Quote of the Day: Invoking Democracy to Destroy Freedom

People are taught that, thanks to democracy, coercion is no longer dangerous because people get to vote on who coerces them. Because people are permitted a role in choosing who will be in charge of the penal code, they are free. Being permitted to vote for politicians who enact unjust, oppressive new laws magically converts the stripes on prison shirts into emblems of freedom. But it takes more than voting to make coercion benign.

The fiction of majority rule has become a license to impose nearly unlimited controls on the majority and everybody else. The doctrine of “majority rule equals freedom” is custom-made to turn mobs of voters into spoiled children with a divine right to plunder the candy store. The only way to equate submission to majority-sanctioned decrees with individual freedom is to assume that individuals have no right to live in any way that displeases the majority.

The more confused people’s thinking becomes, the easier it is for rulers to invoke democracy to destroy freedom. The issue is not simply Lincoln ‘s, Roosevelt’s, Clinton’s or Bush’s absurd statements on freedom but a cultural–intellectual smog in which politicians have unlimited leeway to redefine freedom. If politicians can redefine freedom at their whim, then they can raze limits on their own power.

This is from libertarian author and lecturer James Bovard at the Freeman.

It is important to distinguish constitutional/liberal democracy with that of social democracy and of mob rule (Ochlocracy)

Classroom-less World: The World is your Classroom

The information age will be more about disruptive innovations or reconfiguring specific social activities via decentralized platforms. 

This should apply to education where online classes may be a transition towards a more decentralized paradigm: ‘Socialstructed learning’ or the world as your classroom.

Socialstructed learning as defined by Ms. Marina Gorbis writing at fastcoexist.com “is an aggregation of microlearning experiences drawn from a rich ecology of content and driven not by grades but by social and intrinsic rewards. The microlearning moment may last a few minutes, hours, or days (if you are absorbed in reading something, tinkering with something, or listening to something from which you just can’t walk away). Socialstructed learning may be the future, but the foundations of this kind of education lie far in the past.”

How the possible transition will go about, again Ms. Gorbis

Today’s obsession with MOOCs is a reminder of the old forecasting paradigm: In the early stages of technology introduction we try to fit new technologies into existing social structures in ways that have become familiar to us.

MOOCs today are our equivalents of early TV, when TV personalities looked and sounded like radio announcers (or often were radio announcers). People are thinking the same way about MOOCs, as replacements of traditional lectures or tutorials, but in online rather than physical settings. In the meantime, a whole slew of forces is driving a much larger transformation, breaking learning (and education overall) out of traditional institutional environments and embedding it in everyday settings and interactions, distributed across a wide set of platforms and tools. They include a rapidly growing and open content commons (Wikipedia is just one example), on-demand expertise and help (from Mac Forums to Fluther, Instructables, and WikiHow), mobile devices and geo-coded information that takes information into the physical world around us and makes it available any place any time, new work and social spaces that are, in fact, evolving as important learning spaces (TechShop, Meetups, hackathons, community labs).

We are moving away from the model in which learning is organized around stable, usually hierarchical institutions (schools, colleges, universities) that, for better and worse, have served as the main gateways to education and social mobility. Replacing that model is a new system in which learning is best conceived of as a flow, where learning resources are not scarce but widely available, opportunities for learning are abundant, and learners increasingly have the ability to autonomously dip into and out of continuous learning flows.

The good news is that the radical decentralization of the educational process will translate to its democraticization. With learning resources becoming more “abundant”, this means prices will fall towards zero bound— yes free education. And this means that education will span to cover greater number of people who will have access to specialized learning. This will also mean lesser politicization of the industry.

On the other hand, education service providers will have to discover other sources of revenues.

Also traditional education institutions will need to redraw their business models in order to adapt with the current changes otherwise face extinction.

Quote of the Day: Currency/Capital Controls: A decisive advance on the path to totalitarianism

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

This is from the great Austrian economist Friedrich von Hayek in his 1944 classic The Road to Serfdom

How Earth Hour Policies (Green Energy) Hurt Consumers: UK Edition

In UK, the push for green energy has only been prompting for higher energy bills.

