War on Gold: Pakistan Temporarily Bans Gold Imports

Intervention begets intervention.

Such ratchet effect or mission creep applies not only within a state defined national boundary but could diffuse into the neighbors or the region as well.

The Indian government’s war on gold is an example. Such anti-tradition policies has incited massive smuggling across her borders. Pakistan responds by mimicking the Indian government albeit temporarily.

From Mineweb.com:

India's neighbour Pakistan has decided to temporarily ban the import of gold for one month, to save its foreign currency reserves and to curtail the rampant smuggling going on in the nation.

On Wednesday, July 31, Pakistan imposed a temporary ban on the import of gold.

Following the Indian government’s decision to discourage gold import by imposing 8% duties, buyers have reportedly shifted to Pakistan where the precious metal is allowed to be imported duty free since 2001.

(below charts from tradingeconomics.com)

Pakistan’s government passes the blame on her faltering currency, the rupee, on gold imports. USD-Rupee has been on an uptrend since 2008.

But the reality is that, gold imports has hardly been responsible for Pakistan’s predicaments.

Pakistan’s government continues to run a deficit. (I don’t know why a vacuum exist in the graph above)

Never the less, Pakistan’s government spending has been growing at a rate of 18.33% in 10 years, even when the GDP annual growth rate averaged of 4.73% over the same period. Since 1952, Pakistan’s annual gdp growth rate has been 4.94% according to Trading Economics

Pakistan have also been posting negative balance of trade since 2003 which has prompted for serial current account deficits over the same period

These twin deficits have been financed partly by external debt. 

Pakistan’s external debt nearly doubled since 2008, but has marginal declined in 2012

A big portion of the twin deficits have been financed via monetary inflation where M3 has grown by CAGR of 14.74% which is nearly double the average annual rate of growth her statistical economy. 

This has essentially been responsible for the weakness in her currency which her government scapegoats on gold.

Nonetheless Pakistan’s perfervid monetary activities has pumped up her stock markets.

The Karachi 100 has been one of the best performers in 2013 up by 36.29% in nominal currency terms. Chart from Bloomberg.

The Karachi appears to have hardly been jolted by Bernanke’s “taper” as frontier markets have been in vogue.

If the attack against tradition reach a critical point in a society’s tolerance level, the current passive resistance expressed via smuggling, may transform into social unrest, again Egypt, Brazil, and Turkey are du jour examples.

All these concerted anti-tradition policies are bound for failure.

Quote of the Day: Government Price Fixing of Markets

The government makes prices by buying certain assets but also by compelling you to buy them too. The whole point of QE is to make debt less valuable and to force you into equities. The point of asset purchases is to compel you to buy bonds even though you know it's not smart.

The strategy goes far beyond the equity and bond markets. More and more governments are also forcing businesses to spend money on things that serve the public interest.

Health care is one such issue. In the US now, 'Obamacare' is becoming so expensive to employers that they are starting to encourage workers to hold two part-time jobs in different firms so that neither employer is obliged to pay the full health care cost of a full-time employee.

This has the added advantage of keeping unemployment higher for longer, thus permitting governments to continuously justify their ever increasing role in setting market prices.

In the UK, pension funds are told by the regulators that they should put more capital into investments that are associated with public goals such as social housing and the building of schools or domestic infrastructure.

This is from Dr. Pippa Malmgren who is a  policy expert, (Wikipedia.org) former Special Assistant to the President of the United States for Economic Policy on the National Economic Council and former member of the U.S. President's Working Group on Financial Markets and serves as adviser to many firms, at her website.  A political insider talks about how 'gamed' or rigged the system is.

Is Indonesia ASEAN’s Canary in the Coal Mine?

Tight money may have begun to take its toll on Indonesia's economy

From Bloomberg

Indonesia’s economy grew less than 6 percent last quarter, adding to risks for the Southeast Asian nation as investments ease, inflation accelerates and the currency slumps.

Gross domestic product increased 5.81 percent in the three months ended June 30 from a year earlier, the Central Bureau of Statistics said in Jakarta today. That compares with a 6.02 percent pace reported previously for the first quarter and the median estimate of 5.9 percent in a Bloomberg News survey of 19 economists.

Indonesian policy makers are contending with easing growth at a time when higher fuel costs spurred the fastest price gains in more than four years and the rupiah trades near the weakest since the global financial crisis. The central bank has raised interest rates at the past two meetings in an effort to temper prices and reduce capital outflows, actions that may hurt domestic spending and compound the slowdown in Southeast Asia’s largest economy.

