central bank’s backstopping (or subsidies) of the banking system which has led to lofty financial markets have prompted politicians and the mainstream to rationalize the jettisoning of reforms based on phony “austerity”[22], thereby resuscitating the risks of prolonged depression as well as the risks of a breakup of the euro.

Perhaps the S&P thinks that by putting their stamp of approval on the Philippine government they will heroically be able to convince investors.

Or perhaps, the S&P’s sees the need to be a part of the bandwagon because these have been the chic. 

The trenchant iconoclast and Black Swan author Nassim Nicolas Taleb warned of folly from the groupthink[23]

Alas, one cannot assert authority by accepting one’s own fallibility. Simply people need to be blinded by knowledge—we are made to follow leaders who can gather people together because the advantages of being in groups trump the disadvantages of being alone. It has been more profitable for us to bind together in the wrong direction than to be alone in the right one. Those who have followed the assertive idiot rather than the introspective wise person have passed us some of their genes

Ivory Tower Prescription: Solve Investment Problems with More Interventions

So if investments have been the problem, how does the BSP governor, Amando Tetangco Jr. propose to solve them? The following article gives a clue.

From the Inquirer[24]:

To avoid the middle-income trap, one must increase investments and expand the economy’s absorptive capacity. Now is a very good time to do that given the low interest rates and sufficient liquidity that can be tapped for investment activities

Government spending has gone up over the last three years, and it has significantly contributed to the country’s growth. The private sector should now invest more and serve as the main growth driver of the economy

Some important nuggets of wisdom from such comments:

One, as pointed out last week, aside from sectors driven by massive credit expansion, government spending has been artificially bolstering the statistical economy. This is the reason the why the Philippine government has been tightening the noose on taxes and why the government has launched a shame “class warfare” campaign against wealthy Chinese and members of the Forbes billionaires list.

Does it not seem odd or a logical self-contradiction to think that taxes increases have been thought as being compatible with investments?

Raising taxes increases a firm or an enterprise’s cost of doing business which also means the reduction of the rate of profitability or increases the hurdle rate required for a business to survive, all these extrapolates to penalizing investments. So how will raising taxes lead to more investments?

Yet there are also other political aspects serving as obstacles to promoting businesses, such as more regulations, mandates, inflation, bureaucracy, welfare and other political interventions.

Does the good governor also not realize that by the government’s engagement of class warfare rhetoric translates to the heightening risks of political instability? Will companies invest in economies where property rights are not secured and whose assets are at the risks of arbitrary confiscation from populist policies?

The sad part is that ivory tower based experts have little idea of what goes on in the real world and have been blinded by math based models.

Two, the good governor appears to be saying join the bubble! Interest rates will forever be low. The laws of economics do not exist in the Philippines.

But an economy operating in bubbles would translate to relative price instability. And price instability will impact economic calculation. Price instability will be pronounced especially in the input costs of sectors experiencing bubbles. Economic calculation problems will reduce the investor’s motivation to invest. People will be induced to speculate more in financial markets than to invest in productive activities. 

And this could be why the seeming preference by foreigners on portfolio flows (US $3.911 billion; 2012) rather than to foreign direct investments[25] (US$1.053 billion; 2012) as shown above.

In short, price instability and distortion in the capital structures leads to a shrinking of the markets or real economy and capital losses. How then will these attract investments?

Third, the middle income trap is a macroeconomic hooey. Just take a look at the Phisix. Do the punters and speculators stop buying the Phisix after hitting certain income or price level? Or are they “trapped” at certain income or price levels? Apparently not.

On the contrary, the yield chasing phenomenon into voguish themes based on flawed perception of reality that has been enabled and facilitated by credit expansions has been dramatically escalating. This signifies of the deepening of the mania phase. Such mania has been frequently characterized as “greed”.

While people operate within their own “comfort zones” or limits on the activities they engage in, these are subjectively and individually determined. These cannot be captured by aggregates or by statistics as they are constantly changing.

Yet when people’s income rises or when the middle class grows, they don’t really get “trapped” or get caught in a stasis which is a very foolish way to see the world.

Instead, political officials see and use such as opportunities to impose expansions on myriad political programs. Such diversion of productive resources to non-productive use essentially becomes the “trap”.

As I previously pointed out[26],

the more intervention, the lesser the capital accumulation or reduced economic growth. When politicians become greedy enough to divert much wealth into policy driven consumption activities then productivity diminishes. And that's where the so-called statistical 'trap' comes in.

