Has China’s Bubble Popped?

Is something important because you measure it, or is it measured because it's important? Seth Godin

Some market observers have rightly pointed out to China as a possible principal source of concern.

Given the more mature stage of China’s inflation cycle, for me, she is more prone to a bust than her developed economy contemporaries. A China bubble bust would have a far reaching effect on many economies and on financial markets.

China’s major bellwether the Shanghai index [SHCOMP] has been on a rapid downswing (chart courtesy of Bloomberg) after a major bounce off a key resistance level last April.

The Shanghai index seems on path to test its critical support levels on what seems as a pennant chart formation.

The SHCOMP has been on tight trading range since its meltdown from the October 2007 peak at the 6,000 levels. From the said zenith, the index trades at loss of about 52% based on Friday’s close.

And following this week’s 5% rout, the Shanghai index has been down 3.5% on a year to date basis.

Chinese authorities have been tightening monetary policies to curb heightened risks of inflation.

According to a Bloomberg report[1],

The government has increased reserve requirements for banks 11 times and boosted interest rates four times since the start of 2010 to cool consumer prices

And if we go by the conditions of money supply as potential barometer to China’s economic directions, then it would appear that these compounded efforts against further ballooning of the evolving bubble may have began to affect the economy.

China’s falling money supply (right) appears to have triggered a slowdown on import growth, while consumer prices are also expected to decline according to a Danske Bank report[2].

As an aside, another option which China seems to have used on her fight against inflation has been to reduce her holdings of US treasuries for the fifth month[3] (but added on Japanese debts) and subsequently allowed for her currency the yuan to appreciate[4]. All these could also have added to the China’s process to “normalize” her monetary environment which translates to a potential slowdown.

In a discourse about current state of the US economy Austrian economist Dr. Frank Shostak writes[5],

Ultimately it is fluctuations in the growth momentum of the money supply that set in motion fluctuations in the pace of formations of bubble activities. As a result, various bubble activities that emerged on the back of the rising growth momentum of the money supply will come under pressure — an economic bust will be set into motion.

The above tenet has a universal application which means this applies to China as well.

And a possible evidence of such dynamics could be signs of deceleration in some segments of China’s property sector.

Residential sales in the elite or first tier cities have been on a downtrend.

According to the US Global Investors[6],

Residential house sales are seeing a slowdown in major Chinese cities this year. With the tightening of lending to property developers and restriction of purchases by the governments in China, developers are forced to raise money by selling at lower prices.

However, the current slowdown has not been apparent on China’s yield curve (as shown below[7]), which appears to have even steepened—manifesting signs of further inflation ahead.

Unlike Vietnam, whose unfolding stock market crash[8] appears to have dramatically flatten her yield curve over a short time span and seem to emit early signs of tipping over to an inversion (where long term interest rate are lower than the short term)—which could presage a recession over the coming year or so.

China’s immensely high rate of savings (as shown in the below chart[9]), has contributed substantially to the deferment of the unraveling of its policy induced homegrown bubble.

For as long as these savings would be able to finance economic activities that are both productive or not, the bubble activities may continue.

Nonetheless continued exposure to non-productive activities or malinvestments will eventually lead to wealth or capital consumption or the erosion of the pool of real savings which will force a painful adjustment via crisis or recession.

For now, predicting a bursting of China’s bubble may seem tricky. And I won’t tread on this path yet.

Aside from the yield curve, commodities prices appear to be rebounding, which according to the global-emerging market consumption demand story[10], China plays a significant role in the setting of prices.

Besides, the BRIC (Brazil Russia India China) story seems to share quite a strong correlation (except for Russia) in terms of stock market performance. The vertical lines exhibits the near simultaneous important turns on their respective benchmarks.

With signs that Brazil (BVSP), India (BSE) and Russia (RTSE) recently bouncing off their lows along with the current signs of recovery in commodity prices, China could as well experience an oversold rebound and return to its trading range.

Nevertheless I would need to see more signs or evidences of accelerated deterioration on several markets or economic indicators from which to predict (and take necessary action) on the imminence of a recession or a bubble busting environment.

For now, China’s market volatility could just be representative of the correction phase seen in many of the key global equity markets.

---

[1] Bloomberg.com China Stocks May Extend Slump, ICBC Credit Suisse, Goldman Say, May 24, 2011

[2] Danske Research China: Growth slows but inflation eased less than expected, May 11, 2011

[3] People’s Daily Online China trimmed holdings of US debt again, May 18, 2011

[4] Bloomberg.com Yuan Completes Weekly Gain on Signs Appreciation to Be Allowed, May 27, 2011

[5] Shostak Frank The Effects of Freezing the Balance Sheet, Mises.org, May 20, 2011

[6] US Global Investors Investor Alert, May 27, 2011

[7] asianbondsonline.adb.org, China, People’s Republic of

[8] See Vietnam Stock Market Plunges on Monetary Tightening, May 24, 2011

[9] Chamon, Marcos Liu, Kai Prasad, Eswar The puzzle of China’s rising household saving rate voxeu.org, January 18, 2011

[10] See War On Commodities: China Joins Fray, Global Commodity Politics Intensifies, May 14, 2011

The Peripheral Plays of the Agriculture Boom

Speaking of the boom in agriculture, such buoyancy hasn’t been limited to commodities and farmlands but almost across the other agricultural spectrum.

For instance agri based equipments have been surging too. Other calls this a pick and shovel or peripheral play.

The Bloomberg observes,

The CHART OF THE DAY compares the shares of two equipment makers, Agco Corp. and CNH Global NV, with the price of corn on the Chicago Board of Trade, which has more than doubled in the past year. This month, the stocks have fallen further than the commodity, which has recouped most of a 10 percent loss.

Demand for farm machinery is rising along with prices, according to a report yesterday by Henry Kirn, a UBS analyst. He based this conclusion on a semiannual survey of U.S. dealers for Agco, CNH and Deere & Co. equipment.

“Dealers are generally optimistic,” Kirn wrote. Seventy- one percent of the survey participants expect sales to increase this year. The percentage is the highest since 2004. Prices for new and used farm machines are generally rising, the report said, and inventories of older gear are below normal levels.

The upswing can also be seen in fertilizer and seed stocks, food processing and many other agri related products.

I will be guilty of representative bias here. The above (stockchart.com) chart shows of some performances of Agri based ETFs and stocks which I think could represent most of the price actions of the industry

The Market Vectors Agribusiness ETF (NYSE:MOO) will give you a broader exposure to the agricultural sector.

Agrium Inc. (NYSE:AGU) A fertilizer producer that sells direct to farmers in the U.S., Argentina, Chile and Uruguay.

Potash (NYSE:POT), the largest fertilizer company in the world

Archer Daniels Midland Company (NYSE:ADM) A food processing company, Archer Daniels takes raw products like corn, wheat and oilseeds and turns them into food and agricultural products.

(my sources here here and here)

Bottom line: The agriculture inflation boom has been broadening.

The Occupational Hazards of Caregiving

Caregiving to my misimpression seems as one of the popular overseas job for Filipinos. However, according to this news, only about 140,000 Filipinos are employed as caregivers in the US.

Yet this Gallup report reveals that a career in this health sector has been presented with more hazard than other type of work in terms of well-being, physical and emotional health.

Gallup on Caregiver’s Well Being

Americans who work a full-time job and say they care for an elderly or disabled family member, relative, or friend -- 16% of the full-time workforce -- suffer from lower wellbeing than those who work a full-time job but do not have additional caregiving responsibilities. Caregivers' 66.4 overall wellbeing score is significantly lower than the 70.2 among non-caregivers.

Gallup on Caregiver’s Physical Health

Americans who work a full-time job and say they care for an elderly or disabled family member, relative, or friend, suffer from poorer physical health than those who work a full-time job but do not have additional caregiving responsibilities. Caregivers, who represent 16% of the full-time American workforce, have a Physical Health Index score of 77.4, which is significantly lower than the 83.0 found among non-caregivers.

Gallup on Caregiver’s Emotional Health

Americans who work a full-time job and say they care for an elderly or disabled family member, relative, or friend, suffer from poorer emotional health than those who work a full-time job but do not have additional caregiving responsibilities. Caregivers, who represent 16% of the full-time American workforce, have an Emotional Health Index score of 78.0, which is significantly lower than the 81.9 found among non-caregivers.

I don’t know if the above dynamics also applies to Filipinos.

Nevertheless, given the high degree of mental stress involved perhaps this type of work commands a high pay based on high turnovers.

Here is an estimate of caregiver pay.

However compared to other jobs (above chart from money-zine.com), caregivers which belongs to the Healthcare support work, seems to be on the lowest quartile.

I have less data on this work to make a comprehensive commentary, except that I just find the state of the caregiving job as intriguing (and so is the reason for this post)

Agricultural Boom Fuels Farmland Protectionism

Agricultural protectionism rears its ugly head again.

As prices of food continue to surge, a farmland boom in the US and elsewhere has been taking place. And some governments along with participating private sectors have been adding to the demand pressures for international farmlands.

Unfortunately, xenophobia and anti-market sentiments have prompted some nations to impose restrictions on agriculture land ownership.

The New York Times reports, (bold highlights mine)

Even as Brazil, Argentina and other nations move to impose limits on farmland purchases by foreigners, the Chinese are seeking to more directly control production themselves, taking their nation’s fervor for agricultural self-sufficiency overseas.

A World Bank study last year said that volatile food prices had brought a “rising tide” of large-scale farmland purchases in developing nations, and that China was among a small group of countries making most of the purchases.

Foreigners own an estimated 11 percent of productive land in Argentina, according to the Argentine Agriculture Federation. In Brazil, one government study estimated that foreigners owned land equivalent to about 20 percent of São Paulo State.

