Some Democrats Recognize The Value Of Free Trade

The following data and analysis comes from the website of US Democratic Party [the political party where one would hear a mouthful of anti free trade sentiment], the Democratic Leadership Council.

The article referred herein is about Russia as the largest country outside the WTO, and the prospects of increasing trade relations with her and the US through a membership in the WTO.

Here is the kicker from the DLC.org (bold emphasis mine)

Altogether this would mark the largest burst of economic reforms and liberalizations certainly since Russia's independence in 1991, and likely rival only the perestroika era of the late 1980s as Russia's most ambitious attempt to rejoin the world economy since the First World War and the Revolution.

For the other new WTO members, this has meant big jumps in imports -- America's own export growth to these countries has been double the pace of export growth to new FTA partners and four times the rate to the rest of the world.

Res ipsa loquitor

Will Traffic Cameras Bring Discipline To Philippine Motorists?

Philippine authorities and the local media think that they’ve found the antidote against erring motorists-traffic cameras!

From the Philippine Star,

The MMDA said its enforcers, armed with cameras and speed tracking guns, will man strategic portions of the highway to make sure motorists observe the speed limit. Violators caught on camera and tracked by speed guns will be sent notices within seven days, following the agency’s “no contact” policy.

Unfortunately, as always they are likely to be wrong. That’s because the relationship between speed cameras and accidents have been ambiguous.

This from the Economist, (bold emphasis mine)

TRAFFIC cameras are always controversial. Proponents maintain that an increase in their number results in fewer deaths on the roads. Opponents grumble that they are merely money spinners for local governments at the motorist’s expense. Drivers in Edmonton, Canada, will be refunded for speeding fines issued since November 2009 because of a technical glitch with a particular camera. In Britain, the government’s claims over improved safety were rebuffed by the British Medical Journal, and local councils have begun to turn off cameras. Research carried out recently in Australia by Queensland University points the other way, showing cameras do reduce accidents. The arguments will continue. Our chart shows that the effectiveness of traffic cameras is inconclusive, perhaps because many other factors contribute to road safety, such as population density, the condition of vehicles and roads, and other pedestrian-protection measures.

Authorities are likely to underestimate people’s reaction towards new rules and overestimate on their power to control or regulate people’s behavior.

Yet such “do something” attitude would likely succumb to the ningas cogon trap (enthusiasm only at the start of the project) brought about time consistency problem (popular policies are put in place due to the public’s fickle demand for it) and political grandstanding by the authorities that would lead to inconsistent and arbitrary implementation (in pursuit of popularity, new policies and its implementation will be redirected towards issues or flavors of the day).

Bottom line: Government use of taxpayer resources on these “fashionable” policies will likely end up wasted, the government will fail to accomplish its goal, and at worst, such new policies risks unforeseen consequences.

Nascent Signs of Stagflation?

UK may be the first country to manifest symptoms of stagflation or “a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation” (investopedia.com).

chart from tradingeconomics.com

This from Businessweek-Bloomberg

Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest weather in a century in December hampered services and retailing.

Gross domestic product fell 0.5 percent in the three months through December after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Economists forecast a 0.5 percent gain, based on the median of 33 predictions in a Bloomberg news survey. Growth would have been “flattish” in the quarter without the impact of the weather, the statistics office said.

The U.K. recovery is losing momentum even before Prime Minister David Cameron’s government steps up its fiscal squeeze to cut the budget deficit. While the Bank of England left its key interest rate on hold this month to support the recovery, inflation has soared to an eight-month high and policy maker Andrew Sentance said late yesterday the “time has come to act” as price pressures intensify.

So economic contraction, which adds to unemployment amidst high inflation rates are signs of stagflation- a tradeoff which traditional Keynesian models have not incorporated.

Other developed economies are likewise seeing signs of emergent inflation

From the Economist:

Recently, however, rich-country inflation has also started creeping up: in December Britain’s consumer-price index hit 3.7%, while euro-zone inflation also rose above the ECB's target. Much of the blame has been put on the increase in commodity prices. But the impact on consumers differs widely between countries. A larger share of income is spent on food in poorer countries such as China (33%) and India (46%), so the rise in global food prices is the main driver of inflation there. By contrast, pricier energy is a bigger factor in the rich world, although it forms a relatively small component of consumer spending.

Given the near unanimity of policy directions by global central bankers, it is not deflation that we should worry about but stag- or super-inflation.

China’s New Paradigm To Economic Progress?

Some people, like Martin Jacques (see TED talk here, HT Jeff Tucker), thinks that China’s path to progress will be immensely different from that of the West. They could be right...overtime.

Chart from the Economist

However, for as long as the Chinese read and apply Western economic theories as their own policies, I doubt that Chinese cultural “uniqueness” will hold true. (chart from the Economist shows both Chinese and Americans learning to assimilate each other)

Proof?

