10 Most Common Biases affecting the Psychology of Investing

ConvergEx's Nick Colas has an interesting list of the “10 most common biases affecting the psychology of investing” (via the Zero Hedge)

1) Anchoring & Adjustment:  This combination occurs when initial information unduly influences decisions by shaping the view of subsequent information.  Once the “anchor” or initial information is set, there exists a bias for interpreting other information around the anchor.  Car salesmen frequently use this tactic when presenting an initial sales price, making the subsequent negotiated prices seem lower than the initial price even though they are still higher than what the vehicle is actually worth.

2) Attribution Asymmetry: The concept here involves people’s tendency to attribute success to internal characteristics (such as talent and innate abilities) and to attribute failures to external factors (like simple bad luck).  Research has shown the reverse to be true when evaluating the successes and failures of others.  The lesson here is most valuable when you hit a “hot streak.”  When you experience speed bumps, don’t be quick to write them off as poor luck – there could be a fundamental problem with your strategy.

3) Choice-Supportive Bias:  By distorting recollections of chosen courses of action versus the rejected courses of action, people tend to make the chosen outcomes seem more attractive that the foregone ones.  Just as people more frequently remember “good” memories than they do “neutral” or “bad” memories, the belief that “I chose this option therefore it must have be superior” can lead to a false recollection of the ultimate outcome.  Learn from your mistakes – don’t forget them.

4) Cognitive Inertia: This is just psychological speak for the unwillingness to change thought patterns in light of new circumstances.  Quite simply, do your homework and keep up on your investments.  If a company slashes guidance, for example, perhaps you should consider altering your investment accordingly.

5) Incremental Decision Making & Escalating Commitment:  These biases occur when people view a decision as a small step within a larger process, rather than as a singular choice.  As a result, this viewpoint perpetuates a series of similar decisions, when perhaps many of those decisions should be evaluated with a fresh mind.

6) Group Think: Grown-up lingo for peer pressure, group think occurs when one feels compelled to adhere to opinions held by a larger group.  This one’s easy – don’t let others sway your opinion.  Groups tend to form a singular opinion based on the opinion of the loudest or most influential person in the group.  Doesn’t mean he’s right.

7) Prospect Theory: This theory explains that people are more likely to take on risk when evaluating potential losses; though in looking at potential gains, humans have the tendency to be risk-averse.  In other words, losses feel worse than gains feel good.

8) Repetition Bias: The bias results from the willingness to believe what one has been told most often and by the greatest number of different sources.  Remember all the hoopla over Facebook’s IPO?  And then its year one performance?  Yeah, everybody though it was a hot stock and only now has it drifted above its IPO price.

9) Sunk-Cost Fallacy: If someone makes a decision about a current situation, based all or in part on what they have previously invested (money, time or otherwise) in the situation, they are suffering from sunk-cost fallacy.  Not matter how much you’re down on an investment, if it’s likely to never be recovered, then cut your losses and let it go.

10) Wishful Thinking: This “problem” happens when people are too optimistic; wanting to see things in a positive light can distort perception and objective thinking.  Just because you really really really want your investment to appreciate, doesn’t mean it will.  Investing should not be treated as gambling.

I would 10 more to this list

1.confirmation bias—search for information that confirms on embedded beliefs rather than objective analysis (related to selective perception)

2.endowment effect—ascribing more value on things or ideas that are owned or possessed (related to sunk-cost)

3.optimism bias—the tendency for people to believe that bad things will happen to everyone else but them (Nassim Taleb calls this the denigration of history)

4.regret theory—reaction to opportunity loss (I should have done this…)

5.status quo bias—preference for the status quo, rejection of change

6.clustering illusion—the tendency to see patterns where there is none or the intuition for pattern seeking

7.gambler’s fallacy--mistaken belief that if something happens more frequently than normal during some period, then it will happen less frequently in the future or (Nizkor) a departure from what occurs on average or in the long term will be corrected in the short term

8.confusing cause and effect

9.hindsight bias the presumption of knowledge from something that has already occurred or the “knew-it-all-along effect”

10.survivorship bias—tendency to focus on winners while overlooking the others due to lack of visibility

I wrote about “The Psychological Impact of an Inflationary boom” here.

Cognitive biases and heuristics signify as the "law of least effort"- the tendency to desire more rewards with lesser efforts or costs. 

As Nobel Prize psychologist and author Daniel Kahneman, wrote in Thinking, Fast and Slow (p.35) 

A general “law of least effort” applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.

Jim Rogers: US Stock Markets in a “Fool's Paradise”

The CNBC recently interviewed the legendary investor Jim Rogers who warned US stock market investors to “be careful”

The mania phase:

The U.S. is the largest debtor nation in the history of the world…We may well have a big, big rally in the U.S. stock market, but it's not based on reality. I would encourage investors to know you're in a fool's paradise, be careful, and when people start singing praises, say, 'I've been to this party before, and I know know it's time to leave.

The Fed Backlash

it is only a matter of time until the U.S. stock market runs into devastating problems due to the Fed's quantitative easing program and the prevalence of similar stimulative programs around the world.

Seasonal patterns + bigger imbalances

First of all, throughout American history, we've always had slowdowns every four to six years. That means that sometime in the next couple of years—three years, maximum—we are going to have problems again, caused by whatever reason,..For instance, there was 2001 and 2002, and then 2007 and 2009 was much worse. Well, the next time it's going to be worse still, because the level of debt is so, so, so much higher. Every country is increasing its debt at the same time.

Unsustainability of Fed Policies

This is the first time in recorded history that we have every major central bank in the world printing money, so the world is floating on an artificial sea of liquidity. Well, the artificial sea is going to disappear someday, and when it does, the catastrophe will be even worse. Yes, it's coming..If I was smart enough to tell you when it's going to happen, I would get rich.

Sitting and watching for now

I don't see any reason to rush out and sell stocks now, because of these artificial currents which are taking place. I'm not buying U.S. shares at the moment, but I'm not shorting either, because I am concerned this may turn into a huge bubble. So I'm sitting and watching.

Video: Peter Klein on Goverment Shutdown, Spending Cuts and other Media Spins

Mises Institute's Peter Klein smokes out Media's spin (propaganda-Orwellian doublespeak) on the Shutdown, Spending cuts and etc...

Obamacare Adds 10,350 pages to Existing Regulations

From Austrian economist Gary North at the Tea Party Economist

When the government passes a law, it must be enforced. The executive branch of the government then makes up the actual enforcement rules. It interprets the law and translates it into actual regulations.

The ObamaCare law was 2,000 pages long. That is just the beginning. Now the executive branch is building on its foundations.

The specific interpretations are published in the Federal Register, which is published daily by the federal government. It publishes about 80,000 pages of regulations a year. Each page is three columns of rules that can be understood only by very specialized and very expensive lawyers in a particular field.

CNS news sent a reporter to interview Democrat Congressman Henry Waxman. He asked Waxman if he had read all 10,535 pages. Waxman refused to answer. He said it was a propaganda question. He refused to answer.

You owe it to yourself to see one page in the Federal Register. Few Americans ever have. Go here. You will see a highlighted link: Today’s Issue of the Federal Register. Click it. You will see articles. Click the PDF of any article.  Then read just one column. You will not have to read all three to get the picture. Multiply this one column by 240,000. That is one year’s output.

Burdens from more regulations or mandated social controls translates to higher costs of compliance, higher taxes, more restrictions of commerce and civil liberty, regulatory arbitrages (loopholes-shadow activities) and regulatory capture, redistribution of resources and power from markets to the political class and their cronies equals increased politicization and social tensions, corruption, and lesser commerce which all leads to a lower standards of living

Video: Who are the real victims of the War on Drugs?

One major opportunity cost from the war on drugs, as explained by Professor of Criminal Law Alex Kreit, is the justice system.

From LearnLiberty.org (hat tip Cafe Hayek)

Fewer than half of all violent crimes were resolved in 2011, but over 7 million people are serving time in U.S. prisons. The majority of prisoners were arrested on drug charges, and 81 percent of those are in prison for simple possession. While the United States spends billions of dollars and millions of man hours fighting a war on drugs, 59 percent of rapists and 36.2 percent of murderers are never brought to justice. What do we get for that time and money? It has never been easier to buy drugs. The war on drugs isn't working, and victims and survivors of violent crimes deserve more thorough investigations. Whatever your stance on drug policy, Prof. Alex Kreit says, shouldn't we allocate resources to provide for investigations for all violent crimes? Shouldn't victims come first? Who are the real victims of the war on drugs? What do you think should be done about it?

Quote of the Day: Young people get the sharp end of the (political) stick

This underscores an important point that I’ve been writing about for a long time: young people in particular get the sharp end of the stick.

They’re the last to be hired, the first to be fired, the first to be sent off to fight and die in foreign lands, and the first to have their benefits cut.

And if they’re ever lucky enough to find meaningful employment, they can count on working their entire lives to pay down the debts of previous generations through higher and higher taxes.

But when it comes time to collect… finally… those benefits won’t be there for them.

You see, every government has multiple obligations– whether to creditors and bondholders in the form of interest payments, or citizens in the form of benefits.

And when a government has to borrow money just to be able to pay interest on the money it’s already borrowed, it’s nearly a mathematical certainty that they’re going to default on at least -some- of their obligations.

For some of these obligations, it’s politically palatable to default.

Youth benefits, for example. No one is going to raise a big fuss. So you can absolutely count on governments unilaterally wiping themselves with these contractual obligations.

Case in point: the British government has just announced a new push to eliminate benefits for young people. And this is just step 1.

What a pathetic excuse for a social contract. There has to be a better way. And for young people, there is.

Youth is a gift. It’s a time in your life where you have tremendous energy and very little to lose. You’re not tied down by a mortgage or a family to support.

