Why “Buy Philippines” Will Make Filipinos Poorer

``Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.”-Murray N. Rothbard, Neo-Mercantilism

If there is anything in life that I am so appreciative of, it is to have acquired the opportunity to self-learn the ways of classical liberalism in order to avoid from getting duped by glib talking politicians and their academic cohorts that populate the mainstream.

That’s because the usual “do-goodism” that inhabits media, the primary source of information by the public, accounts for great sound bites and seemingly “feel good” causes unwittingly comes with nasty side effects unseen by the public.

In other words, promises of free lunches in a world of scarcity are not only oxymoronic, but also unrealistic.

In the words of the fabulous Frederic Bastiat[1], ``Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.”

Social ‘public spirit’ themes to enhance the supposed weal of society dominate the airwaves, especially amplified during political seasons, as aspiring politicians conjure up striking catchphrases and alluring slogans to attract votes.

And one political theme that recently emerged exhorts Overseas Foreign Workers (OFW) or today’s du jour “heroes” to BUY PHILIPPINES or buy Philippine made products.

The connection made is thoroughly simple: when OFWs, which are presumed as the sector responsible for “saving” the Philippine economy, buy Philippine made products, the ramifications would include more investments at home, which should result to more jobs and more prosperity. Nice huh?

We’d argue that this premise is arrantly fallacious.

No Man Is An Island

Perhaps many are familiar with the famous abridged John Donne aphorism of “No man is an island”. The fundamental significance of this phrase is that people depend on other people in order to survive.

So why do people depend on other people? The simplistic answer is that because we can NEVER be self sufficient. Therefore we need other people to provide us the things, goods or services. In economics, this is called as the division of labor. If I’m a shoemaker and would like to have fish for my meal, I’d have to go to Pedro, the fisherman, and offer to exchange my pair of shoes for his catch. The other term for the conduct of exchange arising out of the division of labor is simply called trade.

Once Pedro and I consummate the trade, our perceived needs for the moment would have been fulfilled. And thus, trade satisfies us. In other words, because no man is an island, trade, and not the state, is the essence of all societies. State depends on taxation which accrues trade.

And trade, in contrast to what politicians say, knows of no political boundaries. The more people are allowed to the trade the better off a society is. Remember the goal of trade is to achieve satisfaction from the angst of scarcity.

In places where such activities are politically restricted, trades are conducted underground via blackmarkets, or what is known as the “informal” economy. And in nations where trade are restricted, the common characteristics are large incidences of shortages, poverty, hunger or economic deprivation.

So how does this apply to OFWs and BUY Philippines?

If the goal of trade is to satisfy a need, then the nationality of the seller or provider should be among the least of the priorities.

Think of it, would it be practical for OFWs to buy Filipino products if the latter are priced very much dearly or are very much inferior in quality relative to the foreign competitors, simply for the sake of being Filipino?

The most likely is answer is no. Why? Because this defeats the objective of trade, which is to achieve satisfaction of a perceive need or want based on the pecking order of needs of people.

Some OFWs may indeed acquire goods or services out of altruism on some occasions. But similar to donations to charitable institutions, such socially accommodative actions can’t be treated as a staple, because the underlying incentive isn’t to get fed or be clothed but for esteem purposes.

In the hierarchy of people’s needs, according to Abraham Maslow[2], self actualization through identity and purpose are subordinate to physiological and safety needs.

Hence, the call for OFWs to buy Philippine goods simply means sacrificing basic fulfilment for the esteem needs of politicians is also tantamount to subsidizing incompetent or non-competitive ‘zombie’ Filipino suppliers.

In other words, OFWs will be unduly be rewarding local sectors that can’t compete to satisfy consumers (regardless of nationality) but only thrive from the appeal to emotions/nationalism.

Yet, this isn’t a recipe for progress, but a formula for political redistribution through coercive policies (which the Philippines did try in the 1950s).

In addition, charity as the priority for conducting trade is not only unsustainable; it is a fantasy, except in the chimera of ‘socialists’.

That’s because in reality, there is simply no free lunch.

Jollibee’s Success Secret: Serving Filipino Consumers

Buy Filipino is a misguided approach to prosperity. Satisfying the consumer is.

A fantastic example of this should be Jollibee Foods Corporation (JFC).

Jollibee is one of the largest publicly listed companies in the Philippines and is a member component of the elite benchmark of the largest companies in the country called as the Phisix in the Philippine Stock Exchange.

From its a humble entrepreneurial beginning in 1975 as a lowly ice cream parlor in 1975 until it was incorporated in 1978[3], JFC’s rise to prominence has been phenomenally rapid. The domestic company trumped all its foreign competitors, grew at nearly an exponential rate and now captures some 65%[4] of the domestic hamburger market.

JFC has now expanded beyond its traditional lines in the Philippines and is likewise expanding beyond its conventional market; the company has been acquiring Asian contemporaries!

In 2007, the company’s website says, JFC operates more than 1,600 stores in the Philippines and 9 other countries with 8 brands: Jollibee, Chowking, Greenwich, Red Ribbon, Yonghe King, Delifrance, Chun Shui Tang and it’s latest addition Manong Pepe[5].

And along with Jollibee’s business success comes with many recognition, such as the top Philippine company according to Wall Street Journal’s Asia 200 awards[6] (see Figure 1)

Figure 1: Wall Street Journal’s Asia 200 2009 vote

So what has been the secret formula of JFC’s success? Appeal to Nationalism?

Unfortunately not.

A Businessweek article in 1996[7] highlights the typical impression of Filipino consumers on Jollibee’s burgeoning business, ``It's a typical Sunday at the Jollibee fast-food restaurant in Manila's bustling Megamall: The tables are packed, kids are scurrying to and from the playland, and a giant orange-and-yellow bumblebee character is dancing for a birthday party of giggling toddlers. The children say they prefer the spicy-sweet flavors of the local chain's hamburgers and spaghetti over the more bland taste of the fare at McDonald's, whose nearby outlet is quiet. "The Filipino tongue is more accustomed to Jollibee," says 21-year-old student Dave Sevilla, who brought his 7-year-old nephew and 9-year-old cousin. "The burger is juicier." (bold underscore mine)

And here is what Jollibee’s website has to say[8] about their corporate strategy, ``THE WORLD IS GLOBAL, BUT ITS TASTES ARE LOCAL. People adapt foreign foods but change them to their tastes. This is natural. Taste preference along with those of aroma, texture, and presentation evolved over hundreds of years, influenced mainly by the kinds of plant and animal food that grow in their geography. Local preferences are hard to change.” (bold underscore mine, all caps theirs)

So we learn that the Filipino consumers have been warmly reciprocating the way Jollibee has been integrating its products to fit into the Filipinos’ palate and to the Filipino lifestyle.