This from yesterday's China’s People’s Daily, (all emphasis mine)

The People's Bank of China (PBC) will print 1 trillion yuan ($151 billion) worth of new bank notes this year, but officials refuted claims that the announcement had anything to do with inflation, the Xinhua News Agency reported Wednesday.

Ma Delun, deputy governor of the PBC, said Tuesday that the bank intends to replace old paper money floating in the market.

Ma said the amount of paper currency currently in the market is worth about 4.6 trillion yuan ($698 billion), and the central bank plans to replace them in five to seven years.

He said the central bank also plans to release more cash into the market during Spring Festival, but it has no plan to issue large-denomination currency and newly designed Renminbi notes.

Peng Sheng, an official with the Postal Savings Bank of China, told the Global Times that during Spring Festival, people spend more cash to buy gifts, travel, stuff them in red envelopes, while companies need cash for bonuses.

There was speculation that the PBC will print more money because of inflation.

Some points:

One, Chinese authorities justifies the policy of money printing to the perception of scarcity of money.

Second, Chinese authorities denies the causal linkages of money printing with that of inflation.

In the book When Money Dies: The Nightmare of the Weimar Collapse, authored by Adam Fergusson, we note of the following passage:

Most successful businessmen, however, stuck happily to the heresy that only by a continually falling exchange rate could Germany compete in neutral markets. After them, the deluge. Neither they, nor the politicians, nor the bankers — with distressingly few exceptions — perceived any direct connection between inflation and depreciation. And yet, as the printing presses churned out bank notes the exchange continued rapidly to fall. What impressed the ordinary politician was the danger of social unrest which would, in his opinion, inevitably arise if there were any scarcity of currency. He could not see, or intentionally ignored, the obvious danger which proceeded from continuous inflation. Social unrest appeared, just the same.

So basically, the incumbent Chinese leaders, Weimar politicians of the 1920s and the current day central bankers seem to share the same outlook, reasoning and policy directions.

While cultural quirks can influence diversity in people’s value preferences, this doesn’t mean they are immune to the laws of scarcity.

Finally, chatter about “new paradigms” scare the wit out of me because they usually herald a peaking of a bubble cycle.

China To Build The World’s Largest Megacity

Drunk with the recent success of combining capitalism with her “communist” political structure, the Chinese government has embarked on a grand scale of central planning—China plans to build the largest megacity in the world!

This from the Telegraph,

China is planning to create the world's biggest mega city by merging nine cities to create a metropolis twice the size of Wales with a population of 42 million.

City planners in south China have laid out an ambitious plan to merge together the nine cities that lie around the Pearl River Delta.

The "Turn The Pearl River Delta Into One" scheme will create a 16,000 sq mile urban area that is 26 times larger geographically than Greater London, or twice the size of Wales.

The new mega-city will cover a large part of China's manufacturing heartland, stretching from Guangzhou to Shenzhen and including Foshan, Dongguan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing. Together, they account for nearly a tenth of the Chinese economy.

Over the next six years, around 150 major infrastructure projects will mesh the transport, energy, water and telecommunications networks of the nine cities together, at a cost of some 2 trillion yuan (£190 billion). An express rail line will also connect the hub with nearby Hong Kong.

China’s government seems increasingly manifesting signs of overconfidence, a harbinger of bubble bust.

As previously explained in China’s Bubble and the Austrian Business Cycle, imploding bubbles are frequently highlighted or foreordained by “grand” braggadocio (mostly real estate) projects, but instead of the private sector, this time the symptom could emerge from the government.

In addition, while many experts have been obsessed with the supposed certainty of the “deepening” of urbanization trends, I am not one of them. That’s because I see technology as a pivotal offsetting force that leads not to concentration but to decentralization. And technology induced decentralization should apply to most social activities which includes politics, economics, demographics and others.

This is one aspect, which I think, central planners in China or elsewhere seems to have overlooked. Of course, substituting their “expert” knowledge over people’s preferences is another major factor, as exhibited by some of China’s existing ghost cities

Jupiter: Giant Of The Solar System

Last year I noted that despite man's great leap in technological advancement, we are still NO match to the awesome powers of nature-the ultimate black swan.

This documentary video of the planet Jupiter presents a good example. (HT: Bob Murphy)

Jupiter has greatly contributed to life on earth by playing the role of an enormous vacuum cleaner through its massive gravity field (which serves as a defensive shield) that has, so far, kept us free from the risks of catastrophic impact from comets, asteroids and other space objects.

From this point of view, the idea that man is primarily responsible for nature's changes is a speck, irrelevant and represents fatal conceit or intellectual arrogance.

