RBS: Asia Has a Credit Bubble!

Like Thailand, Philippine officials will likely continue to stubbornly contradict publicly on the risks of bubbles, yet as I recently pointed out, recent events in Cyprus only reinforces the perspective of how regulators can hardly see or anticipate bubbles until fait accompli or until the ex-post materialization of the advent of a crisis[1].

And it would seem that more from the mainstream are becoming aware of elevated risks of Asia’s credit expansion. (yes, I am not alone)

The Royal Bank of Scotland (RBS) practically notices all the symptoms I have been elaborating as effects or symptoms of bubbles.

They note that bank deposits have not kept the pace with rate of credit growth. They also noticed that the focus on domestic consumption coincides with rising credit levels and the loosening of credit conditions (left window). Savings have also been in a conspicuous decline.

Remember consumption is a function of income. Outside income, more consumption can only be attained by virtue of borrowing and by running down of savings. Borrowing represents the frontloading of consumption. Expanded consumption today eventually leads to lesser consumption tomorrow as the borrowers would have to pay back on the interest and principal of debts.

As I previously noted[2]

My explanation revolved around examining the 3 ways people to consume; productivity growth (which is the sound or sustainable way) and or by the running down of savings stock and or through acquiring debt (the latter two are unsustainable).

So the decline in deposits and savings as credit expands are signs of capital consumption.

The RBS also observed that the ballooning of credit have come amidst the backdrop of falling labor productivity while the region’s balance of payments had rapidly been deteriorating.

Declining savings and the diversion of household expenditure towards debt financed consumption goods leads to capital consumption, thus the decline in productivity.

Artificially suppressed interest rates, which penalizes savers and encourage speculation in the financial markets and other unproductive uses of capital, mainly through the concentration of speculative investments or gambles on capital intensive projects, e.g. property, shopping mall, casinos, are symptoms of malinvestments. So instead of promoting productive investments, low interest rates serve as another source of productivity losses.

The RBS equally notes that India, Indonesia and Thailand have become balance of payment ‘deficit’ countries whereas Malaysia’s surplus has been sharply declining. The regions banks’ loan-deposit ratios have likewise substantially increased to uncomfortable levels (right window).

When nations spend more than they produce, then such deficits occur. And deficits would then need to be financed by foreigners or as I previously noted “would need to be offset by capital accounts or increasing foreign claims on local assets”[3]. 

And with more countries posting deficits, then the increased competition for savings of other nations will translate to increased pressure for higher domestic interest rates. Yet greater dependence on foreigners increases the risks of a sudden stop or of a slowdown or reversal of capital flows.

On the same plane, when domestic spending is financed by domestic debt then deficits grow along with rising local debt levels.

The deterioration of real savings or wealth generating activities and the expansion of bubble activities only increases the risks of a disorderly adjustment (bubble bust) which may be triggered by high interest rates or by interventions to reverse the untenable policies or by sudden stops or by plain unsustainable arrangements or even a combination of these.

The RBS also comments that household debt ratios particularly in Hong Kong Malaysia and Singapore have increasingly transformed into a fragile state, accounting for over 65% of GDP. Worst is that household wealth has nearly been concentrated in property, which makes the region’s wealth highly vulnerable to higher interest rates and a decline in property prices.

Overreliance on debt which has been used for unproductive and consumption activities only increases people’s sensitivity and susceptibility towards upward changes in interest rates that are likely to affect asset prices and economic performance.

This is known as the bubble cycle.

The RBS as quoted by the Reuter’s Sujata Rao[4],

What is however worrying is the pace of credit growth. …The combination of rapid credit disbursals and more importantly, the on-going divergence between credit disbursals and GDP growth implies that the system is becoming more vulnerable to income and interest rate shocks.

Again while such imbalances may not have reached a tipping point or the critical mass yet and which may not likely impact the region over the interim, everything will depend on the “pace of credit growth”.

And a manic phase will likely goad more debt acquisition in order to chase yields.

---

[1] see The Anatomy of the Cyprus’ Bubble Cycle March 24, 2013

[2] see Shopping Mall Bubble: The Quibble Over Statistics January 29, 2013

[3] See E-Vat 15%: Possible Consequence from Current Quasi Boom Policies December 10, 2012

[4] Sujata Rao Asia’s credit explosion, Global Investing Reuters.com March 22, 2013

The Anatomy of the Cyprus’ Bubble Cycle

The following article from the Reuters has a concise chronicle of the boom bust cycle which today has been plaguing Cyprus via a banking crisis and which I dissect.

(all bold highlights mine, occasional side comments of mine in italics)

1. The Pre-EU setting.

Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.

2. The Moral Hazard from EU’s economic convergence policies

When Cyprus joined the single European currency, Greek and other euro area deposits were reclassified as domestic, leading to billions more local lending, Pambos Papageorgiou, a member of Cyprus's parliament and a former central bank board member said.

"In terms of regulation we were not prepared for such a credit bubble," he told Reuters.

