HOT: China Cuts Lending and Deposit Rates for the Second Time in 2012

Coordinated moves this seem to have been!

Just a few minutes back the Bank of England initiated the next wave of credit 'quantitative' easing policies, now comes China.

From the Marketwatch.com,

The People's Bank of China cut its benchmark lending and deposit rates late Thursday, its second rate cut since early June, according to reports. The Chinese central bank lowered its one-year yuan deposit rate 25 basis points and its one-year lending rate by 31 basis points, according to Dow Jones Newswires. The central bank also announced more relaxed rules on lending, allowing bank lending rates to fall to 70% of the benchmark rate, down from 80% currently.

So China’s political authorities have remained interventionists after all.

I believe that the People’s Bank of China’s (PBoC) response may have been triggered by today’s clobbering of her already beaten down equity markets. The Shanghai index fell by more than 1%.

It is also possible that global central bankers may have decided to coordinate or synchronize their “kick-the-can-down-the-road” responses.

If China’s banks and businesses have been stuffed with bad loans, then interest rates cuts may not be effective. So the next measures will either be asset purchases (ala developed economies) or fiscal stimulus.

BUT we will observe the reaction of China’s financial markets and the commodity markets to these measures.

HOT: Bank of England Reactivates QE

The Bank of England fired the first salvo to the much expected (or may I say much awaited) series of credit easing policies by global central banks

From the Bloomberg,

The Bank of England restared bond purchases two months after halting its expansion of stimulus as the deteriorating outlook spurred policy makers to ramp up efforts to kick start a recovery.

The Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds…

The resumption of quantitative easing is a part of a twin- pronged effort by the central bank to pull Britain out of a recession that includes a new credit-boosting program. With inflation easing and reports this week showing that factory,services and construction activity weakened in June, policy makers were spurred to act…

Policy makers also left their benchmark rate at a record low of 0.5 percent today, a move forecast by all but one of 50 economists in a Bloomberg survey. Within the QE survey, two forecast no change, one forecast a 25 billion-pound increase and eight predicted an addition of 75 billion pounds.

The ECB has likewise been widely expected to cut interest rates today.

The last time the BoE delivered the QE (BoE's balance sheet from the Bank of England), this boosted UK’s major equity benchmark, the FTSE, for about one quarter or for about the same time until the program expired.

The Bank of England’s action has not been about the economy but of the saving of the skins of bankers and stock market investors. This is the Bernanke Put in motion.

War on Education: ADB Disdains Tutoring, Seeks Regulation

The Asian Development Bank (ADB) detests private tutoring which they pejoratively calls the “shadow education”

From Yahoo,

Asian parents are spending billions of dollars on private tutors for their children, and the practice is growing despite doubts over its effectiveness, according to a study published Wednesday.

"Shadow education" is an expanding business not only in wealthy countries but also in some of the region's poorer nations as parents try to give their children the best start in life, the Asian Development Bank said.

Nearly nine out of 10 South Korean elementary pupils have private tutoring, while the figure for primary school children in India's West Bengal state is six out of 10.

"Proportions are lower in other countries, but throughout the region the shadow is spreading and intensifying," the study said, calling for a review of education systems to make such extra teaching less attractive.

Extra academic work is aimed at helping slow learners and supporting high achievers, and is seen by many Asian parents as a constructive way for adolescents to spend their spare time.

However, it can also reduce time for sports and other activities important for well-rounded development, as well as cause social tensions since richer families are able to pay for better-quality tutoring, the study said.

Funny, but are we not suppose to know more of our own interests or what is best for us and our family? Yet these haughty ADB people are saying otherwise...they know more about our children's welfare than us, the parents.

If a family finds that the “one-size-fits-all” educational standards implemented by incumbent institutions has not been sufficient in providing learning services for their children, would it be morally deviant to procure educational services outside of these institutions?

To consider, in the Philippines, nearly 4 out of 10 college graduates are unemployed and one in 10 of graduates go abroad. So how effective has traditional education been? Yet these are the standards which the ADB desires that our children be confined with.

I have to admit I have been a product of tutoring too, as my parents felt the need for me to learn more, when I was in grade school.

Education comes best from the self, as educator John Holt once said,

I believe that we learn best when we, not others are deciding what we are going to learn, and when we are choosing the people, materials, and experiences from which we will be learning

This has been true for me, where everyday is a learning day.

I would extend this idea to say that most of my learning came from self education or “deciding what to learn” and from indirect mentorship (Dr. Faber and the Austrian school for instance).

And I think that most of what I learned from contemporary education has been useless and merely went down the drain.

Yet here is what ADB wants to do…

The study called for state supervision and regulation of the industry, as well as a review of Asia's educational systems.

So the ADB wants to control and regulate the education of your children.

The truth of the matter is that they want our children to become worshipers of state.

