Booming Phisix-ASEAN Equities Amidst More Signs of Global Distribution

I talked about swelling signs of distribution before my dsl connection cut me off.

In spite of this week’s majestic breakaway run by the Phisix and a robust performance by ASEAN peers, there seems to be more evidence of global distribution in motion. Some would call this divergence or disconnect.

So far, ASEAN has been on the positive end and converging.

As of Friday’s close, the Philippine Phisix (Orange line) continues to provide leadership in the region up by .95% over the week or 19.69% nominal currency gains year-to-date.

Such remarkable advance accounts for an average monthly return of about 5.6%. At the current rate of gains, the Phisix 10,000 in 2013 is still very much in play. Of course that’s unless some exogenous event, such as the growing risks of a crisis in Japan, may prove to be an obstacle to the current manic phase.

Our regional counterparts have also been showing signs of buoyancy. Indonesia’s JCI (yellow) has been a distant second to the Phisix after this week’s 1.24% advance which accrues to a 15.79% return year-to-date. Thailand’s SET (red orange) has recaptured double digit gains up 1.19 for the week or 11.3% returns for 2013. Thailand’s SET, which earlier had been neck to neck with the Phisix, has been derailed by interventions from regulators who recently raised collateral requirements for margin trades. Malaysia’s KLCI (green) has officially popped to the positive side (charts from Bloomberg)

The Philippine Mania in Motion

In the Philippines, the manic phase seems in full motion.

The manic phase as aptly described by Harvard’s Carmen Reinhart and Kenneth Rogoff in chronicle of their 8 centuries of financial, banking and economic crises in This Time is Different[1]:

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. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes

A good example is the embarrassing gaffe by one of the leading broadsheets for publishing in the headlines a bogus or spoof pictorial of Time magazine featuring the Philippine President[2]. While the Philippine president did land in the Time’s list of 100 most influential people, he failed to grace the magazine’s cover. 

But the booboo shows exactly how media has functioned as mouthpieces for the government. 

More than that, mainstream media has been quick to hype on the supposed economic boom from alleged “good policies”.

Yet local media hardly covered World Bank’s latest implicit admission of emerging Asia’s bubble in progress, where the World Bank supposedly warned of “demand-boosting measures may now be counterproductive” (euphemism for asset bubbles) and that capital flows “may amplify credit and asset price risks”. Thus the World Bank prescribes that emerging Asia should put a break on easing policies[3].

In addition, local central bank chief also got accolades for taking the Philippine economy to the “stars”. 

The Wall Street Journal Blog reports[4]

Philippine’s central bank chief Amando Tetangco has taken to star gazing, of a kind, to guide the nation’s economy and so far he likes what he sees.

“The star of strong GDP growth and the star of low inflation,” Mr. Tetangco says in an upbeat interview during the Spring meetings of the International Monetary Fund. “This alignment of the stars is further strengthened by a healthy balance of payments surplus,” he said.

But it’s not all about the cosmic. The central bank boss also likes to draw on physics to explain how the quick growing South East Asian economy is faring between surging inward capital flows and risks posed by a sluggish global economy.

“I am not an astrologer but sometimes it is better to describe things like this,’ he says. Physics tell it best.

Amazing hubris.

Mr. Tetangco didn’t say it explicitly but his implication is that “healthy balance of payments surplus” serves as shield against a crisis. 

Mr. Tetangco does not distinguish between the various types of crises. While it is true that most crises has had the character of balance of payments deficits functioning as triggers to imbalances earlier accumulated that led to balance of payment or currency or exchange rate crises[5], there are other forms of crises.

They fall under the categories of debt crises, banking crises and serial defaults[6] (Reinhart, Rogoff 2011).

The above are examples of non-balance of payment crises. Particularly they are examples of two banking crises and a sovereign debt crisis.

Japan’s domestic asset bubbles[7] in the 1980s had been forged amidst current account surpluses. The 1990 bust led to a banking and economic crisis that still lingers 3 decades after…today.

UK’s secondary banking crisis of 1974-1975 also emanated from a prior property boom or the “last hurrah of the post war property boom” as noted by Wikipedia[8], which likewise has had a current account surplus going into the crisis.

Russia’s 1998 debt crisis[9] from unwieldy fiscal deficits that led to a massive government debt build-up was exacerbated by crashing commodity prices that led to a sovereign debt default. Going into the crisis, Russia posted current account surpluses from oil and commodity export receipts.

False assumptions and illusions brought about by a credit boom will eventually be unmasked. 

Such basking in narcissistic self-attribution glory reminds me of the Bank of Cyprus[10], one of the largest financial institutions of the recently stricken Cyprus.

In the mistaken perception that Cyprus successfully eluded the Euro crisis, and that they had become “immune” or has “decoupled” from the Eurozone, the Bank of Cyprus became a recipient of as many as 9 prestigious awards from February 2011 until September 2012[11]. As the Cyprus crisis emerged in March of 2013 or 5 months after the last award, depositors of the Bank of Cyprus may lose up to 60% of their savings[12] to bail-in the banks. Yes this is an example of a bizarre twist of fate.

I may add that for the mainstream, bubbles are after the fact knowledge.

As author Philip Coggan, and Economist contributor under the pen name of Buttonwood notes[13],

Ireland and Spain looked OK on government debt-to-GDP before the crisis but then they didn't.

And one of the haughtiest allusions has been to attribute policy success as “physics”. Such are patent symptoms of bubble mentality.

Positivist policies shaped by mathematical models will hardly extrapolate to “good policy”.

The presumption that natural science as equivalent to social science is a mistake. This has been based on faith or dogma and ego rather than reality. One cannot build on policies based on simplistic assumptions and mathematical aggregates when the fact is that the world is highly complex and where knowledge is distinct, diffused and fragmented. And because of such complexity, econometrics and statistical equations cannot model individual preferences, knowledge, emotions and value scales, since there is nothing constant in human action, especially with people’s interaction with each other or with the environment. 

Statistics are historical artifacts, relying on them means to wrongly assume the same circumstances will take hold in the future. Statistics and math alone cannot precisely foretell of the future. And policies based on statistics and math will be met with unintended consequences.

As the great Austrian economist Ludwig von Mises explained[14]

The natural sciences too deal with past events. Every experience is an experience of something passed away; there is no experience of future happenings. But the experience to which the natural sciences owe all their success is the experience of the experiment in which the individual elements of change can be observed in isolation. The facts amassed in this way can be used for induction, a peculiar procedure of inference which has given pragmatic evidence of its expediency, although its satisfactory epistemological characterization is still an unsolved problem.

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.

The postulates of positivism and kindred schools of metaphysics are therefore illusory. It is impossible to reform the sciences of human action according to the pattern of physics and the other natural sciences. There is no means to establish an a posteriori theory of human conduct and social events. History can neither prove nor disprove any general statement in the manner in which the natural sciences accept or reject a hypothesis on the ground of laboratory experiments. Neither experimental verification nor experimental falsification of a general proposition is possible in its field.

Growing Distribution or Divergences

Finally signs are pointing to a growing dynamic of divergence dynamic among global asset markets.

Among major equities, US and Japan continues to post gains even as much of the world appears to turning over. Of course this is with the exception of ASEAN. 

Despite the material year to date 9.1% gains by the S&P 500, internally the sectoral performance has diverged. Health Care, Consumer staples, utilities cyclicals and financials have boosted the S&P while materials, technology energy and industrials have weighed on the index. Perfchart from stockcharts.com

While I believe that much of the world will likely endure more pangs from growing signs of financial market weakness, it is unclear whether this will also impact the ASEAN markets whose mania phase has been running in full throttle.

This is of course unless there would be a major external financial smash up that could trigger a domino effect.

Nonetheless as market weaknesses becomes more pronounced, we should expect global authorities to jettison their “exit” meme that was really never meant to be and shift their tones to “dovish” or advocate on more inflationism. 

The recent quasi crash of gold-commodities which has been used by the mainstream as pretext to clamor for more central bank inflationism partly validates my earlier views[15].

And in contrast to the common reaction where crashes would lead to a loss of confidence and a ripple effect or a panic contagion, the quasi crash in paper gold at Wall Street, prompted for a near simultaneous frenzied or panic buying of gold in the physical markets[16] across the globe which also attained a milestone. For instance one day sales of US gold mint reached a landmark high[17]. 

In short, gold-commodity markets have also been diverging.

Yet this is hardly about “deflation” under the context of “aggregate demand”, and “liquidity traps” but about the dynamics of bubble cycles.

Navigating today’s treacherous market requires prudence, as incessant interventions has rendered markets highly susceptible to magnified volatility and whose state of fragility raises the risks of bubble busts, whose trigger may emanate from anywhere.

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[1] Carmen M. Reinhart and Kenneth S. Rogoff This Time is Different p.15 Princeton Press 2009

[2] Rappler.com Inquirer: Fake Aquino Time cover ‘honest mistake’ but... April 20, 2013

[3] See World Bank: Developing Asia Should Put a Brake on Easing Policies April 16, 2013

[4] Wall Street Journal Blog Philippines Stars Line Up, Thailand Looks for a Lady’s Touch April 19, 2013

[5] Wikipedia.org Currency crisis

[6] Carmen M. Reinhart and Kenneth S. Rogoff From Financial Crash to Debt Crisis, Harvard University August 2011

[7] Wikipedia.org Japanese asset price bubble

[8] Wikipedia.org 1998 Russian financial crisis

[9] Wikipedia.org 1998 Russian financial crisis

[10] Wikipedia.org Bank of Cyprus

[11] See Example of the Mania Phase: Awards Received by the Bank of Cyprus March 27, 2013

[12] Bloomberg.com Bank of Cyprus Clients May Lose Up to 60% on Deposits April 2, 2013

[13] Philip Coggan Buttonwood Rotation schmotation April 18, 2013 Economist.com

[14] Ludwig von Mises 1. Praxeology and History Chapter II. The Epistemological Problems of the Sciences of Human Action Human Action Mises.org

[15] See I Told You So: Gold Slump Used as Justification for MORE QE April 17, 2013

[16] See Gold Price Crash Spurs Boom in Physical Gold Markets April 18 2013

[17] Frank Holmes Gold Buyers Get Physical As Coin and Jewelry Sales Surge US Global Investors April 19, 2013

Kuroda’s Abenomics May Trigger Global Financial Market Earthquake

Much of the global financial markets have been complacent about what has been going on in Japan. 

Kuroda’s Policies Incites Bond Market Volatility

Yet part of the collapse in gold-commodity prices has been attributed[1] to the recent spike in coupon yields of Japanese Government Bonds (JGBs) across the yield curve, which may have forced cross asset liquidations on investors to pay for margin calls. 

The two week upsurge in 2-year and 5-year JGB yields (chart from the Bloomberg) has essentially brought interest rates to early 2012 levels with year-to-date changes exhibiting an of increase 3.7 and 6 basis points (bps), respectively. Such increase in the short end spectrum of the yield curve comes in the light of the decline in 10 year yield at 20.4 bps, according to Asianbondsonline.org[2] data at the close of April 18, 2013.

The steep climb in short term yields relative to the long term has also materially flattened the JGB yield curve.

While yield curves usually serve as reliable indicators for recession[3], where an inverted yield curve would usually translate to symptoms of growing liquidity shortages from resource misallocations via rising short term rates relative to long end of the curve, central bank manipulation may have muddled up its effectiveness. 

Japan’s rising short term rates are likely manifestations of the growing risks of price inflation from Bank of Japan’s (BoJ) Haruhiko Kuroda’s adaption of ECB chief Mario Draghi’s “do whatever is takes”, in the case of Japan “to end deflation”, or aggressive inflationism channeled through the doubling of Japan’s monetary base.

Kuroda’s “Abenomics”, which is the grandest experiment with monetary policies by yet any central bank, will bring about Japan’s monetary base to over 50% of the GDP by 2014[4], compared to the FED’s QEternity at 19% of the GDP.

Kuroda may have already attained the goal of defeating the strawman-bogeyman called “deflation”[5], that’s if McDonald’s will act as the trendsetter for Japanese companies. Japan’s McDonald’s franchise has announced price increases for as much as 25% for some of her products[6].

But the marketplace hasn’t seen what a continuous rise of interest rates will mean for Japan and for the global financial markets.

Around ¥103.76 trillion (US$1.04 trillion) of JGBs will mature or will get rolled over this 2013.

Of the total, I estimate around 76% of these to be short term papers. They consist of Treasury Bills, 2-year bonds, JGBs for retail investors consisting of 3 and 5 years fixed rate aside from floating rates) and 5 year bonds, based on Japan’s Ministry of Finance latest update[7].

In 2014, ¥72.98 trillion (US$ 733 billion) will mature. 2-5 year bonds will makeup over 60% of such debts.

Consider these figures. According to James Gruber at the Forbes.com[8]

Government debt to GDP in Japan is now 245%, far higher than any other country. Total debt to GDP is 500%. Government expenditure to government revenue is a staggering 2000%. Meanwhile interest costs on government debt equal 25% of government revenue.

Add to this Shinzo Abe’s fiscal stimulus package announced last January amounting of ¥10.3 trillion[9] US $116 billion (January), US $103.5 billion (current) and the Liberal Democratic Party LDP’s proposed US$ 2.4 trillion of public work spending programs[10] spread over 10 years which should expand on the current levels of debt.

In other words, Japan’s unsustainable debt structure has been founded on the continuance of zero bound rates. Thus a further spike in yields from the prospects of “crushing deflation” via monetary inflation will bring to the fore, Japan’s credit and rollover risks. For instance a doubling of interest rate levels will translate to a doubling of interest costs on government debt and so on. Remember, BoJ’s Kuroda set a supposed “flexible” inflation target of 2% in two years[11], while paradoxically expecting bond markets to remain nonchalant or placid.

Thus any signs of the emergence of a loss of confidence that may resonate to a debt or currency crisis may unsettle global markets.

The Japanese government via Abenomics has essentially been underwriting their economic “death warrant”.

It would be a mistake to infer “decoupling” or “immunity” from a debt or currency crisis in Japan.

A Japan crisis will hardly be an isolated event but could be the flashpoint to a global finance-banking-economic crisis given the increasingly fragile state from debt financed economic growth and debt financed political system

Yet we appear to be witnessing emergent signs of instability or a backlash from “Abenomics” based on Japan’s credit default swaps (CDS) last Thursday.

From Bloomberg[12]: 

Two-year overnight-index swap rates that reflect investor expectations for the Bank of Japan’s benchmark rate are set for the biggest monthly jump since November 2010 and reached 0.095 percent this week, according to data compiled by Bloomberg. The contract has climbed from a low of 0.039 percent in January to the highest since July 2011, approaching the 0.1 percent upper range of the Bank of Japan’s benchmark rate target. The comparative swap rate in the U.S. was at 0.163 percent.

While I expect Abenomics to incite a capital flight yen based selloff from Japanese residents and companies that should benefit the Philippines or ASEAN overtime[13], it would be a different scenario if the financial markets precipitately smells the imminence of a crisis.

So the coming week/s will be crucial.

The Crux of Abenomics

It’s also important to analyze why Abenomics has been initiated.

Looking at the composition of the Japan’s public debt, since September 2008[14] or over a period of 4 years, the banking industry [42.4% September 2012; 39.6% September 2008], the Bank of Japan [11.1% September 2012; 8.7% September 2008], foreign investors [9.1% September 2012; 7.9% September 2008] general government [2.6% September 2012; 1.5% September 2008], and others [2.7% September 2012; 2.4% September 2008], posted increases in JGB holdings. The banks, the BoJ and foreigners essentially absorbed the largest share of the growing pie of JGBs.

On the other hand, Public Pensions [7.0% September 2012; 11.7% September 2008], Pension Funds [3.0% September 2012; 3.8% September 2008] and Households [2.7% September 2012; 5.2% September 2008] holdings of JGBs shriveled given the same time frame.

The share of Life and non-life insurance industry has remained largely little changed.

Despite the much ballyhooed battle against “deflation”, the changing debt structure reveals of the crux of Abenomics.

Financials (banks and insurance) accounted for 61.7% of JGBs holdings in 2012. Considering that the largest holders of equities in Japan have reportedly been the banking and insurance industry[15] as households account for only 6.8%, Abenomics has functioned as redistributive mechanism or a subsidy in support of these highly privileged sectors.

Thus, Abenomics has partly been engineered to forestall stresses and frictions that may increase the risks the collapse of these sectors. This also exhibits how this hasn’t been about the economy but about preserving the privileged status of political connected industries which politicians also depend on for financing.

Further Abenomics operates in a logical self-contradiction. While the politically and publicly stated desire has been to ignite some price inflation, Abenomics or aggressive credit and monetary expansion works in the principle that past performance will produce the same outcome or the that inflationism will unlikely have an adverse impact on interest rates, or that zero bound rates will always prevail.

The idea that unlimited money printing will hardly impact the bond markets is a sign of pretentiousness.

But there seems to be a more important reason behind Abenomics; specifically, the Bank of Japan’s increasing role as buyer of last resort through debt monetization in order to finance the increasingly insatiable and desperate government.

Note in particular, savers via Japanese household have reduced stock of JGBs by a whopping 48% since 2008, while pensions by both the public and private sectors contracted by 40% and 21% respectively.

Such a slack has been taken over by the banking system and the BoJ. While foreign holdings have manifested growth, they are considered as fickle and may reverse anytime.

Reduction of JGBs by savers could partly manifest Japan’s demographics or her negative population growth[16]. But such explanation hasn’t been sufficient.

The distribution of Japan’s household assets has mainly been channeled towards cash and deposits (55.2%) and insurance and pension reserves (27.7%). This is according to the latest flow of funds reported by the Bank of Japan[17]

According to the following charts from Danske Bank[18], Japanese investors with parsimonious exposure on foreign assets have been net sellers of foreign stocks (right window).

But more important aspect is that Japan’s insurance and pension companies, which accounts for the second largest bulk of household assets, have increasingly been deploying their resources overseas (left window). The rate of growth has been accelerating in tandem with BoJ’s policies.

In addition, gold priced in the yen[19], in spite of last week’s quasi-crash, which is likely an anomaly, has been ramping up higher since 2008.

Japan’s pension and insurance fund’s accelerating exposure on foreign securities, combined by the bull market in gold priced in the yen and the increasing preference by Japanese companies to tap foreign capital[20] can be seen as seminal signs of capital flight. 

Thus, Abenomics provides the insurance cover or a backstop against capital flight. With this we can expect Abenomics to eventually include price controls and importantly capital-currency controls.

Japan’s major bellwether the Nikkei 225 fell by 1.25% this week, which really is a speck relative to the astounding 28% year-to-date gains. The other major benchmark, the Topix, lost 1.91% but remains 31.04% from the start of the year.

But there appears to be increasing signs of divergences even in Japan, which may be seen as parallel to the ongoing distribution in the global marketplace. The leaders of the recent rally Topix banks (left) and the Insurance (right) sectors seems as exhibiting signs of exhaustion[21]

Finally the coming weeks will be very critical for global financial markets. If Japan’s short term rates continues to spiral higher then this may provoke amplified volatility on the global financial markets.

Another very important factor will be how Japanese authorities will react to them.

Otherwise, if the volatility in yields will be suppressed then we can expect the boom bust cycles to remain in play.

It pays to keep vigilant

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[1] See Tanking Gold and Commodities Prices and the Theology of Deflation, April 15, 2013

[2] Asian Bonds Online Japan ADB

[3] See Influences Of The Yield Curve On The Equity And Commodity Markets, March 22, 2010

[4] Zero Hedge CLSA Breaks The Wall Street Mold: Sells Japanese Equities To Buy Gold, April 18, 2013

[5] See Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism July 6, 2010

[6] See Abenomics: Japan’s McDonald’s to Raise Prices by 25% April 19, 2013

[7] Quarterly Newsletter of the Ministry of Finance Japan, What’s New, January 2013

[8] James Gruber Forget Cyprus, Japan Is The Real Crisis, Forbes.com March 23, 2013

[9] See More Magic from Abenomics: 10.3 Trillion Yen in Fiscal Stimulus January 11, 2013

[10] Quartz Abe is planning a massive fiscal stimulus—but what’s left to stimulate? Yahoo Finance December 20, 2012

[11] Wall Street Journal BOJ's Kuroda Says 2% Inflation Target "Flexible" April 11, 2013

[12] Bloomberg.com Kuroda Endgame Seen as Swaps Climb Most Since ’10: Japan Credit April 18, 2013

[13] See Will Japan’s Investments Drive the Phisix to the 10,000 levels? March 19, 2012

[14] Quarterly Newsletter of the Ministry of Finance Japan, What’s New, January 2009

[15] See Japan’s Economic Minister: We Will Print Money to Boost the Stock Market February 12, 2013

[16] The Statistics Bureau and the Director-General for Policy Planning Chapter 2 Population Ministry of Internal Affairs

[17] Bank of Japan Flow of Funds - Overview of Japan, US, and the Euro area – March 25, 2013

[18] Danske Research Monitor Japanese investor flows, April 19, 2013

[19] Gold.org Spot gold price in JPY in oz

[20] See Abenomics: More Signs of Backfire April 16, 2013

[21] Tokyo Stock Exchange Stock Price Index - Real Time

Has Thomas Malthus been a free market friend or a foe?

Has preeminent demographer and economist Thomas Robert Malthus, whom has been widely criticized for his population time bomb theory, been taken out of context? 

Yes says Michigan State University professor Ross B. Emmett at the FEE

Robert Malthus (his friends called him “Bob”) was one of the primary interpreters of Adam Smith for the generation after Smith. Indeed, a lot of people who pick on “Thomas” Malthus get Bob Malthus wrong.

That’s not to say that Malthus was right about everything. But even more than Smith, Malthus’s economics built upon the idea that all humans similarly respond to incentives; and he thereby rejected the idea of natural hierarchy. Writing in a country that had excessive restrictions on labor markets—take a look at the Poor Laws—Malthus was an advocate of free labor markets. And Malthus argued that private property rights, free markets, and an institution that would ensure that both parents were financially responsible for the children they bore (that is, marriage) were essential features of an advanced civilization.

“Wait a minute,” you may be thinking. “Are we talking about the Malthus who claimed back in 1798 in his Essay on the Principle of Population that population growth would decrease per capita wellbeing? Isn’t this the guy who argued that the combination of population growth and natural resource scarcity would create catastrophic consequences, including disease, starvation, and war for much of the human race? And didn’t he miss the benefits of entrepreneurship and innovation, blinded as he was by the fallacy of land scarcity?”

That Malthus—let’s call this one “Tom”—is more a creature of ideological opponents of markets than of Malthus’s own writings. So maybe we should revisit Malthus and see what he actually said.

It all begins with a thought experiment: what would happen to human population in the absence of any institutions?

The answer is the population principle, which is the only thing most people know about Malthus. And it’s largely correct. In the absence of institutions, humans are reduced to their biological basics: Like animals, humans share the necessity to eat, and the passions that lead to procreation. To eat, humans must produce food. To procreate, humans must have sex. If there are no institutions, human population will behave like any animal population and increase to the limit of their ecology’s carrying capacity.

The biological model is simplistic; it treats humans as mere biological agents. It is this biological model that produces all the results people usually associate with Malthus’s name. And it’s not very far off from people’s conditions when their institutions have suddenly been disrupted by things like conquest, revolution, or war. (Consider the dual problems of war and drought that resulted in famine for Ethiopians in 1983–85, for example.)

But for Bob Malthus, the biological model is only a starting point. The model set up his next concern: the incentives created by different institutional rules for families’ fertility choices (in Malthus’s terms: the decision to delay marriage). The comparative institutional analysis that emerged from his further investigation became the basis for his defense of the institutional framework of a free society.

Read the rest here

On the vilification of Thomas Malthus

It turns out the mainstream view of Tom (as opposed to the real “Bob”) was first created by opponents of markets, sustained throughout the nineteenth century by lovers of hierarchy, and resuscitated in the twentieth century by environmentalists committed to the view that there are natural limits to economic growth. These environmentalists picked out the bits they liked and scrapped the rest, as it suited their agendas.

Mangling of the definitional context of politically sensitive issues such as liberalism, capitalism, inflation or deflation and etc..., has been a typical communications strategy used by statists to skirt on the argumentation of substance.

Matthew Ridley: Bitcoin as Synthetic Money

The impressive and articulate Matthew Ridley on his blog explains that Bitcoin is a form of synthetic money: 

Bitcoins resemble “commodity money”, like gold or cowrie shells, which rely on scarcity and indestructibility to be a good store of value. Real commodity money is vulnerable to inflation if there is suddenly a new discovery of gold — or deflation if there is suddenly a demand to use the commodity differently. In theory “fiat money”, such as we use today, avoids these problems — but governments have always removed the check on supply by printing money at whim to reduce debts.

There might be a way to cross fiat with commodity money and capture the benefits of both. Selgin calls this “synthetic commodity” money. Unlike fiat money it would have absolute scarcity; unlike commodity money it would have no non-monetary use. For example, a government could print paper money and then ostentatiously destroy the lithograph plates to show that it would never print any more.

In effect, this happened to the Swiss Iraqi dinar in the 1990s. Saddam’s regime used high-quality money engraved in Switzerland and printed in Britain. But during the first Gulf war in 1990 the supply dried up because of sanctions. Saddam began to print dinars at home, but these were easily faked, so they fell in value. The Swiss dinars remained in circulation for many years (though growing tatty) and held their value against the dollar.

Metaphorically, Bitcoin’s creators have destroyed the plates by making it impossible for anybody to change the programmed supply. So far that part of the experiment is succeeding, but Bitcoins are not yet ready for prime time. A friend who acquired some is sitting on a handsome profit, but finds the only thing he can exchange them for in his nearest city is chocolate.

Selgin points out that to get an exchange network going from scratch is hard enough when a new currency is fully compatible with established money, as in Birmingham; or when it consists of a commodity with other uses. But to do so using something with no non-monetary uses, so no one ought to want it at all except as a means of trade, should be almost impossible.

This only makes Bitcoin’s modest foothold even more impressive. An appetite for new kinds of money is there. The use of mobile phone credits as a currency in Africa, pioneered by M-pesa, is another example, and has had as jealous a reaction from central banks as Birmingham’s private coins did from the Royal Mint.

Read the rest here.

I would add that bitcoin’s evolution has also been a function, not only of as a cross between fiat money and commodity money, but also of the technology adaption lifecycle or technology diffusion via the S-curve.

French President Hollande’s Class Warfare Politics: Do as I say, not as I do

In politics, one should watch what political agents do rather than simply believe on what they say.

From the Economist

“I DON’T like rich people,” François Hollande once said. When campaigning for the French presidency in 2012, he promised an end to bling, a top income-tax rate of 75% on the rich, and a modest, “normal” presidency in touch with the people. Now the Socialist president’s new disclosure rules reveal that seven of his ministers, including his prime minister, Jean-Marc Ayrault, are millionaires. Laurent Fabius, the foreign minister, who comes from a family of art dealers, duly declared over €6m ($7.9m) of assets, including a flat in Paris worth €2.7m and two country houses. Michèle Delaunay, minister for the elderly, reported €5.2m of assets, including two properties in Bordeaux and two houses in different south-west resorts. Until now, only the president had to publish his wealth. Mr Hollande’s 2012 declaration included two flats in Cannes and a villa nearby, valued in all at nearly €1.2m, just under the threshold at which France’s annual wealth tax kicks in.

To rephrase Mr. Hollande’s campaign slogan “I don’t like rich people competing with me, so I’ll tax them to oblivion”.

Saturday DSL Blues, DSL Bleg

Once again my DSL connection has totally bogged down similar to last Saturday.

And there seems no way to be able to operate normally when the company’s DSL technician tells you that this has been a "bandwidth traffic" problem which means network connectivity disruption has been company problem and not a local one. That’s if such a claim is true. I have been in agony this April for having to call PLDT’s service repair number 172 to report on disruptions quite frequently (about 3x a week). Today I called twice.

Aside from wasting too much time on PLDT’s 172, to my dismay I went to their office and found out that the PLDT’s Dansalan, Mandaluyong business zone is closed on Saturdays, so there won’t be any attempts to address “network problems”, since I would assume that my connection has been linked to the Dansalan office, where their technical people comes from. [update: I just received a call from PLDT promising to remedy this, but I don't need promises, I need results: services for the payments rendered]

I have been a subscriber on PLDT’s DSL for about 9 years. Yet from my end, their services has been rapidly worsening.

Has this been just me or Mandaluyong based subscribers? Or has PLDT’s DSL connection really been a general network problem? I would appreciate some feedback from my Philippine based readers who are wired via PLDT’s DSL.

Since I am also considering a switch, I would also appreciate comments or recommendations for those who are connected with Globe and Skycable.

Pls post your comments or email me: benson.te@gmail.com

Thanks.

Abenomics: Japan’s McDonald’s to Raise Prices by 25%

Lo and behold! This is one example of the supposed magic of Abenomics, Japan’s McDonald’s will raise prices of their products by 25% in order to offset losses!

From Bloomberg

McDonald’s Corp. (MCD)’s Japan business will raise some prices by much as 25 percent next month, the fast food chain’s first increase on burgers in the country since 2008.

Hamburger prices will go up to 120 yen from 100 yen and cheeseburgers will rise to to 150 yen from 120 yen in Japan in May, McDonald’s Holdings Co. Japan Ltd. said in a statement today. The hikes are part of the company’s plan to boost profitability, it said.

McDonald’s is raising the prices after the Japanese unit reported a 12 percent drop in operating profit last year. Fewer discounts drove March same-store sales 3.6 percent lower at the local business, the 12th consecutive monthly decline.

Of course basic economics tells us that higher prices leads to lesser demand. Thus a fall in purchasing power should extrapolate to lesser sales in terms of quantity (and also quality) which eventually should put pressure on profits. 

Chart from Yardeni.com

Yet given Bank of Japan’s recourse to inflationism which hasn’t been anything new, as the Japanese government has been doing this since the start of the new millennium, but has only become more aggressive since 2008, McDonald’s has been suffering from poor sales which isn’t supposed to be the case, especially at the onset of expansionary boom. 

The employment of such poilcies embodies precisely the definition of insanity specifically "doing the same thing over and over again but expecting different results."

Inflationism will hardly bring a boost to the economy, why? Because it inhibits economic calculation and the division of labor by distorting market prices.

As the great Murray N. Rothbard explained (bold mine)

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the "cost" of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation--and may even consume capital while presumably increasing their investments.  Similarly, stock holders and real estate holders will acquire capital gains during an inflation that are not really "gains" at all. But they may spend part of these gains without realizing that they are thereby consuming their original capital.

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

This only means that in a highly inflationary environment McDonald’s and other Japanese firms will be compelled to either reduce quality or to continually raise prices in order to survive or even speculate, which is contradictory to bring about ‘competitiveness’.

Yet any elevated accounting figures boosted by higher prices will be exposed when the BoJ desists from pursuing inflationist policies—the boom bust cycle.

Moreover, given that Japanese households are said to be ‘risk averse’ where 56% of their liquid assets are in the form of cash and where liquid ‘cash’ financial wealth accounts for 319% of Japan’s GDP, while only 5.8% have been invested in equities and .08% in foreign assets, one should expect that the massive fall in the purchasing power of the yen, will lead not to more investments, but to yield chasing masked as capital flight.

Former Morgan Stanley analyst now managing director and cofounder of SLJ Macro Partners Stephen Jen quoted by SNBCHF.com 

The first stage is foreign leveraged funds shorting the yen, acting on the rhetoric from the Abe Administration. This stage is coming to an end, to be followed by the second stage: Japanese investors selling yen

We have already seen signs where Japanese firms would rather raise financing from foreigners than to deploy domestic cash to investments.

So it would signify as a grotesquely obtuse idea to blindly believe (yes inflationism isn’t economics but religion based on heuristics) that inflation will save the day for Japan. Doing the same thing over a decade hasn't help, why should it be different this time? Because of the shock and awe?

One can only look at Argentina and Venezuela’s transition from stagflation to hyperinflation to see how disastrous a policy inflation makes.

Abenomics will only hasten Japan's path to a crisis.