Reality versus Expectations: A Divided US Federal Reserve

A divided US Federal Reserve has been eroding expectations and hopes for the Bernanke PUT.

From the Bloomberg,

A few Federal Reserve policy makers said the central bank will probably need to take more action to boost the labor market and meet its inflation target, according to minutes of their June meeting.

“A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal,” according to the record of the Federal Open Market Committee’s June 19-20 gathering released today in Washington.

Deferment or reluctance to further inflate translates to a bursting of the asset bubbles—the RISK OFF environment.

The S&P 500 on a downdraft.

Yet once markets have fallen significantly enough they will likely reverse course and pursue aggressive inflationism.

Bank of Japan Adds Asset Purchases, Cuts Credit Facility

I have repeatedly been saying that expectations over central bank policies or their anticipated actions has recently driven the price movements of global stock markets.

Today, the Bank of Japan (BoJ) decided to take supposedly a ‘neutral’ stance: they will buy more assets but cut credit facilities by the same amount

From the Bloomberg,

The Bank of Japan refrained from adding monetary stimulus, bolstering its asset-purchase fund while cutting a credit-loan facility by the same amount.

The bank expanded its asset-purchase program to 45 trillion yen ($564 billion) from 40 trillion yen, according to a policy statement released in Tokyo today. Seven of 17 economists surveyed by Bloomberg News predicted monetary easing. The loan facility was cut to 25 trillion yen from 30 trillion yen.

Stocks fell after the decision, which came after South Korea’s central bank unexpectedly lowered borrowing costs amid signs of slower global growth. Japanese Finance Minister Jun Azumi this morning called for more support from the central bank for growth and inflation to meet a 1 percent price goal…

The BOJ pledged to increase its purchases of short-term public debt, according to today’s statement. Previous enhancements to the program had been mostly for long-term government bonds.

Japan’s central bank kept its benchmark interest rates between zero and 0.1 percent and monthly bond purchases at 1.8 trillion yen, the bank said in the statement today.

Here is what I earlier said,

if central bankers FAIL to deliver in accordance to market’s expectations, then we will likely see another huge bout of downside volatility in global equity markets

The Nikkei fell 1.48% today.

This proves that Japan’s stock markets has been thriving on the inflation steroids and that looking for scapegoats such as insider trading has only served as political diversion.

This also confirms my suspicions about the BoJ’s veiled support of the banking and financial system, through more asset purchases, whom are the largest owners of the Japanese Government Bonds (JGB) and of the growing risk of Japan’s gargantuan debt quagmire.

For as long as central bankers stay on sidelines or resort to measures that fall short of market’s expectations we should expect reality to sink in. This should extrapolate to more selling pressures on the global equity markets.

Be careful out there.

Quote of the day: The Market Doesn’t Reward Greed, It Punishes It

Naked greed does not maximize corporate profits. Customers do not have full information about product quality, so they must trust their suppliers. When a corporation like GlaxoSmithKline (GSK) gets caught cheating its customers ( by suppressing information about negative side effects of one of its drugs), the gain in extra profits from cheating on this one drug is surely more than offset by the loss in profits on all drugs (from the damage to GSK’s reputation as a trustworthy supplier).

Contrary to popular wisdom, the market doesn’t reward greed, it punishes it.

This is from Professor William Easterly at the NYU Development Research Institute

China’s Oil Imports Slump, Gold Imports Soar

A slump in oil imports could also be an indicator of slowing economic growth and perhaps the end of China’s hoarding of strategic reserves.

Notes the Zero Hedge, (bold original)

Following months of ever higher Chinese imports, no doubt predicated by stockpiling and hoarding reserves, in June Chinese crude oil imports plunged from over 25 million metric tons to 21.72 MMTs, the lowest since December, or about 5.3 million barrels a day, down over 10% from the previous month's record import. While the number was still quite higher than the 19.7 million tons, the sudden drop is concerning, especially since the price of Brent slid materially in June, and if anything should have resulted in even more imports if indeed China was merely stockpiling crude for its new strategic reserve facilities. Which begs the question: was the demand actually driven by the economy, and just how bad is the economic slowdown over the past month if not even stockpiling at preferential prices can offset the drop in end demand?

From Dow Jones:

China's refineries may process less crude in the third quarter due to weaker domestic demand for diesel, which has led to persistently high stockpiles and steady exports from the country's largest refiner, China Petroleum & Chemical Corp, or Sinopec Corp.

The country's crude throughput declined in both April and May, falling 0.3% and 0.7%, respectively, compared with the corresponding months a year earlier.

Weaker demand for diesel, a primary driver of refinery output, has tracked China's economy, which has slowed for five consecutive quarters. Manufacturing activity in June grew at its slowest pace since November.

Meanwhile gold imports through Hong Kong has been soaring

Again from Zero Hedge (bold original)

There are those who say gold may go to $10,000 or to $0, or somewhere in between; in a different universe, they would be the people furiously staring at the trees. For a quick look at the forest, we suggest readers have a glance at the chart below. It shows that just in the first five months of 2012 alone, China has imported more gold, a total of 315 tons, than all the official gold holdings of the UK, at 310.3 according to the WGC/IMF (a country which infamously sold 400 tons of gold by Gordon Brown at ~$275/ounce).

From Bloomberg:

In May, imports by China from Hong Kong jumped sixfold to 75,635.7 kilograms (75.6 metric tons) from a year earlier, Hong Kong government data showed. The nation “remains the most important player on the global gold market,” Commerzbank AG said in a report. The dollar fell from a five-week high against a basket of currencies, boosting the appeal of the metal as an alternative investment.

“Higher physical demand in China is good news for the market,” Sterling Smith, a commodity analyst at Citigroup Inc.’s institutional client group in Chicago, said in a telephone interview. “The mildly weak dollar is also positive.”

The World Gold Council has forecast that China will top India this year as the world’s largest consumer because rising incomes will bolster demand.

And those looking at the trees will still intone "but, but, gold is under $1,600" - yes it is. And count your lucky stars. Because while all of the above is happening, Iran and Turkey have quietly started unwinding the petrodollar hegemony. From the FT:

According to data released by the Turkish Statistical Institute (TurkStat), Turkey’s trade with Iran in May rose a whopping 513.2 per cent to hit $1.7bn. Of this, gold exports to its eastern neighbour accounted for the bulk of the increase. Nearly $1.4bn worth of gold was exported to Iran, accounting for 84 per cent of Turkey’s trade with the country.

So what’s going on?

In a nutshell – sanctions and oil.

With Tehran struggling to repatriate the hard currency it earns from crude oil exports – its main foreign currency earner and the economic lifeblood of the country - Iran has began accepting alternative means of payments – including gold, renminbi and rupees, for oil in an attempt to skirt international sanctions and pay for its soaring food costs.

“Iran is very keen to increase the share of gold in its total reserves,” says Gokhan Aksu, vice chairman of Istanbul Gold Refinery, one of Turkey’s biggest gold firms. “You can always transfer gold into cash without losing value.”

Turkey’s gold exports to Iran are part of the picture. As TurkStat itself noted, the gold exports were for “non-monetary purpose exportation”. Translation: they were sent in place of dollars for oil.

Iran furnishes about 40 percent of Turkey’s oil, making it the largest single supplier, according to Turkey’s energy ministry. While Turkey has sharply reduced its oil imports from Iran as a result of pressure from the US and the EU, it is unlikely to cut this to zero. The country pays about $6 a barrel less for Iranian oil than Brent crude, according to a recent Goldman Sachs report.

According to Ugur Gurses, an economic and financial columnist for the Turkish daily Radikal, Turkey exported 58 tonnes of gold to Iran between March and May this year alone.

None of these looks anywhere a good news.

Gold prices, at present, may partly have been driven by the Iran sanction dynamic but I think that China may have been insuring themselves from risks of a currency crisis through the stockpiles of gold and oil.

Nonetheless I am not sure if the slump in oil imports represents an anomaly or an indication of a deepening slump in the economy and or may have redirected some of that money to the stimulus directed towards state owned enterprises.

Interactive Graphic: Beyond Bailouts, What is Cronyism?

Writes Matthews Mitchell, research fellow at the George Mason University (interactive graphics included) [hat tip Scott Lincicome]

While the bailouts of hundreds of firms in 2008 are, for many, the most prominent example of cronyism in modern American history, they are only the tip of the iceberg. Bailouts are but one example in a long list of privileges that governments give to particular businesses and industries.

Scroll over each form of cronyism to learn more, and read the full paper "The Pathology of Privilege: The Economic Consequences of Government Favoritism."

Video: How Cronyism Hurts the Economy

Another insightful video from LearnLiberty.org

Here is their summary:

It is clear big businesses wield great control over the federal government. How do we stop this so-called crony capitalism, or collusion? Professor Jason Brennan argues that while it may seem paradoxical the best solution is to limit government power. He provides two reasons for this. First, the power to "regulate the economy" is really the same thing as the power to distribute favors, which corporations will inevitably seek. Second, regulations actually benefit big businesses at the expensive of small businesses. Less government power means corporations have less power to compete for, fewer privileges to seek, fewer subsidies to enjoy, and no agencies to capture.

In short: Interventionism is the father of cronyism

Libertarian Legacies of Henry Hazlitt and Leonard Read…

…in the account of Professor Gary North at the lewrockwell.com

Henry Hazlitt…

Like so many people who came to an understanding of the free market in the 1950s and 1960s, Henry Hazlitt was an influential figure. He had been an influential figure for at least 30 years. He is most famous for his book, Economics in One Lesson, which he wrote in 1946. But he was a New York Times columnist at the time he wrote that book. H. L. Mencken once said that Hazlitt was the only economist who knew how to write.

Hazlitt never went to college. He wrote his first book, Thinking as a Science, when he was 20 years old. That was the same year that he went to work for the Wall Street Journal. That was in 1915. To say that Hazlitt had a long writing career does not begin to convey just how long it was. His final article was published in 1988. He died in 1993 at the age of 98.

I did not meet him until I went to work for the Foundation for Economic Education in 1971. But I had been reading his materials ever since the late 1950s. I was a latecomer in this process. It is safe to say that anyone who called himself a libertarian in 1960 had been influenced, directly or indirectly, by Hazlitt. I suspect that this is still true.

Hazlitt was one of the early American promoters of the writings of Ludwig von Mises. He was convinced in the late 1930s that Mises was right, and that the New Deal was wrong. He wrote a positive review of Mises's book, Socialism, for the New York Times Book Review in 1938. This book had been published in South Africa in 1936, although it had been available in German since 1922. I think it is safe to call him an early adopter. He understood the magnitude of what Mises had been teaching long before most American economists had read Mises's books.

Hazlitt's critique of John Maynard Keynes, published in 1959, The Failure of the 'New Economics,' is a comprehensive and thoroughly readable critique of Keynes's General Theory. It was ignored by the academic profession, possibly because it was so thorough in its criticisms, but probably because Hazlitt was noted as a financial journalist, not as a professor of economics somewhere. He did not have the right credentials, so the academic community ignored him. I don't think this bothered him in the slightest.

He was always enthusiastic. He was always extremely lively. In this sense, he reminded me of Murray Rothbard and Burt Blumert, the co-founder of the Center for Libertarian Studies. I never saw him dejected in any way.

I suppose my best recollection of him was late in his life, when he was in a retirement home. At his age, there were not many men in the home. He remarked, twinkle in his eye, that a lot of the ladies in the home made a fuss over him. Then, coming to his senses, he added, "but don't tell Frances." Frances was Mrs. Hazlitt. He was altogether a sensible man.

