Use Cash for Freedom

I had a gruesome first hand experience on how governments disdains the use of cash.

Sadly this has not been an isolated experience, but a deepening troublesome political trend around the world, particularly in developed economies.

Governments would like to confiscate more of the public’s resources to finance their lavish ways. So the compulsion to transact through their institutional accomplices, the politically endowed banking system.

Through stricter unilateral regulations or immoral laws, governments through the banking system place the public’s hard earned savings under intense scrutiny, and criminalize the actions of the innocent, whom have been uninformed by the rapid pace of changes in manifold regulations covering a wide swath of social activities through the banking system.

Private transactions which does not conform with the goals and the interests of the political authorities risks confiscation. Worst is the trauma of being labeled a criminal. Increasingly desperate governments have wantonly been in violation of the property rights of their citizenry.

A vote against government is to use cash transactions, that’s because cash, according to Charles Goyette at the LewRockwell.com, represents freedom

Mr. Goyette writes, (bold emphasis mine)

Governments hate that cash gives you anonymity. And they are often very anxious to track it and to control your use of it. They often attempt to criminalize the use of cash or at least criminalize having too much of it around.

Right now, 7% of the U.S. economy is cash-based. Across the Eurozone, it's a little bit higher, 9%, but in Sweden cash transactions are falling by the wayside. You can't use cash for buses there. A growing number of businesses are going entirely cashless. In fact, only 3% of all purchases in Sweden are transacted in cash. And some people think that 3% is too much.

Now, there are things you give up when you go cashless, and privacy is only one of them. Because you also give up a piece of every transaction to the facilitating financial institution, a state-approved financial institution that is going to take a cut one way or another of every purchase that it processes. And that cut will be paid by you.

In the United States, the government has implemented increasingly punitive and burdensome measures for those who use cash. Banks, for example, are required to file reports on the use of cash in certain circumstances, including suspicious persons reports for some cash activities. In fact, if you seem to be trying to transact in cash below the reporting threshold, that alone can trigger a suspicious persons report on you. Like a lot of the states' heavy-handed measures, this was all targeted at getting those drug dealers.

As earlier pointed out, governments has used all sorts of "noble" excuses like money laundering, tax evasion, the war on drugs and etc… to justify their confiscatory actions which in reality represents no more than financial repression.

And as governments tighten the noose on the public, people will intuitively look for ingenious alternatives to outflank such oppressive policies.

In the US, the liquid detergent Tide appears to have emerged even as an alternative to cash.

Writes Professor Joseph Salerno at the Mises Institute.

As has been widely reported recently, an unlikely crime wave has rapidly spread throughout the United States and has taken local law-enforcement officials by surprise. The theft of Tide liquid laundry detergent is pandemic throughout cities in the United States. One individual alone stole $25,000 worth of Tide detergent during a 15-month crime spree, and large retailers are taking special security measures to protect their inventories of Tide. For example, CVS is locking down Tide alongside commonly stolen items like flu medications. Liquid Tide retails for $10–$20 per bottle and sells on the black market for $5–$10. Individual bottles of Tide bear no serial numbers, making them impossible to track. So some enterprising thieves operate as arbitrageurs buying at the black-market price and reselling to the stores, presumably at the wholesale price. Even more puzzling is the fact that no other brand of detergent has been targeted.

What gives here? This is just another confirmation of Menger's insight that the market responds to the absence of sound money by monetizing highly salable commodities. It is clear that Tide has emerged as a subsidiary local currency for black-market, especially drug, transactions — but for legal transactions in low-income areas as well. Indeed police report that Tide is being exchanged for heroin and methamphetamine and that drug dealers possess inventories of the commodity that they are also willing to sell.

As governments stifle people’s social and commercial activities through tyrannical laws, expect the use of more cash, local currencies or commodities (such as Tide) as alternative medium of exchanges, as the informal or shadow economies grow.

Most importantly, real assets will become more valuable and may become an integral part of money, as sustained policies of inflationism, as Voltaire once said, will bring fiat money back to its intrinsic value—zero.

Money which emerges from the markets will be emblematic of freedom.

Quote of the Day: Terrorism Cannot Take Away Our Freedoms

The goal of terrorism is not to crash planes, or even to kill people; the goal of terrorism is to cause terror. Liquid bombs, PETN, planes as missiles: these are all tactics designed to cause terror by killing innocents. But terrorists can only do so much. They cannot take away our freedoms. They cannot reduce our liberties. They cannot, by themselves, cause that much terror. It's our reaction to terrorism that determines whether or not their actions are ultimately successful. That we allow governments to do these things to us—to effectively do the terrorists' job for them—is the greatest harm of all.

That's from Mr. Bruce Schneier, a security expert, in a debate on Airport Security at the Economist (hat tip Cato's Julian Sanchez)

Argentina’s Road to Serfdom: Book Import Bans

From Cato’s Juan Carlos Hidalgo,

The Argentine government has severely restricted the importation of books due to “human health concerns” [in Spanish]. That’s right. According to the government, it can be dangerous to “page through” a book that has high lead quantities in its ink. “If you put you finger in your mouth after paging through a book, that can be dangerous,” said Juan Carlos Sacco, the vice-president of an industrialist organization that supports the measure.

The government claims that this is not a ban. However, since each buyer has to demonstrate at the airport’s customs office that the ink in the purchased book has lead quantities no higher than 0.006% in its chemical composition, the result is that all book imports into the country are stalled.

The measure has a lot to do with the increasing efforts of the Argentine government to stop the flight of dollars out of the country. Capital flight in 2011 reached $21.5 billion, and it accelerated after the reelection of Cristina Fernandez de Kirchner in October. Facing increasing fiscal pressures, and after seizing private pension funds and raiding the Central Bank’s reserves, many people expect the government to go after their bank savings.

The government has reacted with increasingly ridiculous measures. Sniffing dogs are being deployed at airports and border check points to detect the ink used to print U.S. bills, so Argentines cannot take out of the country more than $10,000 without declaring it to the government. The Fernandez administration is also requiring major importers such as automakers to match the price of their imports with that of goods they must now export. As a result, Porsche is exporting Malbec wine and Mitsubishi is now selling peanuts.

Desperate governments will resort to any measures to advance their interests. And to stem capital flight from the private sector in reaction to their spendthrift ways, the Kirchner government now attempts to curtail freedom of speech through policies that promotes ignorance and illiteracy. Talk about ‘noble intentions’.

And of course, part of these mind control measures, imposed through propaganda and censorship, has been for the President of Argentina’s central bank to declare that printing money does not lead to inflation, as well as, to ban the private sector from making public estimates of statistical inflation which went against the government’s data.

As Benjamin Franklin once said,

A nation of well-informed men who have been taught to know and prize the rights which God has given them cannot be enslaved. It is in the religion of ignorance that tyranny begins.

Any government cannot simply wish away the laws of scarcity, which in fullness of time will be vented over the marketplace and eventually would incite a tempestuous political response.

Argentinians have yet to slough off their tolerance for despots which has brought about a cycle of political and economic crisis since the 20th century (as previously discussed here)

Quote of the Day: Politics as National Sport

Politics is not cooperative like the market; it is exploitative. The system is set up to threaten the identity and choices of others. Everyone must fight to survive and conquer. They must kill their opponents or be killed. So coalitions form, and constantly shifting alliances take shape. This is the world that the state -- through its election machinery -- throws us all into. It is our national sport. We cheer our guy and hope for the political death of the other guy

That’s from Jeffery Tucker at the Laissez Faire Books.

This so applies to the current deliberation of the impeachment case in the Philippines which is seen as a ‘national sport’- "we cheer our guy and hope for the political death of the other guy" as the much touted solution to "corruption" which is, of course, a politically concocted fantasy.

Little has there been the realization that this political circus serves no more than a distraction to the real purpose of the expansion of the regime’s political power.

The Illusions of Technocracy

Professors Daron Acemoglu and Simon Johnson writes,

In 1979 Paul A. Volcker became chairman of the Fed and tamed inflation by raising interest rates and inducing a sharp recession. The more general lesson was simple: Move monetary policy further from the hands of politicians by delegating it to credible technocrats.

I hope the world operates in such simplicity. We just hire the right persons of virtue and intellect and our problems would vanish.

But that’s not the world we live in.

First of all, too much credit has been given to the actions of ex-US Federal Reserve chief Paul Volcker, who may just be at the right place at the right time.

Here is Dr. Marc Faber on Paul Volcker, (bold emphasis mine)

In the 1970s, the rate of inflation accelerated, partly because of easy monetary policies, which led to negative real interest rates, partly because of genuine shortages in a number of commodity markets, and partly because OPEC successfully managed to squeeze up oil prices. But by the late 1970s, the rise in commodity prices led to additional supplies and several commodities began to decline in price even before the then Fed chairman Paul Volcker tightened monetary conditions.

Similarly, soaring energy prices in the late 1970s led to an investment boom in the oil- and gas-producing industry, which increased oil production while at the same time the world learned how to use energy more efficiently. As a result, oil shortages gave way to an oil glut, which sent oil prices tumbling after 1985.

At the same time, the US consumption boom that had been engineered by Ronald Reagan in the early 1980s (driven by exploding budget deficits) began to attract a growing volume of cheap Asian imports, first from Japan, Taiwan, and South Korea, and then, in the late 1980s, also from China.

I would therefore argue that even if Paul Volcker hadn't pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the USA.

Then, markets had already been signaling the unsustainability of Fed induced inflation which had been underpinned by real market events as oversupply and globalization. Thus, Paul Volcker’s actions may have just reinforced an ongoing development.

In short, lady luck may have played a big role in Mr. Volcker’s alleged feat.

Next, looking at the world in a static frame misleads.

Conditions today are vastly dissimilar from the conditions then, as I recently wrote,

Circumstances during Mr. Volker’s time have immensely been different than today. There has been a vast deepening of financialization of the US economy where the share of US Financial industry to the GDP has soared. In short, the financial industry is more economically (thus politically) important today than in the Volcker days. Seen in a different prism, the central bank-banking cartel during the Volcker era has not been as embedded as today.

Yet how did this came about?

According to Federal Reserve of Dallas Harvey Rosenblum

Banks have grown larger in recent years because of artificial advantages, particularly the widespread belief that government will rescue the creditors of the biggest financial institutions. Human weakness will cause occasional market disruptions. Big banks backed by government turn these manageable episodes into catastrophes

Put differently, public policies or regulations spawn a feedback mechanism between regulators and the regulated through human interactions.

