Bastiat on The Case for Unilateral Free Trade

The great Frédéric Bastiat makes the case for unilateral free trade. (source Mises Institute)

We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.

A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.

There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.

But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.

People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.

The following apologue will demonstrate this.

Stulta and Puera

There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, "See how Puera inundates us with her products; we must see to it." In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.

At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: "We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose." So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.

On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, "The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better."

A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: "Don't listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)

"This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules." Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.

The following passage resonates on the political stumbling block, mentioned by Bastiat above, for unilateral free trade:

The compelling economic case for unilateral free trade carries hardly any weight among people who really matter…

But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports—no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense—but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.

This was written by then international trade economist Paul Krugman in 1997 prior to his tergiversation of the free trade doctrine to become consumed by the forces of mercantilism whom he once condemned. (hat tip Professor Don Boudreaux) Given the temptations to power from "the economist who wants to influence that policy", Mr. Krugman reminds me of the transformation of Anakin Skywalker into Darth Vader

Quote of the Day: Overrated Sincerity, Incorruptibly Evil

Another reason when corruption seems a better option…

As far as I know, Robespierre, Lenin, Stalin, Mao, and Pol Pot were indeed unusually incorruptible, and I do hate them for this trait. 

Why?  Because when your goal is mass murder, corruption saves lives.  Corruption leads you to take the easy way out, to compromise, to go along to get along.  Corruption isn't a poison that makes everything worse.  It's a diluting agent like water.  Corruption makes good policies less good, and evil policies less evil.

I've read thousands of pages about Hitler.  I can't recall the slightest hint of "corruption" on his record.  Like Robespierre, Lenin, Stalin, Mao, and Pol Pot, Hitler was a sincerely murderous fanatic.  The same goes for many of history's leading villains - see Eric Hoffer's classic The True Believer.  Sincerity is so overrated.  If only these self-righteous monsters had been corrupt hypocrites, millions of their victims could have bargained and bribed their way out of hell.

This stirring excerpt is from George Mason University economics professor, Econolog blogger and author Bryan Caplan. [Source: Library of Economics and Liberty]

Chart of the Day: Crowding Out Effect from the Welfare State

From Bloomberg Brief (source Zero Hedge) [bold original] 

Policy choices made in the near-term will affect the economy for years to come. If not addressed, current debt and spending dynamics will probably lead to a reduced growth path, placing at risk expenditures on vital social programs and, over time, crowding out private sector borrowing that funds the gross private domestic investment necessary to boost productivity and living standards. Dollars spent on entitlements dwarf those spent on discretionary items such as education, and tower over net fixed business investment, which is partially responsible for greater productivity, business expansion and rising living standards. Periods with greater investment as a share of GDP are highly correlated with both faster economic growth and rising living standards. One risk to the U.S. economy is that rising entitlement spending will require the government to borrow from the finite amount of capital held by private savers, thus squeezing out private firms that need the capital to expand businesses and increase productivity 

Inflationism (devaluation) will NOT solve the problem wrought by parasitical relationships. The greater the entitlements/welfare state, the lesser economic growth. Such untenable relationship ultimately leads to a crisis. Thus, the only recourse to such predicament is through a substantial reduction, if not the abolishment, of the welfare state accompanied by a liberalization of the economy.

Philadelphia Fed’s Charles Plosser Warns of Risks from QE Forever

In addition to Richmond Federal Reserve’s Jeffrey Lacker, the Fed’s recent QE ‘forever’ has elicited another dissenting insider opinion.

Federal Reserve Bank Bank of Philadelphia President Charles Plosser says that the FED’s measures will not only miss attaining the targeted economic goals but would lead to hefty unforeseen risks.

Here is why employment goals won’t be reached, from SFGate/ Bloomberg, (Bold emphasis mine)

Federal Reserve Bank of Philadelphia President Charles Plosser said new bond buying announced by the Fed this month probably won’t boost growth or hiring and may jeopardize the central bank’s credibility.

“We are unlikely to see much benefit to growth or to employment from further asset purchases,” Plosser said in a speech today at the district bank in Philadelphia. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”…

Plosser said today that central banks can’t effectively target employment levels the same way they can guide inflation rates because hiring also depends on variables unrelated to monetary policy, such as technology, education and tax rates.

“It doesn’t make sense to say that there is a particular unemployment rate that we can achieve,” Plosser told reporters after his speech. “The problem with the labor markets is there are many things that affect employment and unemployment that are beyond the control of the Fed.”

Mr. Plosser acknowledges that in a highly complex world, oversimplified centralized or political solutions can lead to unintended consequences.

Mr. Plosser fails to add that policies such as added taxes and regulations impact investments (aside from monetary policies) and thereby employment levels. The mainstream's favorite indicator, employment, represents an effect from business spending and not the cause.

Small businesses which make up the bulk of the source of US employment has been suffering from tax and regulatory policies (chart from advisor perspectives).

I would like to point out that while poor sales has also been an important concern, poor sales are symptoms of an underlying disease.