Again, the lesson is clear: stick to your knitting, and stick to your guns.

Leonard E. Read…

If anyone deserves the title of the founder of libertarianism, it is Read. He was a born promoter. He was the head of the Chamber of Commerce in Los Angeles in the 1930s. He had never gone to college. He was an effective speaker, and in later years, he proved to be an effective writer. He was never a back-slapper, but he was never confrontational, either.

His story of how he was converted to a free market position made an impression on me. He had gone to see the head of the Pacific Gas and Electric Company, William Mullendore. He went there, as he said, "to straighten out this fellow." By the time he had spent a couple hours being taught the principles of voluntarism, he realized that the worldview which he had held when he walked in the door was wrong.

From that day on, he was not really in alignment with the Chamber of Commerce. The chamber was always ready to promote government intervention in favor of business. From that fateful meeting onward, Leonard Read was not.

A decade later, he turned down a job heading the International Chamber of Commerce, which would have paid him $100,000 a year, which in 1946 was a fortune. Instead, he started the Foundation for Economic Education. He had contacts with rich men because of his time spent in the Chamber, but he always attempted to establish a broad-based support for the organization. FEE was not a rich men's plaything. In 1956, he launched the magazine which served as the major source of recruiting for the libertarian movement for the next 20 years: The Freeman. William F Buckley had wanted to buy it, but Read owned the name, and a year after Buckley started National Review, FEE started publishing The Freeman.

While Read was not a trained economist, he had a very clear understanding of how free markets operate. He wrote an article which I regard as the finest statement of the principle of the division of labor that has ever been written. It is called "I, Pencil." It is the story of how nobody knows how to make a pencil. A simple pencil is such a complex device that it takes coordination and cooperation beyond anyone's ability to comprehend in order to produce a simple pencil.

This insight has persuaded an untold number of people of the power and creativity of the free market. What was also creative about the article is that he wrote it as a narrative given by a pencil. He listed his own name only with these introductory words: "as told to."

He also wrote a classic little book, which is unfortunately out of print, Elements of Libertarian Leadership. He wrote many other books, and numerous collections of essays. He never stopped writing, almost until the day he died at the age of 84.

Here is the same lesson: stick to your knitting, and stick to your guns. He turned down a lot of money in 1946 to do this.

Both libertarians were not trained economists; Hazlitt even “never went to college”, yet both came out with classic economic books and articles. Bottom line: economics can be self-learned. Try the Mises Institute

Shoot the Messenger: Japan Authorities Targets Insider Trading

When markets don’t go in the way the politicians want them to, the intuitive reaction for politicians has been to shoot the messenger.

From the Bloomberg,

Japan’s crackdown on insider trading barely scratches the surface of a practice that allows traders to profit and brokerages to boost their underwriting business at the expense of shareholders and issuers.

The disclosures have undermined confidence in the world’s second-largest stock market, where the Nikkei 225 Stock Average (NKY) remains 77 percent below its 1989 peak and scandals such as the accounting fraud at Olympus Corp. and covered-up losses at AIJ Investment Advisors Co. deter investors from a waning economy.

In the five insider-trading cases uncovered since March, regulators have proposed fines for traders who short sold shares based on information leaked to them by underwriters before public offerings were announced in 2010. The revelations prompted at least two clients of Nomura Holdings Inc. (8604) to take their business elsewhere after Japan’s biggest brokerage acknowledged the breaches by its sales staff.

“Japan has been letting the animals run wild for two or three years now -- that wouldn’t happen in the U.S.,” said Takao Saga, a professor who studies the financial industry at Waseda University in Tokyo. “Insider trading is still going on in the Japan market.”

With the latest actions, the Securities and Exchange Surveillance Commission and its parent, the Financial Services Agency, are keen to show they are cracking down after it took them nine years to discover AIJ hid losses that reached $1.4 billion on pension money it managed. Olympus admitted to a $1.7 billion, 13-year coverup of losses after former President Michael Woodford blew the whistle last year on inflated fees the camera maker paid for takeovers.

Hindering Fundraising

Authorities are paying attention now because short selling by insiders is hindering corporate fundraising, not just burning investors who aren’t privy to the tips, according to consultant Robert Boxwell. The transactions involve traders selling borrowed shares, betting that the price will fall once the offerings become publicly known on concern over dilution.

“These types of insider trades cost Japan Inc. money,” said Boxwell, 54, who has lived in Japan and now studies global insider trading as director of consulting firm Opera Advisors in Kuala Lumpur. In Japan, “after years of ignoring protests from the West about cleaning up their act, they’re talking tough.”

Never mind if Japanese authorities have stubbornly refused or has procrastinated in adapting the necessary reforms and instead opted to prop up zombie institutions.

Such failure to reform has not only led to more than three decade slump in the Nikkei 225 (chart from yahoo), but also has put tremendous strains on Japan’s fiscal (debt) conditions.

Nevertheless, Japan’s authorities has joined their western peers to do more of the same thing, of escalating inflationism, which has led to their self perpetuating crisis. The Bank of Japan has even been supporting her stock markets, apparently, to no avail.

Japanese authorities repeatedly failed to comprehend that the root of their problem has not been insider trading but of having too much interventionism or excessive politicization of their markets and their economy

They should heed the prescient admonitions of the great Professor Ludwig von Mises,

The various measures, by which interventionism tries to direct business, cannot achieve the aims its honest advocates are seeking by their application. Interventionist measures lead to conditions which, from the standpoint of those who recommend them, are actually less desirable than those they are designed to alleviate. They create unemployment, depression, monopoly, dis­tress. They may make a few people richer, but they make all others poorer and less satisfied.

Shooting the messenger and witch hunting won’t solve the problem of productivity, competitiveness and fiscal discipline. They are symptoms of the growing desperation of political authorities

To the contrary such repressive measures would only worsen the situation.

