US Debt Ceiling Showdown: Price to Insure U.S. Government Debt Soars

Threats over an alleged US government shutdown, which has become the centerpiece focus of the debt ceiling debate, has sent cost of insuring debt higher this week

chart from Deutsche Bank

Notes the Wall Street Journal:

The cost of insuring against a U.S. default for a year has risen sixfold in the past week, reaching its highest level since 2011, reflecting investor bets that the government could fall behind on its debt payments in the coming weeks.

The Treasury Department said on Wednesday that by Oct. 17 it would have only $30 billion left to pay bills, and that money is only expected to last one or two more weeks unless Congress raises the so-called debt ceiling, which limits U.S. borrowing. Many Republicans have said they would approve such a move only in exchange for a long list of demands, such as changes to the White House's health-care law and lower tax rates. The White House has said it won't negotiate with Republicans at all and wants the debt ceiling raised immediately.

The stark political divisions have led many lawmakers, analysts and investors to wonder whether policy makers will be able to reach an agreement in time.

This has driven the annual cost to insure $10 million of U.S. government debt for one year using derivatives called credit-default swaps, or CDS, to €31,000 ($41,930), according to Markit data. That is up from about €5,000 as recently as last Friday and is the highest it has been since August 2011, the month in which U.S. debt was downgraded from the highest level by Standard & Poor's Ratings Services.

Default protection on U.S. Treasurys is quoted in euros, just as European sovereign CDS contracts are quoted in dollars, sparing investors the risk the hedge will fall in value at the same time as the currency itself.

Actions of the CDS markets have hardly been consistent with the bond markets.

As shown above, the 1 year (UST1Y) 3 year (UST3Y) and 6 months (UST6M) has recently been rallying (falling yields) mostly from the FED’s UNtaper—a deliberate tactic conducted by the FED similar to the Pearl Harbor surprise bombing equivalent of the bond vigilantes. 

This means that while cost of insuring of US debt has meaningfully risen, the treasury markets (particularly the short maturities) have been saying otherwise.

Yet rising CDS (default risks) will be used as political leverage to justify the call for raising the debt ceiling. (Have the CDS markets been stage managed?)

Americans have been deeply hooked on entitlements. More than 70% of Federal Spending has been due to dependency programs and growing.

This means that despite the hullabaloo in the US Congress, which really is just a vaudeville, as congress people will fear the wrath of losing political power and privileges from entitlement dependent-parasitical voters, eventually the debt ceiling will be raised. (charts from the Heritage Foundation).

Like actions of central banks led by the US Federal Reserve, America’s welfare state will be pushed to the brink of a crisis or will fall into a crisis first, before real reforms will be made.

In the world of politics, cost-benefit tradeoffs has been reduced to short term expediencies.

Updated to add: 

Including "housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds”,  economist James Hamilton estimates at over $70 trillion or 6 times official debt (RT.com)

Meanwhile Boston University Laurence Kotlikoff has even far staggering figure. He pins the fiscal gap which includes unfunded liabilities at $222 trillion or 20 times bigger than official figures. 

Mr. Kotlikoff as quoted by Real Clear Policy: 

The official debt is something that has to be repaid, and the government is committed to principal and interest payments. But the government has other commitments, like Social Security payments, health care and Medicare payments, Medicaid payments, and defense expenditures. And it also has negative commitments, namely taxes. So you want to put everything on even footing. Most of the liabilities the government has incurred in the postwar period have been kept off the books because of the way we’ve labeled our receipts and payments. The government has gone out of its way to run up a Ponzi scheme and keep evidence of that off the books by using language to make it appear that we have a small debt.

European Recovery? Greece Reservist Calls for Coup

Mainstream pundits keep saying that Europe has been on the mend mostly relying on surveys to backup such calls. They suggest that a European economic recovery will ripple and support economic conditions of Emerging markets amidst the Fed Taper-Untaper conundrum.

Yet recent real events such as industrial production and car sales have defied such promising outlook. 

In fact, just yesterday loans to the private sector in the EU reportedly contracted again in August led by Germany. German's private sector loans dropped nearly 4% (month-on-month) and 4.7% (year on year)

We have been told too that the crisis shattered Greece economy has shown signs of recovery. This has been supported by buoyant financial markets.

The Greek equity bellwether the Athens index has been ascendant… 

…as Greek government bonds have been rallying (falling yields), whose late rally has coincided by the Fed’s UN-taper

Since economics drives politics, a call for a putsch by reservists of the Greek army hardly evinces signs of ‘recovery’, despite the above.

From the Guardian

No country has displayed more of a "backslide in democracy" than Greece, the British thinktank Demos has said in a study highlighting the crisis-plagued country's slide into economic, social and political disarray.

Released on the same day that judicial authorities ordered an investigation into a blog posting by a group of reservists in the elite special forces calling for a coup d'etat, the study singled out Greece and Hungary for being "the most significant democratic backsliders" in the EU.

"Researchers found Greece overwhelmed by high unemployment, social unrest, endemic corruption and a severe disillusionment with the political establishment," it said. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc and voiced fears over the rise of far-right extremism in the country.

The report was released as the fragile two-party coalition of the prime minister, Antonis Samaras, admitted it was worried by a call for a military coup posted overnight on Wednesday on the website of the Special Forces Reserve Union. "It must worry us," said a government spokesman, Simos Kedikoglou. "The overwhelming majority in the armed forces are devoted to our democracy," he said. "The few who are not will face the consequences."

Today the yield chasing mania, where falsehoods have been interpreted as truths, has made the markets anesthetized to risk. In other words, central bank induced parallel universes or divergent real events vis-à-vis financial markets, have become ubiquitous.

Hong Kong Regulators Worry Over Growing Risk from Corporate Debt

The Hong Kong’s monetary board, the Hong Kong Monetary Authority (HKMA) seems in a conundrum over what appears to be shifting of credit bubble from real estate to private sector loans.

From the Wall Street Journal Real Economics Blog (bold mine)

Demand for residential real estate has gone flat, so it appears banks are lending to the corporate sector instead.

The ability of Hong Kong companies to pay their debts has “showed a marked deterioration” according to the Hong Kong Monetary Authority’s latest monetary and financial stability report. “There are some initial signs that the credit risk of banks’ corporate exposures may be building up.”

The HKMA calculates that interest coverage ratios, or the ability of companies to pay debt service with the revenues they generate, have gotten worse the past three years. That’s because of a combination of more and more debt, and business performance not keeping pace. Company’s leverage ratios, or the value of a company’s assets on their balance sheet to their debt has also eroded.

Lending to corporations jumped 13.2% in the first half, from 3% growth in the second half of last year. Loans to companies make up 70% of Hong Kong banking loans, whereas mortgage lending is 21.5%. Meanwhile, mortgage lending grew just 3.1% in the first half of 2013, a slowdown from 5% in the second half of last year.

The HKMA figures the banks it regulates have enough capital to weather a storm. But the HKMA is worried as the Fed eventually does cut back on its monetary stimulus, Hong Kong will feel it.

Hong Kong’s credit bubble continues to inflate.

Loans to the private sector rose by 12% over two years.

But Hong Kong’s housing index has been plateauing. This should compound on the system’s credit risks as property developers who took on leverage for their projects are now faced with declining demand for housing.

Yet the banking sector’s loan exposure accounts for over 211% of Hong Kong GDP or Domestic Credit Provided By Banking Sector in 2011 and 200% in 2012 (World Bank)

Yield chasing by the banks in luring more companies to take on more credit comes in the face of rising yields. Hong Kong’s 10 year yields have likewise been affected by the bond vigilantes.

Rising yields have likewise been a factor in the deteriorating quality of corporate loans, aside from growing use of ponzi finance via a "combination of more and more debt, and business performance not keeping pace"

While Hong Kong has still huge forex reserves (US $303 billion) in spite of the recent decline, and previously a trend of current account surpluses (which has now turned slightly negative), the HKMA acknowledges that a FED taper will affect Hong Kong, unlike those institutions bearing delusions of decoupling. 

Nonetheless, Hong Kong’s stock markets as benchmarked by the Hang Seng has ignored on such risks and has almost recovered the losses from the supposed FED taper scare last May-June. 

The don't worry be happy manic crowd seem to embrace the idea that willful ignorance is bliss.

Indonesian Rupiah Knocking at New Lows?

Don’t look now but Indonesia’s rupiah as of this writing seems to be knocking at the September 5 low of 11,701.

At the moment, the USD-Rupiah pair trades at 11,535.

And I find it bizarre on what grounds the Indonesia’s central bank predicts zero inflation this September when the rupiah seems on a renewed meltdown mode.

Yet markets appear to be complacently ignoring this development when a continued run on the rupiah could trigger a regional crisis.

Quote of the Day: Government Shutdown Mean Boondoggle Shutdown

the words “government shutdown” do not mean “government shutdown.” They mean “boondoggle shutdown.” They mean “special-interest-group-subsidy shutdown.”

What about the Post Office? Will it get shut down? No.

What about the CIA? Will it get shut down? No.

What about the NSA? Will it get shut down? No.

What about the TSA? Will it get shut down? No.

What about the Department of Homeland Security? Will it get shut down? No.

My suggestion: stop worrying about a government shutdown. Instead, keep worrying about the government staying open . . . just like you did before.

From the Tea Party Economist Gary North

ADB on the Impact of the Bond Vigilantes on Asian Bonds

From the Asian Development Bank (ADB): (bold mine)

At the end of June, there were $6.8 trillion in local currency bonds outstanding in emerging East Asia, which is comprised of the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam. That was 1.7% more than at the end of March, but a slower growth rate than the 2.9% expansion seen in the first quarter of 2013 with investors now more cautious in the wake of the May announcement from the US Federal Reserve that it will soon start reducing its bond purchases.

Local currency bond issuance also continued in emerging East Asia, but still at a slow pace as some borrowers held back in the face of higher funding costs around the region. There were $827 billion in new bonds sold between April and June, 4.0% more than in January through March, largely thanks to a 26.8% increase in issuance by central governments and agencies. Corporate issuance slumped 20.1% quarter-on-quarter to $168 billion as new bond sales by PRC companies tumbled 48.8%. Excluding the PRC, corporate issuance ticked up 1.4%.

Turmoil in the global financial markets has also made it harder and more expensive for emerging East Asian companies, particularly lower-rated firms, to borrow in the key foreign currencies – US dollars, euros, or yen. After $81 billion in issuance in the first five months of 2013, June and July saw a total of just $7.5 billion raised.

Compared with 1997-1998 when Asia suffered a financial crisis, governments and companies now hold more of their debt in local rather than foreign currency and the debt is now longer-dated than it was, meaning they are less vulnerable to currency depreciation and sudden shifts in borrowing costs and investor appetite.

But domestic sourcing of ballooning debt is an illusion of stability. Increasing accumulation of debt are symptom of bubbles regardless the currency configuration of the debt structure.

As Harvard’s Carmen Reinhart and Kenneth Rogoff pointed out (bold mine)

This brings us to our central theme—the “this time is different syndrome.” There is a view today that both countries and creditors have learned from their mistakes. Thanks to better-informed macroeconomic policies and more discriminating lending practices, it is argued, the world is not likely to again see a major wave of defaults. Indeed, an often-cited reason these days why “this time it’s different” for the emerging markets is that governments there are relying more on domestic debt financing.

Yet the preliminary impact on bond returns

Market returns on Asian bonds have fallen sharply so far this year with the iBoxx Pan Asian Index falling 3.5% in US dollar, unhedged terms. Losses were largest in Indonesia, down 17.8% and Singapore, down 7.8%. Only the Philippines and the PRC markets saw gains of 7.5% and 3.1% respectively.

I say preliminary because should the onslaught of the bond vigilantes continue, expect this to be a global contagion. Expectations of decoupling-insulation will be eventually exposed as grand delusions.

Video: Peter Schiff Was Right (Again) - 'Taper' Edition

hat tip EPJ

China’s Beige Book exhibits why official statistics can’t be trusted

Two weeks back I expressed doubts on the supposed recovery of the Chinese economy as partly a statistical mirage. I noted

I am not comfortable with statistics from the Chinese government in the recognition of the hiding, censoring and editing of data which has not fitted with the government’s agenda

Well more signs that the Chinese government has been data mining their economic figures

From Bloomberg (bold mine, hat tip zero hedge)

China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

Increases in business-investment and real estate revenue also slowed, while service industries picked up and employees became tougher to find, the survey from New York-based China Beige Book International said yesterday. The report is based on responses from 2,000 people from Aug. 12 to Sept. 4 as well as 32 in-depth interviews conducted later in September.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige Book President Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter -- no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

It seems that the recent rise in China’s equity markets, as measured by the Shanghai Index, may have been designed as part of the campaign to create the impression of ‘recovery’. 

I say designed because the Shanghai index recently experienced a “flash spike” which the government blamed on fat finger (trading error) by a state owned firm rather than from what I suspect as a botched attempt at manipulation.

And copper has not chimed with a supposed recovery in China’s fixed investment

Nonetheless whatever stealth stimulus--that the government has been applying to boost her statistical economy that will lead to more debt--is likely to be limited.

That's because rising yields of 10 year China’s sovereign bond are likely to impact her already precarious debt position.

Stephen Roach: Fed is courting an increasingly treacherous endgame at home and abroad

More economist expressing of the baneful effects and depraved ethics of QE.

Here is former chairman Morgan Stanley, Stephen Roach, at the Project Syndicate entitled 'Occupy QE' (bold mine) [hat tip zero hedge]

The Federal Reserve continues to cling to a destabilizing and ineffective strategy. By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad.

By now, the global repercussions are clear, falling most acutely on developing economies with large current-account deficits – namely, India, Indonesia, Brazil, Turkey, and South Africa. These countries benefited the most from QE-induced capital inflows, and they were the first to come under pressure when it looked like the spigot was about to be turned off. When the Fed flinched at its mid-September policy meeting, they enjoyed a sigh-of-relief rally in their currencies and equity markets.

But there is an even more insidious problem brewing on the home front. With its benchmark lending rate at the zero-bound, the Fed has embraced a fundamentally different approach in attempting to guide the US economy. It has shifted its focus from the price of credit to influencing the credit cycle’s quantity dimension through the liquidity injections that quantitative easing requires. In doing so, the Fed is relying on the “wealth effect” – brought about largely by increasing equity and home prices – as its principal transmission mechanism for stabilization policy.

There are serious problems with this approach. First, wealth effects are statistically small; most studies show that only about 3-5 cents of every dollar of asset appreciation eventually feeds through to higher personal consumption. As a result, outsize gains in asset markets – and the related risks of new bubbles – are needed to make a meaningful difference for the real economy.

Second, wealth effects are maximized when debt service is minimized – that is, when interest expenses do not swallow the capital gains of asset appreciation. That provides the rationale for the Fed’s zero-interest-rate policy – but at the obvious cost of discriminating against savers, who lose any semblance of interest income.

Third, and most important, wealth effects are for the wealthy. The Fed should know that better than anyone. After all, it conducts a comprehensive triennial Survey of Consumer Finances (SCF), which provides a detailed assessment of the role that wealth and balance sheets play in shaping the behavior of a broad cross-section of American consumers.

In 2010, the last year for which SCF data are available, the top 10% of the US income distribution had median holdings of some $267,500 in their equity portfolios, nearly 16 times the median holdings of $17,000 for the other 90%. Fully 90.6% of US families in the highest decile of the income distribution owned stocks – double the 45% ownership share of the other 90%.

Moreover, the 2010 SCF shows that the highest decile’s median holdings of all financial assets totaled $550,800, or 20 times the holdings of the other 90%. At the same time, the top 10% also owned nonfinancial assets (including primary residences) with a median value of $756,400 – nearly six times the value held by the other 90%.

All of this means that the wealthiest 10% of the US income distribution benefit the most from the Fed’s liquidity injections into risky asset markets. And yet, despite the significant increases in asset values traceable to QE over the past several years – residential property as well as financial assets – there has been little to show for it in terms of a wealth-generated recovery in the US economy.

This essentially validates my latest outlook where I noted “a significant share of stock ownership have been in the upper ranges of the income bracket”.

The basic error of QE, again from Stephen Roach

This underscores yet another of QE’s inherent contradictions: its transmission effects are narrow, while the problems it is supposed to address are broad. Wealth effects that benefit a small but extremely affluent slice of the US population have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth.

In short, using macro tools to solve micro problems are not only  incompatible they are bound to generate unintended adverse consequences

The injustice from QE:

Lost in the angst over inequality is the critical role that central banks have played in exacerbating the problem. Yes, asset markets were initially ecstatic over the Fed’s decision this month not to scale back QE. The thrill, however, was lost on Main Street.

As I wrote:

Such stealth transfer of wealth enabled and facilitated by central bank policies are not only economically unsustainable, they are reprehensively immoral.

Is Anarchism Utopian?

Depends on the definition, if anarchism is defined from the etymology of anarchy or chaos, then it is not even utopian but dystopian.

Let us do away with ideology first and deal with facts.

If anarchism is defined as statelessness, then the utopian claim is false, for one simple reason: the origin of human society had been WITHOUT the  state.

Human society emerged from the prehistoric stateless hunter-gatherer societal relationship

Notes the Wikipeida.org (bold mine)

Hunting and gathering was the ancestral subsistence mode of Homo. As The Cambridge Encyclopedia of Hunter-Gatherers says: "Hunting and gathering was humanity's first and most successful adaptation, occupying at least 90 percent of human history. Until 12,000 years ago, all humans lived this way." 

What characterizes the hunter gatherer societies?

From another Wikipedia.org article (bold mine)

Hunter-gatherers move around constantly in search of food. As a result, they do not build permanent villages or create a wide variety of artifacts, and usually only form small groups such as bands and tribes. However, some hunting and gathering societies in areas with abundant resources (such as the Tlingit) lived in larger groups and formed complex hierarchical social structures such as chiefdoms. The need for mobility also limits the size of these societies. They generally consist of fewer than 60 people and rarely exceed 100. Statuses within the tribe are relatively equal, and decisions are reached through general agreement. The ties that bind the tribe are more complex than those of the bands.Leadership is personal—charismatic—and used for special purposes only in tribal society. There are no political offices containing real power, and a chief is merely a person of influence, a sort of adviser; therefore, tribal consolidations for collective action are not governmental. The family forms the main social unit, with most societal members being related by birth or marriage. This type of organization requires the family to carry out most social functions, including production and education.

In other words, 90% of human history has been about tribal anarchism.

The origin of the government came during the transition from hunter-gatherer to the agricultural age or the evolution towards pastoral societies.

Pastoralism is a slightly more efficient form of subsistence. Rather than searching for food on a daily basis, members of a pastoral society rely on domesticated herd animals to meet their food needs. Pastoralists live a nomadic life, moving their herds from one pasture to another. Because their food supply is far more reliable, pastoral societies can support larger populations. Since there are food surpluses, fewer people are needed to produce food. As a result, the division of labor (the specialization by individuals or groups in the performance of specific economic activities) becomes more complex. For example, some people become craftworkers, producing tools, weapons, and jewelry. The production of goods encourages trade. This trade helps to create inequality, as some families acquire more goods than others do. These families often gain power through their increased wealth. The passing on of property from one generation to another helps to centralize wealth and power. Over time emerge hereditary chieftainships, the typical form of government in pastoral societies.

From the above account the protection of private property played a significant role in ushering the state.

There are modern day examples of stateless tribal anarchist societies, Somalia—until recently before the  forced introduction of government through the intervention of the US government—and Southeast Asia’s Zomia.

Now let us inject the ideological philosophical component of anarchist societies. 

According to the Wikipedia.org there are several schools of thought, mutualism, individualist anarchism and social anarchism (which is broken down into collectivist anarchism, anarcho-communism, anarcho-syndicalism).

There are even several offspring of ideological anarchism. The internet seems like an example of crypto-anarchism.

As to whether these ideological anarchism are utopian or not is beyond the scope of this post.

The bottom line is that anarchism as defined by statelessness has been an integral part of human society. They are anything but utopian.

Video: Mises Institute's Mark Thornton on the US "Government Shutdown"

Mises Institute's Senior Fellow and Professor Mark Thornton clarifies the sensationalism over the alleged "government shutdown" (source Mises Blog)

IMF Declares: Philippines Insulated to the Fed's Taper-Exit

The demigod known as the IMF declares that the Philippines will be insulated from the FED’s taper and exit.

Reports the Wall Street Real Economics Blog

The Fed’s eventual exit from easy-money policies will separate the emerging market wheat from the chaff.

One country that can handle the Fed exit is the Philippines, says the International Monetary Fund.

Reason? This time is different

But Ms. van Elkan says the country’s strong current account receipts, net creditor status, steady reductions in public debt and low foreign participation in government debt markets have helped insulate the economy against more capital flight. Manila’s own Fed, Bangko Sentral ng Pilipinas, can also release funds from its Special Deposit Account to provide a cushion to growth, she said.

Upside risks instead?

In fact, Ms. van Elkin says risks to the country’s growth are to upside.

“Absorbing the ample liquidity into productive sectors may prove challenging,” she says, after an annual review of the country’s economy.  “Part of the liquidity could finance credit that is used to fuel demand for real estate, potentially with a strong procyclical effect on the economy,” she added.

The IMF Philippine representative seem to suggest that the recent ruckus in the domestic financial markets have been one of the seller’s imagination.

The Philippine Phisix got slammed not once but TWICE within a span of three months.

That’s because perhaps, from the IMF perspective, foreign investors may have been spooked by some imaginary hobgoblin who stampeded out of local assets during the same period (table from the BSP).

The domestic currency, the peso,  has likewise been whipped.

The IMF seems to contradicting US Fed chair Ben Bernanke who has been terrified by the tightening conditions

I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank

Should the taper hit the US economy, the IMF assumes away all economic, financial and political linkages between the US and the Philippines, such that the latter can simply ride off to the sunset because of the reliance on backward looking data. Yet such event defies what occurred in 2008.

And with companies like San Miguel Corporation already been in a debt shindig (total debt Php 424 billion or about 5% of total banking assets-universal, thrift and rural), insatiably gorging on “finance credit”  that has a “procyclical effect on the economy”, it is a wonder how sustained rise foreign interest rates and a fall in the domestic currency, as the IMF assumes, will hardly have an impact to foreign denominated loans, as well as, how a rise in domestic rates will hardly affect credit quality of peso denominated loans. 

Yet what will likely be the ramifications to the broader economy once high geared companies will be exposed to them? Such risks have been dismissed as irrelevant. And the IMF demigods says these the Philippines should continue to borrow like mad and inflate more bubbles.

The reality is that there is no free pass to systemic imbalances molded via debt financed bubbles. Once tightening occurs, the law economics will prevail and delusions will be exposed.

But sorry for ad hominem, but the IMF has been devastatingly wrong in so many times. 

The IMF revised their flawed outlook on Greece’s growth several times, as Keep Talking Greece points out: (bold mine)

The IMF’s review on its Greek program was released late last night. The 51-pages document on Greece’s fiscal adjustment program 2010-2013 is more than clear: The IMF screwed Greeks for three consecutive years. The IMF failed to realize the damage  austerity would do. The IMF failed to predict the real recession. The IMF applied wrong multipliers. The list in which the IMF officially admits its mistakes and failures in the case of Greece is long and despicable, if one takes into consideration the thousands of impoverished Greeks, the 1.3 million unemployed, the crash of the health care and the social welfare, the practical collapse of the public administration and inhuman austerity measures like taxing the verified poor. - 

How they were wrong in Jordan, from the Jordan Times (bold mine)

The estimates made by the staff of the International Monetary Fund, for example, are absolutely undependable. They have no real value, not only in the long run i.e., after several years, but also in the short run i.e., in the same year, as I shall demonstrate.

IMF delegates visited Jordan recently. They examined all figures and statistics, listened to officials at the Ministry of Finance and the Central Bank and came up with a set of economic and financial predictions for the current year 2012.

They published those predictions on the IMF Internet site dated in April, i.e., after an important part of the year had passed and the trends had become clear.

Unfortunately, those predictions were way far from reality.

And how they failed to see the 2008 crisis

From the Foreign Policy.com (bold mine)

The IEO has just released its report—and it's a very tough critique of the IMF's performance and internal culture:

"The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.

One key assertion is that the IMF's staff was intellectually and psychologically unprepared to challenge the regulatory authorities in the most advanced economies.

"IMF staff felt uncomfortable challenging the views of authorities in advanced economies on monetary and regulatory issues, given the authorities’ greater access to banking data and knowledge of their financial markets, and the large numbers of highly qualified economists working in their central banks. The IMF was overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise; this is perhaps a case of intellectual capture.

In short, the IMF’s Achilles Heels is one of “pretense of knowledge”.

As the great Austrian economist F. A. Hayek noted

this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude — an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.

Oh by the way, if the IMF remains “overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise”, then this should be a source of MORE concern.

One reason why the Philippines occurred portfolio outflows in August according to the Bangko Sentral ng Pilipinas has been due to “hesitancy to invest during the “ghost” month of August (believed to be unlucky for business)”  

You can’t make this up. Local officials experts attribute Chinese superstitions as economic analysis. Incredible.

And who were the biggest selling investors in August. 

Again the BSP

The United Kingdom, the United States, Singapore, Luxembourg and Hong Kong were the top five (5) investor countries for the month, with combined share of 76.4 percent.  The United States continued to be the main beneficiary of outflows from investments, receiving US$1.1 billion (or 77.6 percent of total).

I didn’t know that US-UK investors subscribed heavily to the Chinese tradition.

But that’s expert analysis for you.

Venezuela’s Toilet Paper Shortage

Inflation and price controls are siblings. First government inflates, then they place the blame on the public for the ramifications of their actions, thus justifying price controls. Yet the consequence of this inflation price control feedback loop has been to create shortages

The toilet paper shortage in Venezuela is great example.

From Reuters:

A Venezuelan state agency on Friday ordered the temporary takeover of a factory that produces toilet paper in what it called an effort to ensure consistent supplies after embarrassing shortages earlier this year.

Critics of President Nicolas Maduro say the nagging shortages of products ranging from bathroom tissue to milk are a sign his socialist government's rigid price and currency controls are failing. They have also used the situation to poke fun at his administration on social media networks.

A national agency called Sundecop, which enforces price controls, said in a statement it would occupy one of the factories belonging to paper producer Manpa for 15 days, adding that National Guard troops would "safeguard" the facility.

Politicians play by people’s economic ignorance or manipulates the public’s brains via propaganda

Government supporters laud efforts by Maduro, the successor to late socialist leader Hugo Chavez, for maintaining tough regulations of private businesses.

They blame unscrupulous merchants for hoarding products to make quick profits, and celebrate the socialist government's legacy of social assistance programs.

Venezuela’s stock markets has been on fire. The Caracas Index has been up about 260% year to date and 560% since 2012.

Yet Venezuela’s soaring stocks haven’t been signs of a booming economy as manifested by(e.g. shortages of many basic items including toilet papers)…

Instead they are symptoms of hyperinflation or a unfolding currency crisis, as manifested by another symptom the crashing the currency, the bolivar.

 

The average Venezuelans seek titles to capital goods or proxies to real assets as haven from massive loss of purchasing power.

As one would note, interventions breed interventions until the economy eventually collapses.

How Inflationism Spurred Singapore’s Labor Protectionism

In August of 2012, I wrote about Singapore’s “gradual descent into the welfare state” as politicians divert the public’s attention by blaming symptoms of bubbles (zooming property prices and wage inflation) on immigrants to justify increased taxes for social spending.

Singapore’s homegrown bubbles as seen via record home prices (as of August) has been fueled by massive credit expansion or the zooming loans to the private sector.

This has been enabled and facilitated by the central bank’s accrued efforts to suppress the domestic currency, the Singaporean Dollar, from rising by accumulating enormous foreign exchange reserves by printing lots of domestic currency, thereby the easy money environment.  And due to such exchange rate management measures, the Monetary Authority of Singapore (MAS) even posted a $10.2 loss last year.

These bubble activities by the MAS have only amplified on the growing nationalism where this year the ruling party lost due to increasing populist clamor for immigration curbs.

Singapore’s housing index has already surpassed the pre-Asian crisis highs. This shows why the recent “FED taper” turmoil in May-June materially affected Singapore’s financial markets.

Now to Singapore’s labor protectionism, from Bloomberg:

Singapore will widen foreign-worker curbs to professional jobs as the government clamps down on companies that hire overseas talent at the expense of citizens, stepping up efforts to counter a backlash against immigration.

The Southeast Asian nation said yesterday it will set up a job bank where companies are required to advertise positions to Singaporeans before applying for so-called employment passes for foreign professionals. The unprecedented policy will target jobs that currently pay at least S$3,000 ($2,400) a month.

“There are concerns among Singaporeans, which I think is fair, and so it’s timely for us to introduce this,” Acting Manpower Minister Tan Chuan-Jin said in a Bloomberg Television interview yesterday. “There are Singaporeans out there, well-skilled and capable, who are looking for jobs and I think this step would actually facilitate that process.”

The country is persisting with a four-year campaign to reduce its reliance on foreign workers, after years of open immigration policy led to voter discontent over increased competition for housing, jobs and education. The move has led to a labor shortage and pushed up wages, prompting some companies to seek cheaper locations…

Singapore will also raise the minimum pay for employment-pass holders by 10 percent to S$3,300 a month in January, the Ministry of Manpower said in a statement yesterday. The job bank will be set up by mid-2014, it said. Companies with 25 or fewer employees will be exempt from the new rules, as well as jobs that pay a fixed monthly salary of S$12,000 or more, the ministry said.

Singapore’s declining economic freedom and the rise of economic nationalism as a consequence of the global and Singapore’s easy money regime is a sad development especially that I have regards for the country. 

Yet one thing leads to another. Since property bubbles and wage inflation are symptoms, policies that address symptoms means the disease won’t be cured. And once the labor-immigration controls fail to stem her bubbles and the perceived political inequalities, the government of Singapore will resort to even more controls or interventions in other areas (perhaps capital and exchange controls, trade, social mobility as the above, deeper wage and labor controls and more), that would mean lesser prosperity for Singaporeans.

And growing politicization of an economy will lead to more social tensions as various parties compete to use government ‘coercive’ machinery as means to promote their self-interests through the repression of the interests of the others. So as economic freedom declines, economic fascism and or cronyism increases.

Inflationism and social controls or political economic interventionism have always been intertwined. As the great Austrian economist Ludwig von Mises warned (On The Manipulation of Money and Credit)

Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism