Greeks Go For Gold

Ah, paper money versus gold.

When the public lose trust on the highly flawed system that had been imposed on them, they revert back to the old tried and tested ways.

That applies to the Greeks who are reportedly rushing to acquire Gold to secure their savings.

From the Financial Times [bold highlights mine]

Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.

Pledges by socialist prime minister George Papandreou that his government would “save the country” have been widely discounted by the public. However, parliament gave him a vote of confidence late on Tuesday night. The socialists have a six-seat majority in the 300-member house.

Sales of gold coins have soared as savers seek a safer and fungible source of value...

Monthly bank withdrawals were running at €1.5bn-€2bn (£1.3bn-£1.8bn) in the first quarter. Last year, depositors withdrew €30bn, equivalent to 12.3 per cent of total savings, according to the central bank. Greek deposits worth an estimated €8bn were transferred to banks in Cyprus in 2010. But the flow has dried up this year amid fears that Cypriot banks could suffer contagion.

Andreas, a supermarket manager, transferred the family savings to Munich earlier this year: “The Swiss banks aren’t interested unless you’ve got several hundred thousand euros.”

“We can’t trust the politicians to get us out of this mess [and] have to protect our families,” Sakis, a garage owner, said at an anti-austerity protest in Athens’ Syntagma square. “A bank collapse has got to be on the cards.” He added he had withdrawn his savings and placed them in a bank safe deposit box “for security. Who cares about interest right now?”

Politicians can fool us most of the time, but not all of the time. Eventually economic reality prevails and fraudulent promises are exposed. It's been this way for ages.

US Government’s War on US Expats and American Investments Overseas

I have been saying that the US government has increasingly been intruding in the marketplace or applying financial repression for implicit political reasons.

This time the object of their engagement appears to be American expats and possibly overseas investment by American residents! In other words, the US has declared war with her own citizens.

From Financial Times’ Gillian Tett [bold emphasis mine]

This summer, the senior management of one of Asia’s largest financial groups is quietly mulling a potentially explosive question: could it organise some of its subsidiaries so that they could stop handling all US Treasury bonds?

Their motive has nothing to do with the outlook for the dollar. Nor does it reflect fears about the US debt ceiling (or the risk that the US will soon default if it fails to raise the legal limit on bond issuance).

Instead, what is worrying this particular Asian financial group is tax. In January 2013, the US will implement a new law called the Foreign Account Tax Compliance Act (Fatca), that forces all global financial companies to report details to the IRS, the US tax authority, of any clients linked to the US with more than $50,000 in an account. These rules, quietly passed by Congress last year, would partly put the responsibility on the bank or asset manager – not just the individual – to make this filing.

The IRS insists that these measures are simple for banks and asset managers to implement; they just need to perform an electronic “sweep” of their clients to track those with more than $50,000 in an account and obvious connections with the US, such as an address, Treasury officials argue.

“The US interest is to have reporting on accounts to stem the tide of offshore tax evasion,” says Manal Corwin, a senior official at the US Treasury, which hopes the measures could net billions of dollars of badly needed new revenues.

While this logic might sound sensible, the new rules leave some financial officials fuming in places such as Australia, Canada, Germany, Hong Kong and Singapore. Little wonder. Never mind the fact that implementing these measures is likely to be costly; in jurisdictions such as Singapore or Hong Kong, the IRS rules appear to contravene local privacy laws. After all, as Terry Campbell, head of Canada’s banking association, points out, the rules are essentially akin to “conscripting financial institutions around the world to be arms of US tax authorities”.

What has left some financiers doubly angry is that Congress introduced the law with little overseas consultation – but the IRS is now threatening heavy penalties for non-compliance.

More specifically, the IRS is threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups that it deems to be “non-compliant” – and the assets could include US shares or US Treasury bonds.

Hence the fact that some non-US asset managers and banking groups are debating whether they could simply ignore Fatca by creating subsidiaries that never touch US assets at all.

“This is complete madness for the US – America needs global investors to buy its bonds,” fumes one bank manager. “But not holding US assets might turn out to be the easiest thing for us to do.”

Whether anybody follows through on this threat remains doubtful. In practice, banks in places such as Canada, Australia and Germany say that it would probably be impossible for them to not handle US Treasuries or stocks. Some are consequently considering whether they should shun US citizens as clients instead.

In the name of tax evasion, this time taxes are being deployed as instruments for repression and implied interventions on the actions of market participants—“threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups”.

Also regulations imposed on foreign institutions will likely to create geopolitical frictions and other untoward effects, some of which have been explained above.

Maybe legendary investor Jim Rogers got them all so roiled up.

Again we are seeing increasing signs of desperation.

Could capital controls be next?

Markets in Everything: China’s Village Specializes in Breeding Snakes

Markets emerge when people discover economic value in specific goods or services.