As I previously noted, Indonesia has her own credit boom fueled stock market-property bubble. 

And monetary tightening expressed via the bond vigilantes may have commenced to negatively impact on the accumulated imbalances on the real economy.

Indonesia’s bubble conditions has led to the deterioration of her trade balance since 2012.

Sustained government budget deficits has also compounded on her weakening external conditions.  (charts from tradingeconomics.com)

Indonesia's vulnerable external conditions has been reflected by the accelerating decline of her currency, the rupiah, or the rise of the US-IDR as shown in the chart from xe.com. These dynamics has prompted their government to cut fuel subsidies which sparked riots. 

Yet these deficits will need to be funded by more borrowing or higher taxes or by covert inflation. This also means a prospective cut on government expenditures.

So far the recourse has been via debt.

While Indonesia’s external debt level has been low relative to the past (30+% against 60+% in the pre-Asian crisis), it has been rising at an accelerating pace.

In July, Indonesia successfully raised US$ 1 billion from the debt markets but at significantly higher rates.

But these deficits have also been addressed via the monetary inflation route, hence the depreciation of the currency.

Indonesia’s 10 year bond spiked just a few months back when the Fed’s 'taper' talk became a fashion (chart from investing,.com).

With Indonesia's financial markets tightening by its own, the Indonesian central bank, the Bank Indonesia, raised interest twice in a span of a few days last July or just a month back.

Since, the Indonesia’s major stock market benchmark, the JCI, hasn’t been as buoyant as the past (chart from Bloomberg). 

While the JCI has not touched the bear market levels during the market tapering incited spasm in the late May-June, the JCI appears to be weakening as evidenced by a series of lower highs.

Don’t forget that Indonesia used to be the darling of the credit rating agencies. 

For instance the Fitch Ratings has had a series of upgrades on Indonesia’s credit standing since 2002.

Tightening monetary conditions will put Indonesia’s economy to a critical test. The jury is out whether the Indonesian economy will be able to sustain growth or if tightening conditions will expose on the fragility of Indonesia’s systemic leverage that might bring the largest ASEAN nation into a recession--should the bond vigilantes continue to impose their presence around the world.

If Indonesia caves in to the latter, will the rest of the region follow?

And so far, the bond vigilantes have been disproving the outlook of credit rating agencies as in the past.

Are US Stocks Markets in a Wile E. Coyote Moment?

US stocks soared to fresh record highs! Again mostly based on the market’s Pavlovian response to central bank stimulus and partly to selective focus on economic data

 

Markets tend to rise during central bank meetings (see New York Fed Study here) as a conditioned response to central bank guarantees.

This euphoria ironically comes amidst soaring yields of 30 year UST bonds which is at a two year high

Yields of 10 year notes also spiked approximating the recent highs which are also at 2 year highs.

In the recent past, US stocks have risen in the backdrop of DECLINING yields of US Treasuries

And rising stocks and rising yields seem as a replay of 2006-2007.

The market’s Pavlovian response to central banking steroids signifies as expectations of extended zero bound rates or prolonged low interest environment.

But the bond markets has been saying otherwise.

Will this time be different?

Another headwind. Oil prices has also surged and is now at $107+ per bbl (WTIC). 

As I recently pointed out, each time WTIC passed the $100 mark, US stocks eventually succumbed to substantial corrections (green oval). Another this time is different?

Rising bond yields, oil prices, producers prices and stock markets are manifestation of the advanced (maturity ) phase of the US inflationary boom.

The incompatibility of the forces behind rising stocks and high oil/bond yields also means one of these two has been wrong…unless this time is different, where water flows uphill.

The impact of rising yields is on leverage. Rising yields which means higher interest rate extrapolates to higher cost of debt servicing.

The build up margin debt in the US stock markets seem to also mimic record stocks and replicates the 2000 and 2007 episode.

This means that the rate of increase of stock market returns should be greater than the rate of increase in interest rates, otherwise the wheels come off.

So yield chasing in the stock market has now transformed into a Minsky’s Ponzi finance—which relies on continued ascent of asset prices to maintain unsustainable debt levels.

Wile Coyote continues to chase the elusive Road Runner and he may just be running off the cliff.

And another thing, how do you think rising yields or higher interest rates will affect government debt of developed economies?  This time is different?

