Is Ron Paul Being Cheated out of the GOP Caucuses?

Electoral vote shaving isn’t just a common phenomenon in Philippine elections, indications are that such fraud may be happening in the US despite only the GOP caucuses (not general elections yet).

From the Business Insider,

By now, it is clear that the Maine caucuses were a complete mess.

Evidence is mounting that Mitt Romney's 194-vote victory over Ron Paul was prematurely announced, if not totally wrong. Washington County canceled their caucus on Saturday on account of three inches of snow (hardly a blizzard by Maine standards), and other towns that scheduled their caucuses for this week have been left out of the vote count. Now, it looks like caucuses that did take place before Feb. 11 have also been left out of final tally.

As the full extent of the chaos unfolds, sources close to the Paul campaign tell Business Insider that it is looking increasingly like Romney's team might have a hand in denying Paul votes, noting that Romney has some admirably ruthless operatives on his side and a powerful incentive to avoid a fifth caucus loss this month.

According to the Paul campaign, the Maine Republican Party is severely under-reporting Paul's results — and Romney isn't getting the same treatment. For example, nearly all the towns in Waldo County — a Ron Paul stronghold – held their caucuses on Feb. 4, but the state GOP reported no results for those towns. In Waterville, a college town in Central Maine, results were reported but not included in the party vote count. Paul beat Romney 21-5 there, according to the Kennebec County GOP.

Here is a video of the alleged fraud, (hat tip Professor Robert Murphy)

The Ron Paul revolution seems emblematic of the zeitgeist signifying the structural challenge posed by the forces of decentralization against the established forces of the industrial age top-down welfare-warfare based political institutions.

As one would observe, the substantial growth in Ron Paul’s following has been defying the establishment’s implicit campaign to repress his presence (such as media blackout), the exclusion from Jewish forum debate and etc...

I would even posit that some of the GOP candidates have been fielded (by vested interest groups) to erode on Ron Paul’s growing influence over the voting population.

The Ron Paul phenomenon has clearly been bolstered by the internet where the latter as a medium of communication and connectivity has apparently been taking over the lead from mainstream media.

The US may not be the world’s biggest user but has been the largest in terms of penetration level (chart from internetworldstats.com)

And the supposed fraud seems likely as more evidence of fear by the entrenched establishment of an anti-establishment candidate commanding clout from the voters. So the continued task to suppress candidate Paul’s rise.

Ron Paul may not win (which the insiders will make sure of) but his ascendance clearly marks the sign of the times.

Quote of the Day: True Patriotism

Mr. Jacob Hornberger, founder and president of The Future of Freedom Foundation, on true patriotism

The true patriot scrutinizes the actions of his own government with unceasing vigilance. And when his government violates the morality and rightness associated with principles of individual freedom and private property, he immediately rises in opposition to his government.

Graphic: A Valentine Day’s Card for the Economist

If you have an economist as a S.O. (significant other), don’t be surprised if he/she sends you a valentine's day greeting card with the following graphics…or you can send one.

There are 14 ways in graphs, how the economist express their love, check out the rest here (hat tip the Economist blog). [warning: the layman may find this boring!]

War on Drugs: Guatemala President Proposes Legalization

Prohibition laws, though popular, has not worked before and won’t work today, whether applied to alcohol, prostitution, drugs and etc, for the simple reason that demand and supply can’t be wished away by fiat.

Worst, applying prohibition signifies as the proverbial cure that is worst than the disease.

Apparently Guatemala’s President, Otto Pérez Molina, seems to see the light.

From Cato’s Juan Carlos Hidalgo, (bold emphasis mine)

It was going to happen sooner rather than later. Three years ago, a trio of former Latin American presidents denounced drug prohibition and called to “break the taboo” of discussing policy alternatives such as drug decriminalization. Then, a few months later, we had a former Mexican president calling for outright legalization. Late last year, a sitting Colombian president said that he would favor drug legalization “if the rest of the world does it too.” This weekend,a sitting Guatemalan president said he will propose drug legalization for Central America in an upcoming regional summit.

Otto Pérez Molina thus becomes the first sitting head of state to propose ending the war on drugs. Being a conservative former general who ran on a platform of fighting crime with “an iron fist,” Pérez Molina is an unlikely champion of sensible drug policy reform. As he described it, under his proposal “It wouldn’t be a crime to transport, to move drugs. It would all have to be regulated.” Pérez Molina says that with legalization, “you would get rid of money-laundering, smuggling, arms trafficking and the corruption that has crippled judges, police forces and entire government institutions, not only in our country but in the region.”

Central America is one of the hottest battlegrounds in Washington’s hemispheric war on drugs. Guatemala, along with neighboring Honduras, El Salvador and Belize, are among the most violent countries in the world. Most of the violence stems from turf wars between juvenile gangs, but Mexican drug cartels are increasingly escalating it as they extend their influence and operations in the region.

As Pérez Molina said, Central America’s biggest liability in its fight against organized crime is its institutional weakness. Judges, policemen, politicians, and soldiers are easily corrupted by cartels. Despite increasing their security budgets by 60% in the last five years, Central American countries spent approximately $4 billion in 2010 on security and justice. This amount dwarfs with the estimated $25-35 billion that Mexican cartels—who run the drug business in Central America—pocket every year.

Institutional corruption has been a major unintended effect from the war on drugs.

As economist Mark Thornton explains,

In general, however, prohibition results in more, not less, crime and corruption. The black markets that result from prohibitions represent institutionalized criminal exchanges. These criminal exchanges, or victimless crimes, often involve violent criminal acts. Prohibitions have also been associated with organized crime and gangs. Violence is used in black markets and criminal organizations to enforce contracts, maintain market share, and defend sales territory.

The crime and violence that occurred during the late 1920s and early 1930s was a major reason for the repeal of Prohibition (Kyvig 1979, 123, 167). The nondrug criminal activity of heroin addicts has been associated with the economic effects of prohibition laws and is viewed by Erickson (1969) and others as a major cost of heroin prohibition.

Corruption of law-enforcement officers and other public officials is also a familiar manifestation of prohibited markets. Experience with prohibition has shown it to be a major corrupting influence. The corruption of the Prohibition Bureau proved to be a major stumbling block to the effective enforcement of Prohibition and was also cited as a reason for repeal. Most important, this corruption penetrates beyond the enforcement bureaucracy to government in general.

Recent experience has shown that worldwide multidrug prohibition is a major corrupting force in several national governments, such as Colombia and Mexico.

Corruption is a natural side-effect from interventionism.

Yet there are three ways to deal with the drug menace: prohibition, education and rehabilitation-therapy.

Since prohibition predominantly fails, then the next two options would provide for better alternatives: focus on education and rehabilitation.

Mega-Success, Downfall and Sentimentalism

Libertarian columnist Robert Ringer writes,

Seems like we’ve been here before … many, many times. Whitney Houston’s tragic death is the latest in a long string of drug- and alcohol-related celebrity deaths, going back to Jimi Hendrix and Janis Joplin in 1970, Jim Morrison in 1971, Elvis in 1977, Andy Gibb and John Belushi in the eighties, and, of course, Michael Jackson in 2009. And these are just a few of the names that come quickly to mind.

When a show-business icon dies prematurely, we tend to focus on his/her death rather than the life that led to that death. In the case of Whitney Houston, her travails were in the news so much over the years that even I — not a frequent showbiz reader — was aware of them. Anyone who watched the evening news couldn’t help but know about her bouts with drugs and alcohol, and, perhaps even worse, her fifteen-year marriage to a man who physically abused her.

Mr. Ringer says that immaturity (from youth) compounded by loneliness, rather than mega-success brings about the typical downfall of many celebrities.

In my view, mega-success and too much expectations of one’s value to the world can exacerbate ‘immaturity’, aside from inability to adjust to realities. In the average person, wisdom usually supersedes immaturity as people age. So if age doesn’t usher in maturity, then there must be something else wrong.

And possibly intractable egotism bloated by mega-success can be a factor in one’s downfall (not necessarily limited to celebrities). Again the inability to adjust with changing times could bring about loneliness and frustrations.

Of course, all the above depends on the individual’s value scales. This means that while some celebrities fall for the above traps, many others don’t.

But there is another factor I would like to point out. While I lament the loss of many artists of my generation, I usually get miffed at the excessive sentimentality expressed by many to recently deceased celebrities.

For me, this represents an action inconsistent compared to when the celebrity lived. Then, nobody seems to given a whit to what the celebrity did (most especially when they were down). Somewhat like schadenfraude, death becomes an opportunity for credit grabbing, promotion of shows and for social signaling.

Yet this seems part of how public opinion gets molded.

Bank of Japan Yields to Political Pressure, Adds $128 billion to QE

From the Bloomberg,

Japan’s central bank unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and set an inflation target after an economic slide fuelled criticism it has been slower to act than counterparts.

An asset fund rose to 30 trillion yen, with a credit lending program at 35 trillion yen, the central bank said in Tokyo today. The BOJ said today that it will target 1 percent inflation for now. The overnight lending rate stayed between zero and 0.1 percent.

Stocks rose and the yen weakened against the dollar as the central bank expanded stimulus for the first time since October to revive an economy that shrank 2.3 percent in the fourth quarter. Lawmakers had urged extra efforts to counter deflation after the Federal Reserve adopted a 2 percent inflation target and the European Central Bank expanded its balance sheet.

Today’s decision “shows the BOJ bowed to political pressure,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “There will probably be limited impact on the yen’s gains.”

Twelve of 13 economists surveyed by Bloomberg News had anticipated no change in stimulus or rates.

Obviously the BoJ succumbed or ‘bowed’ to the blackmail or pressures applied by the politicos. This announcement basically fulfills my contrarian expectations (the mainstream didn't see this coming).

Here is what I wrote last Sunday,

…politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

There will be more to come. Central banking independence? Duh!

Paper Money’s Usefulness

In Zimbabwe, the former Zimbabwe dollar was used as toilet paper or for mural décor.

Hungary’s Central Bank discovers a new use.

From the Telegraph (hat tip Professor Robert Murphy)

Hungary's central bank is burning old monetary notes to help the needy in Europe's deadly cold snap.

The bank is pulping wads of old notes into briquettes to help heat humanitarian organisations.

"It's a very useful charitable act, a vital aid for our foundation because we can save part of our heating costs," said Krisztina Haraszti, the head of a centre for autistic children in the impoverished northeastern town of Miskolc.

It helped the centre, which also provides aid to autistic adults, save between 50,000 and 60,000 forints (£200) a month, which is a "considerable sum in this time of crisis," she told AFP.

Since the briquettes have a high calorific value, "one only needs to add a few bits of wood and the rooms are really warm," said Haraszti.

As Voltaire once said "Paper money returns to its intrinsic value—zero."

Video: The Economics of Valentine's Day

In the following video, Professor Chris Coyne explains (via Learnliberty.org) the importance of Valentine's Day as a product of free markets, as well as, highlights on the essence of Valentine's Day celebration--mostly as social signaling or the expression of emotions. (hat tip Mark Perry)

Happy Valentines Day!

Quotation of the Day: Fickle Public Opinion

In a sense, public opinion is like one of those mountain snow accumulations…. As snow builds up, the likelihood that the whole drift will come crashing down the mountain steadily increases. Finally, as the ultimate snowflake falls on top of the drift, the weight is now too much too be borne, and the whole drift comes down. Major changes in public opinion tend to take the same form. A very large number of books, articles, and lectures which appear to have no great effect nevertheless prepare the way. Eventually a critical mass is reached and what appears to be an overnight change of opinion occurs.

That’s from Gordon Tullock’s “Foreword” to J. Ronnie Davis’s 1971 book The New Economics and the Old Economists (source: Don Boudreaux at Café Hayek)

Public opinion is fundamentally driven by mawkishness and unctuousness.

Public opinion, today, can be characterized by several dominant cognitive biases; particularly, the comfort of the crowd, appeal to tradition, appeal to majority, appeal to experts and appeal to the emotion.

There hardly have been any critical thinking involved in what have been deemed as ‘cerebral’ discussions among conventional experts. Debates mostly revolve around the acceptance of current circumstances, conditions and methodology, where variances of ideas mostly deal with interpretation of events and or on personality issues and or semantical dimensions (mostly bordering on the abstract).

This means that public opinion has been largely influenced by the way elites or how the intellectual class think and project on the issues.

Yet questioning on the validity and the biases of the sources of information, the socio-economic political theories and or the philosophical underpinnings of the current institutional framework would be considered as heresy that risks ostracism for the expositor. Thus, conformity and social acceptance are prioritized at the expense of reality which drives the popular mindset.

And that’s why politics has mainly been centered on the manipulation of public opinion.

Nevertheless, times have been changing.

Real time connectivity has been encouraging on more critical thinking. A diffusion of critical thinking could influence a shift in public opinion through a change in the direction of the way the intellectual group thinks.

Structural changes are happening at the margins. So will public opinion.

Quote of the Day: How Media Obfuscates Reality

Another fantastic Facebook quote from my favorite iconoclast author Nassim Nicolas Taleb.

Why the Austrian Business Cycle is Not a Tarot Card

Many, if not most people, tend to look for a one-size-fits-all solution or supposed elixirs to the world’s problem. That’s one of the key reason why many are seduced by analysis or reasoning premised on mathematical or statistical models or on pattern seeking formulas.

Readers of this blog recognize that I use much of the Austrian Business Cycle Theory (ABCT), but not as a standalone way to evaluate markets and events. It is important to know of the limitations of every theory, and this applies to the ABCT as well.

Professor Steve Horwitz explains, (italics original, bold emphasis mine)

Both critics and adherents of the ABCT misunderstand it if they think it is some sort of comprehensive theory of the boom, breaking point, and length/depth of the bust. It isn't. As Roger Garrison has long insisted, the theory by itself is a theory of the unsustainable boom. It is a theory that explains why driving the market rate of interest below the natural rate through expansionary monetary policy produces a boom that contains endogenous processes that will cause that boom to turn to a bust. Again, it's a theory of the unsustainable boom.

ABCT tells us nothing about exactly when the boom will break and the precise factors that will cause it. The theory claims that eventually costs will rise in such a way that make it clear that the longer-term production processes falsely induced by the boom will not be profitable, leading to their abandonment. But it says nothing about which projects will be undertaken in which markets and which costs (other than perhaps the loan rate) will rise, and it tells us nothing about the timing of those events. We know it has to happen, but the where and when are unique, not typical, features of business cycles.

Once the turning point is reached, ABCT tells us little to nothing about how the bust will play out. Yes, we know that further inflation and interventionist attempts to prevent the necessary reallocation of resources will make matters worse, but the theory by itself doesn't tell us a priori how this will play out in any given historical circumstance. The ABCT is not a theory of the causes of the length and depth of recessions/depressions, but a theory of the unsustainable boom.

In short, the ABCT explains the cause and effects of tampering with interest rates. Yet there are many other influences to people's incentives to act, which is not limited to interest rate signals.

And in looking for specifics or exactitudes, like ‘timing’ and which ‘particular projects or costs’ will be affected, would be similar to looking for answers from the tarot card. Obviously ABCT does not work that way.

Global Equity Market’s Inflationary Boom: Divergent Returns On Convergent Actions

Since I’ve already lain out my expectations and projections[1], and with little changes in the global political and economic landscape; all that is required is to simply monitor how my stated themes have been playing out.

Global Markets Still on a Bullish Juggernaut, Expect Profit Taking Anytime

The blazing start for the year 2012 for global equity markets continues.

So far, this has been a “free-for-all” environment for global equity markets as stock markets from developed to emerging to frontier markets seem to be furiously galloping for the top spot.

Argentina and the Philippines, whom were the early leaders[2] have fallen back and have been surpassed by newcomers Turkey, Vietnam, Greece and Venezuela. The latter have joined the recent leaders of the pack, particularly Egypt, Germany, Russia, India, Austria and Peru.