The editorial of UK’s news outfit the Telegraph decries on the political obsession for green energy (hat tip AEI’s Professor Mark Perry)

With the worst snow conditions in the country since 1981, it’s worrying, to say the least, that gas supplies are running low. A month ago, The Sunday Telegraph warned in this column of the problems of an energy policy that puts expensive, inefficient green power before coal-fired and nuclear power. There have been a few signs that the Coalition is at last turning its attentions to the issue but, still, not nearly enough has been done. Now we are reaping the consequences. Because of a misguided faith in green energy, we have left ourselves far too dependent on foreign gas supplies, largely provided by Russian and Middle Eastern producers. Only 45 per cent of our gas consumption comes from domestic sources. All it takes is a spell of bad weather, and the closure of a gas pipeline from Belgium, to leave us dangerously exposed, and to send gas prices soaring. Talk of rationing may be exaggerated, but our energy policy is failing to deal with Britain’s fundamental incapacity to produce our own power.

Ed Davey, the Energy Secretary, may have granted planning permission this week to a new nuclear power station, Hinkley Point in Somerset. But one nuclear power station, with two new reactors, isn’t nearly enough. Moreover, it will take a decade to build and, even then, will only provide seven per cent of the country’s energy needs.

It is time for the Coalition to tear up its energy policy before the lights really do go out. The first priority must be to repeal the Climate Change Act of 2008, with its brutal, punishing targets: reducing carbon emissions by 80 per cent by 2050, and 26 per cent by 2020. These targets have already had a disastrous effect, forcing the closure of coal-fired power stations, and increasing tax-funded subsidies on wind power. Next month, electricity bills will soar even higher, thanks to a new tax on carbon dioxide produced by coal-fired and gas-fired power stations.

There are good intentions behind a green energy policy, and no one would wilfully want to damage the environment. But green technology – in its current incarnation, anyway – is just too inefficient and expensive to meet our energy needs. In some of the worst weather for more than 30 years, green power still only provides a tiny fraction of our energy needs. Solar power is of limited use in our cold, dark, northern climate. And wind power isn’t much better – cold weather doesn’t necessarily mean windy weather.

As previously pointed out, earth hour/green energy policies are essentially misanthropic for such policies promote economic hardship and even death. The above is just an example.

Popularity or popular themes don’t make ideas valid or sound. Take it from Albert Einstein: 

What is right is not always popular and what is popular is not always right

How Money Oozed out of Cyprus during Negotiation of Bailout Deal

And almost everyone thought that the public’s money froze in Cyprus as ATMs went out of cash and banks were officially closed while local politicians haggled with unelected eurocrats for a bailout deal which was concluded right before the deadline.

Well, reports say that money had oozed out of Cyprus during the weekend.

From Reuters: (bold mine) 

In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned... on a daily basis was much less than it was in reality," the source said.

Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 percent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece - it is heavily exposed to the euro zone's first bailout casualty.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

Chris Pavlou, who was vice chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Two angles here. 

One, people always search for alternatives by exploiting on legal or regulatory loopholes. As indicated above, some took advantage of the London branches of Cyprus banks to withdraw their money.

On the other hand, aside from the controversy where the Cyprus president warned his friends of the imminence of the crisis, in the world of politics, there will always be exceptions to the rule. This applies most especially in favor of the politically connected. What would be needed are "valid" justifications for such actions.

As George Orwell once wrote in Animal Farm: All animals are equal, but some animals are more equal than others

BRICs Mull Bank to Bypass World Bank and IMF

Developing economies represented by the BRICs or Brazil Russia India and China, a popular acronym coined by Goldman Sach analyst Jim O’Neill, have been reported as intending to establish their own multilateral bank to bypass or breakout from the clutches of the influences of the US and the World Bank-IMF cabal. 

From Bloomberg:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The growing role of emerging markets suggests of a commensurate expansion in geopolitical clout. From the same article:

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe…

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. 

But such plans are still on the drawing board…

While BRICS leaders may approve the creation of a development bank in principle at the summit, there’s still disagreement on how it should be funded and operated.

There is more than meets the eye from this development.

 

The BRICs has been expressing apprehension over central bank 'credit easing policies' adapted or imbued by developed economies led by the US Federal Reserve. 

Russia’s Putin calls Bernanke’s QEs as “hooliganism”. Brazil has blamed the Fed for inciting a currency war, and so with China’s censure of QE. 

And partly in response and also in part to promote advancing her geopolitical role, China has been promoting the yuan, via bilateral trade arrangements to the BRICs and the ASEAN.

BRICs along with other emerging markets have been major buyers of gold

Emerging markets led by the BRICs dominated buying in 2012 according to the Bullion Street:

Central bank buying lifted gold last year and is likely to do so this year as more and more emerging market central banks have become first time buyers in recent years.

Observers said central banks across the globe collectively bought more gold than they had previously over 40 years. The buyers were not the usual central bank suspects among the old world European nations, but emerging economies.

And also in 2011 (chart from Reuters)

And recent events in Cyprus only exhibits of the rapidly deteriorating state of the current central bank based fiat money system. 

As Tim Price at the Sovereign Man aptly commented

It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

So the BRICs dissension over the current system has been prompting them to "diversify" (euphemism for acquiring insurance through gold purchases), as well as, to work on creating an alternative system that would circumvent the US dollar standard, possibly with their own bank. 

Perhaps BRICs officials are becoming more aware of the warning given by the French historian and philosopher François-Marie Arouet, popularly known by his nom de plume Voltaire: Paper money eventually returns to its intrinsic value--zero.

Video: Robert Wenzel on the Collapse of the Soviet Union: Facts versus Myths

At the recent Austrian Economics Research Conference held in the Mises Institute, Economic Policy Journal's Robert Wenzel gives an excellent speech examining the real factors that led to the collapse of the Soviet Union.

Central Bank Fractional Banking System: Bank Runs or Inflation

The incumbent central bank fractional banking system means a choice between bank runs and price inflation.

The great dean of Austrian school of economics Murray N. Rothbard explained. (bold mine)

1. Why fractional reserve banks are uninsurable

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.

2. Money Printing as camouflage. The political choice of inflation over bank runs.

What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government--and not the states or private firms--can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.

Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

But now bank runs--at least for the overwhelming majority of banks under federal deposit insurance--are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.

The political choice of inflation over bank runs can be seen via the loss of US dollar’s purchasing power.

Since the establishment of the US Federal Reserve in 1913, one US dollar in 1913 has an equivalent of buying power of $23.45 today according to the BLS inflation calculator. This means the US dollar have lost nearly 96% of their purchasing power. Chronic and unlimited inflation indeed.

The other implication is that the choice of inflation over bankruns means a subsidy to banks at society's expense.

 

3. Abolish the central banking system and ancillary regulators. Restore sound money

Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.

Cyprus, Troika Reach Bailout Deal

So a midnight deal was struck between the Cyprus government and the “troika” consisting of unelected bureaucrats before the deadline.  

From Bloomberg:

Cyprus agreed to the outlines of an international bailout, paving the way for 10 billion euros ($13 billion) of emergency loans and eliminating the threat of default.

The accord between Cyprus and the “troika” representing international lenders was reached in overnight talks in Brussels and ratified by finance ministers from the 17-nation euro area.

“It’s in best interest of the Cyprus people and the European Union,” Cyprus President Nicos Anastasiades told reporters.

It’s really in the best interests of those in the seat of power and connected to them. and not for Cyprus

The content of the deal, again from Bloomberg:

The agreement calls for Cyprus Popular Bank Pcl (CPB) to be shut down and split. The Bank of Cyprus Plc would take over the viable assets of the failed bank along with 9 billion euros in central bank-provided emergency liquidity aid, according to three EU officials who asked not to be named because talks are ongoing.

Deposits below the EU deposit-guarantee ceiling of 100,000 euros will be protected, and a loss of no more than 40 percent will be imposed on uninsured depositors at the Bank of Cyprus, two EU officials said. Uninsured depositors at Cyprus Popular would largely be wiped out, two other officials said.  

Wow. 40% losses for uninsured deposits above 100,000 euros for Bank of Cyprus while total losses uninsured deposits for Cyprus Popular!

Who determines this? The eurocrats from the troika. They will play "god" here. They will ascertain whose assets are “viable” or assets that would be taken over by Bank of Cyprus, and whose assets will be condemned for total losses. They will decide on who are the winners and the losers. They will play the judge, jury and executioner.

I wonder how much under the table deal is going on right now for deposit accounts of 100,000 euro and above? There will a lot of grease money out there to bargain for survival.

And I also wonder how the Russians will be taking this.

Ah but while deal is reached this is subject to approval.

Again from Bloomberg:

It was the second time in nine days that Cyprus struck a deal with European creditors and the IMF. The first accord, reached in the early hours of March 16, fell apart three days later when the Cypriot parliament rejected a tax on all bank accounts on the island.

Perhaps we should pay heed to the advice of Mises Institute's founder, Lew Rockwell:

Your money is not safe in a bank..If the bank is in trouble the government will take your money…Mattress will be a better place to keep your money

Phisix Mania Phase: Been There, Done That

The Philippine Phisix suffered its second major weekly decline for the year, down 2.04%. 

Two consecutive weeks of hefty losses has brought the Phisix off 4.62% from the recently etched milestone highs. Such losses have shaved the year-to-date gains to only 12.15%.

Yet the local benchmark appears to have bounced off the 50-day moving averages supported largely by domestic participants.

Two weeks of the manic bullish reprieve has translated to net foreign selling.

Yet foreign selling does not necessarily translate to fund repatriation. Selling proceeds could be held in cash at the banking system or could have been shifted to other domestic assets (local bonds or properties). The paltry decline of the Peso over two weeks from 40.68 per USD to 40.84 per USD as of Friday’s close may have manifested on such dynamics.

But so far, domestic participants seem to have used technicals to provide support on the Phisix. This seems to manifest on the “refusal to retrench” and “this time is different” mentality.

We have seen this before.

I have been writing about how I think today’s deepening of the manic phase may partly resemble 1993[1].

Then the Phisix returned an eye-popping 154% in nominal currency gains. Following a sharp run up, there had been two sporadic corrections. Ironically, over the same period today, in March and in May where the index fell 6.1% and 5.8% respectively (see 2 red ellipses).

The gist or 63% of the astounding year-to-date 154% return came during the yearend rally that began in October.

While I am not a fan of searching for patterns, whether charts or statistics, to predict the markets, I believe that the psychological framework undergirding today’s boom represents a good approximation of what may happen during a manic phase.

When the prevailing bias has been to think that the current bullrun has been about “good governance” economics, “robust earnings” and that domestic markets “are financially resilient from stresses abroad” while at the same time blissfully ignorant of the baneful impact of expansionary credit from artificially induced interest rates and other credit easing measures, all these are symptoms of “Wow I am smart” (left window) and the “new paradigm” (right window) of the deepening mania phase.

Again mania, for me, signifies as the yield chasing phenomenon that have been rationalized by voguish themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion.[2]

So if I correctly pinpoint the stage of our stock market cycle, then we should expect the Phisix to use the current corrections or consolidations as potential springboard to reach the bear “capitulation” phase where the Phisix may or could reach the 10,000 level. This may happen this year or the next (2014), and again, is strictly conditional.

And the manic phase will be accompanied by an intensive accumulation of systemic credit which will most likely be supplemented by last week’s easing of the 1.86 trillion peso Special Deposit Accounts (SDA) by the BSP[3].

Remember, the BSP explicitly desires that the banking system’s money deposited at the BSP be “withdrawn” and “circulated” in the economy, since according to them SDA money will hardly extrapolate to inflation risks.

In other words, the BSP’s recent SDA policies will account for as providing implicit support to the domestic asset markets, in addition to its current record low interest rates.

So unless domestic monetary officials make a reversal on these credit easing policies, there is a strong likelihood for the Phisix to playout on the final stage of the boom phase of the domestic bubble cycle.

Let me be clear, I am not suggesting that the Phisix will yield 154% this year. Instead I am saying that since social policies ultimately shapes bubble cycles, we are likely to see current policies sustain the domestic bubble process, unless the BSP reverses current policies—most possibly in response to the market signals, e.g. price inflation pressures—or if exogenous “shock” events will be substantial enough to undermine the current prevailing bias.

---

[1] see Global Financial Markets Party on the Palm of Central Bankers January 21, 2013

[2] see Phisix Amidst the Global Pandemic of Bubbles February 18, 2013

[3] see Phisix and the BSP: This Time is Different? March, 17, 2013

Thailand’s Officials Flexes Muscles on Domestic Stock Market Bubbles

To deny that today’s asset market prices have been mainly driven by social policies is to see only a segment or an incomplete picture of reality.

I mentioned last week that Thailand’s SET has overtaken the Philippine Phisix as the latter saw the bulls hibernate. Yet in a snap of a finger, dramatic changes occurred.

Thailand’s SET nosedived 7.5% this week, with Friday’s huge 3.3% losses accounting for nearly half of the week’s quasi panic selling. This week’s “biggest slump since 2008” basically halved the SET’s year-to-date gains: yes, 7.5% losses in one week.

News reports say that the mini crash accounted for “forced sales on margin accounts”[1] in response to expectations over an increase on “margin requirements on trading”. 

The Thai bourse said that the level of collateral for account holders will be increased to 20% of the credit line from 15%[2] or an additional 5% of collateral will be required for every credit line used.

We are not even talking about market responses to a bubble bust or from interest rate spikes, but from an arbitrary edict by the Thai bourse aimed at allegedly reducing “risks to the clearing system” as well as to “help reduce volatility”.

The Stock Exchange of Thailand (SET) seem to be a government agency, since it is a “juristic entity set up under the Securities Exchange of Thailand Act, B.E. 2517 (1974)”, according to the wikipedia.org[3].

Yet if markets have all been about “fundamentals” and “earnings”, then why the aggregate brutal reaction to what appears as a tightening directed by political officials on stock market participants?

The vehemence of selling pressures incited by the “forced sales on margin accounts” only goes to demonstrate how leveraged Thai’s equity markets have been.

Importantly, this also reveals how policymakers can act unilaterally at the expense of the politically unconnected public.

Thai officials seem to sense of a bubble in progress, then precipitately decides tighten.

But their campaign appears to be hinged on a piecemeal approach targeted at a specific asset class.

The actions by the SET essentially reflect on the recent statements by Deputy Governor of the Bank of Thailand, Mr Pongpen Ruengvirayudh, who I recently cited[4].

The Thai official seems to have a good basic comprehension of the nature of bubbles and has recently acknowledged of the considerable growth of the nation’s systemic credit. But he ambivalently dismissed the prospects of the risks of a bubble in presupposing that their actions will successfully contain them.

So I would read the SET’s recent activities in the context of Mr Pongpen Ruengvirayudh’s declarations; where Thai officials will target specific asset markets for bubble containment measures.

Yet it is unclear if the SET’s latest policies will fundamentally impair the prevailing bias.

This will really depend AGAIN on the prospective actions of SET and other regulators, particularly the Bank of Thailand (BoT).

Interventions basically engender uncertainty. And markets disdain uncertainty. However this axiom would only be true if interventions don’t cover monetary easing or credit expansion. The global financial markets have thus far slobbered over central banking stimulus.

In corollary, the contemporary steroids addicted financial markets detests interventions that are based on “tightening” or “withdrawal”

For the meantime, the recent decree on margin trades will translate to an adjustment window from the policy induced uncertainty made by SET’s latest “tightening”. Thus Thai equities are likely to struggle.

Market participants will then assess if SET officials will continue to foist uncertainty through more ‘tightening’ interventions, or if the authorities will allow markets to function. If the former, then Thai’s equity markets would have more downside bias going forward. If the latter, then Thai’s mania may catch a second wind.

It would also be misguided to assume that assaulting stock markets will extrapolate to the suppression of bubbles. Such actions represent as dealing with the symptoms rather than the disease.

China’s stock market, as measured by the Shanghai Stock Exchange Composite[5], remains in consolidation at the bear market troughs.

But the object of manias via rampant speculation and credit expansion has only been diverted to the property markets.

Stock market bubbles seem as easier to control politically compared to property bubbles. That’s because the former operates on centrally organized regulated platforms as against the latter which represents a localized, diversified and fragmented market.

In servicing the financial needs of the highly dispersed property sector, banks frequently engage in off-balance sheet transactions combined with other nonbank entities or intermediaries. They are resorted to by many firms in order to circumvent or skirt regulations. These companies represent the shadow banking industry[6].

Such phenomenon hasn’t been limited to China[7] and the US[8] but has evolved to cover much of the major economies of the world[9]. 

The global pandemic of bubble policies has mainly fueled their rise. Also, shadow banking has been a function of regulatory responses by markets as well as political entities (like the local governments of China). Yet the more the regulations, the bigger the shadow banks.

It’s been an incessant cat mouse game between regulators and market forces.

As I recently pointed out, the feedback on the newly imposed property restrictions on China’s property markets has prompted people to exploit legal loopholes. Incidences of divorce have skyrocketed as married couples use the divorce route to bypass new regulations[10].

Another example, Malaysia’s string of legal restrains likewise has failed to prevent the recent surge in property prices[11] which the IMF admitted they failed to see beforehand.

So Thailand’s tepid approach in dealing with her bubbles will hardly meet the objectives of managing them. The bubble caused by easy money policies isn’t likely to stop; they will only shift, unless the authorities deal with the real cause.

Officials may deny that bubbles pose as public risk. But they are beginning to tinker with the markets in order to rein them. This means they are admitting indirectly to the menace which they publicly reject. We call this demonstrated preference or action speaks louder than words.

Nonetheless, Thailand’s experience shows how highly sensitive or fragile markets are to the prospects of tightening. 

The attack on Thailand’s stock market by their authorities to quash homegrown bubbles is a lesson that should be relevant for world markets or for the Phisix.

---

[1] Reuters.com SE Asia Stocks-Down; Thailand underperforms on forced sales, March 22, 2013

[2] Bloomberg.com Thai Stocks Post Worst Week Since 2008 on Margin Rule Change March 22, 2013 SFGate.com

[3] Wikipedia.org Operations Stock Exchange of Thailand

[4] see Phisix’s Mania: We’re Still Dancing March 11, 2013

[5] tradingeconomics.com CHINA STOCK MARKET (SSE COMPOSITE)

[6] Wikipedia.org Shadow banking system

[7] see More Signs that China’s $2.4 Trillion Shadow Banking System is in Big Trouble September 14, 2012

[8] see 2008 US Mortgage Crisis: The US Federal Reserve and Crony Capitalism as Principal Causes May 31, 2011

[9] see Financial Bubble: Shadow Banking System Soar to US $67 Trillion or 100% of World GDP November 20, 2012

[10] Finance Asia Property tax exposes Chinese pragmatism March 20, 2013

[11] see More Signs of Manic Phase in The Phisix, ASEAN and the US, March 4, 2013

Cyprus: The Mouse that Roared

Unfolding events in Cyprus may or may not be a factor for the Phisix or for the region over the coming days. 

This will actually depend on how the bailout package will take shape, and importantly, if these will get accepted by the “troika” (IMF, EU and the ECB), whose initial bid to force upon a bank deposit tax indiscriminately on bank depositors had been aborted due to the widespread public opposition.

So far, the Cyprus parliament has reportedly voted on several key measures[1] as nationalization of pensions, capital controls, bad bank and good bank. Reports say that the Cyprus government has repackaged the bank deposit levy to cover accounts with over 100,000 euros with a one-time charge of 20%[2]!

The troika demands that the Cyprus government raise some € 5.8 billion to secure a € 10 billion or US $12.9 billion lifeline.

If there may be no deal reached by the deadline on Monday, then Cyprus may be forced out of the Eurozone. Then here we may see uncertainty unravel across the global financial markets as a Cyprus exit, which will likely be exacerbated by bank runs and or social turmoil, may ripple through the banking system of other nations.

However, if Cyprus gets to be rescued at the nick of time, then problems in the EU will be pushed for another day.

Nonetheless unfolding events in a 1 million populated Cyprus, but whose banking system has been eight times her economy[3] has so far had far reaching effects.

The Cyprus “bail in” has already ruffled geopolitical feathers.

Germans are said to been reluctant to provide backstop to Cyprus due to nation’s heavy exposure to the Russians, where the latter comprises about a third of deposits of the Cyprus banking system. Much of illegal money from Russia has allegedly sought safehaven in Cyprus.

The Cyprus-Russia link goes more than deposits. They are linked via cross-investments too.

Some say that the Germans had intended to “stick it to the Russians”[4].

On the other hand, Russians have felt provoked by what they perceive as discrimination.

Meanwhile events in Cyprus have also opened up fresh wounds between Greeks and the Turkish over territorial claims[5].

The other more important fresh development is of the bank deposit taxes.

Where a tax is defined[6] as “a fee levied by a government on income, a product or an activity”, deposit taxes are really not taxes, but confiscation.

Some argue that this should herald a positive development where private sector involvement takes over the taxpayers. Others say that filing for bankruptcy would also translate to the same loss of depositor’s money.

Confiscation is confiscation no matter how it is dressed. It is immoral. Private sector involvement is forced participation.

Bankruptcy proceedings will determine how losses will partitioned across secured and unsecured creditors and equity holders. Not all banks will need to undergo the same bankruptcy process. Yet confiscation will be applied unilaterally to all. For whose benefit? The banksters and the politicians.

And one reason bondholders have been eluded from such discussion has been because Cyprus banks have already been pledged them as collateral for target2 programs at the ECB[7].

The more important part is that events in Cyprus have essentially paved way for politicians of other nations, such as Spain and New Zealand[8], to consider or reckon deposits as optional funding sources for future bailouts.

With declining deposits in the Eurozone[9], the assault on savers and depositors can only exacerbate their financial conditions and incite systemic bankruns.

So confidence and security of keeping one’s money in the banking system will likely ebb once the Cyprus’ deposits grab policies will become a precedent.

This is why panic over bank deposits have led to resurgent interest on gold and strikingly even on the virtual currency the bitcoin[10]. The growing public interest in bitcoin comes despite the US treasury’s recently issued regulations in the name of money laundering[11].

Such confiscatory policies will also redefine or put to question the governments’ deposit insurance guarantees. Not that guarantees are dependable, they are not; as they tend increase the moral hazard in the banking system as even alleged by the IMF[12]. 

Deposit guarantees are merely symbolical, as they cannot guarantee all the depositors. Given the fractional reserve nature of the contemporary banking system, if the public awakens to simultaneously demand cash, there won’t be enough to handle them. And obliging them would mean hyperinflation. That’s the reason the dean of the Austrian economics, Murray Rothbard calls deposit insurance a “swindle”[13].

The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do — and this would be in their power — would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

So governments will not only resort to taxing people’s savings implicitly (by inflation), they seem now eager to consider a more direct route: confiscation of one’s savings or private property. Note there is a difference between the two: direct confiscation means outright loss. Inflation means you can buy less.

Finally, losses from deposit confiscation, and its sibling, capital controls will lead to deflation.

Confiscatory deflation, as defined by Austrian economist Joseph Salerno, is inflicted on the economy by the political authorities as a means of obstructing an ongoing bank credit deflation that threatens to liquidate an unsound financial system built on fractional reserve banking.  Its essence is an abrogation of bank depositors' property titles to their cash stored in immediately redeemable checking and savings deposits[14]. 

The result should be a contraction of money supply and bank credit deflation and its subsequent symptoms. This will be vented on the markets if other bigger nations deploy the same policies as Cyprus.

That’s why events in Cyprus bear watching.

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[1] See Cyprus President Warned Friends of Crisis March 23, 2013

[2] New York Times Cyprus Makes Plan to Seize Portion of High-Level Deposits, March 23, 2013

[3] Constantinos Stephanou The Banking System in Cyprus: Time to Rethink the Business Model? 2011 World Bank

[4] Investopedia.com The Cyprus Crisis 101 March 19, 2013

[5] See Will Events in Cyprus Trigger a War? March 22, 2013

[6] Investorwords.com Tax

[7] Mark J Grant Why Cyprus Matters (And The ECB Knows It) Zero Hedge March 23, 2013

[8] John Aziz Guest Post: Whose Insured Deposits Will Be Plundered Next? Zero Hedge March 21, 2013

[9] The Economist Infographics March 23, 2013

[10] See Bitcoins: Safehaven from Cyprus Debacle and Officially Recognized by the US Treasury March 21, 2013

[11] International Business Times, US Treasury Department: Virtual Currencies (Read: Bitcoins) Need Real Rules To Curb Money Laundering March 22, 2013

[12] Buttonwood What does a guarantee mean? The Economist March 19, 2013

[13] Murray N. Rothbard Taking Money Back January 14, 2008 Mises.org

[14] Joseph Salerno Confiscatory Deflation: The Case of Argentina, February 12, 2002 Mises.org