Fibonacci: Nature By Numbers

Here is a cool documentary video of the Fibonacci number sequence or the Golden Mean as seen in nature. (HT: Cafe Hayek)

Global Stock Market Update: Advancers Still Dominate

Here is an update of the performances of world stock markets courtesy of Bespoke Invest.

From Bespoke

Just over 30% of the countries shown are down so far this year. Bangladesh has been the worst performer in 2011 with a decline of 23.69% year to date. The country was the 2nd best performer in 2010 behind Sri Lanka with a gain of 82.79%. With its uprising this month, Tunisia is the only other country down more than 10%.

Of the G7 countries, Italy ranks first, followed by France (+6%), the US (+2.57%), Germany (+2.22%), and Japan (+1.14%). The UK ranks second to last of the G7 countries with a gain of 0.74%. Canada ranks dead last and is the only G7 country that is down year to date (-0.69%).

Looking at the BRICs, China continues to struggle with a year-to-date decline of 4% after falling 14.31% in 2010. India is also struggling with a decline of 6.62%, but unlike China, India saw nice gains last year. Russia is currently the top performing BRIC country with a year-to-date gain of 5.39%, and Brazil is just barely in the black at +0.12%.

My comments

Trading Places. Many of last year’s top performers are at the bottom and that includes the Philippines. Whereas many of last year’s laggards are on the upper echelon of the winner’s bracket (Italy, Spain, Greece).

Tailwind. Some of last year’s topnotchers continue to sizzle (Sri Lanka, Ukraine, Estonia), while some of last year’s tailenders continue to trail (Bermuda, Dubai, China).

Definitely NOT A Bear Market. With 30% of global equities down, the obverse side is that 70% of global equities are up. In short, gainers still dominate.

Developed world outpaces major Emerging Markets. It’s yet too early to say that this will be the central trend for the year. Though I wouldn’t bet on it.

Web Revolution. Bespoke links to a New York Times site which shows of the video that triggered the People’s Power revolution in Tunisia. The link here. It’s amazing to see how political events are being shaped by the web.

The Next Green Revolution?

Is the next green revolution upon us?

The non profit organization Philippine based International Rice Research Institute (IRRI) together with a China based institution has come up with a new variety of rice that is said to be “more robust, high yielding, and disease-resistant, yet thrive with less water, fertilizer, and pesticide”

Picture From IRRI

From Yale Global,

The world appears to be on the threshold of another green revolution in rice production as a result of an intensive, 12-year partnership between the Chinese Academy of Agricultural Sciences in Beijing and the International Rice Research Institute in the Philippines.

Called "Green Super Rice," it is the result of a project begun in 1998, involving the painstaking crossbreeding of more than 250 different potential varieties and rice hybrids, according to Dr Jauhar Ali, a senior scientist and regional project coordinator for the Development of Green Super Rice at IRRI in Los Banos, south of Manila.

The development of the process, Dr Ali said, is considered so significant that Microsoft founder Bill Gates met personally with Zhi-Kang Li who holds a dual position both with IRRI as Senior Molecular Geneticist and as Chief Scientist with the Institute of Crop Sciences at the Chinese Academy of Agricultural Sciences in Beijing and, through the Bill and Melinda Gates Foundation, presented the program with a US$18 million, three-year grant to expand the benefits to Asia and Africa.

The two institutions are seeking additional donors to be able to push the rice to undeveloped corners of Africa and other continents to help stave off the growing need for food across the planet.

The process was developed by Zhi-Kang Li, It involves the efforts of hundreds of researchers in dozens of countries across the world, seeking to isolate the desirable traits from indigenous strains and then backcross breed them to produce hardier varieties. (emphasis added)

By the above account, I am reminded of the brilliant economist Julian L. Simon who once said

The essence of wealth is the capacity to control the forces of nature, and the extent of wealth depends upon the level of technology and the ability to create new knowledge.

If markets are only allowed to do their job, we’d see less worries over scarcities of natural resources.

Blogging Hiatus

I will be with my family along with very special friends for the weekend.

I am not sure if I can blog, but for sure regular blogging will resume by next week.

Thank you for your patronage and have a nice weekend.

"Knowledge is essential to freedom." -- William Ellery Channing (1780-1842)

The Politics of The Rice Scam

This from today’s Inquirer

An NFA audit found that 8 of the 10 awardees of the rice importation quotas in Luzon were all cooperatives with offices in Pangasinan province, said a source privy to a Malacañang probe of the previous administration’s massive rice importation program that the NFA said was overpriced....

In his report to Mr. Aquino last week, Banayo said the private importation deals were given to favored contractors supposedly through a questionable first-come-first-served scheme.

“Among the findings were: fictitious cooperatives and corporations were given the quotas, and qualifications standards were extremely liberal,” Banayo said in his executive summary submitted to the President.

Some comments...