Again John Holt,

Education... now seems to me perhaps the most authoritarian and dangerous of all the social inventions of mankind. It is the deepest foundation of the modern slave state, in which most people feel themselves to be nothing but producers, consumers, spectators, and 'fans,' driven more and more, in all parts of their lives, by greed, envy, and fear. My concern is not to improve 'education' but to do away with it, to end the ugly and antihuman business of people-shaping and to allow and help people to shape themselves

It may NOT just be the state, which the ADB promotes.

They may have secondary objectives. They may serve as mouthpieces or shills for established educational (politically connected) institutions whom have feeling the heat from online competition and from homeschooling.

The following video are the kind of stuffs which statists (like the ADB) hates:


Indian education scientist Sugata Mitra, in a TED talk, tackles one of the greatest problems of education—the best teachers and schools don't exist where they're needed most.

Some great quotes from Sugata Mitra:

1:41 children will learn to do what they want to learn to do

16:33 Education is a self organising system where learning is an emergent phenomenon

Like John Holt, the message from Mr. Mitra is simple: education is self determined.

Video: Marc Faber: Cosmetic Fix for the Eurozone

Investing guru, the publisher of Gloom Boom and Doom Report, Dr. Marc Faber has a great analogy for the proposed EU banking fix

Dr. Faber as quoted by LewRockwell.com

If you put one or 100 sick banks in a union, it does not change the fact that they're sick. In my view the markets are rallying because they were grossly oversold. When markets are grossly oversold, especially markets of Portugal, Spain, Italy, France, then any news that is not disastrous news propels stocks higher. Their cosmetic fix basically forces Germans to continue to finance people in Spain and Portugal and Greece that are living beyond their means.

Indeed a foolish thing is a foolish thing. Numbers don't change the essence of the problem.

Yet the common recourse for politicians and media has been to engage in verbal manipulation, particularly the appeal to the popular, in the hope that confidence may be brought back without the required reforms.

More from Dr. Faber

Saudi’s Welfare State In Jeopardy

The resource curse which has spawned Saudi Arabia’s welfare economy seems in jeopardy.

From the Business Insider,

The share of Saudi workers employed by the government increased to 90 percent in 2010, up from 83 percent in 2000, according to a profile in The Economist (via @steven_strauss).

Saudi Arabia also increased unemployment benefits and other handouts during the Arab Spring.

The combination of the resource curse and relatively low oil prices and geopolitical tensions is bad for the regime. Says The Economist:

Saudi Arabia’s rulers are painfully aware that, should the region’s democratic wave leave lasting change and a new order in its wake, the kingdom will stand out as a peculiar and seemingly untenable anomaly. Even if the wave recedes leaving nothing but a mess, it has undermined any assumptions of rule by divine right. At the same time the kingdom’s most important alliance, with America, may face increased pressure. The United States is no longer reliant on Saudi Arabia for more than a small fraction of its energy needs. It has pulled out of Iraq and, soon, Afghanistan. It abandoned Egypt’s Hosni Mubarak. This raises doubts about its strategic intentions.

Oil prices at $80 below, for a prolonged period, will exert tremendous financial pressure on the oil dependent welfare based political economy of Saudi Arabia. This is yet another example of how the abundance of resources prevents economies from being competitive and productive.

Also the shale oil revolution will alter the dimensions of geopolitical relationships.

The Business Insider also has an interesting presentation of conflicts that had been caused by the geopolitics of oil.

Chart of the Day: Alcohol Deadlier than Illegal Substance?

From the Business Insider

We've covered the study by former UK drug czar David Nutt that found alcohol to be the most dangerous drug in the country by far when 20 drugs were rated on how much harm each caused to users and to others.

Nutt just came out with a new book, Drugs Without the Hot Air: Minimizing the Harms of Legal and Illegal Drugs, and last week told the Guardian that research into mental illness is hampered by the prohibition of drugs such as psilocybin and LSD.

If true then this is yet another falsification of popular wisdom about the supposed lethality of drugs, and more importantly, the political justification behind the war on drugs.

Emerging Market “Liquidity” Conditions Deteriorate

Amidst all the external tumult, the Philippine stock market has amazingly defied the convention and continues to climb to new record highs. Because of this, many have come to believe of a ‘miracle’.

Yet the contagion from a global slowdown seems as being transmitted through deteriorating “liquidity” conditions in Emerging Markets which could pose as spoiler to the Phisix shindig.

Here are two views on the increasing risks of contagion through the “liquidity” channels

Canadian independent research outfit, the BCA Research seems bearish Emerging Market Stocks:

Recent data shows that the trade balance in emerging markets has continued deteriorating, a phenomenon that typically entails lower share prices. Falling commodity prices will support this negative trend for many EM countries.

One of the implications is that developing nations foreign reserves accumulation has slowed dramatically. In a number of countries, foreign reserves have in fact been depleted in the past year as authorities have sold international reserves to support their currencies, which, in turn, has squeezed domestic currency liquidity.

Additionally, liquidity will be squeezed as capital inflows to both resource-producing and commodity-importing EM countries deteriorate. FDI inflows into EM have topped out and based on M&A activities, are set to fall drastically this year.

