Phisix: Massive Global Credit Easing Policies Means Short Term Profit Taking

Economic weakness of China and of high oil prices, which supposedly threatens global economic growth, has been attributed by media as the cause for this week’s anemic performance by global stock markets[1].

The Perils of Relying on Media’s Availability Heuristics

It’s has been the intuitive inclination of media to oversimplify the causation process in the narration of events. In reality, such oversimplification represents the available bias or availability heuristic—judgment based on what we can remember, rather than complete data[2] or the fallacy of attributing current events to most recent market actions—than about the real forces driving the market’s action.

And applying heuristics to market analysis can lead one astray, and thus, amplifies the odds of erroneous decision making. One of Warren Buffett’s most precious investment advice has been

Risk comes from not knowing what you're doing.

This applies to sloppy thinking based on heuristics.

Financial markets rarely moves in a straight line.

If they do, then markets must be experiencing an episode of extreme stress, symptomatic of the ventilation of acute systemic imbalances on the marketplace. They appear in the form of a blowoff phase (climax) of a bubble cycle or of hyperinflation in motion.

Yes, stock markets soar to the firmament during episodes of hyperinflation. Although whatever gains seen is largely illusory as the local currency, enduring hyperinflation, depreciates so much faster than the nominal price gains in stock market values.

Zimbabwe which suffered from hyperinflation just a few years back saw its stock markets zoom[3], so as with the German stock market[4] during the horrific days of the Weimar hyperinflation.

Here, the role of stock markets shifts from intermediaries of capital to a monetary lightning rod. Of course, this cannot be explained by the orthodoxy of earnings or corporate fundamentals, since the public’s flight to safety motives has been driven by the desire to protect one’s wealth through ownership of real assets.

As one would note, stock markets becomes the fiduciary alternative to money under such conditions.

Yet in a normal bullmarket (or boom phase of a credit driven bubble cycle), intermittent profit taking sessions should be expected. This is where profit taking sellers of financial securities overwhelm the buyers that result to countertrend price actions. Nevertheless, financial markets tend to move in a general direction (uptrend, consolidation or downtrend) for a given period of time, despite interim countercylical fluctuations.

The pulsating surge of key global equity benchmarks suggests that this week’s retracement represents more of a profit taking process than signs of anxiety, where the losses (left window) have hardly dented on the enormous nominal local currency gains posted by the bellwethers of major economies since the start of the year (right window).

The US S&P 500 posted its second weekly loss in 12 weeks into 2012, while the Germany’s Dax, Japan’s Nikkei and the Philippine Phisix had 3 non-consecutive weekly losses. So far this translates to 1 week loss for every 3 weeks of gains for the latter 3 and 1 loss for every 5 weeks of gain for the S&P. Of course past performance is no guarantee for future outcomes.

In addition our ASEAN neighbors, Indonesia and Malaysia whom has largely missed the recent bullrun seems to defy last week’s profit taking mode. Instead they have posted modest gains, which in essence, incrementally closes on the gap between the region’s leaders the Philippines and Thailand and the laggards.

Moreover, Thailand has finally caught up with the Phisix.

So if we are seeing a rotational process among sectors and in the PSE and issues within specific sectors, then we seem to see the same process at work in global equity benchmarks.

The rotation in relative performances has been symptomatic of an inflationary boom.

As for media’s narrative, one week does not a trend make.

Huge Credit Easing Policies Means Profit Taking Will Be Short Term

If we examine the chart patterns of US equities, they seem to imply that this week’s profit taking mode might be extended.

And this could coincide with a breakdown of the ascending wedge pattern of the S&P 500 below.

Aside from the S&P, the Dow Jones Industrials and the Nasdaq chart patterns seem to tell the same tale.

What makes charts occasionally credible is that many believers can make such patterns a self-fulfilling process over the short run. And perhaps they can be augmented or complimented by trades based on algorithm or computer programs, which buy or sell triggers have been programmed to activate based on specific data points derived from chart patterns and or their corresponding indicators.

Yet any such breakdown could see some support at the 1,350 area. From Friday’s close, a downside move to this level will translate to about 3.3% retracement.

Yet chart patterns of the Philippine Phisix reveals of a subtle difference compared to the US benchmarks.

The Phisix seems to be partly in a symmetrical triangle—fundamentally this is a trend neutral pattern, which either signals continuity or a reversal[5]. Yet the recent double bottom pattern breakout also seems to suggest of a fresh upside trend at work. The implication is that any correction may be short term and shallow.

The Phisix and the S&P has had loose correlations from the last quarter of 2010 until late last year, where there had been numerous accounts of divergent actions between the two bourses. As a reminder, divergence does not represent decoupling.

Their correlations seemed to have tightened only from last October, where the combined actions of major central banks have forcibly led to major short coverings, as well as, yield chasing arbitrages that has painted an aura of ‘recovery’ as evidenced by resurgent global markets.

Another important reminder is that it is a misguided notion to assume that the current financial market developments have entirely been about ‘liquidity’.

Since 2008, political actions have included the widespread alteration of the rules of the game (such as changes in accounting rules[6], easing of collateral requirements[7], indiscriminate changes in the rights of private ownership to sovereign debt[8], arbitrary determination of credit event conditions for derivatives contracts[9]), direct and indirect bailouts, guaranteeing access to credit, implicit and explicit guarantees on assets, manipulation of the yield curve, interest rate payment on excess reserves, market making, buyer of last resort, lender of last resort, and etc..., has not only been about liquidity (liquefying of illiquid assets) but about arbitrary interventions in various forms and degree. In short, today’s financial markets have massively been in violation of various forms property rights of the private sector to the benefit of the banking system and the welfare state.

The mass politicization of the markets has been distorting price signals and has been misdirecting the allocation of resources. The piper in the fullness of time will be paid.

And given that the gist of the current tidal wave of major central asset purchasing programs have only been announced and put into action last month (such as ECB’s LRTO[10]), the effects of these massive cash infusions, compounded by the policy trends to adapt a negative rate regimes for many major emerging markets will likely put a floor on any recent corrections.

Thus it is unclear if the adverse signal emitted by these chart patterns, possibly signifying an extension of the corrective phase, will play out. And even if it does, any correction will likely be shallow.

Market Internals Reveal Profit Taking and Rotational Process

Yet market internals of the Phisix still exhibits some positive signs despite this week’s hefty correction.

True, decliners led advancers, but the spread between them has not deteriorated in a panic stricken scale as the previous sell-offs.