And six weeks into the year, based on nominal local currency returns, the gains have been an eye-popping 15% and more for the frontrunners!

While the local bellwether the Phisix racked up a fantastic 9.41% such advances has not been enough to keep in pace with the current pack of leaders. But this is understandable, the Phisix and ASEAN markets are trading at record highs or near record highs, whereas most of the leaders are coming off from the recent lows.

And another noteworthy observation is that the credit easing operations by the European Central Bank (ECB) at the Eurozone has led Greece and Germany and other European bellwether to outperform. But again, while the region has posted gains in general, the scale of advances has been variable. Again this seems to underscore the relative effects of monetary inflation.

For instance, Greece’s outperformance may be due to the market’s factoring in of the bailout deal[3]. For Germany, in spite of the ephemeral stabilizing effect brought by the ECB’s Long Term Refinancing Operations (LTRO) to the financial markets, investors have reportedly been stuck with placements to German bunds[4] due to lingering uncertainty over the success of the current bailout measures. My guess is that aside from the bund, part of the money from LTRO operations have percolated into Germany’s equities.

Local currency gains can be misleading too. While Venezuela posted 13.73% returns y-t-d, statistical inflation rate has been about or nearly double the returns (see chart[5]) which implies of negative real returns on equity investments.

This also infers that Venezuela’s stock market has mostly been reflecting on the state of their currency’s (Bolivar) chronic disorder, an outgrowth of socialist policies gone haywire, which of course can hardly be explained by either earnings or economic growth.

Going back to the global equity market backdrop, of the 71 bourses I track only 14% are in the red. Most of the issues that are NOT on my screen are from Middle East and North Africa (MENA) and from Central Asia, if time permits I will eventually include these benchmarks.

In Asia, aside from Vietnam, India and the Philippines, the other top gainers have been Hong Kong, Taiwan, Korea and Thailand where gains have ranged from 8-13% over the same period.

Among major ASEAN bourses, there has been a widening gap between the outperformers Philippines-Thailand and this year’s laggards Indonesia-Malaysia. The latter pair has registered measly gains of just over 2%. Such divergence would seem anomalous considering their previous tight correlations of the four bourses.

Yet if such tight correlations should continue, then we should expect either the latter pair to do some sizable catching up or for the former pair to retrace. Otherwise, current actions may signal a departure from the previous relationship.

Meanwhile, Vietnam’s recent surge can be traced to central bank policies too. Interest rates on local currency loans had been cut by 2%[6] which constitutes part of the series of cuts recently made by the Vietcombank. This is aside from recently granted subsidized rates for politically preferred industries made by state owned Bank for Investment and Development of Viet Nam (BIDV)

The big picture matters.

Looking at chart actions should give us a better handle on the current situation.

One does NOT need to rely on technical indicators to see how overbought global markets have been, given that price actions for the FTSE World (FAW), the US S&P 500 (SPX), Europe’s Stoxx 50 (Stox50) and Asia’s Dow Jones Asia Pacific Index (P1DOW) have risen nearly at an angle of 45 degrees with hardly any breathing spell.

The US equity markets, represented by the S&P, appears to have assumed the role of the du jour leader for global equity markets and now trades at the resistance levels (blue horizontal line).

On the other hand, the contemporary benchmarks of the Europe and of Asia remains way below their respective resistance levels.

Notice too how tightly correlated the major global markets have been when based on the seeming symmetry in the undulations of each of the chart actions above.

The point that requires emphasis is that while nominal gains accrued have been relatively diverse, price movements seems have been synchronized. These actions essentially serves as manifestations of the relative effects of inflation which magnifies on the inflationary boom being experienced by global equity markets and the ‘globalization’ of stock market price actions.

Divergent returns on convergent actions primed by a highly inflationary backdrop.

The supercharged and largely overbought global markets have yet to encounter a cyclical countertrend or a natural profit taking cycle.

So while the inflationary push on financial assets may continue over the interim, we should expect profit taking to take place anytime. And global markets will likely embrace any negative developments as an excuse to justify such actions.

However, any profit taking will likely be characterized by short term impact at a modest scale.

More Confirmation Signs of Phisix’s Inflationary Boom

Manifestations of the inflationary boom in global markets seem to be equally evident in the local Philippine Stock Exchange.

My hunch for a boom on capital intensive or capital goods industries (as seen in the property sector and energy sector, aside from the mining sector), as well as, in the banking and financial sector, as funding intermediaries, seem to come to fruition.

As I previously wrote[7],

I am predisposed towards what Austrian economics calls as the higher order stages of production or the capital goods industries, which are likely the beneficiaries of the business cycle, specifically, mining, property-construction and energy, as well as financials whom are likely to serve as funding intermediaries for these projects.

Also, market leadership seem to be rotating away from the former leader the mining sector. The levelling of gains through the broader market appears to be reinforcing the bi-annual outperformance of the mines as I previously noted[8].

Yet index watching may not tell of the entire story too.

The gains of the holding index, which placed third, have likely been due to exposure by the mother companies of Ayala Corporation and SM Investments to their sizzling hot subsidiaries in the property and or the financial sector, while the rest of the holding sector has lagged.

Also while price actions of the mining titans seem to have faltered which has led to the retracement of the mining index, the market’s attention has palpably shifted to the peripheral issues.

To cite some examples of mining component issues on a year-to-date basis, Manila Mining has been up 26.67%, Nickel Asia 17.6%, NiHao Mineral Resources 136% (!!!), Geograce Philippines 67.9% (!!), Apex Mining 37.5% (!), Omico Corporation 15.2%, Oriental Peninsula Resources 48.6% (!!) and oil issues Oriental Petroleum A 31.25% (!) and The Philodrill Corporation 45.45% (!!).

In short, the market’s attention for the mining issues remains intact except that the focus has shifted from the core to the periphery.

Going back to the internal market activities of the PSE, for 2012, through the week ending February 10^th, the Phisix has corrected only once in 6 weeks.

Since the last correction, which was about two weeks ago, the local benchmark has been in consolidation.

So even as the bulls appear to be in a temporary lull, the daily Peso volume traded (averaged on a weekly basis) which has meaningfully improved, appears to have peaked.

In the meantime, advance-decline spread (averaged weekly) seems to be narrowing, following a lopsided surge which has favored the bulls.

Also for the first time this year, foreign trade posted a net selling last week.

I would see these as potential signs of a coming profit taking mode.

But there is an important caveat. In a bullmarket, overbought conditions can remain extended for a certain period of time. Therefore predicting short term moves can be tricky.

Although we can’t discount and should expect a normal countercyclical trend or a correction anytime, any profit-taking shouldn’t be seen as an end to the current momentum, as these would again, likely signify a short-term event with a modest impact (unless external factors will sharply deteriorate)

Besides, as recently exhibited by the market’s internal dynamics, corrections may imply a decline of the benchmark heavyweights but not necessarily reflecting the motions of the overall markets.

To the contrary, the rotational dynamic may likely continue; whether the market’s attention will shift in distributing gains among sectors or among issues within a particular sector.

At the end of the day, easy money policies in the Philippines and abroad will likely lend support to the cause of the bulls.

Inflationary Boom in the Real Economy

I’d further add that the inflationary boom can be seen in in the real economy as systemic credit growth has surged remarkably where the rate of growth of commercial bank lending in the Philippines has doubled in 2011 from 2010.

According to the Manila Bulletin[9]

The total outstanding loans of commercial banks went up by 19.3 percent at the end of 2011, higher than 2010 growth of 8.9 percent and reflecting a robust growth in the real sector.

Growth in commercial loans was across the board. All posted double digit growth led by mining/quarrying loans (60.1%), wholesale and retail trade (57.8%), electricity/gas/water (54.2%), real estate/rending/business services loans (25.2%), construction (22.3%) and financial intermediation (16.8%).

Statistical categorization can’t be relied on though. As in the latest Bangladesh experience[10], many loans labeled as ‘industrial’ were rechanneled to other undertaking, particularly to the stock market. The monetary tightening by the government put an end to yield chasing activities which prompted for last year’s crash that even spawned a political turmoil.

The next very crucial point is policy induced negative real rates seem to be driving the public to take on more credit driven activities. What the mainstream and the media sees as ‘healthy developments’ are in reality nascent indications of malinvestments and the implicit promotion of consumption activities.

As German economist and honorary professor Thorsten Polleit[11] explains (italics original)

The artificial lowering of the market interest rate induces additional investment. At the same time, savings decline and consumption increases. As a result, the economy starts living beyond its means. The boom is inflationary: all that has increased is the amount of money, not the supply of the means of production, such as labor and land.

The boom is economically unsustainable, because the policy-induced deviation of the market interest rate from the neutral interest rate causes malinvestment. Firms embark upon capital-intensive investment projects, and production becomes more time consuming, or roundabout.

The lengthening of the production structure implies a rise in the production of capital goods at the expense of consumer goods. The artificially suppressed market interest rate thus induces firms to engage in a kind of production that does not correspond to actual demand. As soon as this is revealed, the money-driven boom turns into bust.

Again piecing up the pieces together, we are seeing more evidence of an inflationary boom or the Austrian business cycle or the boom bust cycle at work which has been influencing the actions in the financial markets, as well as, in real economic activities.

Expect More Monetary Inflation Ahead

Central banks of developed economies have continued to telegraph aggressive expansions of their balance sheets directly or indirectly.

The Bank of England (BoE) announced a £50 billion increase[12] of their bond purchases over the next 3 months.

The European Central Banks will be offering the second tranche of their Long Term Refinancing Operation (LTRO) by the end of February[13] where ECB President Mario Draghi urged banks to avail of this facility.

The ECB may be adapting more eligible form of collateral to accommodate more banks in the upcoming LTRO.

According to the Danske Research[14],

The ECB has approved proposals relevant for acceptance of additional credit claims as collateral in the credit operations put forward by seven central banks, namely Central Bank of Ireland, Banco de España, Banque de France, Banca d’Italia, Central Bank of Cyprus, Oesterreichische Nationalbank and Banco de Portugal (see national central banks for further details). The other national central banks are working on preparing similar proposals for temporary approval of credit claims as collateral. The broadening of the collateral base can potentially increase the usage of the second LTRO substantially compared with the first one.

Draghi refrained from giving any estimate on the expected usage of the upcoming threeyear LTRO. It was clear that Draghi was comfortable about the substantial market relief following the introduction of the three-year LTRO. We expect banks to take around EUR300-600bn at the 3Y LTRO. According to Reuters, forecasts now range from EUR75bn to EUR800bn and there is still talk of EUR1tr. We expect banks to take around EUR300-600bn

LTRO’s serve not only as free money, but as opportunities for the banking system to offload toxic assets to the ECB. The banking system will oblige on Draghi’s call.