Laws and regulations don’t just alter the incentives of the market participants, they foster changes in the relationship between political authorities and the regulated industry.

More laws tend to increase or deepen the personal connections and communications between authorities and the regulated. This magnifies opportunities to leverage personal relationships where market participants seek concessions or compromises from their regulatory overseers, which leads to political favors, corruption, influence in shaping policies and the ‘captured’ regulators. And such relationships bring about the insider-outsider politics as evidenced by revolving door syndrome.

As human beings we live in a social world. The idea where “virtue” and knowledge are enough to shield political authorities from the influences of the regulated and or the political masters of public officials and or from personal ties, represents a world of ivory towers, and simply is fiction.

The true reason behind the illusions of technocracy as stated by Murray N. Rothbard, (bold emphasis added)

There are two essential roles for these assorted and proliferating technocrats and intellectuals: to weave apologies for the statist regime, and to help staff the interventionist bureaucracy and to plan the system.

The keys to any social or political movement are money, numbers, and ideas. The opinion-moulding classes, the technocrats and intellectuals supply the ideas, the propaganda, and the personnel to staff the new statist dispensation. The critical funding is supplied by figures in the power elite: various members of the wealthy or big business (usually corporate) classes. The very name "Rockefeller Republican" reflects this basic reality.

While big-business leaders and firms can be highly productive servants of consumers in a free-market economy, they are also, all too often, seekers after subsidies, contracts, privileges, or cartels furnished by big government. Often, too, business lobbyists and leaders are the sparkplugs for the statist, interventionist system.

What big businessmen get out of this unholy coalition on behalf of the super-state are subsidies and privileges from big government. What do intellectuals and opinion-moulders get out of it? An increasing number of cushy jobs in the bureaucracy, or in the government-subsidized sector, staffing the welfare-regulatory state, and apologizing for its policies, as well as propagandizing for them among the public. To put it bluntly, intellectuals, theorists, pundits, media elites, etc. get to live a life which they could not attain on the free market, but which they can gain at taxpayer expense--along with the social prestige that goes with the munificent grants and salaries.

This is not to deny that the intellectuals, therapists, media folk, et al., may be "sincere" ideologues and believers in the glorious coming age of egalitarian collectivism. Many of them are driven by the ancient Christian heresy, updated to secularist and New Age versions, of themselves as a cadre of Saints imposing upon the country and the world a communistic Kingdom of God on Earth.

Bottom line: Technocrats are no different than everyone else. They are human beings. They may have specialized knowledge covering certain areas of life, but they don’t have general expertise over the complex world of interacting human beings and of nature.

Technocrats have not been bestowed with omniscience enough to know and dictate on how we should live our lives. Instead, technocrats use their special ‘knowledge’ to advance their personal interests, by short circuiting market forces through politics, and who become tools for politicians or vested interest groups.

And that's why they are technocrats, they are afraid to put their knowledge to real tests by taking risks at the marketplace and rather hide behind the skirt of politics.

Thus, the idea of political efficacies from the philosopher king paradigm through modern day technocratic governance is a myth.

US Treasury to Debase Coins

So policies of inflationism will not be restricted to the US Federal Reserve. The US Treasury as producer and minter of coins, proposes to join the FED by resorting to an age old trick of clipping or shaving the contents of the coin—or debasement—in the pretext of budgetary savings.

Here is the Wall Street Journal Blog (bold emphasis mine)

Geithner, in written testimony prepared for the House Committee on Appropriations, said a good portion of next year’s savings at Treasury will come from changing the composition of U.S. coins to more cost-effective materials.

“Currently, the costs of making the penny and the nickel are more than twice the face value of each of those coins,” Geithner said in his remarks.

The cost of making pennies and nickels are about twice the face value of the coins–2.4 cents for a penny and 11.2 cents for a nickel, the Treasury Department said earlier this month. Rising commodity prices have driven higher production costs. The Mint said it used 16,365 tons of copper, 2,311 tons of nickel and 11,844 tons of zinc to produce all coins in fiscal year 2011.

Changing the makeup of coins and improving the efficiency of currency production will save more than $75 million in the next fiscal year. In addition, the suspension of presidential dollar coin production, announced in December, will save another $50 million.

In reality, debasement is currency devaluation or inflationism, albeit in an archaic sense.

The great Professor Ludwig von Mises wrote (highlights mine)

Mintage has long been a prerogative of the rulers of the country. However, this government activity had originally no objective other than the stamping and certifying of weights and measures. The authority's stamp placed upon a piece of metal was supposed to certify its weight and fineness. When later princes resorted to substituting baser and cheaper metals for a part of the precious metals while retaining the customary face and name of the coins, they did it furtively and in full awareness of the fact that they were engaged in a fraudulent attempt to cheat the public. As soon as people found out these artifices, the debased coins were dealt with at a discount as against the old better ones. The governments reacted by resorting to compulsion and coercion. They made it illegal to discriminate in trade and in the settlement of deferred payments between "good" money and "bad" money and decreed maximum prices in terms of "bad" money. However, the result obtained was not that which the governments aimed at. Their decrees failed to stop the process which adjusted commodity prices (in terms of the debased currency) to the actual state of the money relation. Moreover, the effects appeared which Gresham's law describes.

Here is a visual of coins and currency in circulation in the US…

you can see the original graphics here, although the chart has been based on 2009 data.