International investors have criticized the restrictions. At least $15 billion in farming and forestry projects in Brazil have been suspended since the government’s limits, according to Agroconsult, a Brazilian agricultural consultancy.

“The tightening of land purchases by foreigners is really a step backwards into a Jurassic mentality of counterproductive nationalism,” said Charles Tang, president of the Brazil-China Chamber of Commerce, saying that American farmers had bought sizable plots in Brazil in recent years, with little uproar.

Responding to the criticism, Brazil’s agriculture minister said this month that Brazil might start leasing farmland to foreigners, given the barriers to ownership.

China itself does not allow private ownership of farmland, and it cautioned local governments against granting large-scale or long-term leases to companies in a 2001 directive. China also bans foreign companies from buying mines and oil fields.

Agriculture has been the least globalized sector owing to regulatory and sundry political hurdles.

Proof of this is that global agricultural tariffs has substantially been higher than non-agricultural products.

So trade restrictions has impelled other private and public entities (such as international governments) to try to circumvent national trade restrictions by acquiring land or by providing financing to domestic food producers in return for the assurance of access to future production. [charts from Amber Waves, US Department of Agriculture]

From my end, aside from imbalances erected by local regulations and political privileges (e.g. subsidies), rising prices are likewise consequences of inflationism. This means that the upward trend in food prices and subsequently the demand for farmlands have been either artificially inflated or possibly reflects on a monetary malaise as seen through a “flight to real values”.

Besides, as we have predicted, this boom will continue to deepen as government introduce more market distorting measures.

So far, the global campaign to secure food supplies have been coursed through cooperative channels via trade and investments, in spite of current emergent signs of protectionism.

Otherwise, we should keep in mind that the close door policies will only lead to mutually undesirable consequences.

As the great Frederic Bastiat (1801-1850) warned,

If goods don’t cross borders, armies will

World Bank: Freedom and Liberty As Recipe To Prosperity!

The World Bank seems to have experienced an epiphany.

A recent research paper arrives at the conclusion that the formula to social prosperity are through Economic Freedom and Civil Liberties! [my earlier post here shows that economic freedom precedes civil liberties]

What makes this unusual is that the World Bank is a multilateral government agency. This means that the economics of classical liberalism and the politics of libertarianism has been gaining supporters even among government insiders.

Another way to see this is that some bureaucrats and politicians could be seeing the light of the delusions and failures of central planning.

Writes Jean-Pierre Chauffour (bold emphasis mine) [hat tip: Don Boudreaux]

Freedom and entitlement are largely two different paradigms to think about the fundamentals of economic development. Depending on the balance between free choices and more coerced decisions, individual opportunities to learn, own, work, save, invest, trade, protect, and so forth could vary greatly across countries and over time. The empirical findings in this paper suggest that fundamental freedoms are paramount to explain long term economic growth. For a given set of exogenous conditions, countries that favor free choice—economic freedom and civil and political liberties—over entitlement rights are likely to growth faster and achieve many of the distinctive proximate characteristics of success identified by the Growth Commission (2008): leadership and governance; engagement with the global economy; high rates of investment and savings; mobile resources, especially labor; and inclusiveness to share the benefits of globalization, provide access to the underserved, and deal with issues of gender inclusiveness. In contrast, pursuing entitlement rights through greater state coercion may be deceptive and even self-defeating in the long run.

Amen!

US Federal Reserve’s Pandora’s Box Reveal of More Crony Bailouts

Unknown to most, the politics of redistribution will always benefit certain vested interest groups.

The US Federal Reserve’s actions during the 2008 Lehman crisis should serve as worthy examples.

From the Bloomberg,

Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.

“This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”

Until brought to light by the public, politicians tend to look the other way.

Again from the same Bloomberg article, (bold highlights mine)

Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law.

“I wasn’t aware of this program until now,” said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.

Conflict of interest is an innate constituency of political distribution.

For instance, Rep Barney Frank admitted that he got his ex-lover a job at the Fannie Mae. So denials like the above should be viewed distrustfully.

Part of the Fed’s recent bailouts included wives of Wall Street bigwigs and Libya’s Gaddafi.

And this is one of the many reasons why we should End the Fed and consider the denationalization of money.

Two Ways to Interpret Gold’s Acceptance as Collateral to the Global Financial Community

Prices influence people’s behaviour.

The persistent trend of rising gold prices seems to have been changing the psychology of the public to the point of compelling mainstream financial institutions to accept gold as an asset.

Writes the Mineweb, (bold emphasis mine)

Gold is indeed a form of money as many believe and the latest agreement by the European Parliament's Committee on Economic and Monetary Affairs to allow central counterparties to accept gold as collateral is further recognition of the yellow metal's growing relevance as a high quality liquid asset.

In a press release today, the World Gold Council's Natalie Dempster, is quoted as saying "It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of gold make it an ideal form of high quality liquid collateral.

