Global Shadow Banks Inflate to Over $75 Trillion in 2013 at pre-Crisis Levels!

As of 2012, I posted here  the global tally of Shadow Banks which have grown to 80% of GDP at $71 Trillion. 

At the end of 2013 global shadow banks has inflated to over $75 trillion or still about 80% of GDP to a pre-crisis high!

From the Bloomberg: (bold mine)

The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates.

The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120 percent of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board today.

Shadow banking “tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets,” according to the report. “The current environment in advanced economies seems conducive to further growth of shadow banking.”

Related to the the informal economy, shadow banks are essentially regulatory arbitrages where markets “skirt regulations” in order to conduct credit related activities. 

Record low interest rates only encourages the use of shadow banks when restrained in the formal banking system. As a reminder, because shadow banks are barely regulated, this implies statistical estimates may be prone to significant errors.

Here is a summary of findings from studies conducted by the  FSB’s Regional Consultative Groups (RCG), as per the Financial Stability Board (bold mine)

The main findings from the 2014 exercise are as follows:

-According to the MUNFI estimate, based on assets of Other Financial Intermediaries (OFIs), non-bank financial intermediation grew by $5 trillion in 2013 to reach $75 trillion.This provides a conservative proxy of the global shadow banking system, which can be further narrowed down.

- By absolute size, advanced economies remain the ones with the largest non-bank financial systems. Globally, MUNFI assets represent on average about 25% of total financial assets, roughly half of banking system assets, and 120% of GDP. These patterns have been relatively stable since 2008.

- Adjusted for exchange rate effects, MUNFI assets grew by +7% in 2013, driven in part by a general increase in valuation of global financial markets, while in contrast total bank assets were relatively stable. In the case of Investment Funds, adjusting for valuation effects reduced the 2013 FX-adjusted growth rate by about 10.3 percentage points (see Box 4-2). The global growth trend of MUNFI assets masks considerable differences across jurisdictions, with growth rates of OFIs ranging from -6% in Spain to +50% in Argentina.

- Emerging market jurisdictions showed the most rapid increases in OFIs. Nine emerging market jurisdictions had 2013 growth rates above 10%. However, this rapid growth is generally from a relatively small base. While the non-bank financial system may contribute to financial deepening in these jurisdictions, careful monitoring is still required to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit provided by the non-bank sector.

My comment ‘small base’ doesn’t mean less risk. Risks are not a one size fits all phenomenon. The scale of credit risk depends on the distinctive character of the political economy of every nation to intermediate credit

- Among the MUNFI sub-sectors that showed the most rapid growth in 2013 are Trust Companies and Other Investment Funds. Trust Companies experienced the fastest 2013 growth rate of 42%, which is in line with the sector’s average growth over 2007-2012. Other Investment Funds, the largest MUNFI sub-sector, recorded 18% annual growth in 2013, which represents a sharp acceleration from the average growth rate in the preceding years. It should be noted that the Hedge Funds sub-sector remains significantly underestimated in the FSB’s exercise due to the fact that offshore financial centres, where most Hedge Funds are domiciled, are currently not within the scope of the exercise. More frequent updates of the IOSCO Hedge Fund Survey and further refinement of the data presented in the survey, including the availability of time series, could provide important additions to the Global Shadow Banking Monitoring Report.

-Using more granular data reported by 23 jurisdictions, the broad MUNFI estimate of non-bank financial intermediation was narrowed down by some $27 trillion (see Section 5). The narrowing down items considered in this year’s report are comprised of assets related to self-securitisation, assets of OFIs prudentially consolidated into a banking group, and entities not directly involved in credit intermediation, including Equity Investment Funds, equity REITs, and OFIs which are part of a non-financial group and are created for the sole purpose of performing intra-group activities. This reduced total OFI assets for the 23 jurisdictions that reported granular data from $62  trillion to $35 trillion. Using the narrowed down estimate, the growth rate of shadow banking in 2013 was +2.4%, instead of +6.6% using the MUNFI. The FSB will  continue to refine the methodologies in narrowing down the estimate as well as  encourage its member jurisdictions to collect the relevant data.

-The measures of the level of interconnectedness between the banking and the non-bank financial system were improved in this year’s report by adjusting for bank’s assets and liabilities to OFIs that are prudentially consolidated into banking groups. Overall, the level of interconnectedness between the banking and the non-bank financial system declined in 2013. However, the relevance of the findings in this area is hampered by the absence of reporting of this data by a number of large jurisdictions.

As I said statistical numbers will be incomplete or inacurate, which implies these estimates may be underreporting of the real size of shadow banks.

Assets of Shadow banks are at pre-crisis high levels.

The National share of shadow banks

Sectoral composition of shadow banks

Annualized growth of shadow banks

The FSB elaborates on the potential transmission mechanism via the connection between the formal banking and shadow banks.