My further comments:

Compared to the past where debasement of coins had been conducted surreptitiously by kings, the US Treasury like the Federal Reserve, has been, and will be doing this unreservedly.

As one would observe, whether the US Federal Reserve or the US Treasury, inflationism has been inherent to the actions of political agents

The public will hoard current coins which will spontaneously vanish from circulation as new debased coins will circulate. This is the Gresham’s Law at work.

As testament, hedge fund manager Kyle Bass has reportedly accumulated $1 million dollars worth of 20 million (5 cent coins) nickels.

More people will be looking for old coins as alternative path to preserve wealth. This comes amidst political actions to redistribute wealth for the benefit of politicians and at the expense of the public via rampant inflationism.

Japan’s Inflationism Begins to Backfire

Changes to people’s behavior in response to devaluation policies adapted by the Bank of Japan (BOJ) have begun to manifest in the asset ownership mix by Japanese households.

Here is what I earlier pointed out,

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

As the great Ludwig von Mises wrote,

The holders of ready cash try as far as possible to avoid the dangers of devaluation which today threaten in every country. They keep large bank balances in those countries in which there is the least probability of devaluation in the immediate future. If conditions change and they fear for these funds, they transfer such balances to other countries which for the moment seem to offer greater security. These balances which are always ready to flee-so-called “hot money”—have fundamentally influenced the data and the workings of the international money market. They present a serious problem in the operation of the modern banking system.

The incipient developing signs of capital flight as noted by Zero Hedge (bold emphasis mine)

Bloomberg reports that "Finance Minister Jun Azumi’s efforts to get Japan’s households to increase investment in the nation’s debt are failing as holdings of government bonds fall to a seven-year low." Combing through the Japanese quarterly flow of funds report shows something very disturbing - the last bastion of JGB ownership, Japan's households, have started to shift out of bonds, which are now yielding 0.27% for the retail 5 Year bond, and about 1.00% for the 10 year, and are now putting their money straight into mattresses. "Japanese households owned 3.09 percent of domestic bonds in the final quarter of 2011, a decrease from 3.2 percent in the third quarter and the lowest since 2005, Bank of Japan data released March 23 show." And the worst news for any domestically funded ponzi regime: "Mrs. Watanabe” as many are housewives, have instead increased foreign-currency deposits and cash, according to the BOJ data. "It’s a case of retail JGBs not having enough yield,” said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd."Households are accumulating cash and using financial investments to diversify into higher yields and JGBs don’t really provide this." ..."Individual investors are holding cash rather than bonds and other financial assets because they are wary of making risky investments, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo." Needless to say, when even Japanese households have given up, it's game over... for bubbles in both bonds and in "conventional wisdom."

As the average Japanese flee domestic bonds and the yen, interest rates would significantly rise that would rock the proverbial boat of the balance sheets of their banking and financial system, whom accounts for as the largest financiers of the Japanese government through the JGB (Distribution of JGB owners as of 2009 shown in the below graph from Japan Bankers Association).

This would compel the BoJ to inflate even more in a futile attempt to suppress interest rates. The result would be a feedback loop—rising interest rates would be met with more inflationism which would fuel further rise in interest rates. Also Japanese authorities may resort to other means of financial repression, such as currency controls, mandates to own more bonds, and etc...

Thus, we can expect that the average Japanese to seek refuge either through precious metals or through foreign currency or both.

These are emergent signs of the unintended consequences of BoJ’s reckless policies that will lead to the self implosion of the yen, if, in the condition, that such inflationist policies should would be sternly pursued with. This would also presage the worsening of Japan's economic conditions.

Central bankers, mostly of developed economies, seem to think that they can wish away the law of scarcity through the printing (or should I say the digital) press.

Obviously reality has been catching up with them, as warned by Professor von Mises.

As a universal rule, inflation is a policy that cannot last.

Sustained Inflationism will End of the US Dollar Standard

The Economic Collapse Blog enumerates 10 reasons why they think the reign of the US Dollar is coming to an end.

The following are 10 reasons why the reign of the dollar as the world reserve currency is about to come to an end....

#1 China And Japan Are Dumping the U.S. Dollar In Bilateral Trade

A few months ago, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other. This was an incredibly important agreement that was virtually totally ignored by the U.S. media. The following is from a BBC report about that agreement....

China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade.

The deal will allow firms to convert the Chinese and Japanese currencies directly into each other.

Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

#2 The BRICS (Brazil, Russia, India, China, South Africa) Plan To Start Using Their Own Currencies When Trading With Each Other

The BRICS continue to flex their muscles. A new agreement will promote the use of their own national currencies when trading with each other rather than the U.S. dollar. The following is from a news source in India....

The five major emerging economies of BRICS -- Brazil, Russia, India, China and South Africa -- are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

#3 The Russia/China Currency Agreement

Russia and China have been using their own national currencies when trading with each other for more than a year now. Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade.

#4 The Growing Use Of Chinese Currency In Africa

Who do you think is Africa's biggest trading partner?

It isn't the United States.

In 2009, China became Africa's biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent.

A report from Africa’s largest bank, Standard Bank, recently stated the following....

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

China seems absolutely determined to change the way that international trade is done. At this point, approximately 70,000 Chinese companies are using Chinese currency in cross-border transactions.

#5 The China/United Arab Emirates Deal

China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other.