"We now look forward to the European Parliament and Council of the European Union upholding the inclusion of gold in the next stage of negotiations around EMIR which will now take place after the July plenary vote. The ratification would mark a significant step forward in redefining what constitutes a highly liquid asset under the Capital Requirements IV Directive, due in the coming month, from the European Commission."

The acceptance of gold by the previously reluctant financial community has been growing apace. As the WGC points out, market demand for gold to be used as a high quality liquid asset and as collateral has been building for some time. In late 2010, ICE Clear Europe, a leading European derivatives clearing house, became the first clearing house in Europe to accept gold as collateral. In February 2011, JP Morgan became the first bank to accept gold bullion as collateral via its tri-party collateral management arm.

Exchanges across the world, such as Chicago Mercantile Exchange, are now accepting gold as collateral for certain trades and London-based clearing house LCH Clearnet has said that it also plans to start accepting gold as collateral later this year, subject to regulatory approval.

There are two sides to interpret this development.

First is the good news. Gold as collateral could be construed as transition to integrate gold as part of the future reforms to the current fiat (legal tender based) paper money system. Hence the “remonetisation” label.

The second may be bad news. When we see regulators massively expand their role in the marketplace, coursed through various interventions, we know that this isn’t gold-standard friendly.

Yes gold may be included as collateral, but only as an asset that may help abet the credit expansion process.

The highly protected cartelized banking system would serve as natural political opposition to a gold standard because a gold standard would put tethers to bank credit inflation.

So it’s best to view this collateral issue with a tinge of suspicion. Like the Trojan Horse strategy employed by the Greeks in the Trojan War mythology, this could even be used as a way to confiscate people’s savings through ownership of gold.

Nevertheless one thing is clear, rising prices of gold has been changing the role it plays in the international financial community.

Updated Ranking of Global Credit Default Risks

Consistent with my earlier post, FT’s James Mackintosh: US Credit Risk Greater Than Indonesia, Bespoke Invest has updated tables of the 5-year Credit Default Swaps (CDS) reflecting on default risks of 60 countries.

On a year-to-date basis, Greece has the highest default risk while the US has seen a hefty nearly 20% increase.

Major ASEAN nations have also seen an uptick in default risks with Thailand registering as the worst performer.

Meanwhile major European economies posted most of the improvements over the same period.

But it’s a different view when seen from the ranking in terms of CDS prices.

The biggest improvements seen among European nations have been as consequence to the previous actions, where the nations affected by the PIIGS crisis have led to a contagion as seen with the prior price surges.

And almost along the lines of Newton’s second law of motion, where for every action there is an equal and opposite reaction, the previous steep increases has prompted for equally substantial declines.

What this seems to suggest is that the Greece crisis appears to be isolated for now.

And Europe's performance can be measured relative to the major ASEAN economies. While CDS prices of the ASEAN contemporaries did suffer some deterioration, in the context of prices, ASEAN CDS remains below the levels compared to the prices of nations affected by the PIIGS crisis.

So the above only reveals of the degree of price volatility or the rapid changes in the market’s perception of credit risks.

As Bespoke notes,

The countries that investors believe are least at risk of default are currently Norway, Sweden, Finland, and Denmark. The US used to be the least at risk of default, but CDS prices here have ticked up 20% so far in 2011. US default risk is still low relative to the rest of the world, but any tick higher is something we don't want to see.

Credit rankings can shift swiftly and meaningfully. All these depend on the policies adapted.

So far, the practice to inflate debt has subdued default risk concerns on some the major economies as the US. However, the law of the late economist Herb Stein should apply “If something cannot go on forever, it will stop”.

A Crack-up Boom in Belarus

Belarus appear on the verge of experiencing hyperinflation.

Reports the Bloomberg, [bold emphasis mine]

Belarus is headed for an economic “meltdown” and the ruble will need to depreciate another 51 percent, VTB Capital said, as locals lay siege to shops and protest price increases after the central bank devalued the currency.

The Belarusian central bank let the managed ruble weaken by 36 percent versus the dollar on May 24 as demand for dollars and euros from importers and households threatened to derail an economy already laboring under a current-account deficit equal to 16 percent of gross domestic product. Russia and other former Soviet partners last week agreed to give Belarus a $3 billion loan and urged President Aleksandr Lukashenko’s government to sell $7.5 billion of assets to replenish the state’s coffers.

“A ‘91-style meltdown is almost inevitable,’’ said Alexei Moiseev, chief economist at VTB Capital, the investment-banking arm of Russia’s second-largest lender, referring to the country’s economic slump after the collapse of the Soviet Union. ‘‘Rapid privatization is the only way that can help avert complete disaster.”

From Zero Hedge

As always political goals such such as the desire to maintain hold on power by incumbent political leaders abetted by inflationist and socialist policies have contributed to this.

Again from the same Bloomberg article, [bold highlights mine]

Lukashenko reintroduced controls on prices and the currency and re-nationalized some companies and infrastructure after coming to power in July, 1994, on a platform of “market socialism.” The nation’s economy returned to growth in 1996, according to World Bank data.