Systemic risks can spill over from shadow banking entities to the banking sector. This interconnectedness can take many forms, including direct and indirect linkages. For example, direct linkages are created when shadow banking entities form part of the bank credit intermediation chain, are directly owned by banks, or benefit directly from bank support, (either explicit or implicit). Funding interdependence is yet another form of direct linkage, as is the holding of each other’s assets such as debt securities. In addition, indirect linkages also exist through a market channel, as the two sectors may invest in similar assets, or be exposed to a number of common counterparties. These connections create a contagion channel through which stress in one sector can be transmitted to the other, and can be amplified back through feedback loops.

As one may realize zero bound regime has been inflating assets in both the formal and informal system. 

This implies of a great degree of fragility or a Black Swan risk.

Phisix: Another Remarkable Low Volume Index Massaging Day

Last Sunday I wrote about how domestic stock market operators have been incessantly attempting to manage index levels

Moreover, the recent rebound amidst swooning volume comes in the visage of support from undefined or unidentified stock market operator/s. These faceless entities appear to have been responsible for most of the rallies over the past two consecutive weeks…

Nonetheless, the common trait in the massaging the index, either via intraday “pump” or “marking the close” have been to massively push up prices of at least 3 issues with combined market cap weighting of 15-20%. In panic buying episodes, (September 24 and October 16), the kernel of these activities transpire after lunch break.

Again I’ve got to hand it to the bulls for their tenacity for the reckless use of (whoever’s) money to "make" or "draw" the charts.

Today’s massaging of the Phisix has been an incredible combo of panic buying (on select issues) and ‘marking the close’.

The left window from technistock.net exhibits the relatively low P 7.37 billion from today’s pump.  The official volume was at Php 7.62 billion inclusive of special block sales

The right window from colfinancial illustrates the after lunch break “pump” until the session end, which climaxed with the “marking the close”. The ‘marking the close’ gains contributed to about a substantial 35% of the session’s 1.1% gains.

From the surface, it has largely been a two sector pump due to the extraordinary gains, namely Holding firms  (+2.21%) and Property (1.77%) as shown by the table from the PSE

In reality, three sectors had been involved. The lesser visible of the two had been the industrials (right most window) which sprang back to the positive at the close from early losses.

Today’s combo package of ‘afternoon delight’ buying panic PLUS ‘marking the close’ that has pumped 3 sectors has mainly been channeled through a 6-company push.

From the Holding sector, JGS (+8.23%), AC (+1.27%), and SM (+1.49%).

While the 3 manifested the afternoon delight, JGS’ (left window) marking the close was the most pronounced.

The supporting sectors has been the property and industrials mainly through Ayala Land (+1.53%), SMPH (+3.15%) and JFC (+1.41%)

These 3 had a more elaborate exhibition of the afternoon pump that culminated with a dazzling marking the close. 

Looking at how these 6 companies performed today, would give the impression that these issues are bound to SOAR by a huge margin tomorrow if not in the very immediate future. Why the pump?

Of the 6 issue pump only 4 made it to the top 20 most active.  Such implies that the invisible operators made headway with JFC and AC in a less conspicuous manner.

And the market combined weighting of the 6 issues was at 34% as of the session’s end.

Everything that I have described last Sunday had been showcased today.

These operators have hardly been concerned about valuations or instability risks but about maintaining threshold levels (for political symbolism?).

The index manipulations has also been evident last Monday, October 27th where about all 18-20 points of the day's losses had been wiped out by the same last minute scheme. Monday's session was closed unchanged.

Some bulls represented by the stealth stock market operators have become so desperate as to massage price index so frequently if not with wanton regularity.

Yet they fail to heed the BSP chief’s fresh warnings that “keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield” as well as “in a period of low volatility such as what we have been experiencing, practice the discipline of setting limits. This discipline will not only help you to avoid the pitfalls of “chasing the market”

And hardly has these entities come to realize that history’s lessons reveals that the obverse side of every mania (add to this market manipulation) is a crash.  

Geopolitical Risk Theater Links: More NATO-Russia Encounters, Military Balance in Asia, Blowback on Canada’s Interventions

Updates on the geopolitical risk theater:

1  Financial Times Nato fighter jets intercept Russian military aircraft October 29

An excerpt 

More than two dozen Russian military aircraft, including six nuclear bombers, have conducted “significant military manoeuvres” on the edges of Nato and European airspace in the past 24 hours, causing jets to be scrambled from eight countries as well as Nato’s own Baltic air policing force.