The UAE is a fairly small player, but this is definitely a threat to the petrodollar system. What will happen to the petrodollar if other oil producing countries in the Middle East follow suit?

#6 Iran

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade. For example, it has been reported that India will begin to use gold to buy oil from Iran.

Tensions between the U.S. and Iran are not likely to go away any time soon, and Iran is likely to continue to do what it can to inflict pain on the United States in the financial world.

#7 The China/Saudi Arabia Relationship

Who imports the most oil from Saudi Arabia?

It is not the United States.

Rather, it is China.

As I wrote about the other day, China imported 1.39 million barrels of oil per day from Saudi Arabia in February, which was a 39 percent increase from one year earlier.

Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia, and leaders from both nations have been working to aggressively expand trade between the two nations.

So how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

That is a very important question.

#8 The United Nations Has Been Pushing For A New World Reserve Currency

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world.

In particular, one UN report envisions "a new global reserve system" in which the U.S. no longer has dominance....

"A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency."

#9 The IMF Has Been Pushing For A New World Reserve Currency

The International Monetary Fund has also published a series of reports calling for the U.S. dollar to be replaced as the reserve currency of the world.

In particular, one IMF paper entitled "Reserve Accumulation and International Monetary Stability" that was published a while back actually proposed that a future global currency be named the "Bancor" and that a future global central bank could be put in charge of issuing it....

"A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing."

#10 Most Of The Rest Of The World Hates The United States

Global sentiment toward the United States has dramatically shifted, and this should not be underestimated.

All the above signifies as secondary causes to what truly will end the US dollar standard: Sustained Inflationism.

We must remember, inflationism is a policy that cannot last and would be put to an end by its adverse ramifications: massive disruptions in the marketplace (possibly hyperinflation) and or rapid deterioration in the political environment. Since inflationism distorts price signals, it affects economic calculation of entrepreneurs and of the average citizenry.

The result would translate to a decline society’s division of labor that negatively affects productivity. This in turn sows social conflicts.

I would add that for #10, this has been the combined result of foreign imperial policies and of inflationism. Wars have essentially been funded by inflationism.

As Professor Ludwig von Mises warned in Defense, Controls, and Inflation (p.109)

We have not to choose between financing the increased government expenditure by collecting taxes and borrowing from the public, on the one hand, and financing it by inflation, on the other hand. Inflation can never be an instrument of a fiscal policy continued over a long period of time. Continued inflation inevitably leads to catastrophe.

The Myth of the Middle Income Trap

The Economist writes,

The forces of economic convergence are powerful, but not all powerful. Poor countries tend to grow faster than rich ones, largely because imitation is easier than invention. But that does not mean that every poor country of five decades ago has caught up, as today’s chart shows. It plots each country’s income per person (adjusted for purchasing power) relative to that of America, both in 1960 and in 2008. The chart appeared in the World Bank's recent China 2030 report. If every country had caught up, they would all be found in the top row. In fact, most countries that were middle income in 1960 remained so in 2008 (see the middle cell of the chart). Only 13 countries escaped this middle-income trap, becoming high-income economies in 2008 (top-middle). One of these success stories, it should not be forgotten, was Greece.

This is an example of how macro statistics can be used to mislead people. Countries essentially don’t fall into “traps”, it is the individual who make or unmake their respective wealth.

What truly restrains people from advancing is when productive resources are diverted into non-productive use. That’s basic, and is a matter of the law of opportunity costs or the law of scarcity.

And what induces non-productive use of resources are insatiable government spending, the welfare state, bloated bureaucracy and trade restrictions, anti-competition laws, bubble policies (or policies which induces consumption), inflationism (QEs) and all sorts of market distorting interventionism. Yes, all of them are interconnected.

As the great Professor Ludwig von Mises wrote, (bold emphasis added)

Each authoritarian interference with business diverts production, of course, from the lines it would take if it were only directed by the demand of the consumers as manifested on the market. The characteristic mark of restrictive interference with production is that the diversion of production is not merely an unavoidable and unintentional secondary effect, but precisely what the authority wants to bring about. Like any other act of intervention, such restrictive measures affect consumption also. But this again, in the case of the restrictive measures we are dealing with in this chapter, is not the primary end the authority aims at. The government wants to interfere with production. The fact that its measure influences the ways of consumption also is, from its point of view, either altogether contrary to its intentions or at least an unwelcome consequence with which it puts up because it is unavoidable and is considered as a minor evil when compared with the consequences of nonintervention.

Restriction of production means that the government either forbids or makes more difficult or more expensive the production, transportation, or distribution of definite articles, or the application of definite modes of production, transportation, or distribution. The authority thus eliminates some of the means available for the satisfaction of human wants. The effect of its interference is that people are prevented from using their knowledge and abilities, their labor and their material means of production in the way in which they would earn the highest returns and satisfy their needs as much as possible. Such interference makes people poorer and less satisfied.

In short, the more intervention, the lesser the capital accumulation or reduced economic growth. When politicians become greedy enough to divert much wealth into policy driven consumption activities then productivity diminishes. And that's where the so-called statistical 'trap' comes in.

Bottomline: the so-called Middle income trap represents a macroeconomic hooey.

UK’s Government Discourages Charity

We are often told that the private sector is instinctively greedy, and thus requires intervention to spread ‘charity’ and ‘compassion’.