More troublesome news from Zero Hedge (bold cap and underline are original)

The growth in Emerging Market 'External Liquidity' recently was only ever slower in the quarters either side of the crash in 2008. This is a very worrying sign. EM nations are highly dependent on 'external' capital inflows (to smooth current account deficits) and have empirically been exposed to the 'sudden stop' nature of these inflows. It appears that Europe's banking crisis and deleveraging is indeed having a critical impact on EM nations - which may oddly mean domestic policy adjustments will be necessary (raising rates to encourage capital inflows) that will further exacerbate the problems as global growth slows. This brings to mind our recent comments on the shadow banking system and the drop in deposits among traditional risk-hungry EM funding banks - as we note that the more deposit-free the banking system, the slower the funds will flow. The newer the debt- and asset-inflation-based 'capitalism', the faster it is impacted at the margin - and it appears many EM nations are being affected rather rapidly.

Both seem to be singing the same song.

For as long as central bankers of developed economies continue to dilly dally on the policy directions and for as long political deadlock remains, the risk of an escalation of these downdraft grows.

Will the Phisix continue to defy the world? I can't say.

For how long will hope prevail over reality?

Be careful out there.

S&P’s Philippine Upgrade: There's More than Meets the Eye

From Bloomberg,

The Philippines’ debt rating was raised to the highest level since 2003 by Standard & Poor’s, taking President Benigno Aquino nearer his goal of attaining investment grade.

The nation’s long-term foreign currency-denominated debt was raised one level to BB+ from BB, S&P said in a statement yesterday. That’s one step below investment grade and on a par with neighboring Indonesia. The outlook on the rating is stable.

The foreign currency rating upgrade reflects our assessment of gradually easing fiscal vulnerability,” Agost Benard, a Singapore-based analyst at Standard & Poor’s, said in the statement. “The rating action also reflects the country’s strengthening external position, with remittances and an expanding service export sector continuing to drive current- account surpluses.”

Emerging nations from Brazil to Indonesia have won credit- rating upgrades in the past year as governments contained budget deficits. A higher assessment for the Philippines will help Aquino as he moves to boost spending to a record this year and seeks $16 billion of investment in roads, bridges and airports to shield the economy from Europe’s sovereign-debt crisis.

This is exactly the reflexivity theory at work. Here is how I described it earlier

The foundation of this theory seems to be anchored on the confirmation bias, where changes in prices that reinforces the underlying trend, gives confidence or strengthens the convictions of people to undertake action in the direction of the same trend. Such action feeds into the price mechanism and thus the feedback loop.

Applied to the Philippine equity market, many people will interpret the current state of the Phisix, which is at fresh record levels, as positive changes in the real economy. Believers would see this as having raised confidence levels, which that merits further actions through additional investments. Again this eventually feeds into higher prices.

The reality is that whatever appearance of progress the Philippines has been experiencing has been impelled by internal (negative real rates) and external (negative real rates through Zero Interest Rate Policy, QEs and other forms of inflationism) monetary policies rather than real changes in the economy.

It would be a mistake to generalize surging prices asset markets as “economic improvement” when they are veiled symptoms of underlying bubble policies.

The other factor is about perceptions management. This can be called as PR work, or in political vernacular, propaganda.

Campaign to weed out corruption have mostly been superficial as these have not addressed the roots: arbitrary statutes. Unknown to the public, corruption is not about virtuosity but about the tentacles of crooked laws.

The huge informal sector and the reliance on OFW remittance are really NOT signs of progress. They are symptoms of regulatory failure.

The plight of the OFWs have converted into a publicity stunt meant to evince of a positive political light, when they are manifestations of the failure to create domestic jobs through stagnant investments and falling standards of living.

Look at media’s exaltation from the S&P upgrade…“higher assessment for the Philippines will help Aquino as he moves to boost spending to a record this year and seeks $16 billion of investment in roads, bridges and airports”…this is proof of the dearth of investments. Investors have been reluctant to provide capital, therefore jobs.

Yet the implication is that government spending is an elixir to the economy. In reality, this $16 billion of government spending will be taken off from the private sector. And this also means $16 billion money funneled to the cronies or political favorites of this administration. Also that would extrapolate to $16 billion of tax onus to the productive sector

So the S&P upgrade actually rewards cronyism and advocates more burden for the taxpayers.

What the S&P upgrade does is to SOW the seeds for future downgrades as the current administration goes into a spending binge.

Credit upgrades means only MORE debt acquisition by the Philippine government. This will be financed by the mostly the domestic banking sector and partly by foreign money (foreign banks). So more of local savings will be channeled into unproductive political ventures as public liabilities expand.

In the light of concerns over the growing shortages of global “safe assets”—government bonds, which in reality is a myth, I believe that credit rating agencies have been rushing in aid to the banking system of major economies in order to provide bridge “safe assets”.