The incidents – three of which occurred on Wednesday and one on Tuesday – followed last week’s violation of Nato airspace by a Russian spy plane, the first since the end of the cold war. Taken together they constitute the most serious air provocation mounted by the Kremlin against the alliance this year, if not in more than a decade, according to Nato officials…

“These sizeable Russian flights represent an unusual level of air activity over European airspace,” Nato said in a detailed statement issued from its headquarters in Belgium…

The most significant intercept on Wednesday occurred in the North Sea. A force of eight Russian aircraft, including four Tu-95 long-range strategic nuclear bombers and four refuelling aircraft, were detected flying in formation at about 3am central European time flying from mainland Russia over the Norwegian Sea.

Six aircraft turned back, but two bombers continued southwards, close to the Norwegian coast and followed by F16s sent to intercept them by the Royal Norwegian air force. When the Russian aircraft then turned over the North Sea, RAF Typhoons were scrambled to intercept as they approached UK airspace. Portuguese fighters were later deployed as they came near the Iberian peninsula.

The aircraft did not file flight plans, had turned off their transponders and did not respond to any radio calls from civilian or military controllers.

2 TheAviationist.com German Typhoons have intercepted 7 Russian Air Force combat planes over the Baltic Sea today October 28

3 Vietnamese government blows hot and cold on China

a. Wall Street Journal Frontiers, Vietnam and China Agree to Better Manage Sea Disputes October 28

b. Economic Times, India to supply Vietnam with naval vessels amid China disputes October 28

4 Telegraph Mystery submarine sighting gives clue to Russia's Arctic ambitions October 28

5 RT.com France to hand over first Mistral helicopter carrier on Nov 14 – Russia October 29

6 Telegraph Seven reasons why Russia is spying on its neighbours October 29

7 RT.com Russian nuclear sub test-fires Bulava strategic missile October 30

8 RT.com Contract soldiers outnumber conscripts in Russian military – Defense Minister October 29

9 Al-Arabiya News ISIS fighters seen with advanced antiaircraft missiles October 28

Images from a video released by ISIS captured a fighter firing Chinese-made surface-to-air missile FN6 – and blowing an Iraqi army MI-35M during a battle in the oil-rich town of Baiji, north of Baghdad, according to the New York Times. Two crew members were reportedly killed as a result.

10 Al-Arabiya News ISIS militants execute more than 40 tribesmen in Iraq’s Anbar October 29

11 Spiegel Bound for Syria: German Kurds Join Fight against Islamic State October 29

12 Thomson Reuter’s Knowledge Effect: Military Balance in Asia Oct 27

13 ForeignAffairs.com Don't Mistake Russia for Iran Why the Same Sanctions Strategy Won't Work October 20

Given that Russia has reached out to many Chinese companies to help mitigate the pain caused by U.S. and EU sanctions, the United States would likely be risking dramatically more diplomatic tension with the Chinese by imposing such sanctions again. And that could complicate other issues in the U.S.–China relationship.

There’s another reason why potential new Russia sanctions that set East Asian banks and companies in U.S. sights might not be as effective as policymakers hope. Unlike Iran, Russia has a large, globally-integrated economy. It is more than five times the size of the Iranian economy and is an attractive investment opportunity. For many companies -- big banks in particular -- their business with Iran was not worth losing access to U.S. financial markets. However some firms, particularly in China, may conclude that their strategic interests and financial future lie with Russia. If they make this decision, there is very little the United States can do to get them to cooperate again

14 Laurence Vance The Newest Problem in the Military Lew Rockwell Blog October 28

Whether to call your commanding officer “sir” or “ma’am.” According to the William Institute, a think tank at UCLA that addresses lesbian, gay, bisexual and transgender issues: “About 15,500 transgender people are serving in the military.” Service members are not permitted to take hormones to change their gender, but some have done so anyway. Things are getting pretty comical right now, especially regarding the use of restrooms, as this article shows. Defense Secretary Chuck Hagel has indicated that he is open to studying the transgender ban in the military. I predict that the military will lift the ban and be flooded with people who want to change their genders—at taxpayer expense of course.

Is this what it will take for Christians to end their love affair with the military? Too bad that the military bombing and killing people all over the world is not enough.

15 Ron Paul Once-Peaceful Canada Turns Militaristic; Blowback Follows, October 26

How the world has changed. Canada’s wise caution about military adventurism even at the height of the Cold War has given way to a Canada of the 21st century literally joined at Washington’s hip and eager to participate in any bombing mission initiated by the D.C. interventionists.

Considering Canada’s peaceful past, the interventionist Canada that has emerged at the end of the Cold War is a genuine disappointment. Who would doubt that today’s Canada would, should a draft be re-instated in the US, send each and every American resister back home to face prison and worse?

…

That is the danger of intervention in other people’s wars thousands of miles away. Those at the other end of foreign bombs – and their surviving family members or anyone who sympathizes with them – have great incentive to seek revenge. This feeling should not be that difficult to understand.