Don’t worry, be happy

US GDP Revision: Boost the Statistical Economy by Changing Methodology

The US statistical GDP has undergone major methodological revisions. The likely effect will be to temporarily 'boost' the economy.

The Zero Hedge quotes Bloomberg's Joseph Brusuelas on the changes made by the Bureau of Economic Analysis (BEA)  

Changes to the national income and product accounts data will be released at the same time as the second quarter estimate of gross domestic product. The revisions go back to 1929 and include the current business cycle. They will probably show a deeper recession and modest increases in the level of growth in the current cycle that may add as much as 3 percent to the level of GDP.

While growth may look more impressive, the growth path and rate of overall economic activity in recent years isn’t likely to change.

Policy Implications

Higher GDP may support those on the Fed pushing to start tapering. While the numbers are likely to shift noticeably, the change won’t merit a surprise announcement of tapering later today.

With increased data on receipts, expenditures and cash flow with respect to pensions, regulators and investors should have a better sense of what public entities have severely underfunded pensions programs. Investors should expect the potential crisis in the U.S. public pension system to play a greater role in the national economic narrative given the recent municipal bankruptcy in Detroit that includes $11.9 billion in unsecured obligations to lenders and retirees.

The biggest methodological change will be the reclassification of Research and Development Expenditures as well as Intellectual Property – entertainment, literary, and artistic originals. Where previously treated as an expense, these areas will now be categorized as investments and  included in the measure of GDP.

The other highlights from the revision, according to the Wall Street Journal economic blog will include:

-Dating back to 1929, the U.S. economy grew at a 3.3% annual pace, which is one-tenth of a percentage point higher than previously published estimates. From 2002 to 2012, the growth rate was 1.8%, up from a previously reported 1.6% pace.

-Intellectual property, which includes research and development, entertainment and the arts, and software, grew by 13% in 1997 from the prior year, as the Internet bubble began. But by 2001 growth had slowed and only rose 0.5% from a year earlier. By 2012, the categories’ contributions to overall growth were negligible.

-The BEA also tweaked how it calculates pension contributions. The agency will now consider compensation to reflect the value of the pension promises made by the employer, rather than the employer’s cash contributions to the pension fund. The new method better reflects the retirement benefits a worker earns while working and is consistent with business accounting standards, BEA said. As a result, the personal savings rate averaged 4.7%, an upward revision of one percentage point, for the period between 2002 and 2012.

-In 2012, the economy expanded at a 2.8% pace versus a previous estimate of 2.2%. But that performance was wildly uneven over the course of the year, with a strong 3.7% annualized pace in the first quarter after a big upward revision, followed by two middling quarters and finally an abysmal 0.1% growth rate in the final quarter of the year. In current dollar figures the revisions added nearly $560 billion to the overall figure 2012 GDP figure of $16.2 trillion.

-The great recession was less severe than previously thought, with the economy shrinking at an average annual pace of 2.9%, revised from a 3.2% contraction. The recession stretched, officially, from December 2007 through June 2009, according to the National Bureau of Economic Research, which determines the widely accepted benchmarks for U.S. business cycles.

-The current recovery, while revised to show stronger growth, is still the weakest since World War II. The economy expanded at an average 2.3% annual pace between the second quarter of 2009 and the fourth quarter of 2012, compared with a previously published 2.1% pace.

The US GDP reportedly grew at a rate better than the expected during the 2nd quarter, according to Time.com

But accounting changes may have played a big part in it.

 

The Zero Hedge notes

Think the pick up in Q2 GDP was due to the desired increase in end consumption? Think again. Following the full data revision, Personal Consumption as a component of GDP dropped from 1.54% in Q1 to 1.22% in Q2, offset however by an increase in fixed investment which rose from -0.23% to 0.93%. In fact, aside for Q3 and Q4 of last year, Personal consumption in the just completed quarter was the lowest goin back to Q2 2011 when PCE was 1.03%.

That's why I'd be leery of statistics since governments may manipulate them to suit their ends.

Federal Reserve Watching has become a Practice of Semiotics

Will the Fed be "Tapering"? Not from the latest announcement by the FOMC which reveals of the continued dovish non-tapering stance.

From Bloomberg: 

The Federal Reserve said persistently low inflation could hamper the economic expansion and pledged to keep buying $85 billion in bonds every month.