Well, in the UK, acts of private sector charity or philanthropy will be penalized.

From Wall Street Journal Wealth Blog,

The U.K.’s new budget has ignited all manner of class warfare. Retirees say it’s a gift to the rich at the expense of the poor. The wealthy say it’s another attack on success and job creators.

But one piece has gone largely unnoticed: the limit on philanthropic giving. The measure would cap the tax relief for wealthy givers at 25% of their annual income, or £50,000, whichever is higher. It takes effect next year.

It’s similar to the Obama proposal, which would limit charitable deductions for high earners to 28% for couples with incomes of $250,000 or more or individuals with income of $200,000. The White House says limiting itemized deductions would shrink the deficit by $584 billion over 10 years.

The U.K. expects its measure (along with caps on business deductions) to result in $490 million in saved revenue.

“Giving shouldn’t mean you pay no tax,” according to the U.K. Treasury.

Yet charities say the plan would put a chill on philanthropic giving just as the U.K. government is trying to create a new culture of giving.

The “new culture of giving” is that the government forcibly takes what you own (by taxation), which in turn discourages acts of private charity (both by administrative limits and again by taxation--what you opt to donate will be taken instead).

And as the norm, governments spend these confiscated resources charitably on their pet projects (to the benefit of cronies and or to vote rich welfare dependents or for photo Op sensational projects).

This is not really new. It has been the nature of governments to undertake lawful plunder of the resources of the citizenry when so deemed politically expedient.

As the great Frédéric Bastiat wrote in The Law published in 1850

When does plunder cease, then? When it becomes more burdensome and more dangerous than labor. It is very evident that the proper aim of law is to oppose the fatal tendency to plunder with the powerful obstacle of collective force; that all its measures should be in favor of property, and against plunder.

But the law is made, generally, by one man, or by one class of men. And as law cannot exist without the sanction and the support of a preponderant force, it must finally place this force in the hands of those who legislate.

This inevitable phenomenon, combined with the fatal tendency that, we have said, exists in the heart of man, explains the almost universal perversion of law. It is easy to conceive that, instead of being a check upon injustice, it becomes its most invincible instrument.

It is easy to conceive that, according to the power of the legislator, it destroys for its own profit, and in different degrees amongst the rest of the community, personal independence by slavery, liberty by oppression, and property by plunder.

It is in the nature of men to rise against the injustice of which they are the victims. When, therefore, plunder is organized by law, for the profit of those who perpetrate it, all the plundered classes tend, either by peaceful or revolutionary means, to enter in some way into the manufacturing of laws. These classes, according to the degree of enlightenment at which they have arrived, may propose to themselves two very different ends, when they thus attempt the attainment of their political rights; either they may wish to put an end to lawful plunder, or they may desire to take part in it.

By preventing the private sector from engaging in philanthropic activities and by coercively taking their resources by law, who’s greedy now?

Quote of the Day: War Equals Presidential Greatness

Our data analysis suggests that wars in which a large percentage of the U.S. population is killed will, all other things equal, cause historians to judge as great a president on whose watch those wars occurred. Certainly, this was the perception of presidents Theodore Roosevelt and John F. Kennedy. It was probably also the perception of other presidents.

This conclusion is troubling. Most presidents, after all, probably want to be thought of as great. When they spend resources on war, they are spending almost entirely other peoples money and lives. They get little credit for avoiding war. Martin Van Buren, for example, effectively avoided a war on the northern border of the United States. How many people know that today?
Indeed, how many people have even heard of Martin Van Buren?

Woodrow Wilson, by contrast, inserted the United States into World War I. That was a war that the United States could easily have avoided. Moreover, had the U.S. government avoided World War I, the treaty that ended the war would not likely have been so lopsided. The Versailles Treaty`s punitive terms on Germany, as Keynes predicted in 1919, helped set the stage for WorldWar II.

So it is reasonable to think that had the United States not entered World War I, there might not have been a World War II. Yet, despite his major blunder and more likely, because of his major blunder, which caused over 100,000 Americans to die in World War I, Wilson is often thought of as a great president.

The danger is that modern presidents understand these incentives. Those who want peace should take historians` ratings of presidents seriously. Beyond that, we should stop celebrating, and try to persuade historians to stop celebrating, presidents who made unnecessary wars. One way to do so is to remember the unseen: the war that didn`t happen, the war that was avoided, and the peace and prosperity that resulted. If we applied this standard, then presidents Martin van Buren, John Tyler, Warren G. Harding, and Calvin Coolidge, to name four, would get a substantially higher rating than they are usually given.

That’s from a paper by Professors David Henderson and Zachary Gochenour.

Seeing greatness in war or destruction is an example of the public’s misconceived glorification of the state, which has mostly been a product of indoctrination and political propaganda.

War, according to writer Randolph Bourne, is the health of the state.

Wars are the ramifications of societies that worship the state, where the gullible public are misled to exalt the illusions of the supposed virtues of nationalism by ignoring the destructive real effects of such political actions.

Wars will always be a recourse or an option of any society that depends on political redistribution of resources.

US Federal Reserve Admits Bailout of the Eurozone

The US Federal Reserve finally admits or officially confirms of their bailout of the Eurozone

The Bloomberg reports,

Federal Reserve Bank of New York President William Dudley said that the central bank holds a very small amount of European sovereign debt and that he sees a “high bar” to additional purchases.