Banks' loan books expanded almost 32 percent in 2008 as its newly gained euro zone status made Cyprus a more attractive destination for banking and business generally, but Cypriot banks maintained the unusual position of funding almost all their lending from deposits.

3. How bubble policies reshaped the public’s behavior.

"The banks were considered super conservative," said Alexander Apostolides an economic historian at Cyprus' European University, a private university on the outskirts of Nicosia.

When Lehman Brothers collapsed in the summer of 2008, most of the world's banks suffered in the fallout, but not Cyprus's.

"Everyone here was sitting pretty," said Fiona Mullen, a Nicosia-based economist, reflecting on the fact Cypriot banks did not depend on capital markets for funding and did not invest in complex financial products that felled other institutions.

Note of the "this time is different" mentality and the attitudes of "invincibility".

4. Overconfidence and Mania

Marios Mavrides, a finance lecturer and government politician, says his warnings about the detrimental impact on the economy of so much extra lending fell on deaf ears.

"I was talking about the (property) bubble but nobody wanted to listen, because everyone was making money," he said. (sounds strikingly familiar today—Prudent Investor)

The fact that the main Cyprus property taxes are payable on sale made people hold onto property, further fuelling prices, Papageorgiou added…

Michael Olympios, chairman of the Cyprus Investor Association that represents 27,000 individual stock market investors, said he too criticized the central bank for "lax" regulation that facilitated excessive risk taking.

Ex-post, people always look for someone to pass the blame on. They forget the responsibility comes from within.

The Cyprus General Index from Tradingeconomics.com

Notice: The losses from the bust had been more brutal than the gains from the boom

5. The yield chasing dynamic fueled by monetary-credit expansion

A depositor would have earned 31,000 euros on a 100,000 euros deposit held for the last five year in Cyprus, compared to the 15,000 to 18,000 euros the same deposit would have made in Italy and Spain, and the 8,000 interest it would have earned in Germany, according to figures from UniCredit.

Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island's two biggest lenders, Cyprus Popular Bank -- formerly called Laiki -- and Bank of Cyprus.

6. The Knowledge problem: Regulators didn’t see the crisis coming. Also the transmission mechanism: From the periphery (Greek crisis) to the core (Cyprus crisis)

The extent of this exposure was laid bare in the European Banking Authority's 2011 "stress tests", which were published that July, as the European Union and International Monetary Fund (IMF) were battling to come up with a fresh rescue deal to save Greece. (reveals how bank stress tests can’t be relied on—Prudent Investor)

The EBA figures showed 30 percent (11 billion euros) of Bank of Cyprus' total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Laiki's, which was then known as Marfin Popular.

More striking was the bank's exposure to Greek debt.

At the time, Bank of Cyprus's 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank's total capital, while Laiki's 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.

The close ties between Greece and Cyprus meant the Cypriot banks did not listen to warnings about this exposure…

Artificial booms are often interpreted as validating the policies of the incumbent political authorities. It's only during fait accompli where people recognize of the failures of politics. This is an example of time inconsistency dilemma

Yet the blame will always be pinned on the victims (private sector, e.g. depositors, the speculators) rather than the promoters of the bubble.

 

7. More regulatory failure.

Whatever the motive, the Greek exposure defied country risk standards typically applied by central banks; a clause in Cyprus' EU/IMF December memorandum of understanding explicitly requires the banks to have more diversified portfolios of higher credit quality.

"That (the way the exposures were allowed to build) was a problem of supervision," said Papageorgiou, who was a member of the six-man board of directors of the central bank at the time.

The board, which met less than once a month, never knew how much Greek debt the banks were holding, both Papageorgiou and another person with direct knowledge of the situation told Reuters.

Note that imbalances accrued swiftly and where hardly anyone saw the imminence of today's crisis.  What used to be "Conservative" banks suddenly transformed into aggressive banks.

Yet another interesting point is that the events in Cyprus proves my thesis that crisis are essentially "unique". There is no definitive line in the sand for credit events. Cyprus had its own distinctive thumbprint or identity, particularly her "unusual position" of reliance on deposits, compared to their peers.

 

Wonderful learning experience

Video: Murray Rothbard on the Six Stages of the Libertarian Movement

(hat tip Lew Rockwell Blog)

Cyprus President Warned Friends of Crisis

Events in Cyprus have been demonstrative of the wide distinction between how the pubic perceives governments are supposed to operate (the romantic view where government looks after the interest of the general welfare) with how governments truly operate (self interests).

In reality governments operates around the cabal of insiders, again take it from the events in Cyprus.

From the Daily Mail, (hat tip lewrockwell.com)

Cypriot president Nikos Anastasiades 'warned' close friends of the financial crisis about to engulf his country so they could move their money abroad, it was claimed on Friday.

The respected Cypriot newspaper Filelftheros made the allegation which was picked up eagerly by German media.

Germans are angry at the way their country has been linked to the Nazis and Hitler by Cypriots angry at the defunct rescue deal which called for a levy on all savings.