Moreover, of the 12 Phisix heavyweights representing 67% of the free float market cap last Friday, 3 posted gains and provided cushion to the index, specifically, Alliance Global [PSE:AGI], SM Investments [PSE: SM] and Bank of the Philippine Islands [PSE: BPI].

Meanwhile all the rest of the biggest caps posted losses led by SM Prime Holdings [PSE: SMPH], Philippine Long Distance Telephone [PSE:TEL], market leader Ayala Land [PSE:ALI] and Banco de Oro [PSE: BDO], all of which weighed on the index.

The decline as seen by the Phisix biggest market caps have equally been mirrored on the sectoral performance.

Again, we note that the mining index appears to have regained some appeal as many of the majors fell.

Finally foreign trades posted hefty net selling this week amidst a largely unchanged Peso.

But this came on the heels of the completion of the sale Alaska Milk Corporation[11] [PSE:AMC] from the seller, the Uytengsu family to the new owners the Dutch dairy giant Royal Friesland Campina for Php 12.86 billion.

My puzzle is that the buyer was a foreign group but the seller was a local group yet during the date of execution of the AMC trade, net foreign trade showed net selling almost to the tune of the AMC transaction.

Perhaps the foreign group incorporated a local company to execute the transaction, while the selling group, the Uytengsus’ equity ownership had been divested through a holding company incorporated abroad.

This could be another example of the inaccuracy of statistics which fails to capture the real developments behind each transaction.

The Political Imperative to Inflate the System

Bottom line: It is really very difficult to predict short term moves.

Nevertheless my basic premise still holds, the recent actions of major central banks combined with negative interest rate policy regime by the Philippine central bank, the BSP, as well as other emerging markets, will impact stock markets over the 3-6 months window as it has done before[12]. Most likely, we may see renewed selling pressures as these steroids come to a close.

Manipulating the financial markets including the stock markets has been part of the Bernanke’s doctrine[13] to save the banking system and indirectly to finance the welfare state. And the Bernanke creed seems to have been imbued as the de facto global policy handbook for central bankers.

And hawkish overtones[14] by some members of the US Federal Reserve or the ECB[15] may change as quickly, as so required by political exigency, especially when faced with the reemergence of selling pressures.

It would take a really big and nasty surprise and an equally static or passive or non response by central bankers to such event for the markets to feel pressure again.

And the only thing that may demobilize central bankers will be massive price inflation. As for politics, the arcane world of central banking has so far eluded the scrutiny of the benighted public.

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[1] Businessweek.com Mounting global growth concerns push markets lower, March 23, 2012 Associated Press

[2] Changingminds.org Availability Heuristic

[3] Koning John Paul Zimbabwe: Best Performing Stock Market in 2007? April 10, 2007 Mises.org

[4] Nowandfutures.com Germany, during the Weimar Republic & the hyperinflation

[5] Incrediblecharts.com Triangles and Wedges

[6] Wikipedia.org Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 Mark to Market Accounting

[7] The Euro Crisis Amidst the Cheer, Could the LTRO Be Storing Up Problems for Later?, February 29, 2012 Wall Street Journal Blog

[8] Kotok David R. Moral Hazard-CAC Cumber.com, February 23, 2012

[9] Reuters.com Deeper Greek losses 'unlikely' to trigger CDS -ISDA, October 27, 2011

[10] Weekly Focus, Concerns about fragile global recovery March 23, 2012 Danske Research

[11] Business.inquirer.net Uytengsus complete sale of Alaska Milk stake March 21, 2012

[12] Zero Hedge, Operation Twist Is Coming To An End: A Preview Of The Market Response March 19, 2012

[13] See US Stock Markets and Animal Spirits Targeted Policies, July 21, 2010

[14] Bloomberg.com Fed’s Bullard Sees Price Threat From G-7 Delaying Tighter Policy, March 23, 2012

[15] Bloomberg.com Asmussen Says ECB Must Start to Prepare Exit, Die Zeit Reports, March 21, 2012

Signs of Intensifying Political Woes in China?

Is it really China’s growth story that has distressed the markets as alleged by media?

Let us further examine what media imputes as the cause of this week’s profit taking—a purported slowdown of China’s economy

While recent economic data may have been a valid bearer of bad news, correlation does not necessarily translate to causation.

Movements of the China’s Shanghai index (right window) have not aligned with the motions of the China’s industrial production index (left window; blue line) which seesawed throughout 2010-2011.

In addition, the vigorous rally by the Chinese equity benchmark this year seems to have little relevance with the movement of the (HSBC PMI Index) manufacturing survey and of the ex-post statistical data.

China bulls have been arguing the case that the Chinese government would ease further[1] given the ‘moderating’ pace of price inflation attendant to the current slowdown. And they just may be right.

Almost as reports came where manufacturing in China’s economy contracted for the fifth month[2], the Chinese government selectively cut reserve requirements[3] for the Agricultural Bank of China, to supposedly boost rural credit.

With emergent signs of heightened political risks, a full blown economic crisis would magnify the prospects of a potential upheaval, which should compel authorities to resort to magical tricks by resorting to monetary palliatives.

Incipient signs political destabilization may have resurfaced. Aside from previous instances of riots[4], rumors swirled on the cyberspace of a coup attempt following the removal[5] of the Communist Party’s Chongqing city head Bo Xilai from his post as his deputy and has reportedly sought asylum in the US.

The rumors have been censored and have been temporarily concealed from the public.

But markets may have been exhibiting otherwise. China’s credit default swap or the cost of insuring China’s debts rose significantly the highest in four months[6] The Shanghai index staggered to close the week down 2% despite the monetary easing policies.

Nonetheless this is a revelation that there may have been intensifying political tensions from an ongoing ideologically based power struggle[7].

Entrepreneurs seem to have been gaining political clout in China, enough to exert influence on Communist party members to call for economic reforms based on liberalization.

Bottom up forces have been vastly eroding the command and control politics and thus the ideologically based political infighting.

As I said last October[8], China represents as my potential black swan (low probability high impact event). The risks from China’s unique political economic conditions have been substantially underrated. China, for me, has greater immediate term risk relative to that of the US or the EU, where political authorities of the latter seem to be working in close collaboration.

It should be noted that the political spectrum of the EU and the US seem to be deeply intertwined (e.g. Mario Draghi is a Goldman Sachs alumnus[9]) and has been manifested through revolving door relationships[10]. In short, vested interest groups through captured political authorities can coordinate policies, to the extent where the adverse effects from such policies may be deferred.

It’s a lot different in China.

China’s copycat of western Keynesian policies have led to massive internal bubbles, blatant misreporting of issued loans and financial innovative arbitrages by the political class, particularly the local governments, whom has circumvented party regulations by setting up 6,000 finance companies to raise funds for public works[11].