As Ludwig von Mises wrote about the pre-eminence of consumers[9], ``The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm.” (bold highlights mine)

In short, Jollibee is simply being rewarded, through profits which partly serves to fuel the company’s expansion programs, which incidentally also contributes to the nation’s economic growth, in the service of the needs of the Filipino consumers.

Jollibee, hence, exemplifies the Mises model of a consumer oriented enterprise!

Importantly, Jollibee adds to social service by providing satisfaction through continuous improvements and innovations on their products and services to adapt to changing times, which is why Filipino consumers keep going back to them. JFC uses its spare funds to also engage in community services[10].

As you can see trade is not only mutual beneficial but allows for the company to engage in voluntary charity or philanthropic causes.

So in sharp contrast to the contemptuous insinuations of socialists, Jollibee does not ‘suck the money’ out of Filipino, because Filipinos are NOT unthinking individuals hardwired to mechanistically buy Jollibee products. They patronize JFC because they perceive direct benefit from it!

If there is anything that people are forced to pay for, it is the many lousy, redundant and unneeded services provided for by the state, which incidentally most of the services the marketplace can actually provide for.

Yet many of these so-called public goods services cause structural inefficiencies, imbalances in the political economy and immeasurably increase the costs of doing business. And at best, the supposed benefits are mostly indirect!

The Failure of Protectionism: Import Substitution Policies

What politicians tell the public are mostly the silly melodramatic things people like to hear.

Because these politicians live in a world of free lunches, where taxpayers pay for their boondoggles, they hardly ever speak of the alternatives or the hidden costs embedded within their noble goals. They are like the Satan’s snake offering Eve (yes us) the forbidden apple in the Garden of Eden.

The next thing these self-righteous propagandists will do is to enact legislations that would force the public to buy “local”.

And a possible mixture of policies would be in the form of higher import tariffs, selective financing or access to credit (state loans), tax breaks, foreign exchange allocations that are directed to political “organic” ends and other indirect ways to limit imports (licensing, monopolies etc..), all of which may redound to the closing of doors to trade, from which the repercussions would be economically adversarial.

And by restricting trade the lists of evils are innumerable:

-access to more goods will be limited, i.e. substandard quality and more expensive,

-rising cost of available goods,

-limitations of capital goods and capital flows

-investment will be LIMITED and NOT ENHANCED as investment opportunities will be politically distributed-politically connected will be rewarded,

-the lack of investment would mean higher unemployment and greater security risks,

-more dependence on government means higher fiscal costs which leads higher taxes or more inflation and the overvaluation of the domestic currency,

-less competitiveness,

-more economic inefficiencies,

-more bureaucratic corruption,

-dearth of innovation,

-declining productivity and etc...

As said earlier, the Philippines tried quasi “buy Philippines” policies via the Import Substitution Industrialization (ISI), aimed to promoted domestic industries in the 1950s.

According to Philip Gerson from an IMF working paper[11], (bold highlights mine)

``For many years, the Philippines pursued an industrial policy that encouraged import substitution rather than promoting exports. Until tariff reforms were introduced in 1991, trade policies heavily penalized the primary and agricultural sectors and benefited the manufacturing sector. In addition, the overvaluation of the Philippine peso during several periods between the 1950s and the 1980s contributed to declines in the prices of exports in peso terms and diverted resources away from agriculture and toward import-substituting manufacturing. In addition, incomes in the agricultural sector were depressed by heavy regulation. Beginning in the 1970s, price controls were imposed on rice and other products, and the importation of wheat and soybeans was monopolized. The government introduced controls on the production, marketing, and processing of coconuts and created a price stabilization fund, while fertilizer and pesticide imports were controlled through licensing requirements.

``Overvaluation of the peso, tariff policies, and heavy government regulation discouraged investment in agriculture, with a disastrous effect on productivity. For example, during 1982–85, productivity in the coconut sector—which had long been the country's most important agricultural industry in terms of export earnings and employment—averaged 1.0 metric ton per hectare, exactly the same as during 1962–66. Low agricultural productivity remains a drag on growth, partly because some agricultural tariffs have been maintained at the maximum level permitted by World Trade Organization (WTO) agreements, even though tariffs were dramatically lowered in almost all other sectors during the early and mid-1990s. While real GDP growth has averaged 5 percent annually since 1994, growth in the agriculture, fishing, and forestry sectors has averaged less than half this rate.”

As one would note, errant policies begot another. Interventionism led to more interventionism with even more disastrous results.

The redistribution of economic benefits from to one sector at the expense of the rest led to the massive imbalances cited above (high costs, lost productivity etc...), which prompted for price controls. Yet, in spite of the government support, the local manufacturing sector did not evolve to become globally competitive enterprises. That’s because they had been shielded from competition and therefore lacked the incentives of dynamism due to political cover or dependence.

The worst impact was not only to hurt the Filipino consumers, but the Philippine economy overall suffered from a lag in economic development.

And as for the beneficiaries, according to Joe Studwell[12], In the short-term ISI produced respectable growth rates in the region. But it was all too easily manipulated by a tycoon class that was raised on trading. Every effort to plan industrial development was another arbitrage opportunity for the politically well-connected. Usually, the procedure was for a tycoon to obtain the necessary license, bring in a foreign partner to provide a manufacturing process that was reduced to kit assembly (with most parts and components imported), and then to hide behind tariffs barriers selling goods that were unsaleable internationally. The results was profits, but minimal progress in constructing a sustainable domestic manufacturing base.”

As you can see, policy advocates of Buy Philippines are not only exposed for being “short term oriented”, but could be either untrue to their constituents, having ulterior motives to promote some sectors at the expense of the rest of society, by manipulating the gullible or are plain economically uninformed, refusing to learn from both local and international experiences.