In politics, the basic objective for the politicians is to grab credit (aimed at attaining high approval rating for election purposes) at the expense of another. This is usually coursed through the virtuosity (I am clean, the other is dirty) route. It represents crab mentality at its finest.

This issue is actually a revival. We dealt with this here: Government Failure: Imported Surplus Rice

The above news account exemplifies-special access or political privileges, privatizing gains while socializing losses or importantly the fundamental symptoms of the maladies of political distribution empowered or enabled by arbitrary laws. This maybe called either crony capitalism or rent seeking (state capitalism) or both.

Since it is the state who determines “who gets what” or the politically picking winners and losers (and not via the market forces through the price mechanism), the obvious result is inefficiencies, distortions, wastages (overpricing), and corruption. And who pays for all these? Obviously, the taxpayers.

Once politics is involved, economic calculation is set aside, as politics become the driver of the attendant actions by the leadership to redistribute resources. “Overpricing” thus becomes a politically subjective factor. (Based on which price level? As determined by whom? And when?)

This of course, is related to the problems of time consistency or the political sustainability of the policy over changing circumstances. The rice scam was an urgent issue during the Typhoon days of Pepeng and Ondoy. Today, with the urgency lost, wrong and questionable political decisions become a fodder for politicking.

This also represents as the knowledge problem, where the political leadership don’t know the costs and consequences of their actions (since they are just human) and the where unintended consequences of politically based actions extrapolate to a huge negative externality (side effect) on the populace.

The point is the problem isn’t mainly based on the virtues of the political leadership, but on the system that encourages such errant actions and malfeasances. Personality based politics won't solve the problem.

Lastly when the political leadership says “Let us reform the NFA. Let us reform its mandate so it will be much better”, the answer shouldn’t be in the direction of more political concentration and distribution of resources, but economic liberalization from the clutches of power hungry politicians.

In short, let the markets decide!

Will Falling Population (Demographic Time Bomb) Lead To A Reversal Of Globalization?

Lately I have encountered several commentaries suggesting that the “demographic time bomb” (falling population) will pose a risk to globalization by creating imbalances that would lead to political upheavals.

Here are two:

From Neil Howe and Richard Jackson in Global Aging And The Crisis Of The 2020's (bold emphasis mine)

“Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline. As societies and electorates age, growing risk aversion and shorter time horizons may weaken not just the ability of the developed countries to play a major geopolitical role, but also their will.”

From Morgan Stanley’s Spyros Andreopoulos and Manoj Pradhan in ‘Ten for the Teens’(bold emphasis mine)

“The increase in macro instability comes at a time of major demographic transition in most DM and many EM economies. As populations become older, the demand for economic security - stable jobs, pensions - increases. This tension between higher instability and increased demand for security is likely to find its political expression in a backlash against globalisation. So far, the benefits of globalisation - higher income levels for most, i.e., the large middle class - have outweighed its drawbacks - increased competition and job instability. This has kept the globalisation show on the road until now. As this balance tips because the preferences of the middle class shift towards more security/stability, globalisation is likely to stall or reverse.”

There seems to be two separate issues here: unsustainable welfare states and globalization.

However the comments above attempt to make a connection which, for me, looks tenuous and confusingly premised on the fallacious ‘aggregate demand’.

Protectionism Equals Security?

Here is how I understand this: stripped out of the spending capacity due to old age, and with a government hobbled by fiscal straitjacket, the lack of demand (from both the private and the public) means slower economic growth which likewise would extrapolate to a political milieu that shifts from risk appetite (globalization) towards demand for ‘security and stability’ (protectionism), or in short, political stress.

For instance the Morgan Stanley tandem does an incredible turnaround, ``So far, the benefits of globalisation - higher income levels for most, i.e., the large middle class - have outweighed its drawbacks - increased competition and job instability. This has kept the globalisation show on the road until now.”

Are they suggesting that people who benefited from globalization will eventually bite the proverbial hand that feeds them? Are they suggesting too that people will see “security and stability” from lower incomes?

Will protectionism or restricting market activities make goods and services needed by the ageing society abundant and affordable? To the contrary, protectionism will only highlight on the shortages and the exorbitance of these economic goods that should lead to even more instability.

Murray N. Rothbard refuted this age old fallacy, he explained, (bold highlights mine)

It is difficult to see how a decline in population growth can adversely affect investment. Population growth does not provide an independent source of investment opportunity. A fall in the rate of population growth can only affect investment adversely if

-All the wants of existing consumers are completely satisfied. In that case, population growth would be the only additional source of consumer demand. This situation clearly does not exist; there are an infinite number of unsatisfied wants.

-The decline would lead to reduced consumer demand. There is no reason why this should be the case. Will not families use the money that they otherwise would have spent on their children for other types of expenditures?

Thus the problem of declining population can be helped by accepting immigrants or adopting to greater social mobility or the globalization of labor and by even more free trade.