In China, cuisine and medicinal demand for snakes has led to a village specializing in snake breeding.

From Reuters,

This sleepy village nestled in the heart of vast farmland in China's eastern Zhejiang province hides a deadly secret.

A step into the homes of any of the farming families here brings visitors eye-to-eye with thousands of some of the world's most feared creatures -- snakes, many of them poisonous.

Cobras, vipers and pythons are everywhere in Zisiqiao, aptly known as the snake village, where the reptiles are deliberately raised for use as food and in traditional medicine, bringing in millions of dollars to a village that otherwise would rely solely on farming.

"As the number one snake village in China, it's impossible for us to raise only one kind of snake," said Yang Hongchang, the 60-year-old farmer who introduced snake breeding to the village decades ago.

"We are researching many kinds of snakes and the methods of breeding them."...

Today, more than three million snakes are bred in the village every year by the 160 farming families.

Snakes are renowned for their medicinal properties in traditional Chinese medicine and are commonly drunk as soup or wine to boost the person's immunity.

Belgian Central Bank ‘Lends’ 41% of Gold Reserves, Growing Role of Gold as Money

Tyler Durden of Zero Hedge points to CLSA’s Chris Wood’s report noting that the Belgian Central Bank has lent out 41% of its gold reserves and that gold and silver coins as money have been making strides in the US.

From CLSA (via Zero Hedge) [bold emphasis mine]

Belgian central bank Vice Governor Francoise Masai reportedly told shareholders that about 41% of the central bank’s 216 metric tons of gold was on loan at the end of last year, and that the central bank earned a 0.3% return on its loans of physical gold to commercial banks last year. There are two points to note about this. The first is the puny annualised return earned on the gold leasing market. The second is the significant percentage of the central bank’s gold lent out. This is a reminder that the paper gold market is significantly larger than the physical market. Just like a run on a bank in a fractional banking system, GREED & fear suspects it will be very hard to settle all the paper claims to gold physically in a real scramble for the metal. This is why in a parabolic spike physical gold is likely to trade at a significant premium to paper claims. On this point GREED & fear should make it clear that the 25% of the global portfolio for a US dollar-denominated pension fund allocated to gold bullion is in physical gold.

Meanwhile, it is an interesting note that more than a dozen state legislators in America have now seen bills introduced that would make gold and silver coins legal tender in the respective states. Thus, gold and silver coins minted by the US government are now considered legal tender in Utah. Much of this activism is coming from Tea Party supporters. Financial sophisticates will scoff. But to GREED & fear it is a healthy sign that some people in America are thinking. For more on this popular movement to return to the monetary role of gold read an article published last week by the Los Angeles Times (“Pushing for a return to the gold standard”, 3 June 2011 by Nathaniel Popper).

Gold leasing is almost equivalent to short sales.

As John Hathaway of Tocqueville Asset Management L.P explains,

The gold that is being borrowed from central banks [and private sources] is being sold into the physical market where it is being consumed as jewelry. It is no longer in liquid, deliverable form. Gold loans will not be as easy to repay as the borrowed yen. The shorts are facing an epic squeeze.

Aside from Belgium, I would suspect that many of central banks of major economies could have also lent out (shorted) part of their gold reserves.

Aside from the lease-short sale dynamics, the emerging fissures in the paper money system will likely drive many EM economies as major buyers of gold. Chart above from IBTimes

And that’s what we seem to be seeing today.

From gold.org May report,

As of the IMF’s May release of its International Financial Statistics, several countries have reported additional purchases of gold. Notably, Mexico reported to the IMF that it acquired 14.8 and 78.5 tonnes of gold in February and March, respectively. This was a significant increase in its gold holdings, raising Mexico’s position in the table to the 34th largest holder of gold with 100.2 tonnes. In its press release, the Banco de Mexico indicated that its acquisition of gold was in line with prudent diversification principles of reserves management. Indeed, Banco de Mexico’s acquisition of gold was likely motivated by a need to diversify its rapidly expanding foreign reserves, which increased from approximately $75 billion to $120 billion between Q1 2007 and Q1 2011.

Additionally, Thailand also reported an increase in its gold reserves of 9.3 tonnes in March, raising its total gold holdings to 108.9 tonnes. This follows an acquisition of 15 tonnes in July of last year. Finally, Russia continues to regularly add gold to its reserves, adding 22.5 tonnes between January and March. Russia is the 8th largest holder of gold.

The latest statistics show no significant selling by the signatory central banks in Year 2 of the third Central Bank Gold Agreement (CBGA3).

So these incentives should continue to drive the actions of the central banks, which should account for a significant force for higher gold prices.

Also as previously explained, rising gold prices has gradually been changing the outlook of the public; once an outcast which economic ideologues disparaged as the ‘Barbaric relic’, now momentum favors more acceptance of gold and silver as money—as it had been for most of human history.

This time won’t be different.