Seeking to understand the motivation of a criminal does not mean that the crime is justified, however. We can still condemn and be appalled by the attacks while realizing that we need to understand the causation and motivation. This is common sense in other criminal matters, but it seems to not apply to attacks such as we saw in Canada last week. Few dare to point out the obvious: Canada’s aggressive foreign policy is creating enemies abroad that are making the country more vulnerable to attack rather than safer.

My comments

Increasing tensions in the global military arena not only heightens risks of a world war, they also increase domestic societal frictions via the degradation of the community’s moral fiber. 

In the economic context, excessive military build up leads to the incremental impoverishment of the population as more resources are being diverted to non-productive and importantly towards socially destructive activities. Divisive geopolitics leads to protectionism which aggravates tensions.

In addition, military spending serves as an invisible transfer of wealth to the politically connected defense suppliers and contractors and affiliates and the bureaucracy.

In the political context, militarization leads to less civil liberties. Worst, deepening militarization has the tendency for society to evolve towards a police state.

Alan Greenspan: QE Failed the Real Economy, Unwinding will Unleash Market Volatility, Recommends Gold

As the US Federal Reserve officially “concluded” its QE 3.0 program this month, former Fed chief Alan Greenspan has been quoted by the Wall Street Journal as giving his assessment and predictions from such actions. (hat tip Zero Hedge)

Mr. Greenspan on the QE’s efficacy: (bold mine)

He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

Mr. Greenspan fails to include the massive debt build up as part of the asset based 'success story'.

Yet it’s one thing to be an insider and it’s another thing to be outside the corridors of power; personal views radically changes. In the case of Mr. Greenspan he goes from defending incumbent policies (as insider) to critiquing them (as outsider). 

Ironically, Mr. Greenspan initiated today's de facto easy money “aggregate demand” policy-standard, which his successor Mr. Bernanke improvised.

On QE withdrawal:

He also said, “I don’t think it’s possible” for the Fed to end its easy-money policies in a trouble-free manner.

“We’ve never had any experience with anything like this, so I’m not going to sit here and tell you exactly how it’s going to come out,” Mr. Greenspan said. But he noted that markets often react to changes in central bank policy unpredictably and not entirely rationally. Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different, Mr. Greenspan said.

He said the Fed may not even have that much power over the timing of interest-rate increases. The problem as he sees it is an interest rate the Fed pays on the money banks park at the central bank, called reserves. Fed officials plan to use this tool as their primary lever for raising interest rates when the time comes. If bankers decide to put this money to work, creating inflation risks, the Fed may be forced to raise rates, even if the economy isn't ready for it, he warned.

“I think that real pressure is going to occur not by the initiation by the Federal Reserve, but by the markets themselves,” Mr. Greenspan he said.

chart from zero hedge

With world debt levels going bonkers, the path to a relatively tighter money policy would naturally cause 'adjustment strains' which may be characterized as “significant volatility in markets”. 

Of course this won’t be limited to just the financial asset markets.

Finally. Mr. Greenspan seems to have reverted to his pristine position as 'gold bug'.

Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

In 1966, the pre-Fed chair Mr. Greenspan penned this classic Gold and Economic Freedom article on the gold standard, here is an excerpt...

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

This just illustrates how power changes people. 

But I agree with the Maestro here, in today's massive manipulation of money and markets, gold is an insurance.

Geopolitical Risk Theater Watch: Article Links October 28

From now on, I will be occasionally posting links on articles covering geopolitical risk theater. This should give us an idea of the evolving risks developments. I'll start with 12 articles

1 Jane.com NATO completes largest naval exercise in five years October 26

2 Aseanbriefing.com ASEAN Update: Understanding the Geopolitics of the South China Sea Dispute – October 27

A quote:

During the 2012 ASEAN summit in Phnom Penh, four member nations – Malaysia, Vietnam, the Philippines, and Brunei – all declared there were conflicting territorial claims with China in the South China Sea. This did not include ongoing disputes with Taiwan, whose claims are generally excluded from ASEAN dialogue. Yet, the ASEAN states were unable to agree on an appropriate response. Internal squabbling reached new heights when, for the first time in the group’s 45-year history, they were not even able to agree on a language for the summit’s concluding communiqué.

Aside from creating antagonism internally, ASEAN’s response – or lack thereof – clearly signaled to China the alliance’s key shortcoming: the incompatibility of individual interests with regional loyalty. Indeed, in addition to diluting US influence, China’s insistence on bilateral resolution of the South China Sea disputes deliberately takes advantage of this vulnerability.

3 FreeBeacon.com China's Alarming Military Buildup Is Shifting The Balance Of Power In Asia October 13

An excerpt

On China’s strategic nuclear buildup, the report identifies China’s large-scale buildup of both conventional and nuclear-armed missiles as a serious threat.

China’s has as many as 1,895 ballistic and cruise missiles, including up to 1,200 short-range missiles, up to 100 medium-range missiles, up to 20 intermediate-range missiles, up to 75 intercontinental missiles, and up to 500 ground-launched land attack cruise missiles.