The Cyprus newspaper did not say how much money was moved abroad but quoted sources saying the president 'knew about the possible closure of the banks' and tipped off close friends who were able to move vast sums abroad. 

Italian media said the 4.5 billion euros left the island in the week before the crisis.

As an update on the swiftly unfolding events in Cyprus, Russia has rejected a deal with Cyprus.  Also the Cyprus parliament approved of instituting capital controls aside from other measures passed.

From Reuters:

As hundreds of demonstrators faced off with riot police outside parliament late into Friday night, lawmakers inside voted to nationalize pension funds, pool state assets for a bond issue and peel good assets from bad in stricken banks.

We live in very interesting times.

Tom Woods: Why the Greenbackers Are Wrong

One of the strident critics of the US Federal Reserve have been the Greenbackers. 

Greenbackers represent a left wing American political party backed by the ideology which embraces inflationism (hence “greenbacks” in reference to non-gold backed paper money) and who are opposed to the gold standard due to its deflationary outcome. Greenbackers desire the engagement of more money printing as a solution to social ills.

One of the Greenback movement’s most vocal spokesperson Atty. Ellen Brown has been repeatedly critiqued by Austrian economist Gary North.

At the 2013 Austrian Economic Research Conference, Austrian economist Thomas Woods points out of the basic economic errors of the Greenback’s ideology by dealing with money basics, which is why I posted his paper.

Here is a snip of Tom Woods’ paper:

One of Ron Paul’s great accomplishments is that the Federal Reserve faces more opposition today than ever before. Readers of this site will be familiar with the arguments: the Fed enjoys special government privileges; its interference with market interest rates gives rise to the boom-bust business cycle; it has undermined the value of the dollar; it creates moral hazard, since market participants know the money producer can bail them out; and it is unnecessary to and at odds with a free-market economy.

Unfortunately, not all Fed critics, even among Ron Paul supporters, approach the problem in this way. A subset of the end-the-Fed crowd opposes the Fed for peripheral or entirely wrongheaded reasons. For this group, the Fed is not inflating enough. (I have been told by one critic that our problem cannot be that too much money is being created, since he doesn’t know anyone who has too many Federal Reserve Notes.) Their other main complaints are (1) that the Fed is “privately owned” (the Fed’s problem evidently being that it isn’t socialistic enough), (2) that fiat money is just fine as long as it is issued by the people’s trusty representatives instead of by the Fed, and (3) that under the present system we are burdened with what they call “debt-based money”; their key monetary reform, in turn, involves moving to “debt-free money.” These critics have been called Greenbackers, a reference to fiat money used during the Civil War. (A fourth claim is that the Austrian School of economics, which Ron Paul promotes, is composed of shills for the banking system and the status quo; I have exploded this claim already – here, here, and here.)

With so much to cover I don’t intend to get into (1) right now, but it should suffice to note that being created by an act of Congress, having your board’s personnel appointed by the U.S. president, and enjoying government-granted monopoly privileges without which you would be of no significance, are not the typical features of a “private” institution. I’ll address (2) and (3) throughout what follows.

The point of this discussion is to refute the principal falsehoods that circulate among Greenbackers: (a) that a gold standard (either 100 percent reserve or fractional reserve) or the Federal Reserve’s fiat money system yields an outcome in which outstanding loans cannot all be paid because there is “not enough money” to pay both the principal and the interest; (b) that if the banks are allowed to issue loans at interest they will eventually wind up with all the money; and that the only alternative is “debt-free” fiat paper money issued by government.

My answers will be as follows: (1) the claim that there is “not enough money” to pay both principal and interest is false, regardless of which of these monetary systems we are considering; and (2) even if “debt-free” money were the solution, the best producer of such money is the free market, not Nancy Pelosi or John McCain.

Read the rest here

This portion where Mr. Woods deals with the how the banking system would be regulated by economic forces in a free market environment is particularly worth quoting:

as with every other industry, profit regulates production. The production of money, like the production of all other goods, settles on a normal rate of return, and is not uniquely poised to shower participants in that industry with premium profits. As more firms enter the industry, the rising demand for the factors of production necessary to produce the money puts upward pressure on the prices of those factors. Meanwhile, the increase in money production itself puts downward pressure on the purchasing power of the money produced.

In other words, these twin pressures of (1) the increasing costliness of money production and (2) the decreasing value of the money thus produced (since the more money that exists, ceteris paribus, the lower its purchasing power) serve to regulate money production in the same way they regulate the production of all other goods in the economy.

Once the gold is mined, it needs to be converted into coins for general use, and subsequently stamped with some form of reliable certification indicating the weight and fineness of those coins. Private firms perform such certification for a wide variety of goods on the free market. This service is provided for newly coined money by mints.

Banking services would exist on the free market to the extent that people valued financial intermediation, as well as the various services, such as check-writing and the safekeeping of money, that banks provided.

Quote of the Day: Distinguishing Property from Wealth

Property is a legal concept, whereas wealth is an economic concept. The two are often confused, but they should be kept quite clearly distinct. The one refers to a set of rights, the other to how people value such rights. The same legal claim to property may yield great wealth today and none tomorrow. Market exchanges change the values of property claims continuously, as Ludwig Lachmann explained clearly in his important essay on “The Market Economy and the Distribution of Wealth.”

This is from Cato Institute’s Tom G. Palmer, in the continuing debate over negative and positive rights at the Cato Unbound

Cyprus: From Deposit Taxes to Capital Controls; Russian Intervention Next?

After the botched attempt by scheming unelected Eurocrats to impose bank deposit levies in order to bail out the banking system, which had been foiled by the Cyprus Parliament, the EU now threatens to kick Cyprus out of the Union, followed by proposed measures to impose capital controls.

From Reuters

The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

So same dog but with a different collar.

Principally, capital controls would represent the same assault on property rights.

Notes the Zero Hedge: (bold and italics original)

As Europe wakes up to what could be a tumultuous day, Handelsblatt reports that the ECB has decided that, due to the "great danger" of a bank run once they reopen next week, it will enforce capital controls independently of Cypriot (elected) officials. With perhaps a nod towards negotiating some ELA funding for Cypriot banks next week (if the government accepts this ECB-enforced 'program'), the rather stunning restrictions on people's private property include:

-Freezing Savings - no time-frame (it's not your money anymore)

-Make bank transfers dependent on Central Bank approval (a money tzar?)

-Lower ATM withdrawal limits (spend it how we say?)

The capital controls will be designed "so that citizens have access to sufficient cash to go about their lives." So, there it is, a European Union imposed decision on just how much money each Cypriot can spend per day. Wasn't it just last week, we were told Europe is fixed?

Another interesting aspect the geopolitical consequence from the unfolding events in Cyprus.

While I have earlier noted that unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region may trigger a regional military conflict, Russia’s heavy stake in Cyprus could also spark a military conflagration.

Nearly a third or $19 billion of the 70 billion euros in deposits in Cyprus banks are reportedly held by Russians (supposedly from oligarchs to alleged mafias to political money). 

According to CNBC

One Russian bank, Alfa Bank, estimates that $70 billion of illegal capital flight from Russia in the past two decades may have found its way to Cyprus.

Moody's rating agency said last week Russian banks had about $12 billion placed with Cypriot banks at the end of 2012 and has estimated that Russian corporate deposits at Cypriot banks could be around $19 billion.

"We think that the $19 billion exposure is mostly wholesale - ie corporate," Eugene Tarzimanov, Senior Credit Officer at Moody's in Russia, told Reuters.

Some of Russia's largest banks have some credit exposure to Cyprus. VTB, Russia's second-largest bank by assets, had $13.8 billion in assets and $374 million through its Cypriot subsidiary, Russian Commercial Bank, at the end of 2011.

Political pressure has allegedly been building up for the Russian government to intervene

From Investmentwatch.com

From latest reports, the Cypriot banks might open on March 26th at the earliest. That’s two weeks after being shut down. That’s two weeks of unmet financial obligations, ie government employee salaries, public works financing, unpaid pensions etc etc…Expect unrest on the streets of Moscow

The EU/Germany are certainly aware that 95% of all Russian money goes through the Cypriot banks. Certainly they were well aware of the consequences this would lead to. Is this the first salvo in the new world war??

Dennis Gartman of the eponymous The Gartman Letters made a recent germane comment at the CNBC “Don’t Mess with the Russian Mafia”.

Next week will be very interesting.

Earth Hour: Keep Lights ON!

Many people will fall again for the demagoguery of celebrating “earth hour” purportedly for “saving” the environment. 

Most of them will simply follow “feel good” popular politically correct themes rather than understanding the real dynamics or “crony based” green energy politics behind them.  

This serves as example of the Bandwagon effects, not only in the marketplace, but also in the realm of the politics of environmentalism.

Earth Hour advocates avoid explaining the cost benefit tradeoffs between their populist pseudo-environmental interests (which are principally based on highly flawed computer simulations*) and the economic and social value of electricity to humanity. 

*people's lives are supposed to be determined by computer models which can't even predict economies and the markets! Queen Elizabeth even took to task the London School of Economics for failing to predict the 2008 crash.

They fail to take into account that “electricity is the backbone of modern life”. On the other hand, they elude discussing the costs of their themes from which life without electricity equals poverty and death.

North Korea or the medieval life are great examples of life without electricity.

So advocates of earth hour are basically misanthropists. They want people to suffer in the name of preserving the "environment" (ahem, promoting the interests of cronies and of the political class)

 

The following video from the Copenhagen Consensus eloquently showcases the benefits of electricity.

Danish environmentalist Bjorn Lomborg gives further explanations on the benefits of electricity at the Slate.com: (hat tip AEI’s Professor Mark Perry) [bold mine]

Electricity has given humanity huge benefits. Almost 3 billion people still burn dung, twigs, and other traditional fuels indoors to cook and keep warm, generating noxious fumes that kill an estimated 2 million people each year, mostly women and children. Likewise, just 100 years ago, the average American family spent six hours each week during cold months shoveling six tons of coal into the furnace (not to mention cleaning the coal dust from carpets, furniture, curtains, and bedclothes). In the developed world today, electric stoves and heaters have banished indoor air pollution.

Similarly, electricity has allowed us to mechanize much of our world, ending most backbreaking work. The washing machine liberated women from spending endless hours carrying water and beating clothing on scrub boards. The refrigerator made it possible for almost everyone to eat more fruits and vegetables, and to stop eating rotten food, which is the main reason why the most prevalent cancer for men in the United States in 1930, stomach cancer, is the least prevalent now.

Electricity has allowed us to irrigate fields and synthesize fertilizer from air. The light that it powers has enabled us to have active, productive lives past sunset. The electricity that people in rich countries consume is, on average, equivalent to the energy of 56 servants helping them. Even people in Sub-Saharan Africa have electricity equivalent to about three servants. They need more of it, not less.

This is relevant not only for the world’s poor. Because of rising energy prices from green subsidies, 800,000 German households can no longer pay their electricity bills. In the United Kingdom, there are now more than 5 million fuel-poor people, and the country’s electricity regulator now publicly worries that environmental targets could lead to blackouts in less than nine months.

Today, we produce only a small fraction of the energy that we need from solar and wind—0.7 percent from wind and just 0.1 percent from solar. These technologies currently are too expensive. They are also unreliable (we still have no idea what to do when the wind is not blowing). Even with optimistic assumptions, the International Energy Agency estimates that, by 2035, we will produce just 2.4 percent of our energy from wind and 0.8 percent from solar.

To green the world’s energy, we should abandon the old-fashioned policy of subsidizing unreliable solar and wind—a policy that has failed for 20 years, and that will fail for the next 22. Instead, we should focus on inventing new, more efficient green technologies to outcompete fossil fuels.

If we really want a sustainable future for all of humanity and our planet, we shouldn’t plunge ourselves back into darkness. Tackling climate change by turning off the lights and eating dinner by candlelight smacks of the “let them eat cake” approach to the world’s problems that appeals only to well-electrified, comfortable elites.

So we can’t discount of the "conspiracy theory" where one of the other possible subsidiary reasons for the massive printing of money by central banks could have been meant as subsidies for green energy via the pushing up or inflating prices of fossil fuels, which should make "unreliable" "inefficient" and "costly" green energy "competitive".

Unfortunately, markets know better. The free-market based Shale energy revolution has been proving to be the likely “environmental friendly” alternative more than the politically blessed “green energy” that has been founded on disinformation.

Graphic of the Day: Fatalities Count from the Iraq War

This is from Reuter’s chart of the Day

According to a study released last week, the U.S. war in Iraq has cost $1.7 trillion with an additional $490 billion in benefits owed to war veterans. The war has killed at least 134,000 Iraqi civilians and may have contributed to the deaths of as many as four times that number. When security forces, insurgents, journalists and humanitarian workers were included, the war’s death toll rose to an estimated 176,000 to 189,000

On the other hand, Agora Publishing founder Bill Bonner at the LFB writes of the cost of Iraq war which have been far more than such mainstream estimates.

Mehdi Hasan, writing in the New Statesman:

“Between 2003-06, according to a peer-reviewed study in The Lancet medical journal, 601,000 more people died in Iraq as a result of violence — that is, bombed, burned, stabbed, shot, and tortured to death — than would have died had the invasion not happened. Proportionately, that is the equivalent of 1.2 million Britons, or 6 million Americans, being killed over the same period.

“…31% of the excess deaths in Iraq can be attributed to coalition forces — about 186,000 people between 2003-06. Second, most studies show that only a minority of Iraqi insurgents were card-carrying members of AQI [al-Qaeda Iraq]. The insurgency kicked off in Fallujah on April 28, 2003, as a nationalist campaign, long before the arrival of foreign jihadists, but only after U.S. troops opened fire on, and killed, 17 unarmed Iraqi protesters.

“Third, there were no jihadists operating in Iraq before our Mesopotamian misadventure; Iraq had no history of suicide bombings. Between 2003-08, however, 1,100 suicide bombers blew themselves up inside the country. The war made Iraq, in the approving words of the U.S. general Ricardo Sanchez, ‘a terrorist magnet… a target of opportunity.’

“‘Let me clear it up for any moron with lingering doubts,’ wrote the Iraqi blogger known by the pseudonym Riverbend on her blog Baghdad Burning in February 2007. ‘It’s worse. It’s over. You lost…You lost every sane, red-blooded Iraqi when the Abu Ghraib pictures came out…You lost when you brought murderers, looters, gangsters and militia heads to power…’

“In September 2011, a Zogby poll found that 42% of Iraqis thought they were ‘worse off’ as a result of the Anglo-American invasion of their country, compared with only 30% of Iraqis who said ‘better off.’ An earlier poll conducted for the BBC in November 2005 found a slim majority of Iraqis (50.3%) saying the Iraq war was ‘somewhat’ or ‘absolutely’ wrong.”

In terms of the financial cost, we estimated that the war in Iraq would cost $1 trillion when it was launched. Dear readers wrote to say we were crazy. It was a cakewalk, they said. They said it could be accomplished for pennies.

But even $1 trillion was far too low. Nobel Prize winner Joseph Stiglitz may be an idiot, but he can add. And he puts the cost at over $5 trillion, perhaps $6 trillion, when the final bill for missing limbs and lifelong psychological care is tallied.

Will Events in Cyprus Trigger a War?

The Cyprus bank deposit tax fiasco could turn out to be more than just a domestic financial and economic morass; it could morph into a regional geopolitical quagmire or a potential tinderbox for an outbreak of military confrontation or war. 

Such are based on the Cyprus’ unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region.

Here is a snapshot from historian Eric Margolis at the lewrockwell.com:

But there’s much more to the Cyprus crisis than its dubious banks. Cyprus has bedeviled Europe and world diplomacy since 1974, then Greek Cypriot far rightists staged a coup and sought union – or "enosis" – with mainland Greece. Turkey promptly intervened with 30,000 troops to protect Turkish Cypriots in the north. Many Greeks fled or were expelled to the south.

Europe and the UN have been trying to sort out the Cyprus mess ever since. After decades of mind-numbing negotiations, former UN chief Kofi Annan proposed a sensible deal in 2004 for a Greek-Turkish federation. Turks accepted, but Greek Cypriots blocked it. Britain, which has two important air bases in Cyprus, backed the status quo.

In the same year, the EU committed the grave error of admitting Cyprus as a member without first insisting that Greek Cypriots agree to a peace deal and Greek-Turkish federation.

Northern Cyprus was left in limbo while the south became part of the EU, assuring the island’s ugly dispute would be come part of the European Union. Cyprus should never have been admitted to the EU.

Europeans who opposed Turkish membership in the EU used Cyprus as a pretext to delay admission, infuriating Turkey.

After decades of patient work developing normal relations after centuries of conflict, Greece and Turkey are again up in arms again over Cyprus. Their dangerous problem of overlapping air and sea claims in the Aegean has revived - just when Greece must slash its bloated military budget.

Read the rest here

All political efforts to save and preserve the interests of the political class and their cronies have only opened up old wounds and continues to fan the flames of social enmity.

Video: Murray Rothbard on the Benefits of Bank Runs

(hat tip: Lew Rockwell Blog)

Bitcoins: Safehaven from Cyprus Debacle and Officially Recognized by the US Treasury

I questioned yesterday the wisdom of mainstream’s assault on bitcoins, where the Economist calls bitcoins a “bubble”.

Well it figures that the recent spike in the public's interests on bitcoins has partly been a ramification or an offshoot to the Cyprus savings grab debacle

Here is Businessweek/Bloomberg,

Since Sunday, a trio of Bitcoin apps have soared up Spain’s download charts, coinciding with news that cash-strapped Cyprus was planning to raid domestic savings accounts to pay off a $13 billion bailout tab. Fearing contagion on the other end of the Mediterranean, some Spaniards are apparently looking for cover in an experimental digital currency.

“This is an entirely predictable and rational outcome for what’s happening in Cyprus,” says Nick Colas, chief market strategist at ConvergEx Group. “If you want to get a good sense of the stress European savers are feeling, just watch Bitcoin prices.”

The value of the virtual currency has soared nearly 15 percent in the last two days, according to the most-recent pricing data. “One hundred percent of that is due to Cyprus,” says Colas. “It means the Europeans are getting involved.”

So aside from gold, bitcoins appear to be a major beneficiary from the Euro crisis. So which shows more signs of a bubble: bitcoin or fiat money?

Yet for those who claim bitcoin lacks the widespread acceptance, well, they fail to take account that even the US Treasury now officially recognizes bitcoins.

From Bradley Janzen of Freebanking.org

Financial Crimes Enforcement Network (FinCEN) is the bureau of Treasury that enforces the Bank Secrecy Act (which requires banks to spy on their customers for the government).

FinCEN Issues Guidance on Virtual Currencies and Regulatory Responsibilities

To provide clarity and regulatory certainty for businesses and individuals engaged in an expanding field of financial activity, the Financial Crimes Enforcement Network (FinCEN) today issued the following guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. The guidance is in response to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use convertible virtual currencies or make a business of exchanging, accepting, and transmitting them. Convertible virtual currencies either have an equivalent value in real currency or act as a substitute for real currency. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN's definition of MSBs.

News Release: http://www.fincen.gov/news_room/nr/pdf/20130318.pdf

Guidance: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf

Welcome to the mainstream bitcoin.

Well, my favorite iconoclast Nassim Taleb has great words to say about bitcoins at the reddit.com: (hat tip Zero hedge)

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.

A sentiment I share. 

Bitcoins could herald the epoch of decentralization or the information age and importantly perhaps a transition to F. A. Hayek's denationalization of money

Argentines Flee to Gold on Financial Repression, Devaluation

Escalating financial repression implemented by the Argentina government has been prompting its citizenry to seek gold as safehaven. 

From the International Business Times:

Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg.

Banco Ciudad is the only bank left that trades in gold after Fernandez  banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading.

There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.

Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.

Watch Bloomberg’s news video on this here

I must say that Argentina’s inflation rate must have been severely understated by the mainstream. Price controls have been distorting real conditions in Argentina. The Argentine government even recently banned advertising as part of price controls.  Official inflation rates are way below private estimates. Argentina’s government has also been censoring private sector economists from making inflation forecasts.

Argentina’s “blue dollar” or the nickname for the US dollar based on the black market rate has fallen to a new low yesterday, at 8.27 from 8.07 last Monday or a decline of about 2.4% in just a few days. The Peso is far from the official rate of about 5.1. The gap between the black market rate and the official rate continues to widen.

The increasingly desperate government has imposed more capital controls through a 15% tax hike on the use of credit cards abroad aside from new 20% levy on airline tickets.

Unlike Venezuela, so far, Argentina’s stock market has yet to manifest symptoms of hyperinflation. The Merval index has been up 22.23% year to date, as of Friday’s close, and nears a milestone breakout.

We should not confuse rising stock markets with prosperity or even bubble cycles, when they serve as evidence of worsening monetary disorder. Nonetheless a breakout of the Merval along with increased panic buying on gold will could mean a tipping point towards hyperinflation and a crisis.

Warren Buffett: Bet on Natural Juices of Capitalism

For all the repeated calls of taxing the rich and the need for interventions, former value investor and now political entrepreneur (crony) does a U-turn and unexpectedly praises capitalism

From Bloomberg, 

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said investors should bet on the “natural juices” of capitalism in the U.S. even as lawmakers struggle to narrow the budget deficit.

People tend to “focus too much on what the government’s done, and to give them either credit or blame,” Buffett said in an interview conducted by the chief executive officer of Business Wire, the Berkshire subsidiary that distributes press releases. “The real credit belongs to our system.”

Buffett, 82, has used annual letters to shareholders and public appearances to highlight the prospects for the world’s largest economy, where most of Berkshire’s operations are based. He’s also called for an increase in taxes on the wealthiest individuals to help reduce budget deficits and forestall cuts, an approach that Republicans say would hurt growth.

The U.S. economy “is coming back because of the natural juices of capitalism and not because of government,” Buffett told Business Wire’s Cathy Baron Tamraz in a video interview posted online today. “We have a wonderful system that eventually is self-cleansing and always moves forward.”

Perhaps Mr. Buffett could just be rationalizing his actions due to the recent bullish bets he made, part of such acquisitions involved 28 newspapers for $344 million. Yet this should be an example of how people use "capitalism" when it is convenient for them.

Or perhaps he may just have read the book package sent by Austrian school of economics in fulfillment of his father’s request.

Japan’s Ticking Time Bomb: Worsening Streak of Current Account Deficits

We have been told by mainstream media and experts that PM Shinzo Abe’s inflationist policies popularly coined as “Abenomics” will deliver economic “competitiveness” .

Yet even in the short term, where the magic of inflationism should work best, Abenomics fails. 

Exports which supposedly should have been boosted by a devalued currency shrank, while imports continue to surge.

From Bloomberg,

Japan posted its longest run of trade deficits in three decades as exports fell in February, underscoring challenges for Bank of Japan (8301) Governor Haruhiko Kuroda in reviving the world’s third-biggest economy.

Shipments dropped 2.9 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg News was for a 1.7 percent decrease. Imports rose 11.9 percent, leaving a trade shortfall of 777.5 billion yen ($8.1 billion).

Kuroda, who began his tenure as governor yesterday and will give his first press briefing this evening, is pledging more aggressive monetary easing that may further weaken a yen down about 10 percent against the dollar this year. While the currency’s decline boosts the outlook for exporters in coming months, it’s already swelling the nation’s import bill as nuclear-plant shutdowns force bigger imports of fossil fuels.

Apologists for Abenomics say that a “time lag” exists for such policy to create “traction”. But contrary to such an absurd idea, rising input or producers prices, e.g. energy, will neutralize any gains from the supposed currency panacea. (chart from tradingeconomics.com)

Yet consumers have also been exhibiting signs of a squeeze in purchasing power through reduced spending.

And a string of worsening current account deficits will parlay into a drawdown on savings or increasing reliance on foreigners that amplifies the fragility of Japan’s precarious fiscal balance. As I previously wrote,

Worst, a sustained deterioration of current accounts means that Japan will increasingly rely on foreign capital and or draw down from the her pool of savings which has been estimated at $19 trillion and which could also extrapolate to a reduction of assets held overseas or $4 trillion net foreign investment position.

And given the deliberate debasement of the yen, I am not inclined to see a reduction of foreign assets by Japanese households. Instead, Japan’s private sector will likely increase their exposure overseas couched under euphemism of Foreign Direct Investment (FDI) or portfolio flows when in reality they account for as “capital flight”.

So “Abenomics” will mean that Japan will transition from a net savings-net creditor nation to eventually a net debtor country overtime or a sordid tale of from riches to rags, if such policies continue.

And given the nation’s colossal debts, any signs of funding stress will mean a jump in interest rates which should further aggravate highly vulnerable Japan’s fiscal balance. This increases Japan’s potential transition to a crisis whether through a debt or through a currency strain, depending on how policymakers will react.

One recent positive development though is Shinzo Abe’s proposal for Japan to join the Trans Pacific Partnership Free Trade Agreement (FTA). 

Yet it remains to be seen if gains from expanding trade will be enough to offset the negative effects from massive interventionist measures of monetary easing and fiscal stimulus.

Quote of the Day: Free Migration would be Great for the World

If First World governments simply respected everyone’s right to accept job offers from willing employers, most of the world’s poor wouldn’t need charity. They could take care of themselves. Any able-bodied person living in poverty would be free to sell his labor to the highest bidder in the world. Instead of paying years of income to coyotes, the global poor could migrate for the cost of a bus or boat ticket. Instead of crossing the border in fear to compete for illegal jobs, the global poor could cross the border openly to compete for any job they’re qualified to do.

Wouldn’t this simply drive First World wages down to Third World levels? No. Basic economics tells us that trade barriers don’t just redistribute wealth; they destroy wealth. Confining able-bodied workers to the Third World is like confining agriculture to Antarctica. Standard economic estimates say that open borders would roughly double world output. While trade liberalization never benefits absolutely everyone, free migration would be great for the world and great for the world’s poor.

(italics original)

This is from Professor Bryan Caplan in a debate over “negative and positive rights” at the Cato Unbound

Which is a Bubble: Bitcoins or Fiat Money?

The mainstream sees the exploding public interest on bitcoin as a threat and brands it a “bubble”.

Here is the Economist,

NOT MANY fund-managers have heard of Bitcoin, let alone put any of their clients’ money in it. But over the past few months, the world’s first “crypto-currency” has become one of the world’s hottest investments. Since September, when The Economist last wrote about it, the price of a unit of Bitcoin as recorded by Mt Gox, a popular Bitcoin exchange, has soared. Unlike other online currencies—such as the new Amazon Coins—the supply of Bitcoin is not determined by any central issuing authority. Instead, new coins are generated according to a predetermined formula by thousands of computers solving complex mathematical problems. As more coins are generated, these problems get ever more complex, increasing the cost of computing power necessary to generate them, and so setting a floor underneath the price. Mimicking gold, the currency is designed to be deflationary. However, there is every reason to think that the current Bitcoin boom will shortly bust. As the chart shows, online interest in the currency has spiked in recent months. Though an increasing number of legitimate businesses are adopting the currency—one Finnish software developer has offered to pay its employees in Bitcoin—it still has relatively few users. Its primary commercial use is probably to buy drugs from Silk Road, a sort of pirate eBay hidden in the “deep web”. This suggests that the new users are buying Bitcoin as an investment, not as a means of exchange. For any currency to thrive it needs users, not just speculators.

The idea that bitcoins “still has relatively few users” ergo a bubble simply begs the question. This doesn’t establish the bubble properties.

The transition towards “moneyness” is a market process and doesn’t come instantaneously. Since the article admits that bitcoin attempts to "mimic gold", then the process entails the expansion of the commodity’s marketability which may have partly been exhibited by the chart.

As the great dean of Austrian economics Murray N. Rothbard explained,

Once a commodity begins to be used as a medium of exchange, when the word gets out it generates even further use of the commodity as a medium. In short, when the word gets around that commodity X is being used as a medium in a certain village, more people living in or trading with that village will purchase that commodity, since they know that it is being used there as a medium of exchange. In this way, a commodity used as a medium feeds upon itself, and its use spirals upward, until before long the commodity is in general use throughout the society or country as a medium of exchange. But when a commodity is used as a medium for most or all exchanges, that commodity is defined as being a money.

In this way money enters the free market, as market participants begin to select suitable commodities for use as the medium of exchange, with that use rapidly escalating until a general medium of exchange, or money, becomes established in the market.

Paradoxically the article mentions a Finnish software company offering to pay employees based on bitcoins.

 

Another good example for this could be Iran. Hammered by trade and financial embargo, part of the embattled nation’s economic activities have shifted to using bitcoins. 

So expanding public interest on bitcoins does not necessarily entail a bubble.

The reality is that the ECB and other central banks see bitcoins as threat to their monopoly over Seigniorage privileges and thus engage in negative publicity or propaganda to besmirch a potential market based competitor.

The essence of bubbles is really a “something for nothing” or a "free lunch" dynamic.

If Bitcoins are generated with a huge cost, “As more coins are generated, these problems get ever more complex, increasing the cost of computing power necessary to generate them, and so setting a floor underneath the price”, then compare this with exploding balance sheets of global central banks, whom are simply digital entries as determined by political authorities to the banking system.

Guess which is unsustainable and has the character of a bubble?