“The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said today after a two-day meeting in Washington. Growth will “pick up from its recent pace.”

The Fed continues to use evasive language which has led the markets to second guess their prospective policy actions. Such seem as signs of the Fed’s deepening confusion (or looking to justify further easing)

Fed officials seem to acknowledge how the financial markets have become acutely or deeply dependent on them. 

During the recent selloffs which had the markets focusing on the ‘taper’ aspect of the Fed communiqué (while ignoring the dovish part), central bankers immediately acted to rectify what seems as a policy communications blunder.  

Such has even prompted concerted actions by ex-US central bankers as the BoE’s Mark Carney and the ECB’s Mario Draghi to introduce “forward guidance” policies which assures of the lower levels of interest rates “for an period of time extended period of time”, as part of the damage control on the Fed's communications. 

Just a week back Dr. Bernanke laid the cards with “If we were to tighten policy, the economy would tank.”

Still the consensus position has been that the Fed will taper in September. 

So central bank assurances has once again fired up the Pavlovian or the stimulus addicted equity markets. Most of Asian markets have been in green, as of this writing (Bloomberg).

The odd thing is that despite the FOMC’s dovishness, these has hardly made a significant dent on the US 10 year UST note yields. Yes, last night yields of 10 year UST fell from a high of 27 and closed the session down by .38%, yet the interim trend has been a rising one.

Assurances of central bankers of low interest rate environment may have partly stabilized bond markets of major economies such as 10 year UK bonds, 10 year German bonds, 10 year French bonds or 10 year Japanese Government Bonds, but they remain elevated. Immediate trend of these bond yields, like the US counterpart, have even been creeping upwards during the last week.

So the bond markets seem hardly convinced of the efficacy of the Fed’s or other central banker's position of maintaining an extended low interest rate environment.

And as I have been saying, the Fed has only repackaged “exit” communication strategies since 2010 as du jour “tapering”. This for me looks like the Fed's serial ‘Poker Bluffs’. And should there be any possible realization of “tapering” such will signify as tokenism, as these would partially be designed to realign monetary policy direction with actions in the bond markets in order to safeguard the central bank’s “credibility”. QE will continue and may even be broadened when financial markets suffer another bout of convulsion.

Fed watching has become a practice of semiotics or (dictionary.com) “study of signs and symbols as elements of communicative behavior”. 

Unfortunately, such dependency on the Fed and central banks, reveals of how broken financial markets have been.

Quote of the Day: Deutungshoheit or Interpretative Superiority

So here’s an important German word, which we could well import into English:Deutungshoheit. This translates literally as “interpretative superiority” and is analogous to “air superiority”. Deutungshoheit is what politicians and their spin doctors attempt to win by putting forward their interpretations and framings of the semirandom events that constitute the “news”.

This is from telecom research analyst Alex Harrowell at the Fistful of Euro. (hat tip Arnold Kling)

Julian Assange on Bradley Manning’s Court Martial Verdict; Obama’s Promise to Protect Whistleblower Disappears

The statement of Wikileaks founder Julian Assange on Bradley Manning’s conviction. 

From Wikileaks.org:

Today Bradley Manning, a whistleblower, was convicted by a military court at Fort Meade of 19 offences for supplying the press with information, including five counts of ’espionage’. He now faces a maximum sentence of 136 years.

The ’aiding the enemy’ charge has fallen away. It was only included, it seems, to make calling journalism ’espionage’ seem reasonable. It is not.

Bradley Manning’s alleged disclosures have exposed war crimes, sparked revolutions, and induced democratic reform. He is the quintessential whistleblower.

This is the first ever espionage conviction against a whistleblower. It is a dangerous precedent and an example of national security extremism. It is a short sighted judgment that can not be tolerated and must be reversed. It can never be that conveying true information to the public is ’espionage’.

President Obama has initiated more espionage proceedings against whistleblowers and publishers than all previous presidents combined.

In 2008 presidential candidate Barack Obama ran on a platform that praised whistleblowing as an act of courage and patriotism. That platform has been comprehensively betrayed. His campaign document described whistleblowers as watchdogs when government abuses its authority. It was removed from the internet last week.

Throughout the proceedings there has been a conspicuous absence: the absence of any victim. The prosecution did not present evidence that - or even claim that - a single person came to harm as a result of Bradley Manning’s disclosures. The government never claimed Mr. Manning was working for a foreign power.