The Pentagon after 2010 halted releasing annual assessments of Chinese missile forces that one expert said undercuts the Obama administration’s policy of seeking a more open Chinese military by “indirectly assisting Chinese secrecy.”

For short-range missiles, China currently is developing five new systems with ranges between 94 and 174 miles. The new missiles will have greater accuracy and lethality.

For targeting US forces in Japan and South Korea, China has deployed DF-21C theater-range missiles with ranges of about 1,240 miles and appears to have developed a second system, the DF-16.

Its new intermediate-range missile, to be deployed in the next five years, will be able to hit US forces on Guam, Northern Australia, Alaska, and US forces in the Middle East and Indian Ocean.

A variant of the DF-21D is a unique anti-ship ballistic missile that has been deployed in two brigades in southeastern and northeast China.

China’s nuclear strike forces remain couched in secrecy, the report said. “China’s official statements about its nuclear forces and nuclear capabilities are rare and vague in order to maintain ‘strategic ambiguity,’” the report says.

4 Moscow Times Russia Inches Toward Permanent Naval Presence in Mediterranean October 16

5 Inquisitr.com Russian Spy Plane Violates NATO Airspace, Estonia Alarmed October 23

Fighters scrambled to intercept a Russian spy plane in Estonia’s airspace and escort it back to Russia in what’s being considered the most serious violation of NATO airspace since the Cold War…

For the year 2014, the deployment of NATO fighters for interceptions like this one are up by around 300 percent from 2013. It’s not clear if there will be any lasting consequence for the Russian spy plane, except one: Baltic states will continue to be worried.

6 RT.com Poland to move thousands of troops to border with Ukraine October 27

7 Businessinsider.com Sweden's Epic Hunt For A 'Russian' Sub Shows Europe Is Terrified Of Putin October 24

8 Inquisitr.com Russian Jets Invading Japan Airspace In Record Numbers Over Past Year, Japan Wants To Know Why October 19

Russian jets flying perilously close to Japan airspace forced Japanese fighters to take to the skies 533 times over the past six months — a number up from 308 in the same time period a year earlier. Now Japan is trying to figure out why the Russian military jets have made Japan a target

9 BBC.co.uk Why is the US Navy practising for war with China? October 15

10 Wall Street Journal As China Deploys Nuclear Submarines, U.S. P-8 Poseidon Jets Snoop on Them October 24

The P-8s’ operations can bring them into confrontation with Chinese forces. In August, the Pentagon said a Chinese jet fighter had flown dangerously close to a U.S. P-8 during an interception near Hainan island, site of one of China’s submarine bases. China’s defense ministry publicly said its pilot flew safely and demanded that the U.S. cease surveillance operations near its base.

11 Wall Street Journal  China’s Submarines Add Nuclear-Strike Capability, Altering Strategic Balance October 24

The message was clear: China had fulfilled its four-decade quest to join the elite club of countries with nuclear subs that can ply the high seas. The defense ministry summoned attachés again to disclose another Chinese deployment to the Indian Ocean in September—this time a diesel-powered sub, which stopped off in Sri Lanka…

China’s nuclear attack subs, in particular, are integral to what Washington sees as an emerging strategy to prevent the U.S. from intervening in a conflict over Taiwan, or with Japan and the Philippines—both U.S. allies locked in territorial disputes with Beijing…

China's nuclear-sub deployments, some naval experts say, may become the opening gambits of an undersea contest in Asia that echoes the cat-and-mouse game between U.S. and Soviet subs during the Cold War—a history popularized by Tom Clancy's 1984 novel "The Hunt for Red October."

Chinese officials say their subs don’t threaten other countries and are part of a program to protect China’s territory and expanding global interests. Chinese defense officials told foreign attachés that the subs entering the Indian Ocean would assist antipiracy patrols off Somalia, say people briefed on the meetings.

12 Paul Craig Roberts: Vladimir Putin Is The Leader Of the Moral World lewrockwell.com October 27, 2014

Excerpts from Mr. Putin's speech:

On Western Foreign policies:

A unilateral diktat and imposing one’s own models produces the opposite result. Instead of settling conflicts it leads to their escalation, instead of sovereign and stable states we see the growing spread of chaos, and instead of democracy there is support for a very dubious public ranging from open neo-fascists to Islamic radicals…

On brinkmanship politics:

Joint economic projects and mutual investment objectively bring countries closer together and help to smooth out current problems in relations between states. But today, the global business community faces unprecedented pressure from Western governments. What business, economic expediency and pragmatism can we speak of when we hear slogans such as “the homeland is in danger”, “the free world is under threat”, and “democracy is in jeopardy”? And so everyone needs to mobilise. That is what a real mobilisation policy looks like.