The fallacious middle income trap theory does not even see people as human beings but as some statistical abstract, who are incapable of thinking.

The problem of investments will not be solved by interventionist policies, but by the promotion economic freedom through the dismantling of anti-competitive laws that benefits the concentrated few.

Philippines Government Balks at ASEAN Integration: Delays Joining ASEAN Trading Link

But real reforms haven’t really been on the cards.

Just take a look at the latest ASEAN integration talks. The Philippine president threw cold water on the possibility of a free trade zone in 2015

From the Rappler[27]:

Southeast Asia's efforts to create a single market by 2015 are in their hardest phase owing to protectionist reflexes on sensitive sectors, Philippine President Benigno Aquino said.

Despite the challenges, however, leaders of the Association of Southeast Asian Nations are working hard to meet the target, Aquino told reporters on Wednesday night, April 24, in Brunei where he is attending ASEAN's annual summit.

"They have finished with the easy parts but the accomplishments will not be as fast as in discussing the hard parts. When you reach that point, there can be some protectionist measures taken by each economy," Aquino said.

"But since we are focused on reaching the target, everyone who believes that one community is beneficial to everybody concerned will really try hard (to reach the goal)."

“Protectionist reflexes on sensitive sectors” represents as the “concentrated” segments of the economy that are controlled by the unholy alliance of political elites and their cronies. They are the key beneficiaries of today’s central bank asset market friendly policies. Many of them are into the yield chasing bubbles in the real economy. And so the unevenness of the much touted economic boom.

Yet like typical politicians, promises have been made but fulfilment will be pushed into the future.

Proof?

Take the ASEAN Trading Link[28]. This is milestone pan-Asian financial platform project aimed at linking 7 stock exchanges from 6 countries that would allow more than 3,600 companies to be traded within the ASEAN region.

Think of trading Thai, Malaysian, Singaporean, Vietnam, Indonesian stocks under the PSE platform. Integrating these exchanges would mean vastly expanded supply of equities (more choice), greater access to capital and investors (bigger markets), lower transaction costs, trading efficiency, promote competition and transparency, more integrated economies which should promote REAL economic growth, and many other multiplier effects as cross cultural relations and more. Think about communicating with more ASEAN people due to cross border trading (e.g. stock market forums, or annual meetings)

As of 2012, Thailand has joined Singapore and Malaysia[29]. Vietnam has conducted a roadshow on INVEST ASEAN 2013 and will join sometime within the year[30].

But the Philippines for two years or from 2011[31] has resorted to dilatory manoeuvres to defer on participating in the trading link. In 2012 the PSE, a monopoly regulated by the SEC, will be delayed due to flimsy reasons; supposedly for getting the system into place and for updating regulations[32].

Let me guess, should there emerge a crisis from anywhere that will affect the region, this will again be used as pretext for postponement.

Yet the refusal to integrate with the region can be seen as parallel to the absence of spot or commodity futures markets. Reason: vested interests. We are the only major ASEAN country without commodity markets. That’s because commodity markets will displace the highly connected middlemen.

Such refusal to equitably distribute economic opportunities via marketplace particularly through economic freedom is simply a sign of protecting economic interest of the politically connected or cronyism.

Good governance? Duh!

This also means that the statistical growth based on government spending, concentrated “crony” based economy and credit driven expansion all adds up illusions from a credit driven asset bubble.

George Magnus: Asia’s Vulnerabilities

The prominent economist George Magnus, who coined the Minsky Moment, recently wrote that Asia needs to rely on real reforms than from “miracles”. He states that one of the six major vulnerabilities of Asia as[33]:

Asia's 'financial' indicators are flashing warning signs, even if there does not appear any immediate threat of instability, and many financial regulation lessons from the Asia crisis have remained 'learned'.

But excluding China, the ratio of credit to GDP has risen to over 100% — higher than it was in 1997. Also, land loan to deposit ratios in Asian banking systems are rising significantly again.

Those who refuse to learn the lessons of history are bound to repeat them.

Yet the other vulnerabilities cited by Mr. Magnus are China’s economic performance, the export centric models of ASEAN and East Asian giants, more complex Asian economies, India’s demographic dividends, and income inequality.

Except for China, I am not so concerned for the others as these problems that are mostly products of interventions which economic liberalization should be able to address. For instance, wealth or income inequality, as shown above, has been products of cronyism and corporate protectionism or corporatism.