Quote of the Day: David versus Goliath: Why Underdogs Win

Famed author Malcolm Galdwell talked about his new book “David and Goliath” and has been quoted by the Business Insider (bold original)

The crux of Gladwell's argument is that "underdogs win all the time, more than we continue to think," he told Thompson. "Traits that we consider to be disadvantages aren't disadvantages at all. ... As a society, we depend on damaged people far more than we realize. ... They're capable of things the rest of us can't do [because] they look at things in different ways."

Gladwell says that through his research he found that "'Goliath' only wins 66 percent of the time — which is first of all astonishing — so 34 percent of time someone who is one-tenth the size of his opponent wins. That blew my mind."

Underdogs who win refuse to compete by the same standards as their opponent; instead they use an entirely different strategy that exploits their stronger opponent's weaknesses. In business, this is essentially the judo strategy, or a way of disruptive innovation.

In the field of investment, I would add that underdogs are commonly known as the “contrarians” and are likely to have much greater odds of winning than the mainstream because of their ability to think independently and think 'outside the box' by going against the crowd and by challenging the conventional thinking or wisdom.

Steve Forbes on How to Bring Back America

Media mogul Steve Forbes of the Forbes magazine recently interviewed by the Hera Research Newsletter gives his prescription for the restoration of America: Gold Backed Dollar, Simplified Tax Code and the return to a free market

From Hera Research Newsletter (Hat tip Zero Hedge)

The Hera Research Newsletter is pleased to present an incredibly powerful interview with Steve Forbes, Chairman and Editor-in-Chief of Forbes Media. The company’s flagship publication, FORBES, is the leading business magazine. Combined with international and licensee editions,FORBES reaches more than 6 million readers worldwide. The Forbes.com website is a leading destination for senior business decision-makers and investors with more than 30 million unique visitors per month.

Hera Research Newsletter (HRN): Thank you for joining us today. With the U.S. economy struggling to recover from recession and financial crisis, what policies would you recommend?

Steve Forbes: The only way to recover is to stabilize our money, have a gold backed dollar, simplified tax code and return to a free market.

HRN: You advocate the gold standard?

Steve Forbes: If there’s any better system to ensure a stable value for money, it’s yet to be found. For nearly all of America’s first 200 years, the dollar was linked to gold. Since we went off the gold standard, we’ve had more and more financial, economic and banking crises. For example,if the Federal Reserve hadn’t started to print so much money ten years ago, we wouldn’t have experienced the housing bust or the commodities boom or the sovereign debt crisis in Europe. Eventually, events become a persuasive teacher.

HRN: Don’t we need a flexible money supply?

Steve Forbes: That’s like saying that changing the number of minutes in an hour would be a great tool to increase productivity in the economy. Manipulating weights and measures, whether it’s the number of ounces in a pound or minutes in an hour, is a false way to think that you can achieve prosperity. All gold does is serve as a yardstick to measure the value of your currency.

HRN: Doesn’t increasing the money supply help to stimulate the economy?

Steve Forbes: The only way to increase prosperity is through innovation and productivity. Attempts to manipulate the value of money invariably fail. We’ve had numerous devaluations, and not once has it created lasting prosperity.

HRN: Under the gold standard, would there still be a lender of last resort to backstop the banking system?

Steve Forbes: The gold standard doesn’t prevent lending during a panic. The Bank of England pioneered acting as a lender of last resort in the 1860s under the gold standard.

HRN: Wouldn’t the gold standard prevent financial innovation?

Steve Forbes: No. Financial innovation has been with us for hundreds of years in terms of new financial instruments to meet expanding needs as the global economy becomes more complex. Many of the innovations of recent years, however, have come about in response to the instability of the dollar and other currencies, which has increased volatility in currency and commodity markets. New instruments have been designed either as insurance against volatility or to take advantage of it. If you had stable money, there would be much less hedging and financial speculation.

HRN: Can governments function under the gold standard?

Steve Forbes: Certain countries feel free to spend money whether they have it or not. Fiat money, which can just be printed up, has disguised the real cost. We would never have experienced the kind of government borrowing we’ve had in recent years if we’d had stable money. The gold standard would keep the government honest.

HRN: Doesn’t government deficit spending smooth over recessions?

Steve Forbes: The bottom line for the U.S. is that a weak dollar means a weak recovery. Stability is good for the economy. The simplest thing to do is to re-link the U.S. dollar to gold.

HRN: Wouldn’t that tie the hands of the Federal Reserve?

Steve Forbes: Tie their hands to do what, further harm to the economy? I don’t think that’s such a bad thing.

HRN: Isn’t the price of gold volatile like other commodities?

Steve Forbes: The reason to return to the gold standard is that gold maintains a stable, intrinsic value over time. Stable money meets all conditions. Gold doesn’t change in value. Currencies change in value. Gold is Polaris.

HRN: How would re-linking the U.S. dollar to gold work?

Steve Forbes: You simply peg the value of the dollar to gold. Let’s say, for argument’s sake, you peg the dollar to gold at $1,600 per ounce. If gold goes above $1,600, you tighten up on money creation. If it goes below $1,600, you ease up. You keep it around $1,600 by tightening or easing up on money creation. The gold standard doesn’t preclude a booming economy having more money or a stagnant economy having less money.

HRN: Isn’t the gold standard deflationary?

Steve Forbes: No. The gold standard is neither inflationary nor deflationary. It’s like the mile: There are 5,280 feet in a mile; it’s a fixed length. That doesn’t restrict the number of miles of highway you can build. Between 1776 and 1900 the U.S. grew from a small, agricultural nation of 2.5 million people to a nation of 76.2 million people, and it became the greatest industrial power on earth. The money supply went up about 160-fold while the dollar was pegged to gold.

HRN: Wouldn’t the gold standard severely limit leverage in the financial system?

Steve Forbes: If you’re a worthy borrower, you can borrow at the market interest rate; if you’re an unworthy borrower, you have to pay a higher interest rate or you can’t get money. The gold standard would have prevented the wild lending and money creation we’ve experienced in the last few years, which has led to disaster. You can see it in the housing bubble and in the European government debt bubble. None of these things could have happened had we had stable money.

HRN: Is the Utah Legal Tender Act, which makes gold and silver legal in Utah, helpful?

Steve Forbes: I’m in favor of the states trying to get away from the Federal Reserve’s play-money approach. The key is for the next President to institute a gold-linked dollar policy.

HRN: Do competing currencies make sense?

Steve Forbes: The idea of a parallel currency is a perfectly good one. People would come to prefer a dollar based on gold rather than a dollar based on politicians.

HRN: Do you also suggest using silver as money?

Steve Forbes: The Chinese and other cultures have used silver as money, but silver doesn’t maintain its value the way gold does. Over time it takes more silver to buy an ounce of gold. About 120 years ago it took 15 ounces of silver to buy 1 ounce of gold. Today it takes more than 50 ounces. That’s why the U.S. moved away from a bi-metallic standard to the gold standard. One metal becomes more valuable than the other at different times. Silver is better than fiat money, but there’s only one gold standard.

HRN: Would the gold standard help the U.S. economy to recover?

Steve Forbes: In the 1980s, when we had very high unemployment and a stagnant economy, the way out was through a strong dollar, lower income taxes, entrepreneurship and new wealth creation. Remember, the values of assets go up when people see a future. They don’t today.

HRN: We didn’t have the gold standard in the 1980s.

Steve Forbes: Ronald Reagan killed the terrible inflation of the 1970s and sharply reduced income tax rates. Reagan wanted a return to the gold standard, but none of his advisors believed in it. Inflation was effectively killed by high interest rates. Deregulation was pushed forward, and America roared. In 1982, the Dow bottomed at 776; over the next 18 years it went up 18-fold.

HRN: You advocate cutting taxes?

Steve Forbes: Yes, and we should put in a flat tax. The advantage of the flat tax is that it enables people to focus on real things. Abraham Lincoln’s Gettysburg Address, which defines the character of the American nation, is all of 272 words. The Declaration of Independence is a little more than 1,300 words. The Constitution of the United States and all of its amendments are a little more than 7,000 words. The Bible, which took centuries to put together, is a mere 773,000 words. The U.S. federal income tax code—with all of its cross-references, descriptions of amendments and effective dates—is probably now in excess of 4,000,000 words. Nobody knows what’s in it. Last year the IRS announced that Americans spent 6.1 billion hours filling out tax forms and $300 billion on tax preparation. This is a huge waste of resources and brain power. Not to mention that it’s a corrupting influence. It’s a huge source of government power, and it brings out the worst in us. The sooner we get simplicity—and a flat tax would give us that—the more energy we can devote to productive pursuits.

HRN: How could the U.S. transition to a flat-tax system?

Steve Forbes: Since people get hung up on their deductions, we would institute a flat tax and give people the option of filing either under the new, simple system or the old, horrific system. If you’re a masochist and want to punish yourself, you can file under the old income tax system. If you want the simplified one, you can go with that. I think 99% of Americans, out of sheer convenience, would quickly switch to the new system.

HRN: You mentioned deregulation. How would that help the U.S. economy?

Steve Forbes: Take health care, for example. We don’t have a free market in health care. There’s a disconnect between patients and health care providers. If you go to a hospital and ask how much something costs they’ll look at you strangely because they think you’re either uninsured or a lunatic. How many hospitals put the prices of procedures on their websites? It’s like going into a restaurant and having no idea how much anything on the menu costs. It’s a crazy system.

HRN: How would you go about deregulating health care?

Steve Forbes: First, we should repeal the Patient Protection and Affordable Care Act—Obamacare—which is an abomination. Patients should have more choice. The insurance companies don’t compete freely for business. We should allow people to shop nationwide for health insurance. I live in New Jersey, which has a lot of senseless regulations. Why can’t I buy a health insurance policy in Pennsylvania that costs less? We should equalize the tax treatment of health care expenses. If you’re a business or are self-employed, you should be able to deduct the expense. And individuals should be free to go into the market and pay with after-tax dollars. We should make it easier for small businesses to form a collective to buy health insurance. There are a lot of simple things that could be done.

HRN: Do free markets really work?

Steve Forbes: Free markets, with sensible rules of the road, can do all the things that big government advocates say the government does but that it really can’t do. Free markets enable people to move out of poverty and break down barriers between ethnic groups and between nations. Free markets increase cooperation and foster a sense of humanity. Everything that big government says it will do, you get more from free markets than from government bureaucracies. Which one has a better future, FedEx or the U.S. Post Office? Do you want food stamps or paychecks? Big government makes a lot of promises, but it’s short sighted. Government is about meeting its own needs at the expense of the nation, and it’s immoral. Free markets have gotten a bad rap, which happens to be the subject of my new book.

HRN: The Federal Reserve recently announced that it will extend its “Operation Twist” program by $267 billion through the end of 2012. Will that help the U.S. economy?

Steve Forbes: No. The more Federal Reserve Chairman Ben Bernanke messes up, the more he’s hailed as a savior. The Federal Reserve’s programs—quantitative easing 1 and 2 and Operation Twist—are just fancy words for printing up more money. It’s a bunch of smoke and mirrors. They’ve done a lot of damage already, and they’re continuing to. What they’re doing is dangerous. Not only has the Federal Reserve created a lot of money and vastly expanded its balance sheet but, along with the U.S. Department of Treasury, it has dramatically shortened the maturity of U.S. government debt.

HRN: What do you mean when you say that the Federal Reserve has done a lot of damage?

Steve Forbes: By keeping interest rates artificially low, Chairman Ben Bernanke is cheapening the dollar, which punishes savers and harms future investment. It distorts financial markets and misdirects investments into things like creating the housing bubble. It subsidizes government borrowing at the expense of the rest of us. It’s the equivalent of a cut in pay for workers. Let’s say you’re earning $20 per hour and the government cheapens the dollar; then, in effect, you’re making $15 per hour. It violates contracts and undermines social trust.

HRN: What should Chairman Bernanke do instead?

Steve Forbes: Other than resign, Chairman Bernanke should realize that the gold standard works and that when you deviate from it, you create more and more uncertainty. He should re-link the dollar to gold. Doctors used to treat patients by bleeding them. Bernanke just keeps bleeding the economy.

HRN: Thank you for being so generous with your time.

Steve Forbes: Thank you.

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Taxing Greeks: Separating Reality from Fiction

This terse article gives us a glimpse of the mechanics of how wealthy Greeks has successfully been able to avoid paying taxes

From the Wall Street Journal Blog,

That Greeks have a penchant for evading taxes isn’t exactly news — when tax collectors started comparing swimming-pool ownership with incomes, wealthy Greeks camouflaged their pools. And because hidden income is hidden, figuring the size of the tax dodge is difficult.

Armed with data from one of Greece’s ten largest banks, economists Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura recently set themselves to the task. The banks, with tens of thousands of customers across the country, provided loan and credit-card application and performance data. That not only gave the economists access to self-reported incomes, but also allowed them to infer the banks’ estimates of true incomes — which are likely closer to the mark.

The economists’ conservatively estimate that in 2009 some €28 billion in income went unreported. Taxed at 40%, that equates to €11.2 billion — nearly a third of Greece’s budget deficit.

Why hasn’t Greece done more to stop tax evasion? The economists were also able to identify the top tax-evading occupations — doctors and engineers ranked highest — and found they were heavily represented in Parliament.

It’s always easy to portray the solution to fiscal problems, through statistical estimates, as merely one of enforcement procedures of tax policies.

Unfortunately, such simple minded approach escapes the premises of people’s reactions to repressive social policies and to the parasitical relationships which underpins their political institutions.

As for some of the professional Greek elites, as noted above, their tax shields may have been derived through their participation in the political hierarchy.

Mainstream economists seem to forget that they are dealing with real people, who by nature will look after their interests by adapting to the realities of the evolving political economic environment.

And it is for this reason why top-down or centralized policies inherently fails.

Picture of the Day: Capitalism is for People as They are

From a signboard of a combined Coffee Shop and Bar in Greenwich Village, NYC, as posted by New York University’s Development Research Institute’s Professor William Easterly on their blog.

Capitalism is indeed about real people.

China’s External Trade Slumps, Yuan Weakens

More bad news from China as merchandise trade has been on a slump

From Bloomberg,

China’s imports rose less than anticipated in June while export growth slowed, adding pressure on the government to support expansion after inflation data yesterday showed demand softening.

Inbound shipments increased 6.3 percent from a year earlier, the customs bureau said in a statement today in Beijing, compared with the 11 percent median estimate in a Bloomberg News survey of 32 economists. Overseas sales gained 11.3 percent. The trade surplus rose to a three-year high of $31.7 billion.

The data add to signs of flagging momentum in the world’s biggest exporter as Europe’s debt crisis curbs foreign sales and the government’s property controls restrain domestic demand. Growth probably decelerated last quarter to the least in three years, with International Monetary Fund Managing Director Christine Lagarde saying China’s slowdown is among reasons the organization will reduce its estimate for global expansion.

Weakening imports are signs of a deepening slowdown of the Chinese economy.

And here is the juicy part…

China has allowed its currency to weaken this year amid slowing growth and Europe’s turmoil. The yuan fell 0.88 percent from April through June, the biggest quarterly decline since a dollar peg ended in 2005. The currency dropped 0.1 percent yesterday to 6.3714.

The increase in exports compared with a 15.3 percent gain in May. The median estimate of analysts in a Bloomberg survey was for a 10.6 percent gain. The trade surplus was wider than the $24 billion median forecast of economists.

The weakening Chinese currency the yuan could also be a symptom of hot money outflows which may be indicative, not merely of a slowdown, but of a property bubble bust in process.

The Yuan-US dollar chart from Yahoo

Also China’s exports have also been deteriorating. More from the same article…

Export Orders

A gauge of export orders in China’s official purchasing managers’ index for June showed a contraction for the first time since January, suggesting that overseas shipments may slow in coming months.

So China’s merchandise trade conditions suggests of more slackening of her domestic economy, as well as of a pronounced slowdown in the global economy.

The cocktail mix of vacillation in politics and economic downdraft from both China and the global economy suggests that more uncertainty lies ahead and magnifies the contagion risks.

As proof of this China’s Shanghai index breached their support levels yesterday.

Be careful out there.

Celebrity Denise Rich Abandons US Citizenship

There has been a growing trend of wealthy Americans giving up on their citizenship.

I earlier noted that this controversial trend may have been accentuated by Eduardo Saverin, one of Facebook founder.

Another celebrity, Denise Rich, has opted to vote with their feet in response to the intensifying class warfare politics which is being passed off through repressive tax policies.

From the Wall Street Journal,

Denise Rich, the songwriter and socialite who was once married to pardoned financier Marc Rich, has given up her U.S. citizenship, a move that could also help shield her from future U.S. taxes.

“In order to be closer to her longtime life partner, as well as her family and loved ones, she made the decision to become an Austrian citizen. That was in November 2011,” said Judy Smith, a spokeswoman for Ms. Rich.

Ms. Rich’s name showed up in an April 30 list of those who had given up their U.S. citizenship. She was listed under her maiden name of Denise Eisenberg. The move was first reported by Reuters.

Ms. Rich and many others adds to the statistics of nearly 1,800 Americans whom have renounced their citizenship.

The absolute number may indeed be small (yes that’s because they are the detestable 1%), but they are the source of productive capital.

Daily Reckoning’s Erics Fry rightly concludes

Surrendering US citizen was absolutely unthinkable. But not anymore. Now it is “thinkable,” albeit still relatively rare. The absolute numbers are still tiny, but the trend conveys a very large message: Discontent is on the rise.

Intervention begets intervention, taxes begets taxes, repressive actions by the desperate political class will only exacerbate. Ultimately these would affect everyone and vented through a crisis. Hence discontent will snowball.

Interesting signs of times and the reversal of what used to be seen as entrenched trends.

Graphic of the Day: Thou Shalt Not Commit Logical Fallacies

A priceless advice..

courtesy of yourlogicalfallacy.com (hat tip Bob Wenzel)

Quote of the Day: Intellectual Rights and Duties

Ms. Wendy McElroy at the Laissez Faire Books enumerates what she thinks constitutes our intellectual rights and duties…

The following are some intellectual rights and duties that I’ve evolved as guidelines for constructing — one person at a time — the type of intellectual society in which I want to live.

YOUR INTELLECTUAL RIGHTS

You Have the Right to Be Uninterested

When you are trapped in an unpleasant or boring conversation, you are well within your intellectual rights to state, “I don’t care to talk about this (or to you) further.” Make the statement without hostility, as a matter of fact, and then simply walk away. No one has an unconditional claim on your time or on your attention. And the assumption that you should care about every issue and event in the world is ridiculous. Don’t accept the unrealistic demand that you find everything and everyone interesting.

Everyone Has the Right Not to Understand

Most of us spend a lot of time trying to avoid uttering the sentence, “I don’t understand what you are saying.” Too often, people see this statement as an admission of ignorance or inadequacy, rather than one of self-confidence. No one understands everything, and it is folly to pretend you do. Nevertheless, the fear of appearing ignorant or stupid frequently underlies a reluctance to admit that you simply do not understand what is being said. Do not apologize. Just ask whoever is speaking to clarify what they mean. Most people are more than happy to expound at length in front of an attentive audience.

Everyone Has the Right to Make a Mistake

This is far more than a right. It is an inevitability. You will commit errors, and frequently. If this upsets you, then curse human nature. As a human being, you are a fallible creature without godlike or automatic knowledge. Yet many people will argue themselves (and everyone else) into the ground or into absurd intellectual corners, rather than admit, “I’m obviously mistaken about that one point.” There is no shame in admitting, “I made a mistake.” Indeed, there is great strength in being willing to acknowledge your errors and learning from them.

Everyone Has the Right to Change His Mind

Changing your mind or a stated position is not intellectual indecision or weakness. It is part of the learning process by which you discover errors and correct them. If someone convinces you on an issue, it is a mark of intellectual honesty and courtesy to say, “You’ve persuaded me to your point of view.” After all, what is the alternative? Holding onto an untenable position just because that is what you believed yesterday? Everyone has the right to say, “Obviously, I am wrong on that point,” and not to feel diminished by this act of intellectual honesty.

Everyone Has the Right to Disagree

Whenever you hear a statement with which you disagree, you have the right to say so. Often you are in situations in which your opinion would be unpopular if stated. Perhaps a family gathering has turned into a political discussion, and you hold the only dissenting view. Your alternatives are wider than either stewing in silence or starting an intellectual brawl. You don’t need to justify yourself. You needn’t become either hostile or apologetic. You can simply state, “I disagree,” and walk away. Or stay and argue. The option is yours.

At this point, many people will ask, “Why bother? Why cause trouble?” In some cases, you may reasonably decide that speaking out is not worth the price. But showing discretion is different than allowing silence in the face of offensive opinions to become a habit. Such habitual silence is destructive to the most-important aspect of your intellectual life: your own self-esteem. Breaking the silence and saying, “I disagree,” can be important. If it were not, most people would not feel such resistance to making the statement.

Everyone Has a Right to His or Her Own Opinion

Everyone has the right to so weighty a thing as an opinion, and to express it. You do not need a diploma, permission from your spouse, a dispensation from the church: Simply by being a human being, you have a right to reach your own conclusions and publicly state them. The more knowledge you have, the more likely your opinions are to be correct. But this does not mean that you should not refuse to reach a conclusion right now based on what you know. That is all anyone ever does: form opinions based on their current level of knowledge. After all, as noted above, you also have the right to change your mind if more or better information arrives. .

YOUR INTELLECTUAL DUTIES TOWARD OTHERS

Never Purposely Embarrass Anyone

People often make unsupported claims, contradict themselves or otherwise become vulnerable to being intellectually humiliated. Don’t do it. Argue as well as you can, but do not take psychological advantage of someone’s weakness. If you do so, then you will make an enemy of the humiliated person and win no points from onlookers who recognize an act of gratuitous cruelty when they see one. If the other person has become so irritating that you cannot continue discussion without launching into personal attacks, then walk away. Brute reason is as inexcusable as brute force.

Give the Other Person Time to Consider the Argument

Do not badger someone for an immediate response or to instantly concede a point you have established. After all, accepting what you say may mean that the person has to question other beliefs, and such a process can be extremely uncomfortable, especially if performed in public or under duress. Allow the person room to think and to change his mind gracefully.

Acknowledge Good Points

If the other person scores a point in the discussion, acknowledge it. Even if he doesn’t change your mind on the main issue, give him the credit he deserves by saying, “That’s an interesting perspective,” or, “You are obviously right about that.” This level of intellectual courtesy is so rare that you will acquire a reputation for fairness based on such remarks alone.

Freely Acknowledge When You Have Made an Error

Honesty works two ways. When you misstate a date, for example, admit the mistake without embarrassment and move on. If you “stick by your guns” and refuse to acknowledge an obvious error, the other person is likely to focus the rest of the argument on that weak spot. Once you have admitted the error, however, don’t allow the other person to hammer away on the point. If he attempts to do so, then cut him short and demand, “If this is how you treat a simple mistake, what would you do if I conceded your main point — ridicule me for agreeing with you?”

Be Tolerant of Small Slips

Don’t jump on the occasional silly statement or inane question. We all make foolish remarks at some time or other.

When You Are Uncertain of Something, Say So

If you are asked a question for which you don’t have the answer, say, “I don’t know,” or, “I haven’t given the matter any thought.” This is not only a sign of intellectual honesty, but as importantly, it is a way to keep from making a fool of yourself.

Avoid Ostentatious Displays of Knowledge

Never argue just to display your own cleverness. This is as offensive to most people as an ostentatious display of wealth, which usually causes resentment, rather than admiration.

Civility and mutual respect are the first things to go in despotic times. A regime that doesn’t trust people to manage their lives tends to undermine our own trust in others and ourselves. In the end, however, the state cannot manage our minds and our habits of thinking and communicating with each other. This we can and must control for ourselves. Let not the state take away our intellectual rights and responsibilities.

Thanks for the advice Ms. McElroy.

The Coming Global Debt Default Binge: Japan’s Government Under Financial Strains

Unwieldy welfare states and bureaucracies are cracking.

Japan’s politicians bicker about maintaining unsustainable public spending even when source of funding has been depleting fast.

From Reuters,

Japan's government could run out of money by the end of October, halting all state spending including salaries, pensions and unemployment benefits, because of a standoff in parliament that has blocked a bill to finance the deficit.

The deficit financing bill, which would allow the government to sell bonds needed to fund almost half of the budget, has languished in parliament as the ruling Democratic Party tussles with opposition parties that can use their control of the upper house to reject legislation.

"Without this bill, the budget will collapse," Finance Minister Jun Azumi said on Friday, pleading for cooperation from the two largest opposition parties.

"It doesn't matter which party is in power. I really hope that we can get a multi-partisan agreement on the deficit bill."

If the bill is not passed, government spending would grind to a halt, the world's third-largest economy would be put in jeopardy and its standing among credit ratings agencies could suffer.

Japan is not the only developed nation that is staring at an imminent fiscal crisis. Greece's debt-strapped government could run out of money within weeks unless it secures a 31.8 billion euro tranche of bailout funds from the European Union.

The U.S. economy is facing $4 trillion worth of expiring tax cuts and automatic government spending reductions at the end of the year, and a standoff in Congress makes the chance of a compromise over the so-called "fiscal cliff" look dim.

chart of Japan’s unsustainable fiscal balances (tradingeconomics.com)

Not to worry, like the US Federal Reserve, the Bank of Japan (BOJ) will most likely come to the rescue.

They are likely to announce more stimulus in supposed aid to the “export” industry.

In reality, these will about saving the banks and financial institutions who constitutes as the major financiers or creditors or owners of Japan’s Government Bonds (JGBs) with some 76% share as of 2009. [chart from Japan Bankers Association]

But the share of ownership by banking and financial institutions of JGBs has even been larger based on 2011 data

From the Wall Street Journal,

Nearly two-thirds of all JGBs are held by just two groups: major Japanese banks with 44%, and insurers with 21%. If either sector starts to sell—or simply stops buying new debt—the market could tumble quickly, since there is little sign that foreign buyers would quickly fill the gap. Foreign investment is just 5.7%, as of end-June figures, less than the share held by Japan's biggest bank, Mitsubishi UFJ Financial Group, which has 6.9%.

So Japanese politicians, like their European and American counterparts, are increasingly caught between the metaphorical devil and the deep blue sea.

Default will either be through inflation or restructuring (bankruptcy).

Contagion Risk: More Signs of Asian Economic Slowdown

As I noted last night, the nasty repercussions of bubble bust conditions have been percolating into the global economy from different directions. [Good luck to the stock market bulls]

Here are more evidences of the escalation of the transmission… (from Bloomberg)

Hong Kong and Vietnam signaled growth may fall short of government forecasts this year as Asian policy makers stepped up efforts to protect their economies and currency markets from the worsening global outlook.

Hong Kong may revise its 2012 economic forecast next month, Financial Secretary John Tsangsaid on July 7. In Vietnam, Deputy Prime Minister Vu Van Ninh said the country may miss its growth target and the central bank told lenders to cut borrowing costs on existing loans to help businesses. The Philippines unveiled plans to contain currency gains that may hurt exports.

The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP) reveals of their mercantilist leanings where destruction of the Peso is seen as the elixir to prosperity. History and theory serves no lesson to political agents who uses mercantilists policies to promote the interest of cronies and the political class in the name of exports (or remittances). Good governance? Duh!

The economic growth slowdown also slams Japan hard (from another Bloomberg article)

Japan’s current-account surplus was the smallest in May since at least 1985 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation’s rebound.

The excess in the widest measure of the nation’s trade shrank 63 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg News was for a surplus of 493.1 billion yen. Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005.

Japan’s trade position has weakened due to growing energy imports after last year’s earthquake and nuclear meltdown and also the yen’s gain of 4.9 percent against the dollar since mid- March. Prime Minister Yoshihiko Noda gave approval for a restart of reactors at the Ohi nuclear plant, which resumed power generation last week, to avoid power shortages and rolling blackouts over the summer.

“Today’s machinery order drop is very large, and it may be a signal that Japanese companies are becoming cautious about investment” amid concern about a global economic slowdown, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “Though exports have been slumping, we don’t expect Japan to have any major trade deficit.”

Given that the economic slowdown emanates from multiple fronts, which amplifies the global contagion risks, for any interventions to have short term palliative effect, they must be really huge, coordinated or in collaboration with central banks of major economies from both BRIC and G-7.

Yet if they do so, expect a major train wreck that would make the 2007-2008 episode a picnic ahead.