The only ’victim’ was the US government’s wounded pride, but the abuse of this fine young man was never the way to restore it. Rather, the abuse of Bradley Manning has left the world with a sense of disgust at how low the Obama administration has fallen. It is not a sign of strength, but of weakness.

The judge has allowed the prosecution to substantially alter the charges after both the defense and the prosecution had rested their cases, permitted the prosecution 141 witnesses and extensive secret testimony. The government kept Bradley Manning in a cage, stripped him naked and isolated him in order to crack him, an act formally condemned by the United Nations Special Rapporteur for torture. This was never a fair trial.

The Obama administration has been chipping away democratic freedoms in the United States. With today’s verdict, Obama has hacked off much more. The administration is intent on deterring and silencing whistleblowers, intent on weakening freedom of the press.

The US first amendment states that "Congress shall make no law... abridging the freedom of speech, or of the press". What part of ’no’ does Barack Obama fail to comprehend?

Oh by the way, US President Obama once promised to “protect whistleblowers” in one of his serial policy promises during the post 2008 elections

Unfortunately such provision, previously published at the the Change.gov website, “which was set up by the Obama transition team after the election in 2008 has suddenly been scrubbed of all of its original content” according to the techdirt.com. (hat tip Gary North)

When promises will not be fulfilled, just erase the records and hope that the public's truncated memory will lead to its oblivion.

Will Record Rental Prices lead to Higher US Consumer Inflation? A Redux

Soaring property prices in the US has been prompting for a decline in homeownership.

From Bloomberg:

The U.S. homeownership rate, which soared to a record high 69.2 percent in 2004, is back where it was two decades ago, before the housing bubble inflated, busted and ripped more than 7 million Americans from their homes.

This serves evidence of the unintended consequences from noble-sounding social redistributionist policies of promoting homeownership through debt and inflationism.

This homeownership program has spanned the Clinton administration (June 5, 1995)  “Today, all across the country, I say to millions of young working couples who are just starting out: By the time your children are ready to start the first grade, we want you to be able to own your own home”…

…and the Bush Administration’s Ownership society (October 15, 2002) “working together as a nation to encourage folks to own their own home”

So the push for more homes via redistribution has led to bubbles that eventually defeats the original intent; Americans have now LESS homes. 

Differently said the housing bust has been greater than the boom.

The failed policy of promoting homeownership has began to put pressure on prices of rental properties.

On the demand side, from the same Bloomberg article: (bold mine)

The homeownership rate in the second quarter was unchanged from the prior three month period, according to Census Bureau data released today. It will hit bottom at about 64 percent in the next year as families leave the foreclosure pipeline and enter rental homes, according to a May analysis by London-based Capital Economics Inc. It’s currently the lowest in almost 18 years after averaging about 64 percent for 30 years through 1995.

The result of the switch to rental properties: soaring rental prices

From the Zero Hedge: (bold original, all chart excluding US Treasury yields theirs)

A record lot in fact: the median asking rent for US vacant housing units just hit an all time high of $735 per month.

The price rental increases has been nationwide. But the rate of increases differs by region where the Northeast has posted the biggest increase

Though there are more homeowners than renters, if the Fed fueled property boom persists and if income growth continues to stagnate (as shown by the above chart) then the shift to rentals could deepen, further undermining the homeownership levels

But what seems more important for now is the potential effect of higher rental prices to US CPI and to the financial markets.

If rental prices continue to soar, then given that housing rents comprises the biggest weighing in the CPI calculation, then record rental prices will mean higher CPI as I raised before (chart from dshort.com). 

Rising inflation expectations will thereby add further pressures on the elevated yields of US treasuries

While 5 year yields are off the highs, 10 and 30 year yields are knocking at new highs.

At the end of the day property boom will be threatened by the supply side response to prices…

From Wall Street Journal: (bold mine)

The speed with which prices have risen over the past year has taken many economists by surprise. Gains have been fueled by record-low mortgage rates, a slowly improving economy that has released pent-up demand and strong appetites from investors converting homes into rentals.

…and from higher interest rates or combination of both.

Again clearly policy induced boom bust cycles at work

Myanmar’s Seething Property Bubble, Redux

I was shocked to learn that office space rental prices in Myanmar has zoomed past their equivalent in New York’s Manhattan

From Bloomberg: (bold mine)

Sean Danley has spent the past six months scouting office space in Yangon after being sent to establish the Myanmar branch of his U.S.-based employer.