Relative economic freedom, the US has been on a decline since 2000 or when the FED began to massively inflate the system (chart from Cato Institute)

Mr. Plosser also believes that the Fed’s latest QE will lead to significant risk of consumer price inflation…

“I opposed the Committee’s actions in September because I believe that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment,” Plosser said. “Every monetary policy action has costs and benefits, and my assessment is that the potential costs and risks associated with these actions outweigh the potential meager benefits.”…

The Fed’s “hard-won credibility” is crucial because if the public doesn’t have confidence in policy makers, their ability to set effective monetary policy will be harmed, hurting households and businesses, Plosser said. If people believe the central bank will delay raising rates, they may “infer that the Fed is willing to tolerate considerably higher inflation,” spurring an increase in inflation expectations that would require a response from the FOMC, Plosser said.

“The Fed’s most recent actions carry with them significant risks,” Plosser said. “I am not forecasting that those risks will necessarily materialize and I hope they will not. But if they do, they could prove quite costly to the economy.”

And Mr. Plosser suggests that the Fed has been trapped, where exiting from current measures would likely be highly disruptive.

Plosser said in response to audience questions that he’s “worried that the actions we are taking to make our balance sheet bigger entail risks and those risks could be quite substantial.”

The central bank may “be forced into selling assets in the open market” when it needs to reduce stimulus, he said. Policy makers “must be aware of the consequences,” from their decisions.

In short, Mr. Plosser warns of two possible consequences from current the policy of QE forever: massive inflation or boom bust cycles, both of which would only destabilize the US and global economies.

Mr. Plosser’s warning eerily resonates with the admonitions of the great Professor Ludwig von Mises

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

Quote of the Day: Manipulation of Interest Rates Sow Seeds to Crisis

Because the interest rate is the price of money, manipulation of interest rates has the same effect in the market for loanable funds as price controls have in markets for goods and services. Since demand for funds has increased, but the supply is not being increased, the only way to match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At some point the capital projects funded by the new credit are completed. Houses must be sold, mines must begin to produce ore, factories must begin to operate and produce consumer goods.

But because consumption patterns have either remained unchanged or have become more present-oriented, by the time these new capital projects are finished and begin to produce, the producers find no market for their goods. Because the coordination between savings and consumption was severed through the artificial lowering of the interest rate, both savers and borrowers have been signaled into unsustainable patterns of economic activity. Resources that would have been used in productive endeavors under a regime of market-determined interest rates are instead shuttled into endeavors that only after the fact are determined to be unprofitable.  In order to return to a functioning economy, those resources which have been malinvested need to be liquidated and shifted into sectors in which they can be put to productive use. 

Another effect of the injections of credit into the system is that prices rise.  More money chasing the same amount of goods results in a rise in prices.  Wall Street and the banking system gain the use of the new credit before prices rise.  Main Street, however, sees the prices rise before they are able to take advantage of the newly-created credit. The purchasing power of the dollar is eroded and the standard of living of the American people drops.

We live today not in a free market economic system but in a "mixed economy", marked by an uneasy mixture of corporatism; vestiges of free market capitalism; and outright central planning in some sectors.  Each infusion of credit by the Fed distorts the structure of the economy, damages the important role that interest rates play in the market, and erodes the purchasing power of the dollar.  Fed policymakers view themselves as wise gurus managing the economy, yet every action they take results in economic distortion and devastation.

Unless Congress gets serious about reining in the Federal Reserve and putting an end to its manipulation, the economic distortions the Fed has caused will not be liquidated; they will become more entrenched, keeping true economic recovery out of our grasp and sowing the seeds for future crisis.

This is from US Congressman Ron Paul

Quote of the Day: Newspapers as Polluted Vehicles

To your request of my opinion of the manner in which a newspaper should be conducted, so as to be most useful, I should answer, "by restraining it to true facts & sound principles only." Yet I fear such a paper would find few subscribers. It is a melancholy truth, that a suppression of the press could not more compleatly deprive the nation of it's benefits, than is done by it's abandoned prostitution to falsehood. Nothing can now be believed which is seen in a newspaper. Truth itself becomes suspicious by being put into that polluted vehicle. The real extent of this state of misinformation is known only to those who are in situations to confront facts within their knowledge with the lies of the day. I really look with commiseration over the great body of my fellow citizens, who, reading newspapers, live & die in the belief, that they have known something of what has been passing in the world in their time; whereas the accounts they have read in newspapers are just as true a history of any other period of the world as of the present, except that the real names of the day are affixed to their fables. General facts may indeed be collected from them, such as that Europe is now at war, that Bonaparte has been a successful warrior, that he has subjected a great portion of Europe to his will, &c., &c.; but no details can be relied on. I will add, that the man who never looks into a newspaper is better informed than he who reads them; inasmuch as he who knows nothing is nearer to truth than he whose mind is filled with falsehoods & errors. He who reads nothing will still learn the great facts, and the details are all false. 

This excerpt is from America’s founding father, principal author of the Declaration of Independence and 3rd US President Thomas Jefferson in a letter to John Norvell, June 11, 1807 (Source: The Library of Congress)

MVP-Ateneo Rift: The Politicization of Education

In reaction to Mogul and PNoy favorite Manny Pangilinan’s severance of ties with his alma mater due to political differences somewhere I read a paraphrased comment that out of MVP's actions

Children should be spared of politics

Putting the blame on MVP alone is an example of misreading effects as the cause. The reason for the sensational split in the relationship is because the heated political divergences hasn’t just been between MVP and Ateneo, but instead this involves Ateneo official’s moral and political stand to inculcate into their professors and students.

