The US Federal Reserve Moves towards Social Media Censorship

I have been saying that signaling channel is a policy tool used by central banks to manage the public’s ‘inflation expectations’ or price levels of exchange rates. This tool seems to be prominently used since the post Lehman collapse.

I have associated the repeated assaults on the commodity markets as part of this tactical move to project subdued inflation in order to justify more inflationism.

And managing the market’s mindset seems to be on a slippery slope that will perhaps entail escalating information control or censorship on the web.

The Economic Collapse Blog writes,

The Federal Reserve wants to know what you are saying about it. In fact, the Federal Reserve has announced plans to identify "key bloggers" and to monitor "billions of conversations" about the Fed on Facebook, Twitter, forums and blogs. This is yet another sign that the alternative media is having a dramatic impact. As first reported on Zero Hedge, the Federal Reserve Bank of New York has issued a "Request for Proposal" to suppliers who may be interested in participating in the development of a "Sentiment Analysis And Social Media Monitoring Solution". In other words, the Federal Reserve wants to develop a highly sophisticated system that will gather everything that you and I say about the Federal Reserve on the Internet and that will analyze what our feelings about the Fed are. Obviously, any "positive" feelings about the Fed would not be a problem. What they really want to do is to gather information on everyone that views the Federal Reserve negatively. It is unclear how they plan to use this information once they have it, but considering how many alternative media sources have been shut down lately, this is obviously a very troubling sign.

You can read this "Request for Proposal" right here.

Read more here.

Monetary central planners think that they can repeal the laws of economics by applying Orwellian approach in communications management.

More signs of an increasingly desperate US Federal Reserve.

Ron Paul: UN Membership No Guarantee of Sovereignty Recognition

Ron Paul’s take on Palestinian Authority's application for UN membership (bold emphasis added)

I have reservations about the Palestinian drive for UN recognition. Personally I wish the United States would de-recognize the United Nations. As most readers already know, in every Congress I introduce legislation to end our membership in that organization. The UN is a threat to our sovereignty-- and as we are the main source of its income, it is a threat to our economic well-being. Increasingly over the past several years, we see the United Nations providing political and legal cover for the military aspirations of interventionists rather than serving as an international forum to preserve peace. Neoconservatives in the US have grown to love the United Nations as they co-opt the organization under the guise of endless "reform." Under the sovereignty-destroying doctrine of "Responsibility to Protect," adopted at the 2005 World Summit, the UN takes it upon itself to intervene in internal conflicts of its member states whenever it believes that human rights are being violated. Thus under "Responsibility to Protect," the UN provides the green light for a kind of global no-knock raid on any sovereign country.

If asked, I would personally counsel the Palestinians to avoid the United Nations. UN membership and participation is no guarantee that sovereignty will be respected. We see what happens to UN members such as Iraq and Libya when those countries' leaders fall out of favor with US administrations: under US and allied pressure a fig leaf resolution is adopted in the UN to facilitate devastating military intervention. When the UN gave NATO the green light to bomb Libya there was no genocide taking place. It was a purely preventative war. The result? Thousands dead, a destroyed country, and extremely dubious new leaders.

Read the rest here

The UN has been a tool for global political-economic elites to advance their interests around the world.

Classical Liberalism: Towards A Less Violent World

Steve Pinker at the Wall Street Journal brings us a good news: there has been a declining trend of violence worldwide.

Mr. Pinker writes,

Believe it or not, the world of the past was much worse. Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species.

The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

Mr. Pinker attributes the “six major declines of violence” as the process of pacification, civilizing process, the Humanitarian Revolution, the Long Peace, the New Peace and the cascade of "rights revolutions.

He further notes that 3 peacemakers are responsible for the deepening trend towards greater peace.

1. the pacificist state

2. commerce

3. cosmopolitanism or the expansion of people's parochial little worlds through literacy, mobility, education, science, history, journalism and mass media.

In my earlier posts, I showed Hans Rosling in two videos explaining how people have become remarkably wealthier over the past 200 years, through the division of labor (how washing machine enhanced out lives).

Today, I quoted Matt Ridley saying that the successful evolution of the homo sapiens came from trade.

In short, liberalism has been the primary force responsible for bringing about civilization, wider access to information and knowledge, increasing wealth, vastly improved quality of life and charity, all of which has led to lesser appetite for violence.

In the words of the great Ludwig von Mises, (emphasis added)

Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another. Because the division of labor requires undisturbed peace, liberalism aims at the establishment of a system of government that is likely to preserve peace, viz., democracy.

Does Growing Signs of People Power Upheavals in China Presage a ‘China Spring’?

Popular unrest or increasing signs of a ‘China Spring’ appears to be proliferating in China.