He looked in the city’s three sole 1990s-era towers, where annual rents have climbed to more than $100 a square foot, compared with less than $75 in downtown Manhattan, according to broker CBRE Group Inc. Too expensive, he said.

The villas he considered either didn’t have safety exits, weren’t clean, required sharing space with other companies or were in odd locations -- all unsuitable to the image of his $29 billion in revenue engineering and construction company, which he said he wasn’t authorized to identify. After seeing 10 places and losing one possibility to someone faster with his “bag of money,” Danley is still looking.

In 2011, I pointed out that Burma, which officially is known as Republic of the Union of Myanmar, has commenced to liberalize her previously closed political economy governed by military autocrats. Such structural change obviously should be a welcome development.

BUT the global yield chasing phenomenon has apparently seeped or spread into Myanmar’s economy, as evidenced by escalating the inflating property bubble as I earlier noted in June of 2012

One can sense mania when the investing public imprudently ignore risks. From the same Bloomberg article:

International developers will probably seek partnerships with local counterparts in a country where they’re not yet sure of rules and regulations, Pun said. For large-scale projects, some foreign companies bring their own workers from outside, while also using local resources available, he said.

Foreigners have been stampeding into Myanmar in the anticipation that foreigners will “no longer require a local partner to start a business in the country, and will be able to legally lease but not own property” based on a March 2012 draft foreign investment law (Wikipedia.org). 

But foreigners are prohibited to own land and immovable property (PWC).

So the massive influx of foreign investments on the non-property sectors has played a significant role in driving up Myanmar’s property prices to stratospheric heights.

Yet one would wonder how such eye-popping scale of property price inflation has been financed.

Myanmar has a dysfunctional, “outdated and debased” banking system as a result of decades of “abuse by the previous regime”. The banking system has effectively been “shunned by about 90% of the population” (CNN) where the average Burmese simply hold their savings or cash at home. 

Financial services such as loans, financial products, interbank operations and other forms of credit barely exists.

And the absence of a viable banking system and capital markets has prompted residents to turn into “real estate as a place to stash their cash” according to a Myanmar based finance analyst (Quartz). 

Myanmar is slated to open the Yangon Stock Exchange in 2015.

And because of the largely cash based nature of the transactions in the property sector, some analysts opine that the boom-bust cycle in Burma has been “overstated”.

I believe that the cash transaction segment of Myanmar’s markets sizzling hot property markets represents only part of the story. 

According to a survey conducted by an IFC report only 16% of households use the formal financial services. The other sources of loans emanates from family, friends and moneylenders [IFC: Microfinance in Myanmar Sector Assessment] So Myanmar has a huge shadow banking system which essentially eclipses the formal banking sector.

Importantly, the idea of the absence of leverage in Myanmar’s property boom may not entirely reflect on reality. 

Singapore has played a big role in providing financial services to Myanmar even when US sanctions were in place. According to Hans Vriens of the Insight Bureau Briefings, “Most overseas transactions are handled in Singapore, which acts like an off-shore banking platform for Myanmar and using the informal hundi system” 

Additionally, aside from the $2.4 billion of bilateral trade, there has been “significant business presence by Singaporean firms on Myanmar” as well as a “large Myanmar community in Singapore and a pool of Myanmar companies using Singapore as an intermediary hub to expand overseas”. 95% of Myanmar’s foreign transactions reportedly has been coursed through Singapore’s United Overseas Bank (UOB) (Asia One Business). 

So loans by the informal sector may have partly been financed by Singaporeans and or Myanmar based investors domiciled in Singapore.

This also implies that while property transactions may have mostly been executed through cash, the source of funding  may have been conducted through shadow banks, or through overseas lending via Singapore’s banks or both.

Whatever the source of transactions, one thing is clear, Myanmar’s money supply has been exploding, according to the World Bank’s Data.

Myanmar’s excessively high property prices (or property bubble) is likely either to fall from its own weight or would likely recoil from the prospects of monetary tightening as consequence to ongoing instability in the global bond markets. 

It's unfortunate that central bank's inflationism will act as spoiler to what has generally been a positive development.

Chinese Government to Crack Down on Local Government Debt

China’s runaway credit financed property bubble will undergo scrutiny from Chinese national government, who will focus on reining debt levels of the local government

That’s according to a news from Bloomberg;

China will start a nationwide audit of government debt this week as the new Communist Party leadership investigates the threats to growth and the financial system from a record credit boom.

