Inflation and Price Controls: Latin America Edition

I have been saying that price controls functions as the alter ego or the twin sibling of inflationism where both operates under the umbrella of financial repression (euphemism legal plunder of people's resources via social policies). 

I have also been pointing out that depending on statistics (historical data) to establish a theory can hardly be relied on because statistics does not capture real human events, and can be manipulated to serve political goals.

Here is how it works. First government inflates money supply via credit expansion. Next, the resultant higher prices will be blamed on “greed” on the private sector, thus, justifying price controls. Then government imposes price controls and other related restrictions.

Price controls effectively mutes statistical inflation. But on the other hand, price controls provides disincentives for producers to produce, thereby leading to goods shortages, and thus, leads to social deprivation and hardships.

At the end of the day, inflationism-price controls brings about economic crises and social unrest.

Cato’s Steve Hanke says the spreading use of price controls in Latin America, while reducing statistical inflation, has been depriving the public access to goods. (italics original)

Argentina, Venezuela, and now even Ecuador have all embraced an unfortunate, if familiar, economic craze currently sweeping the region – price controls. In a wrong-headed attempt to “suppress” inflation, the respective governments have attempted to fix prices at artificially low levels. As any economist worth his salt knows, this will ultimately lead to scarcity.

Consider Venezuela, where the government sets the price of a number of goods, including premium gasoline, which is fixed at only 5.8 U.S. cents per gallon. As the accompanying chart shows, 20.4% of goods are simply not available in stores.

While price controls ostensibly keep the prices of goods on official markets low, they ultimately lead to empty shelves, depriving many consumers access to essential goods (such as toilet paper). This, in turn, leads to “repressed” inflation – given the price controls that exist, the “true” rate of inflation is held down, or repressed through Soviet-style government intervention. As the accompanying chart shows, the implied annual inflation rate for Venezuela (using changes in the black-market VEF/USD exchange rate) puts the “repressed” inflation rate at 153%.

Likewise, Argentina is facing a similar dilemma (see the accompanying chart).

In addition to scarcity and repressed inflation, price controls can lead to unintended political consequences down the road. Once price controls are implemented it is very difficult to remove them without generating popular unrest – just consider the 1989 riots in Venezuela when President Carlos Perez attempted to remove price controls.

This only proves my observations that Venezuela and Argentina, as enduring episodes of hyperinflation (the new generation of Zimbabwes), although at different stages; Venezuela is at a more advanced state relative to Argentina’s incipient phase from earlier stagflation.

I expect stagflation-hyperinflation to occur in many parts of the world as governments rely on the printing press and financial repression to advance their interests.

So Where’s the Magic of Abenomics? Japan Post Ninth Month of Trade Deficits

So where’s the much ballyhooed ‘competitiveness boosting’ magic of Abenomics?

Despite the BoJ’s announcement of the doubling of monetary base in 2 years, Japan’s trade balance continues to drift at the negative territory.

chart from tradingeconomics.com

From the Wall Street Journal,

Japan's merchandise trade balance logged a deficit of 362.4 billion yen ($3.69 billion) in March, stretching the run of deficits to a record nine months, as the weak yen pushed up import prices.

The result compares with a median forecast for a deficit of ¥430 billion in a survey of economists by Dow Jones Newswires and showed an improvement from a revised ¥779.5 billion deficit in February.

Exports also showed some recovery, rising 1.1% from the same period last year to ¥6.27 trillion ($63.9 billion), the Ministry of Finance data released Thursday showed. In February, exports had been down 2.9%.

While exports to China remained weak, falling 2.5% on year, sales to the U.S. jumped 7% as demand there began to rise amid a steady if somewhat subdued recovery.

Continuing to darken Japan's trade picture has been a sharp increase in energy imports. Crude oil imports were up 7% while liquefied natural gas imports were up 8.8%.

Japan has been forced to sharply increase its purchases of fossil fuels for electricity production ever since the March 2011 nuclear plant accident in northern Japan. The total cost has been pushed higher by the decline in the yen since mid-November. Japan's currency has fallen nearly 20% over that period.

Overall, imports were up 5.5% to ¥6.634 trillion.

Yes, admittedly there has been some improvements, but remember the potency of inflationism have usually been in the short term, which means dramatic improvements should have already been manifest. Apparently this has not been the case...perhaps not yet.

Instead, what has been happening is that Japanese firms have been tapping into foreign funds, and of a spike in the yields of short end spectrum of JGBs which has contributed to the market's sharp volatility.

Hardly any signs of improvements.

Quote of the Day: The Merit of Gold

It is the outstanding merit of gold as the monetary standard that it makes the supply and the purchasing power of the monetary unit independent of government, of office holders, of political parties, and of pressure groups. The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice. It is precisely the merit of the gold standard, finally, that it puts a limit on credit expansion.

This is from the late great libertarian Austrian economist, philosopher, journalist Henry Hazlitt in his book THE INFLATION CRISIS, AND HOW TO RESOLVE IT p.173

Gold Price Crash Spurs Boom in Physical Gold Markets

Apologists for inflationism have been saying in media that the plunge in gold prices marks the “end of gold’s bull market era”. 

But they hardy explain that the such quasi-crash has been brought about mainly by a selloff in paper gold rather than the physical gold: a parallel market.

Tocqueville Asset Management’s John Hathaway explains that the US centric based selling of gold paper translated to about 1 million contracts which exceeded global annual gold production by 12%—an anomaly. Well this for me smells like manipulation.

Since the selloffs, like press releases, suddenly media has synchronically been saying that central banks lost money from their reserves, which I point out in the case of the US government this has simply been untrue or disinformation, and that such selloff justifies more inflationism which has been expected of them

Yet following the price smash up, instead of prompting the public to eschew gold, the physical gold market continues to exhibit reaccelerated demand for gold worldwide.

From Bloomberg (bold mine)

Shoppers in China lined up for gold this week, while in Hong Kong they rushed to buy bracelets and in India sought jewelry for weddings not set until December. The metal’s biggest price drop in three decades provoked the clamor.

From Zaveri Bazaar in Mumbai, India’s largest bullion market, to Australia’s Perth Mint, where sales doubled from last week, consumers headed to shops after the commodity entered into a bear market last week. As gold plunged 13 percent in the two sessions through April 15, retail sales tripled across China on April 15-16, the China Gold Association reported.

The frenzy appeared in India and China, the biggest gold- consuming nations, with cultures that traditionally acquire the metal for brides, babies or strongboxes. This year’s 18 percent decline may reignite demand that last year fell for the first time in three years, with Asian investors in particular seeing the drop as a buying opportunity.

Note the term “frenzy”.

Now to the coin market

From the Wall Street Journal (bold mine)

Sales of gold and silver coins are soaring despite the sudden plunge in the price of precious metals, benefiting mints around the world and driving the cost of the collector items to well above the value of the metal they are made of.

Coins account for about a fifth of all gold purchases for investment and are often favored by retail investors because they are far cheaper than the larger bars bigger investors buy.

While traders dumped gold futures earlier this week on signs global inflation is easing and world economies are slowing, coin prices have been cushioned by high demand from gold enthusiasts who say coins hold their value over the long term.

The premium on gold coins has risen to about 5% more than the spot price of the metal, and compares with 3% at the start of the year, traders say. For silver, the premium has risen to as much as 18% from about 15% at the start of the year. Comparisons aren't precise because the coins generally contain small amounts of other metals to strengthen them, and there is typically a small premium because of manufacturing costs.

Again prices in the real world and financial paper gold reflects on a patent disconnect.

Yes central bankers have reportedly been divided too.

From another Bloomberg article:

The biggest drop in gold prices since 1983 has divided central banks on whether the metal is cheap enough to increase investment.

Sri Lanka’s central bank governor said falling prices are an opportunity for nations to raise gold reserves and that the island will “favorably” examine buying more. The Bank of Korea said the plunge isn’t a “big concern” because holding the metal is part of a long-term strategy for diversifying currency reserves. Reserve Bank of Australia’s assistant governor said bullion has no “intrinsic value.” South Africa’s central bank governor won’t adjust its reserves policy.

Central banks own about 19 percent of all gold ever mined, and last year boosted their holdings by the most since 1964, according to the London-based World Gold Council.

In the attempt to shut down alternative currencies, and by claiming that gold isn’t a safehaven, what politicians and the inflationists want to project is that we all have NO choice but to trust governments.

This means that we ought to or should unquestionably abdicate to governments a bigger part of our savings directly via outright confiscation or indirectly by inflation for the benefit of the political class and their cronies.

 

A famous politician once said, You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

The pushback from the gold bear raid as seen in the physical gold market implies that the governments and their apologists cannot fool all the people all the time.

Updated to add: The Zero Hedge points out that the US Mint sold a record 63,500 ounces of gold in ONE day.

According to today's data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.

Philippine Economy: Airline Liberalization Yields Greatest Number of Cheap Travel

Well this development is certainly a refreshing plus for the Philippine economy. 

The domestic airline industry’s liberalization has led to a boom in domestic tourism and has earned the Philippines plaudit as having the greatest number of cheapest air fare in the world.

From the Economist, (bold mine)

LOW-COST airlines like Ryanair and Southwest Airlines have swollen to formidable size in recent years by offering a very different approach to that of more traditional full-service airlines. With their single-class seating, range of ancillary charges and pared-down approach to all things aviation-related, these budget carriers have become a familiar, often bemoaned, feature of holidays and business trips around the globe. In British airports, for example, more than 50% of all passengers last year squeezed into seats on low-cost carriers. But Britain only comes seventh on a list ranking countries on that criterion. Figures released by Amadeus, a global travel distribution system, show that the Philippine aviation market has the greatest proportion of low-cost flyers. In that country of over 7,000 islands, 65% of all passengers used budget carriers last year. Cebu Pacific, the nation’s biggest low-cost operator, boasted over 46% of the domestic market. Among the smallest low-cost markets are Russia, Japan and China, where budget carriers accounted for just 5%, 4% and 1% of departures respectively. In China, the government keeps strict control of the airline industry and shields the three main state-controlled carriers (Air China, China Southern and China Eastern) from low-priced competition. Shanghai-based Spring Airlines, which launched in 2005, is the country's only low-cost carrier of any size.

Since the Philippine government has liberalized the airline industry in 1995, the entry of new players has prompted competition to drastically lower airfares which translated to a natural boom in the domestic tourism industry. Lowering the cost of airfare has allowed a greater number of people, across income and wealth strata, to enjoy the benefits of traveling.

Here is the current list of domestic commercial airlines from Wikipedia.org

Domestic tourism plays a big role in the tourism industry where spending share of local tourists accounts for 59.1% of the industry in 2011 as I earlier pointed out here.

Rather than blowing bubbles, real structural reforms on the local economy should be modeled after the Philippine airline industry.

As post-war free market reformist, former Chancellor of Germany Ludwig Erhard, popularly known to have ushered in "Wirtschaftswunder" or German for "economic miracle", wrote in his classic book Prosperity through Competition, page 1

Competition is the most promising means to achieve and to secure prosperity. It alone enables people in their role of consumer to gain from economic progress. It ensures that all advantages which result from higher productivity would eventually be enjoyed.

Indeed.

I Told You So: Gold Slump Used as Justification for MORE QE

I earlier mentioned that the deflation bogeyman from the recent gold-commodity panic will be used to justify more inflationism

Expect this selloff in gold-commodity sphere to increase risks towards a transition to a global crisis, and for central banks to engage in more aggressive inflationism.

Well media’s rationalization or the Fed’s implicit public conditioning strategy (signaling channel) through media to generate public support for more QE seems to have been initiated.

From Bloomberg: (bold mine)

The slump in gold may hand activist central bankers more reasons to pursue the easy monetary policy that helped drive up the metal’s price in the first place.

Among many explanations for the biggest drop in more than 30 years: a fourth annual global growth scare as data disappoint from China to the U.S. and investors fold long-held bets that monetary stimulus will ultimately unleash inflation. Other reasons for the drop range from a view that the price reached so-called technical levels to concerns that Cyprus could start a rush by indebted nations to sell their supplies of the metal.

The combination of growth jitters and reduced inflation anxiety boosts the case of Federal Reserve Chairman Ben S. Bernanke and counterparts elsewhere to keep pump-priming their economies in the hope they will finally secure traction. It also may help them beat back critics, including some U.S. Republican lawmakers.

From Wall Street Journal Blog (bold mine)

Tuesday’s inflation data reported by the Labor Department gives the Federal Reserve a new reason to keep its easy money policies in tact – inflation could be slowing.

The consumer price index was up 1.5% in March from a year earlier, the fourth time in five months that it has been below the Fed’s 2% inflation goal. The index for consumer prices excluding volatile food and energy was up 1.9% for the fourth time in five months. Readings like that are likely to get the attention of central bank officials.

The Fed has been debating when to begin winding down an $85 billion-per-month bond-buying program. The Fed has linked the bond buying to developments in the job market, saying it would gradually reduce the amount of the monthly purchases once the job market improves substantially.

No conspiracy?

Contra Media, US Government Gold Reserve Holdings Unscathed by Gold Plunge

Mainstream media attempts to downplay the “conspiracy” theory that the current plunge in gold prices may have been engineered.

So they allude to losses incurred by central banks in the wake of the selloffs 

From a Bloomberg article 

Central banks are among the biggest losers because they own 31,694.8 metric tons, or 19 percent of all the gold mined, according to the World Gold Council in London. After rallying for 12 straight years, the metal has tumbled 28 percent from its September 2011 record of $1,923.70 an ounce.

Central bank-got-hit meme looks like a press release.

Reuters has a chart suggesting the same

I don’t know about other central banks, but for the US government via the US FEDERAL RESERVE and the US Treasury, the recent slump has hardly impacted the dollar value of gold reserves because they are “valued” at 42.2222 per troy ounce.

This straight from the US Federal Reserve’s footnote on US Reserve Assets as of September 2012

Gold held "under earmark" at Federal Reserve Banks for foreign and international accounts is not included in the gold stock of the United States; see table 3.13, line 3. Gold stock is valued at $42.22 per fine troy ounce.    

And this from the US Treasury

The Status Report of U.S. Treasury-Owned Gold (Gold Report):

• Reflects gold bullion and gold coins owned by the federal government
• Summarizes the fine troy ounces and the book value of gold held by various facilities
• Identifies the value of gold coins and bullion on display at Federal Reserve banks; coins and bullion in reserve at the Federal Reserve Bank of New York; and gold held by U.S. Mint facilities

The book value of gold is currently $42.2222 per troy ounce. The information used to compile this reporting is received from the U.S. Mint, Federal Reserve banks, and FMS.

In effect, based on the US government's accounting treatment of gold reserves, media’s reporting can be seen as deceptive or misleading.

And that's even to assume yet that the official holdings of gold are intact, which is questionable. It would reportedly take SEVEN years for the FED to return the gold reserves of the Bundesbank. Why?

I am inclined to think that this quasi-crash may have provided the window for the Fed to load up gold to return to the Bundesbank. Talk about conspiracy.

This Time is Different: Fiscal Discipline Not Required

This time is different. Each time a literature or study proposes to show that government discipline is required to avert a crisis, some rejoinder will be issued to justify the opposite.

From Bloomberg,

A paper by Harvard University economists Carmen Reinhart and Kenneth Rogoff that has been cited by Republican lawmakers to justify eliminating the budget deficit contains “serious errors,” according to a study by a group of University of Massachusetts academics.

The Reinhart-Rogoff paper, “Growth in a Time of Debt,” argued that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth.

The new study -- by economists Thomas Herndon, Michael Ash and Robert Pollin -- says that the Harvard economists excluded some data and unconventionally weighted the statistics they included to reach their conclusions.

This led to “serious errors that inaccurately represent the relationship between public debt and growth,” Herndon, Ash and Pollin said in the paper published yesterday.

In an e-mail, Reinhart and Rogoff defended the conclusions of their 2010 paper and said that “on a cursory look” the new study also finds growth slowing in nations with excessive debt. “We literally just received this draft comment, and will review it in due course,” they said.

Ash said in a telephone interview that his paper does show “a modest diminishment of growth” in countries with big debts yet nothing like “the stagnation or decline” seen in the study by Reinhart and Rogoff.

Note: The kernel of the paper’s objection to Rogoff-Reinhart’s study: “modest diminishment” versus “stagnation”.

More of Reinhart-Rogoff response at the Wall Street Journal Blog, they rebut,

cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.

Based on the Bloomberg article, the critique is an example of the silly quibbling over statistics while ignoring of the real human effects of a debt laden economy (mostly hobbled by higher taxes, financial repression, byzantine regulations and politicization of markets--all of which diminishes growth and whose economic losses will never be captured by data). 

While I am no big fan of Professors Reinhart and Rogoff, for what I see as their skewed views of capital flows and their advocacy of inflationism as means to reduce debt, at least they recognize of the hazards or of the perils of a leveraged economy from their chronicles of 8 centuries of crises.

As Carmen Reinhart and Kenneth Rogoff writes in their book This time is different Part I Financial Crisis: An Operational Primer (bold mine)

The essence of this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provokes a crisis of confidence that pushes it off.

For the mainstream: This time is different. Yes, this is mania at its finest.

Video: Marc Faber: I love the fact that gold is finally breaking down

Quotes and video from ETFDaily News

On Gold’s decline in perspective

I love the markets. I love the fact that gold is finally breaking down. Because that will offer an excellent buying opportunity. I would just like to make one comment. At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple is down 39% from last year’s high. At the same time, the S&P is at about not even up 1% from the peak in October 2007. Over the same period of time, even after today’s correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. So I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed.

Gold fundamentals intact, signs of deflation?

$1300. Nobody knows for sure but I think the fundamentals for gold are still intact. I would like to make one additional comment. Today we have commodities breaking down including gold. At the same time we have bonds rallying very strongly. If you stand aside and you look at these two events, it would suggest that they are strongly deflationary pressures in the system. If that was the case, I wouldn’t buy stocks or sovereign bonds because the stock market would be hit by disappointing profits if there was a deflationary environment.

Dr. Faber is referring to bursting bubbles via asset deflation.

What to do under deflationary (bubble bust) conditions

Yes, I agree. That’s why I said if the gold market collapse is saying something about deflation and at the same time we have this sharp rise in bond prices and the signals are correct that we have deflation, I wouldn’t buy stocks because in a deflationary environment, corporate profits will disappoint very badly.

Policies from Cuckoo People means we should expect sharp volatilities on any assets

Everything is possible…In the economy of the cuckoo people that populate central banks, everything is possible. What you have is gigantic bubbles, the NASDAQ in 2000, then the housing bubble and then commodities in 2008 when oil went from $78 to $147 before plunging to $32 within sixth months. That kind of volatility comes from expansionary monetary policies from money-printing.

On Gold’s short and long term view.

All I am saying as a trader I would probably enter the market quickly for a rebound of $20 or $40. From a longer term perspective, I would give it some time. We may go lower. I am not worried. I am happy gold is finally coming down, which will provide a very good entry point.

I say gold will register negative returns this year, but may recover from recent lows by the yearend.

 

On being nimble.

My argument is that you should always have in this kind of high volatility environment a fair amount of cash because opportunities will always arise again and again and if you have cash you can then buy assets at a reasonable price. I think Patience is very important in this environment. The question is, how do you hold your cash? Hopefully not with a Cyprus bank.

Like Dr. Faber, I am not worried about gold’s plunge, as we’ve seen this before. I am rather disturbed by how the selloff has been rationalized through disinformation by the mainstream. Global government's deepening thrust to confiscate people's savings directly (outright confiscation via bank deposits) or indirectly (inflation) will continue to provide gold with a safehaven appeal over time.

I am more worried about the growing risks of a global/regional crisis than of gold.

World Bank: Developing Asia Should Put a Brake on Easing Policies

Interesting call from the World Bank. 

From the Jakarta Globe:

The World Bank is urging developing economies in East Asia and Pacific, including Indonesia, to put a brake on monetary and fiscal policies that boost consumer demand, arguing that such actions would add to inflationary pressures as the global economy gradually recovers.

“Most countries in developing East Asia are well prepared to absorb external shocks, but continued demand-boosting measures may now be counterproductive, as it could add to inflationary pressures,” said World Bank East Asia and Pacific chief economist Bert Hofman in a report on Monday.

“A strong rebound in capital inflows to the region induced by protracted rounds of quantitative easing in the US, EU and Japan, may amplify credit and asset price risks,” he added.
 

Developing East Asia and Pacific include China, Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Malaysia, Laos, Mongolia, Myanmar, East Timor, Fiji, Papua New Guinea, Solomon Islands and other smaller island economies in the Pacific.

So the World Bank finally admits or acknowledges of the existence of the Asian-ASEAN bubbles which they couch in technical gobbledygook as “demand-boosting measures may now be counterproductive”. 

“Counterproductive” is really about capital consumption from malinvestments that will be unraveled by inflationary pressures. Mainstream terminology for this is "overheating".

This has been a dynamic I have been pointing out since last year.

The World Bank also puts into proper context  the role of capital inflows as “may amplify credit and asset price risks”. Yes this is an acknowledgement of my assertion that all bubbles are inherently domestic.

Glad to hear some forthrightness from a taxpayer funded multilateral agency.

Yet, be careful of what you wish for.

If the boom in ASEAN economies has mainly been derived from counterproductive “demand boosting measures”, then a policy brake (tightening) would translate to a reversal of such speculative, unproductive, wealth consuming activities: particularly such will likely be ventilated through economic recession, crashing markets and possibly a financial/banking crisis.

A “brake” in easing policies, for instance, will essentially expose on the underlying reality behind the supposed Philippine economic miracle labeled as “Aquinomics” along with political façade from other ASEAN nations whose economic growth has been cosmetically boosted by credit expansion.

Thus, will ASEAN politicians acquiesce to a virtual exposé of their pretentious policies that risks undermining their political privileges and of their supposed popular moral standings? 

I doubt so.

Yet more institutions appear to recognize implicitly, slowly but surely, my concerns of a coming crisis from today’s bubble policies.

Video: Why do we Trade or Exchange Things?

Voluntary trading or exchanging are ubiquitous activities for people, unfortunately many don't understand its essence and that's the reason why trading or exchanging has often been subjected to politics. 

In the following video from LearnLiberty.org, Duke University's Professor Mike Munger explains why people trade: (hat tip Professor Don Boudreaux)

How the Korean Peninsula Crisis will be Settled

Historian Eric Margolis at the lewrockwell.com offers the scenario (bold mine)

Now, the US has finally deployed its diplomatic muscle by sending the new Secretary of State John Kerry to Beijing to try to arm-twist China into clamping down on its errant bad boy, North Korea. The result was a joint communiqué calling on the US and China to jointly pursue the de-nuclearization of the Korean Peninsula.

China has long advocated this policy, so nothing new here. But the North American media hailed it as a breakthrough in the crisis. In fact, China is not happy with North Korea’s nuclear program, but Beijing considers an independent, stable North Korea essential for the security of its highly sensitive northeast region of Machuria.

Chinese strategists fear the collapse of the Kim dynasty in North Korea would lead to the US-dominated South Korea absorbing the north and even implanting US bases within range of Manchuria and the maritime approaches to Beijing. In 1950, China responded to the advance of US forces onto its Manchurian border, the Yalu River, by intervening in the Korean War with over 1.5 million soldiers.

The collapse of North Korea would also move South Korean and US military power 200 km closer to Russia’s key Far Eastern population and military complex at Vladivostok.

Accordingly, China’s strategy to date has been to talk moderation and issue occasional blasts at North Korea to appease the outside world and its major American trading partner while quietly ensuring that North Korea remains viable. China supplies all of North Korea’s oil, part of its food, and large amounts of industrial and military spare parts.

North Korea’s Kim Jung-un appears to have climbed too far out on a limb by issuing dire threats that include nuclear war. His problem is to climb back without losing too much face or appearing to be forced by the United States.

Prestige is a key factor in dictatorship. An obvious defeat can lead to the dictator’s fall. That’s why Hitler refused to retreat from the deathtrap at Stalingrad, rightly fearing such a loss of prestige and his mystique of military genius would encourage his domestic foes to move against him.

So Kim will likely need Beijing’s help in ending the crisis, and Beijing will be both happy to do so and end up in a position to demand useful concessions from Washington.

Beijing has been claiming that the US whipped up the current Korea crisis to justify deploying new military forces to Asia and emplacing more anti-missile systems in Alaska and a new one in Guam – all part of President Barack Obama’s much heralded "pivot to Asia."

At the end of the day, North Korea will remain as the convenient bogeyman, stooge, prop and supposed “buffer” for the benefit of both China and the US (particularly the military industrial complex and the neocons).

The vaudeville of the geopolitics of blackmail continues.

Abenomics: More Signs of Backfire

Japan’s inflationism will lead to increasing reliance on foreign capital first, and importantly to eventual capital flight, these increases the risks of a debt/currency crisis

Here is what I wrote back then

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

There seems to be incipient signs of the above as Japanese companies opens the door to financing from abroad.

From Bloomberg:

Shizuoka Bank Ltd. (8355) joined Japanese national lenders in expanding U.S. dollar finance activity, anticipating monetary easing will crush margins on yen loans.

The nation’s second-biggest regional bank by market value raised $500 million in zero-coupon notes due 2018, the first public sale of dollar-denominated convertible bonds by a Japanese company since 2002. The average interest rate on long- term yen loans from the country’s lenders fell to 0.942 percent in February, compared with 3.348 percent companies worldwide pay on dollar facilities, according to data compiled by Bloomberg.

Mitsubishi UFJ Financial Group Inc. plans to increase energy and utility financing in the U.S., as the Bank of Japan (8301)’s focus on cutting long-term borrowing costs undercuts earnings from yen loans, President Nobuyuki Hirano said. Sumitomo Mitsui (8316) Financial Group Inc. aims to sell a record amount of dollar bonds this year for overseas business, even as the BOJ policy seeks to spur domestic lending to revive the economy.

Abenomics has failed to prompt for the desired domestic spending and credit growth as Japanese firms remains flushed with cash, preferring foreign financing. Again from the same article

Prime Minister Shinzo Abe’s call to boost fiscal and monetary stimulus hasn’t been enough to spark corporate demand for loans, leaving Japan’s banks with a record amount of excess cash. Customer deposits held by Japanese lenders exceeded loans by 176.3 trillion yen ($1.8 trillion) in March, central bank data show.

Yet concerns over Japan credit ratings have emerged, as seen via Japan’s Credit Default Swaps CDS at near record highs.

The cost to insure Japan’s sovereign notes for five years against nonpayment was at 71 basis points yesterday, after reaching 78 earlier this month, the highest since Jan. 23, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the credit-default swaps signals improving perceptions of creditworthiness.

The adverse impact from Kuroda’s implementation of aggressive Abenomics has reportedly contributed to the gold-commodity rout.

We can see why.

Yields of the 30 year JGBs has sharply bounced off the lows

Yields of 2 year JGBs has surpassed the .1% level, which have been standard for about 1 year 

From the bigger picture or 5 year chart we can see the deviation of 2 year JGB yields from the norm (all charts from Bloomberg)

All these has coincided with a monster rally in the yen, decline of the Nikkei and a nosediving gold.

Abenomics has simply been doing the same thing over and over again expecting different results. Some people call this insanity. 

The halcyon days of Abenomics appears to be numbered.

Parallel universe in Gold: Physical versus Paper gold

Two interesting outlooks from the two day 14% massacre on gold prices

1. Falling gold prices equals bigger demand for physical gold in India

From Outlook India

With gold prices tumbling to a 15-month low today, retailers are witnessing a surge in demand and expect up to 50 per cent spike in sales volume in this marriage season.

They are also expecting prices to fall further to around Rs 25,000 per 10 grams in the immediate short-term.

"Over the weekend, demand has picked up and there is surge in footfalls. As such, demand for jewellery has been up since Holi due to the upcoming wedding season. However, the recent plunge in prices have added to the momentum.

"We are expecting a whopping 50 per cent growth in sales volume during this season over the same period last year," Vice-Chairman of the Mumbai Jewellers Association Kumar Jain told PTI.

Jain, who also owns Umedmal Tilokchand Zaveri retail chain, said jewellers are expecting a good season on the back of expectations that the prices are likely to tumble further to around Rs 25,000 due to global cues.

2. Has the selling of paper gold been far more than the actual inventories?

From Mark Byrne of Goldcore (via Zero Hedge) [bold original]

Gold futures with a value of over 400 tonnes were sold in hours and this is equal to 15% of annual gold mine production. The scale of the selling was massive and again underlines how one or two large banks or hedge funds can completely distort the market by aggressive, concentrated leveraged short positions.

It may again be the case that bullion banks with large concentrated short positions are manipulating the price lower as has long been alleged by the Gold Anti Trust Action Committee (GATA). The motive would be both to profit and also to allow them to close out their significant short positions at more advantageous prices and possibly even go long in anticipation of higher prices in the coming weeks.

Those with concentrated short positions may also have been concerned about the significant decline in COMEX gold inventories.

The plunge in New York Comex’s gold inventories since February is a reflection of increased demand for the physical metal and concerns about counter party risk with some hedge funds and institutions choosing to own gold in less risky allocated accounts.

Comex gold bullion inventories have slumped 17% already in 2013, falling to just 286.6 metric tons of actual metal on April 11, the lowest since September 2009.

This means that futures speculators on Friday sold a significant amount of more paper gold, in an hour or two, then the entire COMEX physical gold bullion inventories.

Sell on banksters and governments! This should give the physical gold market (or the public) more space or opportunities to accumulate.

War on Gold: CME and Shanghai Gold Raises Gold, Silver Margins

Gold’s has been utterly clobbered for the past two days. Yesterday price of gold got crucified down by 8.71%. Silver had also been razed down 12.48%

Part of that steep dive has been exacerbated by the raising of trading margin requirements from the CME and the Shanghai Gold Exchange.

From the Bloomberg:

CME Group Inc. (CME) increased the margin requirements on gold trading after prices plunged.

The minimum cash deposit for gold futures will rise 19 percent to $7,040 per 100-ounce contract at the close of trading tomorrow, Chicago-based CME said in a statement. For silver, the minimum cash deposit was raised to $12,375 from $10,450.

The CME’s Comex unit is making it more expensive for speculators to trade after gold fell the most in 33 years today, dropping to the lowest since February 2011, after prices entered a bear market last week. Silver, also in a bear market, slumped 11 percent today and extended the year’s loss to 23 percent.

From CityIndex.co.uk (bold original)

The plunge in gold and silver was also accelerated by reports that the Shanghai Gold Exchange may hike margins on gold and silver contracts to 12% and 15%. Margin hikes were carried out in 2011 by Comex in order to stabilize speculation, whereas an increase in Shanghai following violent price plunge may reflect the stability of the Exchange’s clearinghouse.

Intervening supposedly to “stabilize” gold-silver markets apparently backfired.

Yet two exchanges doing the same thing, as if they had been coordinated.

Such actions signify as the proverbial “kick a man when he is down” or may have been meant to ensure that gold-silver’s decline continues.

Murray Rothbard on Tax Day

Murray N. Rothbard at the lewrockwell.com on Tax Day

April 15, that dread Income Tax day, is around again, and gives us a chance to ruminate on the nature of taxes and of the government itself.

The first great lesson to learn about taxation is that taxation is simply robbery. No more and no less. For what is "robbery"? Robbery is the taking of a man’s property by the use of violence or the threat thereof, and therefore without the victim’s consent. And yet what else is taxation?

Those who claim that taxation is, in some mystical sense, really "voluntary" should then have no qualms about getting rid of that vital feature of the law which says that failure to pay one’s taxes is criminal and subject to appropriate penalty. But does anyone seriously believe that if the payment of taxation were really made voluntary, say in the sense of contributing to the American Cancer Society, that any appreciable revenue would find itself into the coffers of government? Then why don’t we try it as an experiment for a few years, or a few decades, and find out?

But if taxation is robbery, then it follows as the night the day that those people who engage in, and live off, robbery are a gang of thieves. Hence the government is a group of thieves, and deserves, morally, aesthetically, and philosophically, to be treated exactly as a group of less socially respectable ruffians would be treated.

This issue of The Libertarian is dedicated to that growing legion of Americans who are engaging in various forms of that one weapon, that one act of the public which our rulers fear the most: tax rebellion, the cutting off the funds by which the host public is sapped to maintain the parasitic ruling classes. Here is a burning issue which could appeal to everyone, young and old, poor and wealthy, "working class" and middle class, regardless of race, color, or creed. Here is an issue which everyone understands, only too well. Taxation.