From the Wall Street Journal, (bold emphasis mine)

China's massive economic-stimulus program has supported near double-digit growth, but also stoked inflation, piled up debt and fueled another unwelcome development: social unrest.

In 2010, China was rocked by 180,000 protests, riots and other mass incidents—more than four times the tally from a decade earlier. That figure, reported by Sun Liping, a professor at Tsinghua University, rather than official sources, doesn't tell the whole story on the turmoil in what is now the world's second-largest economy.

But what is clear is that the level of social tension and number of protests against the government is rising. That is a sensitive subject as the ruling Communist Party prepares to mark the 62nd anniversary of the founding of the People's Republic of China on Oct. 1.

Earlier I made this observation

China’s top-down political system and her attempt to bottom-up the economic system looks rife for a head-on collision course.

And it’s just a matter of time.

Like in the recent “Arab Spring” populists revolts, consumer price inflation has partly fuelled the unrest.

Again from the same Wall Street Journal article (bold emphasis mine)

Rising prices might not figure as a direct trigger of unrest, but inflation remains a key source of discontent. In an annual survey of social attitudes published by the Chinese Academy of Social Sciences, inflation shot to the top of the list of problems in 2010, up from fifth place in 2009.

There is a reason for that move up the ranks. A sweeping monetary stimulus in 2009 and 2010—with the banks issuing 17.5 trillion yuan ($2.7 trillion) in new loans—translated into higher levels of inflation, reflected largely in food prices. In 2011, the problem has become more severe. The latest data show food prices rose 13.4% year-to-year in August. Prices for pork, China's favorite meat, rose 52.3% to a record level. The urban poor, who spend a large share of their income on food, are hardest hit by food costs.

But what truly has been provoking such restiveness has been China’s strong arm or repressive and inflationist policies combined with cronyism.

If inflation provides the powder keg, the spark that ignites social unrest is likely to come from land grabs. A decade long real-estate boom has made land a valuable commodity. Weak legal protections for property rights and alliances between government officials and developers mean that land often is seized without adequate compensation for residents…

That number could climb. China's local governments have spent the past three years amassing debt—10.7 trillion yuan according to a June estimate by the National Audit Office. Concerns are mounting about whether local governments can repay that debt. This month, local media reported that 85% of local-government borrowers in Liaoning, a province in North East China, didn't have sufficient revenue to make interest payments.

Why did the banks make so many loans to projects with little hope of repayment? One word: land. According to the National Audit Office, 2.5 trillion yuan of loans to local government—23% of the total—depend on sales of land for repayment. Some analysts say the real percentage is much higher.

In 2010, China's local government raised 2.9 trillion yuan in revenue from land sales. Repaying debts will mean selling almost the same amount of land over again. If town halls want to continue paying for hospitals, schools, and other services, the implication is a massive increase in land sales. Even worse, as local governments bring more land to market to pay their debts, excess supply pushes prices down, and the area of land that has to be sold increases.

While China’s current economic boom may have forestalled what may have been a major political revolution, signs are on the wall where continuing policies will likely widen the cracks or amplify political strains until the foundation to China’s bubble economy implodes.

As I earlier wrote,

The desire to uphold the Keynesian unemployment goals will backfire and result to China's version of today's MENA political crisis.

Political instability are corollary to boom bust cycles.

US Derivative Time Bomb: Five Banks Account for 96% Of The $250 Trillion Exposure

From Zero Hedge (bold emphasis mine)

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely."

True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse.

...

Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

Such immense risk exposure by ‘Too Big to Fail’ (TBTF) US banks entail that political actions or policy making will likely be directed towards the prevention of a massive deflationary banking sector collapse from a derivatives meltdown.

And problems at the Eurozone could just be the pin that could ‘pop the bubble’.

This implies greater likelihood of persistent bailout policies which mostly will be coursed through inflationism. It’s an “inflate or die” for politically privileged TBTF banks in the US or in the Eurozone.

Again political leaders appear to be using the financial markets as leverage to negotiate for the passage of such policies.

Proof?

From today’s Bloomberg article, (bold emphasis mine)

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the IMF failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.”

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed “so we can in fact let a state go insolvent” if it can’t pay its bills, she said.

Policy makers can make the EFSF more “efficient” by leveraging it without involving the ECB, German Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013.

Bank of Canada Governor Mark Carney estimated 1 trillion euros ($1.3 trillion) may have to be deployed while U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time that Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

Policymakers have been intensifying their jawboning or mind conditioning of the public of the exigencies of more bailouts.

They will come. But, perhaps, only after the markets endure more pain.

Marc Faber: Asia to Benefit from Imploding Welfare States of the West

Dr. Marc Faber has been an indirect mentor of mine. It has been through his writings which has led me to learn of Austrian Economics, the major pillar of my analytical methodology.

Nevertheless, recently he says that imploding welfare states of the West should be positive for Asia.

The Asian Investor quotes Dr. Faber, (bold emphasis mine)

“Asia should send a thank-you letter to [Federal Reserve chairman Ben] Bernanke” for stimulus policies that have been an “utter failure” for the US but beneficial to Asia.

"We had, essentially, a bank failure in 2008 and the financial system in the Western world went bankrupt. Then it was bailed out by governments and the banks have learned nothing. “

Government intervention in private finance will have a damaging effect to the US and European economies over the long run, he predicts. “In 2008, the financial sector [went] bust, and in the future, the [Western] governments will go bust.”

In contrast, “the Asian banks are in a good shape”, says Faber. “Asia reacted well in the 1997-1998 crisis. A period of deleveraging followed. Businessmen became conservative. They paid down debts and the banks became very cautious in terms of their lending.”

As a result, he has more confidence in Asian banks than their Western counterparts. “I would deposit money with a Thai bank, no problem. They will pay me back. They don’t know what derivatives [are], because the derivatives salesmen never get through the traffic in Bangkok,” he quipped.

“I would rather stick to emerging economies than Europe and the US.”

For as long as Asia resists the siren song of the welfare based political economy and shun protectionism, the policy divergences between the West and the East should imply for a wealth convergence, where Asia’s potential higher returns on investments emanating from the declining relative trend of interference from the region’s governments should attract more of the savings from the West.

The above would compliment domestic growth dynamics for as long as Asian governments continue to ease on economic restrictions or regulations.

This also implies that the current contagion based financial market meltdown in Asia—mainly transmitted from the boom bust cycle policies of Western governments which have been aimed at the preservation of the unsustainable state of incumbent political institutions—is likely a temporary event.

And given the right conditions (not yet today) would present as ‘buy’.

Quote of the Day: Trade Made Us Superior

Fantastic quote from the prolific Matt Ridley (bold emphasis mine)

There was no sudden change in brain size 200,000 years ago. We Africans—all human beings are descended chiefly from people who lived exclusively in Africa until about 65,000 years ago—had slightly smaller brains than Neanderthals, yet once outside Africa we rapidly displaced them (bar acquiring 2.5% of our genes from them along the way).

And the reason we won the war against the Neanderthals, if war it was, is staring us in the face, though it remains almost completely unrecognized among anthropologists: We exchanged. At one site in the Caucasus there are Neanderthal and modern remains within a few miles of each other, both from around 30,000 years ago. The Neanderthal tools are all made from local materials. The moderns' tools are made from chert and jasper, some of which originated many miles away. That means trade.

Evidence from recent Australian artifacts shows that long-distance movement of objects is a telltale sign of trade, not migration. We Africans have been doing this since at least 120,000 years ago. That's the date of beads made from marine shells found a hundred miles inland in Algeria. Trade is 10 times as old as agriculture.

At first it was a peculiarity of us Africans. It gave us the edge over Neanderthals in their own continent and their own climate, because good ideas can spread through trade. New weapons, new foods, new crafts, new ornaments, new tools. Suddenly you are no longer relying on the inventiveness of your own tribe or the capacity of your own territory. You are drawing upon ideas that occurred to anybody anywhere anytime within your trading network…

That is what trade does. It creates a collective innovating brain as big as the trade network itself. When you cut people off from exchange networks, their innovation rate collapses. Tasmanians, isolated by rising sea levels about 10,000 years ago, not only failed to share in the advances that came after that time—the boomerang, for example—but actually went backwards in terms of technical virtuosity. The anthropologist Joe Henrich of the University of British Columbia argues that in a small island population, good ideas died faster than they could be replaced. Tierra del Fuego's natives, on a similarly inhospitable and small land, but connected by trading canoes across the much narrower Magellan strait, suffered no such technological regress. They had access to a collective brain the size of South America.

Today is My 'Lazy' Day

Today is a special day for me. It's gonna be my lazy day--No reading, no writing or blogging after this.

Bruno Mars best expresses what I desire to do on my special lazy day.

War on Precious Metals: Has the Eurozone been Gradually Restricting Individual Gold Purchases?

Yes says Marc Slavo of SHTF Plan

A couple of weeks ago our report that some Austrian banks had begun restricting the sale of gold and silver to 15,000 Euro (~$20,000 USD) reportedly because of money laundering issues was met with disbelief by many readers of financial news and information web sites. As we mentioned in that commentary, it is our view that governments, namely in Western nations, are making it more difficult for individuals to make gold purchases, as well as to do so anonymously.

It looks like this trend of restricting the peoples’ ability to acquire assets of real monetary value is expanding. If a recent report from France is accurate, and based on the French governments official web site it looks like it is, then as of September 1, 2011, anyone attempting to sell or purchase ferrous or non-ferrous metals, which includes gold and silver, will be required to pay for their purchase via a credit card or bank wire transfer if it exceeds 450€ (~ $600 USD):

“Here is the applicable French law via www.legifrance.gouv.fr and translated into English by Google Translate:

“Article L112-6
Amended by Law n ° 2011-900 of July 29, 2011 – art. 51 (V)

“I. Can be made in cash payment of a debt greater than an amount fixed by decree, taking into account the place of tax residence of the debtor and the professional purpose of the operation or not.

“In addition a monthly fixed by decree, the payment of salaries and wages is subject to the prohibition contained in the preceding paragraph and shall be made by check or by transfer to a bank or postal account or account held by a payment institution.

“Any transaction on the retail purchase of ferrous and non ferrous is made by crossed check, bank or postal transfer or by credit card, not the total amount of the transaction may not exceed a ceiling set by decree. Failure to comply with this requirement is punishable by a ticket for the fifth class.

“II.-I Notwithstanding, the costs of the department conceded that exceed the sum of 450 euros must be paid by bank transfer. (bold highlights original-Prudent Investor)

“III.-The preceding provisions shall not apply:

“a) For payments made by persons who are incapable of binding themselves by a check or other payment, as well as those who have no deposit account;

“b) For payments made between individuals not acting for business purposes;

“c) paying the expenses of the state and other public figures.

According to independent reports the law was passed to curb the illegal sale of stolen metals like copper, steel, etc. Given the rampant rise in thefts of these metals from telephone poles, construction sites and businesses here in the United States, we can certainly see this as a reasonable assessment for why the French passed this law.

When governments see their political privileges being eroded as a result of their own policies, the next set of actions would be to destroy any competitive threats on their monopoly franchise of money by restricting the ownership of metals.

I am reminded by the wisdom of the great F. A. Hayek who once wrote in Choice in Currency, (bold emphasis mine)

There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue…

…This was observed many times during the great inflations when even the most severe penalties threatened by governments could not prevent people from using other kinds of money; even commodities like cigarettes and bottles of brandy rather than the government money—which clearly meant that the good money was driving out the bad…

…But the malpractices of government would show themselves much more rapidly if prices rose only in terms of the money issued by it, and people would soon learn to hold the government responsible for the value of the money in which they were paid. Electronic calculators, which in seconds would give the equivalent of any price in any currency at the current rate, would soon be used everywhere. But, unless the national government all too badly mismanaged the currency it issued, it would probably be continued to be used in everyday retail transactions. What would be affected mostly would be not so much the use of money in daily payments as the willingness to hold different kinds of money. It would mainly be the tendency of all business and capital transactions rapidly to switch to a more reliable standard (and to base calculations and accounting on it) which would keep national monetary policy on the right path.

Legislative restrictions will not prevent people from switching to good money.

The Ugly Head of Protectionism Resurfaces in Brazil

In my view, Brazil’s recent boom has been getting into the heads of their policymakers.

From the Economist, (bold emphasis mine)

ON SEPTEMBER 15th Guido Mantega, Brazil’s finance minister, announced a 30-point increase in the country’s industrial-product tax on cars. The amount was startling, but the purpose familiar. Cars that are mostly made in Brazil, Mexico or the Mercosur trade block will be exempt; only importers will pay. “Brazilian consumption has been appropriated by imports,” he said in announcing the tax.

According to the National Carmakers’ Association, poor infrastructure and pricey credit and labour mean that making cars is 60% more expensive in Brazil than in China. Local manufacturers have long relied on high tariffs. Imports are gaining market share, from 16% of sales in 2009 to 23% this year. The new measure will probably reverse that trend, since it will increase the price of imports by a quarter.

The government has taken small steps to help local firms.

Contrary to the publicly stated goals, Brazil’s politicians will not be helping local firms but politically favored ones or political cronies.

Yet more ugly head of protectionism in Brazil

Again from the same Economist article,

Farmland is being treated as a strategic asset on a par with oil. Last year, spooked by the idea of foreign sovereign-wealth funds and state-owned firms buying up vast tracts, the government resurrected a 1971 law limiting the amount of rural land foreigners can buy. It was revived even though in the 1990s it was deemed incompatible with the new democratic constitution and open economy. The details are under review: foreigners may be allowed to buy a bit more without restriction, and still more if the government thinks it is in the national interest. But there is no timetable for passing a new law. The Brazilian Rural Society estimates that $15 billion of planned foreign agriculture investments are being dropped.

The strength of the new protectionist mood can be gauged by the government’s willingness to tolerate legal uncertainty and collateral damage. It reintroduced the antique land-ownership law despite knowing that its flawed design would almost halt much-needed foreign investment. Since it limits the total share of each district that can be owned by foreigners, many land registries are playing it safe and rejecting all foreign purchasers. Kory Melby, an agricultural consultant, advises foreigners on land purchases in Brazil. He says he has heard from furious sellers whose deals are now “as good as garbage”.

As the great Murray N. Rothbard once wrote,

The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favored high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favored alliances with nobles and with cartelizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries.

Neither did the cartelizing companies need much of a theory to come out in favor of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles, or favored business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles, and monopoly export companies. And who does not want the supply of money in their pockets to rise?

Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist "theory" was a set of rationales designed to uphold or expand particular vested economic interests.

Perhaps, the current market crash may bring about some humbling effects on them.

War on Precious Metals: Amidst Market Slump, Credit Margins Raised Anew!

From Barrons,

The CME Group (CME) on Friday raised margin requirements for some gold, silver and copper futures contracts. The hikes will be effective after the close of business on Monday, according to the exchange operator.

Initial requirements to trade and hold gold’s benchmark contract rose 21% to $11,475 per contract. Meanwhile, maintenance margins climbed to $8,500 from $7,000 per contract.

At the same time, initial requirements for silver rose 16% to $24,975 a contract and maintenance margins increased to $18,500 from $16,000 a contract.

Initial requirements for copper jumped 18% to $6,750 per contract, from $5,738. Also, maintenance margins were increased to $5,000 from $4,250 per contract.

Margin hikes have been blamed by traders for curtailing rallies earlier in the year. This time around, however, CME’s attempt to again dampen speculation comes at a time when market forces are already seemingly at work doing much the same.

Here is how the gold and the precious metal markets responded.

From Barrons,

Silver futures kept heading down on Friday, finishing with an 18% fall marking the metal’s biggest drop in decades. Meanwhile, the most active gold contract in New York sank 5.9% to register its largest percentage loss since June 2006.

More from Bloomberg,

Commodities fell to a nine-month low, led by routs in metals, on deepening concern that governments are running out of tools to avert a global recession, eroding prospects for raw-material demand.

European officials may accelerate the setup of a permanent rescue fund as the sovereign-debt crisis mounts. On Sept. 21, the Federal Reserve said the U.S. economy faces “significant downside risks.” In the next two days, gold plunged the most since 1983, and copper had the biggest slide in almost three years. Today, silver posted the largest drop in 32 years…

“We are seeing commodity prices correcting, so they are more compatible with the global economy,” said Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen. “When we have fears over the economic cycle as we have now and a higher probability of contraction, it hits industrial metals and commodities.”

“We are not predicting a recession in the Western world, but low growth for the long term,” Tuxen said. “We are looking for a rebound in China and Asia in the fourth quarter and in 2012, which will help copper and aluminum.”

Some things to note here

The current financial market carnage has been indicating of an ongoing liquidity contraction, given that Mr. Bernanke’s has thwarted expectations of further aggressive rescue policies. Yes, Bernanke’s non inflation stance is something to cheer at, but this has not been about political-economic apostasy but rather about political obstacles.

Second, the timing of CME’s intervention appears suspicious. Such needless interventions have been weighing on an already bleak sentiment.

Yet the public is being impressed upon by media and experts that this has been about economic performance. If current environment is “not predicting a recession” then the dramatic selloff in commodities would seem unwarranted, except for liquidity and or manipulation issues.

I deem this continuing series of credit margin hikes as part of the signaling channel tool employed by team Bernanke to project on the intensifying risk environment of a deflationary bust, which will be used to rationalize QEs and to quell QE policy dissenters. As stated above, I am don’t think that Mr. Bernanke has backtracked from his activist central banking dogma.

And as pointed out earlier, Mr. Bernanke appears to be implicitly challenging his political detractors by laying the recent market carnage on their doors.

My guess is that eventually the divided FOMC will accede to Bernanke’s policy preferences, but that would entail more market pressures. In other words, the global financial markets would remain hostage to, or will be used as negotiation leverage by the political class in furtherance of their interests.

But until there will be clarity in the directions of policy actions, it would be best to stay clear from the current environment whom signifies as victims of the imbroglio or the bickering of political stewards.

Nonetheless, despite the slump in precious metals, these are likely to be temporary events.

Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms

Despite my current circumstances, I felt the compulsion to offer a reaction on today’s market meltdown.

Here is what I recently wrote,

I would certainly watch the US Federal Reserve’s announcement and the ensuing market response.

If team Bernake will commence on a third series of QE (dependent on the size) or a cut in the interest rate on excess reserves (IOER), I would be aggressively bullish with the equity markets, not because of conventional fundamentals, but because massive doses of money injections will have to flow somewhere. Equity markets—particulary in Asia and the commodity markets will likely be major beneficiaries.

As a caveat, with markets being sustained by policy steroids, expect sharp volatilities in both directions.

Obviously the market’s response on team Bernanke’s failure to deliver on what had been expected has apparently been violent.

The Philippine Phisix (chart from technistock.net), as well as ASEAN equity markets, has basically suffered the same degree of bloodbath relative to her developed economy equity market peers

This reaction from a market participant captures the underlying sentiment. From a Bloomberg article

“This is not likely to provide any significant stimulus,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “The market really needed a boost of confidence. There is no confidence from this.”

So what did the Mr. Bernanke deliver?

Again from the same article at Bloomberg

The Federal Reserve will replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

The central bank will buy securities with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.

Chairman Ben S. Bernanke expanded use of unconventional monetary tools for a second straight meeting after job gains stalled and the government lowered its estimate of second- quarter growth. Yields on 30-year Treasuries fell below 3 percent for the first time since 2009 and U.S. stocks had their biggest drop in a month on the Fed’s plan, dubbed “Operation Twist” after a similar Fed action in 1961.

The twist, as earlier stated, has been telegraphed. What was not expected has been the non-appearance of Bernanke’s QE which resulted to today’s convulsions.

The ‘twist’ which essentially attempts to flatten the yield curve basically reduces the banking system’s profitability from the borrow short and lend long (maturity transformation) platform that has partly catalyzed these selloffs.

From the Wall Street Journal

But for bankers, who are already struggling with low interest rates on loans and tepid loan demand, the twist option could further dent already-weakened profits. That is because lower long-term interest rates would result in contracting net interest margins for banks—essentially, the profit margin in the lending business—at a time when their revenue is growing slowly, if at all. Banks would earn less on loans and investments, and might end up making fewer loans as well.

"Ouch" is how one executive at a big retail bank described the prospect of Operation Twist. (Bankers typically don't publicly comment on Fed policy given the central bank's role as a bank regulator.)

Austrian Economist Bob Wenzel says that Operation Twist represents a failed experiment…

So how did the original Operation Twist turn out? Three Federal Reserve economists in 2004 completed a study which, in part, examined the 1960's Operation Twist. Their conclusion (My bold):

“A second well-known historical episode involving the attempted manipulation of the term structure was so-called Operation Twist. Launched in early 1961 by the incoming Kennedy Administration, Operation Twist was intended to raise short-term rates (thereby promoting capital inflows and supporting the dollar) while lowering, or at least not raising, long-term rates. (Modigliani and Sutch 1966).... The two main actions of Operation Twist were the use of Federal Reserve open market operations and Treasury debt management operations.. Operation Twist is widely viewed today as having been a failure, largely due to classic work by Modigliani and Sutch.”

The economists go on to state that the size of Operation Twist was relatively small, possibly too small to determine if such an operation could be successful if carried out at on a larger scale. That experiment is now being conducted on the economy of the United States with the $400 billion Operation Twist announced today. How big was the original Operation Twist? $8.8 billion.

The three Fed economists, who seem to concur that the first Operation Twist was a failure, are sure going to get an experiment on the United States economy on a much grander scale to see if this time it will work different than it did the first time. So who are these three lucky Fed economists who are now going to be able to witness Operation Twist on a grander scale? Vincent R. Reinhart, Brian P. Sack and BEN S. BERNANKE.

So part of the market’s virulent reaction signifies a revolt on Bernanke’s experimental policy. This is an example of how interventionist measures prompts for heightened uncertainties.

The Fed also promised to support mortgage markets by keeping the interest low. Again from the same Bloomberg article,

The central bank said today it will also reinvest maturing housing debt into mortgage-backed securities instead of Treasuries “to help support conditions in mortgage markets.”

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates tumbled the most in more than two years relative to Treasuries. The average rate on a typical 30-year fixed loan fell to a record low 4.09 percent last week.

So why has Bernanke failed to live up with the expectations for more QE?

Like in the Eurozone, there has been mounting opposition to Bernanke’s inflationist bailout policies as seen by a divided FOMC… (same Bloomberg article)

The FOMC vote was 7-3. Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the FOMC decision for a second consecutive meeting. They “did not support additional policy accommodation at this time,” the Fed statement said today.

…and from some Republicans who mostly recently who made public representations against further QEs.

Republican lawmakers including Boehner and Senate Minority Leader Mitch McConnell urged Bernanke in a letter this week to refrain from additional monetary easing to avoid “further harm” to the economy.

This is aside from political pressures applied by his predecessor, Paul Volker

In my view, Chairman Ben Bernanke could be:

-trying to lay the blame of policy restraints at the foot of his opponents in the recognition that markets would behave viciously from a stimulus dependent ‘withdrawal syndrome’, or

-that his penchant for grand experiments made him deliberately withhold QE to see how the markets would respond to his innovative ‘delusion of grandeur’ measures.

By withdrawal, I don’t mean a reduction of the Fed’s balance sheet, which the Fed aims to maintain (which probably would incrementally expand on a less evident scale) but from further specifically targeted asset purchases. The ‘twist’ essentially sterilizes the operation which means no money supply growth.

Today’s brutal reaction in global financial markets essentially validates my view that the contemporaneous market has been built on boom bust policies such that NOT even gold prices has been spared.

The tight correlations in the collapsing prices of equities and commodities as well as the rising dollar (falling global currencies) are manifestations of a bust process at work.

The primary issue here is that in absence of government’s backing via assorted stimulus, mostly via monetary injections, artificially established price structures from government stimulus or from credit expansion unravels.

Only when the tide goes out, to paraphrase Warren Buffett, do we know who has been swimming naked.

Or as Austrian economist George Reisman writes,

A fundamental fact is that our present monetary system is characterized both by irredeemable paper money, i.e., fiat money, and by credit expansion. There is no limit to the quantity of fiat money that can be created. This is the foundation for potentially limitless inflation and the ultimate destruction of the paper money, when the point is reached that it loses value so fast that no one will accept it any longer. The fact that our monetary system is also characterized by credit expansion is what creates the potential for massive deflation — for deflation to the point of wiping out the far greater part of the money supply, which in the conditions of the last centuries has been brought into existence through the mechanism of credit expansion

Blogging Hiatus

Because of a personal emergency, I am not certain if I can go on posting through the weekend. But if I find the any opportunity to do so, I will give a try.

Thanks for your understanding.

Quote of the Day: Fallacy of Animal Spirits

From Bob Wenzel

Markets clear. If consumer products are out there, they will be purchased, and a production-consumption structure will emerge based on those prices. Steve Jobs isn't successful selling iPads and iPhones because consumers are confident. He is able to sell them because first he produced the products, second consumers desire the products he has produced, and third the products are sold at a price where the market clears, which also happens to be at a price where Apple can make a profit.

Consumers can be totally unconfident about the economy to the point where iPads and iPhones have only consumer demand at $1.00. If all other products are also bid at such an overall low price level, the factors of production will adjust to the new low price level and products will continue to be produced. Keynesian concerns about "confidence", "animal spirits" etc. have no place in an economy where markets are allowed to clear through pricing.

Again beware of the fallacy of mistaking effects (confidence-fear, greed) as causes.

Declining World Economic Freedom (includes the Philippines)

The Cato Institute and the Fraser Institute has just published the 2011 Economic Freedom of the World with bleak results.

From Cato’s Ian Vasquez (bold emphasis mine)

After having risen for decades, global economic freedom has fallen for a second year in a row. That’s according to Economic Freedom of the World: 2011 Annual Report co-published today with the Fraser Institute. The average global economic freedom score rose from 5.53 (out of 10) in 1980 to 6.74 in 2007 and has fallen to 6.64 in 2009, the last year for which data is available.

As the graph below shows, the United States has had one of the largest declines in the past decade. It now ranks in 10th place compared to 3rd in 2000, largely due to higher government spending and lower ratings on “rule of law” measures.

The report documents the strong, positive relationship between economic freedom and a range of indicators of standard of living including wealth, economic growth, longer life spans, better health care, lower poverty, civil and political liberties, and so on.

Economic freedom is central to human progress. As the response of activist governments to financial and ongoing debt crises fails to address underlying issues responsible for low growth and high unemployment, this report is an important empirical reminder about the wide-ranging consequences of politics or markets in determining the use of resources.

More from the study

Economic freedom has suffered another setback

• The chain-linked summary index permits comparisons over time. The average economic freedom score rose from 5.53 (out of 10) in 1980 to 6.74 in 2007, but fell back to 6.67 in 2008, and to 6.64 in 2009, the most recent year for which data are available.

• In this year’s index, Hong Kong retains the highest rating for economic freedom, 9.01 out of 10. The other nations among the top 10 are: Singapore (8.68); New Zealand (8.20); Switzerland (8.03); Australia (7.98); Canada (7.81); Chile (7.77); United Kingdom (7.71); Mauritius (7.67); and the United States (7.60).

• The rankings (and scores) of other large economies are Germany, 21 (7.45); Japan, 22 (7.44); France, 42 (7.16); Italy, 70 (6.81); Mexico, 75 (6.74); Russia, 81 (6.55); China, 92 (6.43); India, 94 (6.40); and Brazil, 102 (6.19).

• The bottom 10 nations are: Zimbabwe (4.08); Myanmar (4.16); Venezuela (4.28); Angola (4.76); Democratic Republic of Congo (4.84); Central African Republic (4.88); Guinea-Bissau (5.03); Republic of Congo (5.04); Burundi (5.12); and Chad (5.32).

The world’s largest economy, the United States, has suffered one of the largest declines in economic freedom over the last 10 years, pushing it into tenth place. Much of this decline is a result of higher government spending and borrowing and lower scores for the legal structure and property rights components. Over the longer term, the summary chainlinked ratings of Venezuela, Zimbabwe, United States, and Malaysia fell by eight-tenths of a point or more between 1990 and 2009, causing their rankings to slip.

The chain-linked summary ratings of Uganda, Zambia, Nicaragua, Albania, and Peru have increased by three or more points since 1990. The summary ratings of eight other countries—Bulgaria, Poland, El Salvador, Romania, Ghana, Nigeria, Hungary, and Guinea-Bissau—increased by between two and three points during this same period.

The spate of government interventions which can be seen via “higher government spending and borrowing” and various forms of legislative and monetary policy interventions, especially in the developed world (meant to save the highly privileged banking sector) has definitely been weakening the underlying trends of global economic freedom.

Distortion of price signals in the marketplace has been one big symptom.

All these will continue for as long as politics is the preferred avenue to solve current social predicaments.

Nevertheless, it’s hardly been good news for the Philippines…

…whose Economic Freedom continues to decline since 2005

Quote of the Day: The Religion called Government

From Ron Paul

It has been said that when all you have is a hammer, everything is a nail. Our government is full of people who sincerely believe big government and more spending is the answer to every problem. They automatically look to government for every solution. Government is their hammer, and all they know to do is to keep hammering. When government "solutions" still don't solve the problems, they are unfazed. They keep calling for more government, more laws, and more programs. Americans are tired of being treated like nails.

This government-centric mindset is the root of the problem. People who think this way are naturally drawn to politics and government. To them, the Constitution is an annoying road block, something to get around, or ignore.

Such dogmatism looks like a universal phenomenon, not limited to Americans. Also this seem to deeply ingrained to the Filipino mindset.

OPEC’s Welfare State: Buying Off the Populace to Maintain Political Power

From Bloomberg, (bold highlights mine)

Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150 billion in additional spending this year on their citizens. They will need to keep U.S. benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp…

OPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the U.S. government said…

This time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency KUNA said in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.

“As soon as the government announced handouts, people went out and bought cars,” said John Stadwick, managing director of General Motors Co. (GM)’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20 billion for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20 billion from Qatar and $4 billion from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

Of OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the U.A.E. doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1 billion wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

For many of the incumbent political leaders of OPEC nations, buying off the population with expanded welfare spending extracted from oil revenues will only buy them sometime to preserve their grip on power.

With the growth of welfare spending increasing the cost of oil, OPEC’s welfare state has increasingly been dependent or sensitive to ascendant levels of the prices of oil.

Anytime oil prices don’t keep up with the cost of maintaining the system heightens the risks of political upheaval (Arab Springs).

So we can expect welfare states even among resource rich (resource curse) nations to continue to yearn for inflationism. As this should keep commodity prices elevated, as well as, depreciate the purchasing power of money used to finance the current welfare spending.

Again inflation is a policy that won’t last.

Paul Volker Swings at Ben Bernanke on Inflationism

Writing at the New York Times former Federal Reserve Chairman Paul A. Volcker takes a swing at Ben Bernanke over the latter’s inflationist policies (bold emphasis mine)

IN all the commentary about Ben S. Bernanke’s recent speech in Jackson Hole, Wyo., little attention has been paid to six crucial words: “in a context of price stability.” Those words concluded a discussion by Mr. Bernanke, the Federal Reserve chairman, of what tools the central bank could consider appropriate to promote a stronger economic recovery.

Ordinarily, a central banker’s affirming the importance of price stability is not headline news. But consider the setting. There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.

It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.

The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability.

Well, good luck.

Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth.

My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.

What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate.

It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy.

At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.

Mr. Paul Volker appears to live up by his “inflation fighting” reputation

And with special emphasis, Mr. Volker criticism highlights Mr. Bernanke’s excessive reliance on models.

Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way.

Mr. Volker’s stinging rebuke reminds me that inflation is not a policy that will last.

From the great 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.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.