Next politicians have been pressuring the Bank of Japan (BoJ) to ease further or face a revision of the BoJ law[15] in order to “give the government more room to intervene in monetary policy”. This is an example of the sham in the so-called central banking independence.

Central banks are politically influenced directly or indirectly. The BoJ will be stepping on the QE gas pedal. Yet, if Japan’s government manages to remold on the BoJ law which gives Japanese politicians the space to intervene directly, then the yen will be faced with greater risk of hyperinflation.

Acting chairman of the Swiss National Bank, Thomas Jordan, also vowed to continue with currency intervention[16] through quantitative easing if deemed required by the technocracy.

Moreover, a purported $26 billion foreclosure deal[17] by the US government with various states and the 5 biggest banks appear to be parcel to US Federal Reserve chairman Ben Bernanke’s repeated pronouncements of QE 3.0 targeting mortgages[18] which could serve as a backdoor bailout of the privileged “too big to fail” banks[19].

Around the world this week, three central banks slashed rates (Belarus and Indonesia[20] as well as Vietnam). This further adds to the negative real rates environment that should be supportive of the asset markets.

Commodity prices have risen but returns have varied. Gold has led the recovery followed by the industrial metals (DJAIN) and the energy index (GJX). Agriculture prices have trailed (GKX). Nonetheless, world food prices have reportedly reached the highest level in 11 months[21].

With commodity prices not as responsive relative to gains of financial asset markets, this will be seen by central bankers as windows of opportunities for the deployment of more credit easing programs.

So any correction must be seen as an opportunity to accumulate as all these money printing will have to flow somewhere.

Finally while I have been emphasizing that interest rates will serve as a major gauge on monetary conditions, interest rates won’t be a one-size-fits all solution in predicting cyclical inflection points.

As I have pointed out in the past[22],

interest rates will most likely determine the popping of this bubble where interest rates may be driven by any of the following dynamics, changes in: 1) inflation expectations 2) state of demand for credit relative to supply 3) perception of credit quality and or 4) of the scarcity/availability of capital.

Plainly put, different circumstances will influence interest rate prices distinctly. This also means varying impacts on the financial markets. Thus identifying the cause of interest rate conditions will matter. The yield curve will matter. Actions in several credit markets (CDS, TED Spread, Libor-OIS) will matter. The correlations with other interconnected markets will also serve as other pivotal factors.

Since markets represent human actions, they are a complex dynamic. Thus aggregate based analysis or heuristics paraded as economic reasoning can be fatal.

---

[1] See What To Expect in 2012, January 9, 2012

[2] See Global Equity Markets: Philippine Phisix Grabs Second Spot, January 14, 2012

[3] Reuters.com Greece set to agree bailout as Germany demands action, February 12, 2012

[4] Bloomberg.com ECB Cash Fails to Wean Investors Off German Debt: Euro Credit, February 10, 2012

[5] Tradingeconomics.com Venezuela Inflation Rate

[6] Vietnamnews.com Banks flirt with low interest rates February 11, 2011

[7] See Phisix-ASEAN Equities: Awaiting for the Confirmation of the Bullmarket, November 13, 2012

[8] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011

[9] Manila Bulletin Loans Grow 19.3% In 2011 February 9, 2011 mb.com.ph

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

[11] Polleit, Thorsten The Cure (Low Interest Rates) Is the Disease, April 5, 2011, Mises.org

[12] See Bank of England Adds 50 billion Pounds to Asset Buying Program (QE), February 9, 2012

[13] Reuters.co Euribor rates fall after ECB urges banks to tap LTRO, February 10, 2012

[14] Danske Research Flash Comment ECB meeting: looking intensively at credit tightening risk, February 9, 2012

[15] Reuters.com BOJ may consider action next week as political pressure mounts, February 10, 2012

[16] Financial Times Jordan vow to continue SNB intervention, February 2, 2012

[17] New York Times, States Negotiate $26 Billion Agreement for Homeowners, February 8, 2012

[18] Bloomberg.com Bernanke Doubles Down on Fed Bet Defied by Recession: Mortgages, January 20, 2012 Businessweek.com

[19] Newsmax.com David Stockman: Obama Mortgage Refinance Plan is 'Crony Socialism' February 8, 2012

[20] Centralbanknews.info Monetary Policy Week in Review - 11 February 2012, February 10, 2012

[21] See Inflation Watch: World Food Prices Jump Most in 11 Months February 9, 2011

[22] See I Told You Moment: Philippine Phisix At Historic Highs! January 15, 2012

Quote of the Day: Real Knowledge versus Pretentious Knowledge

People who know what they're talking about...

Almost always talk like they know what they're talking about. That's why it pays to invest more time than you might imagine on the vocabulary, history and concepts of your industry.

Insider language, terms of art, the ability to use technical concepts... it matters.

On the other hand, sounding like you're smart doesn't mean you are.

Necessary but not sufficient.

My favorite marketing guru Seth Godin says it best.

Admitting to ignorance is a fundamental way to acquire knowledge. On the other hand, the presumption of possessing superlative knowledge exposes one's ignorance. Filtering one from the other matters.