The standard for buying more European sovereign debt “is extraordinarily high for the U.S., for the Federal Reserve, to actually go out and buy foreign sovereign debt for its own portfolio, apart from the very small foreign exchange holdings that we have,” Dudley said today to a House Financial Services subcommittee hearing.

And US intervention in the EU has been no dollop, they consist of nearly hundred of billion of dollars of which ups the stake of US taxpayers on the EU. Well, billions in a bailout world of trillions does look like a "very small amount", but this would be linguistic misrepresentation.

The US has been expanding its ‘imperialist’ interventions formerly limited in the scope of foreign policies (military and geopolitics), which now seems to be swiftly expanding to cover finance and banking aspects.

In other words, the US is not just a policeman of the world, but also the world’s lender or banker of last resort.

Ron Paul recently wrote to expose on this central banking legerdemain

Essentially, beginning late last year the Fed provided U.S. dollars to the European Central Bank in exchange for Euros-- sometimes as much as $100 billion at a time. The ECB then funneled those dollars to European banks to provide liquidity and prevent crises from bank insolvencies. Since the currency swap was not technically a loan, the Fed did not have to embarrass itself by openly showing foreign bank debt on its balance sheet. The ECB meanwhile did not have to print new Euros and expose the true fragility of big European banks.

The entire purpose of this unholy arrangement was to obscure the truth: namely that the Fed was bailing out Europe with U.S. dollars.

But why is it the business of the Federal Reserve to bail out European banks that find themselves short of dollars to pay their dollar-denominated contracts? After all, those contracts often were hedges taken to protect banks against weakness of the Euro. Hedges are supposed to reduce risk, but banks that miscalculate should suffer their own losses accordingly. It’s not our business if the ECB chooses to create moral hazards by providing liquidity to European banks, but why should the Fed prop up Europe’s bad decisions!

The Fed has promised to provide unlimited amounts of dollars to the ECB, should circumstances require it. It boggles the mind. Of course when Fed officials first entered into these swap agreements with the ECB last September, they did so quietly. The American public only found out via websites of the ECB, the Bank of England, or the Swiss Central Bank.

The Fed already has pumped trillions of dollars into the economy since 2008, and US banks currently hold $1.5 trillion of excess reserves. So why don't American banks lend those excess trillions to European banks if they really need dollars? If US banks could earn 1 or 2 percent on those loans, they might just be interested. But they can't compete with the ½ percent interest rate charged by the Fed to the ECB. That's one glaring example of the harm caused by the Fed's ability to create money and loan it at below-market interest rates.

The Fed argues that these loans will be temporary, merely providing a little boost to get Europe over the hump. But that's what they thought a few years ago when such lines of credit to the ECB were set to expire, only to see the Fed reauthorize them. What happens if the European financial system collapses? Will the Fed be left holding a bunch of worthless Euros? Will the ECB simply shrug and turn over the collateral it received from European banks, maybe in the form of bonds from Ireland, Italy, or Greece? Have the 17 individual central banks backing the ECB pledged their gold holdings as collateral?

The Fed has placed a hundred-billion dollar bet on the future of the Euro, with the strength of the dollar on the line. This is absolutely irresponsible, and directly contrary to market discipline. Let private banks, European or otherwise, take their own risks. Let foreign central banks inflate their own currencies and suffer the consequences. In other words, it’s time to apply market principles to banks and money.

Clearly, Fed policies have not been designed to "devalue" the US dollar, which many in the left alleges as meant to promote exports (putting lipstick on a pig), but to survive the incumbent the crumbling unsustainable welfare-central banking and banking cartel based political institutions.

The world operates in a de facto US dollar standard or a banking system whose currency reserves have been built mostly on US dollar holdings. This means that Fed policies does not only expose US taxpayers to undue burden from policy risks, Fed policies has far reaching consequences which needlessly exposes the world to destabilizing financial and monetary risks that could ripple throughout national economies.

This also shows how centralized actions engender systemic risks.

This is just one fundamental reason to abolish the FED.

End the Fed. End central banking and the politicization of money.

Quote of the Day: Democracy as Instrument of Oppression

Great stuff from Professor Butler Shaffer at the LewRockwell.com,

Beyond this simplistic faith in a "social contract" theory of the state lies the reality that such systems have always been under the control of small groups of persons who are answerable to no one, particularly those they presume the authority to rule. "Democracy" is just one abstraction that the state owners have employed to distract the attention of their victims; to create in the minds of their subjects the illusion that they, not the owners, are running the system.

Believing that the state represents their interests, and that – through "democratic" processes - they control its direction and energies, most men and women identify themselves with that state. In this way, people and the state share the same "ego boundaries." When millions of people come together in this manner, it becomes easy for each to lose his or her individuality – and, hence, responsibility - in a collective identity. By engendering fear of others who share different ego-boundary identities, the state is able to mobilize "dark side" forces of the collective unconscious into a critical mass that allows the state to aggrandize its powers through violent, destructive means. Adolf Hitler used such methods to organize Germans against those he called non-Aryans. In the same way has the United States employed the specters of "communism," "drug-dealers," and "terrorism" to bamboozle its ego-boundary adherents into participating in its continuing war against life itself.

