Shinzo Abe Increases Sales Tax as Japan’s Industrial Output Slumps

We have been repeatedly told that Abenomics or Japan’s version of central bank inflationism will deliver the magic economic growth formula for Japan's seemingly perpetual stagnation.

Lately media, banking on surveys, say that one source of optimism has been in the manufacturing index, which in August rose to 52.2 from 50.7. This has supposedly even risen to 52.5 in September. 

And unfortunately like in Europe, what people say and what people actually do have been different.

Contra surveys, real Industrial output DROPPED in August, according to the Wall Street Real Time Economics Blog (bold mine)

In a sign that Prime Minister Shinzo Abe’s aggressive economic stimulus has only produced mixed results at best so far, industrial production dropped a larger-than-expected 0.7% in August from the previous month, according to the Ministry of Economy, Trade and Industry on Monday. Economists were looking for a more modest 0.4% fall…

By category, output for consumer durables, such as passenger cars, refrigerators, TV sets and notebook computers, fell an average 2.5%.

“Recent data show that a larger portion of household income needs to be spent to pay for basic necessities, leaving much less money for discretionary items,” said the ministry official briefing reporters.

The prices of daily necessities, such as energy, have been on the rise recently as businesses started passing on the higher costs of imported goods to consumers amid a sharply weaker yen.

Output was also down in the important export sector. Production of capital goods, which are largely for export, fell 1.7%, despite the recent weakness of the yen, which should make Japanese exports more competitive. “Exporters are using a weaker yen to rebuild profit margins rather than cutting prices and boosting exports. We are waiting for them to start cutting prices and boosting output,” the briefer said.

The only good news for Mr. Abe in the figures was itself something of a mixed blessing. There was strong demand for cement and other bridge construction materials, on demand from expressway operators. Output was up 1.3% for the fabricated metals category, and up 1.0% for the ceramics and stone category

Media blames the fall in industrial production on Consumer Price Inflation (CPI).

The reality is that the bulk of Japan’s consumer price inflation for August appears to have been largely concentrated on energy and energy related expenditures such as light and transportation (red rectangles). Excluding energy (and food), Japan’s CPI even FELL by .1% annualized (lower green rectangle).

With input prices rising faster, businesses in Japan are having a difficult time passing these costs to the consumers as I explained before. So a squeeze in profits, which are distortions on economic calculation and therefore a drag on economic coordination activities, has been prompting for reduced output; no matter what media and their apologists say.

And the increases in cement and construction materials is a sign of government induced output. 

Thus, the industrial data reveals that the private sector has been reluctant to participate in real economic activities, while government activities has been bolstering statistical economic growth. Yet statistical growth is being touted as an excuse to raise taxes.

This fall in industrial output appears have been reinforced by Japan’s joblessness which likewise soared in August. Again from another Wall Street Real Times Economics blog

The main unemployment reading came in at a surprisingly high 4.1% in August, the government said Tuesday, the first rise in six months and an apparent dark cloud on a day of otherwise bright economic data. It was also higher than the 3.8% predicted by economists surveyed by The Wall Street Journal.

Media has been quick to defend this by saying that the August spike has been due to more people entering the workforce. 

However, logic tell us that when businesses dithers on investing, so will this be reflected on employment....unless the government goes on a hiring binge.

The reality is that all these extoling or media worship of Abenomics represents a (propaganda) justification for Japan PM Shinzo Abe’s call for higher taxes and more inflationism and interventions—which of course benefits the cronies than the economy.

And today PM Abe raised taxes. From today’s Reuters:

Prime Minister Shinzo Abe took a long-awaited decision to raise Japan's sales tax by 3 percentage points, placing the need to cut the nation's towering debt ahead of any risk to recent economic growth, as he now focuses on crafting a broader package of measures to address both problems further.

Mr. Abe on Tuesday promised more stimulus to cushion the impact of the sales-tax rise on the economy, stressing the nation needs both fiscal consolidation and economic growth to end 15 years of debilitating deflation.

The stimulus measures total around ¥5 trillion ($51 billion), including cash-handouts to low-income families, Mr. Abe said. On top of that, there will be tax breaks valued at ¥1 trillion for companies making capital investments and wage increases.

The so-called statistical growth of Japan’s debt laden economy has recently been driven by government spending rather than from the private sector. The industrial output data, as noted above, reveals of such disparity.

The implication is that Japan will need more debt to finance all these noble sounding crony benefiting boondoggles which will only extrapolate to increasing debt and consequently the burden of debt servicing.

And it is a mistake to believe that tax hikes will proportionally raise the required revenues for the simple reason that people respond to incentives (whether positive or negative) brought about by such policies.

Café Hayek’s Don Boudreaux explains

The reason for these outcomes is that people respond predictably to incentives – in this case, to incentives created by higher taxes.  Obliged, for example, by such a tax to pay a higher price for apples, consumers will not buy as many apples as they bought before the tax hike. Similarly, obliged – because of the tax – to accept a lower take-home price on each pound of apples sold, sellers aren’t willing to sell as many pounds of apples with the tax as they were before the tax was raised.