We shouldn’t underestimate how people adjust to the new realities from the current underlying conditions. Importantly, we shouldn’t write off productivity of the senior citizens too (why? see below).

Illusion Or Reality?

Next would be the issue of welfare states. Once society realizes that the welfare state has been unsustainable, will people fight violently to retain the status quo (even if this is recognized as not possible) or will they cope up with the new reality?

The former would fall as part of the entitlement mentality engendered by excessive dependency or the moral hazard from political distribution while the latter will likely result from the realization that there’s no free lunch.

And perhaps in the realization that bellicosity won’t further society’s interests, they may opt for the latter (accepting harsh reality) than the former (live in a charade). And any political tensions from the succeeding reforms would signify as symptoms of ‘resistance to change’ than from a key reversal of political sentiment.

In the context of abrupt political-economic transitions from a crisis, Iceland’s violent riots from her financial crash of 2008 didn’t mechanically translate to close door ‘security’ based policies, as Iceland remains “moderately” economic free (44^th), according to Heritage Foundation, even as the crisis did have some negative impact on her economic freedom ratings (due to higher taxes and government spending).

From Heritage Foundation

The point is that the notion that crisis will instigate a radical reversal of people’s sentiment from openness to protectionism seems likely misguided.

Today, Iceland has shown signs economic recovery and has even applied to join the European Union (aimed at achieving more financial and trade openness, aside from social mobility)!

Protectionism likewise did not spread like wildfire in 2008, as earlier discussed.

Ignoring Technology

Another factor would be technology.

While it may true that fertility rates may be going down (upper window), it is often ignored how the advances in technology has continually enhanced people’s living conditions.

From Google Public Data

Global Life expectancy (lower window) has lengthened from 50 years to 68.95 years over the past 50 years. Japan reportedly has some 41,000 centenarians (over 100 years old)! [But I won’t be lucky to live this long, because of my love affair with beer]

And if futurist Ray Kurzweil is correct, people’s life span may extend to 120 years (by 2030) or even more (180 years) as rate of technology advances accelerates.

Again Murray Rothbard on the importance of technological advancement

“technological progress, is certainly an important one; it is one of the main dynamic features of a free economy. Technological progress, however, is a decidedly favorable factor. It is proceeding now at a faster rate than ever before, with industries spending unprecedented sums on research and development of new techniques. New industries loom on the horizon. Certainly there is every reason to be exuberant rather than gloomy about the possibilities of technological progress.”

In short, should these advances occur then all demographic projections should be thrown to the garbage bin, as they are falsely premised and would be rendered irrelevant.

The basic problem with mainstream insights is that people are treated like unthinking automatons. And because of this they’re most likely wrong.

The ultimate threat to globalization is inflationism and not demographic trends.

Will Jurassic Park (The Movie) Become Reality?

I’ve always been fascinated, and thus repeatedly watched via cable TV, the highly successful sci-fi thriller trilogy film of the Michael Crichton (novel) and Steven Spielberg (director), the Jurassic Park. The movie has been about the unforeseen consequences of turning a menagerie of cloned dinosaurs into an amusement park.

Well what seemed as merely a science fiction in the past may perhaps become a reality soon. I’m not referring to the amusement park of dinosaurs, but of the technology that would enable one.

According to the Telegraph (which includes the diagram above)

The woolly mammoth, extinct for thousands of years, could be brought back to life in as little as four years thanks to a breakthrough in cloning technology.

Previous efforts in the 1990s to recover nuclei in cells from the skin and muscle tissue from mammoths found in the Siberian permafrost failed because they had been too badly damaged by the extreme cold.

But a technique pioneered in 2008 by Dr. Teruhiko Wakayama, of the Riken Centre for Developmental Biology, was successful in cloning a mouse from the cells of another mouse that had been frozen for 16 years.

Now that hurdle has been overcome, Akira Iritani, a professor at Kyoto University, is reactivating his campaign to resurrect the species that died out 5,000 years ago.

If these scientists will be spot on with their predictions, then the implications would be REVOLUTIONARY. You may call it a black swan- a rare high impact event.

Since one thing may lead to another, then it won’t likely be just about Jurassic Park and about possibly saving endangered or the restoring of extinct species, but likewise the possibility of resurrecting our ancestors!

While it would be a pleasure to see Hayek, Mises, Rothbard, Menger debate Keynes live, it would be a nightmare to see Stalin, Mao, Hitler, Pol Pot or Marcos back, yikes!

We’d also probably see our world co-exist with clones ala the movie The Island, starred by Scarlett Johannson. Of course, am guilty here of the projecting current trends into the future as a way of mental stimulation.

Nevertheless, the rapid progression of technological innovations never cease to amaze me.

Cognitive Dissonance And Inflation

It’s been one heck of a week as global markets appear to be in cognitive dissonance.