The Racist Risks From Buy Philippines

While contemporary politicians and advocates of “Buy Philippines” do not specifically dwell on racism, group labeling can also lead to unforeseen catastrophic consequences. That’s because an escalation of political zealotry can lead to the risks of tagging patrons of non-Filipino goods as “anti-Filipino”.

In the realm of politics, black propaganda is a conventional instrument for promoting political goals.

As legendary investor Doug Casey in an interview says[13], ``Groupthink is not a problem of acknowledging the existence of groups, including human groups; it's treating individuals as though they were the group, or as though they necessarily hold all the traits that define the group.” (bold emphasis added)

In short, in groupthink, role of individualism is seen non-existent, a reductio ad absurdum.

In groupthink, political zealots don’t see that non-Filipino enterprises can be mostly foreign franchises owned by Filipinos or foreign companies with Filipino partners. Where implied boycotts or policies imposed tend not only to hurt these local investors, but also workers employed in these firms aside from the local enterprises supplying these entities, the foregone tax revenues and the lost technology and capital transfers from the politicization and polarization of trade.

In groupthink, political fanatics forget that consumers have the RIGHT to choose and spend on what they think should fulfill them. Buyers are simply voters who vote with their wallets based on perceived individual interests and not in the collective sense. The stakeholdings for consumers are direct unlike in elections where individual stakes are more perceived than real (sorry to be a spoiler, but your vote won’t affect the outcome of elections- 1% of voting population is about 500,000 votes- and neither will your vote affect the policies of the next set of next leaders).

In groupthink, the politically blind see only one direction from their choice of action. They fail to see that if I slap you, then you are mostly likely to respond with similar or more drastic actions. Xenophobic policies incite political brinkmanship and antagonism. And to paraphrase Frederic Bastiat, “when goods don’t cross borders, then armies will”

Therefore in groupthink, rational thinking is jettisoned for sensationalism. What people won’t rationally do alone they will do based on the comfort of crowds, e.g. Fraternity melees.

What lessons can we glean from “groupthink” policies?

Our neighbour Malaysia is no stranger to groupthink policies.

Malaysia in 1971, as a result of Sino-Malay racist riots which culminated in the May 13^th incident which resulted to hundreds if not thousands of casualties, prompted for her government to adopt “aggressive affirmative action policies, such as the New Economic Policy (NEP)[14]” The NEP was aimed at achieving a 30% share of equity in the GDP for the ethnic Bumpitera class.

The new policies empowered ethnic Malays (known as Bumiputras, literally “sons of the soil”) which accounted for some 60 percent of the population, with economic opportunities dominated by ethnic Chinese. This meant that “Bumiputras have been given, among other privileges, priority for government contracts, increased access to capital, opportunities to buy assets that are privatized, and other subsidies.[15]”

The result was according to Wikipedia.org[16], ``These policies have succeeded in creating a significant urban Malay middle class. They have been less effective in eradicating poverty among rural communities. Some analysts have noted a backlash of resentment from excluded groups, in particular the sizable Indigenous Non-Muslim Malays Orang Asli, Chinese and Indian Malaysian minorities.”

Yet according to Joe Studwell[17], After twenty year term envisaged at the outset of the NEP expired in 1990, the Malay share of corporate equity in Malaysia had increased from almost nothing to around one-fifth, but the Chinese share had also doubled from one-fifth to two-fifths. This reflected the fact that the tycoon fraternity was doing better than ever; the NEP had not ended the deals between the ethnically separate political and economic elites.

Wikipedia.org also quotes former Prime Minister Tun Dr. Mahathir Mohammad criticism on the extreme reliance of Bumiputras on their privileges:

"We have tried to tell them if you depend on subsidies, you are going to be very weak. But they don’t seem to understand. We tell them if you use crutches, you will not be able to stand up. Throw away the crutches, stand up straight because you still have the capacity.”

In other words, Bumpitera policies failed in its objective to achieve a more balanced distribution as intended in spite of the privileges due to the implications from dependency.

Figure 2: Heritage Foundation: Economic Freedom Malaysia and The Philippines

Nevertheless Malaysia’s recent successes have been more about her willingness to embrace economic freedom (left window) relative to the Philippines (right window) as measured by the Heritage Foundation[18], which apparently has overshadowed the setbacks from NEP.

In spite of the Asian crisis which led to lesser economic freedom for both economies, Malaysia has been showing vital recovery (part of this by dismantling the vestiges of the Bumpitera policies) while the Philippines remains nearly stagnant.

To add, Malaysia in 2009 ranked 59^th relative to the Philippines at 109^th in the rankings of economic freedom, and the former has been traditionally “freer” relative to the world average even prior to the 1997 Asian crisis.

Importantly, I’d like to point out that the fundamental difference in the nationalist policies of Malaysia’s Bumiputera with that of the genre of “Buy Local” policies is that Malaysia dealt with policies concerning intra-racist distribution rather than xenophobia.

And of course Malaysia is the “benign” example of intra-racism nationalist policies relative to extreme counterparts as Zimbabwe, South Africa or Nazi Germany or even the 1994 Rwanda genocide.

As for xenophobic trade policies, the best example in the extreme case would be the US Smoot-Hawley Tariffs act[19], that resulted to severely worsened the recession in the 1930s which morphed to a decade long Great Depression.

Hence it would be sheer insanity or foolishness to believe or preach that implied antagonism as an economic or trade policy would result to prosperity knowing that “no man is an island”. In math, the operation required to have more is addition and not subtraction. Beggar thy neighbour policies, as protectionism or racism, epitomizes subtraction.

More Political Nonsense: Invest Philippines and Teach Locals To Save

The same logic should apply to investing.

People should invest based on the merits of the perceived risk-reward tradeoffs as seen through the profit and loss guidance system and not because of the folly of being a Filipino who must “Invest Philippines”.

As Murray Rothbard explained[20], Every entrepreneur, therefore, invests in a process because he expects to make a profit, i.e., because he believes that the mar­ket has underpriced and undercapitalized the factors in relation to their future rents. If his belief is justified, he makes a profit. If his belief is unjustified, and the market, for example, has really overpriced the factors, he will suffer losses.

Any OFW or anyone who plunks their money based on nationalism deserves to lose their equity as this would be reckless and devoid of market or even mundane realities.