Since the banking system of major economies have been in dire straits, they will be in need of “safe assets” to bolster their balance sheets. So emerging market debts, such as the Philippines, could provide temporarily some of the supply of “safe assets”.

Have we forgotten too that credit agencies had been party (or may I say functional stamp pads) to the US property and mortgage bubble which blew up in 2007-2008?

Also government debt spree will likely be accompanied by a private sector debt expansion on the belief of the sustainability of a boom or from capital flight from economies inflating away their debt problems or from “bridge” collateral or a combination of these.

So will likely there be a surge in hot money.

This would seem like a déjà vu of the Asian Crisis of the 90s (Wikipedia.org)

Thailand's economy developed into a bubble fueled by "hot money". More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power

Eventually the entire thing collapses.

Only when the tide goes out, to quote Warren Buffett, do you discover who's been swimming naked.

Party on. But be aware that this is a bubble and not about politically driven progress. Politics is about redistribution or a zero sum game--where someone's gains comes at the expense of another.

It is the markets that provide real growth.

Updated to add:

Below is an example of why credit rating agencies cannot be trusted:

From Bloomberg,

Morgan Stanley successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.

According to the plaintiffs, the documents reveal that what the ratings companies describe as independent judgments were actually unsupported by evidence and written in collaboration with the bank that was packaging the securities. Morgan Stanley and the ratings companies deny the allegations.

Declaring Independence from Big Government

A splendid message from Dr. Richard Ebeling,

Never before in history had a people declared and then established a government based on the principles of the individual’s right to his life, liberty, and property. Never before was a society founded on the ideal of economic freedom, under which free men may peacefully produce and exchange with each other on the terms they find mutually beneficial without the stranglehold of regulating and planning government.

Never before had a people made clear that self-government meant not only the right of electing those who would hold political office and pass the laws of the land, but also meant that each human being had the right to be self-governing over his own life. Indeed, in those inspiring words in the Declaration, the Founding Fathers were insisting that each man should be considered as owning himself, and not be viewed as the property of the state to be manipulated by either king or Parliament.

It is worth remembering, therefore, that what we are celebrating every July 4 is the idea and the ideal of each human being’s right to his life and liberty, and his freedom to pursue happiness in his own way, without paternalistic and plundering government getting in his way.

I hope that the torch of the freedom and the principle of upholding individual’s right to his life, liberty, and property will not just be an American ideal but for the entire world to espouse.

To my American readers, Happy Independence Day!

Don’t Expect the Government to Solve Social Problems Caused by Weather

Spot the mistakes of this article.

From Sunstar.com.ph (bold emphasis mine)

MALACANANG appealed for understanding from the public following another confusion in the announcement of class suspension in Metro Manila and nearby provinces that have experiencing heavy rains since Monday night.

Deputy presidential spokesperson Abigail Valte said since there is no storm signal, the responsibility of suspending classes is left to the discretion of the local chief executives.

“We will be asking for a little bit of your patience because it is a new devolved system and our local government units will need to also get used to that system,” she said.

To remind the local officials with their task, Malacañang again posted on the Official Gazette Executive Order 66, which authorizes municipal mayors, as respective chairpersons of respective Local Disaster Risk Reduction and Management Councils (LDRRMC), to cancel classes and work of government offices during inclement weather.

“We would like to take this opportunity to remind them that the responsibility to suspend classes in times of inclement weather when there is (sic) no storm signals belongs now to the local government officials,” Valte said.

She added it is stated in the EO that suspension of morning classes must be announced by 4:30 a.m. so as not to inconvenience students, school staff and parents.

Classes from pre-school to high school levels in Metro Manila were cancelled Tuesday morning due to continuous rains caused by a low pressure area last seen at 40 kilometers west of the capital.

Several parents, however, complained about the late announcement of class suspension as their children were forced to go to school early in the morning despite the flooding.

Local Government Secretary Robredo, in a radio interview, admitted the need to improve the local government units’ announcement of class suspension.

Robredo said mayors, village chiefs, and school principals should coordinate in making the necessary announcement regarding cancellation of classes during heavy rains since they are the ones who see the situation on the ground.

Ok this news is an ex-post observation of the recent flood. Hindsight is 20/20. It’s easy to finger point based on the past.

Yet the problem is tomorrow. The problem is accurately anticipating the weather and its potential impact in both quality and quantity dimensions to affected areas and the social policy response.

The next problem is that families expect schools to make the necessary announcements. Unfortunately schools have NO EXPERTISE in forecasting weather. So it will be judgment call for schools.

The same problem plagues the local government units, hardly any of them have the ADEQUATE knowledge of the impact of nature’s challenges. So it will be judgment call for LGUs.

This leads us back to the national government through the government weather bureau PAG-ASA. Again unfortunately, outside conventional storms, it seems that PAG-ASA hardly can forecast accurately the nitty gritty of the weather changes. So it will be judgment call for the national government through PAG-ASA.