At the Minsk Refrigerator Plant Co. shop in the capital today, about 20 people queued in drizzling rain to use their rubles to buy fridges. While the shop didn’t open on the day of the devaluation, most of the models in the store already had ‘Sold Out’ stickers on their doors.

“I came on Saturday and it was a nightmare, the store was stormed by people who wanted to spend their rubles because of rumors about the devaluation,” said Nikolay, a 74-year-old pensioner who declined to provide his last name. His entire savings of 6 million rubles now buy one fridge compared with three before the devaluation, he said.

The ruble traded at 5,019.75 per dollar at banks and currency kiosks around the country today, according to the median mid-price of six banks compiled by Bloomberg from the lenders’ websites. That’s 1.8 percent weaker than the official rate.

The devaluation lifted the local price of automobile fuels as much as 24 percent, according to Belneftekhim, an industry group for the country’s oil sector. Last night, about 50 people protested the price increase in the car park of a Minsk hypermarket.

“I can’t describe how I feel without using obscenities, this is all our government’s fault,” said Sergey, a 32-year old attending the protest who works for a computer importer. “The whole world tells them, guys, you have economic problems, you should do something, and all they did was live off getting more and more loans.”

Both the IMF and the EBRD have blamed Lukashenko’s spending before last year’s presidential election for much of the economy’s woes. Lending was increased by 38 percent last year and public-sector salaries rose by about 50 percent, the Washington-based IMF said in a March 9 report.

Belarus got a $3.5 billion bailout loan from the IMF during the global credit crisis and the country has more than $2 billion of ruble and dollar debt outstanding. Foreign-currency reserves hit a 1 1/2-year low in March...

The price of children’s diapers has “gone completely insane” in Minsk, said Natalia, a 24-year-old mother also queuing outside the refrigerator store. “I used to buy a pack for 69,000 rubles, now they cost 140,000,” or almost half the 343,260-ruble monthly child benefit paid by the government, she said.

“We have become paupers,” said Tatiana, a 70-year-old woman in the line who also declined to give her last name. “We have been squeezed into a corner by this devaluation.”

Belarus’ skyrocketing inflation from Danske Bank

The previous bailout of the IMF has introduced the moral hazard factor which seems to have compounded this process.

Yet the unfolding episode in Belarus seems like a good example of the phase of the inflation process known to the Austrian school as the crack-up boom

From Ludwig von Mises,

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them.

Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them

McKinsey Quarterly on the Deepening of the Information Age

In a recent study by McKinsey Quarterly Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity, they find a dramatic surge in the influence of the internet on commerce and the global economy.

Their findings as follows (including charts):

-The Internet accounts for 3.4 percent of overall GDP in the 13 nations studied. More than half of that impact arises from private consumption, primarily online purchases and advertising. An additional 29 percent flows from investments by private-sector companies in servers, software, and communications equipment. The Internet economy, now larger than that of Spain, surpasses global industry sectors such as agriculture and energy.

-The Internet is a critical element of economic progress, pushing a significant portion of economic growth. Both our macroeconomic approach and our statistical approach show that in the mature countries we studied, the Internet accounted for 10 percent of GDP over the 15-year period from 1995 to 2009, and its influence is expanding. Over the last five years of that period, its contribution to GDP growth in these countries doubled, to 21 percent. If we look at the 13 countries in our scope, the Internet contributed 7 percent of growth from 1995 to 2009 and 11 percent from 2004 to 2009. In the global Net's growing ecosystem of suppliers, US companies play leading roles in key sectors. China and India rank among the fast-growing players in the Internet's global supply chain.

-Most of the economic value the Internet creates falls outside of the technology sector: companies in more traditional industries capture 75 percent of the benefits. The Internet is also a catalyst for generating jobs. Among 4,800 small and midsize enterprises surveyed, it created 2.6 of them for each lost to technology-related efficiencies.

Read the complete study here

Bottom line:

The web’s dramatic usage explosion is being reflected on the global economy. Real time connectivity has translated to vastly expanding economic value added and to immense productivity growth.

Increasing specialization could be part of the current dislocations that has led to lofty unemployment levels.

Yet those who see the world in terms of the industrial age will get things so awfully wrong.

As Alvin Toffler writes in the Revolutionary Wealth (p.12),

The developments in capital tools for knowledge expansion are like a rocket in a fueling stage, preparing to launch us toward the next phase of wealth creation. That next phase will spread the new wealth system more widely across the world.

A revolution is under way. And the challenge arising with it will challenge everything we thought we knew about wealth.

Graphic: Knowledge Problem

Here is Jessica’s Hagy’s graphic version of what seems to be F. A. Hayek’s Knowledge Problem.

Ms. Hagy calls it There’s no such thing as a know-it-all.