One, gold appears to be in a corrective mode. And since gold for me functions as a barometer for the direction of global stocks, the recent consolidation in Gold seems to be having some transmission effects.

Some volatility seems to have emerged in parts of the world markets. Bangladesh’s Dhaka Index recently experienced a violent shakeout with a crash that incited street riots[1], but has rallied intensely to close the week down only 2%.

Where there was no crash the damage had bigger, India’s market (4.22%) fell hard alongside with China (Shanghai 1.67%, Shenzhen 4.59%) as the latter raised bank reserve requirements[2] anew. Another High flying and one of the top gainer for 2010, Peru like Bangladesh experienced substantial losses (4.96%).

On a regional basis, ASEAN and Latin American markets were mostly lower, while East Asia was mixed, whereas major markets in Europe including Portugal whom has reportedly been pressed to accept a bailout have mostly risen. Talk about markets rising as concerns over a crisis ripple.

The Portuguese government has officially declined on the need for a bailout. However like contemporaries Greece and Ireland before her, both eventually succumbed[3] to bailouts. Nevertheless Portugal successfully sold 599 million euros ($778 million)[4] on the back of European Central Bank’s aggressive buying of the Portugal’s offering, aside from declarations of support from Japan and China, may seem to have prevented an auction failure, and thus, may have mitigated the crisis from escalating.

So as we predicted the bailouts, whether direct and indirect, have become a permanent feature of the marketplace until market forces eventually undercuts government ability to do pursue with this strategy.

Some experts say that gold’s decline forebode of a rising dollar that would likewise adversely impact commodity and equity prices. I would deduce that these experts have anchored or fixated their views to the 2008 post Lehman episode.

It isn’t true that a rally in the US dollar automatically means the reversal of the price trends of commodities. In 2005, the US dollar rose alongside with commodities or even gold.

Nevertheless it may seem difficult to become structurally bullish on the US dollar in the cognizance that the US appears as not restricting bailouts on her constitutents but likewise the Eurozone and even the rest of the world.

Inflation Is here

Next, even as gold has been weakening, while emerging market equities have been mixed, commodity markets seem to have picked up momentum. Meanwhile US treasury yields remain elevated from October lows.

stockcharts.com: Surging Commodities, Elevated Yields and Strong S & P

So you have surging commodities, weakening of the US dollar rising equities and higher yields, all of which seem to highlight the return of inflation.

And we seem to be seeing more indications where inflation has been gaining ground over the global economy. Importantly this can be seen even in nations which were supposedly under threat from “deflation”.

The Casey Research[5] enumerates on some of these:

-Consumer prices in December exceeded forecasts, up 0.5%, with core inflation up 1%.

-Producer prices rose 1.1% in December.

-China’s inflation, at over 5%, is beginning to cause problems.

-Import prices into the U.S. are on the rise.

-The European Central Bank is now warning of inflation, and interest rates there continue to rise. Back in the U.S., the rise in interest rates is becoming persistent, with 10-year Treasury rates moving from 2.57% in November to 3.31% today –

And the sequence of how inflation percolates as seen in the Austrian framework as aptly described by Gerald O’Driscoll[6],

``In the Mises/Hayek theory of economic fluctuations, the transmission of monetary shocks works through producer prices and incomes, and only later consumer prices. No measure of consumer prices, and certainly not a subset of consumer prices, is an adequate gauge of inflation.”

And I would further add that Wall Street seems to be acting based on these premises as banks cut holding of US treasuries at the fastest pace since 2004[7].

All the seemingly cognitive dissonance seen in the marketplace appears to highlight on the growing recognition of inflationary forces gaining traction.

At the end of the day, we should realize that inflation and volatility are like twins.

---

[1] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011

[2] Strait Times, China reserve requirements raised to tame inflation, January 16, 2011

[3] Wall Street Journal Blog Portugal Bailout Denial: Sure Sign One Is Coming Soon?, January 11, 2011

[4] Businessweek/Bloomberg Portugal’s Borrowing Costs Fall at 10-Year Bond Sale, January 16, 2011

[5] Gold-speculator.com Let Us Print Notes!, January 14, 2011

[6] O’Driscoll, Gerald Inflation Is Here ThinkMarkets.com January 13, 2011

[7] Bloomberg.com Wall Street Dumps Most Treasuries Since 2004 on Growth, January 10, 2011

US Dollar, Gold and Democracy

I find it odd or self-contradictory for a high profile investment expert[1] to claim that Eurozone bondholders should accept losses while declaring US muni bonds as a “buy”. In short, bearish Euro bullish USD. I view this more as an endowment bias where people place a higher value on objects they own than objects that they do not[2] (That’s because the expert is domiciled in the US).