Online Interactive Learning: Flipped Classrooms

I have been predicting that the information age or digital economy will be driving radical changes in many aspects of social life especially in education.

Peer based instruction seems as another frontier for innovation in education.

From Harvard (bold emphasis mine)

Researchers at Harvard University have launched the Peer Instruction (PI) Network (www.peerinstruction.net), a new global social network for users of interactive teaching methods.

PI, developed by Eric Mazur, Area Dean for Applied Physics and Balkanski Professor of Physics and Applied Physics at the Harvard School of Engineering and Applied Sciences (SEAS), is an innovative evidence-based pedagogy designed to improve student engagement and success.

Mazur, famous for his talk titled "Confessions of a Converted Lecturer," developed the method after realizing in the 1990s that his physics lectures at Harvard, while popular, were not helping students to master the basic concepts.

The PI technique relies on the power of the "flipped classroom." Information transfer (i.e., a teacher transferring knowledge to students) takes place in advance, typically through online lectures. In short, students study before rather than after class.

As a result, the classroom becomes a place for active learning, questions, and discussion. Instructors spend their time addressing students' difficulties rather than lecturing.

While originally developed for Mazur's introductory physics courses, PI is now used across multiple disciplines, from the sciences to the humanities.

The Peer Instruction Network will serve as a hub for educators around the world to connect and share their PI experiences, submit questions, and engage with other PI users.

Most of the changes will gravitate towards personalized or individual based learning rather than from the current mass based ‘classroom’ education. Online education will bridge the geographical distance and competition should drive down costs. Online learning will drive the knowledge revolution.

Video: Comparing Effective Tax Rates of Corporations

In the following video, the Tax Foundation demonstrates how US companies have been losing their competitive edge, due to the relatively high tax burden from effective tax rates on the corporate level compared to the world.

It is important to point out that aside from tax policies, the policies that constitute the monetary, political, legal, bureaucratic and regulatory regimes also contributes to the economy's level of competitiveness.

Overall, the lesser involvement by the government, the more competitive the economy. In other words, economic freedom is the key to prosperity.

Understanding America’s Debt Culture

Writes The End of the American Dream

When most people think about America's debt problem, they think of the debt of the federal government. But that is only part of the story. The sad truth is that debt slavery has become a way of life for tens of millions of American families. Over the past several decades, most Americans have willingly allowed themselves to become enslaved to debt. These days, most of us are busy either going into even more debt or paying off the debt that we have accumulated in the past. When your finances are dominated by debt, it makes it really hard to ever get ahead. Incredibly, 43 percent of all American families spend more than they earn each year. Even while median household income continues to decline (now less than $50,000 a year), median household debt continues to go up. According to the Federal Reserve, median household debt in America has risen to $75,600. Many Americans spend decades caught in the trap of debt slavery. Large numbers of them never even escape at all and die in debt. It can be a lot of fun to spend lots of money and go into lots of debt, but it can be absolutely soul crushing to toil and labor for years paying off those debts while making others wealthy in the process. Hopefully this article will inspire many people to try to escape the chains of debt slavery once and for all.

Because the truth is that the American people need a wake up call. Consumer borrowing rose by another $19.3 billion in December. Right now it is sitting at a grand total of $2.5 trillion according to the Federal Reserve.

Overall, consumer debt in America has increased by a whopping 1700% since 1971.

We always criticize the federal government for going into so much debt, but we rarely criticize ourselves for our own addiction to debt.

Debt slavery is destroying millions of lives all across this country, and it is imperative that we educate the American people about the dangers of all this debt.

The following are 30 facts about debt in America that will absolutely blow your mind....

Credit Card Debt

#1 Today, 46% of all Americans carry a credit card balance from month to month.

#2 Overall, Americans are carrying a grand total of $798 billion in credit card debt.

#3 If you were alive when Jesus was born and you spent a million dollars every single day since then, you still would not have spent $798 billion by now.

#4 Right now, there are more than 600 million active credit cards in the United States.

#5 For households that have credit card debt, the average amount of credit card debt is an astounding $15,799.

#6 If you can believe it, one out of every seven Americans has at least 10 credit cards.

#7 The average interest rate on a credit card that is carrying a balance is now up to 13.10 percent.

#8 According to the credit card calculator on the Federal Reserve website, if you have a $10,000 credit card balance and you are being charged a rate of 13.10 percent and you only make the minimum payment each time, it will take you 27 years to pay it off and you will end up paying back a total of $21,271.

#9 There is one credit card company out there, First Premier, that charges interest rates of up to 49.9 percent. Amazingly, First Premier has 2.6 million customers.

Auto Loan Debt

#10 The length of auto loans in America just keeps getting longer and longer. If you can believe it, 45 percent of all new car loans being made today are for more than 6 years.

#11 Approximately 70 percent of all car purchases in the United States involve an auto loan.

#12 A subprime auto loan bubble is steadily building. Today, 45 percent of all auto loans are made to subprime borrowers. At some point that is going to be a massive problem.

Mortgage Debt

#13 Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago.

#14 Mortgage debt as a percentage of GDP has more than tripled since 1955.

#15 According to the Mortgage Bankers Association, approximately 8 million Americans are at least one month behind on their mortgage payments.

#16 Historically, the percentage of residential mortgages in foreclosure in the United States has tended to hover between 1 and 1.5 percent. Today, it is up around 4.5 percent.

#17 According to Dylan Ratigan, 46 percent of all mortgaged properties in Florida are underwater, 50 percent of all mortgaged properties in Arizona are underwater and 63 percent of all mortgaged properties in Nevada are underwater.

#18 Overall, nearly 29 percent of all homes with a mortgage in the United States are underwater.

#19 If you can believe it, the mortgage lenders now have more equity in U.S. homes than the American people do.

Medical Debt

#20 Medical debt is a major problem for a growing number of Americans. One study discovered that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.

#21 Sadly, the number of Americans that are protected by health insurance continues to decline. An all-time record 49.9 million Americans do not have any health insurance at all right now, and the percentage of Americans covered by employer-based health plans has fallen for 11 years in a row.

#22 But even if you do have health insurance, there is still a good chance that you could end up with huge medical debt problems. According to a report published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States. Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved individuals that actually did have health insurance.

Student Loan Debt

#23 Total student loan debt in the United States is rapidly approaching 1 trillion dollars.

#24 If you went out right now and starting spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#25 In America today, approximately two-thirds of all college students graduate with student loan debt.

#26 The average student loan debt load is now approximately $25,000.

#27 After adjusting for inflation, U.S. college students are borrowing about twice as much money as they did a decade ago.

#28 One survey found that 23 percent of all college students actually use credit cards to pay for tuition or fees.

#29 The student loan default rate has nearly doubled since 2005.

#30 Student loans made to directly to parents have increased by 75 percentsince the 2005-2006 academic year.

At this point, most Americans are up to their eyeballs in debt. According to a recent study conducted by the BlackRock Investment Institute, the ratio of household debt to personal income in the United States is now 154 percent.

Our entire economy has become based on credit.

Read the rest here

You’d hear or read of many adverse or negative imputations as “consumerism”, “not producing enough”, “spendthrift behavior”, “squanderville” and etc… from the mainstream, as if it has been the nature of Americans to be prodigal.

Lost on the real causation for the present circumstances, the politically popular theme has been to shift the blame on China for “currency manipulation” and or for financing US “profligacy”. In short, China bashing has served as a convenient political scapegoat for politicians and their allies.

Yet there have hardly been significant mainstream inquiries on what forces or variables may have influenced or motivated Americans to adapt on such consumption debt-financed based lifestyles.

In terms of government policies, a black hole emerges from mainstream thinking.

While the mainstream fixates on the moral aspects of the debt-consumption dynamics, they gloss over the effects of government policies that have vastly skewed people’s behavior to take on debts at the expense of savings and equity.

For instance, the credit fueled 2008 housing bubble has largely been policy driven. The speculative environment was entwined with debt based consumption activities.

Tax deductions on interest for corporations, and similarly for individuals—tax deductibility on mortgage interest and government subsidies on mortgages—encouraged debt take up and over-leveraging.

Another, capital regulations discouraged traditional mortgage lending and incentivized securitization, which has been abetted by the conflict of interest role played by credit rating agencies, whom ironically have been tightly regulated by the US government.

Also, public policy to promote housing or homeownership provided the moral hazard aspects via commitment by government to various housing subsidies. Thus, American’s penchant for McMansions. (My source Professor Arnold Kling: THE FINANCIAL CRISIS: MORAL FAILURE OR COGNITIVE FAILURE?)

Importantly, the zero bound interest rate policies, or formerly known as the Greenspan Put, favored debtors at the expense of savers. The Greenspan Put had also functioned as a conventional tool used against past crisis which has successfully kicked the proverbial can down the road.

Policies implemented by team Bernanke today have been NO different from the past, ergo the eponymous Bernanke Put.

Artificially suppressed interest rates thereby increases people’s time preference to consume at the expense production.

As the illustrious Ludwig von Mises explained,

The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

Thus, alternative to consumption activities from boom bust policies would be to entice short term speculation; ergo today’s speculative inflationary boom.

The ‘innovative’ and unparalleled Quantitative Easing (QE) approach also shields the banking system from having to face the harsh reality of the required market adjustments, from the massive malinvestments accumulated, brought upon by past policies.

QEs labeled as credit easing by central banks, have likewise been designed to promote debt by alleviating the conditions of the accounting books of the banking and financial industry.

In addition, America’s debt culture signifies a product of mainstream ideology

I previously wrote,

The culture of debt signifies symptoms of accrued policies shaped by the dominant economic ideology which sees spending as the key force for promoting prosperity or keeping society “permanently in a quasi-boom”.

The war against savings, which is being channeled through policy-based low interest rates (“The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last”-General Theory) punishes savers and rewards speculative activities which benefits the wards of central banks—added profits for the banking industry cartel and expanded government spending for politicians.

Never mind the law of diminishing returns on debt to an economy

Past ephemeral successes [plus sustaining a debt based political economy] will lead global authorities towards path dependent policy choices (which is why I think that global QEs will continue)

Besides, politicians and the bureaucracy sees such policies as even more beneficial to them even if the markets suffer from the convulsions of debt overdose: people will be more captive to them which expands their control over the society.

Put differently, the cartelized political institutions made up of the triumvirate of the central bank, the welfare state and the politically privileged “too big to fail” banks represents as the major beneficiaries of a debt driven society, and thus, the incumbent political agents will continue to focus on maintaining the status quo founded on policies, laws and regulations that rewarded debts.

Sad to say, the laws of economics has been catching up with the artificiality of such political arrangement.