Might as well just donate that money to the Philippine government to enhance one’s self esteem (ensure to have photo op with the a key official!) or contribute this money to private charity institutions compared to getting suckered by the political-economic class who would remorselessly use people’s capital to secure economic rents.

Nevertheless it is also wantonly misplaced to even suggest that locals ought to be taught by their OFW principals on how to save.

Figure 3: Asian Development Bank: Philippine Savings and Investment

I don’t know why many people come to even accept this poppycock as a grain of truth from a political moralizer.

The implication is that recipients of remittances are a bunch of free spending nitwits! What bravado! If this is not an insult to the intelligence of the Filipino, I don’t know what this is.

Far from reality, the problem isn’t about savings, even if the Philippines have one of the lowest savings rate in Asia.

This according to the Asian Development Bank[21], (bold highlights mine)

``Higher private investment, too, would play a more significant role in upgrading infrastructure and, more generally, the productive capacity of the economy. Saving is not the main constraint, since national saving has steadily risen, bolstered by remittances.

“Rather, sluggish private investment reflects infrastructure deficiencies, particularly in power and transport, and weaknesses in governance and the policy climate. According to the World Economic Forum, the global competitiveness ranking of the Philippines in 2009/10 fell to 87 (out of 133 countries) from 71 (out of 134) in 2008/09, putting it below India, Indonesia, and Viet Nam, among others. The report cited corruption, inefficient bureaucracy, policy instability, and inadequate infrastructure as the main reasons for the low ranking.”

As we earlier said investments is a function of returns. The ‘sluggishness’ of investment means that the returns have not been attractive enough to convince local or international capitalists to fill in the infrastructure deficiencies or that returns have not met what we call as the “hurdle rate”-minimum acceptable returns. Not perhaps unless you are associated with the political class.

And the reasons cited by the World Economic Forum for the paucity of competitiveness constitute as symptoms and NOT the source of the problems. In short, ADB’s congenial words are euphemisms for collective government failure.

The fundamental shortcoming of the Philippines is our overdependence on politicians and politics for economic development, much like Waiting for Godot.

We have been blighted by the lack of economic freedom, bloated bureaucracy, high taxes, the onus of regulatory compliance, the lack of respect for property rights, deficiency in contract enforcement, a maze of complex and incomprehensible laws, politicization of industries, protectionist laws or legal barriers to more competition, politicization of the justice and legal system and public institutions, regulatory capture by the political-economic class, regulatory arbitrage (e.g. legalized smuggling) based on political connections, state instituted cartels and monopolies and many other political obstacles (permits, labor regulation, starting or closing business, registering property and etc.).

All these has translated to high transactions costs, high input and overhead costs (including corruption costs-estimated at $ 3 billion per year[22]), which all add up to a high cost of doing business-the Philippines is ranked 144^th out of 183 countries in World Bank’s Doing Business 2010[23].

And worst we have a public caught ambling between hopes of immediate deliverance from the delusion of an omniscient and virtuous state with that of grinding reality based on the limitations of state authorities with regards to the knowledge over the individual, human relations, incentives guiding people’s actions, as well as their own personal motivations (as officials are human beings too!), and importantly, the supremacy of basic economic laws over politics.

Although we have many aspiring political leaders rambling about political correctness which are all majestically flawed in logic, they only make good electoral themes, hopefully not for real policies.

At the end of the day, to paraphrase US President Abraham Lincoln, “Politicians can fool almost all the people some of the time, and some of the people all the time, but economic reality ensures that you cannot fool all the people all the time."

---

[1] Bastiat, Frederic That Which is Seen, and That Which is Not Seen, 1850

[2] Wikipedia.org, Maslow’s Hierarchy Of Needs

[3] Jollibee Food Corporation, About us-milestone history

[4] Hub Pages, Jollibee Vs McDonalds - Filipino burger kings fight against global giant

[5] Jollibee Food Corporation, Investor Relations

[6] Wall Street Journal, Jollibee Captures Top Spot in Philippines

[7] Businessweek, HAPPY MEALS FOR A McDONALD'S RIVAL (int'l edition) July 1996

[8] Jollibee Food Corporation, Investor Relations

[9] Ludwig von Mises, The Sovereignty of the Consumers

[10] Jollibee Foods Corporation, About us, Community

[11] Gerson, Philip Poverty and Economic Policy in the Philippines, IMF Finance and Development

[12] Studwell, Joe, Asian Godfathers Money and Power in Hong Kong and Southeast Asia p.37

[13] Casey Doug, Doug Casey on Race, lewrockwell.com

[14] Wikipedia.org, May 13 incident

[15] Johnson, Simon; Kochhar, Kalpana; Mitton, Todd and Tamirisa, Natalia, Malaysian Capital Controls: Macroeconomics and Institutions, IMF Working Paper

[16] Wikipedia.org, Bumiputera (Malaysia)

[17] Studwell, Joe; Ibid, p.27

[18] Heritage Foundation, 2010 Index of Economic Freedom

[19] US State Department, Smoot-Hawley Tariff

“The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports...

“The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the "beggar-thy-neighbor" policies (policies designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.

[20] Rothbard, Murray N. Man, Economy and the State Chapter 8—Production: Entrepreneurship and Change

[21] Asian Development Bank, Outlook 2010 p.239

[22] Spero news, Philippines: Corruption and waste in Philippines election

[23] World Bank, Reforming Through Difficult Times, Doing Business 2010

Inflationism And The Bailout Of Greece

``The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.”- Leo Tolstoy

Speaking of economic reality, the unsustainable state of welfare system in Greece and the PIIGS in the Eurozone today seems like a good example of government wastrel, that needs to be rebalanced or ‘revert to the mean’.

But this outcome while necessary may not likely be a preferred path for policymakers.

Mainstream’s Penchant For Currency Devaluation

Figure 4: Danske Bank[1]: The Euro Crisis

Yet the problems of the PIIGs (see figure 4) is not mostly because of the recent bursting of the US housing bubble but from previous government profligacy which arose from the incentives brought about by the prevailing monetary platform...the fractional reserve system operated by central banking.

Economists Peter Boone and former chief of the IMF, Simon Johnson formerly chief of the IMF writes[2], (bold highlights mine)

``The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros. The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels.

``This same structure directly distorts the incentives of commercial banks: they have a backstop at the ECB, which is the “lender of last resort”; and the ECB and European Union (EU) put a great deal of pressure on each nation to bail out commercial banks in trouble. When a country joins the eurozone, its banks win access to a large amount of cheap financing, along with the expectation they will be bailed out when they make mistakes. This, in turn, enables the banks to greatly expand their balance sheets, ploughing into domestic real estate, overseas expansion, or crazy junk products issued by Goldman Sachs. Just think of Ireland and Spain, where the banks took on massive loans that are now sinking the country.” (all bold highlights mine)

While Messrs. Boone and Johnson prescribe a whopping $1 trillion backstop for Portugal, Italy and Greece, they also call for the end of the current “repo window” to be substituted by “eurozone bonds”.

And like most of the Euro doomsayers, the common denominator to blame for the Greece or the PIIGS crisis has been the rigid monetary system from the Union or that these crisis-affected-countries can’t devalue its way out of the mess.

However, contra such generalizations, devaluing a currency would have some merit if the debts had been priced in local currency. But if they are priced in foreign currency then devaluation raises the cost of real debts. Hence, devaluations will not resolve the problems that require massive adjustments or reversion to the mean in economic sphere.

Central Banking Means Inflationism, ECB Included

For the mainstream economists, as always, money printing appears to be the only feasible solution to the mess surrounding the government’s spendthrift ways for so-and-so noble reasons.

Whether it is the ECB or the Fed, the political incentives for the central banks remain the same, to re-quote Murray N. Rothbard[3] anew,

``The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.”

In other words, governments are not likely to radically alter the framework of the banking system because of the following reasons:

One, it defeats the purpose of having a central bank, i.e. finance government deficit, cartelize private banks and circumvent market’s restriction to expand credit,

As for the government banks financing of government debt, Germany’s government banks had been recently reported to have sizeable holdings of Greek debt. According to the New York Times[4], (bold highlights mine)

``Germany’s financial institutions hold some €28 billion, or $37 billion, in Greek bonds, Barclays Capital estimates, extrapolating from International Monetary Fund data.

``A quick survey of Germany’s largest banks Wednesday indicates that probably half of that debt — rated “junk” by Standard & Poor’s since Tuesday — sits on the balance sheets of institutions that are owned or controlled by the government. The percentage could be much higher, but outsiders have no way of knowing for sure because bank regulators and many of the banks refuse to disclose precise numbers.”

So this only serves as proof of how central banks and the banking cartel system work hand in hand.

Second, the most conspicuous path dependency for the authorities of the ECB and the US Fed (or even with Bank of Japan) would be to inflate the system (as we previously discussed[5]), given the du jour mainstream ideology triumphalism of present policies and the addiction to the printing press,

Third, except for some tweaks (via financial reforms) in the banking regulation, the path towards banking regulation is to maintain the status quo but with more control over the cartelized system (one just needs to ask why has governments steadfastly refrained from the nationalizing the system?) and

Importantly, as long as the private sector continues to use government’s “legal tender” as the preferred medium of exchange then some semblance of political control over the economy is assured.

In essence, central banks are means to a political end. This only extrapolates that politics and central banking have been tightly enmeshed. And to argue that politics only emerged recently is unalloyed hogwash.

So it would be quite naive to suggest that for instance, Germany can simply walk away given the current problems, as this view ignores the main function of central banks.

Understanding The Euro’s Political Foundation, The Bailout Of Greece

One major reason why the Eurozone forged a union through a common currency had been to avoid from having to get immersed into repeated military conflicts, given its vulnerable geographic location.

As Marko Papic and Peter Zeihan of Stratfor[6] writes, (bold emphasis mine)

``Germany’s exposure and vulnerability thus make it an extremely active power. It is always under the gun, and so its policies reflect a certain desperate hyperactivity. In times of peace, Germany is competing with everyone economically, while in times of war it is fighting everyone. Its only hope for survival lies in brutal efficiencies, which it achieves in industry and warfare.”

``Pre-1945, Germany’s national goals were simple: Use diplomacy and economic heft to prevent multifront wars, and when those wars seem unavoidable, initiate them at a time and place of Berlin’s choosing.”

So I guess Frederic Bastiat’s “when goods don’t cross borders, then armies will” serves as the foundation behind Euro’s emergence.

From a moral point of view (which I subscribe to), the EU should have kicked Greece’s wazoo for fudging or falsifying her data, just to be included in the elite membership. But that would be overly simplistic reasoning.

Again we cite Messrs. Papic and Zeihan[7], (all bold highlights mine)

``The problem with that logic is that this crisis also is about the future of Europe and Germany’s place in it. Germany knows that the geopolitical writing is on the wall: As powerful as it is, as an individual country (or even partnered with France), Germany does not approach the power of the United States or China and even that of Brazil or Russia further down the line. Berlin feels its relevance on the world stage slipping, something encapsulated by U.S. President Barack Obama’s recent refusal to meet for the traditional EU-U.S. summit. And it feels its economic weight burdened by the incoherence of the eurozone’s political unity and deepening demographic problems.

``The only way for Germany to matter is if Europe as a whole matters. If Germany does the economically prudent (and emotionally satisfying) thing and lets Greece fail, it could force some of the rest of the eurozone to shape up and maybe even make the eurozone better off economically in the long run. But this would come at a cost: It would scuttle the euro as a global currency and the European Union as a global player.”

And this appears to undergird why Germany assiduously took all the time and efforts to convince Greece on reforms, than to speedily embrace a bailout. By successfully convincing Greece to adapt fiscal austerity, Germany would be able to reduce the leash effect from the moral hazard that would influence the actions of the other “crisis affected countries” from taking on the same path.

Yet Greece has adamantly resisted reforms until last week’s panic in the CDS and bond markets (see Figure 5), which apparently posed as the proverbial straw that broke the camels’ back.

Figure 5: Danske Bank[8]: Greece Debt Meltdown - What's Next?

And this has forced the arms of both the Eurozone and Greece to come up with a package.

And as of this writing, Greece appears to have finally acceded to a €100 billion (US $133 billion) bailout[9], which appears to validate our view once again!

No Trend Goes In A Straight Line

Does the panic in the European bond markets imply the end to the inflation driven financial markets?

Hardly.

The incentives driving the authorities of central banks have been to use more inflation in the face of any crisis (throw them money at them[10]), and the Greek episode simply amplified and validated this path dependency.

Considering that much of the world has been more on the recovery phase in the current economic cycle (or at the next phase of a budding bubble cycle), we aren’t inclined to believe that a market meltdown from a contagion is likely to prosper.

Also, it doesn’t mean that because global equity markets stumbled this week translates to the end of the current cycle.

For the perma-bears that would be wishful thinking.

In the US, the Dow Jones Industrials has been up for 8 consecutive weeks prior to this correction along with the Nasdaq, while the S&P 500 had been up for 6 straight weeks prior to 2 successive weekly declines (see figure 6).

In short, markets don’t move in a straight line!

Figure 6: stockcharts.com: Greece Contagion?

Yet there is hardly any trace that the correction has been related to the contagion of the Greek crisis.

Funny how, perma bears scamper for any piece of evidence to justify a bearish outlook- a cart before the horse logic. Two weeks ago it was Goldman, now they’re back to Greece after failing last February.

If the recent correction is about a Greece sovereign spillover, then why has US treasury 10 year yields fallen or why has US treasuries bonds rallied?

We seem to be seeing some rotation away from the Euro area and into US Treasuries. The US dollar appears to likewise validate this perspective.

Most of Asia, except for China, has been less as pressured. The Philippine Phisix was up this week, while the Philippine Peso was slightly lower. Asia’s mixed performance implies that the rotation was very much a Euro-US dynamic.

The VIX or the fear index isn’t likely much of a forward looking indicator either. The current spike in the VIX index hasn’t even surpassed the February high, yet the S&P after this week’s correction is still very much higher than the when the VIX previously spiked.

Moreover we are seeing a rally in Gold and Oil.

While US treasuries haven’t chimed with these commodities to indicate general inflation, this only continues to affirm our outlook that we are currently treading in the sweet spot of the inflation cycle.

So there are hardly any vital signs to exhibit that markets are about to inflect. What we are likely seeing is just a natural pause from a persistent run-up.

China’s Next Wall Of Inflationism

Finally, today’s Keynesian world only means more money printing to fund the government sponsored shindig as insurance against any crisis.

China’s market is in an apparent doldrums following the repeated assaults by her government to stem a localized bubble. The latest government directive was reportedly the “most draconian measures in history[11]” as noted by an analyst, as China’s government ordered a total freeze in loans on acquisitions of third properties.

So aside from the government actions, China’s languid markets may also reflect on the present weakening of her domestic credit cycle.

Nevertheless China appears to be preparing for any eventuality. A Chinese daily have recently floated that the next tsunami of government spending worth 4 trillion yuan ($586 billion) for nine industries will be announced in August[12].

Apparently for policymakers there is no alternative route but to engage in rampant inflationism.

In my view, it is not worthy to fight this trend.

---

[1] Danske Bank, The Euro Crisis, Can Politicians Catch Up With The Avalanche?

[2] Boone, Peter and Johnson, Simon; To Save The Eurozone: $1 trillion, European Central Bank Reform, And A New Head for the IMF

[3] Rothbard, Murray N. The Case Against The Fed p. 58

[4] New York Times, Germany Has Big Investment in Greece Even Before Bailout

[5] See Why The Greece Episode Means More Inflationism

[6] Papic, Marko and Zeihan, Peter; Germany's Choice stratfor.com

[7] Ibid

[8] Danske Bank Greece Debt Meltdown - What's Next?

[9] Bloomberg, Greece Accepts Terms of EU-Led Bailout, ‘Savage’ Budget Cuts

[10] See Mainstream’s Three “Wise” Monkey Solution To Social Problems

[11] Bloomberg.com, China’s Property Demand May Remain ‘Strong,’ HSBC’s Yorke Says

[12] Bloomberg.com, China May Announce 4 Trillion Yuan Stimulus, China Business Says

Global Migration Trends: Youth And Least Educated Prefers US, US Expats Think Otherwise

Gallup's article on global migration trends, which involves some 700 million people (nearly 10% of global population) and growing, reveals that the US still remains as the most desired destination among 15 nations that attracted most (500 million or 70%) of the migration flows.

What piqued my interest is that Gallup imputes the 'youth and the least educated' as having to prefer the US as the ideal place for relocation, in contrast to the second ranked Canada.

From Gallup:

Together, the number of potential migrants who would like to move to the United States, which represents 24% of adults who would like to move overall, and Canada, which represents 7%, make Northern America the most desired region to move to in the world. But individually, both countries appeal to people from different parts of the world. Gallup finds the U.S. appeals more to the youngest and least educated adults, while those who choose Canada are on average slightly older and more educated. (bold highlights mine)

And interestingly, people from Asia and Africa appear to be the sectors most in favor of the US.

In a choice between the US and Canada, I'd also be in the minority camp. But if I would be granted the opportunity to relocate I would choose as my priority one of Asia's key financial centers Hong Kong, Singapore and Japan, or perhaps even Australia or New Zealand as alternatives. That should make me stand opposite to the conventional wisdom as posited by the polls.

Well, various forms of perceived opportunities constitute that the incentives to relocate. Here is Gallup again,

``The United States and Canada attract potential migrants for various reasons -- personal, political, or economic -- but opportunity is the common, overarching theme. People may see moving to these countries as a chance to reunite with family members who have already moved, to find jobs, or to provide better lives for their children. Immigration policy and migrant policy, too, could play a role in the talent each nation attracts. Health and social services available to them as newcomers, and their future benefits as citizens, may be yet another factor."(bold underscore mine)

Again I would be in the opposite camp, as political and economic opportunities, for me, appear tilted to the East more than the West, especially if America's "gradualist" political trend to emulate Europe's social democracy is likely to get entrenched which obviously would have unfavorable ramifications on both her financial balance sheets aside from diminishing civil liberty or personal freedom.

The Greece crisis seems merely a prologue of the gamut of ailments that will plague these welfare states. Yet America's leadership seems steadfastly navigating her political economy into the same trap.

And a growing number of Americans appear to be renouncing their citizenship seemingly shares this view.

From the New York Times (bold emphasis mine),

``The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their U.S. citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.

``Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown.

``Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

``American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income."

More...

``Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.

``Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision."

I find the articles' incoherence in suggesting that taxation isn't a political problem, when it notes that the primary incentive in relinquishing citizenship has been out of onus of regulatory and taxation compliance.

Taxation and regulation is a product of politics, so how can these not be related? For instance, $1.42 trillion in fiscal deficits in 2009 to "save favored sectors", which would obviously leads to higher taxes in the future isn't about politics?

Going back to the original topic, while the US of A would seem like an ideal place to relocate, this would seem more of a delusion, unless we see a dramatic around in the current political trends.

In Spain, Pop Goes The Magic 'Green' Bubble

ONE of the likely casualty from the Greece led PIIGS debt crisis seems to be "Green" energy.

From Businessweek,

``Spain is lancing an 18 billion-euro ($24 billion) investment bubble in solar energy that has boosted public liabilities, choking off new projects as it works to cut power prices and insulate itself from Greece’s debt crisis...

"Spain is battling on several fronts to revive its economy and convince government bondholders it can avoid getting dragged into a Greek-style debt spiral after Standard & Poor’s cut its credit rating April 28. Solar-plant owners including General Electric Co. earn about 12 times what’s paid for power from fossil fuels. Most of that is a subsidy charged to customers

``Prime Minister Jose Luis Rodriguez Zapatero’s government last cut solar rates in 2008, hitting plants not built at the time. Now it’s weighing reductions for the thousands of installations already making power from the sun, wind and biomass.

‘Excessive Subsidy’

“This is necessary,” said Leon Benelbas, chairman of Atlas Capital Close Brothers investment bank in Madrid. “It’s an excessive subsidy at a time Spain has to gain competitiveness, and the cost of energy is a determining factor.”

``Spain’s fixed-price system for renewable power, which attracted more investment in solar panels in 2008 than the rest of the world put together, boosts the state’s liabilities even though they don’t show up on its balance sheet.

``That’s because the Spanish system delays payments by consumers for part of their electric bills for years. The government guarantees repayment to power suppliers such as Endesa SA and Gas Natural SDG SA. The cost of those unpaid bills rose last year by about 4 billion euros to 16 billion euros.

``Spain intends to revise the clean-energy rates down “to avoid damaging the competitiveness of industry,” Sebastian told the Spanish parliament yesterday."

This only shows that industries that cannot stand on its two feet, that can't compete, but survives mainly on government mandates and subsidies (or crutches), will be subjected to politics and this includes suffering from cuts in spending or support when austerity is required, especially in response to a crisis.

And the impracticality or non-feasibility would be eventually revealed from such retrenchment. In short, "the emperor has no clothes!"

Yet, "green energy" hasn't been proven to be a net positive contributor to the economy.

George Will comments on a study by Professor Calzada on Spain's alternative energy programs,

``Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs elsewhere in Spain's economy."

Overall, like typical bubbles, resources spent on these government pet projects only means waste.

Iceland's Eyjafjallajokull Volcanic Eruption In Pictures

Fantastic photographs from the recent volcanic eruption of Iceland's Eyjafjallajokull.

Find more pictures in Boston.com's The Big Picture (click on the link)

Axel Merk On Greece: Political Resolve Needed On The Greece Crisis

Last night while I was scanning the TV, I came across and watched Bloomberg's Mark Crumpton's interview of Axel Merk President of Merk Mutual funds, whose insights are relevant to the ongoing concerns over Greece and the PIIGs

I scoured the internet and found the video (see below)...



Some notes:

-Spain is not a short term debt problem but very different structural issues (economic problem)

-This is not a monetary question, this is a political question. Is there political will to resolve Greece’s problem?

-would require policy measures that have teeth (to implement against Greece's profligacy)

-sovereign debt is a global issue

-there will be more sovereign downgrades outside the Eurozone.

-Collateral rules will be relaxed

-Any bailout should include Greek Banks.

-We like the Euro, others are fully priced.

-Euro is priced at an "end of the world scenario"

Graphic: Central Planning

Below is an example of how central planning looks like. (hat tip: Russ Roberts)

It's a powerpoint presentation which attempts to define the conditions in Afghanistan




Try figuring it out.

As a military official commented,

"'When we understand that slide, we'll have won the war,' General Stanley McChrystal, the US and NATO force commander, remarked wryly when confronted by the sprawling spaghetti diagram in a briefing."

Just goes to show of the impossibility of comprehending every bit of information in a constantly changing world.

As F.A. Hayek once wrote, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Key Drivers To Emerging Market Outperformance: Increasing Trends of Economic Freedom, Trade Openness And Rule of Law

US Global Investor's Frank Holmes enumerates six key drivers in favor of a secular emerging markets outperformance over the coming years.

Mr. Holmes writes(black bold highlights his, blue mine) :

1. Rapid Economic Growth: In the coming years, growth in emerging economies is expected to outpace that of the developed world. This growth is fueling an increase in household income in places like China and India where nearly 60 million people—roughly the combined populations of Texas and California—are joining the ranks of the middle class each year.
2. High Savings Rates in Asia: Despite rising consumption, households in emerging Asia save 17 percent of disposable income—that’s roughly four times what is saved in the U.S. and much higher than the developed world. These high savings rates allow them to meet the higher requirements for home ownership—many require at least 20 percent down—and have larger amounts of funds to invest in capital markets.
3. Urbanization: The world’s urban population is growing by more than 70 million people each year. China already has over 100 cities with 1 million people and is expected to have over 200 of them by 2025. This urban migration has overwhelmed existing infrastructure like roads, sewers and electrical grids. The buildout of this critical infrastructure will require vast amounts of copper, steel and increase demand for all commodities.
4. Desire for Social Stability: One main goal of emerging market governments to remain in power is to keep the public happy. They are doing this by increasing personal freedoms for citizens and providing them with opportunities to increase their quality of life. Many governments have found the key to social stability is focusing on job creation which establishes a path of upward mobility for citizens.
5. Natural Resources Wealth: Many of today’s most promising emerging nations sit atop some of the largest oil, metal and other valuable resource deposits in the world. Many of these nations have teamed up with private and/or foreign enterprises to bring these resources to market. Revenue generated through taxation and direct ownership allows for these governments to build infrastructure, create jobs and pursue other economic opportunities.
6. Corporate Transparency: A history of corruption and political turmoil has given way to higher standards of corporate governance in today’s globalized world. Though still far from perfect, the improved transparency and oversight has made important information available to investors and reduced uncertainty. By aligning themselves with international business standards and requirements, emerging nations will attract more foreign capital and better integrate themselves into the global marketplace.

I'd like to add three more important variables.

Although Mr. Holmes did mention in passing about the increasing "personal freedom", it must be emphasized that the respect for property rights serves as the root for economic freedom and trade openness which predominates all the above.

Not to mention the legal "rule of law" framework that underpins social institutions from which all these would be operating on.

In short, prosperity or capital accumulation emanates from economic freedom, trade openness and the rule of law, where all the others are simply offshoots or products of these 'sine qua non' underlying drivers.

Outside the incentives brought about by privatize profits and socialize losses, no rational person will invest in any country or markets where they see great risk from governments' arbitrary confiscation of investor's risk capital.

In other words, it isn't much of the issue of return on investments but the return OF investments.

As you can see below, the reason for the explosive growth in emerging markets has been because of the deepening depth of economic freedom and freer trade relative to the past.

chart courtesy of Moody's/ FT Alphaville

While Moody's expects a retreat, as the reason for the orange dot (arrow from FT Alphaville) I don't share the pessimism.

That's because many, among the emerging markets, have been realizing the benefits of trade, which has started to filter into the political process of many EM countries but whose impact comes at a different scale.


Yet much of the perceived pessimism has been due to the financial crisis which caused a dramatic retrenchment in global trade.

But this seems more of a the blip, though. Most of the disruption had been triggered by the Lehman event, which prompted for a near seizure of the US banking industry, which rapidly escalated across the world. To be sure, it hasn't been due to increased signs of protectionism (as pointed out in this space, example see WTO: Little Signs Of Protectionism).

And the swift recovery in global trade (chart courtesy of finfacts) appears to validate our analysis.

Hence, the trend towards greater economic freedom and trade liberalization in key emerging markets are likely to resume as the main trend and provide the framework as to why emerging markets are likely to outperform developed markets.

Failed Predictions From Enviromental Gloom-Mongers

One of the fundamental errors of mainstream analytics is that it focuses mainly on the interpretation of available information from the present angle. It hardly, in layman terms, “put oneself in the shoes” of those who saw it earlier based on their existing knowledge or conditions.

For instance, environmentalism has long been one aspect of a social concern. While the basics (or even the politics) of environmentalism today and the past are the same, the “issues of the day” have been different. And as events are developing, the alarmist concerns of the past are being repeated today.

Yet, these predictions have been utterly wrong.

Some examples from Ihatethemedia.com (hat tip Cafe Hayek)

Here are some of the hilarious, spectacularly wrong predictions made on the occasion of Earth Day 1970.

“We have about five more years at the outside to do something.”
• Kenneth Watt, ecologist

“Civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind.”
• George Wald, Harvard Biologist

“We are in an environmental crisis which threatens the survival of this nation, and of the world as a suitable place of human habitation.”
• Barry Commoner, Washington University biologist

“Man must stop pollution and conserve his resources, not merely to enhance existence but to save the race from intolerable deterioration and possible extinction.”
• New York Times editorial, the day after the first Earth Day

“Population will inevitably and completely outstrip whatever small increases in food supplies we make. The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years.”
• Paul Ehrlich, Stanford University biologist

“By…[1975] some experts feel that food shortages will have escalated the present level of world hunger and starvation into famines of unbelievable proportions. Other experts, more optimistic, think the ultimate food-population collision will not occur until the decade of the 1980s.”
• Paul Ehrlich, Stanford University biologist

“It is already too late to avoid mass starvation.”
• Denis Hayes, chief organizer for Earth Day

“Demographers agree almost unanimously on the following grim timetable: by 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions….By the year 2000, thirty years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine.”
• Peter Gunter, professor, North Texas State University

“Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half….”
• Life Magazine, January 1970

“At the present rate of nitrogen buildup, it’s only a matter of time before light will be filtered out of the atmosphere and none of our land will be usable.”
• Kenneth Watt, Ecologist

“Air pollution…is certainly going to take hundreds of thousands of lives in the next few years alone.”
• Paul Ehrlich, Stanford University biologist

“We are prospecting for the very last of our resources and using up the nonrenewable things many times faster than we are finding new ones.”
• Martin Litton, Sierra Club director

“By the year 2000, if present trends continue, we will be using up crude oil at such a rate…that there won’t be any more crude oil. You’ll drive up to the pump and say, `Fill ‘er up, buddy,’ and he’ll say, `I am very sorry, there isn’t any.’”
• Kenneth Watt, Ecologist

“Dr. S. Dillon Ripley, secretary of the Smithsonian Institute, believes that in 25 years, somewhere between 75 and 80 percent of all the species of living animals will be extinct.”
• Sen. Gaylord Nelson

“The world has been chilling sharply for about twenty years. If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age.”
• Kenneth Watt, Ecologist

Moral: Realize that the predictions before have been wrong, and today’s alarmism is likely to reflect on the same shortcomings. Don’t fall into the environmental politics trap.

Are We Seguing Into The Next Phase Of The Bubble Cycle?

There's been some discussions about the increasing participation of US commercial banks in the longer end of the US sovereign market.

This suggest that some of the excess reserves could now be "leaking out".

Taking a glimpse at the chart from the St. Louis Fed, I'm not sure that such "leakage" into the 10-year and 30 year treasuries has really been occurring as bank reserves remain high.

Instead the prospective seepage could likely occur elsewhere.

As seen above, there's been a recovery in commercial and industrial loans for large commercial banks, but this hasn't been true yet for all banks.


However, surprisingly, consumer loans at all commercial banks have spiked! (hat tip: Mark Perry)

And as we have repeatedly noted in this space, [e.g. see A Sweet Vindication And Validation As The Phisix Soar To A 25 Month High!], we expect the leakage to turn into a flood as global market responds to the incentives brought about by the steep yield curve.

"And as the report says, the hoarded liquidity in the US banking system is starting to find some leakage, as short term money market funds are regaining more confidence or “animal spirits” to redeploy cash into other asset markets in search of higher returns.

"And once this seepage turns into a flood, that’s where we should start to worry. But this should take more time, and possibly, based on the cyclical effect of yield curves, inflationary pressures is likely to be more apparent by the last quarter of the year."

Could this be the start of the next phase of the current bubble cycle?