The negative effects of such top down policies have not only bred corruption, it has sown political conflicts which run the risks of escalation and transition to violent political uprisings.

The bottom line is that China’s behind the scene political struggles have been seeping out into the public and will be manifested through price signals in the marketplace, despite repeated attempts by political authorities to expurgate such developments.

This should be monitored closely.

Until further evidence shows of a serious deterioration of China’s political conditions, then my assumption would remain transfixed towards the politicized nature of today’s global marketplace which has been designed to support financial markets for the benefit of the banking system and the welfare state.

As for media, they could be looking at the wrong angle.

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[1] US Global Investors Investor Alert - Appreciating China to its Fullest, March 9, 2012

[2] Bloomberg News China Manufacturing Contraction May Worsen, HSBC PMI Shows Bloomberg News March 22, 2012 SFGate.com

[3] Nasdaq Brace for more stimulus: Central Bank of China slashes reserve requirements, March 22, 2012

[4] See Does Growing Signs of People Power Upheavals in China Presage a ‘China Spring’? September 26, 2012

[5] The Economic Times, Censors block online rumors about coup as China battles infighting within ruling party March 24, 2012

[6] Thestandard.com.hk Business as usual after coup rumors spark jump in credit-default swaps March 22, 2012

[7] See China’s Coup Rumors: Signs of the Twilight of Centralized Government? March 22, 2012

[8] See Can China’s Slowdown Trigger a 1987 moment? October 23, 2011

[9] See ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut, November 4, 2011

[10] Corporate Europe Observatory Block the revolving door, November 23, 2011

[11] Bloomberg.com China Banks Said to Underestimate Local Government Risks March 24, 2012

Graphic: The Virtue of Failure

The incredibly creative Ms. Jessica Hagy has a great illustration of what I have been lately discussing about as the virtues of failure (which she calls 2nd (and 3rd, and 4th) chances are vital)

Bottom line: Failure, generally, brings about improvisation via learning.

(of course there will always be exception to the rule—as some people adamantly refuses to learn from repeated failures, mostly political authorities and their zealots. Albert Einstein called this insanity—doing the same thing over and over again and expecting different results.)

Quote of the Day: How the Information Age has been Enriching People’s Lives

This is a rather long but substantially insightful excerpt from Jeffrey A. Tucker of Laissez Faire books on the unquantifiable benefits of the information age. [bold emphasis mine]

The most difficult-to-quantity aspect of digital media has been its contribution to the sharing of ideas and communication throughout the world. This has permitted sharing and learning as never before, and this might be the single most productive activity in which a person can participate. The acquisition of information is the precondition for all investing, entrepreneurship, rational consumption, division of labor and trade.

Step back and consider what a revolution this truly is. From the beginning of history until the 19th century, information could travel only as fast as we could run, walk or sail. There were also smoke signals, carrier pigeons, putting notes in bottles, waving lanterns in windows and the like. Finally, in the 1830s -- extremely late in a vast and grueling history in which humanity languished in poverty and sickness without knowledge broader than the immediate surroundings -- we saw the beginnings of modern communication with the glorious invention of the telegraph.

Here we had, for the first time, the emergence of geographically noncontiguous communication. People could find out more about what was going on in the world beyond their immediate vicinity, and that has had amazing implications for everyone engaged in the grand project of uplifting humanity. What could people then share? Cures, technologies, resource availability, experiences and information of all sorts.

This is also the period when we saw the first signs of the modern world as we know it, with a rising global population, extended lives, lower infant mortality and the creation and rapid increase of the middle class. Communication is what signaled people about new possibilities. From there, we saw huge advances in metallurgy, medicine, sanitation and industry. Then followed expansions of income; the division of labor; transportation via railroads; and, eventually, more of the thing that really matters: ever-better ways to share information and learn from others through telephones, radios and televisions.

But then 1995 represented the gigantic turning point in history. This was the year when the Web browser became widely available and the Internet opened for commercial purposes. It's remarkable to think that this was only 17 years ago. Unimaginable progress has taken place since then, with whole worlds being created by the day, all through the wondrous, spontaneous order of global human interaction in an atmosphere of relative laissez-faire. This was the beginning of what is called the digital age, the period of global enlightenment in which we find ourselves today.

And what gave it to us? What made it possible? This much we know for sure: The government did not make this possible. The forces of the marketplace caused it to come into being. It was the creation of human hands through the forces of cooperation, competition and emulation.

This alone refutes the common lie that the free market is all about private gain, the enrichment of the few. All these technologies and changes have liberated billions of people around the world. We are all being showered with blessings every hour of the day. Yes, some people have gotten rich -- and good for them! -- but all the private gain in the world pales in comparison with what digital commerce has done for the common good.

Yes, of course, we take it all for granted. In one sense, it has all happened too fast for us to truly come to terms with this new world. There is also this strange penchant human beings have for absorbing and processing the new and wonderful and then asking just as quickly, "What's next?"

No amount of empirical work can possibly encapsulate the contribution of the Internet to our lives today. No supercomputer could add it all up, account for every benefit, every increase in efficiency, every new thing learned that has been turned to a force for good. Still, people will try. You will know about their claims thanks only to the glorious technology that has finally achieved that hope for which humankind has struggled mightily since the dawn of time.

In short, the information age has been democratizing and fueling the knowledge revolution—a revolution that is bound to empower entrepreneurs and would topple 20th century vertically top-down structured (public and private) organizations and institutions.

Shale Oil Revolution: (Laissez Faire) Capitalism Deals Peak Oil a Fatal Blow

I used to believe in peak oil. That all changed when I got immersed in Austrian school of economics. I have come to realize that we are dynamic, and not static, beings whose actions are driven by time and value scale based incentives in response to the changes in the environment and to social developments. In other words, human action is what drives economic values of goods or services.

And given the opportunity or the right environment or a society tolerant for experimentation that rewards success and penalizes failure, people will find ways and means to employ resources in a more efficient manner in order to improve on our current unsatisfactory conditions.

“Peak oil” as a social phenomenon, and not in the engineering sense, is about to be vanquished [unless socialists cloaked as environmentalists succeeds to put a political kibosh on this sunshine industry].

The phenomenal pace of advances in engineering technology has been intensifying the Shale Oil Revolution

From the New York Times Green Blog, (bold emphasis mine) [hat tip Professor Mark Perry]

The revolution in production in Texas and across the country is partly tied to the rising price of oil over much of the last decade, which propelled aggressive technological experimentation and development. (Government encouragement over the last several administrations helped as well.)