FT’s James Mackintosh: US Credit Risk Greater Than Indonesia

US credit risk is now greater than Indonesia. James Mackintosh at the Financial Times writes, (bold highlights mine)

It sounds dotty to suggest the US is at imminent risk of default. A country that has rarely been able to borrow so cheaply, that issues debt in its own currency and has just demonstrated that it can print as much money as it likes need never miss a coupon payment.

Yet in the past fortnight traders have come to the conclusion that America might breach its own constitutional clause that its debt “shall not be questioned”. According to Markit, the cost of one-year US credit default swaps, which insure against default, almost tripled in six trading days.

According to this – far from perfect – measure, the US is now more likely to default than Indonesia or Slovenia in the next 12 months.

Well the US has already been engaged in a policy to default on her liabilities indirectly.

Paying creditors with currency that has lesser purchasing power than when the debt had been contracted represents as (hidden) default. The nominal amount of the contract remains the same, but the currency's buying power has substantially been reduced.

And such policy has been channeled through what is known as Quantitative Easing or money printing (inflationism).

As Murray Rothbard wrote,

Inflation, then, is an underhanded and terribly destructive way of indirectly repudiating the "public debt"; destructive because it ruins the currency unit, which individuals and businesses depend upon for calculating all their economic decisions.

War on the Internet: G-8 Mulls Regulation of the Web

As earlier predicted, global politicians who see their turfs dramatically being eroded by the rapidly expanding flow of decentralized information, enabled and facilitated by the web, will declare an open war against the cyberspace.

The New York Times reports,

Leaders of the Group of 8 industrialized countries are set to issue a provocative call for stronger Internet regulation, a cause championed by the host of the meeting, President Nicolas Sarkozy of France, but fiercely opposed by some Internet companies and free-speech groups.

The G-8 leaders will urge the adoption of measures to protect children from online predators, to strengthen privacy rights and to crack down on digital copyright piracy, according to two people who have seen drafts of a communiqué the G-8 will issue at the end of a meeting this week in Deauville, France. At the same time, the document is expected to include a pledge to maintain openness and to support entrepreneurial, rather than government-led, development of the Internet.

This balancing act was reflected Tuesday in a speech by Mr. Sarkozy, who convened a special gathering of the global digerati in Paris on the eve of the G-8 meeting. Calling the rise of the Internet a “revolution,” Mr. Sarkozy compared its impact to that of two previous transforming episodes in global history: the age of exploration and the industrial revolution.

The Internet revolution “doesn’t have a flag, it doesn’t have a slogan, it belongs to everyone,” he said, citing the recent uprisings in the Arab world as examples of its positive effects.

These actions represent “resistance to change”, whereby politicians will try to enforce information control or censorship in the way the industrial age used to operate.

The horizontal flow of information threatens the institutional centralized frameworks built upon the industrial age economy.

As I earlier wrote,

Political and economic ideology latched on a vertical top-bottom flow of power will be on a collision course with horizontal real time flow of democratized knowledge.

This would likely result to less applicability of ideologies based on centralization, which could substantially erode its support base and shift political capital to decentralized structure of political governance that would conform with the horizontal structure of information flows.

People will know more therefore control from the top will be less an appealing idea.

But again these attempts to regulate the web are likely to fail.

Nevertheless the war on the internet accounts as part of the adjustment process away from the command and control structure of the industrial ages with the knowledge revolution taking place beyond the reach of politicians. Besides, technological advances will work around regulations.

As visionary Alvin Toffler writes (Revolutionary Wealth p.40)

As change accelerates still further, institutional crisis will not be limited to the United States. Every country in the twenty-first-century world economy—including China, India, Japan and the E.U. nations—will need to invest new style institutions and adjust the balance between synchronization and de-synchronization. Some countries may find it more difficult than the United States, whose culture, at least, smiles on change-makers.

Tariffs on Furniture Trade: Example of Mercantilist Policy Failure

In the eyes of mercantilists, the world operates in a fixed pie where trade is reduced to a zero sum game—one benefits at the expense of the other.

Because it is a zero sum game, for mercantilists, trade has to be controlled to favor the locals.

And one of the conventional route for this is via protective tariffs.

The Washington Post gives an account of how recent tariffs imposed on the furniture trade with China, has resulted not to the benefits of Americans, but to politically affiliated lobbyists.

The WaPo reports, (hat tip Mark Perry) [highlights mine]

The United States and China have exchanged accusations of dumping for years and imposed tit-for-tat duties. All along, though, China has generally come out on top: Its trade surplus with the United States rose to $273 billion in 2010, according to U.S. Census Bureau figures, more than three times the level of a decade earlier.

The trade concerns have led to growing calls for tougher action from Washington to stem the tide and protect U.S. jobs. But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million...

“This whole saga is a perfect example of good intentions gone completely haywire,” said Keith Koenig, president of City Furniture, a big Florida-based retailer and critic of the tariffs. Like many retailers, he relies on imported goods, which are cheaper than those made in America.