It may true that state of the US muni bonds should be seen at the local level, but this should apply to the Eurozone too. In other words, prospective haircuts should apply to any nations/state where the cost to maintain debt levels can’t be economically sustained and where the policy of bailouts ceases to be part of the picture.

The cost to maintain debt levels can also be read as the willingness to pay, as Dr. Antony P. Mueller rightly commented[3],

``With debt it is as much the willingness to pay as it is the ability to pay. One could even say that the willingness to pay precedes de ability to pay.”

In addition, there is the tendency to ignore the role played by central banks. In as much as the US Federal Reserve can print money to conduct bailouts, so as with the Europeans through the ECB. So who prints more money will likewise impact on the relative economics of debt.

While it may be true that interest rates would impact the Eurozone more than the US (see figure 2), interest rate dynamics can swiftly change depending on either rate of change of inflation at the national level or on the public’s fluid perception of credit quality conditions.

Interest Payments as share of GDP[4]

Besides, both the US dollar and the Euro are fiat based money that are structurally flawed, as it is being shown today with a gamut of bailout policies left and right, targeted at rescuing the banking system and welfare nations/states in distress.

Thus, like all paper money subject to currency debasement and currency wars or competitive devaluation, that would make both like a race to the bottom.

So it’s a matter of which country (US or the Euro) would make more policy errors.

So even while I may be bullish the Euro over the US over the short-term, I wouldn’t recommend positioning on either one of them over the opportunity costs of holding other assets.

Why the USD or the Euro when there are others to choose from?

And many investors seem to share my view and vote with their money. According to analyst Doug Noland[5]

``The past year saw another $500 billion flee the U.S. money fund complex in search of higher yields. Tens of billions flooded into perceived low-risk bond and muni funds, while tens of billions more headed overseas. Meanwhile, money flowed into the hedge fund community, where assets and leverage are said to now approach pre-crisis levels. All of this amplifies systemic risk.”

So while it may hold the US dollar may rally, mostly as a result of a weakened Euro, I think this could be temporary.

Yet even as the USD should rally, we shouldn’t expect the same pattern of asset behaviour to occur as with the 2008 paradigm as some other experts seem to suggest.

It’s not true that a strong USD automatically translates to weakness in all other assets.

In 2005 the US dollar rallied alongside commodities and global equity markets. Thus, reference points can give divergent views and the view that a strong USD means automatic weakness in all others means anchoring to the 2008 post Lehman bankruptcy episode.

For me, it will always be a question of how authorities are likely to respond to any unfolding problems than simply projecting past or present conditions into the future.

For now, the auto response mechanism or path dependency by policymakers has been to engage in bailouts. Thus, in sustaining these policies means we should position for boom bust cycles, or at worst, insure ourselves from the prospects of a crack-up boom phenomenon (flight to commodities) since money is never neutral.

In a similar vein, it would seem to be impractical to be bearish on gold or precious metals for the same reasons.

And in growing recognition of these reckless monetary policies, in the US, lawmakers of some 10 states have reintroduced bills to recognize gold and silver as money[6].

Thus, it would misguided to suggest that democracy can’t be compatible with gold.

As Professor Tibor Machan points out[7]:

In a just society it is liberty that is primary – the entire point of law is to secure liberty for everyone, to make sure that the rights of individuals to their lives, liberty and pursuit of happiness is protected from any human agent bent on violating them. Democracy is but a byproduct of liberty

Thus if gold should represent liberty then democracy, as a byproduct of liberty, should blend well with gold as money.

And this may be zeitgeist of the current trend of gold prices

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[1] Moneynews.com Pimco’s El-Erian: European Bond Investors Must Accept Losses, January 14, 2011

[2] Wikipedia.org, Endowment Effect

[3] Mueller, Antony P. Portuguese Bond Sale, cashandcurrencies.blogspot.com, January 12, 2011

[4] Mitchell J. Daniel Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?, Cato.org, January 11, 2011

[5] Noland Doug Issues 2011 Credit Bubble Bulletin, PrudentBear.com, January 14, 2011

[6] TPMDC At Least 10 States Have Introduced Gold Coins-As-Currency Bills, January 5, 2011

[7] Machan Tibor R. Reexamining Democracy, January 4, 2011

Politics Of International Bailouts

One major development that has offset such policy mistakes has been globalization. But of course, while policies from fiat currencies tend to likewise distort trade, the fact is that globalization has mushroomed in spite of fiat currencies.

Google Public Data: Global Merchandise trade has Doubled Since 1971

Global merchandise trade has more than doubled since the Nixon shock which closed the US dollar-gold convertibility in 1971 or the Bretton Wood standard.

Yet even when I harbored or expected a tinge of possible policy responses similar to that of the Great Depression, as it has been the natural impulse by governments to use crisis to usurp or expand the reach of political power, or in the words of former White House Chief Emmanuel Rahm[1], "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before", this did not happen.