While the public is being deceived by an artificial boom masked by credit expansion, the real beneficiaries are the financial asset holders, since central bank policies essentially provide subsidies to these assets at the expense of the real economy whether in the US, or Philippines or elsewhere.

As analyst Doug Noland enunciates of the nature of inflationism[34]

Once its takes root, monetary expansion enjoys powerful momentum and powerful constituents. The bias is always to get bigger, with system deficiencies amply available for justification and rationalization.

Record US Stocks, Near Record Net Margin Debt

Finally as the US stock markets soar to unprecedented heights this chart is a must look

US Stock markets has likewise been driven by a credit bubble, as margin debt nearly hits record highs[35]. Margin debt is just one of the many symptoms of blossoming credit bubble in the US. But such would be a subject for another day.

For now, the mania phase seems as gaining more momentum.

Up, Up and Away!

Trade cautiously.

---

[1] Jakarta Globe Indonesian Officials Confident Economy to Grow Despite Rating Outlook Downgrade, May 3, 2013

[2] Global Property Guide Malaysian house prices continue to rise, albeit at a slower pace April 11, 2013

[3] Tradingeconomics.com MALAYSIA INTEREST RATE

[4] See More Signs of Manic Phase in The Phisix, ASEAN and the US March 4, 2013

[5] See ECB Cuts Rates, Mulls Negative Deposit Rates May 3, 2013

[6] See Reflexivity Theory In Commodity Markets November 3, 2008

[7] George Soros The Alchemy of Finance John Wiley $ Sons 2003 p.5

[8] Soros ibid p. 58

[9] Soros ibid p .23

[10] Bangko Sentral ng Pilipinas Bank Lending Growth Sustained in March April 30, 2013

[11] See Example of the Mania Phase: Awards Received by the Bank of Cyprus March 27,2013

[12] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Higher in March April 30, 2013

[13] Bangko Sentral ng Pilipinas Foreign Portfolio Investments Grow in March April 11, 2013

[14] Inquirer.net 1M join ranks of jobless Filipinos, May 3, 2013

[15] Tradingeconomics.com PHILIPPINES UNEMPLOYMENT RATE

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

[17] See Phisix 7,000: Why Asia’s Rising Star is a Symptom of Mania April 29, 2013

[18] See IMF to Asia: Put a Brake on Credit Bubbles! April 30, 2013

[19] See CNBC: The Growing Risks from ASEAN’s Asset Bubbles May 1, 2013

[20] Daniel Kahneman Thinking, Fast and Slow p.204-205

[21] Inquirer.net S&P gives PH second credit ratings upgrade May 03, 2013

[22] Bloomberg.com European Leaders’ Softening on Austerity May Accelerate April 29, 2013

[23] Nassim Nicolas Taleb, The Black Swan The Impact of the Highly Improbable, Allen Lane p.192

[24] Inquirer.net BSP: PH likely to avoid ‘middle-income trap’ May 2, 2013

[25] BSP Foreign Direct Investments Post US$576 Million Net Inflows in January 2013 April 10, 2013

[26] See The Myth of the Middle Income Trap March 28, 2013

[27] Rappler.com ASEAN single market push in hardest phase: Aquino, April 25, 2013

[28] Asiaetrading.com THE ASEAN TRADING LINK EXPLAINED

[29] Wikipedia.org ASEAN Exchanges

[30] Thetradenews.com ASEAN Trading Link extends to Vietnam April 3, 2013

[31] ABS-CBN PSE delays joining ASEAN trading link November 18, 2011

[32] Business Mirror Cross-border e-trading link will just have to wait for PSE December 9, 2012

[33] George Magnus Is Asia's Miracle Over? May 02, 2013

[34] Doug Noland Too Much Asset Inflation Credit Bubble Bulletin Prudent Bear May 3, 2013

[35] Bloomberg.com Near-Record NYSE Margin Debt Leads to Caution: Chart of the Day, May 2, 2013

Richard Ebeling: No Voting Right for Those Living at the Taxpayer’s Expense

Parasites should be disenfranchised from the rights to suffrage argues Austrian economist and Northwood University professor Richard Ebeling at the Epic Times

One of the most sacred ideas in our democratic era is the belief in the universal and equal right of all citizens to have the voting franchise. Yet, some have argued against this “right.” But their challenge to an unlimited right to vote has not been based on grounds of gender, age, or property ownership.