Philippine Banking System: “Most Heavily Fortified Bastion of Privilege and Profit”

The unholy trinity of banking-central banking and government patronage system operates even in the Philippines as well.

From Joe Studwell Asian Godfathers, Money and Power in Hong Kong and Southeast Asia [p.105], (bold emphasis mine)

Such antics caught up with the Philippines in the early 1980s, when the debt-laden regime defaulted on its foreign on its foreign borrowings and several banks failed. After the departure of Marcos in 1986, however, the government of Cory Aquino bailed out the banking system by issuing high-yielding government bonds and providing additional, cheap government deposits. The cost of this action became apparent in 1993 when the old central bank was closed down with a US$12-billion write-off to be born by the treasury, and hence taxpayers. The annual cost of servicing this debt in the mid 1990s was more than the Philippines’ health budget. Those tycoons who did not, like Benedicto and Disini, flee with Marcos, and survived the Philippine Commission on Good Government, found their banks revived with public money and able to enforce cartel pricing that in the late 1990s gave them the best banking margins in Asia. Despite all the trading and production cartels and monopolies sanctioned by Marcos and others in the Philippines, Paul Hutchcroft concludes that the banking sector has always been the ‘the country’s most heavily fortified bastion of privilege and profits’.

That’s the Philippine version of ‘Financial Repression’.

Also, here lies the political "dirty laundry" which have largely been unseen by the public. Good government? Bah!

The Coming Global Government Debt Default Binge

From the Wall Street Journal blog:

The biggest risk, however, isn’t Greece per se. It is the prospect of other peripheral euro members — Ireland, Spain, and Portugal — following Greece down the default path. That cascade effect has to be avoided….

The global credit authorities and financial markets have been digesting this problem for more than a year. Some participants think a default is inevitable; Greece should just do it.

Then the world can move on to an even bigger worry: whether the U.S. government will soon default on its debt.

Yes, ballooning debt as a consequence of incessant government spending on the welfare state isn’t just an issue of Greece. It’s everywhere.

From the Bank of International Settlements

Sooner or later, something will occur to prevent debt from exploding: governments will adopt corrective measures on their own, or they will be forced to act as sovereign risk premia reach unbearable levels.

And this is only from the facet of government liabilities, which does not include the banking system

This bring us to the admonitions of the great Ludwig von Mises

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

Governments will default, either by massive inflation or by the far better option-deflation.

And that’s why the events in Greece is a prelude to the next monumental chain of government-and-banking debt crisis.

We are approaching the Mises moment.

Jose Rizal’s Libertarian Roots

In commemoration of Philippine national hero Jose Rizal’s 150^th birthday, below is an excerpt of an article depicting Jose Rizal’s libertarian roots.

Michael Gilson-de Lemos narrates: (thanks Michael)

Rizal ( here) remains (here) adopted by Pacific ( here) Libertarians and his interaction with Libertarians of his day is a perennial topic of discussion; and he was a close friend of Francisco Pi y Margall, Liberal first President of Spain's First Republic his predecessor Figueras is more viewed as a caretaker) and an avowed admirer and student of the ideal of Libertarian anarchist communities.

Pi y Margall wrote the classic "Reaction and Revolution" where he diligently sought to work through Proudhonian minimalizing-government anarchism with Iberian realities. Once criticized for being too "purist" on freedom issues, he is said to have replied political convictions are like virginity — once lost, they are not recovered. His program seems similar to budding Liberal welfare statism, until one realizes Spanish law at that time is meant to be suggestive, not directive; and he was if inconsistently working for a Federalism to create choice to community levels as a prelude to anarchist or mutual-agreement communities. For this reason he is ignored by modern collectivist literature, and a real problem to US boosters of the War at the time, for as an elder statesman he was moving the government towards accepting Cuban independence.

Rizal, like many early Latin and Latin-influenced proto-libertarians and Libertarians such as (here) Heberto Padilla, is better understood through his poetry and art. The poetry he wrote before his execution is generally considered by Spanish critics and readers alike as among the most sublime ever written. The point is the Philippines was no bunch of tribal yahoos peeling bananas, but as Ade discovered, something very different.

While as today the US tries to portray what is happening in simplistic terms, Ade helped disclose to the public that there was a complex political ecology being ignored. Remarkably, one of Rizal's friends and inspirers was the fascinating figure of ( here) Ferdinand Blumentritt, from whom he learned it is said of the work of the budding Austrian economists (while aware of the work of the Paris Ultras inspired by such as Molinari, Spanish Libertarians were repelled by the Gallic political horseplay that led to attacks on people such as Walras and ultimately destroyed the French Market economists when the government outflanked their influence by decreeing economics would be taught henceforth in the collectivist dominated University Law departments; they rejected "libertarianism imposed from above") — and who is considered one of the founders of ethnography.

Blumentritt was involved in one of the many proto-Libertarian "Individualist Societies" then extant promoting discussion of non-governmental alternatives and agitating for everything from the vote to freer markets.

Read the rest here

NOTE: Because this article was published in June 2003, some of the attached links have either been relocated or has become inaccessible.

Glenn Beck Endorses Ron Paul for President in 2012

Consolidating Phisix and Global Equity Markets

Given the length of a project's life, a decline in the discount rate pumps up the present value of a capital project. An artificially low interest rate alters the evaluation of projects – with longer-term, more capital-intensive projects becoming more attractive relative to shorter-term, less capital-intensive ones. Steve H. Hanke, Boom and Busts

More Interventions Clouds Market Signals

Global equity markets continue to struggle.

This could part of the cyclical growth slowdown which has been deemed as a “growth scare”. This could also signify seasonal factors at work.

Chart above from chartoftheday[1]

This could also represent dour sentiment which has been looking for events to connect with (e.g. Greece Crisis). This may also account for the waning effects of global stimulus measures.

Aside from the forces above, from my contrarian perspective, these could be part of the grand scheme of central planners to generate conditions that would justify further interventions[2].

Interventions of various forms seem as becoming routinary.

For this week, renewed thrust to rig the commodity markets has been initiated by the banning of OTC trades[3] in US commodity markets as part of the latest Dodd-Frank Act targeted at hedge funds.

So the new rules could force some renewed liquidations or put some selling pressures on the commodity markets over the coming sessions.

In the meantime, commodity investors are likely to consider alternative avenues to go about trading the markets.

Considering the next wave of bailouts (China[4] and Greece[5]), there will likely be more direct interventions ahead

As Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia writes[6],

Other approaches to creating or expanding demand for government debt may be more direct. For example, at the height of the financial crisis U.K. banks were required to hold a larger share of gilts in their portfolio. Greek, Irish, and Portuguese banks have already liquidated a substantial fraction of their foreign assets and used the proceeds to buy domestic public debt. Thus the process by which debts are being placed at below market interest rates in pension funds and other more captive domestic financial institutions is already under way in several European countries. Spain has recently reintroduced a de facto form of interest rate ceilings on bank deposits. Similar trends are developing in Eastern Europe.

Moreover, the use of capital controls by emerging markets hoping to control destabilizing inflows (hot money), potential overheating, rising inflationary pressures, and related competitiveness issues have found far greater acceptance in the international community than at any time since the breakdown of the Bretton Woods system. Indeed, many emerging markets have already begun to use such policies.

Therefore we should expect more volatility on either direction, as the distortions in the economic distribution of resources are amplified.

Selling Strains Vented on Equity and Currency Markets

Strains of the fumbling equity markets worldwide have also been evident among ASEAN bellwethers.

Chart from Bloomberg

As one would note, the price motion of ASEAN’s bellwethers appear to be highly correlated. This is with the exception of Malaysia’s KLCI (red line), which appears to have grabbed the leadership from Indonesia (orange) or Thailand (yellow). Apparently this shifting leadership dynamic signifies more evidence of the ongoing rotational process.

So far, the current failing seen in global markets hasn’t had a substantial adverse impact on the above bourses. Except for Malaysia which popped to the winning column, the former top gainers have currently posted minimal losses.

This dynamic has not been limited to equities.

Currencies of the above ASEAN economies have also tumbled against the US dollar. This downside pressure has also been seen in the currencies of most of the major Asian economies.

For the Peso, part of the current weakness has reportedly been from massive intervention by the local central bank or BSP to stem the Peso’s appreciation.

The Danske Research team writes[7],

BSP has intervened massively in the FX market to stem the appreciation of PHP. While capital controls have so far not been introduced, they remain a possibility

If these interventions are not mopped up, then this should boost liquidity into the system that should add to the inflationary pressures that would have the main point of entries on the asset markets.

Phisix: Market Internal Points to Consolidation and Not Reversal

This week’s losses have been reflected on the broader market.

All sectors were in the red, mostly led by the Financials and the Service sector.

Friday’s bizarre last minute selloff, which brought the Phisix to the negative zone after drifting the entire day on the positive (see below chart), was apparently led by the marked declines of Bank of the Philppine Islands (-4.34%), Banco De Oro (-5.73%) and Globe Telecoms (-4.2%).

Chart from technistock.net

Combined with earlier losses this week, a vital segment of the decline of the Phisix can be traced on the performances of these heavyweights, that is in addition to PLDT.

The massive selldown on the above issues last Friday appears to be locally driven. Only Globe Telecoms posted foreign selling.

Yet in spite of the selloffs, BPI and Globe Telecoms were not even on the top 10 most active list, where both ranked 16^th and 21^st respectively. Meanwhile, BDO had only php 44 million in value traded.

This implies of the panicked reaction of the seller whom I suspect could be the handywork of one entity who probably got spooked for whatever reason and dumped their holdings at the closing bell.

Foreign trade registered positive this week, which means that the recent declines have been locally driven.

And despite the second week of losses, market sentiment have not been bearish overall.

The above chart shows of the daily trades (bottom) and the Phisix (top; courtesy of stockcharts.com)

Ever since the Phisix breached 4,000 level, one would note of a spike in the daily number of trades which usually coincides with upticks in the Phisix.

In September 2010, when the Phisix soared from 3,600-4,400, the number of daily trades spiked to reach the 20,000 level.

Another attempt at a runup in late December also coincided with an upsurge in daily trades to a similar level. The ensuing correction in the Phisix which lasted from January to March of this year saw a decline of the number of issues traded.

But this remained elevated compared to the first semester of 2010, where the Phisix traded from 2,800 to 3,600 and where number of trades ranged from 5,000-10,000.

We seem to be seeing the same cycle playing out today.

The point is, the number of trades reflect on the market’s sentiment. People tend to trade more often during upside swings than during downturns.

The elevated and ascendant (red trend) sentiment indicator reveals that despite current corrections, the local market has, so far, has resisted bearish assaults on market psychology.

In short, these signfiy signs that the Phisix has merely been consolidating and not enduring from a major reversal.

I would further posit that should there be any major reversals, both the Phisix and the daily number of trades would breakdown from their current trends simultaneously.

I don’t see this happening soon. Definitely NOT when the local and foreign monetary policies remain accommodative. And definitely NOT when policy stimulus, the addiction to debasement of the currency, could get activated anytime soon.

IMF Acknowledges Impact of Low Interest Rates

As final thought on this abbreviated discussion on the equity markets.

I’d like to point out that the IMF has acknowledged that a low interest rate environment encourages speculation.

From the IMF[8] (bold emphasis mine)

Low interest rates in advanced economies are promoting pockets of re-leveraging by lowering the “all-in” cost of debt capital for corporate borrowers. This is encouraging investors to use financial leverage to generate sufficiently attractive returns on equity. Although credit spreads are still higher than before the crisis, ultra-low short-term interest rates mean that the cost of debt is now lower, both for floating-rate and fixed-rate debt. This lower cost of borrowing renders debt servicing ratios more favorable, even at higher debt loads, thereby enabling companies to operate with more financial leverage

Has the IMF finally seen the light which the Austrians have long been pounding? This premise of IMF essentially lends credence to or validates the Austrian Business Cycle Theory.

Further, the causal relationship between low interest and financial leverage only goes to prove that business cycles or boom bust cycles underpin most of the actions in the financial markets and likewise plays an important role in the developments of the real economy.

And these relationships have become increasingly evident in Emerging Markets bonds (corporate and sovereign) markets, as well as the US leverage loans and high yield bond markets.

And we can see that this dynamic has also been a factor in influencing the actions in the US stock markets (chart from David Rosenberg[9])

As I have long been saying, today’s markets have largely been a function of inflationism.

---

[1] Chartoftheday.com Dow Average Monthly Gain, June 3, 2011

[2] See Falling Markets, QE 3.0 and Propaganda, June 12, 2011

[3] See War on Gold and Commodities: Ban of OTC Trades and ‘Conflict Gold’, June 18, 2011

[4] See China Prepares For Massive Bailout!, June 1, 2011

[5] See Serial Bailouts For Greece (and for PIIGS), June 4, 2011

[6] Reinhart Carmen M. Kirkegaard Jacob F. and Sbrancia M. Belen Financial Repression Redux, IMF Finance and Development, June 2011

[7] Danske Bank Slowdown in global recovery takes toll on EM equities, Emerging Market Briefer June 15, 2011

[8] IMF.org Markets Pricing a Mid-Cycle Slowdown, Global Financial Stability Report Market Update, June 2011

[9] Rosenberg, David Breakfast with Dave, vccm.squarespace.com, April 11, 2011

Greece Crisis: The Lehman Moment Hobgoblin

But while, as in the lynch mob, the majority can become actively tyrannical and aggressive, the normal and continuing condition of the State is oligarchic rule: rule by a coercive elite which has managed to gain control of the State machinery. There are two basic reasons for this: one is the inequality and division of labor inherent in the nature of man, which gives rise to an "Iron Law of Oligarchy" in all of man's activities; and second is the parasitic nature of the State enterprise itself. Murray N. Rothbard For a New Liberty: The Libertarian Manifesto

Some have suggested that the ongoing crisis in Greece could epitomize the counterpart to the Lehman episode, which triggered global meltdown contagion in 2008.

As Olli Rehn, European Union Economic and Monetary Affairs Commissioner said in a recent Bloomberg interview[1]

“We have always been concerned of contagion,” Rehn said. “One of the achievements over the past one-and-a-half years has been that we have been able to prevent a financial meltdown in Europe. We have been able to avoid a Lehman Brothers kind of catastrophe on the European soil. And moreover, we have been able to contain the crisis to the three countries now under the program,” he said.

This rabid fear of fractional reserve banking induced debt deflation represents as only one of the major influences guiding the current path of policymaking. It’s partly ideological.

But most importantly this signifies as the implicit desire to keep the current unholy central bank-government-banking system cartel or patronage system intact.

Proof of this is that the exigency to conduct bailouts has almost been representative of the creditor nation’s banking system exposure to crisis affected economies[2]

Any signs that would risk the survival of this tripartite global political arrangement would translate to urgent or contingent collaborative actions, despite political differences.

Faced with the risks of a Greek default, the ECB and Germany have been working on a compromise[3]. China’s recent declaration to help shore up Eurozone bonds or the bailout of Greece[4] has also demonstrated such tight kinship on a global scale.

The current framework of socio-political institutions has been built around such symbiosis. It’s a relationship based on financial repression.

And unknown to most, the political elites will fight to maintain this status quo despite the unpopularity on the constituency.

Politicians essentially know that they can manipulate voters.

Voters have mostly elected leaders for what they stand for. But once in power, people cannot or will not be able influence the politicians’ actions, which usually depart from their pre-election promises.

And this is what most experts don’t get.

So political elites will come up with usual hobgoblins as the “Lehman Moment” to ensure that accompanying policies would translate to the preservation of their political privileges.

Misdiagnosing Greeces’ Problems

It would be misplaced to argue that the survival of the Euro depends on “political and fiscal union” as celebrity guru Nouriel Roubini writes[5].

Had this been true, then the Soviet Union would have still existed. The USSR had a centralized monetary system, political and fiscal union but got dissolved.

The current problems of the Euro have not been because of the lack of centralization but because of it.

Political spending has reached levels whereby the productive sectors of the society can’t afford to pay.

As exhibited in the above charts, government spending growth[6] and a nation’s ability to pay[7] has been tightly correlated.

Thus, the political economy of institutional centralized redistribution (or free lunch policies) backfires once economic imbalances has reached the “tipping point”.

Essentially the Bismark-Keynesian concepts of welfare economics have reached a point of having to boomerang. We are at this turning point.

Thus the key to restoring competitiveness is to REVERSE the fundamental cause of such imbalance—government spending or dismantle or reduce welfarism.

The unfolding Greece crisis should be a reminder of the unviability of false promises and serves as preview of what we should expect once a major bubble bust emerges—but this time at a much larger scale.

Deflation Charade

I read of some comments that suggests of a deflation risk from Greece’s insistence to keep up with the “fiscal austerity” and that Greece would greatly benefit from exiting the Eurozone where she can devalue at will.

And that by devaluing this risk “flooding the Eurozone with ‘cheap’ goods”.

Despite the current crisis, Greece has NOT been suffering from deflation but from stagflation as shown in the charts from tradingeconomics.com[8]

Yet devaluation would not solve Greece’s economic predicament because her debt are mostly denominated in Euros.

An exodus from the Euro coupled with devaluation would only mean Greece would need more drachmas to pay for Euro based obligations unless she can convert these to drachmas ahead of devaluation.

In addition, it is such a nonsense to believe that cheap currency equals export greatness. If this snakeoil economics is to believed then Zimbabwe would have been an export titan, the Philippines would have also been one of the most prosperous.

Besides, if the riots in Greece has been about maintaining political entitlements, then this won’t lead to increased investments and expansion in productive ventures, but rather, this increases the risks of a European version of Dr. Gono's Zimbabwean policy, once Greece does exit from the Euro.

To believe that banking or fiscal austerity based deflation would cause the Euro’s demise is loopy.

Throughout history, currencies usually die from hyperinflation or from wars[9]. Reducing the prospect of war has been one of the main pillars why the Eurozone Union was put to existence[10]. This leaves hyperinflation as the biggest threat.

The Mises moment is when a critical choice will have to be made between policies that could lead to hyperinflation or mass deflation.

I don’t think that today’s condition would warrant such decisions yet as central banks still have some leeway to move about.

---

[1] Bloomberg.com Rehn Sees Markets Misreading of EU Leaders’ Intentions on Greece, June 16, 2011

[2] Economist.com Piggybacking, Daily Chart, April 15, 2011

[3] Wall Street Journal Schaeuble Calls For ECB Compromise On Greece, Boosting EFSF-Spiegel, June 19, 2011

[4] See China to Assist in the Bailout of Greece, June 18, 2011

[5] Roubini Nouriel, Could the Eurozone Break Up? June 18, 2011

[6] Buttonwood’s Notebook Spending too much or taxing too little? Economist.com April 4, 2011

[7] CreditWritedowns.com Five Misconceptions Squashed, June 2011

[8] Tradingeconomics.com Greece Indicators

[9] Dollardaze.org, Demonetized Currencies

[10] See Buy The Peso And The Phisix On Prospects Of A Euro Rally, June 14, 2010

China to Assist in the Bailout of Greece

I have been saying that today’s globalization has not been limited to trade, investment and labor but also to the conduct of policies.

Recent concerns over Greece debt and entitlement Crisis has prompted China to renew her pledge of support to latest the bailout scheme still being finalized by the Eurozone as of this writing.

This report from the Reuters, [bold emphasis mine]

China's "vital" interests are at stake if Europe cannot resolve its debt crisis, the Chinese Foreign Ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner.

At a media briefing ahead of Chinese Premier Wen Jiabao's visit to Europe next week, Vice Foreign Minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade.

"Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Fu said.

"China has consistently been quite concerned with the state of the European economy," she said.

Wen is due to visit Hungary, Britain and Germany late next week, just months after he visited France, Portugal and Spain and offered to help Europe overcome its debt woes.

Well China’s earlier purchases had already been substantial.

From another Reuters article [bold emphasis added]

The Asian powerhouse has been steadfast in its support for the Eurozone since the onset of the crisis. It purchased a significant amount of EUR440bn EFSF rescue facility that started auctioning bonds earlier this year. Although it is difficult to clarify how large its European debt holdings actually are since this data isn’t published by China’s Sovereign Wealth Fund, it is thought to include Greek, Portuguese and Spanish bonds.

Some observations

This adds to the pile of evidence of the tightly entwined and coordinated actions of the central bank-government-banking system global cartel.

Remember, it isn’t Greece who is being bailed out but bondholders which comprise mostly foreign banks. The global political claque appears to be closing ranks.

One positive aspect is that trade fosters such collaborative action, even if trade could have possibly been just as a guise or a subordinated priority.

This should also serve as a foreign policy guide in dealing with China especially applied to the local Spratlys dispute. Elsewhere in the world, China’s foreign policy appears tilted towards cooperation than belligerency.

Finally, the money China will utilize, from her mounting over $3 trillion forex reserves, in assisting Europe would likely come at the expense of supporting US bonds. This should put more pressure on the US Federal Reserve to redeploy QE but perhaps in another name and or another form.

China has reportedly marginally increased her bond purchases from the US last April, but statistical inflation continues to ramp up (despite 4 policy rate increases). China’s bubble cycle appears to be in the maturing stage as her property sector continues to sizzle despite her government’s actions.

War on Gold and Commodities: Ban of OTC Trades and ‘Conflict Gold’

In the US, in compliance to the new law, the Dodd-Frank Act, Over The Counter (OTC) trades will be prohibited beginning next month.

Lew Rockwell quotes the Forex.com

As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

Next, an initiative to standardized screening of sourcing of gold via certification to prevent so called ‘financing of war or insurgency’ has taken shape.

Diamonds have already been subject to this measure and this has widely been known as Blood Diamond.

From Tyler Durden of Zero Hedge,

In what could be the oddest development in the precious metals market in a long time, the World Gold Council has just unveiled an initiative whose sole purpose if to combat "conflict gold." From the just released notice: "The World Gold Council today announces that, working together with its member companies and the leading gold refiners, it has produced a draft framework of standards designed to combat gold that enables, fuels or finances armed conflict. The draft standards represent a significant, industry-led response to this challenge and are designed to enable miners to produce a stream of newly-mined gold which is certified as ‘conflict free’ on a global basis."

While we are confused what exactly is being pursued with this action, aside from the creation of a black market for gold of course, it does seem that the logical end result will be a decline in the total supply of "certified" gold.

On the other hand, it will also afford the WGC or any prevailing authority the ability to brand any country it so chooses (Indonesia?) a sourcer of "conflict gold" and effectively clamp down on the production of the yellow metal. Additionally, what better way to deprive a gold sourcing country of massive export revenues than to effectively make their product unsellable in the "legitimate" market. Which then would lead to a surge in fair market value due to supply considerations.

While the pretext is to prevent financing illegitimate activities, the ulterior objective is to exert wider swath of control over the gold and commodity markets.

Apparently, all these looks like more signs of desperation as cracks on the US dollar standard widens.

US Economy: Manufacturing and Technology as Sunshine Industries?

Perhaps enrollment trends could serve as an indicator or clue on how the US economy (and perhaps the world economy) will take shape.

According to the Wall Street Journal,

Harvard Business School's incoming class will have a substantially smaller percentage of finance professionals than in previous years. Instead, a higher number of students will have manufacturing and technology backgrounds.

According to preliminary figures from Harvard's admissions department, about 25% of the 919 students in the class of 2013 are from finance industries— including private equity, banking and venture capital—compared with 32% last year.

Harvard administrators say the change reflects a greater quantity of strong applicants from nonfinance industries. The number of applicants from the finance world decreased as recession woes eased, as well.

Students with manufacturing backgrounds make up 14% of the class of 2013, up from 9% the previous year. Technology rose three percentage points to 9%.

Professor Arnold Kling calls it the Patterns of Sustainable Specialization and Trade [PSST] or the process where markets continually work to discover on where consumer demands are or the new patterns of trade.

Harvard’s incoming MBA class shows manufacturing as having the greatest growth followed by technology.

Could this signal that the new patterns of trade will become more apparent in the US manufacturing and technology industries? Will these two industries signify as the sunshine industries? (hat tip Mark Perry)

Video: Understanding Liberty and Equality

Professor James Otteson, in the video below, explains the relationship between Liberty and Equality


From LearnLiberty (bold emphasis mine)

Two central values in American political life are liberty and equality. But are these two values in tension with one another?

As philosophy Prof. James Otteson explains, it depends on how you define them. There is more than one way to think about liberty, and more than one way to think about equality. For example, when talking about equality, there are two different central conceptions. The first is formal equality, equality that comes from the form of institutions. An example of formal equality is equality before the law: all laws apply equally to everyone. Formal equality is a central tenet of the classical liberal tradition, and compatible with individual liberty.

But a second conception of equality is material, or substantive, equality. Material equality holds that people ought to be equal in material respects, such as wealth or resources.

Material equality poses real challenges to classical liberalism, and according to Otteson, also faces challenges of its own. Otteson outlines three major challenges to material equality: first, it may be impossible, both to measure, and to achieve. Second, material equality interferes with human diversity. Humans have different talents, different interests, and different values, which in a free society get reflected in a range of goods & activities that individuals acquire and pursue. To try to enforce some kind of material equality would mean interfering with this diversity.

That leads to the third problem, which is that material equality interferes with human dignity. Part of what it means to have human dignity is to have the capacity and the freedom to make choices. These choices are reflected in the way we live our lives; to respect the free choices that people make is to respect their dignity. Enforcing material equality would necessarily interfere with the free choices that people make.

Ex-US President Jimmy Carter: Call Off the Global Drug War

Former US President Jimmy Carter joins the bandwagon calling for an end to the Global War on Drugs.

Writing in the New York Times, (bold emphasis mine)

IN an extraordinary new initiative announced earlier this month, the Global Commission on Drug Policy has made some courageous and profoundly important recommendations in a report on how to bring more effective control over the illicit drug trade. The commission includes the former presidents or prime ministers of five countries, a former secretary general of the United Nations, human rights leaders, and business and government leaders, including Richard Branson, George P. Shultz and Paul A. Volcker.

The report describes the total failure of the present global antidrug effort, and in particular America’s “war on drugs,” which was declared 40 years ago today. It notes that the global consumption of opiates has increased 34.5 percent, cocaine 27 percent and cannabis 8.5 percent from 1998 to 2008. Its primary recommendations are to substitute treatment for imprisonment for people who use drugs but do no harm to others, and to concentrate more coordinated international effort on combating violent criminal organizations rather than nonviolent, low-level offenders...

Drug policies here are more punitive and counterproductive than in other democracies, and have brought about an explosion in prison populations. At the end of 1980, just before I left office, 500,000 people were incarcerated in America; at the end of 2009 the number was nearly 2.3 million. There are 743 people in prison for every 100,000 Americans, a higher portion than in any other country and seven times as great as in Europe. Some 7.2 million people are either in prison or on probation or parole — more than 3 percent of all American adults!

Some of this increase has been caused by mandatory minimum sentencing and “three strikes you’re out” laws. But about three-quarters of new admissions to state prisons are for nonviolent crimes. And the single greatest cause of prison population growth has been the war on drugs, with the number of people incarcerated for nonviolent drug offenses increasing more than twelvefold since 1980.

Not only has this excessive punishment destroyed the lives of millions of young people and their families (disproportionately minorities), but it is wreaking havoc on state and local budgets. Former California Gov. Arnold Schwarzenegger pointed out that, in 1980, 10 percent of his state’s budget went to higher education and 3 percent to prisons; in 2010, almost 11 percent went to prisons and only 7.5 percent to higher education.

There’s been a snowballing awareness that prohibition laws, particularly the war on drugs, eventually ends up with MORE accrued adverse effects than the intended benefits.

Unfortunately, events will turn for the worst before such feckless laws will get repealed.

And the sad part is that taxpayers everywhere will endure most of the burdens, aside from the extended risks of societal degeneration from the prospects of escalation of violence, rampant corruption, obstacles to medical advancement, loss of civil liberty, police brutality and many other injustices from war on drugs related regulatory abuses.

Noble intentions will not substitute for economic reality, that’s why whether prohibition is applied to drugs, illegal gambling such as jueteng (Philippines), prostitution or etc..., they are all bound for failure.