To anyone who makes a sincere effort to understand the nature of a supposedly democratic state, it is apparent that such a system rests on the flimsiest of foundations. People must be given the impression that, by voting, they are the show; they are steering the ship-of-state. But the corporate-state interests – the political establishment – that actually own the system, are not burdened by such delusions. The entire institutional order – including the state, major corporations, schools and universities, organized religions, and the mainstream media – share a common interest in keeping people subservient to their authority and control. At its most basic level – and as more of us have been learning of late – there are too many trillions of dollars of despoiled wealth, and too much power over the direction of human energy, to permit the establishment to allow preferences or even whims of ordinary people to upset institutional interests. In the words of Emma Goldman, "if voting changed anything, they’d make it illegal."

Read the rest here

The Coming Global Yen Carry Trade

I earlier noted that Japan’s currency, the yen, may function as a funding currency for interest rate and currency value arbitrages, or known as the carry trade, that may augment the ongoing bubble process in Philippines, as well as, in other ASEAN asset markets. It appears that the Yen carry may well be a global phenomenon.

Writes analyst Howard Simons at the Minyanville,

the BOJ may be ready to fly the Mission Accomplished banner in its war on the yen (yes, I just wrote this). The yen has regained its status as the cheapest currency to borrow, edging out other worthies such as the Hong Kong and Singapore dollars, the Swiss franc, and the US dollar.

That status is pushing more and more currencies into a positive carry against the yen. Even in those many cases where the yen has gained on a spot-rate basis, the loss is being offset by a higher interest rate spread. The overall result is a positive total carry. As recently as November 2011, 20 currencies had negative carries against the yen over the post-March 2009 era; that number is down to six.

In short, more positive carries should translate to more carry trades.

Central bank policies have indeed been spawning numerous imbalances globally. And if the BoJ’s debasement policies continues, then we should expect international investors to take advantage of these emerging arbitrage opportunities.

Profit from folly.

The Suddenness of Inflation

Bloomberg columnist, author and Council on Foreign Relations (CFR) analyst Amity Shlaes warns about the complacency of political authorities over inflation. (hat tip Professor Antony Mueller)

“Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1 percent for 1915 to 7 percent in 1916 to 17 percent in 1917. To returning vets, that felt awful sudden.

The popular mainstream ‘begging the question’ argument on consumer price inflation goes something like this: inflation risk is minimal, because there has been little signs of inflation today.

Present and past actions have been construed as extending to the future, with little regards to the cause-and-effect relationship from implemented policies such as money printing or zero bound rates. In reality, these arguments have been pushed to justify more inflationist-interventionist policies: No inflation? Have more inflation.

Yet like natural disasters, inflation wreaks havoc at the least expected moments.

The volatile episodes of US CPI inflation coincided with wars (World War I, World War II and the Vietnam War). (chart from tradingeconomics.com)

In a relative sense, today’s US CPI inflation environment has been ‘calmer’ than the current periods. Even if the US has been engaged in numerous imperialist wars, along with the huge welfare state that substantially contributes to the ballooning record fiscal or budget deficits. (chart from the Heritage Foundation)

chart from Cleveland Federal Reserve

And this comes amidst the exploding balance sheet of the US Federal Reserve. The US Federal Reserve has topped China as the largest owner of US treasuries, which means that the US central bank has become the key source of financing for the US government.

And these banking based financing of public expenditures are inflationary. The great Murray N. Rothbard explained

Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.

On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old Treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect "print" new money to pay for the federal deficit.

Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.

While we cannot exactly predict exactly when CPI inflation is bound to hit the US economy, given the recent actions by the US Federal Reserve and US Federal government, we understand though that inflation will eventually rear its ugly head.

The question is a WHEN rather than an If. And to what degree of inflation.

And worst, since the world has operated on a monetary standard based on the US dollar, the effects of US inflation will be worldwide.

The basis for such prediction is our theoretical understanding of the 3 stages of inflation

As the great Ludwig von Mises pointed out, (bold highlights mine)

In the early stages of an inflation only a few people discern what is going on, manage their business affairs in accordance with this insight, and deliberately aim at reaping inflation gains. The overwhelming majority are too dull to grasp a correct interpretation of the situation. They go on in the routine they acquired in non-inflationary periods. Filled with indignation, they attack those who are quicker to apprehend the real causes of the agitation of the market as "profiteers" and lay the blame for their own plight on them. This ignorance of the public is the indispensable basis of the inflationary policy. Inflation works as long as the housewife thinks: "I need a new frying pan badly. But prices are too high today; I shall wait until they drop again." It comes to an abrupt end when people discover that the inflation will continue, that it causes the rise in prices, and that therefore prices will skyrocket infinitely. The critical stage begins when the housewife thinks: "I don't need a new frying pan today; I may need one in a year or two. But I'll buy it today because it will be much more expensive later." Then the catastrophic end of the inflation is close. In its last stage the housewife thinks: "I don't need another table; I shall never need one. But it's wiser to buy a table than keep these scraps of paper that the government calls money, one minute longer."

A fundamental example has been the most recent bout of hyperinflation which buffeted Zimbabwe’s economy during the last decade, which I posted three years back.

When inflation strikes, it slams like a tidal wave. Zimbabwe’s hyperinflation produced a hockey stick like effect, similar to Weimar Germany’s experience.

While the risk of hyperinflation is not yet imminent, if the current path of inflationist policies is sustained, then this would enhance the probability of such a risk.