One such critic was the famous British social philosopher and political economist, John Stuart Mill. In his 1859 book, “Reflections on Representative Government,” (Chapter 8, ‘Of the Extension of the Suffrage’), Mill argued that those who received “public assistance” (government welfare) should be denied the voting franchise for as long as they receive such tax-based financial support and livelihood.

Simply put, Mill reasoned that this creates an inescapable conflict of interest, in the ability of some to vote for the very government funds that are taxed away from others for their own benefit. Or as Mill expresses it:

“It is important, that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people’s money, have every motive to be lavish and none to economize.

“As far as money matters are concerned, any power of voting possessed by them is a violation of the fundamental principle of free government . . . It amounts to allowing them to put their hands into other people’s pockets for any purpose which they think fit to call a public one.”

Mill went on to explain why he considered this to be especially true for those relying upon tax-based, redistributed welfare dependency, which in 19th century Great Britain was dispersed by the local parishes of the Church of England. Said Mill:

“I regard it as required by first principles, that the receipt of parish relief should be a peremptory disqualification for the [voting] franchise. He who cannot by his labor suffice for his own support has no claim to the privilege of helping himself to the money of others . . .

“Those to whom he is indebted for the continuance of his very existence may justly claim the exclusive management of those common concerns, to which he now brings nothing, or less than he takes away.

“As a condition of the franchise, a term should be fixed, say five years previous to the registry, during which the applicant’s name has not been on the parish books as a recipient of relief.”

Read the rest here.

Side Effects of Inflationism: Rat Meat, Horsemeat and Fake Tuna Scandals

Due to price instability brought about by inflationist policies, one of the major nasty side effects has been to encourage a decline in quality of products (value deflation) or even promote fraud in the marketplace in order for many to survive.

As the great Murray N. Rothbard explained (bold mine)

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality.  The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

Take for instance the recent horsemeat scandal that hit Europe. UK’s The Guardian offers the origin: (bold mine)

Supermarket buyers and big brands have been driving down prices, seeking special offers on meat products as consumers cut back on their spending in the face of recession. The squeeze on prices has come at a time when manufacturers' costs have been soaring. Beef prices have been at record highs as has the price of grain needed to feed cattle. The cost of energy, heavily used in industrial processing and to fuel centralised distribution chains, has also soared. There has been a mistmatch between the cost of real beef and what companies are prepared to pay.

Such price mismatching gives credence to the economic logic that inflationism encourages value deflation or fraud. The next question is what causes such mismatches?

There has also been reportedly growing incidences of mislabeling of tuna and other growing seafood fraud in the US from 2010-2012.

In China, food scams has become a recent fixture. Some of what has been sold as lamb meat have been substituted with rat meat.

From Washington Post:

BEIJING — Chinese police have broken up a criminal ring accused of taking meat from rats and foxes and selling it as lamb in the country’s latest food safety scandal.

The Ministry of Public Security released results of a three-month crackdown on food safety violators, saying in a statement that authorities investigated more than 380 cases and arrested 904 suspects.

Among those arrested were 63 people who allegedly ran an operation in Shanghai and the coastal city of Wuxi that bought fox, mink, rat and other meat that had not been tested for quality and safety, processed it with additives like gelatin and passed it off as lamb.

The meat was sold to farmers’ markets in Jiangsu province and Shanghai, it said.

Despite years of food scandals — from milk contaminated with an industrial chemical to the use of industrial dyes in eggs — China has been unable to clean up its food supply chain.

There seems to be a coincidence: China’s food scandals emerged at the same period where accounts of seafood fraud in the US surfaced. 

From the same article

The supreme court said 2,088 people have been prosecuted in 2010-2012 in 1,533 food safety cases. It said the number of such cases has grown exponentially in the past several years. For example, Chinese courts prosecuted 861 cases of poisonous food in 2012, compared to 80 cases in 2010.

And all these likewise coincides with accounts of Ponzi and pyramiding scams in the Philippines and the world.

Media predominantly points the finger on individual aberrations or the lack of regulations as source of such misdemeanor, misdeeds or iniquities. Yet such would only signify as dealing with the superficial or the symptoms rather than the cause.

Media either have deliberately overlooked or have been ignorant of the incentives brought about by social policies that has led to such repulsive erosion of the public's moral fiber. Like price controls, culpability has been shifted to the private sector to justify more politicization when such logic gets it backwards. 

In reality, these offenses represent the unintended effects from the distortions of price signals brought about by monetary inflationism, which central banks have employed and which has been growing at accelerating scale, since 2008. (chart from Tradingeconomics.com)