Well, not for most of the world.

DLC.org[2]: 155 temporary tariffs in 2008

In short, most nations opted to keep trade channels open in spite of the crisis.

Alternatively this means that nations have not responded in the same way as in the past or that most of the world has remained receptive to globalization to the disappointment of the protectionists.

And today, globalization isn’t only on trade but also in terms of bailouts. Not only that the US has been bailout the Europe[3] and the world, but also China[4] and Japan[5] as earlier stated have offered to bailout the Eurozone by buying the Euro debts.

Why then the international bailouts?

Bailouts always have political dimensions whether it is local or international. And the likely answer is that globalization has become a huge political influence from which the present crop of political leaders has latched on.

Where trade levels should diminish and magnify poverty levels, unsustainable political structures, like China and other autocratic regimes, could be exposed and risk destabilization that would result to the overthrow of the incumbent political leader or the system.

And considering that political dynamics have likewise been substantially affected by trade enabled innovations on technology, as evidenced by the recent People Power in Tunisia[6], rigid vertical government structures would be challenged by the political influences based on real time “flat world” connectivity, thus likely resulting to a new political order.

It’s either global governments prevents further advances of trade and technology, or governments adapts to the new political realities of the information age.

And given that people continually adjusts to the state of government affairs by circumventing policies or regulation, my bet is one of the latter.

Even the despotic regime of North Korea hasn’t stopped people from engaging in voluntary trade underground. North Korean authorities attempted to inflate the currency[7] in order to wipe out savings and stop the informal economy but this resulted to a huge backlash which the North Korean government eventually backtracked.

So while the politics of international bailouts may be meant to keep trade channels open, the longer term effects is for the mass distortions that could risks future trade via frictions from boom bust cycles or “super” inflation.

Nevertheless, one of the major fundamental positive developments is that connectivity enabled by technology would certainly pose as continuing hurdle to the advances of governments.

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[1] Wall Street Journal Editorial A 40-Year Wish List, January 29, 2010

[2] DLC.org Governments imposed 155 temporary tariffs in 2008, September 23, 2009

[3] See The Phisix And The Boom Bust Cycle, January 10, 2011

[4] Los Angeles Times, China moves to prop up Europe's economy, January 15, 2011

[5] Wall Street Journal Japan To Buy Eurozone Debt To Help Europe Tackle Debt-Crisis, January 10, 2011

[6] See Tunisia’s People Power: A Combination Of Creative Destruction And The Politics of Obedience January 16, 2010

[7] Will North Korea's Version Of The 'Berlin Wall' Fall In 2010? January 3, 2010

Tunisia’s People Power: A Combination Of Creative Destruction And The Politics of Obedience

The New York Times reports,

The fall of Mr. Ben Ali marked the first time that widespread street demonstrations had overthrown an Arab leader. And even before the last clouds of tear gas had drifted away from the capital’s cafe-lined Bourguiba Boulevard, people throughout the Arab world had begun debating whether Tunisia’s uprising could prove to be a model, threatening other autocratic rulers in the region….

Because the protests came together largely through informal online networks, their success has also raised questions about whether a new opposition movement has formed that could challenge whatever new government takes shape. (emphasis mine)

This represents another validation of our prediction when I wrote,

The growing friction between technology and the old political society is definitely taking shape; eventually one has to give. My bet: creative destruction will win.

Aside from the first People Power at an Arab nation where the changes in the political order appear to be significantly influenced by the rapidly diffusing adaption to connectivity based technology platforms, the Tunisian experience suggests that People Power as a political concept as presciently advanced by the founder of modern political philosophy in France, Etienne de la Boetie, will become more accepted from the grassroots levels or become more widespread globally as more people will learn about their inherent power over governments.

To quote Etienne de la Boetie in the Politics of Obedience

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself, cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it.

In short, people power and the web would make a mighty combination over the tyranny of governments.

So governments will try to fight these via the introduction of regulations and control of the web which would limit the democratization of information.

As one of the five things we should worry about in 2011 Cato’s Dan Mitchell rightly observers, (bold emphasis mine)

The Federal Communications Commission just engaged in an unprecedented power grab as part of its “Net Neutrality” initiative, so we already have bad news for both Internet consumers and America’s telecommunications industry. But it may get worse. The bureaucrats at the United Nations, conspiring with autocratic governments, have created an Internet Governance Forum in hopes of grabbing power over the online world. This has caused considerable angst, leading Vint Cerf, one of inventors of the Internet (sorry, Al Gore) to warn: “We don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works — protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.” International bureaucracies are very skilled at incrementally increasing their authority, so this won’t be a one-year fight. Stopping this power grab will require persistent oversight and a willingness to reject compromises that inevitably give bureaucracies more power and simply set the stage for further demands.