The State Council, under Premier Li Keqiang, requested the National Audit Office review, the office said in a statement yesterday without elaborating. The cabinet’s July 26 order was “urgent” and the office suspended other projects to work on the review and will send staff to provinces and cities this week, People’s Daily reported yesterday on its website, citing sources it didn’t identify.

The first full audit since an initial review two years ago underscores concern expressed by institutions such as the International Monetary Fund, which this month cited risks to the economy from borrowing by local governments and an expansion of non-traditional sources of credit. The new leadership oversaw a showdown with state-owned lenders last month as the People’s Bank of China engineered a cash squeeze to pressure banks to better manage their operations.

On the surface this looks impressive, but the question is how or on what basis will the national leadership apply controls? Will these be selective? Will the  political opposition bear the brunt of such crackdown?

The enormous leveraged exposure by local governments. From the same article:

The first audit of local-government debt found liabilities of 10.7 trillion yuan ($1.8 trillion) at the end of 2010, the National Audit Office said in June 2011…

Ding estimated China has at least 12 trillion yuan of local-government debt. The review may pave the way for future fiscal reforms, including changes to rules on local governments’ roles and responsibilities, Ding said.

I think that this goes beyond merely changing of rules, it is more likely that the problem lies, aside from the PBoC’s inflationary policies, on China’s top down political system and the command economy. 

China's centralized political framewok has previously used the statistical economy as a tool to promote the national political agenda. Moreover, the statistical economy has also been used as carrot and stick to manage the political careers of local government officials.

As explained by a paper from Cornell University (Derek Headey, Ravi Kanbur, Xiaobo Zhang) [bold mine]

Modern China has always had centralized merit‐based governance structure. In the planning economy era, the evaluation of cadres was largely based on political performance. However, since the China’s reforms initiated in 1978, political conformity gave way to economic performance and other competence‐related indicators as the new criteria for promotion. The promotion of China cadres’ is now largely based on yardstick competition in several key economic indicators, including economic and fiscal revenue growth rates, and some central mandates, such as family planning (Li and Zhou, 2005, Chapter 12, this volume). These indicators have been written into local leaders’ contracts. This creates tremendous pressure for local government personnel to compete with each other through superior regional performance.

In other words, the massive local government leverage has been a product of the political imperatives of the previous leaderships in generating high statistical economic growth regardless of the costs.

More. The Chinese government will allegedly cap spending…

Separately, China’s government has decided to cap the ratio of the fiscal deficit to gross domestic product at 3 percent in a bid to avert a downgrade of China’s credit rating by international rating companies, China Business News reported today, citing an unidentified person familiar with the matter.

So will the recently announced $85 billion railway stimulus be a limited one? This remains to be seen. I suspect that should China's economic slowdown intensify, spending caps may become an open spigot for stimulus. That's because a meltdown of the Chinese economy will likely jeopardize the power structure of the incumbent political system that would put to risks the grip on power by the incumbents.

Again chasing statistical growth at any cost by the local government has been previously powered by huge borrowing. 

As an aside, more than bubbles, as consequence from the politically driven growth strategy China suffers from a massive environmental degradation or pollution.

Again from the same Bloomberg article:

Local-government financing vehicles need to repay a record amount of debt this year, prompting Moody’s Investors Service to warn that Premier Li may set an example by allowing China’s first onshore bond default.

Regional governments set up more than 10,000 LGFVs to fund the construction of roads, sewage plants and subways after they were barred from directly issuing bonds under a 1994 budget law. A 4 trillion yuan stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they have been rolling over or refinancing with new note sales.

LGFVs may hold more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said in April. Refinancing will be a challenge after corporate bond sales slumped to a two-year low in the second quarter and policy makers cracked down on shadow-banking activities that bypass regulatory limits on lending.

The obvious lesson here is that politically driven economic growth engenders massive imbalances. The boom of which are not only artificial and temporary, but eventually backfires.

Whether or not the national government pursues with tenacity the crackdown on local government and on the shadow banks, the above accounts appear as  deepening manifestations of the unfolding meaningful slowdown of the real (and not the inflated statistical) Chinese economy, the increasing hissing signs from China’s property bubbles and of the greater uncertainty over political direction and its ramifications.

In the face of a volatile global bond markets, these risks are likely to be amplified.

Interesting times indeed.