I am NOT here to defend any political position by both camps, but to underscore the point of the vicious politicization of education, which in this case, has been through the imposition of political preferences by school authorities and church leaders on members of the academe and students. 

Essentially this controversial schism validates my views on why elite schools have been inclined towards statism.

To highlight the point of the dictatorial tendencies of the church-school cabal is the recent threat to purge by excommunication 159 Ateneo professors who sided with Philippine government’s RH Bill.

[As a side note, I am against any coercive imposition of “values” on the family: This means I am against the RH Bill and am equally against church strictures aimed at the interdiction of their moral stand on their constituents.]

Church influence on politics has had nasty social outcomes, as the great Professor Murray Rothbard wrote, (bold emphasis mine)

Historically, the union of church and state has been in many instances a mutually reinforcing coalition for tyranny. The state used the church to sanctify and preach obedience to its supposedly divinely sanctioned rule; the church used the state to gain income and privilege.

The Anabaptists collectivized and tyrannized Münster in the name of the Christian religion.

And, closer to our century, Christian socialism and the social gospel have played a major role in the drive toward statism, and the apologetic role of the Orthodox Church in Soviet Russia has been all too clear. Some Catholic bishops in Latin America have even proclaimed that the only route to the kingdom of heaven is through Marxism, and if I wished to be nasty, I could point out that the Reverend Jim Jones, in addition to being a Leninist, also proclaimed himself the reincarnation of Jesus.

Moreover, now that socialism has manifestly failed, politically and economically, socialists have fallen back on the "moral" and the "spiritual" as the final argument for their cause.

For the mainstream, coercion, as along as it is committed by the state, is seen as moral. Thus, the desperate attempts by competing interests (represented by diverse power blocs, church, schools, environmentalists, and others) to influence policymaking which thereby results to the attendant social frictions.

Yet education must be free of politics and of government interventions, as Professor Tibor Machan argues (bold emphasis mine)

When a country tries to combine freedom of thought and speech with government-administered education, there will be irresolvable conflict. In a system of private education competition among schools would take care of philosophical correctness. In some schools certain books will be featured in the library, in others they will not, and students and their parents will be able to select which they want to be exposed to. Biology will be taught as creationists wish or as Darwinians do.  No official doctrine will be imposed, period.

But when government delivers a coercive system of "education"--actually mostly indoctrination, since no alternative is available to the bulk of us who have to pay for and use such a system--any selection of books, magazines, films shown in classes and so forth will amount to censorship of the materials not chosen. They will be deemed as having been banned--whereas in a private system selection by the administrators of some schools, library officials, or teachers will not preclude exclusion by others. It is government's nearly one-size-fits-all approach to education that stands in the way of free inquiry.

Unfortunately, in many societies people want to mix elements of liberty with elements of coercion, as if that were something trouble free—health food with some poison! It isn't--the courts will struggle forever with trying to square that circle and politicians will engage in varieties of demagoguery to gain the power over the “educational” turf.

Only by getting government out of education can that matter be made consistent with the principles of a free society and fit for human beings whose minds must forever be free to think.

The MVP-Ateneo rift only confirms the symptoms of irresolvable social conflict brought upon by the politicization of education and of government interventions.

Updated to add: Because I was in a hurry and had something things to do, I was unable to edit this post at the time of the publication. Thus I made belated grammatical changes on the first three sentences about 4 hours after.
  

Quote of the Day: Real Deleveraging

No stock market commentary for today.

Here is a brilliant objective analysis of the current bubble conditions from Doug Noland of the Credit Bubble Bulletin at the PrudentBear.com (bold emphasis mine)

Our economic structure certainly enjoys unmatched capacity to absorb Credit excess without engendering traditional consumer price inflation.  Yet there is indeed a huge problem that no one seems to want to recognize:  Our system also has an unprecedented capacity to expand Credit that is backed by little in the way of wealth-creating capacity.  Our government literally injects Trillions into the economy – Credit that inflates incomes and sustains consumption and elevates asset prices.  The downside of this economic miracle is that, at the end of the day, there’s little left to show for the whole exercise except for an ever-expanding mountain of suspect financial claims.  Moreover, market values of these claims are sustained only by the unrelenting expansion of additional claims/Credit concurrent with increasingly radical monetary management.  This is Minsky’s “Ponzi Finance” at a systemic level.

A real deleveraging would see the economy and financial markets weaned off of rampant Credit growth.  Non-financial Credit growth averaged about $700bn annually during the nineties.  This inflated to about $2.4 TN at the Mortgage Finance Bubble pinnacle in 2007.  As I noted above, we’re currently running at an annualized Credit growth rate of nearly $2.0 TN.  This is posing great unappreciated risk to system stability.

A real deleveraging would see price levels (and market-based incentives) adjust throughout the economy in a manner that would spur business investment – in the process incentivizing sound investment-based lending and resulting job growth.  Real deleveraging would see a shift in the economic structure from Credit-fueled consumption to savings and productive investment.  Real deleveraging would give rise to our endemic trade deficits shifting to surplus.  Real deleveraging would see a meaningful reduction in non-productive debt.  Real deleveraging would see market prices dictated by fundamentals rather than governmental intervention, manipulation and inflationism.

The “raging” debate is whether recent elevated unemployment is a “cyclical” or “structural” phenomenon.  Academic “white papers” not required.  After all, find a system that doubles mortgage Credit in about six years and then proceeds to double federal debt in four - and you'll no doubt locate a deeply maladjusted economic structure.  Such gross financial imbalance ensures economic imbalance.  And, importantly, the longer such imbalances are accommodated/incentivized by loose fiscal and monetary policies the deeper the structural impairment.  Throw massive fiscal stimulus and monetize Trillions and such a structure will surely demonstrate historic deficiencies and fragilities.

Deleveraging – the process of unwinding the economic damage wrought from years of excess - will be a quite arduous economic process; one that will commence at some unknown date in the future.  Oh, I guess I failed to mention that total (financial and non-financial) Credit ended Q2 at a record $55.031 TN, or 353% of GDP.  And Rest of World holdings of our financial assets ended the quarter at a record $19.100 TN, a $3.860 TN increase from the end of 2008.

Deleveraging, which has been the mainstream tautology, has been promoted by cherry-picking evidences in support of this view.

Yet while it may be true that some sectors have been enduring salutary deleveraging, the big picture reveals that systemic debt has been intensifying not only in the US but on a global scale most of which has been borne by the governments.

And much like austerity, deleveraging has been a maligned and distorted term and uttered like an incantation which has been used to justify more government interventions. 

All these only adds up to have a compounding effect on systemic fragility. 

Brazil and China Governments Slam the FED’s QE Forever

The US Federal Reserve’s QE ‘forever’ hasn’t been welcomed by some of the major emerging market central banking peers.

Brazil’s Finance Minister Guido Mantega, according to a Nasdaq/ Dow Jones report, accuses the Fed’s third-round of quantitative easing as "stimulating currency wars”.  Mr. Mantega, thus, will “continue to take whatever action is necessary to prevent speculative flows from flooding into the country” through currency interventions that will prevent Brazil’s currency, the real, from appreciating.

Brazil’s central bank, according to Mr. Mantega, “is going to buy more reserves” through the “use of the so-called reverse swap auctions that remove U.S. dollar-hedging contracts from the futures market”

Mr. Mantega will also adopt other measures including higher taxes on investment inflows.

China’s head of the Central Bank also rebuked the Fed's quantitative easing policies.

According to Sydney Morning Herald 

THE head of China's central bank, Zhou Xiaochuan, says quantitative easing is not working and more targeted measures are required to channel credit into areas where they are needed the most.

Mr Zhou made the call in a speech delivered in April but not published on the website of the People's Bank of China until this week, as the chairman of the US Federal Reserve, Ben Bernanke, announced a new round of quantitative easing - an injection of cheap credit into the financial sector - aimed at resuscitating the sluggish US economy.

Mr Zhou criticised the flood of cheap money as an inflexible and orthodox approach, although he stopped short of naming the Fed. Chinese authorities have long expressed their displeasure at US quantitative easing policy measures, which have eroded the value of the Chinese holding of US dollar-denominated assets such as Treasury bonds. Beijing is the largest holder of US government debts.

In reality all these signify as the proverbial pot calling the kettle black.

Both Chinese Central Bank and Brazil’s central bank have engaged in the same policies of waging war against interest rates although through more subtle means.

For instance I pointed out last week of the leakage from the sterilization measures by Brazil central bank’s foreign reserve accumulation have led to a bank credit boom which a Financial Times analyst sees as credit (QE) driven economic boom.

Chart from Mao Money, Mao Problems

And given the huge foreign reserves of $3.3 trillion during the first quarter held by China, the same policy dynamic may have been implemented by the People's Bank of China (PBoC). Evidence says that the PBoC's balance sheet continues to swell.

The world of politics is like a game of the hot potato, where some entity would have to take the blame to cover for one’s malfeasance.

Quote of the Day: The Fallacy of Redistribution

Those who talk glibly about redistribution often act as if people are just inert objects that can be placed here and there, like pieces on a chess board, to carry out some grand design. But if human beings have their own responses to government policies, then we cannot blithely assume that government policies will have the effect intended.

The history of the 20th century is full of examples of countries that set out to redistribute wealth and ended up redistributing poverty. The communist nations were a classic example, but by no means the only example.

In theory, confiscating the wealth of the more successful people ought to make the rest of the society more prosperous. But when the Soviet Union confiscated the wealth of successful farmers, food became scarce. As many people died of starvation under Stalin in the 1930s as died in Hitler's Holocaust in the 1940s.

How can that be? It is not complicated. You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth -- and that future wealth is less likely to be produced when people see that it is going to be confiscated. Farmers in the Soviet Union cut back on how much time and effort they invested in growing their crops, when they realized that the government was going to take a big part of the harvest. They slaughtered and ate young farm animals that they would normally keep tending and feeding while raising them to maturity.

People in industry are not inert objects either. Moreover, unlike farmers, industrialists are not tied to the land in a particular country.

Russian aviation pioneer Igor Sikorsky could take his expertise to America and produce his planes and helicopters thousands of miles away from his native land. Financiers are even less tied down, especially today, when vast sums of money can be dispatched electronically to any part of the world.

If confiscatory policies can produce counterproductive repercussions in a dictatorship, they are even harder to carry out in a democracy. A dictatorship can suddenly swoop down and grab whatever it wants. But a democracy must first have public discussions and debates. Those who are targeted for confiscation can see the handwriting on the wall, and act accordingly.

Among the most valuable assets in any nation are the knowledge, skills and productive experience that economists call "human capital." When successful people with much human capital leave the country, either voluntarily or because of hostile governments or hostile mobs whipped up by demagogues exploiting envy, lasting damage can be done to the economy they leave behind.

 This is from author Thomas Sowell. Read the rest here

Senkaku Islands Dispute: Chinese Government Behind Anti-Japan Protest

It seems that the Chinese government may have a hand in the agitation, mobilization and organization of the nationwide protest against the Japanese over the disputed Senkaku Islands.

From the LA Times,

The last week's anti-Japan demonstrations in China have been a spectacular display of just how easily the ruling Communist Party can harness the power of protest.

In the aftermath of nationwide protests, in which mobs trashed Japanese-owned businesses and set fire to Japanese model cars, critics are questioning the degree to which the Chinese government fanned the flames as part of its dispute with Japan over an island chain both nations claim.

"It is obvious that this was planned," said Ai Weiwei, the dissident artist, who videotaped some of the protests. The 1989 pro-democracy demonstrations in Tiananmen Square were "the last time that the people themselves organized a real protest and then the government sent in tanks to crush them," he said.

Although there has been no evidence that police officers participated in the violence, in many cities they directed the public on where to protest and cleared streets to allow tens of thousands to mass. Many protesters interviewed Tuesday said they had been given the day off by employers to demonstrate. Sept. 18 is a traditional day of protest, marking the anniversary of the Japanese invasion of Manchuria in 1931.

These organized demonstrations, which in the Philippines is known as the “hakot” crowd, as I previously pointed out have merely been camouflages.

In reality these are most likely smokescreens to the worsening internal problems experienced by both countries and to the mounting interventionism being applied by the increasingly desperate political authorities.

The war rhetoric, expressed through nationalism, has been used to divert people’s attention, to suppress political opposition and to justify inflationism, as well as other interventionists measures being imposed on China and Japan's economy. 

QE Forever and Obama’s Re-election

I earlier wrote that the direction of the stock markets significantly influences the outcome of US presidential elections—where the incumbent has the edge when stock markets are on the rise.

Mitt Romney, Republican presidential candidate, lately announced that should he win the presidency this November, according to a Bloomberg article, “he wouldn’t reappoint Bernanke, raising questions about the succession more than a year before Bernanke’s term expires in January 2014.”…

In the knowledge that the Fed can tweak policies to favor the stock markets, and in the prospects that Mr. Bernanke will be out of work from a Romney presidency, then the most likely guiding incentive for Mr. Bernanke will be to work to retain his tenure by promoting the re-election of President Obama through “stock market friendly” policies in September or October.

Earlier, expectations from Bernanke’s repeated signaling of QE 3.0 prompted US stock markets to surge.

The realization of QE forever accelerated this bullish momentum where the S&P 500 has reached a milestone (December 2007) high.

As of Friday’s close, marginally off the highs, the S&P posted a substantial 16% year to date returns 

And since the announcement of the QE ‘Forever’…

…the surge in the US stock markets has now been reflected on Obama’s reelection: nearly 70% chance to win (!!!), that’s according to the prediction markets of Intrade.com 

This is one example of how policies have been used to promote the self-interests of political agents.

Donald Trump: I Loved Inflation, But Don’t Like it For the Country

Nice to hear some candidness from real estate mogul Donald Trump

From CNBC.com

Echoing comments made by Dallas Fed President Richard Fisher that an open-ended quantitative easing, or QE3, would do little to help revive the economy, Trump said only stocks, real estate, and the investors who owned them would benefit from the move. 

“Everything is artificial, there’s nothing that’s real,” the mogul said on CNBC’s “Squawk Box.” 

Stock markets — which recently surged to multi-year peaks — are on the rise less because of fundamentals, and more because of the expected liquidity from the Fed that will filter into asset markets. 

Trump warned that the Fed’s $40 billion a month mortgage-backed security buying program would lead to inflation. He also suggested wealthy asset owners would be the biggest beneficiaries of a potential surge in prices. 

“I should be very happy about [inflation] in theory … but I’m not happy because ultimately it will come home to roost, and it’s going to be very, very unfortunate in the form of [higher] interest rates and some very severe things happening later on with the economy,” said Trump… 

“Inflation is a great friend at a certain level of real estate. I’ve loved inflation, but I don’t like it for the country. But as an individual, inflation has made me very rich,” he said.

This just goes to show how inflationism promotes the politically privileged class or inequality (in terms of social, wealth and political categories) at the expense of society

Quote of the Day: Economic Calculation

Without private ownership in the means of production, there will not be a market in the means of production. Without a market for the means of production, there will not be monetary prices established on the market (which reflect the exchange ratios, or relative trade-offs people are wiling to make). And, without monetary prices, reflecting the relative scarcities of different goods and services, there will be no way for economic decision-makers to engage in rational economic calculation. Rational economic calculation is impossible in a world without private-property rights and the monetary prices that emerge within the competitive market process. By definition, socialism eliminates the basis of the market economy, i.e., private property in the means of production; the system must find some other mechanism to serve the role that economic calculation plays in the market process. Without the ability to engage in rational economic calculation, economic decision-makers will be stumbling and bumbling in the dark. As Mises puts it, without economic calculation, "all production by lengthy and roundabout processes would be so many steps in the dark”

This is from Professor Peter Boettke’s wonderful book review of Professor Ludwig von Mises’ classic Socialism at the Laissez Faire Books

The Welfare State Benefits the Better Off

You might be wondering how I am doing lots of posting this day, well my mom is out with some of her friends.

Anyway, in the Buttonwood column of the Economist, Philip Coggan points out that the welfare state benefits the well off more than the intended. (bold emphasis mine)

All this is well illustrated in Suzanne Mettler's book "The Submerged State", which shows how these hidden subsidies can distort voters' view of the way that government policy works; a 2008 poll found that 57% of Americans denied ever using a government programme. But when shown a list of 21 actual programmes, including student loans and home-mortgage interest deduction, 94% of the deniers turned out to have benefited after all.

Some of these programmes are heavily skewed towards the better-off. According to Ms Mettler, 69% of the benefits of the mortgage interest deduction went to those who earned $100,000 or more; 55% of the benefits from employer-provided retirement benefits* went to those earning $100,000 or more. Only 16% of workers in the lowest income quintile had employer-sponsored (and tax deductible) health insurance compared to 85% of those in the top quintile.

In cash terms, the average subsidy for those earning $200,000 to $500,000 is three times that for those earning $10,000 to $20,000.

And these programmes are large; mortgage-interest tax relief cost $104.5 billion in 2010 while the tax subsidy for retirement benefits was $67 billion. But these programmes are politically very hard to get rid of…

Universal benefits are very expensive. But targeting benefits requires means-testing, an instrusive process that causes hard cases at the margin. And restricting benefits to the poorest may weaken political support for the whole system, along the lines highlighted by Mr Romney; people may believe that the hard-working "us" are subsidising the feckless "them".

This just shows how the current system has been gamed by entrenched power blocs and through complicit political authorities/political class. 

Ever wonder why the welfare state is headed for a collapse?

China’s Manufacturing falls for the 11th month, Shanghai Index Plunges

China remains as the X-factor amidst all the inflationism deployed by global central banks.

China’s manufacturing continues to go downhill.

From Reuters:

Manufacturing in China contracted for the 11th month in a row in September, according to a private sector survey of factory managers that indicated the world's second largest economy remains on track for a seventh quarter of slowing growth.

The HSBC Flash China manufacturing purchasing managers' index (PMI) showed activity stabilized in September after hitting a nine-month low in August, with the headline reading ticking up to 47.8 from 47.6 last month.

But while the economy may not have worsened, there were few signs of a fast turnaround. Rather, the PMI, which provides the first glimpse of September's conditions for Chinese industry, pointed to a month in which a slide was halted but not reversed.

September's reading extends the longest period that the PMI has been below 50 - the value that separates contraction from expansion - since HSBC began compiling the survey in 2004.

There was a broad steadying across the sub-indexes in the survey, released on Thursday, with the exception of output, which dipped to its lowest level in 10 months.

"China's manufacturing growth is still slowing, but the pace of slowdown is stabilizing. Manufacturing activities remain lackluster, thanks to weak new business flows and a longer than expected destocking process," Qu Hongbin, chief economist for China at HSBC, said in a statement accompanying the survey.

"This is adding more pressure to the labor market and has prompted Beijing to step up easing over the past weeks. The recent easing measures should be working to lead to a modest improvement from Q4 onwards."

Not enough steroids? Again from the same article:

China unveiled a series of measures last week to help stabilize export growth, including faster payment of export tax rebates and boosting loans to exporters.

That was on top of a series of approvals for infrastructure projects worth more than $150 billion, two earlier cuts to interest rates, the easing of bank reserve requirements that freed about 1.2 trillion yuan ($190 billion) for lending and a steady series of liquidity injections into money markets.

Still, purchasing managers in the survey had little cause for premature cheer. A sub-index that measures output fell to 47.0, its lowest level since November 2011.

After spending several months bumping just beneath the crucial 50 mark, the overall PMI index is now at a level rarely seen since the 2008-2009 global financial crisis.

Asian markets have not seen this as anything to cheer about

China’s equity markets continue to hemorrhage with the Shanghai Index sharply down today by 2.08%  (table from Bloomberg)

Today’s steep decline means that the recent lows of around 2040+s will be tested (chart from stockcharts.com)

These developments brings some questions to mind:

Will Chinese political authorities up the ante of policy bailouts through fiscal and monetary channels or will they allow the markets to clear? My bet is on the former.

Will developments in China weigh on global markets or will inflationism eventually diffuse to China.  This is something to be yet determined.

Bastiat on Mercantalism: The Candle Maker's Petition

Many intellectually incapacitated or practitioners of political religion frequently use pretentious economic arguments on what they perceive as threat of competition posed by anything foreign on the local economy: be it immigrants, trade, investments, capital flows, education, jobs and etc…

Xenophobia thus calls for the government to institute protectionist measures (mercantilism) to supposedly achieve their brand of utopia. Never mind if history keeps proving that closed economies leads to a path of poverty.

In reality, these xenophobes apply the fallacy of reductio ad absurdum when they oversimplify what truly is a complex world, and forget or deliberately ignore or discount the large influences of technology, globalization, inflationism (boom bust cycles) that reduces capital thereby jobs, as well as other forms of interventionism via regulations and taxes that all affect people’s incentives and time preferences on allocation of capital.

The great Frédéric Bastiat exposes on the absurdity and ridiculosity of the mercantilist argument through the classic The Candle Maker’s Petition (From Mises.org) [bold emphasis mine]

Petition of the Manufacturers of Candles, Waxlights, Lamps, Candlelights, Street Lamps, Snuffers, Extinguishers, and the Producers of Oil, Tallow, Resin, Alcohol, and, Generally, of Everything Connected with Lighting

To the Members of the Chamber of Deputies.

Gentlemen:

You are on the right road. You reject abstract theories, and have little consideration for cheapness and plenty. Your chief care is the interest of the producer. You desire to protect him from foreign competition and reserve the national market for national industry.

We are about to offer you an admirable opportunity of applying your — what shall we call it? — your theory? No; nothing is more deceptive than theory — your doctrine? your system? your principle? But you dislike doctrines, you abhor systems, and as for principles you deny that there are any in social economy. We shall say, then, your practice — your practice without theory and without principle.

We are suffering from the intolerable competition of a foreign rival, placed, it would seem, in a condition so far superior to ours for the production of light that he absolutely inundates our national market with it at a price fabulously reduced. The moment he shows himself, our trade leaves us — all consumers apply to him; and a branch of native industry, having countless ramifications, is all at once rendered completely stagnant. This rival, who is none other than the sun, wages war mercilessly against us, and we suspect that he has been raised up by perfidious Albion (good policy nowadays), inasmuch as he displays toward that haughty island a circumspection with which he dispenses in our case.

What we pray for is that it may please you to pass a law ordering the shutting up of all windows, skylights, dormer-windows, outside and inside shutters, curtains, blinds, bull's-eyes; in a word, of all openings, holes, chinks, clefts, and fissures, by or through which the light of the sun has been in use to enter houses, to the prejudice of the meritorious manufactures with which we flatter ourselves that we have accommodated our country — a country that, in gratitude, ought not to abandon us now to a strife so unequal.

We trust, gentlemen, that you will not regard this our request as a satire, or refuse it without at least first hearing the reasons which we have to urge in its support.

And, first, if you shut up as much as possible all access to natural light, and create a demand for artificial light, which of our French manufactures will not be encouraged by it?

If more tallow is consumed, then there must be more oxen and sheep; and, consequently, we shall behold the multiplication of meadows, meat, wool, hides, and above all, manure, which is the basis and foundation of all agricultural wealth.

If more oil is consumed, then we shall have an extended cultivation of the poppy, of the olive, and of rape. These rich and soil-exhausting plants will come at the right time to enable us to avail ourselves of the increased fertility that the rearing of additional cattle will impart to our lands.

Our heaths will be covered with resinous trees. Numerous swarms of bees will, on the mountains, gather perfumed treasures, now wasting their fragrance on the desert air, like the flowers from which they emanate. Thus, there is no branch of agriculture that shall not greatly develop.

The same remark applies to navigation. Thousands of vessels will proceed to the whale fishery; and in a short time, we shall possess a navy capable of maintaining the honor of France, and gratifying the patriotic aspirations of your petitioners, the undersigned candlemakers and others.

But what shall we say of the manufacture of articles de Paris? Henceforth, you will behold gildings, bronzes, crystals in candlesticks, in lamps, in lustres, in candelabra, shining forth in spacious showrooms, compared with which, those of the present day can be regarded but as mere shops.

No poor resinier from his heights on the seacoast, no coal miner from the depth of his sable gallery, but will rejoice in higher wages and increased prosperity.

Only have the goodness to reflect, gentlemen, and you will be convinced that there is perhaps no Frenchman, from the wealthy coalmaster to the humblest vendor of lucifer matches, whose lot will not be ameliorated by the success of this our petition.

We foresee your objections, gentlemen, but we know that you can oppose to us none but such as you have picked up from the effete works of the partisans of Free Trade. We defy you to utter a single word against us which will not instantly rebound against yourselves and your entire policy.

You will tell us that, if we gain by the protection we seek, the country will lose by it, because the consumer must bear the loss.

We answer: 

You have ceased to have any right to invoke the interest of the consumer; for, whenever his interest is found opposed to that of the producer, you sacrifice the former. You have done so for the purpose of encouraging labor and increasing employment. For the same reason you should do so again.

You have yourselves obviated this objection. When you are told that the consumer is interested in the free importation of iron, coal, corn, textile fabrics — yes, you reply, but the producer is interested in their exclusion. Well, be it so; if consumers are interested in the free admission of natural light, the producers of artificial light are equally interested in its prohibition.

But, again, you may say that the producer and consumer are identical. If the manufacturer gains by protection, he will make the agriculturist also a gainer; and if agriculture prospers, it will open a vent to manufactures.

Very well! If you confer upon us the monopoly of furnishing light during the day, first of all we shall purchase quantities of tallow, coals, oils, resinous substances, wax, alcohol — besides silver, iron, bronze, crystal — to carry on our manufactures; and then we, and those who furnish us with such commodities, having become rich will consume a great deal and impart prosperity to all the other branches of our national industry.