Horizontal drilling and hydraulic fracturing have been around for years, but over the last five years, engineers have fine-tuned these and other techniques, even as many environmentalists worry about their impact on water and air.

Computer programs have been developed to simulate wells before they are even drilled. Advanced fiber optics permit senior engineers at company headquarters to keep track of drillers on the well pad, telling them when necessary where to direct the drill bit and what pressure to use in injecting fracking fluids. Seismic work has become far more sophisticated, with drillers dropping microphones down adjacent wells to measure seismic events resulting from a fracking job so they can more accurately determine the porosity and permeability of rocks when they drill nearby in the future.

Just a decade ago, complete wells were fracked at the same time with millions of gallons of water, sand and chemical gels. Now the wells are fracked in stages, with various kinds of plugs and balls used to isolate the bursting of rock one section at a time, allowing for longer-reaching, more productive horizontal wells. A well that once took two days to drill can now be drilled in seven hours.

For instance, when the Apache Corporation began drilling in the 100,000-acre Deadwood field in the West Texas Permian basin in 2010, there had only been a trickle of production there. The deep shale, limestone and other hard rocks had potential, but for years they had not been considered economically viable. The rocks were so hard, they would have likely sheared off the usual diamond cutters on the blade of any drill bit attempting to cut through.

But new adhesives and harder alloys have made diamond cutters and drill bits tougher in recent years. Meanwhile, Apache experimented with powerful underground motors to rotate drilling bits at a faster rate. Now, a well that might have taken 30 days to drill can be drilled in just 10, for a savings of $500,000 a well.

“By saving that money, you can spend more on fracking, which translates into more sand and more stages and better productivity,” said John J. Christmann, the Apache vice president in charge of Permian basin operations.

All these serves as empirical evidence of how the price signaling channel sets in motion entrepreneur’s incentives to fulfill market demands through the employment of savings or capital accumulation in shaping the fantastic advances in technology (in spite of the numerous government interventions) in a market economy.

As the great Professor Ludwig von Mises wrote,

What distinguishes modern industrial conditions in the capitalistic countries from those of the precapitalistic ages as well as from those prevailing today in the so‑called underdeveloped countries is the amount of the supply of capital. No technological improvement can be put to work if the capital required has not previously been accumulated by saving.

Saving—capital accumulation—is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumula­tion was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving.

The entrepreneurs employ the capital goods made available by the savers for the most economical satisfaction of the most urgent among the not-yet-satisfied wants of the consumers. Together with the technologists, intent upon perfecting the methods of processing, they play, next to the savers themselves, an active part in the course of events that is called economic progress. The rest of mankind profit from the activities of these three classes of pioneers. But whatever their own doings may be, they are only beneficiaries of changes to the emergence of which they did not contribute anything.

The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods—to the nonprogressive majority of people. Capital accumulation exceeding the increase in population raises, on the one hand, the marginal productivity of labor and, on the other hand, cheapens the products. The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements. It forces the three progressive classes to serve the nonprogressive majority in the best possible way.

As seen from the shale oil revolution, the illustrious economist Julian Simon has been right anew, human beings have indeed been the ultimate resource.

Buy Low, Sell High the Euro Crisis

Daily Reckoning’s Chris Mayer opines that the Eurozone crisis is a golden opportunity for investors because it represents “the biggest firesale in history”

Mr. Mayer writes,

Europe’s banking sector holds 2½ times as many assets as the U.S. banking sector. It’s huge. And it’s in big trouble. Europe’s banking sector needs cash — mountains of cash.

As a result, it will have to sell more than $1.8 trillion of assets, which will likely take a decade to work through. For perspective, it sold only $97 billion from 2003–10. “The list of asset sales is the longest I’ve seen in 10 years,” says Richard Thompson, a partner at PricewaterhouseCoopers in London. Knowing how these things work, the final tally could well be double that. The world has never seen anything this big before.

Where will the cash come from?

This is our opportunity. There is no better, more-reliable way to make money than to buy something from someone who has to sell. Bankers are the best people in the world to buy from. Believe me, I know.

I was a vice president of corporate banking for 10 years before I started writing newsletters in 2004. I would get at least three or four requests every year from some investor group asking if we had any assets we were looking to unload. Why? Because they know banks are stupid sellers…

But institutionally, banks can’t really hold bad debts for long. As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen. It means they have to put aside more capital for this particular loan, which they hate to do, as it lowers profitability and requires a lot of paperwork. It can raise the attention of regulators, which banks hate. It can raise shareholder suspicions about lending practices, which banks hate. So the usual way to deal with bad debts is to clear ’em out as fast as possible. (Unless you’re swamped with bad debts in a full-blown crisis, in which case you try to bleed them out and buy time to earn your way out, and/or patch them up as best you can to keep up appearances while you pray for a miracle — or a bailout.)

With the EU banking sector loaded with trillions of stuff it must sell, the mouths of knowing investors drool with money lust.

The fundamental universal concept discussed above is “buy low, sell high”.

And bursting bubbles or bubble busts have presented as great windows of opportunities to acquire assets at bargain basement prices or at fire priced sale that should signify best value for one’s money (whether for investment or for consumption).

But it takes tremendous self-discipline to go against the crowd, to shun short term temptations, and to patiently wait for opportunities like these. And it also takes prudence and emotional intelligence to adhere to Warren Buffett’s popular aphorism of “be fearful when others are greedy and greedy when others are fearful”.

There is another major or important implication from the article above. The Euro crisis is far far far from over. And so with the US banking system (although to a much lesser degree relative to the Eurozone)

Euro banks have only sold a speck or a fraction of what has been required ($97 billion of $1.8 trillion) to cleanse their balance sheets to restore a sense of normalcy in their banking system.

This only means that the political path will come from one of the two options:

One, central banks, particularly the ECB, possibly in conjunction with the US Federal Reserve, will have to persist in massively inflating the system in order to prevent the markets from clearing. The policy of deferment (as seen today) allows for the banking system to gradually dispose of their assets at artificially inflated prices…

Otherwise, the second option means facing the consequence of a banking system meltdown, which should ripple to the welfare state—an option, which so far, has been sternly avoided by incumbent political authorities.

Of course, politicians and the vested interest groups have been hoping that economic growth will eventually prevail that would help resolve the crisis.

But this is wishful thinking as the direction of political actions, purportedly reform the political economies of crisis stricken nations, has little to do with promoting growth but to transfer resources from the public to the politically protected banking system.