Even in conventional storms, PAG-ASA has hardly been successful in accurately predicting the exactitudes of nature's disturbances.

All these reveal that the fundamental problem is the failure of centralization in weather forecasting. But media's and the political approach has been to finger point.

Two more important things to drive at:

The first is the KNOWLEDGE problem.

The fact is that while there are instruments to help predict the changes in the weather, that knowledge is limited. This means that policy responses will ALWAYS be insufficient, no matter what they do.

The second point is that these has been all about the HOT POTATO problem—everyone seems to toss the responsibility to another party.

Everyone has been HARDWIRED to EXPECT that the government must and shall deliver us from environmental disruptions and disasters.

Yet no matter the horrible track record, we maintain this illusion of infallibility.

People cannot seem to accept that government are composed by people, and like everyone else, has limitations in the possession of knowledge.

In reality, people should NOT depend on government for making these calls.

Everyone should take the responsibility to assess and act upon the tradeoff of allowing you and your family members to go to school or work during inclement weathers.

There are many risks attendant to bad weather e.g. leptospirosis and other diseases, potential accidents (falling trees, open manhole, electrocution among the many). This should be done individually and depending on the circumstances of the environment one operates on.

Government will never know the details of each and everyone of our lives.

Of course there are institutional solutions to these, such as not only the privatization of PAG-ASA but importantly to de-politicize them or subject them to market competition.

People or social institutions, such as schools, can reward or punish private institutions for providing accuracy in weather forecasting through the profit and loss system. Under the government monopoly, sustained mistakes should be expected.

Weather derivatives can also be used as an insurance against tail events or weather based calamities. Institutions can now make their calls based on appropriate assessment of cost and benefits.

There are many REAL things the markets can do that may alleviate the current predicament. But under the current popular mindset, such is a state of vacuum so the problem becomes reiterative or self-reinforcing

Thus the biggest among all the fundamental flaws is the public’s mysticism of government.

As Professor Don Boudreaux wrote,

Too many people, including otherwise very smart people, believe in secular magic. They believe that words written on paper by people, each of whom receive a majority of votes on certain days of the year of adult citizens living in certain geographic areas, and who utter ritualistic pronouncements under marble domes in buildings conventionally called “capitols,” are somehow endowed with greater understanding of society’s complexities and with superhuman capacities to care about the welfare of strangers. These priests preach devotion, dedication, and sacrifice to the One True State (your own government), even while each recognizes that legitimate disputes about the details of the dogma divide various cliques of the secular clergy. When they speak and act in their official roles, they expect – usually correctly – that the laity pay their words special heed as if these words have extraordinary power.

We will never improve on our approach to solve the weather predicament, until we come to realize of the existence of other alternatives…the markets.

Quote of the Day: Dignity is Worth Nothing Unless You Earn It and Pay the Price for It

A half-man (or, rather, half-person) is not someone who does not have an opinion, just someone who does not take risks for it.

My greatest lesson in courage came from my father — as a child, I had admired him before for his erudition, but was not overly fazed since erudition on its own does not make a man. He had a large ego, immense dignity, and required respect. But he was once insulted by a militiaman at a road check during the Lebanese war. He refused to comply, and got angry at the militiaman for being disrespectful. As he drove away, the gunman shot him in the back. The bullet stayed in his chest for the rest of his life so he had to carry an X-ray through airport terminals. This set the bar very high for me: dignity is worth nothing unless you earn it, unless you are willing to pay a price for it.

A lesson I learned from this ancient culture is the notion of as Megalopsychon (a term expressed in Aristotle’s ethics), a sense of grandeur that got superseded by the Christian values of “humility”. There is no word for it in Romance languages; in Arabic it is called Shhm —best translated as nonsmall. If you take risks and face your fate with dignity, there is nothing you can do that makes you small; if you don’t take risks, there is nothing you can do that makes you grand, nothing. And when you take risks, insults by half-men (small men those who don’t risk) are similar to barks by nonhuman animals: you can’t feel insulted by a dog.

This inspirational treasurable quote is from my favorite iconoclast and the profound thinker and philosopher Nassim Nicolas Taleb post at Facebook

Thank you Mr. Taleb.

My father (who was not a libertarian but I think had libertarian leanings) paid the price of dignity by steadfastly refusing to profit from politics--even when presented with such conditions.

I am carrying his principle over today.

Will France’s Fairness Doctrine Save the EU?

From Zero Hedge

With the Great June Socialist Revolution spilling over into July, here are some details as they become available from France:

• FRANCE TO HAVE NEW TAX RATE OF 45% FOR WEALTHY
• FRANCE TO TAX INCOME OF MORE THAN EU1 MLN AT 75%, AYRAULT SAYS
• FRANCE TO TAX CAPITAL INCOME AT SAME LEVEL AS WAGES
• FRANCE TO RAISE TAXES FOR LARGE COMPANIES, BANKS, OIL FIRMS

But... FRANCE TO ANNUL PLANNED VAT INCREASE PLANNED BY SARKOZY

After all, it's only fair. In other news, we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again.

Politicians believe the path to prosperity is only through confiscation and redistribution. They also believe that growth comes with subtraction and division and not from addition and multiplication

They further think that the wealthy are dingbats whose actions are limited by the dictates of politicians.

Professor Ludwig von Mises was right…

Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich…

Confiscations of capital through the legal form of taxation are neither socialistic nor a means to Socialism. They lead, not to socialization of the means of production, but to consumption of capital. Only when they are set within a socialist system, which retains the name and form of private property, are they a part of Socialism.

So the French government will spend MORE and get LESSER revenues as productive segments of society either reduces productive activities and or flee to other havens. Capital will be consumed at a more faster rate.

After all, money goes where it is best treated.

Yet under the sustainment of such political conditions, the Euro’s death warrant has been sealed.

Asia should welcome with open arms the prospective diaspora of French capital by implementing policies opposite to those embraced by the French politicians. Yes, such policy is known as economic freedom.

Barclay’s LIBOR Scandal: Is the Bank of England the Culprit?

Barclays chief executive Bob Diamond recently resigned over allegations of the manipulation of the LIBOR (London Interbank Offered Rate) or the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks (Wikipedia.org)

From Reuters (bold highlights mine)

Barclays chief executive Bob Diamond suddenly quit on Tuesday over an interest rate-rigging scandal that threatens to drag in a dozen more major lenders but suggested the Bank of England had encouraged his bank to manipulate the figures.

"The external pressure placed on Barclays has reached a level that risks damaging the franchise - I cannot let that happen," said Diamond, 60. The terms of his severance were not announced, though Sky News said the bank would ask Diamond to forfeit almost 20 million pounds ($30 million) in bonuses.

Politicians and newspapers have zeroed in on the scandal - which revealed macho e-mails of bankers congratulating each other with offers of champagne for helping to fiddle figures - as an example of a rampant culture of wrongdoing in an industry that stayed afloat with huge taxpayer bailouts.

Barclays released an internal 2008 memo from Diamond, then head of its investment bank, suggesting that the deputy governor of the Bank of England, Paul Tucker, had given Barclays implicit encouragement to massage the interest figures lower during the peak of the financial crisis in order to present a better picture of the bank's financial position.

Here is the principle, central banks are the only entities permitted to manipulate interest rates…

…but they need accomplices.

More from Zero Hedge

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS PROVIDES COPY OF DIAMOND'S CALL NOTE
• BARCLAYS SAYS DIAMOND DIDN'T BELIEVE HE HAD GOT INSTRUCTION
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

Hoping to take the political heat off what seems obvious, Barclay’s and Bob Diamond has served as BoE’s fall guy.

Chinese Builds Ghost City in Angola

China seems to have (allow me the metaphor) ‘exported’ her bubble policies to Africa

From the BBC, (hat tip Bob Wenzel)

A giant new Chinese-built city has sprung up on the outskirts of Angola's capital Luanda.

Nova Cidade de Kilamba is a brand-new mixed residential development of 750 eight-storey apartment buildings, a dozen schools and more than 100 retail units.

Designed to house up to half a million people when complete, Kilamba has been built by the state-owned China International Trust and Investment Corporation (CITIC) in under three years at a reported cost of $3.5bn (£2.2bn).

But on a recent trip back to Luanda, the BBC's former Angola correspondent Louise Redvers discovered that most of the buildings currently lie empty, as this footage she recorded shows.

Watch the footage from BBC here

RISK ON Environment: Expectations for ECB to Lower rates

Markets continue to climb on mounting expectations of central bank doping.

From Bloomberg,

Asian stocks headed for their longest winning streak this year and the Japanese yen declined as speculation grew central banks will act to spur economic growth and U.S. factory orders beat estimates. Gold advanced to a two- week high.

The MSCI Asia Pacific (MXAP) Index climbed for the sixth day and was up 0.4 percent as of 9:01 a.m. in Tokyo, while Standard & Poor’s 500 Index futures were little changed. The yen weakened 0.1 percent to 79.84 per dollar, the South Korean won strengthened 0.3 percent to 1,135.18 per dollar and New Zealand’s currency strengthened 0.1 percent to 80.47 U.S. cents. Gold for immediate delivery rose 0.1 percent to $1,619.15 an ounce.

The European Central Bank is forecast by economists to cut interest rates tomorrow and the International Monetary Fund said further monetary policy easing by the Federal Reserve may be needed. Factory orders in the world’s largest economy rose in May for the first time in three months.

“The ECB story itself will do wonders to keep the risk on for a little bit longer,” said Gavin Stacey, Sydney-based chief rate strategist at Barclays Plc.

The ECB will lower its main refinancing rate by a quarter- percentage point to 0.75 percent, economists in a Bloomberg survey forecast. The Bank of England’s Monetary Policy Committee will raise its target for bond purchases by 50 billion pounds ($79 billion) to 375 billion pounds tomorrow, a Bloomberg survey forecast.

Central bankers better make good of their pledges, otherwise eventually expectations will experience diminishing returns and hope will collide with reality, the outcome of which is not going to be pleasant.

Updated to add:

Perhaps as precursor for tomorrow's highly expected interest rate move (as well as for future injections ala LTRO, where the lowering of collateral terms means more assets to use), the ECB further loosened collateral terms.

From Deutsche Bourse Market News (hat tip zerohedge)

The European Central Bank Governing Council on Tuesday adopted a further change to ECB rules on the eligibility of collateral for Eurosystem refinancing operations.

In its preamble to the new rule, the Governing Council said "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances."

As a result, the Governing Council adopted the following change to its collateral rules, effective immediately:

"The following Article 4b is inserted in Decision ECB/2011/25:

Acceptance of government-guaranteed bank bonds

1. Counterparties that issue eligible bank bonds guaranteed by an EEA public sector entity with the right to impose taxes may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this

Decision enters into force.

2. In exceptional cases, the Governing Council may decide on derogations from the requirement laid down in paragraph 1. A request for a derogation shall be accompanied by a funding plan."

So the ECB's balance sheet will be stuffed with even more garbage.

Video: Will Taxing the Rich Fix the Deficit?

Thanks to Tim D. Hedberg from LearnLiberty.org.

Chart of the Day: Information Age and Romantic Relationships

The internet has been reconfiguring the way we do things or our social lifestyles

The internet have become a key dynamic in forging romantic relationships, supplanting the traditional modes of networking (referred by family, referred by or met as friends, met in bars, referred by or met as co-workers, met in college/school, met as neighbor or in church). Study here (hat tip NYU’s William Easterly)

Resource Curse: Iraq’s Property Bubble

Excess cash from Iraq’s oil wealth have led to massive spending on the property sector.

The New York Times observes, (bold highlights mine)

American-style malls, fixtures in most of Iraq’s wealthy Persian Gulf neighbors, have come late to war-torn Baghdad, but Iraqis are taking to them now like Valley Girls, as a consumer society fueled by the country’s booming oil profits begins to flourish here.

Big malls are being built across the capital. The largest will include a five-star hotel and a hospital, and at one already in operation, a truck arrives each week carrying frozen Big Macs from a McDonald’s in Amman, Jordan.

The construction boom is generally hailed as proof of Iraq’s progress and return to normalcy, more than nine years after the American invasion and six months after the last combat troops departed. But economists and other experts see a dark side. They say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.

“Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,” said Marie-Hélène Bricknell, the World Bank’s representative in Iraq.

One of Washington’s principal aims was to develop a free-market economy here. Yet with so much oil wealth at hand, Iraq’s leaders have taken few steps to develop a private sector. More than 90 percent of Iraq’s government revenues derive from oil, and with oil production rapidly expanding, the country’s annual revenues could triple over the next five years, to more than $300 billion. With that kind of wealth rolling in, one of the greatest questions the country faces is what it will do with all that cash.

Given the statist mentality of most top Iraqi officials and widespread corruption, diplomats are generally pessimistic that the expected boom in government revenues will be used either to help develop a private sector or to pay for an ambitious public works program — something the country, where 40 percent of the population still lacks access to safe drinking water, desperately needs. Instead, experts worry it will finance more of what Iraq already has: corruption and a huge government work force.

Most of the major industries remain in the hands of the state, and the greatest ambition of many Iraqis is to secure a government job. According to statistics from the Iraqi Ministry of Planning, almost a third of the labor force works for the government. That is more than five million people, and the number is rising, as political parties that run government ministries use paychecks to expand their constituencies.

“The state’s payrolls have massively expanded, not with technocrats but with party functionaries, because the state has become a way of funding party loyalty,” said Toby Dodge, a professor at the London School of Economics, at a recent panel discussion in London about Iraq. “That’s directly undermined and hindered the state’s ability. So we have a huge state.”

Because government salaries are much higher than those in the private sector, independent businesses operate at a disadvantage because, among other disincentives, would-be entrepreneurs cannot afford to hire the most skilled workers. The World Bank ranks Iraq 153rd out of 183 countries on the ease of doing business.

“Building a consumer society on top of nothing is like building a bubble that will burst in the future,” Ms. Bricknell said. With the shopping malls, she said, “you are putting a veneer over a rotting core, basically.”

This is an example of what has typically been called as the resource curse.

According to Wikipedia.org a resource curse is the paradox that countries…with an abundance of natural resources, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.

For as long as there remains resources from which politicians can prey and feast on, channeled through the welfare state, the bureaucracy and state spending, then there will be less incentive to liberalize or make the economy competitive and productive. For now this has been free lunch to the political leaders, bureaucracy, technocrats and their political allies.

To the contrary, oil revenues leads to growing dependency on government and the accompanying spendthrift behavior by political agents, which also contributes to the economic imbalances.

Yet the combination of rapid expansion of parasitical relationship and finite resources (oil) eventually extrapolates to a speed bump or the law of diminishing returns.

Aside from the crowding out effect, government spending undermines the private sector by pricing them out.

Iraq’s resource based economy are reminiscent of the fabled Potemkin Villages or a façade of prosperity or progress.

In reality, Iraq’s oil generated progress from statism and cronyism constitutes no more than a property bubble, again from government policies, which like always, will have a tragic outcome.

Is it Time to be Bullish BRICs and other Emerging Markets?

Goldman Sachs’ Jim O’Neill is bullish BRICs

From Bloomberg,

The biggest emerging markets are contributing more than ever to the global economy as their proportion of the world stock market shrinks, leaving investors with the widest valuation gap in seven years.

Brazil, Russia, India and China, known as the BRICs, will comprise 20 percent of the world economy this year after growing more than four-fold in the past decade, International Monetary Fund data show. At the same time, their combined stock-market value has dropped to a three-year low of 16 percent of the total invested in equities, according to data compiled by Bloomberg.

To Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the term BRIC in a 2001 research report, the 4 percentage point difference makes stocks in these markets irresistible. The last time the gap was this wide, in 2005, the MSCI BRIC Index (MXBRIC) jumped 53 percent in 12 months, more than double the gain in the MSCI All-Country World Index. (MXWD)

“Unless we are seeing a major collapse of those economies, it’s a huge opportunity for investors,” O’Neill, who helps oversee $824 billion, said in a June 28 phone interview. The BRIC stock markets may double by 2020 as their share of world gross domestic product increases to about 27 percent, he said.

Combined GDP in the BRICs will rise to more than $14 trillion this year from $2.8 trillion in 2002, according to the IMF. Their equity value, which includes locally-traded shares and companies based in the BRIC nations with primary listings abroad, has dropped to $7.6 trillion from $9.5 trillion a year ago, when they made up 18 percent of the global total, according to data compiled by Bloomberg.

History is not a reliable indicator of the future. Otherwise to paraphrase Warren Buffett, the best investors or the richest people would have been librarians.

Contra O’Neill foreigners have become defensive and have taken the home bias stance.

Again from the same article…

Fund Outflows

Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, fell to the world’s 39th-largest company by value from the 10th-biggest in July 2011. China Construction Bank Corp. (939)’s rank dropped to 20 from 12 while OAO Rosneft,Russia (INDEXCF)’s largest oil producer, sank to 106 from 70.ICICI Bank Ltd. (ICICIBC), India’s second-biggest lender, has lost 17 percent during the past year, compared with an average gain of 9 percent for global peers.

The retreat has pared what was a 180 percent increase in the MSCI BRIC index since October 2008 and reflects concern that economic growth is slowing, according to John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London. Mutual funds that invest in BRIC equities, which recorded about $70 billion of inflows in the past decade, have posted 16 straight weeks of withdrawals, losing a net $5.3 billion, EPFR Global data show.

Why?

Downside Risk

While the BRIC economies expanded by 4.8 percent on average during the first quarter, more than double the pace in the U.S., their growth decelerated from 6.8 percent a year earlier.

Falling stock markets suggest the slowdown will worsen because share prices are a leading indicator of economic growth and corporate profits, said Michael Shaoul, the chairman of Marketfield Asset Management in New York. The $2 billion Marketfield Fund (MFLDX) has topped 99 percent of its peers this year in part because of bets that emerging-market shares will retreat.

“Equity markets have started to anticipate much more difficult economic times in these countries,” Shaoul said in a June 28 phone interview from New York. “The balance of risks is to the downside.”

The balance of risks has indeed been to the downside.

Here’s Zero Hedge to prove that point. (bold original)

The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: "Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world."

I believe this is more than just about the Euro debt crisis, but also of the slowdown (or bubble bust) in China.

So far what has been kept the markets buoyant has been the repeated doping of the markets with minor bailouts and of the torrent of pledges of more bailouts.

In reality, markets remain highly fragile.

As I wrote last weekend

But the dicey cocktail mix of political deadlock, escalating economic woes and the uncertain direction of political (monetary) policies contributes to the aura of uncertainty that may induce a fat tail event.

A recovery in the BRICs and emerging markets will likely be reinforced by a recovery in commodity prices. This has not yet been established.

Until perhaps central bankers of major economies makes major moves, I don’t think the time for positioning on the BRICs is ripe.

How Obamacare will Self Destruct

Austrian economist Bob Wenzel explains. (bold emphasis mine)

It's clear that, under Obamacare, premiums will go through the roof, especially for the young. It will be cheaper for almost everyone to pay the penalty rather than buy insurance. And since, Obamacare requires that insurers take on those who already have pre-existing conditions, there is no risk for those who simply pay the penalty. If a penalty payer comes down with a catastrophic condition, he can simply buy "insurance" at that point.

This will eventually collapse the system, unless penalties are made higher than the cost of insurance (which would require congressional approval--imagine that circus).