Bastiat on Why Protectionism Fails: Money is Not Wealth

One of the fundamental flaws of protectionism have been to mistake money, which is a medium of exchange, for wealth. Thus, the obsession by the mainstream for inflationism-protectionism as popular political solutions to economic predicaments.

The great classical liberal Frédéric Bastiat explodes this myth more than a century back. (From Mises Institute/The Bastiat Collection) [bold emphasis mine]

Do you desire to be in a situation to decide between liberty and protection? Do you desire to appreciate the impact of an economic phenomenon? Inquire into its effects upon the abundance or scarcity of commodities, and not upon the rise or fall of prices. Distrust nominal prices; they will only land you in an inextricable labyrinth.

Mr. Matthieu de Dombasle, after having shown that protection raises prices, adds:

"The enhancement of prices increases the expense of living, and consequently the price of labor, and each man receives, in the enhanced price of his products, compensation for the higher prices he has been obliged to pay for the things he has occasion to buy. Thus, if everyone pays more as a consumer, everyone receives more as a producer."

It is evident that we could reverse this argument, and say:

"If everyone receives more as a producer, everyone pays more as a consumer."

Now, what does this prove? Nothing but this, that protection displaces wealth uselessly and unjustly. In so far, it simply perpetrates spoliation.

Again, to conclude that this vast apparatus leads to simple compensations, we must stick to the "consequently" of Mr. de Dombasle, and make sure that the price of labor will not fail to rise with the price of the protected products. This is a question of fact that I remit to Mr. Moreau de Jonnes, that he may take the trouble to find out whether the rate of wages advances along with the price of shares in the coal mines of Anzin. For my own part, I do not believe that it does; because, in my opinion, the price of labor, like the price of everything else, is governed by the relation of supply to demand. Now, I am convinced that restriction diminishes the supply of coal, and consequently enhances its price; but I do not see so clearly that it increases the demand for labor, so as to enhance the rate of wages; and that this effect should be produced is all the less likely, because the quantity of labor demanded depends on the available capital. Now, protection may indeed displace capital, and cause its transference from one employment to another, but it can never increase it by a single farthing.

But this question, which is one of the greatest interest and importance, will be examined in another place. I return to the subject of nominal price; and I maintain that it is not one of those absurdities that can be rendered specious by such reasonings as those of Mr. de Dombasle.

Put the case of a nation that is isolated, and possesses a given amount of specie, and that chooses to amuse itself by burning each year one-half of all the commodities that it possesses. I undertake to prove that, according to the theory of Mr. de Dombasle, it will not be less rich.

In fact, in consequence of the fire, all things will be doubled in price, and the inventories of property, made before and after the destruction, will show exactly the same nominal value. But then what will the country in question have lost? If John buys his cloth dearer, he also sells his corn at a higher price; and if Peter loses on his purchase of corn, he retrieves his losses by the sale of his cloth. "Each recovers, in the extra price of his products, the extra expense of living he has been put to; and if everybody pays as a consumer, everybody receives a corresponding amount as a producer."

All this is a jingling quibble, and not science. The truth, in plain terms, is this: that men consume cloth and corn by fire or by using them, and that the effect is the same as regards money, but not as regards wealth, for it is precisely in the use of commodities that wealth or material prosperity consists.

In the same way, restriction, while diminishing the abundance of things, may raise their price to such an extent that each party shall be, pecuniarily speaking, as rich as before. But to set down in an inventory three measures of corn at 20s., or four measures at 15s., because the result is still 60s. — would this, I ask, come to the same thing with reference to the satisfaction of men's wants?

It is to this, the consumer's point of view, that I shall never cease to recall the protectionists, for this is the end and design of all our efforts, and the solution of all problems. I shall never cease to say to them: Is it, or is it not, true that restriction by impeding exchanges, by limiting the division of labor, by forcing labor to connect itself with difficulties of climate and situation, diminishes ultimately the quantity of commodities produced by a determinate amount of efforts? And what does this signify, it will be said, if the smaller quantity produced under the regime of protection has the same nominal value as that produced under the regime of liberty? The answer is obvious. Man does not live upon nominal values, but upon real products, and the more products there are, whatever be their price, the richer he is.

In writing what precedes, I never expected to meet with an anti-economist who was enough of a logician to admit, in so many words, that the wealth of nations depends on the value of things, apart from the consideration of their abundance. But here is what I find in the work of Mr. de Saint-Chamans (p. 210):

If fifteen million worth of commodities, sold to foreigners, are taken from the total production, estimated at fifty millions, the thirty-five million worth of commodities remaining, not being sufficient to meet the ordinary demand, will increase in price, and rise to the value of fifty millions. In that case the revenue of the country will represent a value of fifteen million additional.… There would then be an increase of the wealth of the country to the extent of fifteen million, exactly the amount of specie imported.

This is a pleasant view of the matter! If a nation produces in one year, from its agriculture and commerce, a value of 50 million it has only to sell a quarter of it to the foreigner to be a quarter richer! Then if it sells the half, it will be one-half richer! And if it should sell the whole, to its last tuft of wool and its last grain of wheat, it would bring up its revenue to 100 million. What a way of getting rich, by producing infinite dearness by absolute scarcity!

Again, would you judge of the two doctrines? Submit them to the test of exaggeration.

According to the doctrine of Mr. de Saint-Chamans, the French would be quite as rich — that is to say, quite as well supplied with all things — had they only a thousandth part of their annual products, because they would be worth a thousand times more.

According to our doctrine, the French would be infinitely rich if their annual products were infinitely abundant, and consequently, without any value at all.

Think of it, if you alone have been stranded in a remote and inaccessible island inhabited by primitive tribes, what will your bag filled with $10 million buy (if they should accept your greenbacks at all)?

Currency Manipulation and the Politics of Neo-Mercantilism

At the local stock market forum, the Stock Market Pilipinas I had been asked to comment about the currency manipulation charges hurled against China.

For starters, as per Wikipedia’s definition of currency intervention, otherwise known as exchange rate intervention or foreign exchange market intervention, is the purchase or the sale of the currency on the exchange market by the fiscal authority or the monetary authority, in order to influence the value of the domestic currency. (bold emphasis mine)

In brief, the employment of currency/foreign exchange/exchange rate interventions implies that both monetary and fiscal authorities of ALL nations are currency manipulators.

(chart from Bloomberg)

As evidence, considering that international reserves assets (excluding gold) are at record highs mainly through the expansion of central bank balance sheets (via unsterilized interventions) these means that all central banks have been manipulating their respective currencies.

The growth of central bank balance sheets includes Asia and the Philippines. (Bank of International Settlements)

Such concerted balance sheet expansions has also been reflected on the state of money supply growth. (chart from Mao Money, Mao Problems)

Fund manager David R. Kotok of Cumberland Advisors has a good narrative of why the growing concerns over dollar debasement are valid.

Mr. Kotok writes, (bold emphasis mine)

The dollar maintains its reserve currency status because it is the least worst of the major four currencies – the US dollar, the British pound, the Japanese yen, and the euro.  All four of these currencies are now suffering the effects of a stimulative, expansive, and QE-oriented monetary policy.

We must now add the Swiss franc as a major currency, since Switzerland and its central bank are embarked on a policy course of fixing the exchange rate between the franc and the euro at 1.2 to 1.  Hence the Swiss National Bank becomes an extension of the European Central Bank, and therefore its monetary policy is necessarily linked to that of the eurozone… 

When you add up these currencies and the others that are linked to them, you conclude that about 80% of the world’s capital markets are tied to one of them.  All of the major four are in QE of one sort or another.  All four are maintaining a shorter-term interest rate near zero, which explains the reduction of volatility in the shorter-term rate structure.  If all currencies yield about the same and are likely to continue doing so for a while, it becomes hard to distinguish a relative value among them; hence, volatility falls.

The other currencies of the world may have value-adding characteristics.  We see that in places like Canada, Sweden, and New Zealand.  But the capital-market size of those currencies, or even of a basket of them, is not sufficient to replace the dollar as the major reserve currency.  Thus the dollar wins as the least worst of the big guys.

Fear of dollar debasement is, however, well-founded.  The United States continues to run federal budget deficits at high percentages of GDP.  The US central bank has a policy of QE and has committed itself to an extension of the period during which it will preserve this expansive policy.  That timeframe is now estimated to be at least three years.  The central bank has specifically said it wants more inflation.  The real interest rates in US-dollar-denominated Treasury debt are negative.  This is a recipe for a weaker dollar.  The only reason that the dollar is not much weaker is that the other major central banks are engaged in similar policies.

Given the high concentration of exposure by the world’s banking system on these four major international reserves currencies (US dollar, British pound, Japanese Yen, and the euro), this means that policies of ancillary central banks has to adjust in accordance to the policies of these major international reserve currencies.

In short, policies by the US mostly dominate on the policies of global central banks. Alternatively this suggest that the US has been the world’s biggest 'currency manipulator'.

While it is also true that some peripheral currencies has differentiating factors as pointed above, the point is that these currencies don’t have enough market depth to replace the incumbent international reserve currencies.

As caveat, such premises remain conditional on the absence of a currency crisis. Abrupt changes to the current setting should be expected if or once a currency crisis should occur.

Yet the fundamental issue is to understand the role of role of central banks. As Mises Institute founder Llewellyn Rockwell Jr. recently wrote, (lewRockwell.com):

First, they serve as lenders of last resort, which in practice means bailouts for the big financial firms. Second, they coordinate the inflation of the money supply by establishing a uniform rate at which the banks inflate, thereby making the fractional-reserve banking system less unstable and more consistently profitable than it would be without a central bank (which, by the way, is why the banks themselves always clamor for a central bank). Finally, they allow governments, via inflation, to finance their operations far more cheaply and surreptitiously than they otherwise could.

The bottom line is that currency manipulation, through inflationism, is the essence of the paper money legal tender based central banking.

So what’s the hullabaloo over China as "currency manipulator"?

Well, “currency manipulation” has been no less than a popular sloganeering of “us against them” politics meant to attain political goals.

Such political goal has been subtly designed for the protection of the privileged business interests allied with the political class through trade restrictions or through the transformation “of the economy from roughly laissez-faire to centralized, coordinated statism” as the great dean of Austrian school of economics Murray N. Rothbard pointed out.

This is called neo-mercantilism.

In the 80s, rising Japan had been painted as a threat to American economic standings, such that hate and envy based politics echoed the call for neo-mercantilist protectionism, again from Professor Rothbard,

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.

Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.

With Japan suffering from a humongous bubble bust that has led to a lost decade, today such political bogeyman has shifted to China.

The mainstream (mostly representing captured interests) has used all sorts of highly flawed and deceptive technically based assumptions and theories as cheap labor theory, cheap currencies, global savings glut, global imbalances and others to divert or camouflage the public’s attention from the unintended consequences from serial interventionist domestic policies and bubble monetary policies by riling up or conjuring emotive nationalist or xenophobic sentiment.

Gullible public opinion are easily swayed due to either the dearth of economic understanding or because they are blinded from the obsession to politics.

As the great Ludwig von Mises pointed out (OMNIPOTENT GOVERNMENT p.183)

People favor discrimination and privileges because they do not realize that they themselves are consumers and as such must foot the bill. In the case of protectionism, for example, they believe that only the foreigners against whom the import duties discriminate are hurt. It is true the foreigners are hurt, but not they alone: the consumers who must pay higher prices suffer with them.

And part of that reality has not entirely been about achieving some dubious trading objectives but to expand credit, again for political goals.

Again the Professor von Mises, (Human Action)

While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.

The politics of neomercantilism exploits economic patsies and the politically blind in the name of nationalism for the benefit of political class, vested interest groups and or their cronies at the expense of society.

How Actions of the UN Security Council Increases the Risks of World War III

The UN Security Council has been a stooge for the war mongering politicos of Israel, neoconservatives and the military industrial complex which has been increasing the risks of World War III

Writes historian Eric Margolis at the Lew Rockwell.com 

Ahmadinejad has become a vital enabler of Netanyahu’s scare tactics. In reality, both are playing to domestic audiences. Netanyahu is fighting for a third term as Israel suffers from major economic problems. However, his nuclear alarms over Iran have succeeded in sidelining demands for a viable Palestinian state. No one at the UN paid any attention to Palestinian’s plaintive chirps.

There was no mention that Israel’s threats to attack Iran, and its demands the US blitz Iran, clearly violate the UN Charter and international law. Iran’s claims the West and Israel were waging economic and computer war against it and murdering its scientists were shrugged off.

Few seemed to take notice of Russia’s increasingly forceful comments that a US/Israeli attack against Iran or Syria could produce “consequences.” For those who enjoy worrying about a possible World War III,” this could be a good way to begin.

What was again painfully clear is that the UN Security Council is an unfair outdated relic of World War II that needs be expanded and made more democratic – and moved to a neutral nation. The victors of World War II they make the real decisions.

Quote of the Day: Prices and the Myth of Energy Budgets

There is no "energy budget" any more than there is a lumber budget, coffee budget, iron budget or oatmeal budget. There are supplies of these products, which can increase or decrease depending upon prices, but to call these supplies "budgets," suggests A. a fixed amount and B. something that needs to be managed at some national level.

Anyone who understands free markets, would not for a minute be concerned with the amount of energy that is used by various consumer products. Prices will simply dictate limitations of use of products.. For example, gold is a perfectly functional metal that could be used in the construction of bridges. It is not because gold is valued more as jewelry and as a safe non-inflationary alternate medium of exchange. This is reflected in its price. There is no need for any thinking about a "gold budget." The price of gold provides the knowledge to bridge builders that gold should not be used in the building of bridges.

In the same way, it is economic ignorance to be thinking about an "energy budget." Prices will signal to us how energy sensitive our products need to be. That plenty of people use  full-sized HD television sets and X-Box Consoles + a TV, suggests that the energy used for these products is not prohibitive for most…concern about a "world energy budget" belongs up there with the concern for the "world jock strap" budget. It's a complete central planning notion that results from the failure to understand how prices signal uses and production.

This is from Robert Wenzel at the Economic Policy Journal. 

The point is to understand the essence of market price signals than to fall for political demagoguery.

How Inflationism Brings About Quality or Value Deflation

Retired professor Michael S. Rozeff at the Lew Rockwell blog explains how monetary inflationism results to the deterioration or deflation in the quality of food products.

Here is Professor Rozeff:

Ever since inflation took off in the 1960s, the food has gone downhill. That's not the only cause of it, but it's one cause. The food companies have tried to hold prices down by cheapening the food and cutting down the quantities. They've eliminated many good ingredients and substituted drek. There are foods today that I wouldn't feed to a dog.

Many bacon makers have watered the bacon. Water is a cheap ingredient! When you fry it, the water comes out and so does some white guck. I made bacon from the age of 10, and I can tell you for sure that this stuff isn't cutting it. The meat itself? Forget it! They've bred the fat out of pork, beef, and now lamb and with it went the flavor, the juiciness, and the tenderness. If you watch the food shows on TV, the cooks are constantly adding everything under the sun to the meats in an effort to create something that tastes halfway decent.

A can that says chunk tuna fish actually contains flakes that used to be what cat food was. Many common soups are salt baskets.

If a package says ORIGINAL INGREDIENTS, you simply cannot believe it! It will usually have partially hydrogenated oil and corn syrup and high fructose corn syrup, stuff that didn't exist when many of these brands first began or else wasn't used. They used to use sugar. A Sara Lee cake when first introduced was almost as good as homemade because it had the butter and makings that people used in their kitchens. It still has some butter down there after soybean oil, although maybe not since it says the butter is (cream, salt) . It has "Sugar, enriched bleached flour (wheat flour, niacin, iron, thiamin mononitrate, riboflavin, folic acid), water, eggs, soybean oil, butter (cream, salt), skim milk, corn syrup." That's before the 2% or less of the chemicals: "glycerin, leavening (sodium aluminum phosphate, baking soda, monocalcium phosphate), corn starch, natural and artificial flavors, salt, mono- and diglycerides, potassium sorbate (preservative), gums (xanthan, gellan), colored with (turmeric and annatto extract), wheat starch, soy lecithin, soy flour." Sara Lee is one of the better cases. Your typical product is usually even worse.

I find this anecdote highly relevant here in the Philippines. 

When I recently interviewed my neighborhood carinderias or eateries (small scale informal food retail businesses) on how they usually respond to rising commodity prices, their reply has mostly been to reduce the content or quantity or quality of their servings, first, because of the fear that raising prices would diminish the capacity of their consumers to spend or would lead to "poor sales".

Simon Black of the Sovereign Man labels such value deflation as shadow inflation,

Value deflation is not taught at university economics courses; you’ll never hear any of these Nobel economists or central bankers mention it. Stiglitz, Krugman, and Bernanke all happily tow the line that ‘there is no inflation’ because the price of iPads keeps going down.

These are the people who have the power to influence policy and conjure trillions of dollars out of thin air… and it’s amazing how easily they can hide the truth from people through this shadow inflation.

Curiously, this is what passes as a free society today. It is a truly, truly bizarre system.’

It’s unfortunate to see how these small scale entrepreneurs, fighting for survival, gets the kernel of the blame from supposed unethical practices, which has been used to justify more regulatory interventions (promoted by mainstream media), when they have merely been responding to the incentives brought about by immoral policies.

This shows how policies of inflationism-interventionism destroys the moral fabric of a society.

Quote of the Day: Better Regulation Means Regulation by Markets Forces

No stock market commentary for this week

We do need better regulation. But what does that mean? Once we understand the nature of markets and bureaucracies, there’s only one reasonable conclusion: Better regulation means regulation by market forces. Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy. Anything government does to weaken those forces simultaneously weakens the otherwise unforgiving discipline imposed on business firms (and their counterparties)—to the detriment of workers and consumers. Public well-being suffers.

Admittedly, this is a hard sell. Explaining how markets work when they are free of the government’s easy money, favoritism, implicit guarantees, and other perverse incentives takes time and the listener’s concentration. Denouncing markets, railing against greed (which of course never taints politicians), and calling for more government power makes for good sound bites. In the Internet and remote-controlled-cable-TV era, patience is a scarce commodity. So advocates of liberty have barriers to overcome.

Of course government interference with free exchange (misleadingly called “regulation”) is portrayed as necessary for the public good. A key to understanding why it is not is grasping the inability of bureaucrats to know what they would  need to know to do the job they promise to do. Markets–particularly financial markets–are too complex for government officials (or anyone else) to manage. No matter how much power they are given, they will not be able to see the future, spot “excessive risk,” or anticipate how things might go wrong.  But they can be counted on unwittingly to interfere with innovation that would yield public benefits. Any move toward central direction courts disaster. Decentralization and the discipline of competition are our only hope for economic security.

 This is from Sheldon Richman at the Freeman on how political regulation leads to the “money power” (cronyism)

Lessons from Bernanke’s Thank You Notes

From the Politico (hat tip Bob Wenzel)

If you have the Federal Reserve’s back, there’s a good chance Ben Bernanke will notice.

He may even send you a thank you note.

In July, the Fed chairman sent letters of gratitude to five Democratic members of Congress after they delivered speeches on the House floor urging fellow lawmakers to reject the “Audit the Fed” bill authored by retiring Texas Republican Ron Paul, the central bank’s chief antagonist.

Their efforts failed to defeat the bill, but they were not in vain, at least in Bernanke’s eyes.

“While the outcome of the vote was not in doubt, your willingness to stand up for the independence of the Federal Reserve is greatly appreciated,” Bernanke wrote in the letters, which were obtained by POLITICO through a Freedom of Information Act request.

He continued, “Independence in monetary policy operations is now the norm for central banks around the world — and it would be a grave mistake were Congress to reverse the protection it provided to the Federal Reserve more than 30 years ago.”

The letters were sent to Reps. Barney Frank, Elijah Cummings, Melvin Watt, Carolyn Maloney and Steny Hoyer.

“It's not unusual for the chairman to write thank you notes to members of Congress,” said Fed spokesman David Skidmore.

Dated July 26, the notes were written the day after the House voted 327-98 to pass Paul’s bill, which would authorize the Government Accountability Office to audit how the central bank implements monetary policy.

While the Fed defends Mr. Bernanke’s thank you notes as having been “not usual”, meaning that such action may have been a tradition, bureaucratic traditionalism does not translate into moralistic actions.

The above simply exhibits how political agents operate behind the scenes to attain self-interested goals. In this case,  Bernanke tries to influence the outcome of votes of the US congress (which he failed). This also implies that such relationship works the other way around for other political du jour issues.

One can construe “conflict of interests” and “agency problems” rather than supposed “independence” from such interactions, as well as, reciprocity and horse trading as part of concession seeking approach employed by political agents from different branches of government.

This also further demystifies the highly glamorized “virtuosity” of governments (myth of good government) as the above account puts into perspective similar human frailties of those in command of the use guns and badge institutions over the populace…except of course the difference is that they can wield political power over society to feed on their caprices.

Remembering Ludwig von Mises on his 131st Birthday

My regular followers know how much my perspectives have largely been influenced by the school of economic, political and philosophical ideas and principles inspired by the great Professor Ludwig Heinrich Edler von Mises and his colleagues and disciples at the Ludwig von Mises Institute where the former is the acknowledged leader.

Although largely unappreciated by the politically brainwashed mainstream. much of Professor von Mises’s views, theories, predictions and warnings are being validated today. Aided by the information age, more and more people are getting to recognize this. 

From Google Trend

Today marks Professor von Mises’ 131st birthday (September 29, 1881- October 10, 1973). 

Professor von Mises set as a personal mission to educate the public from the evils of Socialism.

His life long motto was tu ne cede malis, sed contra audentior ito which comes from Virgil's Aeneid, Book VI; the motto means "do not give in to evil but proceed ever more boldly against it."

Here is the great Mises on the struggle against Socialism

Society lives and acts only in individuals; it is nothing more than a certain attitude on their part. Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

How Argentina’s Class Warfare Policies Promotes Poverty

Argentina’s politics serves as an example of how the minority (political class) exploits the majority (voting poor) to perpetuate themselves into power.

In the attempt to redistribute wealth, Argentina’s government has engaged in the tightening of currency controls that has only exacerbated capital flight.

First the unintended consequences

From the Telegraph, (bold emphasis mine)

The new regulations required anyone wanting to change Argentine pesos into another currency to submit an online request for permission to AFIP, the Argentine equivalent of HM Revenue & Customs. To submit the request, however, you first needed to get a PIN number from AFIP, either online or in person. Having finally obtained your number, submitted your online request and printed out your permission slip, you could then present it at the bank or official cambio and buy your dollars. Well, that was the theory.

In practice, the result was chaos. The online system quickly folded under the onslaught of applications, while a personal visit to an AFIP district office meant bringing a camp bed and picnic hamper.

The reason for this tidal wave of requests, and indeed for the introduction of the restrictions in the first place, was the ferocious rate of capital flight from the Argentine economy that had started in 2010, when many could already see the writing on the wall. Which brings us to that thumping electoral victory in October.

Argentina’s politicians implemented class warfare policies to gain hold of political power.

Again from the same article,

When Mrs Kirchner first came to power in 2007 she inherited the social reform programme of her predecessor (also her husband), Nestor Kirchner. Hefty tax demands on the country’s wealth base were liberally redistributed to the disadvantaged, but with little investment in longer-term projects that would deal with the causes of poverty.

From the point of view of the middle-classes, the Kirchners were using taxpayers’ money to buy themselves a constituency of dependents that would keep them in power, a tactic vindicated by that 54 per cent majority last October. Anyone with moveable assets started shifting them out of her reach by transferring them abroad or converting them into dollars.

The nasty economic effects from despotic redistributive policies and a culture of dependency: capital flight, inflation and economic stagnation as investors scamper for safety elsewhere.

In 2010 the flight of capital started gathering speed, totalling $11 billion by the end of the year. In 2011, as the election approached and signs of a probable Kirchner win emerged, this figure more than doubled to $23 billion. Hence the great slamming of the fire exits as soon as her victory was in the bag.

The months since then have seen an almost weekly tightening of restrictions to close any remaining loopholes, to the extent that it has now become almost impossible to buy foreign currency anywhere apart from the black market.

Which is, of course, exactly what the government hoped for, and in that respect at least the policy has been a success. In the first six months of this year dollar flight has been reduced to $3.5 billion. But damming the flood has come at a huge cost to the economy, especially since the currency restrictions were coupled with another set of regulations that effectively imposed a near-total ban on any imported goods. 

Apart from the minor inconveniences this has caused to shoppers, such as no longer being able to buy breakfast cereal not composed of shredded carpet, the measure has also backfired on Argentine industry itself because so many of the products manufactured in Argentina still need component parts and raw materials from elsewhere. Hence, for example, the 1,600 workers laid-off from the Renault car plant in Cordoba last June, while the parts they needed to finish the job languished in a container on a Buenos Aires quayside. But you do not need to be an economist to imagine the consequences when a G20 nation suddenly adopts North Korean-style siege-economy tactics, which does make you wonder about the quality of advice the government is getting.

Eventually there will be no one else to squeeze but the gullible and manipulated poor, and signs are becoming evident…

It’s not that significant, but set alongside the downwardly spiralling prospects and the upwardly spiralling inflation (25 per cent), the frantic hunt for hard currency and the bland ministerial assurances that there is nothing to worry about, it is just another little ripple of déjà vu permeating life in Argentina.

This reminds me of all the free stuffs given by local governments in the Philippines which most people think are without costs.

Nevertheless Argentina’s politics serves as a grim reminder of the evils of democracy.

As the great libertarian Henry Louis H.L. Mencken once warned,

The state — or, to make matters more concrete, the government — consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting ‘A’ to satisfy ‘B’. In other words, government is a broker in pillage, and every election is a sort of advanced auction on stolen goods.

Bottom line: There is no such thing as a free lunch

US Drone Warfare Fuels Arabic and Islamic Hatred

One of the main reasons why there has been too much vile and hatred against Americans in the Muslim world has been because of the imperialist-interventionist-militant foreign policies adapted by the US government influenced by the military industrial complex and the imperial goals of the politically entrenched neoconservatives.

One such evidence is the rampant use by the US military of drones to supposedly weed out terrorists. Such actions in reality defies the 3D policies (Development, Diplomacy and Defense), framed by Secretary of State and former first lady Hilary Clinton

As Professor Bill Easterly of the NYU in a recent blog writes,

Hilary Clinton said a while ago that Defense and Development were complements.

Not so much. A new report from Stanford and NYU (see excellent summary in the Guardian) found that US drone strikes (greatly increased under this administration) in Pakistan were killing and terrorizing civilians, while very few killed their terrorist targets.

It would be hard for Development to benefit from “drones hovering 24 hours a day over communities in northwest Pakistan, striking homes, vehicles, and public spaces without warning.”

The report alleges that drones strike areas multiple times, killing rescuers of victims of the first strike.

Such gruesome violation of human rights which masquerades as the war on terror will exacerbate geopolitical tensions instead of solving them

Yet the best way to promote peace is through trade.

As Judge Andrew Napolitano recently pointed out,

Is it not more likely that when the West supported toppling Arab strongmen, the rioters in the streets saw that as a signal to express hatred toward the meddling West? Might Obama’s drones, which have fallen all over the Middle East killing innocents in schools and hospitals, at weddings and funerals, and demolishing mosques and homes, be coming back to haunt him?

The Arab Spring has become the Western Winter, brought about by two American presidents who thought they could kill without moral justification or painful consequence. We should come home from these barbaric places and leave them alone. We should trade with them, since they want to buy our iPads and washing machines and blue jeans, but let them run their own governments.

Yet another emerging problem has been the escalating anxiety over the overbearing use of drones against Americans in their homeland—another sign of America’s transition towards a police state. These are symptoms of the growing desperation of the ruling class.

War on Internet: Despite Ban, Social Media Users in China Booms; Philippine Hackers Protests

As I have been pointing out, the information age, which essentially represents the snowballing forces of decentralization, particularly globalization and rapid technological advances, will dramatically change every aspect of our lives.

And governments operating from the political economic constructs of the 20th century, particularly the centralized top-down industrial age era political institutions has been fighting tooth and nail against such revolutionary changes that undermines the privileges of the incumbent the political class and their cronies.

Today’s centralization’s debt and welfare crisis have been in fact symptoms of the decadent top-down political institutions. Inflationism has thus been one of the measures of financial repressions that has been applied to achieve such an end.

Yet desperate attempts to preserve the status quo in favor of the current beneficiaries through more social controls has only transformed the internet into a major battlefront

Today’s war on the internet through serial attempts at censorship has apparently seen a backlash from civil society, whom has been waging a broad front online guerilla warfare.

Proof?

In China, banned social media websites continue to blossom.

From Bloomberg,

Facebook Inc. (FB) and Twitter Inc. have millions of users in China despite bans on the social networking services in the world’s largest Internet market, according to the results of a survey released today.

Facebook grew to 63.5 million users in China in the second quarter of this year, up from 7.9 million two years earlier, London-based researcher GlobalWebIndex said in a blog post today. Twitter users tripled to 35.5 million from 2009.

Sites blocked in China can be accessed via so-called proxy services, which connect users to servers outside the country so they can visit sites that are filtered. The workarounds have helped Facebook and Twitter compete with local sites including microblogging service Sina Weibo, said Tom Smith, founder of GlobalWebIndex.

“It only takes a little bit of desk research to discover that what is called the Great Firewall is actually much more porous than the Chinese government would like to admit,” Smith said in the blog post.

Despite their rapid growth, the two social networks are smaller than Qzone, a website operated by Tencent Holdings Ltd. (700), with 286.3 million users. Local rival Sina Weibo had 264.1 million users. Google+, the social network created by Google Inc. (GOOG) last year, had 106.9 million users. China has 513 million Internet users, according to the government-backed China Internet Network Information Center.

GlobalWebIndex asked 2,000 Chinese Internet users earlier this year which social sites they have created an account for, and which ones they used in the past month.

The quest for free market connectivity and the Hayekian knowledge revolution has been no different in the Philippines where attempts to censor social media has led to a concerted hacker attack on Philippine government offices

From another Bloomberg article, 

Hackers attacked websites of the Philippine central bank and at least two other government agencies last night to protest a law against cyber crime set to take effect next week.

The Cybercrime Prevention Act of 2012 “effectively ends the freedom of expression in the Philippines,” according to a statement posted on the central bank website by a group that called itself Anonymous Philippines. Websites of Metropolitan Waterworks & Sewerage System, the Pilipinas Anti-Piracy Team and the American Chamber of Commerce were also defaced, the Philippine Daily Inquirer reported today.

President Benigno Aquino signed the law on Sept. 12, which identifies, prevents and punishes Internet-based crimes such as hacking, identity theft and spamming. Provisions on online libel and the authority of the Department of Justice to block websites without a court order have been opposed in several petitions filed with the Supreme Court.

The law will “infringe on the Constitutional-guaranteed freedom of speech and expression,” Senator Teofisto Guingona, a member of Aquino’s party, said in a statement today. Guingona asked the Supreme Court to declare unconstitutional several provisions of the law to take effect Oct. 3.

As I previously wrote, 

The internet essentially provides the platform for the unceasing struggle to attain civil and economic liberties, through the effective neutralization of political manipulations of the people’s minds.

The chief proponent and inspiration of nonviolent resistance and civil disobedience, the great philosopher anarchist Étienne de La Boétie once wrote,

“Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything, but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself,  cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it. If it cost the people anything to recover its freedom

Thus enslavement and freedom is a matter of people’s choice. And the state of knowledge or ignorance by every individual in a society determines that choice.

The more the diffusion of knowledge in a society, the balance of power shifts towards individual sovereignty at the expense of political entities.

And that’s why welfare warfare based governments have been averse to the internet, and that’s why political authorities will continue to wage an all out war of control of the internet.

It seems that my predictions are on a volatile path to realization.

How Statistics ‘Discovered’ Wealth in Australia

For the mainstream, wealth is what government statisticians say it is…

From Reuters,

Australians are suddenly a whole lot better off after the government statistician "found" A$325 billion ($338 billion) in share assets previously unrecognized.

The Australian Bureau of Statistics on Thursday released its latest report on household assets which included massive upward revisions to estimates for equity holdings. Total financial assets were now put at A$3.1 trillion at the end of March, compared to the originally reported A$2.77 trillion.

The revision is worth roughly A$14,380 for every one of the country's 22.6 million people.

"This issue incorporates new estimates for households holding of unlisted shares and other equity in other private non financial corporations," the statistician drily noted.

The value of such equity is now put at A$383 billion at the end of March, compared to the original A$91 billion.

"The Bureau of Statistics has effectively 'found' A$325 billion in household wealth," said Craig James, chief economist at CommSec.

Total financial assets also rose further in the second quarter to stand at A$3.11 trillion by the end of June, up A$76 billion on the same period last year.

Of course since there are hardly any basis for the “new estimates” of “unlisted shares and other equity ownership other private non financial corporations”, this means that such "newfound wealth" have merely been arbitrarily determined by government magicians. 

Of course, forget that domestic credit provided by Australia’s banking sector has exploded since 2008

chart from tradingeconomics.com

chart from tradingeconomics.com

And also forget that money supply M2 as % of GDP has reflected on these bank driven credit boom.

A credit driven boom that is being reflected mainly on the capital intensive property markets.

This commentary from Australian Financial Review has a terse but accurate narrative of Australia’s business (bubble) cycle in progress (charts their too)

When the RBA cut the cash rate to 3 per cent in 2009, Australian house prices responded with disconcertingly robust capital gains of 13.7 per cent. Melbourne houses prices exploded in 2009, recording growth of 21 per cent.

The RBA is wary about stoking too much asset price inflation.

Although Australia’s equity benchmark (S&P/ASX 200) has not been a major recipient of the recent RBA driven credit boom.(chart from tradingeconomics.com)

Ah but the government statistics above doesn’t seem to have an inkling about this.

Well, the above instance is a neat example of of what the illustrious classical liberal French economist Jean Baptiste Say pejoratively described about government's obsession about statistics.  Quoted by the great Dean of the Austrian School of economics Murray N. Rothbard, here is JB Say…

Hence, there is not an absurd theory, or an extravagant opinion that has not been supported by an appeal to facts; and it is by facts also that public authorities have been so often misled. But a knowledge of facts, without a knowledge of their mutual relations, without being able to show why the one is a cause and the other a consequence, is really no better than the crude information of an office-clerk

Video: F.A. Hayek at BBC (Masters of Money)

Glad to see the great F. A. Hayek go mainstream

  

Somewhere in the video, Paul Krugman (Darth Vader) said that "unregulated banking and financing system is prone to financial crisis". Really? 

 

(the number of banking crisis since the Nixon Shock; chart from the World Bank) 

Jeffrey Sachs (Count Dooku) said that one of Hayek’s “badly failed” predictions is that of Hayek’s claim that “moving to a social welfare society would eat away at the health of democracy”. Really? 

To use the US as example,

chart from Heritage Foundation

from yesterday’s chart of the day

Maybe all these has nothing to do with America’s growing police state?

Or perhaps Professor Hayek had been just too early.

Senkaku Dispute: Japan-Taiwan in Water Canon Gunfighting

From the Economist, (hat tip Bob Wenzel)

A fierce shootout with water-cannon broke out between Japan’s coast guard and Taiwan’s on the morning of September 25th. The Japanese side was trying to repel an armada of almost 60 Taiwanese fishing vessels, which had sailed irritatingly near the islets, by blasting some of them with deck-mounted water cannon. Taiwan’s patrol boats retaliated by firing back with their own high-pressure hoses at the Japanese coastguard ships, all the while booming over loudspeakers that these rocks are the sovereign territory of the Republic of China (Taiwan’s official name) and that the Japanese vessels must leave Taiwan’s territory immediately. The fishing fleet managed to sail within three nautical miles (5.5km) of the disputed islands, before being turned back by the Japanese side. Meanwhile Taiwan’s navy dispatched frigates to the country’s north-eastern coast and scrambled warplanes, such as F-16s and Mirages, to monitor the civilian armada, according to a statement issued by the defence ministry on September 26th. The point, they say, was to be prepared for any eventuality. The president, Ma Ying-jeou, lent his support too, not missing a chance to add that the waters around the contested islands have been fishing grounds for Taiwan’s fishermen for more than 100 years.

This marked Taiwan’s first foray into the waters that surround the uninhabited Diaoyus since the Japanese government first nationalised a few of them, two weeks ago. The Japanese government is said to have protested to Taiwan through Japan’s de facto embassy. The incident complicates the ongoing row between Japan and the People’s Republic of China, over the archipelago’s sovereignty. Even without Taiwan’s interference, the affair has triggered huge protests on the mainland, some of them violent, and calls to boycott Japanese business.

Two things: one, this unfortunate event could be a prelude to the real thing, or two, this serves as another pantomime distraction of the public from domestic troubles or justification or cover for inflationism-interventionism.

Quote of the Day: The Mercantilist’s Pareto Strawman

The market economy has never been without its critics and enemies.  Those who feel threatened by the market; those who, however unwisely, feel they could do better without it; economists with little imagination; those, like the devotees of Pareto optima, with only too much of it; those who find most entrepreneurs disgusting characters; those attracted by the romantic charm of a feudal order in which they never had to live; social thinkers offended by the raucous tone of modern advertising; and social thinkers who know only too well how to exploit envy and greed in the service of anticapitalistic movements – all these make a formidable array of opponents.

This quote is from Ludwig Lachmann’s 1978 essay “An Austrian Stocktaking: Unsettled Questions and Tentative Answers,” Chapter 1 in Louis M. Spadaro, ed.,New Directions in Austrian Economics (1978) page 11 lifted from Professor Don Boudreaux of Café Hayek’s Quotation of the Day 

Anti-capitalists critiquing the societal benefits of voluntary exchange through the Pareto efficiency strawman have been presumptive of the possession of omniscience of the summation or aggregation of interpersonal evaluations or interpersonal utility comparisons from which to clearly establish the parameters where “no one can be made better off without making at least one individual worse off” from a “perfectly competitive equilibrium” environment.

If I go to my neighborhood sari-sari store to buy beer/s, who is to say and under what objective technical-ethical-welfare framework will they determine if my actions (as buyer) or of the sari sari store’s (as seller) are Pareto efficient or not? The government ‘expert’ or some appointed institutional economist? Duh!

Free trade have always always a function of individual actions coursed personally or through varying forms of organization where geographical or political boundaries are irrelevant.

Yet these romantic and self-absorbed (deluded) anti-capitalists utopians fail to account that in as much as the markets, which are an expression of actions constituting individual subjective value scales and time preferences, are imperfect, governments likewise operated by a cadre of individuals also should be measured by the same Pareto efficiency effected through their policies.

The appropriate question, measured relatively, should be: Which is more Pareto efficient: decentralized voluntary exchanges or centralized government coercive redistribution?

Unfortunately for the utopians there is such a thing as the law of unintended consequences: government failures.