Austerity has been a fiction peddled by the left.

chart from Bloomberg

Central bank assets have soared to uncharted territories, as taxes and numerous restrictive trade regulations have been imposed, while price inflation has been percolating through the system.

chart from tradingeconomics.com

In short, the fire sale of assets from Eurozone’s crisis afflicted banking system has yet to come.

And we should first expect more central banking interventions that would amplify such an outcome.

And I’d further state that the boom bust cycle fostered by global negative real rates environment will lead, not only to fire sales of financial assets to the Eurozone, but across the world—in the fullness of time.

Gold is Money: Turkey Edition

While Ben Bernanke and his ivory tower based cohorts do not treat gold as money, for the average Turks, gold is money.

From the Wall Street Journal,

The Turkish government, facing a bloated current-account deficit that threatens to derail the country's rapid expansion, is trying to persuade Turks to transfer their vast personal holdings of gold into the country's banking system.

The push to tap into the individual gold reserves—the traditional form of savings here—is part of Ankara's efforts to reduce a finance gap that is currently about 10% of gross domestic product.

Government officials say the banking regulator will soon publish a plan to boost incentives for consumers to park their household wealth inside the financial system. Banking executives said they are considering new interest-yielding gold-deposit accounts that would allow savers to withdraw gold bars from specially designed automated teller machines.

The moves come after the central bank in November announced that lenders could hold up to 10% of their local-currency reserves in gold, in part to tempt Turkey's gold hoarders to deposit their jewelry, coins or bullion at banks.

Economists say the policy shift is designed to change Turks' historic preference for storing a high percentage of personal wealth outside the banking system as a way to protect themselves against the economic volatility that has periodically hit Turkey in recent decades.

The effort is one front in a broader battle to encourage more savings while curbing the ballooning current-account deficit—a pressure point many investors fear could upend a fast-growing economy, estimated to have expanded more than 8% last year. Turkey's current-account gap has expanded faster than expected in recent weeks amid a surge in oil prices and data showing unexpectedly high consumer demand.

"Turkey has historically been hit by crises and inflation, so the tradition of holding gold outside the system could be hard to shift," said Murat Ucer, an economist at Global Source Partners, an Istanbul-based research consultancy.

The size of the gold haul stored outside Turkey's banking system is hard to quantify; no data reliably capture the scale of the informal economy. The Istanbul Gold Refinery estimates the figure at 5,000 metric tons, valued at $270 billion. Recent numbers show many consumers have boosted home-held deposits even as the country's tightly regulated banking system won plaudits for comfortably weathering the financial crisis.

Unlike India, whom recently announced plans to raise import duties on gold imports, Turkey’s government either has not yet reached a point of desperation to impose political controls over gold trades, or that they have come to realize of the futility of imposing antagonistic and oppressive policies. Instead, the Turkish government has, so far, resorted to wooing or appealing to the public to help the government.

However, I am inclined to the view that this as an initial or temporary step before any imposition of political controls. With institutional violence under their control (police or military power), the temptation to use force through tax or administrative policies will always be there.

It is also very important to note of how gold has served as insurance against political control via the banking system. It would appear that the average Turks, basically don’t trust the banking system, and thus keeps their savings in gold and stashed away from the prying eyes of political authorities. The average Turks, I presume, perhaps (culturally) understands that through the banking system, their savings or wealth could be faced with greater risks of confiscation through various political means as taxation.

Nevertheless this is a good remainder of the distinction between the world as seen by politicians and bureaucrats and of reality (which reflects on people’s sense of values.)

This quote, which I earlier blogged, attributed to Mr. Janos Feteke (who I think was the deputy governor of the National Bank of Hungary) seems very relevant

There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold

This is essentially why political actions that go against public’s desires eventually self-destructs.

Cartoon of the Day: Wind Power: All the Pain for Zero Gain

From Watts up with That (hat tip Professor Mark Perry)

The Mythical World of Ben Bernanke

For Ben Bernanke and their ilk, the world exists in a causation vacuum, as things are just seen as they are, as if they are simply "given". And people’s action expressed by the marketplace, are seen as fallible, which only requires the steering guidance of the technocracy (the arrogant dogmatic belief that political authorities are far knowledgeable than the public).

Monetary economist Professor George Selgin majestically blasts Ben Bernanke’s self-glorification. (bold emphasis mine)

So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price "bubbles" as things that happen because...well, the point is that there is generally no "because." These things just happen; central banks, on the other hand, exist to prevent them from happening, or to "mitigate" them once they happen, or perhaps (as in the case of "bubbles") to simply tolerate them, because they can't do any better than that. That central banks' own policies might actually cause inflation, or contribute to the business cycle, or trigger crises, or blow-up asset bubbles--these are possibilities to which every economist worth his or her salt attaches some importance, if not overwhelming importance. But they are also possibilities that every true-blue central banker avoids like so many landmines. Are you old enough to remember that publicity shot of Arthur Burns holding a baseball bat and declaring that he was about to "knock inflation out of the economy"? That was Burns talking, not like a monetary economist, but like the Fed propagandist that he was. Bernanke talks the same way throughout much (though not quite all) of his lecture.

And for the central bank religion, politics has never been an issue. It’s always been about the virtuous state of public service channeled through economic policies…

In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks--that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. He is thus able to steer clear of the thorny challenge of explaining just how it was that institutions established for function X happened to prove ideally suited for functions Y and Z, even though the latter functions never even entered the minds of the institutions' sponsors or designers!

By ignoring the true origins of early central banks, and of the Bank of England in particular, and simply asserting that the (immaculately conceived) Bank gradually figured-out its "true" purpose, especially by discovering that it could save the British economy now and then by serving as a Lender of Last Resort, Bernanke is able to overlook the important possibility that central banks' monopoly privileges--and their monopoly of paper currency especially--may have been a contributing cause of 19th-century financial instability. How currency monopoly contributed to instability is something I've explained elsewhere. More to the point, it is something that Walter Bagehot was perfectly clear about in his famous 1873 work, Lombard Street. Bernanke, in typical central-bank-apologist fashion, refers to Bagehot's work, but only to recite Bagehot's rules for last-resort lending. He thus allows all those innocent GWU students to suppose (as was surely his intent) that Bagehot considered central banking a jolly good thing. In fact, as anyone who actually reads Bagehot will see, he emphatically considered central banking--or what he called England's "one-reserve system" of banking--a very bad thing, best avoided in favor of a "natural" system, like Scotland's, in which numerous competing banks of issue are each responsible for maintaining their own cash reserves.

People hardly realize that central banks had been born out of politics and survives on taxpayer money which is politics, and eventually will die out of politics.

Any discussion of politics affecting central banking policymaking has to be purposely skirted or evaded.