The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. Their work includes haggling each year over private “settlement” payments that Chinese manufacturers denounce as a “protection racket.”

This whole saga is a perfect example of a longstanding myth debunked since the 18^th century.

First of all, people buy and sell voluntarily because they see fulfillment from such activity. And no territorial boundary changes such dynamics.

Next, mercantilism signifies a form of mental heuristics, only justified by the use of mathematical models, which essentially ignores human action.

Mercantilist see people as behaving like robots or automatons especially in the lens of statistical aggregates.

They omit the fact the people will work their way around absurd policies. And that’s why economic theories which support these policies are exploded as the above.

This is especially amplified in today's deepening of globalization trend as more avenues are made available to circumvent nonsensical policies.

As Ludwig von Mises wrote,

All that a tariff can achieve is to divert production from those locations in which the output per unit of input is higher to locations in which it is lower. It does not increase production; it curtails it.

Lastly mercantilism sells to either economic ignoramuses or to ideological zealots which sees the state as an omni-virtuous entity.

The latter hardly realizes that the state is composed of acting humans, who also operates on the premise of self-interests.

The key difference is that these entities use the power of gun (coercion) to exploit the masses from which to attain their personal goals.

The followers of mercantilism also hardly realize that they serve as pawns to unscrupulous political masters and the crony clients, who benefit from politically unequal policies in the name of the upholding the public’s weal.

Mercantilism is like a superstition which simply refuses to go away.

Should Doomsayers Be Censored?

It had been a calculation error says the California preacher, thus doomsday will be reset on October 21. Booooo!

Reports the Yahoo, (bold highlights mine)

A California preacher who foretold of the world's end only to see the appointed day pass with no extraordinarily cataclysmic event has revised his apocalyptic prophecy, saying he was off by five months and the Earth actually will be obliterated on Oct. 21.

Harold Camping, who predicted that 200 million Christians would be taken to heaven Saturday before catastrophe struck the planet, apologized Monday evening for not having the dates "worked out as accurately as I could have."

He spoke to the media at the Oakland headquarters of his Family Radio International, which spent millions of dollars_ some of it from donations made by followers — on more than 5,000 billboards and 20 RVs plastered with the Judgment Day message.

It was not the first time Camping was forced to explain when his prediction didn't come to pass. The 89-year-old retired civil engineer also prophesied the Apocalypse would come in 1994, but said later that didn't happen then because of a mathematical error.

Not only has the events proven him wrong, but the preacher even admits to it: econometrics has failed him as I predicted. Yet he continues to apply the same methodology.

But I hear some people clamor that government has to “act” on Mr. Camping’s doom mongering.

Should the US government apply censorship on Mr. Camping?

Does it mean that we should rely on his poor track record to use force against what we may perceive as wrong predictions or ideas we don’t agree with?

But what if he will be correct and October will indeed account for as doomsday? Remember Aesop’s famed fable, The Boy who cried Wolf?

I am not saying that I agree with or believe in him. I think his overdependence on math camouflaged by religious creeds will continue to lead his predictions astray. But I could be wrong.

But there are two important points here:

-he is selling an idea of what he purportedly believes in and

-two we don’t know the future.

On the issue of selling ideas, marketing guru Seth Godin has a terrific commentary on the possible lessons gleaned from the recent apocalyptic prophesy.

Mr. Godin writes, (italics original)

Sell a story that some people want to believe. In fact, sell a story they already believe…

Not everyone wants to believe in the end of the world, but some people (fortunately, just a few) really do. To reach them, you don't need much of a hard sell at all.

In other words, many of those who listen to Mr. Camping’s prophesies could be people who already believed in them or that Mr. Camping merely personifies the belief of an extant segment of captive audiences. That's why he gets donations.

If Mr. Camping’s followers represent as zealots of doom, can we legislate away beliefs or faiths? Are we supposed to prevent the expression of ideas that doesn’t mesh with ours?

Besides, who should decide whose ideas are accurate anyway, the President? If governments have been shown as unable to sufficiently resolve social problems, then why should we expect them to know the substance of information which signifies relevance for us and what are not? Have you ever heard of propaganda or indoctrination-false information deliberately spread as truths for political ends?

This shows of the assumptions that government have superior knowledge accounts for as fatal conceit-the fallacious presumption of omniscience.

As US playwright and Nobel awardee Eugene Gladstone O'Neill said,

Censorship of anything, at any time, in any place, on whatever pretense, has always been and will always be the last resort of the boob and the bigot

Second is the issue of uncertainty.

All of us speculate about the future, that’s because we don’t know exactly how things will turnout. That’s why markets are there. And that’s why money exists. And that’s why people use mathematics, such as statistics, in the perpetual attempt to “smooth out” risks and uncertainties.

True, some issues are more predictable than the others, but again that’s why markets exist—to allocate resources according to one’s perception of time variant needs (satisfying one’s unease, e.g. some people see the need of believing in doomsdays).

As Professor Art Carden writes

People with strong beliefs should be willing to put their money where their mouths are. The late Julian Simon was a master of this. Superior knowledge and insight can be turned into profitable opportunities. My personal property no longer has value to me after the Rapture, but it might have value to someone else. If I knew the precise date of the end of the world, I would sell everything in the months leading up to it and use the resources to spread the word, as some of Camping’s followers have apparently done.

If I were pretty sure the Rapture might happen sometime over the next 40 years, I should be able to make a deal with someone who disagrees but who would be willing to pay me now in exchange for title to my property after the Rapture. I could then use the resources to spread my message. I got no takers on my offer of $1000 for all of one apparently Camping-affiliated group’s earthly belongings I made after I first learned about the claim that Judgment Day would happen on 5/21/2011.

Harold Camping isn’t the only discredited doomsday prophet among us. As I’ve followed this, I’ve wondered what percentage of the people who laugh at Camping and his misled followers nonetheless nod sagely, furrow their brows, and reach for their checkbooks whenever professional doomsayers in the environmental movement like Lester Brown and Paul Ehrlich warn of overpopulation, the end of oil, and the end of prosperity in spite of track records littered with doomsday predictions that failed to come true.

Indeed, beliefs can be parlayed into profit opportunities. We can profit from someone else’s mistakes, so why apply censorship?

This is like investing the stock market where wrong analysis or flawed theories or inaccurate information can lead to losses. So given the logic of advocates of censorship should we effectively ban losers (applied not only to stockmarkets but to all markets)? Or should we also apply censorship on newsletters fund managers and analysts whose prediction of the markets have been inaccurate?

What people say and do are frequently detached. Did global economic activities stop prior to May 21^st in anticipation of the rapture? Did you sell or give away your assets because of this?

If not, then the obviously you were not affected, because you didn’t believe, you were a skeptic. This is called demonstrated preference. Because the world didn’t fall into a stasis, most people around the world simply ignored such cataclysmic prophesy.

Only media likes to drum up on sensational issues because they profit from them. Fear draws attention. Yet shooting the messenger won’t eradicate the message. So censorship would signify as a fool’s errand.

At the end of the day, the issue of Judgment day will be one decided by your and my personal disposition and not by the government. Unless you honestly believe that governments can stop doomsday [har har har].

Finally, it would be an issue of legal fraudulence if modern day Cassandras engage in purposeful misrepresentation or deception to profit from prophesies of Armageddon.

But that would mean personal issues of those who felt affected or victimized, whose recourse should be channeled through the courts of law.

I close this anti-censorship ‘freedom of speech’ rant with this prominent quote which has been frequently (mis) attributed to Voltaire (but according to Wikipedia is from Evelyn Beatrice Hall who wrote “under the pseudonym of Stephen G Tallentyre in The Friends of Voltaire (1906), as a summation of Voltaire's beliefs on freedom of thought and expression)

I disapprove of what you say, but I will defend to the death your right to say it.

Mainstream Calls For More Quantitative Easing

As financial markets reveal some signs of exhaustion or possibly indications that the stimulative effects of inflationism could be waning, I see more calls for renewing or expanding existing Quantitative Easing (QE) programs.

From Oxford Analytica on the US(researchrecap.com)

The US Federal Reserve is underachieving both planks of its mandate to maximise employment consistent with price stability. The former amounts to an unemployment rate consistent with non-inflationary growth. The price-stability mandate translates into an informal 2% inflation target.

Although the Fed no longer tracks higher-level measures of the broadest conception of the supply of ‘money’ in the economy, private-sector and academic gauges of such notions indicate a collapse. This means that QE3 is positive for sustaining US and global equities valuations, because it maintains a channel of liquidity that otherwise would begin draining from the economy. This also makes it positive for global commodity prices, either sustaining their already lofty valuations or at least cushioning the extent of any broad downward correction.

From Moody’s on Japan (researchrecap.com)

Another uncertainty overshadowing Japan’s fiscal outlook is the extent to which the government will share the burden of Tokyo Electric Power’s rising earthquake-related liabilities. The Bank of Japan, for the time being, has refrained from further augmenting its post-quake liquidity and asset-purchase program. Should the rebound in Japan’s economy be weaker than forecast or delayed entirely, additional actions by both the Ministry of Finance and Bank of Japan may be needed.

In my view, all these signify part of the central bank policy called ‘signaling channel’ which are meant to manage inflation expectations. Remember central banks also work their policies through the private sector networks which they are allied with.

Of course the other terms for managing inflation expectation are mind control (psychology) or propaganda (politics) or psy war (military). Such addiction to inflationism will eventually end in tears.

As the great Ludwig von Mises wrote,

People still believe, however, that destroying the value of the monetary unit is something that does not hurt the masses. But it does hurt the masses. And it hurts them first. There is no better way to bring about a tremendous revolution than to destroy the savings of the masses that are invested in savings deposits, insurance policies, and so on.