So Abenomomics runs a greater risks of generating lower rather than higher revenues overtime as real (not statistical) economic growth weakens further.

As I wrote three weeks back:

Raising sales tax or whatever taxes will only accelerate the downside spiral of Japan’s economy. Japanese investors have already been reluctant to invest, how would higher taxes encourage investments and more economic output?

Even a former adviser to billionaire George Soros and now a member of Japan’s upper house of parliament, Takeshi Fujimaki reportedly joined politics because he sees the inevitability of Japan crisis which he sees will occur in 2020.

With Japan’s government’s government intensifying the ponzi financed debt spending spree, I believe that a Japan credit event is likely sooner than later (2020)

Finally, seen from the yen (USD-JPY), the wonders of Abenomics seem to be stalling. This has big implications. A falling yen is a manifestation of the effects of the BoJ’s inflationism. If the yen refuses to fall further then the “inflation” on Consumer Price Index will have hit a wall. 

So this means either the current boom will turn into a bust or that PM Abe will have to significantly ante up on Abenomics via an even more aggressive BoJ.

Tick toc tick toc.

The US Government Shuts Down for the First Time in 17 Years

Political impasse has prompted for a partial shutdown of the US government.

From the Bloomberg:

The U.S. government began its first partial shutdown in 17 years, idling as many as 800,000 federal employees, closing national parks and halting some services after Congress failed to break a partisan deadlock by a midnight deadline.

Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns among some lawmakers that the shutdown could bleed into the more consequential fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.

Chances of a last-minute deal -- seen so often in past fiscal fights -- evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing to concede and planned a morning vote to reject the House’s call for formal talks.

Liberal media immediately raised the shutdown bogeyman, as Currency Wars author Jim Rickards points out

From another Bloomberg article

A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.

While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.

What the shutdown really means is that current political trends have simply been unsustainable. The real shutdown (a crisis) will inevitably arrive if current trends won’t be reversed.

And importantly the shutdown will only be symbolic. Eventually like the so-called taper, there will be some compromise on the debt ceiling and the Obamacare.

Austrian economist Robert Higgs sees the irony

Government shutdown? Nonsense. Only in our dreams will the U.S. government shut down. The current flap about an impending shutdown represents only the latest episode in the soap opera that stars the government as the hysterical teenage drama queen.

For fiscal year 2013, which will end in a week, estimated federal revenue is expected to be about $2.7 trillion. In real terms, this revenue is roughly equal to the amount the government spent ten years ago, near the beginning of the Bush II administration.

Yet there has been little evidence that shutdowns extrapolates to economic harm.

First Trust’s Brian Wesbery and Robert Stein even sees positive effects from the previous shutdowns (bold mine)

Some pundits and analysts say a shutdown will hurt the economy, but it’s hard to say that based on history. The Washington Post recently listed every shutdown from 1976 to 1996. There were 17 shutdowns totaling 110 days. Out of those 110 days, only 6 days were during recessions. That’s very few given that we were in recession about 14% of the time during that twenty–year period.

Of course, maybe that’s because politicians are more likely to forge a budget agreement during economic downturns. But the last and longest shutdown doesn’t appear to have hurt the economy either. 

That was the three-week shutdown from mid-December 1995 to early January 1996 under President Clinton. Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995 and then at a 2.6% pace in Q1-1996, despite the shutdown and the East Coast Blizzard, a multiple day massive snowstorm in January that was followed by large floods.

The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending. And when politicians can’t hide, when the public finally finds out the “Emperor Has No Clothes,” there is a political reaction. In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.

Meanwhile the Gallup sees ambiguous  impact from a shutdown: 

As the federal government prepares to shut down for the first time since 1995/1996, historical Gallup data reveal that the repercussions of that past conflict ranged from none to short-lived, in terms of Americans' concerns about the U.S. and the political players involved.

The Gallup says that perhaps the 'shutdown' may exacerbate the public’s already faltering confidence on the economy

Beyond the politicians though, Americans' confidence in the economy is already floundering and their satisfaction with the way things are going in the U.S. remains in the low-20% range. If history is a guide, it is possible that their views of the situation in the country may worsen in the short term, which for an economy -- and job market -- still in recovery, is troublesome. But, long term, it is unclear whether a possibly short-lived government shutdown will ultimately negatively impact the economic situation in the U.S.

It’s important to note that all previous shutdowns has had different circumstances that led to the unique historical event, as shown by the Washington Post here. For instance some shutdowns occurred during recessions.

So market reactions on shutdowns, such as the S&P 500, has largely reflected on the underlying trend rather from the event itself. And given that most shutdowns occurred during the bullish epochs, the outcome tends to give weight on the positive. The chart above from JP Morgan highlights on these. But blindly interpreting returns without understanding the circumstances behind the shutdown events would be like seeing the forest for trees.

And this gives weight to the suggestions of FT and the Gallup where shutdowns tend to have short-lived effects. So a shutdown seems neither bullish or bearish over the long run. 

This means that there will be bigger forces that will drive the markets.

The shutdown only reminds us of this resonating words of the great Frédéric Bastiat

Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.

How Sustainable is Thailand’s Welfare and Debt Economic Model?

The bullish mainstream says that the current meltdown in the emerging markets has merely been a shakeout and that economic growth will eventually prevail.

But the $64 trillion question is, what drives economic growth?

In the case of Thailand, how dependable has her welfare-debt based growth model been?

The Wall Street Journal Real Time Economic Blog provides precious clues on these: (bold mine)

Thailand is discovering that putting the populist genie back in the bottle is harder than letting it out.

Since introducing a multi-billion dollar subsidy for the country’s rice farmers in 2011, the country has seen a plethora of other special interest groups demand handouts of their own. Among them, rubber planters this month staged running battles with riot police in southern Thailand in their bid to secure higher minimum prices for their harvests.

Now the country’s corn farmers are getting in on the act, last week blocking roads in northern Thailand, and raising questions among economists over whether Prime Minister Yingluck Shinawatra’s government will be able to roll back the scale of its handouts – and what the consequences might be if it doesn’t.

Central bank governor Prasarn Trairatvorakul warned an investor conference last week that populist subsidies “add to micro-level risks by making households undisciplined and addicted to ‘easy’ money, while also adding to macro-level risks by stretching fiscal resources without enhancing competitiveness in any meaningful way.”

Give them your hand, they want your arm. See how 'free lunch' policies fosters dependency or addiction?

And indeed populist welfarism via subsidies has been adding pressure to Thai’s government deteriorating fiscal conditions…(bold mine)

The subsidies are adding to the government’s budget, which already is bloated by a rubber subsidy and spending of 700 billion baht, or $22 billion, to support rice farmers since Ms. Yingluck was elected – an amount equal to 6% of Thailand’s gross domestic product last year.

…as well as compounding on the economy’s addiction to debt (bold mine)

Ms. Yingluck’s government has defended the subsidies as a way of supporting the growth of a strong consumer economy in rural Thailand, the heartland of the ruling Puea Thai, or For Thais, Party.

But the subsidies also are threatening to disrupt Thailand’s economy at a time when global investors are concerned about rising public and private debt levels in many emerging markets. Huge subsidies in countries like Thailand, Indonesia and India have added to government debt burdens – an important reason why investors have turned cold on these nations stocks and currencies this year.

Again Thai’s system depends on the Risk ON environment (low interest rates, strong baht, and debt financed activities) provided by zero bound rates, which the bond vigilantes has been exposing as untenable.

The doleouts have also contributed to the near doubling of Thai government’s external debt as well as to the surge in private sector debt (bold mine)

At the same time, the government’s goal of raising living standards and consumer spending in rural areas appears to be having unintended consequences.

Some farmers are using the promise of guaranteed future incomes as a basis for borrowing more money. Thailand’s total household debt is now pushing close to 80% of GDP, with a third of the lending provided by government-run institutions such as the Bank for Agriculture and Agricultural Cooperatives and the Government Housing Bank, which aren’t subject to regulatory control by the central bank.

So aside from zero bound rates, government sponsored lending and guarantees has compounded on the debt financed consumer spending binge.

And notice, when mainstream emphasize on consumer economy, what they really mean is a debt financed consumer spending, which is unproductive. 

Thailand's loans to the private sector has soared by about 30% in 2 years.

And part of this spending more than producing can be seen in Thai’s largely negative balance of trade.

Yet more unintended consequences from state subsidies…

A tax rebate scheme for first-time car buyers that was designed to stimulate production in Thailand’s auto sector, which was badly hit by severe flooding in 2011, also has raised debt to levels that have worried some analysts.

Consultancy IHS Global estimates that 10% of Thais who took out loans under the program have either defaulted on payments or unwound the borrowings, creating a glut of second-hand cars.

Thailand’s “free lunch” redistributive and debt financed economic model, again, has been highly dependent on the maintenance of a low interest rate environment which seems likely about to change.

Yet with the recent bout of spending splurge that has racked up systemic debt, the Thai economy has become increasingly vulnerable to the actions of the bond vigilantes. 

As for shakeout on emerging Asia, I believe we may see more bouts of volatility ahead.

The Symbiotic relationship between Crony Capitalism and the Welfare State

The welfare state has been built on the popular delusion that the major beneficiaries have been the underprivileged or the poor. 

In reality, such welfare programs favor the crony elitist class.

Austrian economist Gary North explains: (bold original)

October 1 is the day of the new fiscal year of the United States government. Little known to the general public, it is the supreme day of celebration for the American Establishment. Let me explain why. It has to do with government spending, specifically this: Who wins? Who pays?

The American welfare state is generally supported by the very rich. They clean up by means of the welfare state. Why? Because the welfare state is seen by political liberals as justifying the expansion of the federal government, and the federal government then protects the interests of the super rich. This has gone on for so long that it is astounding to me that the chattering class -- mostly Leftists -- does not understand it.

Leftist Democrats constantly lobby for more welfare state programs. They think the rich will pay for them. To see why this is silly, look at this pie chart on federal spending. Ask yourself: Who wins? Who pays?

Look at defense spending. Who wins? A handful of large defense firms. This is fat city for the rich. It always has been.

Look at net interest payments. Do you think that money goes to the rich? What does the U.S. government pay? Under 3% a year. The super rich do not buy such low-paying investments. Who does? Retirement funds, insurance companies, money market funds, and banks. This rate of return is for the middle-classe. The interest rate returns after taxes do not keep up with price inflation. Who pays? The rich pay a good chunk of it as taxpayers. They do not care. Why not? Because this level of federal debt guarantees a huge federal government. With the government-enforced restricted-access profits they make, it's just a cost of doing business.

Now let's look at the biggies: Social Security and Medicare/Medicaid. They constitute 45% of federal spending. Who pays? Working stiffs. The Social Security taxable salary cutoff is about $110,000 a year. So, the worker and his employer pay about $16,000 a year, max. For the super rich, this tax is irrelevant -- invisible.

Do you see what the voters have done? They have created two gigantic, politically untouchable welfare programs that the working class finances. These programs are so huge that no new major spending program will be imposed. They have put a ceiling on the growth of the welfare state. The welfare state cannot touch them. They are now immune.

ObamaCare? The workers will pay. Small business owners will pay.

How about food stamps, called SNAP? This costs $75 billion a year. Who gets this money? Agribusiness. In short, food stamps are a subsidy to the super rich in the name of helping the poor.

The income tax was a problem, which went from 25% in the 1920s to 63% in 1932, to 79% in 1936, to 94% in 1944. Truman took it back to 91% in 1948, where it stayed until Kennedy, who got Congress to drop it to 70%. Reagan got it lowered in stages to 28% in 1988. No President since has got it above 40%.

We know that Americans will not accept federal taxes above 20% of GDP. In 1944, in World War II, it got to 20.8%. That was the top. So, the voters have placed a ceiling on total taxation. The federal government is at that ceiling. New programs must come from borrowing. When that gets cut off at low rates, as it will at some point, the welfare state will go belly-up, except for payments to oldsters.

The Left has shot its wad politically. There is no extra federal money to tap. The oldsters lay claim to the federal government's biggest welfare programs, and these programs are paid for by the working class, not the rich.

More on the the Middle class as carrying the cross of the poor….(bold mine)

Crony capitalism favors the super rich. The super rich are willing to pay income taxes to fund a small portion of the welfare state, because the bulk of the welfare state is funded by taxes on the middle class. The super rich don't pay much into Social Security and Medicare/Medicaid. The working class pays: "regressive" taxation. These are the largest welfare programs there are. The super rich avoid having to pay much of anything into the two largest welfare state programs there are. It is a sweet deal for the super rich. The federal government's regulatory apparatus keeps growing, and the super rich's balance sheets keep growing.

Add to this Bernanke’s and or the central bank dogma of promoting quasi permanent booms (bubble cycles) or asset inflation

 

The welfare state as protectionist shield in favor of cronies. (bold mine)

Crony capitalism removes the most important threat to the Establishment, namely, the threat of free market competition. It makes certain that existing large firms have the advantage. The existing large firms can afford the high-powered and highly expensive legal talent to make the system work for them. This locks out competitors whose only advantage is that they can serve the customer more efficiently. That doesn't count, because federal regulation makes it illegal for these firms to serve the customer.

From the point of view of the Establishment, the cost of the welfare state is chump change. The two big kahunas of the welfare state, Social Security and Medicare/Medicaid, are financed by the working class. So, they are no sweat off the brows of the super rich. These two programs make it impossible to expand any other major welfare programs. Even if we think of ObamaCare as such a program, it still serves the interests of the super rich, because it will make it more difficult for smaller firms to compete. Once you've established the dominant position in the market, you can afford lots of regulation. Regulation becomes a gigantic barrier to entry that is placed in front of your potential competitors.

The political Left sees that the rich are getting richer, and its response is always the same: more welfare state. They don't understand that the federal government is what has created the existing distribution of income, which favors the super rich. They don't learn that welfare state politics makes things worse for the poor. They have been barking up the wrong tree ever since 1896, when William Jennings Bryan got his first nomination by the Democratic Party for President. His candidacy killed the old Democracy, best represented by Grover Cleveland, a limited-government vision of politics, and firmly committed to low tariffs and the gold standard. It did not survive Bryan's three runs for the presidency.

Oh by the way, who has been benefiting from America’s existing healthcare programs?

Again it is the rich, from Zero Hedge: (bold original)

According to the latest data compiled by the Agency for Healthcare Research and Quality, in 2010, just 1% of the population accounted for a whopping 21.4% of total health care expenditures with an annual mean expenditure of $87,570. Just below them, 5% of the population accounted for nearly 50% of all healthcare spending. Just as stunning is the "other" side: the lower 50 percent of the population ranked by their expenditures accounted for only 2.8% of the total for 2009 and 2010 respectively. Perhaps in addition to bashing the "1%" of wealth holders, a relatively straightforward and justified exercise in the current political climate, it is time for public attention to also turn to the chronic 1% (and 5%)-ers who are the primary issue when it comes to the debt-funding needed to preserve the US welfare state.

The spending distribution in chart format

see more charts here

Liberal media and their experts have served no more than mouthpieces for cronies. 

And another thing, this hasn't just been exclusively a US dynamic.

Tweet of the Day: Jim Rickards on US Government Shutdown

This is from American lawyer, economist and author of the Currency Wars, James ‘Jim’ G. Rickards at his twitter (hat tip Peter Coyne of the Daily Reckoning)

Pork Barrel Scam Saga: Ferreting Out Corruption with Corruption

It’s is of no puzzle for me to see how the supposed corruption-free ‘good governance’ has been all the while a rigmarole or “smoke and mirrors”.

From today’s headlines at the Inquirer.net:

Former Sen. Joker Arroyo on Sunday accused Malacañang of attempting to deceive the public by lumping him together with 19 senators who received additional pork barrel amounting to P1.107 billion a few months after the Senate voted to convict then Chief Justice Renato Corona last year.

Arroyo found it strange that Budget Secretary Florencio Abad would now claim that the former senator’s office received P47 million worth of projects in February, eight months after Corona was ousted by the Senate sitting as an impeachment court.

Along with Senators Miriam Defensor-Santiago and Ferdinand Marcos Jr., Arroyo voted to acquit Corona of charges of betrayal of public trust and culpable violation of the Constitution for dishonesty in his statements of assets, liabilities and net worth.

Extending pecuniary favors to political allies from the Senate to the House of Representatives, from another Inquirer headline article:

Members of the House of Representatives received what senators got in extra lump sum funds from the Disbursement Allocation Program (DAP), albeit in smaller amounts.

Budget Secretary Florencio Abad said on Saturday that each representative received last year between P10 million and P15 million in DAP, a little known lump-sum budgetary item that pooled savings from unused budgetary items or lower-than-expected expenses of state agencies.

“The same accommodation we extended to the senators we also extended to the House representatives,” Abad said in a series of text messages to the Inquirer…

In the 15th Congress, there were 285 representatives. If 200 got P10 million to P15 million each, the total amount would be P2 billion to P3 billion.

A total of 188 House members (or twice the minimum one-third vote or 95 signatures needed) impeached Corona on Dec. 12, 2011. Some lawmakers complained that Majority Leader Neptali Gonzales II had told them to just put their name on the complaint although they hadn’t read the articles of impeachment against Corona.

Two days later, the Senate convened itself into an impeachment court. On May 29, 2012, 20 senators found Corona guilty of betrayal of public trust and culpable violation of the Constitution largely because he was untruthful in his financial declaration.

If true, then the Renato Corona ouster or impeachment of ex-Supreme court Chief justice, has all been about the proverbial “pot calling the kettle black” or ferreting out corruption with corruption or the rewarding of political constituencies with earmarks “extra lump sums” who voted or towed along with the President's desires. 

The end of such actions served nothing more than to raise poll rating approvals or populist politics in order to justify the administration’s expansionary government and political control over society.

This is just a validation of what I have been saying about the sham of ‘good governance’ from a new administration.

Commons sense tells me that immense elections expenses will need to be recovered and that the political baggage from assorted horse trading and backroom dealing with different and ideologically opposed political groups will suggest more of the same policies, but with a subtle difference-the distribution of power will be based according to the degree of political debts as perceived by the new leaders.

In other words, the only “changes” I expect to see post elections are personalities involved in dispensing public funds and controlling power (and not in the system dominated by cronyism and client-patron relations).

And the Pork barrel has been used as one of THE instruments for “assorted horse trading and backroom dealing” again from another article of mine:

So essentially, the Pork Barrel culture reinforces the patron-client relations from which the Patron (politicos) delivers doleouts and subsidies, which is squeezed from the Pork Barrel projects, to the clients who deliver the votes and keeps the former in power. Hence, the Pork Barrel system is essentially a legitimized source of corruption and abuse of power seen from almost every level of the nation’s political structure, an oxymoron from its original “moralistic” intent (unintended consequences). As the saying goes “the road to hell is paved with good intentions”.

The great the French classical liberal Claude Frédéric Bastiat warned at the Law of the mass delusions espoused by the public on the worship of the state-law-legislature (p.43)

One of the strangest phenomena of our time, and one that will probably be a matter of astonishment to our descendants, is the doctrine which is founded upon this triple hypothesis: the radical passiveness of mankind,—the omnipotence of the law,—the infallibility of the legislator: this is the sacred symbol of the party that proclaims itself exclusively democratic

Unless there will be massive orchestrated and coordinated coverups or whitewashing, expect to see the deepening and broadening of the scandal and a possible dramatic change in the sentiment of "radial passiveness" of domestic politics.

Yet the public should clamor for an independent non-partisan audit on earmarks (Pork barrel) of all incumbent officials (which should include previous tenures or positions) beginning with the highest to the lowest ranking. 

But this would signify a Herculean task of cleaning up the Aegean stable that would be met by stiff resistance and would likely extrapolate to a wholesale expose of how filthy the local political system operates.

Let me add that should today's inflationary boom be faced with economic reality, then this will compound on political woes endured by this supposed puritanical administration from the unraveling Pork Barrel scam saga. 

The Pork barrel scam is really peanuts to the stealth plunder from an inflationary boom which has in fact partly financed the Pork Barrel via zero bound rates

Video: Dot.com boom’s “New Economy” that never was

Reminiscent of American economist Irving Fisher’s infamous call, who thought that stock market boom during the “roaring twenties” hit a “permanently high plateau”, this 1999 CNN video during the glory days of the dot.com boom exhibits the same “this time is different” mania outlook we seem to be witnessing today.

As the Zero Hedge points out: (bold original)

In an effort to bring back some of that "memory" - and dispel the inevitable recency bias (and cognitive dissonance) as even the Fed is admitting markets are frothy, we bring you 1999's CNN Special "The New Economy - Boom Without End."

A brief clip from the archives full of internet dreams, globalization hopes, growth without inflation, and most importantly productivity gains. It seems we weren't that far off 14 years ago as Ed Yardeni notes, the internet is an inherently price-deflating animal (in its global competition exposing ways) which means - for firms to maintain profits (and stock prices), they must increase productivity... or in the modern parlance cut costs and lay off workers. "The economy has changed for good..." sums up the 'it's different this time' view of the 90s bubble.

Stephen Roach notes at the time - "if we are not in a new economy and the 'old rules' come into play from time to time, then much of what has happened in the 1990s will ultimately be challenged." Indeed Stephen...

___

Fait accompli

This is how Wikipedia describes the dot.com’s transition towards the bubble bust: (bold mine)

Over 1999 and early 2000, the U.S. Federal Reserve increased interest rates six times, and the economy began to lose speed. The dot-com bubble burst, numerically, on March 10, 2000, when the technology heavy NASDAQ Composite index, peaked at 5,048.62 (intra-day peak 5,408.60), more than double its value just a year before. The NASDAQ fell slightly after that, but this was attributed to correction by most market analysts; the actual reversal and subsequent bear market may have been triggered by the adverse findings of fact in the United States v. Microsoft case which was being heard in federal court. The conclusions of law, which declared Microsoft a monopoly, were widely expected in the weeks before their release on April 3. The following day, April 4, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223, forming an intraday chart that looked like a stretched V. At the time, this represented the most volatile day in the history of the NASDAQ.

On March 20, 2000, after the NASDAQ had lost more than 10% from its peak, financial magazine Barron's shocked the market with its cover story "Burning Up". Sean Parker stated: "During the next 12 months, scores of highflying Internet upstarts will have used up all their cash. If they can't scare up any more, they may be in for a savage shakeout. An exclusive survey of the likely losers". The article pointed out that "America's 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock market".

By 2001 the bubble was deflating at full speed. A majority of the dot-coms ceased trading after burning through their venture capital, many having never made a profit. Investors often referred to these failed dot-coms as "dot-bombs"

Again monetary tightening emerged to expose on the delusions of "this time is different" brought about by a antecedent inflationary boom.

And as the chart above shows (bigcharts), the bursting of the dotcom came with a furious denial phase (red ellipse)

The dot.com has been a product of a series of easing monetary policies—the Plaza and Louvre Accord, BoJ easing which spurred the Yen “carry trade”, and the Fed’s lowering of interest rates—all of which piggybacked on the ‘displacement’ brought by the internet revolution, as Mises Wiki describes here.

The mania character of "This time is different" has been etched in the history of crises, Harvard’s Carmen Reinhart and Kenneth Rogoff admonishes:

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crisis is something that happens to other people in other countries at other times; crises do not happen here and now to us. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many previous booms that preceded catastrophic collapses (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes…

Inflationary permanent quasi-booms all end up the same way...

Quote of the Day: Financialization of US Households is a product of experimental monetary policy

Household Net Worth (assets less liabilities) has become a focal point of my Macro Credit Analysis. For the quarter, Household Net Worth inflated another $1.342 TN, or 7.3% annualized, to a record $74.821 TN. At 449% of GDP, Household Net Worth is within striking distance of the record 470% of GDP back at the 2007 peak of the mortgage finance Bubble. Over the past year, Household Net Worth jumped $7.690 TN, or 11.5%. Net Worth rose a notable $13.388 TN, or 21.8%, over two years. In arguably the single most pertinent macro data point, Household Net Worth has surged $17.607 TN, or 30.8%, since the end of 2008. 

It’s worth our time to dig just a little into the composition of Household Assets. At the end of Q2, Financial Assets accounted for 70%, and Non-Financial Assets 30%, of Total Assets. This compares to a 65%/35% split at the end of 2008. In nominal dollars, Financial Assets increased $15.237 TN, or 33%, since 2008, while Non-Financial Assets gained $1.684 TN, or 7% to $26.516 TN (Real Estate, at $21.123 TN, comprises about 80% of Non-Financial Assets).

Even more striking is the growth divergence between Household Financial Asset categories since 2008. In particular, safer “money”-like holdings have notably lagged the historic expansion in “risk assets.” Total Deposits (bank and money market), the bedrock of perceived safe and liquid “money,” increased $982bn since the end of 2008, or 12%, to $9.026 TN. Treasury holdings rose about a Trillion to $1.2 TN, and agency securities increased $597bn to $1.65 TN. In total, deposits, Treasuries and agencies rose $2.58 TN, or 28%, to $11.865 TN.

Meanwhile, since ’08 Household holdings of mutual funds and equities have surged $10.640 TN, or 85%, to $23.191 TN. Pension Fund Entitlements jumped $4.675 TN, or 33%, to $18.737 TN. It’s no longer true that American households have the majority of their wealth in savings and real estate. These days, and much the product of experimental monetary policy, Household perceived wealth is wrapped up in the risk markets.

(bold mine)

This perspicacious quote is from Credit Bubble Bulletin author Doug Noland at the PrudentBear.com

This is a striking observation on the deepening dependence of US household on the inflation financial assets as a source of “wealth”, as indicated by the data from the US Flow of Funds.

The so-called gains on prosperity of US households have less been from value added real economic activities but from increased speculation and of the sustained inflation of asset prices which alternatively means that US households have been imbuing more market risks in response to the FED’s grand experimental bubble blowing policies.

More importantly or more tellingly, this reveals of the US Federal Reserve’s direction of policy making or why the orgy of inflationism will remain as main instrument to bloat up artificial wealth.

Yet the bigger the boom, the greater the bust.

No Financial-Stock Market Commentary

I will spend my weekend away from the computer to be with my family to celebrate a special day. This also seems an opportune time to get some relief…

from the Johari window of libertarianism…

So there will be no financial stock market commentary this weekend.

Thanks for your patronage.

Have a great weekend.

Remembering Ludwig von Mises on his 132nd Birthday

September 29, 2013 will mark the 132nd birthday of my mentor (via his works) and inspiration Ludwig von Mises. 

It has been through the works of Mr. von Mises and the Austrian school of economics who opened my eyes to reality or the truth amidst a world seemingly lobotomized of reason and a world seemingly governed by deception, manipulation, indoctrination, repression, oppression and untruths.

It is interesting to know that Nazi Germany even hunted down Mr. von Mises as his trenchant tirades against inflation and interventionism meant that "both fascists and communists hated him" according to Austrian economist Dr. Richard Ebeling.

Mr. von Mises, narrowly escaped the Gestapo dragnet in Vienna during the German occupation by fleeing to Switzerland. Nonetheless volumes of Mr. Mises work had been captured but luckily enough had not been destroyed and had been recovered in a Moscow archive 1996—decades after the Soviets “liberated” Bohemia.  

The Huffington Post writes of the recovery of the treasure troves of Dr. von Mises work here.

Read Ludwig von Mises’ biography here.

Here is a compilation of Mr. von Mises works at the Mises Institute.

My tribute to Mr. Mises ends with this excerpt from his magnum opus, Human Action (p.239)

Theism and Deism of the Age of Enlightenment viewed the regularity of natural phenomena as an emanation of the decrees of Providence. When the philosophers of the Enlightenment discovered that there prevails a regularity of phenomena also in human action and in social evolution, they were prepared to interpret it likewise as evidence of the paternal care of the Creator of the universe. This was the true meaning of the doctrine of the predetermined harmony as expounded by some economists. The social philosophy of paternal despotism laid stress upon the divine mission of kings and autocrats predestined to rule the peoples. The liberal retorted that the operation of an unhampered market, on which the consumer—i.e., every citizen—is sovereign, brings about more satisfactory results than the decrees of anointed rulers. Observe the functioning of the market system, they said, and you will discover in it too the finger of God

Quote of the Day: Governments rely on indirect coercion

Governments rely on indirect coercion because direct coercion seems brutal, unfair, and wrong.  If the typical American saw the police bust down a stranger's door to arrest an undocumented nanny and the parents who hired her, the typical American would morally side with the strangers.  If the typical American saw regulators confiscate a stranger's expired milk, he'd side with the strangers.  If the typical American found out his neighbor narced on a stranger for failing to pay use tax on an out-of-state Internet purchase, he'd damn his neighbor, not the stranger.  Why?  Because each of these cases activates the common-sense moral intuition that people have a duty to leave nonviolent people alone.

Switching to indirect coercion is a shrewd way for government to sedate our moral intuition.  When government forces CostCo to collect Social Security taxes, the typical American doesn't see some people violating their duty to leave other people alone.  Why?  Because they picture CostCo as an inhuman "organization," not a very human "bunch of people working together."  Government's trick, in short, is to redirect its coercion toward crucial dehumanized actors like business (and foreigners, but don't get me started).  Then government can coerce business into denying individuals a vast array of peaceful options, without looking like a bully or a busy-body.

This is from George Mason University Professor and Author Bryan Caplan at the Library of Economics and Liberty Blog

Warren Buffett & co. Abandons ‘Buy India’ Theme

Former value investor and now Obama crony Warren Buffett cut losses from his investments in India along with other major investors.

From the Bloomberg: (bold mine)

Little more than two years after Warren Buffett labeled India a “dream market,” the economy is expanding at the slowest pace in a decade and the nation’s debt ratings are at risk of being cut to junk.

In the last three months, ArcelorMittal (MT) and Posco scrapped plans for $12 billion of investments, while global funds pulled $12.6 billion from Indian stocks and bonds. The exodus drove the rupee to a record low and caused short-term borrowing costs to soar, sending the government’s two-year bond yield to the biggest premium to the 10-year rate in Bloomberg data going back to 2001. Even Buffett packed up and left, with Berkshire Hathaway Inc. (BRK/A) exiting an insurance distribution venture.

Earlier the legendary investor Jim Rogers said that he has shorted India, while Greed and Fear author CLSA’s Chris Wood sees India as highly vulnerable to a sovereign debt crisis.

Despite the sharp rebound of India’s markets, India’s problems has been structural, has been intensifying and has been highly dependent on a risk ON environment

From the same Bloomberg article: (bold mine)

Investors see little prospect of India tackling budget and current-account deficits that drove the rupee down 20 percent in two years as Prime Minister Manmohan Singh boosts food subsidies to woo voters before a May 2014 election. Standard & Poor’s said this month there is more than a one-in-three chance the nation will lose its investment-grade rating within two years, while Pacific Investment Management Co. sees a “large” chance of a cut in as little as 12 months. Last year’s economic growth of 5 percent compares with an average 7.6 percent in the previous decade…

Weakened by corruption scandals and the loss of allies, Singh’s government has passed the fewest bills ever by an administration sitting a five-year term. That is allowing imbalances to build in Asia’s third-largest economy.

The current-account deficit widened to a record 4.8 percent of gross domestic product in the fiscal year ended March 31, while the 4.9 percent shortfall in public finances was the highest among the four largest developing nations. The World Bank estimates more than 800 million people live on less than $2 per day in India, where consumer-price inflation has held close to 10 percent for more than a year.

Data this month showed gains in wholesale prices unexpectedly accelerated to a six-month high of 6.1 percent in August. Every 10 percent decline in the rupee adds as much as 80 basis points, or 0.80 percentage point, to wholesale-price inflation, Nomura Holdings Inc. estimates show.

The emergence of bond vigilantes has only exposed on the structural defects of highly politicized economies as India. 

India’s war on gold for instance is a symptom of shrinking real markets due to expansive political controls.

Yet fickle foreign funds stampede in and out of Indian markets

Raghuram Rajan outlined a plan to give concessional swaps for banks’ foreign-currency deposits when he took charge as the 23rd governor of the Reserve Bank of India on Sept. 4. That, along with the U.S. Federal Reserve’s decision this month to continue monetary stimulus that has buoyed emerging-market assets, has helped the rupee pare some losses. Foreign funds have bought a net $2.04 billion worth of Indian shares in September and outflows from debt have slowed to $594.6 million.

The rupee has rallied 5.8 percent in September, after a 14 percent slide in the previous three months that was the worst performance among 24 emerging-market currencies tracked by Bloomberg. The S&P BSE Sensex (SENSEX) of local shares has climbed 6.8 percent this month as Rajan’s measures and the Fed’s policy boosted inflows. It fell 5.8 percent in the June-August period.

Those ‘financial tourist dollars’ flowing into India of late represents the throng of frantic yield chasing players, in the words of CLSA’s Chris Wood "crowded into quality, albeit expensive stocks that have outperformed".

And proof of this has been the wide divergence between blue chips and small companies, again from Bloomberg:

India’s smallest companies are trailing its biggest corporations by the most since 2006 in the stock market. The S&P BSE Small-Cap Index, a gauge of 431 companies with a median market value of $91 million, has tumbled 26 percent this year, compared with a 2.4 percent advance in the Sensex, where the median value of 30 firms is $16.9 billion, data compiled by Bloomberg show.

The most important development has been in India’s bond markets, which appears to be signaling a forthcoming recession or even a crisis via an inverted yield curve, again from the Bloomberg (bold mine)

A cash crunch created by the RBI to shore up the exchange rate caused short-term interest rates to exceed long-term ones, inverting the yield curve that gauges the length of investment against returns. Three-month government debt costs jumped to as high as 12 percent at the end of August, from 7.31 percent three months earlier. Two-year bond yields exceeded 10-year rates by as much as 272 basis points on July 31. Notes due in a decade pay 8.72 percent, compared with 2.63 percent in the U.S., 0.69 percent in Japan and 3.98 percent in China. 

Inverted yield curves typically reflect investors’ lack of confidence in an economy and presaged bailouts in Europe in the past three years. Greece’s two-year debt started paying more than 10-year securities a month before the government sought financial aid for the first time in 2010, while Portugal’s curve inverted a week before it sought a rescue.

Inverted yield curves are manifestations of the transition from policy induced inflationary boom to a deflationary bust.

As Austrian economist Gary North explains (bold original)

This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely,and is almost always followed by a recession.

So while the yield chasing manic crowd may drive India’s frothy markets to even higher levels, the emergence of the inverted yield curve implies of a escalating risk of a market shock.

India epitomizes what has been going on globally; manic yield chasing punts pushing up markets, even as unsustainable imbalances have become more evident and more prone to violent adjustments.