Policies must be painted as having positive influences or at worst neutral effects. This leaves all flaws attributable to the marketplace.

In reality, any admission to the negative consequence of the central bank polices would extrapolate to self-incrimination for central bankers and the risk of losing their politically endowed privileges.

Besides ignoring the destabilizing effects of central banking--or of any system based on a currency monopoly--Bernanke carefully avoids any mention of the destabilizing effects of other sorts of misguided financial regulation. He thus attributes the greater frequency of banking crises in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England. Hearing Bernanke you would never guess that U.S. banks were generally denied the ability to branch, or that state chartered banks were prevented by a prohibitive federal tax from issuing their own notes, or that National banks found it increasingly difficult to issue their own notes owing to the high cost of government securities required (originally for fiscal reasons) as backing for their notes. Certainly you would not realize that economic historians have long recognized (see, for starters, here andhere) how these regulations played a crucial part in pre-Fed U.S. financial instability. No: you would be left to assume that U.S. crises just...happened, or rather, that they happened "because" there was no central bank around to put a stop to them.

Because he entirely overlooks the role played by legal restrictions in destabilizing the pre-1914 U.S. financial system, Bernanke is bound to overlook as well the historically important "asset currency" reform movement that anticipated the post-1907 turn toward a central-bank based monetary reform. Instead of calling for yet more government intervention in the monetary system the earlier movement proposed a number of deregulatory solutions to periodic financial crises, including the repeal of Civil-War era currency-backing requirements and the dismantlement of barriers to nationwide branch banking. Canada's experience suggested that this deregulatory program might have worked very well. Unfortunately concerted opposition to branch banking, by both established "independent" bankers and Wall Street (which gained lots of correspondent business thanks to other banks' inability to have branches there) blocked this avenue of reform. Instead of mentioning any of this, Bernanke refers only to the alternative of relying upon private clearinghouses to handle panics, which he says "just wasn't sufficient." True enough. But the Fed, first of all (as Bernanke himself goes on to admit, and as Friedman and Schwartz argue at length), turned out be be an even less adequate solution than the clearinghouses had been; more importantly, the clearinghouses themselves, far from having been the sole or best alternative to a central bank, were but a poor second-best substitute for needed deregulation.

To be fair, Bernanke does eventually get 'round to offering a theory of crises. The theory is the one according to which a rumor spreads to the effect that some bank or banks may be in trouble, which is supposedly enough to trigger a "contagion" of fear that has everyone scrambling for their dough. Bernanke refers listeners to Frank Capra's movie "It's a Wonderful Life," as though it offered some sort of ground for taking the theory seriously, though admittedly he might have done worse by referring them to Diamond and Dybvig's (1983) even more factitious journal article. Either way, the impression left is one that ought to make any thinking person wonder how any bank ever managed to last for more than a few hours in those awful pre-deposit insurance days. That quite a few banks, and especially ones that could diversify through branching, did considerably better than that is of course a problem for the theory, though one Bernanke never mentions. (Neither, for that matter, do many monetary economists, most of whom seem to judge theories, not according to how well they stand up to the facts, but according to how many papers you can spin off from them.) In particular, he never mentions the fact that Canada had no bank failures at all during the 1930s, despite having had no central bank until 1935, and no deposit insurance until many decades later. Nor does he acknowledge research by George Kaufman, among others, showing that bank run "contagions" have actually been rare even in the relatively fragile U.S. banking system. (Although it resembled a system-wide contagion, the panic of late February 1933 was actually a speculative attack on the dollar spurred on by the fear that Roosevelt was going to devalue it--which of course he eventually did.) And although Bernanke shows a chart depicting high U.S. bank failure rates in the years prior to the Fed's establishment, he cuts it off so that no one can observe how those failure rates increased after 1914. Finally, Bernanke suggests that the Fed, acting in accordance with his theory, only offers last-resort aid to solvent ("Jimmy Stewart") banks, leaving others to fail, whereas in fact the record shows that, after the sorry experience of the Great Depression (when it let poor Jimmy fend for himself), the Fed went on to employ its last resort lending powers, not to rescue solvent banks (which for the most part no longer needed any help from it), but to bail out manifestly insolvent ones. All of these "overlooked" facts suggest that there is something not quite right about the suggestion that bank failure rates are highest when there is neither a central bank nor deposit insurance. But why complicate things? The story is a cinch to teach, and the Diamond-Dybvig model is so..."elegant." Besides, who wants to spoil the plot of "It's a Wonderful Life?"

Cherry picking of reference points and censorship had been applied on historical accounts that does not favor central banking.

Of course, it is natural for central bankers to be averse to the gold standard. A gold standard would reduce or extinguish central banker’s (as well as politicians') political control over money.

Bernanke's discussion of the gold standard is perhaps the low point of a generally poor performance, consisting of little more than the usual catalog of anti-gold clichés: like most critics of the gold standard, Bernanke is evidently so convinced of its rottenness that it has never occurred to him to check whether the standard arguments against it have any merit. Thus he says, referring to an old Friedman essay, that the gold standard wastes resources. He neglects to tell his listeners (1) that for his calculations Friedman assumed 100% gold reserves, instead of the "paper thin" reserves that, according to Bernanke himself, where actually relied upon during the gold standard era; (2) that Friedman subsequently wrote an article on "The Resource Costs of Irredeemable Paper Money" in which he questioned his own, previous assumption that paper money was cheaper than gold; and (3) that the flow of resources to gold mining and processing is mainly a function of gold's relative price, and that that relative price has been higher since 1971 than it was during the classical gold standard era, thanks mainly to the heightened demand for gold as a hedge against fiat-money-based inflation. Indeed, the real price of gold is higher today than it has ever been except for a brief interval during the 1980s. So, Ben: while you chuckle about how silly it would be to embrace a monetary standard that tends to enrich foreign gold miners, perhaps you should consider how no monetary standard has done so more than the one you yourself have been managing!

Bernanke's claim that output was more volatile under the gold standard than it has been in recent decades is equally unsound. True: some old statistics support it; but those have been overturned by Christina Romer's more recent estimates, which show the standard deviation of real GNP since World War II to be only slightly greater than that for the pre-Fed period. (For a detailed and up-to-date comparison of pre-1914 and post-1945 U.S. economic volatility see my, Bill Lastrapes, and Larry White's forthcoming Journal of Macroeconomics paper, "Has the Fed Been a Failure?").

Nor is Bernanke on solid ground in suggesting that the gold standard was harmful because it resulted in gradual deflation for most of the gold-standard era. True, farmers wanted higher prices for their crops, if not general inflation to erode the value of their debts--when haven't they? But generally the deflation of the 19th century did no harm at all, because it was roughly consistent with productivity gains of the era, and so reflected falling unit production costs. As a self-proclaimed fan of Friedman and Schwartz, Bernanke ought to be aware of their own conclusion that the secular deflation he complains about was perfectly benign. Or else he should read Saul's The Myth of the Great the Great Depression, or Atkeson and Kehoe's more recent AER article, or my Less Than Zero. In short, he should inform himself of the fundamental difference between supply-drive and demand-driven deflation, instead of lumping them together, and lecture students accordingly.

Although he admits later in his lecture (in his sole acknowledgement of central bankers' capacity to do harm) that the Federal Reserve was itself to blame for the excessive monetary tightening of the early 1930s, in his discussion of the gold standard Bernanke repeats the canard that the Fed's hands were tied by that standard. The facts show otherwise: Federal Reserve rules required 40% gold backing of outstanding Federal Reserve notes. But the Fed wasn’t constrained by this requirement, which it had statutory authority to suspend at any time for an indefinite period. More importantly, during the first stages of the Great (monetary) Contraction, the Fed had plenty of gold and was actually accumulating more of it. By August 1931, it's gold holdings had risen to $3.5 billion (from $3.1 billion in 1929), which was 81% of its then-outstanding notes, or more than twice its required holdings. And although Fed gold holdings then started to decline, by March 1933, which is to say the very nadir of the monetary contraction, the Fed still held over than $1 billion in excess gold reserves. In short, at no point of the Great Contraction was the Fed prevented from further expanding the monetary base by a lack of required gold cover.

Finally, Bernanke repeats the tired old claim that the gold standard is no good because gold supply shocks will cause the value of money to fluctuate. It is of course easy to show that gold will be inferior on this score to an ideally managed fiat standard. But so what? The question is, how do the price movements under gold compare to those under actual fiat standards? Has Bernanke compared the post-Sutter's Mill inflation to that of, say, the Fed's first five years, or the 1970s? Has he compared the average annual inflation rate during the so-called "price revolution" of the 16th century--a result of massive gold imports from the New-World--to the average U.S. rate during his own tenure as Fed chairman? If he bothered to do so, I dare say he'd clam up about those terrible gold supply shocks.

So when it comes to the gold standard, it is not only the omission of facts and of glaring blind spots, but importantly, it is about deliberate twisting of the facts! At least they practice what they preach--they manipulate the markets too.

Now this is what we call propaganda.

It is best to point out how Bernanke’s central banking has destroyed the purchasing power of the US dollar as shown in the chart above.

Yet here is another example of the mainstream falling for Bernanke’s canard.

Writes analyst David Fuller,

Preservation of purchasing power is the main reason why anyone would favour a gold standard. However, if we assume, hypothetically, that the US and other leading countries moved back on to a gold standard, I do not think many of us would like the deflationary consequences that followed. Also, a gold standard would almost certainly involve the confiscation of private holdings of bullion, as has occurred previously. Most of us would not like to lose our freedom to hold bullion.

I have long argued that we would never see the reintroduction of a gold standard because no leading government is likely to surrender control over its own money supply. For current reasons, just ask the Greeks or citizens of other peripheral Eurozone countries, struggling to cope with no more than a euro standard.

There would also be national security issues as it would not be difficult for rogue states to manipulate the price of bullion as an act of economic war.

First of all, the paper money system is not, and will not be immune to the deflationary impact caused by an inflationary boom. That’s why business cycles exist. Under government’s repeated doping of the marketplace we would either see episodes of monetary deflation (bubble bust) or a destruction of the currency system (hyperinflation) at the extremes.

As Professor Ludwig von Mises wrote

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Next, as previously pointed out the intellectuals and political authorities resort to semantic tricks to mislead the public.

Deflation caused by productivity gains (pointed out by Professor Selgin) isn’t bad but rather has positive impacts—as evidenced by the advances of technology.

Rather it is the money pumping and the leverage (gearing), or the erosion of real wealth, caused by prior inflationism from the central bank sponsored banking system. These political actions spawns outsized fluctuations and the adverse ramifications of monetary deflation.

And it is the banking system will be more impacted than that the real economy which is the reason for these massive bailouts and expansion of balance sheets of central banks. It's about political interest than of public interests.

In addition, it is wildly inaccurate to claim to say gold standard would “involve the confiscation of private holdings of bullion”. FDR’s EO 6102 in 1933 came at the end of the gold bullion standard which is different from the classical gold standard. In the classic gold standard, gold (coins) are used as money or the medium of exchange, so confiscation of gold would mean no money in circulation. How logical would this be?

Finally while the assertions that “no leading government is likely to surrender control” seems plausible, this seems predicated on money as a product of governments—which is false. Effects should not be read as causes.

As the great F. A. Hayek wrote (Denationalization of Money p.37-38)

It the superstition that it is necessary for government (usually called the 'state' to make it sound better) to declare what is to be money, as if it had created the money which could not exist without it, probably originated in the naive belief that such a tool as money must have been 'invented' and given to us by some original inventor. This belief has been wholly displaced by our understanding of the spontaneous generation of such undesigned institutions by a process of social evolution of which money has since become the prime paradigm (law, language and morals being the other main instances).

If governments has magically transformed money into inviolable instruments then hyperinflation would have never existed.

At the end of the day, the world in which central bankers and their minions portray seems no less than vicious propaganda.

China’s Coup Rumors: Signs of the Twilight of Centralized Government?

China’s political system has shown increasing signs of fracturing.

Writes the Wall Street Journal Editorial,

Rumors of a coup in Beijing ricocheted around the Chinese Internet on Tuesday and even caused the cost of credit default swaps on Chinese debt to rise slightly. That's remarkable considering there wasn't one iota of evidence that shots were fired at the Diaoyutai State Guest House or tanks were taking to the streets, as viral microblog posts had it.

But then consider that a month ago, Wang Lijun, an official of vice ministerial rank, sought asylum in the U.S. Consulate in Chengdu. Last week, his boss Bo Xilai, the popular party secretary of Chongqing, was dismissed from his post six months before a national leadership transition. In these strange days, it's easy to see why Chinese citizens may believe reports of a coup.

China is supposed to have "institutionalized" its leadership transitions so that such an upheaval could never happen. The outgoing Politburo Standing Committee hands over power to the anointed party general secretary and premier and picks the rest of the new Politburo. The Standing Committee also selects the two slightly younger men who will take over the top jobs 10 years down the road.

I have previously noted that like Europe, China’s top down politics has had a fragile and unsustainable relationship with snowballing forces of decentralization inspired by the growing political power of entrepreneurs, which eventually will lead to a head-on collision that would translate to a political upheaval.

We are seeing more signs of these developments.

Again from the same article, (bold emphasis mine)

The party has been able to keep internal strife under control by avoiding ideological struggle over the last 20 years. The factions have competed for important posts and the spoils of power, but they ruled by consensus. The public was simply told to believe in the myth of a monolithic party and ignore the men squabbling behind the curtain.

This technocratic pragmatism may now be breaking down. For instance, Bo Xilai appealed to leftists' disgust with bourgeois individualism and public unhappiness with income inequality, a tactic that alarmed some leaders. Since his dismissal, leftist websites and commentators have also been silenced.

But there are plenty of other voices on the "right" advocating liberal political reform. Ten years ago, the prospect of achieving middle-class incomes made most intellectuals unwilling to rock the boat. Now they feel secure enough to demand more rights. The party sees this as evidence of Western infiltration, and it is tightening control over the media and launching new campaigns to promote the spirit of self-sacrifice.

Entrepreneurs are indeed becoming a political force.

Either China's politics harmonize with the dynamics of the economy through decentralization, or China’s politics would regress to the Mao Zedong model which would close their doors to the world. My bet is in the former.

Yet any crisis or recession will likely accelerate this turbulent transitional process.

And as I earlier posted

Entrepreneurship will be the hallmark of the information age.

Interesting times indeed

The Virtue of Failure

Here is a helpful career tip from my favorite marketing guru Seth Godin

Too many MBAs are sent into the world with bravado and enthusiasm and confidence.

The problem is that they also lack guts.

Guts is the willingness to lose. To be proven wrong, or to fail.

No one taught them guts in school. So much money at stake, so much focus on the numbers and on moving up the ladder, it never occurs to anyone to talk about the value of failure, of smart risk, of taking a leap when there are no guarantees.

Well tolerance of failure is a trait dovetailed for market economies.

In socialist countries anyone’s willingness to lose would have been substituted for dependence on the state.

That’s why productivity and innovation is hampered. People have not been motivated to take risks. Losses are perceived as stigma. Regimented conformity displaces competitive thinking.

Also as emphasized by Mr. Godin, gut is a character that is hardly learned from school.

High Taxes Equals Lower Revenues: UK Edition

The Wall Street Journal Wealth Blog writes,

To dig itself out of recession, Britain hiked its income-tax rate to 50% for those making £150,000 or more. Proponents said the tax was needed to bring fairness to an economy, in which the rich were getting richer and not contributing enough to the cause. Critics said the tax would chase out the job creators.

As it turned out, the real impact was in tax avoidance. According to the Chancellor of the Exchequer’s budget announced today, the income-tax hike caused “massive distortions” that cost the government.

A study found that £16 billion of income was deliberately shifted into the previous tax year. As a result, the tax raised only £1 billion – a third of the amount forecast.

This is another concrete example of a blowback of simplistic knee jerk policies embraced by the left.

In desperate attempts to raise revenues, the stereotyped recommendation by left leaning experts, which has often been adapted by politicians, has been to raise taxes.

They assume that people are like robots who will blindly comply with the regulations. They fail to understand that policies create incentives for people to act, particularly to circumvent on regulations whom they view as either undeserving or excessive.

And higher taxes, observes Cato’s Dan Mitchell, lower incentives to earn and report income, and lower tax rates increase incentives to earn and report income.

That’s exactly what transpired in UK. The response of the rich from higher taxes had been to use tax avoidance measures to withhold from paying more taxes. Common sense.

Unfortunately common sense is uncommon to people blinded by political self-righteousness

17 Reasons to be a Rational Optimist

My favorite science and environmental columnist and author of the must read Rational Optimist, the eminent Matthew Ridley propounds 17 reasons why we should be cheerful:

1. We're better off now

2. Urban living is a good thing

3. Poverty is nose-diving

4. The important stuff costs less

5. The environment is better than you think

6. Shopping fuels innovation

7. Global trade enriches our lives

8. More farm production = more wilderness

9. The good old days weren't

10. Population growth is not a threat

11. Oil is not running out

12. We are the luckiest generation

13. Storms are not getting worse

14. Great ideas keep coming

15. We can solve all our problems

16. This depression is not depressing

17. Optimists are right

Read Mr. Ridley’s explanations here.

All the above redounds to a single most important theme: the human being.

Rational optimism is a bet on human capital, or in the context of the Austrian economic school, praxeology or the science of human action—purposeful behavior towards the fulfillment of an end which aims to substitute present unsatisfactory conditions.

Human actions in pursuit of constant improvements is likely to bring about positive changes, despite attendant challenges (especially from politicians, the regulators and cronies).

People are the ultimate resource, as the great author and Professor Julian Simon once wrote,

Only one important resource has shown a trend of increasing scarcity rather than increasing abundance. It is the most important and valuable resource of all—human beings

Quote of the Day: Economic Fascism

It is again worth noting that this is merely the most extreme manifestation of the economic effects of interventionism in the mixed economy. Since fascism is, in essence, a system of hyperinterventionism, the economic effects of the fascist system are merely the logical extremes of smaller "pragmatic" interventionist programs. Each intervention in a mixed economy distorts prices, misallocates resources to unproductive endeavors, and results in a net loss of production. At the same time intervention increases the value of political influence and thereby shifts effort from production to political lobbying.

With enough political intervention in the economy, this culminates in economic stagnation, then net capital consumption, and, finally, economic collapse, occurring when capital supplies become insufficient to sustain basic services. As this process occurs, parasitic groups in the system suck as much as possible from the dying economy, with their parasitic activities becoming increasingly frantic as the economy collapses and the resources available for capture become scarcer.

The problems with the fascist economic system become more and more clear, but there is no incentive for those in control of the state apparatus to avoid the approaching disaster. Since the only antidote to the problem is liberalization of the economy from state control, the cure for the economic decline threatens the personal livelihoods of the state bureaucrats and the ideological program of the higher-level members of the ruling regime.

Of course, it is true that sustained economic decline will eventually threaten the position of the ruling elite, particularly since they must make some appeals to the "public good" in their efforts to maintain their own power. However, their situation is threatened far more directly and far more immediately by the cure for economic decline than from the decline itself.

That’s from a brilliant article by Ben O’Neill at the Mises Institute on the Vampire Economy/authoritarian capitalism/state capitalism/ economic fascism. These conditions resonate or evinces signs of relevance to current developments here and abroad. Also, these represents the main cause why black markets or informal or shadow economies exists.