Sanctions are already undermining the foundations of world trade, the WTO rules and the principle of inviolability of private property. They are dealing a blow to liberal model of globalisation based on markets, freedom and competition, which, let me note, is a model that has primarily benefited precisely the Western countries. And now they risk losing trust as the leaders of globalisation. We have to ask ourselves, why was this necessary? After all, the United States’ prosperity rests in large part on the trust of investors and foreign holders of dollars and US securities. This trust is clearly being undermined and signs of disappointment in the fruits of globalisation are visible now in many countries.   The well-known Cyprus precedent and the politically motivated sanctions have only strengthened the trend towards seeking to bolster economic and financial sovereignty and countries’ or their regional groups’ desire to find ways of protecting themselves from the risks of outside pressure. We already see that more and more countries are looking for ways to become less dependent on the dollar and are setting up alternative financial and payments systems and reserve currencies. I think that our American friends are quite simply cutting the branch they are sitting on. You cannot mix politics and the economy, but this is what is happening now. I have always thought and still think today that politically motivated sanctions were a mistake that will harm everyone, but I am sure that we will come back to this subject later.

We know how these decisions were taken and who was applying the pressure. But let me stress that Russia is not going to get all worked up, get offended or come begging at anyone’s door. Russia is a self-sufficient country. We will work within the foreign economic environment that has taken shape, develop domestic production and technology and act more decisively to carry out transformation. Pressure from outside, as has been the case on past occasions, will only consolidate our society, keep us alert and make us concentrate on our main development goals.

Of course the sanctions are a hindrance. They are trying to hurt us through these sanctions, block our development and push us into political, economic and cultural isolation, force us into backwardness in other words. But let me say yet again that the world is a very different place today. We have no intention of shutting ourselves off from anyone and choosing some kind of closed development road, trying to live in autarky. We are always open to dialogue, including on normalising our economic and political relations. We are counting here on the pragmatic approach and position of business communities in the leading countries…

On the growing risks of nuclear war:

From here emanates the next real threat of destroying the current system of arms control agreements. And this dangerous process was launched by the United States of America when it unilaterally withdrew from the Anti-Ballistic Missile Treaty in 2002, and then set about and continues today to actively pursue the creation of its global missile defence system.

Colleagues, friends, I want to point out that we did not start this. Once again, we are sliding into the times when, instead of the balance of interests and mutual guarantees, it is fear and the balance of mutual destruction that prevent nations from engaging in direct conflict. In absence of legal and political instruments, arms are once again becoming the focal point of the global agenda; they are used wherever and however, without any UN Security Council sanctions. And if the Security Council refuses to produce such decisions, then it is immediately declared to be an outdated and ineffective instrument.

Many states do not see any other ways of ensuring their sovereignty but to obtain their own bombs. This is extremely dangerous. We insist on continuing talks; we are not only in favour of talks, but insist on continuing talks to reduce nuclear arsenals. The less nuclear weapons we have in the world, the better. And we are ready for the most serious, concrete discussions on nuclear disarmament – but only serious discussions without any double standards.

What do I mean? Today, many types of high-precision weaponry are already close to mass-destruction weapons in terms of their capabilities, and in the event of full renunciation of nuclear weapons or radical reduction of nuclear potential, nations that are leaders in creating and producing high-precision systems will have a clear military advantage. Strategic parity will be disrupted, and this is likely to bring destabilization. The use of a so-called first global pre-emptive strike may become tempting. In short, the risks do not decrease, but intensify.

Have a nice day.

Philippine Politics: To Save the Kids, Stop Inflationism, Promote Economic Freedom; Henry Hazlitt’s Cure for Poverty

In the Philippines, election season is upon us or just about a year and a few months away, so populist politics has once again been hugging the headlines. 

So what easier way to boost popular approval to generate future votes than—not only to focus on “poverty”—but to publicly appeal for compassion by fixating on a specific group: poverty on kids. 

Yet most of the proposed solution has been the same since time immemorial; more centralization, bigger government or simply more redistribution: multiplying wealth by dividing it.

So for this election season, it seems that poor kids will serve as instruments of sloganeering for the advancement of political careers of politicians.

Politicians make it sound is as if the private sector has no sense of compassion at all. Hardly the politicians realize that from an economic standpoint, the relief of poverty equates to the well-being of enterprises.

Charity requires no political mandates. 

So why shouldn’t the private sector contribute voluntarily? There are numerous civic groups (such as Rotary, Lions and et.al.) working to help solve social ills by voluntarism. [The two Rotary's which I used to be a member of have active feeding programs mainly on public schools]

The question is what has been an obstacle to private sector solutions?

There has been almost zero zilch nada nein nyet in any mainstream discussion has tackled on how financial repression or government redistribution policies mainly through central bank inflationism has served as a fundamental and structural reason in raising self-poverty ratings that has spurred populist calls for more centralized solution on poverty. 

Add to this the plethora of interventionisms via mandates, regulations, government spending and more all finance by higher taxes. Where will taxes come from? Manna from heaven?

Yet hasn’t it been contradictory to see a swelling of self poverty ratings in the face of G-R-O-W-T-H?

The clueless mainstream calls 'strong' economic growth and soaring self poverty ratings a “paradox”. They apparently have been long blind to comprehend that statistical G-R-O-W-T-H has been occurring to a few ‘concentrated’ bubble sectors, controlled by mostly the elites, whose G-R-O-W-T-H (use of more resources) has occurred from extensive leveraging in the formal banking system and capital markets—coming at the expense of or, all financed by Peso holders (via the use of less resources but pays the cost of higher prices or diminished purchasing power on income or savings).

Yet the same politically connected or influential economic elites contributes to a significant majority to the statistical economic output which mainstream G-R-O-W-T-H which is the reason for the “strong”. 

But statistical growth isn’t real economic growth. That's what the "paradox" has been about.

It is only when this massive redistribution mechanism via invisible subsidies in favor of the government and to these political elites channeled through the banking system diminishes when the burdens of self-poverty eases (as I have previously shown in SWS’s chart last August)

I post below the great libertarian Henry Hazlitt’s proposal for the cure for poverty.  From the Conquest of Poverty (chapter 20: The Cure of Poverty p 229-234; bold and italics mine)

Individual or family poverty results when the "breadwinner" cannot in fact win bread; when he cannot or does not produce enough to support his family or even himself. And there will always be some human beings who will temporarily or permanently lack the ability to provide even for their own self-support. Such is the condition of all of us as young children, of many of us when we fall ill, and of most of us in extreme old age. And such is the permanent condition of some who have been struck by misfortune—the blind, the crippled, the feebleminded. 

Where there are so many causes there can be no all embracing cure. 

It is fashionable to say today that "society" must solve the problem of poverty. But basically each individual—or at least each family—must solve its own problem of poverty. The overwhelming majority of families must produce more than enough for their own support if there is to be any surplus available for the remaining families that cannot or do not provide enough for their own support. Where the majority of families do not provide enough for their own support—where society as a whole does not provide enough for its own support—no "adequate relief system" is even temporarily possible. Hence "society" cannot solve the problem of poverty until the overwhelming majority of families have already solved (and in fact slightly more than solved) the problem of their own poverty.

All this is merely stating in another form the Paradox of Relief referred to in Chapter 18: The richer the community, the less the need for relief, but the more it is able to provide; the poorer the community, the greater the need for relief, but the less it is able to provide. 

And this in turn is merely another way of pointing out that relief, or redistribution of income, voluntary or coerced, is never the true solution of poverty, but at best a makeshift, which may mask the disease and mitigate the pain, but provides no basic cure.

Moreover, government relief tends to prolong and intensify the very disease it seeks to cure. Such relief tends constantly to get out of hand. And even when it is kept within reasonable bounds it tends to reduce the incentives to work and to save both of those who receive it and of those who are forced to pay it. It may be said, in fact, that practically every measure that governments take with the ostensible object of "helping the poor" has the long-run effect of doing the opposite. Economists have again and again been forced to point out that nearly every popular remedy for poverty merely aggravates the problem. I have analyzed in these pages such false remedies as the guaranteed income, the negative income tax, minimum-wage laws, laws to increase the power of the labor unions, opposition to labor-saving machinery, promotion of "spread-the-work" schemes, special subsidies, increased government spending, increased taxation, steeply graduated income taxes, punitive taxes on capital gains, inheritances, and corporations, and outright socialism.

But the possible number of false remedies for poverty is infinite.

Two central fallacies are common to practically all of them. One is that of looking only at the immediate effect of any proposed reform on a selected group of intended beneficiaries and of overlooking the longer and secondary effect of the reform not only on the intended beneficiaries but on everybody.

The other fallacy, akin to this, is to assume that production consists of a fixed amount of goods and services, produced by a fixed amount and quality of capital providing a fixed number of "jobs." This fixed production, it is assumed, goes on more or less automatically, influenced negligibly if at all by the incentives or lack of incentives of specific producers, workers, or consumers. "The problem of production has been solved," we keep hearing, and all that is needed is a fairer "distribution."

What is disheartening about all this is that the popular ideology on all these matters shows no advance—and if anything even a retrogression—compared with what it was more than a hundred years ago. In the middle of the nineteenth century the English economist Nassau Senior was writing in his journal:

"It requires a long train of reasoning to show that the capital on which the miracles of civilization depend is the slow and painful creation of the economy and enterprise of the few, and of the industry of the many, and is destroyed, or driven away, or prevented from arising, by any causes which diminish or render insecure the profits of the capitalist, or deaden the activity of the laborer; and that the State, by relieving idleness, improvidence, or misconduct from the punishment, and depriving abstinence and foresight of the reward, which have been provided for them by nature, may indeed destroy wealth, but most certainly will aggravate poverty."