And rather than follow the conventional path of indebting yourself for 13-years so that you can attend university for four, and then fork over the bulk of your pay to the government, instead focus on learning tangible, valuable skills overseas.

This is from Simon Black at the Sovereign Man

Matthew Ridley on IPCC’s Global Lukewarming

The prolific scientist and author Matthew Ridley writes about the IPCC’s backsliding from alarmist anthropogenic global warming. (bold mine)

Yet read between the lines of yesterday’s report from the Intergovernmental Panel on Climate Change (IPCC) and you see that even its authors are tiptoeing towards the moderate middle. They now admit there has been at least a 15-year standstill in temperatures, which they did not predict and cannot explain, something sceptics were denounced for claiming only two years ago. They concede, through gritted teeth, that over three decades, warming has been much slower than predicted. They have lowered their estimate of “transient” climate sensitivity, which tells you roughly how much the temperature will rise towards the end of this century, to 1-2.5C, up to a half of which has already happened.

They concede that sea level is rising at about one foot a century and showing no sign of acceleration. They admit there has been no measurable change in the frequency or severity of droughts, floods and storms. They are no longer predicting millions of climate refugees in the near future. They have had to give up on malaria getting worse, Antarctic ice caps collapsing, or a big methane burp from the Arctic (Lord Stern, who still talks about refugees, methane and ice caps, has obviously not got the memo). Talk of tipping points is gone.

Read the rest here

Murray Rothbard on the Budget Crisis and the Government Shutdown

The great dean of the Austrian school of economics, Murray Rothbard on the budget crisis and the shutdown from Making Economic Sense (hat tip Mises Blog) [bold mine]

In politics fall, not spring, is the silly season. How many times have we seen the farce: the crises deadline in October, the budget "summit" between the Executive and Congress, and the piteous wails of liberals and centrists that those wonderful, hard-working, dedicated "federal workers" may be "furloughed," which unfortunately does not mean that they are thrown on the beach to find their way in the productive private sector.

The dread furlough means that for a few days or so, the oppressed taxpaying public gets to keep a bit more of its own money, while the federal workers get a rare chance to apply their dedication without mulcting the taxpayers: an opportunity that these bureaucrats invariably seem to pass up.

Has it occurred to many citizens that, for the few blessed days of federal shutdown, the world does not come to an end? That the stars remain in their courses, and everyone goes about their daily life as before?

I would like to offer a modest proposal, giving us a chance to see precisely how vital to our survival and prosperity is the Leviathan federal government, and how much we are truly willing to pay for its care and feeding. Let us try a great social experiment: for one year, one exhilarating jubilee year, we furlough, without pay, the Internal Revenue Service and the rest of the revenue-gathering functions of the Department of Treasury.

That is, for one year, suspend all federal taxes and float no public debt, either newly incurred or even for payment of existing interest or principal. And then let us see how much the American public is willing to kick into, purely voluntarily, the public till.

We make these voluntary contributions strictly anonymous, so that there will be no incentive for individuals and institutions to collect brownie-points from the feds for current voluntary giving. We allow no carryover of funds or surplus, so that any federal spending for the year--including the piteous importuning of Americans for funds--takes place strictly out of next year's revenue.

It will then be fascinating to see how much the American public is truly willing to pay, how much it thinks the federal government is really worth, how much it is really convinced by all the slick cons: by the spectre of roads falling apart, cancer cures aborted, by invocations of the "common good," the "public interest," the "national security," to say nothing of the favorite economists' ploys of "public goods" and "externalities."

It would be even more instructive to allow the various anonymous contributors to check off what specific services or agencies they wish to earmark for expenditure of their funds. It would be still more fun to see vicious and truthful competitive advertising between bureaus: "No, no, don't contribute to those lazy louts in the Department of Transportation (or whatever), give to us." For once, government propaganda might even prove to be instructive and enjoyable.

The precedent has already been set: if it is proper and legitimate for President Bush and his administration to beg Japan, Germany, and other nations for funds for our military adventures in the Persian Gulf, why shouldn't they be forced, at least for one glorious year, to beg for funds from the American people, instead of wielding their usual bludgeon?

The 1990 furlough crisis highlights some suggestive but neglected aspects of common thinking about the budget. In the first place, all parties are talking about "fair sharing of the pain," of the "necessity to inflict pain," etc. How come that government, and only government, is regularly associated with a systematic infliction of pain?

In contemplating the activities of Sony or Proctor and Gamble or countless other private firms, do we ask ourselves how much pain they propose to inflict upon us in the coming year? Why is it that government, and only government, is regularly coupled with pain: like ham-and-eggs, or . . . death-and-taxes? Perhaps we should begin to ask ourselves why government and pain are Gemini twins, and whether we really need an institution that consists of a massive engine for the imposition and administration of pain and suffering. Is there no better way to run our affairs?

Another curious note: it is now the accepted orthodoxy of our liberal and centrist establishment that taxes must be raised, regardless of where we are in the business cycle. So strong is this article of faith that the fact that we are already in a recession (and intelligent observers do not have to wait for the National Bureau of Economic Research to tell us that retroactively) seems to make no dent whatever in the thirst for higher taxes.

And yet there is no school of economic thought--be it New Classical, Keynesian, monetarist, or Austrian--that advocates raising taxes in a recession. Indeed, both Keynesians and Austrians would advocate cutting taxes in a recession, albeit for different reasons.

So whence this fanatical devotion to higher taxes? The liberal-centrists profess its source to be deep worry about the federal deficit. But since these very same people, not too long ago, scoffed at worry about the deficit as impossibly Neanderthal and reactionary, and since right now these same people brusquely dismiss any call for lower government spending as ipso facto absurd, one suspects a not very cleverly hidden agenda at work.

Namely: a love for higher taxes and for higher government spending for their own sake, or, rather, for the sake of expanding statism and collectivism as contrasted with the private sector.

There is one way we can put our hypothesis to the test: shouldn't these newfound worriers about the deficit delight in our modest proposal one year with no deficit at all, one year with no infliction of pain whatever? Wanna bet?

New Zealand Regulators on Bubbles: A worrisome déjà vu?

Bubbles have become a ubiquitous phenomenon.

Regulators in New Zealand superficially act to stem to what they see as growing risks of inflating homegrown bubbles

From the Wall Street Real Economics Blog: (bold mine)

It just got harder to swing a mortgage in New Zealand.

For homebuyers seeking to place a first foot on the property ladder, that’s bad news. For the central bank, however, it’s an attempt to head off a property bubble that would threaten the health of one of the best-performing developed economies.

Starting Oct. 1, banks have less leeway in making home loans to buyers who can make only a small down payment.

“It’s like taking medicine when you’re not well,” Prime Minister John Key said in a television interview Tuesday.

The rules are having an immediate impact, with one bank canceling mortgages that had already been approved.

New Zealand’s efforts are being closely watched as central banks across the globe experiment with steps targeting specific pockets of financial excess — particularly housing, which played such a prominent role in the global financial crisis.

Late last month, Australia’s central bank advised lenders against being too eager to offer mortgages to customers, saying record-low interest rates risked fueling a surge in speculative home buying.

Nice to see regulators acknowledging the untoward effects of their policies. Yet it's one thing to admit and it's another thing to act. The dilemma: Preventing a populist artificially inflated boom will extrapolate to a political backlash.

Yet zero bound rates induced mania…

Lawmakers here remember the last time lending was allowed to grow largely unchecked in New Zealand.

Easy credit in the early 2000’s fueled a housing bubble that the Reserve Bank of New Zealand tried to control — with little success — by boosting the policy interest rate. With so much of the country’s wealth tied up in housing, when prices did eventually fall the economy dipped into recession even before the global financial crisis.

Now, with New Zealand’s interest rates at record lows since March 2011, the housing sector could be heading down the same path again.  House prices in Auckland, a city experiencing rapid population growth, rose 13% on-year in August, while prices in Christchurch rose 11% amid a continuing housing shortage following devastating earthquakes. Nationwide, prices are up 8.5% on-year.

Cool stuff. 

The above exhibits New Zealand’s interest rate vis-à-vis annual GDP. Rising rates coincides with lower GDP in 2001-2008. 

So a boost to the GDP means that authorities implemented Zero bound rates in 2008.

This means pumping bubbles produce statistical growth rather than real economic growth.

New Zealand’s deteriorating balance of trade is another manifestation of a bubble economy. New Zealanders have recently been spending more than they produce financed by ballooning debt.

Zero bound rates have fueled a surge in domestic credit to private sector (% of gdp) which is over 140%. The above data is from 2010, the World Bank has no updates yet on New Zealand. This has got to be a lot higher today for regulators to raise the alarm bells.

Notice too that when interest rates moved up in 2001-2007 loan growth contracted which coincides with the declining trend in the annualized GDP.

 

New Zealand’s stock market zoomed from 2003 even as interest rate trended higher—amidst slowing loans—the Wile E. Coyote moment.

New Zealand’s stock market faced reality with a crash along with the world in 2008.

Finally New Zealand’s housing index: For regulators, is this the worrisome déjà vu?

Shinzo Abe Increases Sales Tax as Japan’s Industrial Output Slumps

We have been repeatedly told that Abenomics or Japan’s version of central bank inflationism will deliver the magic economic growth formula for Japan's seemingly perpetual stagnation.

Lately media, banking on surveys, say that one source of optimism has been in the manufacturing index, which in August rose to 52.2 from 50.7. This has supposedly even risen to 52.5 in September. 

And unfortunately like in Europe, what people say and what people actually do have been different.

Contra surveys, real Industrial output DROPPED in August, according to the Wall Street Real Time Economics Blog (bold mine)

In a sign that Prime Minister Shinzo Abe’s aggressive economic stimulus has only produced mixed results at best so far, industrial production dropped a larger-than-expected 0.7% in August from the previous month, according to the Ministry of Economy, Trade and Industry on Monday. Economists were looking for a more modest 0.4% fall…

By category, output for consumer durables, such as passenger cars, refrigerators, TV sets and notebook computers, fell an average 2.5%.

“Recent data show that a larger portion of household income needs to be spent to pay for basic necessities, leaving much less money for discretionary items,” said the ministry official briefing reporters.

The prices of daily necessities, such as energy, have been on the rise recently as businesses started passing on the higher costs of imported goods to consumers amid a sharply weaker yen.

Output was also down in the important export sector. Production of capital goods, which are largely for export, fell 1.7%, despite the recent weakness of the yen, which should make Japanese exports more competitive. “Exporters are using a weaker yen to rebuild profit margins rather than cutting prices and boosting exports. We are waiting for them to start cutting prices and boosting output,” the briefer said.

The only good news for Mr. Abe in the figures was itself something of a mixed blessing. There was strong demand for cement and other bridge construction materials, on demand from expressway operators. Output was up 1.3% for the fabricated metals category, and up 1.0% for the ceramics and stone category

Media blames the fall in industrial production on Consumer Price Inflation (CPI).

The reality is that the bulk of Japan’s consumer price inflation for August appears to have been largely concentrated on energy and energy related expenditures such as light and transportation (red rectangles). Excluding energy (and food), Japan’s CPI even FELL by .1% annualized (lower green rectangle).

With input prices rising faster, businesses in Japan are having a difficult time passing these costs to the consumers as I explained before. So a squeeze in profits, which are distortions on economic calculation and therefore a drag on economic coordination activities, has been prompting for reduced output; no matter what media and their apologists say.

And the increases in cement and construction materials is a sign of government induced output. 

Thus, the industrial data reveals that the private sector has been reluctant to participate in real economic activities, while government activities has been bolstering statistical economic growth. Yet statistical growth is being touted as an excuse to raise taxes.

This fall in industrial output appears have been reinforced by Japan’s joblessness which likewise soared in August. Again from another Wall Street Real Times Economics blog

The main unemployment reading came in at a surprisingly high 4.1% in August, the government said Tuesday, the first rise in six months and an apparent dark cloud on a day of otherwise bright economic data. It was also higher than the 3.8% predicted by economists surveyed by The Wall Street Journal.

Media has been quick to defend this by saying that the August spike has been due to more people entering the workforce. 

However, logic tell us that when businesses dithers on investing, so will this be reflected on employment....unless the government goes on a hiring binge.

The reality is that all these extoling or media worship of Abenomics represents a (propaganda) justification for Japan PM Shinzo Abe’s call for higher taxes and more inflationism and interventions—which of course benefits the cronies than the economy.

And today PM Abe raised taxes. From today’s Reuters:

Prime Minister Shinzo Abe took a long-awaited decision to raise Japan's sales tax by 3 percentage points, placing the need to cut the nation's towering debt ahead of any risk to recent economic growth, as he now focuses on crafting a broader package of measures to address both problems further.

Mr. Abe on Tuesday promised more stimulus to cushion the impact of the sales-tax rise on the economy, stressing the nation needs both fiscal consolidation and economic growth to end 15 years of debilitating deflation.

The stimulus measures total around ¥5 trillion ($51 billion), including cash-handouts to low-income families, Mr. Abe said. On top of that, there will be tax breaks valued at ¥1 trillion for companies making capital investments and wage increases.

The so-called statistical growth of Japan’s debt laden economy has recently been driven by government spending rather than from the private sector. The industrial output data, as noted above, reveals of such disparity.

The implication is that Japan will need more debt to finance all these noble sounding crony benefiting boondoggles which will only extrapolate to increasing debt and consequently the burden of debt servicing.

And it is a mistake to believe that tax hikes will proportionally raise the required revenues for the simple reason that people respond to incentives (whether positive or negative) brought about by such policies.

Café Hayek’s Don Boudreaux explains

The reason for these outcomes is that people respond predictably to incentives – in this case, to incentives created by higher taxes.  Obliged, for example, by such a tax to pay a higher price for apples, consumers will not buy as many apples as they bought before the tax hike. Similarly, obliged – because of the tax – to accept a lower take-home price on each pound of apples sold, sellers aren’t willing to sell as many pounds of apples with the tax as they were before the tax was raised.

So Abenomomics runs a greater risks of generating lower rather than higher revenues overtime as real (not statistical) economic growth weakens further.

As I wrote three weeks back:

Raising sales tax or whatever taxes will only accelerate the downside spiral of Japan’s economy. Japanese investors have already been reluctant to invest, how would higher taxes encourage investments and more economic output?

Even a former adviser to billionaire George Soros and now a member of Japan’s upper house of parliament, Takeshi Fujimaki reportedly joined politics because he sees the inevitability of Japan crisis which he sees will occur in 2020.

With Japan’s government’s government intensifying the ponzi financed debt spending spree, I believe that a Japan credit event is likely sooner than later (2020)

Finally, seen from the yen (USD-JPY), the wonders of Abenomics seem to be stalling. This has big implications. A falling yen is a manifestation of the effects of the BoJ’s inflationism. If the yen refuses to fall further then the “inflation” on Consumer Price Index will have hit a wall. 

So this means either the current boom will turn into a bust or that PM Abe will have to significantly ante up on Abenomics via an even more aggressive BoJ.

Tick toc tick toc.

The US Government Shuts Down for the First Time in 17 Years

Political impasse has prompted for a partial shutdown of the US government.

From the Bloomberg:

The U.S. government began its first partial shutdown in 17 years, idling as many as 800,000 federal employees, closing national parks and halting some services after Congress failed to break a partisan deadlock by a midnight deadline.

Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns among some lawmakers that the shutdown could bleed into the more consequential fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.

Chances of a last-minute deal -- seen so often in past fiscal fights -- evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing to concede and planned a morning vote to reject the House’s call for formal talks.

Liberal media immediately raised the shutdown bogeyman, as Currency Wars author Jim Rickards points out

From another Bloomberg article

A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.

While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.

What the shutdown really means is that current political trends have simply been unsustainable. The real shutdown (a crisis) will inevitably arrive if current trends won’t be reversed.

And importantly the shutdown will only be symbolic. Eventually like the so-called taper, there will be some compromise on the debt ceiling and the Obamacare.

Austrian economist Robert Higgs sees the irony

Government shutdown? Nonsense. Only in our dreams will the U.S. government shut down. The current flap about an impending shutdown represents only the latest episode in the soap opera that stars the government as the hysterical teenage drama queen.

For fiscal year 2013, which will end in a week, estimated federal revenue is expected to be about $2.7 trillion. In real terms, this revenue is roughly equal to the amount the government spent ten years ago, near the beginning of the Bush II administration.

Yet there has been little evidence that shutdowns extrapolates to economic harm.

First Trust’s Brian Wesbery and Robert Stein even sees positive effects from the previous shutdowns (bold mine)

Some pundits and analysts say a shutdown will hurt the economy, but it’s hard to say that based on history. The Washington Post recently listed every shutdown from 1976 to 1996. There were 17 shutdowns totaling 110 days. Out of those 110 days, only 6 days were during recessions. That’s very few given that we were in recession about 14% of the time during that twenty–year period.

Of course, maybe that’s because politicians are more likely to forge a budget agreement during economic downturns. But the last and longest shutdown doesn’t appear to have hurt the economy either. 

That was the three-week shutdown from mid-December 1995 to early January 1996 under President Clinton. Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995 and then at a 2.6% pace in Q1-1996, despite the shutdown and the East Coast Blizzard, a multiple day massive snowstorm in January that was followed by large floods.

The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending. And when politicians can’t hide, when the public finally finds out the “Emperor Has No Clothes,” there is a political reaction. In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.

Meanwhile the Gallup sees ambiguous  impact from a shutdown: 

As the federal government prepares to shut down for the first time since 1995/1996, historical Gallup data reveal that the repercussions of that past conflict ranged from none to short-lived, in terms of Americans' concerns about the U.S. and the political players involved.

The Gallup says that perhaps the 'shutdown' may exacerbate the public’s already faltering confidence on the economy

Beyond the politicians though, Americans' confidence in the economy is already floundering and their satisfaction with the way things are going in the U.S. remains in the low-20% range. If history is a guide, it is possible that their views of the situation in the country may worsen in the short term, which for an economy -- and job market -- still in recovery, is troublesome. But, long term, it is unclear whether a possibly short-lived government shutdown will ultimately negatively impact the economic situation in the U.S.

It’s important to note that all previous shutdowns has had different circumstances that led to the unique historical event, as shown by the Washington Post here. For instance some shutdowns occurred during recessions.

So market reactions on shutdowns, such as the S&P 500, has largely reflected on the underlying trend rather from the event itself. And given that most shutdowns occurred during the bullish epochs, the outcome tends to give weight on the positive. The chart above from JP Morgan highlights on these. But blindly interpreting returns without understanding the circumstances behind the shutdown events would be like seeing the forest for trees.

And this gives weight to the suggestions of FT and the Gallup where shutdowns tend to have short-lived effects. So a shutdown seems neither bullish or bearish over the long run. 

This means that there will be bigger forces that will drive the markets.

The shutdown only reminds us of this resonating words of the great Frédéric Bastiat

Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.

How Sustainable is Thailand’s Welfare and Debt Economic Model?

The bullish mainstream says that the current meltdown in the emerging markets has merely been a shakeout and that economic growth will eventually prevail.

But the $64 trillion question is, what drives economic growth?

In the case of Thailand, how dependable has her welfare-debt based growth model been?

The Wall Street Journal Real Time Economic Blog provides precious clues on these: (bold mine)

Thailand is discovering that putting the populist genie back in the bottle is harder than letting it out.

Since introducing a multi-billion dollar subsidy for the country’s rice farmers in 2011, the country has seen a plethora of other special interest groups demand handouts of their own. Among them, rubber planters this month staged running battles with riot police in southern Thailand in their bid to secure higher minimum prices for their harvests.

Now the country’s corn farmers are getting in on the act, last week blocking roads in northern Thailand, and raising questions among economists over whether Prime Minister Yingluck Shinawatra’s government will be able to roll back the scale of its handouts – and what the consequences might be if it doesn’t.

Central bank governor Prasarn Trairatvorakul warned an investor conference last week that populist subsidies “add to micro-level risks by making households undisciplined and addicted to ‘easy’ money, while also adding to macro-level risks by stretching fiscal resources without enhancing competitiveness in any meaningful way.”

Give them your hand, they want your arm. See how 'free lunch' policies fosters dependency or addiction?

And indeed populist welfarism via subsidies has been adding pressure to Thai’s government deteriorating fiscal conditions…(bold mine)

The subsidies are adding to the government’s budget, which already is bloated by a rubber subsidy and spending of 700 billion baht, or $22 billion, to support rice farmers since Ms. Yingluck was elected – an amount equal to 6% of Thailand’s gross domestic product last year.

…as well as compounding on the economy’s addiction to debt (bold mine)

Ms. Yingluck’s government has defended the subsidies as a way of supporting the growth of a strong consumer economy in rural Thailand, the heartland of the ruling Puea Thai, or For Thais, Party.

But the subsidies also are threatening to disrupt Thailand’s economy at a time when global investors are concerned about rising public and private debt levels in many emerging markets. Huge subsidies in countries like Thailand, Indonesia and India have added to government debt burdens – an important reason why investors have turned cold on these nations stocks and currencies this year.

Again Thai’s system depends on the Risk ON environment (low interest rates, strong baht, and debt financed activities) provided by zero bound rates, which the bond vigilantes has been exposing as untenable.

The doleouts have also contributed to the near doubling of Thai government’s external debt as well as to the surge in private sector debt (bold mine)

At the same time, the government’s goal of raising living standards and consumer spending in rural areas appears to be having unintended consequences.

Some farmers are using the promise of guaranteed future incomes as a basis for borrowing more money. Thailand’s total household debt is now pushing close to 80% of GDP, with a third of the lending provided by government-run institutions such as the Bank for Agriculture and Agricultural Cooperatives and the Government Housing Bank, which aren’t subject to regulatory control by the central bank.

So aside from zero bound rates, government sponsored lending and guarantees has compounded on the debt financed consumer spending binge.

And notice, when mainstream emphasize on consumer economy, what they really mean is a debt financed consumer spending, which is unproductive. 

Thailand's loans to the private sector has soared by about 30% in 2 years.

And part of this spending more than producing can be seen in Thai’s largely negative balance of trade.

Yet more unintended consequences from state subsidies…

A tax rebate scheme for first-time car buyers that was designed to stimulate production in Thailand’s auto sector, which was badly hit by severe flooding in 2011, also has raised debt to levels that have worried some analysts.

Consultancy IHS Global estimates that 10% of Thais who took out loans under the program have either defaulted on payments or unwound the borrowings, creating a glut of second-hand cars.

Thailand’s “free lunch” redistributive and debt financed economic model, again, has been highly dependent on the maintenance of a low interest rate environment which seems likely about to change.

Yet with the recent bout of spending splurge that has racked up systemic debt, the Thai economy has become increasingly vulnerable to the actions of the bond vigilantes. 

As for shakeout on emerging Asia, I believe we may see more bouts of volatility ahead.

The Symbiotic relationship between Crony Capitalism and the Welfare State

The welfare state has been built on the popular delusion that the major beneficiaries have been the underprivileged or the poor. 

In reality, such welfare programs favor the crony elitist class.

Austrian economist Gary North explains: (bold original)

October 1 is the day of the new fiscal year of the United States government. Little known to the general public, it is the supreme day of celebration for the American Establishment. Let me explain why. It has to do with government spending, specifically this: Who wins? Who pays?

The American welfare state is generally supported by the very rich. They clean up by means of the welfare state. Why? Because the welfare state is seen by political liberals as justifying the expansion of the federal government, and the federal government then protects the interests of the super rich. This has gone on for so long that it is astounding to me that the chattering class -- mostly Leftists -- does not understand it.

Leftist Democrats constantly lobby for more welfare state programs. They think the rich will pay for them. To see why this is silly, look at this pie chart on federal spending. Ask yourself: Who wins? Who pays?

Look at defense spending. Who wins? A handful of large defense firms. This is fat city for the rich. It always has been.

Look at net interest payments. Do you think that money goes to the rich? What does the U.S. government pay? Under 3% a year. The super rich do not buy such low-paying investments. Who does? Retirement funds, insurance companies, money market funds, and banks. This rate of return is for the middle-classe. The interest rate returns after taxes do not keep up with price inflation. Who pays? The rich pay a good chunk of it as taxpayers. They do not care. Why not? Because this level of federal debt guarantees a huge federal government. With the government-enforced restricted-access profits they make, it's just a cost of doing business.

Now let's look at the biggies: Social Security and Medicare/Medicaid. They constitute 45% of federal spending. Who pays? Working stiffs. The Social Security taxable salary cutoff is about $110,000 a year. So, the worker and his employer pay about $16,000 a year, max. For the super rich, this tax is irrelevant -- invisible.

Do you see what the voters have done? They have created two gigantic, politically untouchable welfare programs that the working class finances. These programs are so huge that no new major spending program will be imposed. They have put a ceiling on the growth of the welfare state. The welfare state cannot touch them. They are now immune.

ObamaCare? The workers will pay. Small business owners will pay.

How about food stamps, called SNAP? This costs $75 billion a year. Who gets this money? Agribusiness. In short, food stamps are a subsidy to the super rich in the name of helping the poor.

The income tax was a problem, which went from 25% in the 1920s to 63% in 1932, to 79% in 1936, to 94% in 1944. Truman took it back to 91% in 1948, where it stayed until Kennedy, who got Congress to drop it to 70%. Reagan got it lowered in stages to 28% in 1988. No President since has got it above 40%.

We know that Americans will not accept federal taxes above 20% of GDP. In 1944, in World War II, it got to 20.8%. That was the top. So, the voters have placed a ceiling on total taxation. The federal government is at that ceiling. New programs must come from borrowing. When that gets cut off at low rates, as it will at some point, the welfare state will go belly-up, except for payments to oldsters.

The Left has shot its wad politically. There is no extra federal money to tap. The oldsters lay claim to the federal government's biggest welfare programs, and these programs are paid for by the working class, not the rich.

More on the the Middle class as carrying the cross of the poor….(bold mine)

Crony capitalism favors the super rich. The super rich are willing to pay income taxes to fund a small portion of the welfare state, because the bulk of the welfare state is funded by taxes on the middle class. The super rich don't pay much into Social Security and Medicare/Medicaid. The working class pays: "regressive" taxation. These are the largest welfare programs there are. The super rich avoid having to pay much of anything into the two largest welfare state programs there are. It is a sweet deal for the super rich. The federal government's regulatory apparatus keeps growing, and the super rich's balance sheets keep growing.

Add to this Bernanke’s and or the central bank dogma of promoting quasi permanent booms (bubble cycles) or asset inflation

 

The welfare state as protectionist shield in favor of cronies. (bold mine)

Crony capitalism removes the most important threat to the Establishment, namely, the threat of free market competition. It makes certain that existing large firms have the advantage. The existing large firms can afford the high-powered and highly expensive legal talent to make the system work for them. This locks out competitors whose only advantage is that they can serve the customer more efficiently. That doesn't count, because federal regulation makes it illegal for these firms to serve the customer.

From the point of view of the Establishment, the cost of the welfare state is chump change. The two big kahunas of the welfare state, Social Security and Medicare/Medicaid, are financed by the working class. So, they are no sweat off the brows of the super rich. These two programs make it impossible to expand any other major welfare programs. Even if we think of ObamaCare as such a program, it still serves the interests of the super rich, because it will make it more difficult for smaller firms to compete. Once you've established the dominant position in the market, you can afford lots of regulation. Regulation becomes a gigantic barrier to entry that is placed in front of your potential competitors.

The political Left sees that the rich are getting richer, and its response is always the same: more welfare state. They don't understand that the federal government is what has created the existing distribution of income, which favors the super rich. They don't learn that welfare state politics makes things worse for the poor. They have been barking up the wrong tree ever since 1896, when William Jennings Bryan got his first nomination by the Democratic Party for President. His candidacy killed the old Democracy, best represented by Grover Cleveland, a limited-government vision of politics, and firmly committed to low tariffs and the gold standard. It did not survive Bryan's three runs for the presidency.

Oh by the way, who has been benefiting from America’s existing healthcare programs?

Again it is the rich, from Zero Hedge: (bold original)

According to the latest data compiled by the Agency for Healthcare Research and Quality, in 2010, just 1% of the population accounted for a whopping 21.4% of total health care expenditures with an annual mean expenditure of $87,570. Just below them, 5% of the population accounted for nearly 50% of all healthcare spending. Just as stunning is the "other" side: the lower 50 percent of the population ranked by their expenditures accounted for only 2.8% of the total for 2009 and 2010 respectively. Perhaps in addition to bashing the "1%" of wealth holders, a relatively straightforward and justified exercise in the current political climate, it is time for public attention to also turn to the chronic 1% (and 5%)-ers who are the primary issue when it comes to the debt-funding needed to preserve the US welfare state.

The spending distribution in chart format

see more charts here

Liberal media and their experts have served no more than mouthpieces for cronies. 

And another thing, this hasn't just been exclusively a US dynamic.

Tweet of the Day: Jim Rickards on US Government Shutdown

This is from American lawyer, economist and author of the Currency Wars, James ‘Jim’ G. Rickards at his twitter (hat tip Peter Coyne of the Daily Reckoning)