If you urge that the light of the sun is a gratuitous gift of nature, and that to reject such gifts is to reject wealth itself under pretense of encouraging the means of acquiring it, we would caution you against giving a death-blow to your own policy. 

Remember that hitherto you have always repelled foreign products, because they approximate more nearly than home products the character of gratuitous gifts. To comply with the exactions of other monopolists, you have only half a motive; and to repulse us simply because we stand on a stronger vantage-ground than others would be to adopt the equation + × + = − ; in other words, it would be to heap absurdity upon absurdity. 

Nature and human labor cooperate in various proportions (depending on countries and climates) in the production of commodities. The part nature executes is always gratuitous; it is the part executed by human labor that constitutes value and is paid for. 

If a Lisbon orange sells for half the price of a Paris orange, it is because natural, and consequently gratuitous, heat does for one what artificial, and therefore expensive, heat must do for the other.

When an orange comes to us from Portugal, we may conclude that it is furnished in part gratuitously, in part for an onerous consideration; in other words, it comes to us at half price as compared with those of Paris.

Now, it is precisely this semigratuity (pardon the word) that we contend should be excluded. You say, How can national labor sustain competition with foreign labor, when the former has all the work to do, and the latter only does one-half, the sun supplying the remainder?

But if this half, being gratuitous, determines you to exclude competition, how should the whole, being gratuitous, induce you to admit competition? If you were consistent, you would, while excluding as hurtful to native industry what is half gratuitous, exclude a fortiori and with double zeal that which is altogether gratuitous.

Once more, when products such as coal, iron, corn, or textile fabrics are sent us from abroad, and we can acquire them with less labor than if we made them ourselves, the difference is a free gift conferred upon us. The gift is more or less considerable in proportion as the difference is more or less great.

It amounts to a quarter, a half, or three-quarters of the value of the product, when the foreigner only asks us for three-fourths, a half, or a quarter of the price we should otherwise pay. It is as perfect and complete as it can be when the donor (like the sun in furnishing us with light) asks us for nothing.

The question, and we ask it formally, is this: Do you desire for our country the benefit of gratuitous consumption or the pretended advantages of onerous production? Make your choice, but be logical; for as long as you exclude, as you do, coal, iron, corn, foreign fabrics, in proportion as their price approximates to zero, what inconsistency it would be to admit the light of the sun, the price of which is already at zero during the entire day!

At the end of the day, in the world of politics, logic and the basic law of demand and supply gets swallowed by the black hole of preposterous political correctness.

As Julius Caesar once said,

Men in general are quick to believe that which they wish to be true

Quote of the Day: China’s Territorial Disputes: Distractions from Homegrown Problems

Well I have been saying that ‘the brouhaha over Asia’s territorial disputes have really been smokescreens.  

Dr. Ed Yardeni sees the same:

The Chinese government is picking fights with some of its neighbors over several islands in the South China Sea. These issues have been simmering for a very long time. Why are they coming to a boil now? One possibility is that the Chinese government is stirring up nationalist sentiments to distract the locals from some serious homegrown problems, and doesn't believe that the US will side with Japan and other Asian nations disputing China's territorial claims.

China’s Communist leadership change isn’t going smoothly at the same time that the economy is slowing significantly. For example, electricity output during the three months through August rose only 1.4% y/y. Crude oil demand has flattened out around 9.5mbd over the past six months through August. Fred Smith, the head of FedEx, warned on Tuesday that China watchers may be “completely underestimating” that the export slowdown is more than offsetting attempts by the government to boost growth.

The recent widespread protests in China against Japan’s claims to some of the disputed islands in the South China Sea are already harming the economy. Japanese companies are temporarily closing their manufacturing facilities and retail outlets in China. Trade between China and Japan totaled $323 billion (saar) during August, with China’s exports to Japan at $147 billion and imports from Japan at $176 billion.

China’s Shanghai-Shenzhen 300 stock price index rallied late last week, but now seems to be resuming the downward trend of the past year. The price of copper rebounded smartly last week on news that China will spend to build subways and roads, but could weaken if tensions between China and Japan don’t abate soon. Japan’s Nikkei is also vulnerable to the dispute between the two countries.

The sad part is that the smoke and mirror’s game only worsens the problems

Bank of Japan Joins ECB-FED: Increases Quantitative Easing by 10 Trillion Yen ($697 Billion)

Having just pointed out how inflationism by both Bank of Japan and China’s PBOC has functioned as a principal unseen causal factor behind Senkaku Islands dispute, here comes another round of easing from Bank of Japan (BoJ)

From Bloomberg,

The Bank of Japan expanded its easing program in an effort to prevent a rising yen from undermining an economic recovery, following measures from the U.S. Federal Reserve last week to stimulate growth.

The central bank increased its asset-purchase fund to 55 trillion yen ($697 billion) from 45 trillion yen and its lending facility was kept at 25 trillion yen, according to a statement released in Tokyotoday. Five of 21 analysts surveyed by Bloomberg News predicted easing while 11 forecast the action by October.

Here is what I recently wrote,

Yet the huge amount of coming infusions from the FED-ECB will likely be complimented by the Bank of England, and Bank of Japan, as well as the Swiss National Bank whom has been the quasi-pioneer implementer of the unlimited option via the Swiss-Franc Euro price cap

This has not been about the rising yen, this has been about political desperation to survive the current crumbling debt based political order.