Man throughout history has been searching for the cure for poverty, and all that time the cure has been before his eyes.

Fortunately, as far at least as it applied to their actions as individuals, the majority of men instinctively recognized it—which was why they survived. That individual cure was Work and Saving. In terms of social organization, there evolved spontaneously from this, as a result of no one's conscious planning, a system of division of labor, freedom of exchange, and economic cooperation, the outlines of which hardly became apparent to our forebears until two centuries ago. That system is now known either as Free Enterprise or as Capitalism, according as men wish to honor or disparage it.

It is this system that has lifted mankind out of mass poverty.

It is this system that in the last century, in the last generation, even in the last decade, has acceleratively been changing the face of the world, and has provided the masses of mankind with amenities that even kings did not possess or imagine a few generations ago.

Because of individual misfortune and individual weaknesses, there will always be some individual poverty and even "pockets" of poverty. But in the more prosperous Western countries today, capitalism has already reduced these to a merely residual problem, which will become increasingly easy to manage, and of constantly diminishing importance, if society continues to abide in the main by capitalist principles. Capitalism in the advanced countries has already, it bears repeating, conquered mass poverty, as that was known throughout human history and almost everywhere, until a change began to be noticeable sometime about the middle of the eighteenth century. 

Capitalism will continue to eliminate mass poverty in more and more places and to an increasingly marked extent if it is merely permitted to do so.

In the chapter "Why Socialism Doesn't Work," I explained by contrast how capitalism performs its miracles. It turns out the tens of thousands of diverse commodities and services in the proportions in which they are socially most wanted, and it solves this incredibly complex problem through the institutions of private property, the free market, and the existence of money—through the interrelations of supply and demand, costs and prices, profits and losses. And, of course, through the force of competition. Competition will tend constantly to bring about the most economical and efficient method of production possible with existing technology—and then it will start devising a still more efficient technology. It will reduce the cost of existing production, it will improve products, it will invent or discover wholly new products, as individual producers try to think what product consumers would buy if it existed. 

Those who are least successful in this competition will lose their original capital and be forced out of the field; those who are most successful will acquire through profits more capital to increase their production still further. So capitalist production tends constantly to be drawn into the hands of those who have shown that they can best meet the wants of the consumers.

Perhaps the most frequent complaint about capitalism is that it distributes its rewards "unequally." But this really describes one of the system's chief virtues. Though mere luck always plays a role with each of us, the increasing tendency under capitalism is that penalties are imposed roughly in proportion to error and neglect and rewards granted roughly in proportion to effort, ability, and foresight. It is precisely this system of graduated rewards and penalties, in which each tends to receive in proportion to the market value he helps to produce, that incites each of us constantly to put forth his greatest effort to maximize the value of his own production and thus (whether intentionally or not) help to maximize that of the whole community.

If capitalism worked as the socialists think an economic system ought to work, and provided a constant equality of living conditions for all, regardless of whether a man was able or not, resourceful or not, diligent or not, thrifty or not, if capitalism put no premium on resourcefulness and effort and no penalty on idleness or vice, it would produce only an equality of destitution.

Another incidental effect of the inequality of incomes inseparable from a market economy has been to increase the funds devoted to saving and investment much beyond what they would have been if the same total social income had been spread evenly. The enormous and accelerative economic progress in the last century and a half was made possible by the investment of the rich—first in the railroads, and then in scores of heavy industries requiring large amounts of capital. The inequality of incomes, however much some of us may deplore it on other grounds, has led to a much faster increase in the total output and wealth of all than would otherwise have taken place.

Those who truly want to help the poor will not spend their days in organizing protest marches or relief riots, or even in repeated protestations of sympathy. Nor will their charity consist merely in giving money to the poor to be spent for immediate consumption needs. Rather will they themselves live modestly in relation to their income, save, and constantly invest their savings in sound existing or new enterprises, so creating abundance for all, and incidentally creating not only more jobs but better-paying ones. 

The irony is that the very miracles brought about in our age by the capitalist system have given rise to expectations that keep running ahead even of the accelerating progress, and so have led to an incredibly shortsighted impatience that threatens to destroy the very system that has made the expectations possible.

If that destruction is to be prevented, education in the true causes of economic improvement must be intensified beyond anything yet attempted.

The cure for poverty is for the government to STOP COERCIVE REDISTRIBUTION via financial and economic repression. The obverse side is to PROMOTE SOUND MONEY and ECONOMIC FREEDOM. But none of this economic reality will generate votes.

Infographics: China's Top 10 Ghost Towns

From Caixin Online: