Phisix and the Rotational Dynamics

It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with 'free banking.' The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.- Former US Federal Reserve chairman Paul Volcker

The Phisix fell 1.43% for the first time in four weeks. This comes after a turbocharged advance since the start of the year. Year to date, the local benchmark has been up 7.04% based on nominal Peso returns. But for foreign investors invested in the Phisix, the returns are higher. Since the Philippine Peso has materially gained (over 2%) from the same period, returns from local equity investments in US dollar terms is about 9+%.

Could this week’s decline presage a correction phase?

Rotational Dynamics in the PSE and the Cantillon Effects

The decline of the Phisix has not been reflected over the broad market as exhibited by the positive differentials of the advance-decline spread. This means more issues gained despite the natural corrective profit taking process seen on many of the Phisix component heavyweights.

And leading the market gainers has been the mining index which seems to have reasserted the leadership after a rather slow start. Also defying the profit taking mode has been the industrial sector.

From the start of the year, despite this week’s retrenchment, the property sector remains the best performer followed by the mining and the financial sectors.

This week’s market activities demonstrate what I have always called as the rotational process or dynamic. Sectors that has lagged outperforms the previously hot sectors which currently has been on a profit taking mode. Eventually the overall effect is to raise the price levels of nearly issue.

Here is what I previously wrote[1],

A prominent symptom of inflation is that prices are affected unevenly or relatively.

Eventually prices in general moves higher, but the degree and timing of price actions are not the same.

It’s the same in stock markets, which represents as one of the major absorbers of policy induced inflation.

Prices of some issues tend go up more and earlier than the others. At certain levels, the public’s attention tend to shift to the other issues which has lagged. This brings about a general rise in prices.

These are the spillover effects which I call the rotational process.

The mining sector has been narrowing the gap with the property sector and has surpassed service and financial sectors. The industrial sector which has been the tail end, has shrugged off the current profit taking process.

In the real economy, the effects of inflation has been similar, this known as the Cantillon Effect (named after the Mercantilist era Irish French economist Richard Cantillon) who brought about the concept of relative inflation or the disproportionate rise in prices among different goods in an economy[2]

The great Murray Rothbard dealt with the social and ethical considerations of Cantillon Effect or the relative effects of inflationism to an economy[3]

The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up--as we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven; in the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But, on the other hand, people in remote areas of the economy, who have not yet received the new money, find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most, and at the expense of the latest receivers.

Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race--to see who can get the new money earliest. The latecomers--the ones stuck with the loss--are often called the "fixed income groups." Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts--contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are "taxed."

The distributional impact of an inflation generated boom means the chief beneficiaries of inflation policies are the first recipients of new money who constitutes the political agents (politicians, bureaucrats), the politically privileged (welfare beneficiaries) or politically connected economic agents (war contractors, government suppliers, cronies and etc.). Where they spend their newly acquired money on will then serve as entry points to the diffusion of these new (inflation) monies to the economy.

The impact of current series of inflation policies works the same way too, they are meant to benefit, not the economy, but the insolvent banking and financial system of developed nations and their debt dependent welfare states teetering on the brink of collapse. And such policies have partly been engineered to buoy the financial markets (stock markets, bond markets and derivatives markets) because the balance sheets of their distressed banking system have been stuffed or loaded with an assorted mixture of these paper claims.

In the stock market, a similar pattern occurs, early receivers of circulation credit who invest on stock markets will benefit at the expense of the latecomers, usually the retail participants, where at the end of every boom, retail investors are left holding the proverbial empty bag.

As Austrian economist Fritz Machlup wrote,

the money which flows onto the stock exchange and is tied up in a series of operations, need not come directly from stock exchange credits (brokers' loans) but that any "inflationary” credit, no matter in what form it was created, may find its way onto the stock exchange[4]…

Extensive and lasting stock speculation by the general public thrives only on abundant credit[5].

So for as long as the interest rate environment can accommodate an expansion of inflationary or circulation credit, then stock markets are poised for an upside move.

Rotational Dynamics Abroad

The distributional and rotational dynamic can also be seen in the actions of ASEAN-4 bourses where Thailand’s SET has swiftly been closing on the lead of the Phisix on a year to date basis, while Indonesia and Malaysia has yet to get started.

Not only have the rotational effects been manifested in the region but also seem to be percolating around world.

Of the 71 bourses in my radar list, only about 18% have been in the red. The current environment has been the opposite of what we have seen in 2011.

And importantly, similar to the dynamics dynamics in the Philippine Stock Exchange, last year’s laggards have currently been outperforming.

About two weeks ago, the Philippine Phisix took the second spot[6] after Argentina among world’s top performing bourses. Apparently the relative effects of inflation has prompted for a strong recovery for the previous tailenders—such as the BRICs [Brazil, India, and Russia to the exclusion of China whose bourses have been closed for the week in celebration of the Year of Dragon] and developed economies as Germany and Hong Kong as well as a fusion of other nations from developed as Austria to the frontier markets Peru—to eclipse the gains of the Phisix and Argentina.

Central Banking Fueled Inflationary Boom

Financial markets have only been responding to what seems as synchronized efforts to deluge the world with liquidity in the hope that these efforts would lead to a structural economic recovery.

Unfortunately such short term oriented policies will only mask the problems by delaying the required adjustments and at worst, build or compound upon the current imbalances which would significantly increase systemic fragility which ultimately leads to a bubble bust.

Four central banks cut interest rates this week[7] (Thailand, Israel, Angola and Albania) with India paring down on the reserve requirements—mandated minimum reserves held by commercial banks.

Most of the world’s major central banks have been enforcing an environment of negative real rates, where as I have earlier noted, global interest rates reached the lowest level since 2009[8].

Meanwhile the US Federal Reserve recently announced the extension of the incumbent zero interest policy (ZIRP) rates “at least through late 2014”[9] on economic growth and unemployment concerns.

Also US Federal Reserve Chair Ben Bernanke has again been signaling the prospects of the revival of Fed’s bond buying which he said is “an option that is certainly on the table”[10].

In reality, the Bernanke led US Federal Reserve has been using the economy as cover or as pretext to rationalize the funding of what has been the uncontrollable spending whims by US politicians, aside from providing support to the banking system (both the US and indirectly Europe), which serves as medium for government to access financing.

However it would seem that access to financing windows has been closing.

The US debt ceiling, without fanfare, had been raised anew[11], which accounts for the relentless increase in the spending appetite of the incumbent administration.

Next foreign financing of US debts are likely to shrink, perhaps not because of geopolitical issues but because economic developments could alter the current financing dynamics. For instance, Japan’s trade balance posted a deficit for the first time in 31 years[12] and that China’s trade surpluses have been steadily narrowing[13]. China has already been reducing its holding of US treasuries.

If the trade balance of the key traditional financers of the US turns into extended deficits, this would put a cap on funds from Japan and China. Unless other emerging markets will fill in their shoes, and with low domestic savings rate, the US government will be left with the US Federal Reserve as financier of last resort. Of course, the Fed may possibly work in cahoots with other central banks through the banking system to accomplish this.

This only translates to a growing dependency on the printing press for an increasingly debt reliant welfare-warfare based political economic system.

And importantly, monetization of debts would have to be supported by zero bound rates to keep the US treasury’s interest expenditures in check.

So the current debt and debt financing dynamics will imply for a deeper role of the US Federal Reserve. All of which will have implications to markets and the production aspects.

Yet Bernanke’s nuclear option (helicopter drop approach) has palpably become the conventional central bank policy doctrine for global central bankers, specifically for most of developed economies.

There is no better way to show of the unprecedented direction in central bank policymaking than from the aggregate expansion of, in terms of US dollar, the balance sheets of 8 nations (US, UK, ECB, Japan, Germany, France, China and Switzerland) in order to keep the current system afloat.

By such nonpareil actions, there would no meaningful comparisons in modern history (definitely not Japan circa 90s or the Great Depression)

Deflation as Political Agenda and the Fallacy of Money Neutrality

It is important to stress that the mainstream’s obsession with so-called deleveraging process, although part of this is true, operates in an analytical vacuum. For their analysis forgoes the political incentives of the central banks to forestall the markets from clearing. For allowing the markets to clear will translate to a collapse in the current redistribution based political system. Deflation, a market clearing process, is a natural consequence to the distortions brought upon by prior inflationary policies or the boom bust cycle.

The irony is that those who benefit from inflation (government and banks), will be the ones who will suffer from deflation.

As Professor Jörg Guido Hülsmann explains[14],

the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners. This starkly contrasts with inflation, which creates anonymous winners at the expense of anonymous losers. Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.

Thus the shrill cry over deflation amounts to nothing more than a front for vested interest groups who insists on pushing forward the inflationism agenda. Yet despite years of ceaseless incantations about deflation, asset markets and economic activities have behaved far far far away from the scenarios deflationists have long been fretting about. To contrary the risks has been tilted towards higher rates of consumer inflation.

I would further add that another mental lapse afflicting mainstream analysts, who embrace the “we inhabit a deflation, deleveraging reality”[15] mentality is that their aggregatism based economic analysis sugar-coats what in reality signifies as largely heuristics or mental short cuts predicated on political beliefs or appeal to acquire readership or catering to the mainstream to get social acceptance.

They believe that money printing by central banks has neutral effects—which means changes in money supply would lead to a proportional and permanent increase in prices that has little bearing on real economic activity as signified by output, investment and employment.

In reality, prices are determined by subjective valuations of those conducting exchanges, given the particular money at hand, the goods or services being traded for and the specific timeframe from which trade is being consummated, thus changes in the supply of money will not affect prices proportionally.

Money is never neutral. Professor Thorsten Polleit explains[16],

What is more, money is a good like any other. It is subject to the law of diminishing marginal utility. This, in turn, implies that an increase in the stock of money will necessarily be accompanied by a drop in money's exchange value vis-à-vis other goods and services.

Against this backdrop it becomes obvious that a rise or fall of the money supply does not confer a social benefit: it merely lowers or raises the exchange value of the money unit. And a change in the money supply also implies redistributive effects; that is, a change in money stock is not, and can never be, neutral.

So even as central banks continue with their onslaught of adding bank reserves at a pace that has never happened in modern history, they believe that such actions will be engulfed by “deleveraging”.

And going back to the “policy trap” or path dependency of policymaking that has been tilted towards inflationism, as said above, the balance sheets of crisis affected financial and banking institutions greatly depends on artificially bloated price levels. And in order to maintain these levels would require continuous commitment to inflationary policies, which means compounding or pyramiding inflation on top of existing inflation. Inflation thus begets inflation.

Again Professor Machlup[17],

An inflated rate of investment can probably be maintained only with a steady or increasing rate of credit expansion. A set-back is likely to occur when credit expansion stops.

And anytime central banks’ desist or even slow the rate of these expansions, this would entail or usher in violent downside volatilities in the marketplace (including the Phisix). Thus “exit strategies” signify no less than political agitprops.

A noteworthy and relevant quote from James Bianco[18], (which includes the chart above)

Until a worldwide exit strategy can be articulated and understood, risk markets will rise and fall based on the perceptions and realities of central bank balance sheets. As long as this is perceived to be a good thing, like perpetually rising home prices were perceived to be a good thing, risk markets will rise.

When/If these central banks go too far, as was eventually the case with home prices, expanding balance sheets will no longer be looked upon in a positive light. Instead they will be viewed in the same light as CDOs backed by sub-prime mortgages were when home prices were falling. The heads of these central banks will no longer be put on a pedestal but looked upon as eight Alan Greenspans that caused a financial crisis.

So how does one know that “expanding balance sheets will no longer be looked upon in a positive light” considering that central banks can elude accounting rules? My reply would be to watch the interest rate price actions, currency movements and prices of precious metals along with oil and natural gas.

No Decoupling, a Redux

Any belief that the Phisix operates separately from the world would be utterly misguided.

2011 should be a noteworthy example.

The Phisix ended the year marginally up while the US S&P 500 was unchanged. Except for the first quarter where the S&P 500 and the Phisix diverged (green oval, where ironically the US moved higher as the Phisix retrenched), the rest of the year exhibits what seems as synchronized actions. Or that based on trend undulations, the motion of the Phisix appears to have been highly correlated with that of the S&P.

While correlation does not translate to causation, what has made the US and the Phisix surprisingly resilent relative to the world has been the loose money policies adapted by the US Federal Reserve. Money supply growth in the US has sharply accelerated during the latter half of the year despite the technical conclusion of QE 2.0.

Not only has such central bank actions partly offset and deferred on the potential adverse impact from the unfolding crisis in the Eurozone, aside from exposing internal weaknesses, monetary inflation has buoyed the US financial markets.

The deferment of recession risks magnified the negative real rates environment in the Philippines and the ASEAN financial markets which has prompted for the seemingly symmetrical moves and the outperformance relative to the world.

My point is that the notion where Philippine financial markets will or can decouple or behave independently from that of the US, or will not be affected by developments abroad, has been baseless, unfounded, in denial of reality and constitutes as wishful and reckless thinking that would be suicidal for any portfolio manager.

Final Thoughts and Some Prediction Confirmations

Bottom line:

Given the added empirical indications of an ongiong an inflationary boom, here and abroad, the current correction phase seen in the Phisix will likely represent a temporary event

The seemingly synchronized actions by global central bankers to lower rates allegedly to combat recession risks will magnify the negative real rate environment that should be supportive of the bullish trend in both the Phisix and the Philippine Peso and also for global markets.

The hunt for yield environment will be concatenated by the debasing policies of central banks of major economies which will likely spur international arbitrages or carry trades.

Before I conclude, I would like to show you some confirmations of my predictions

An inevitable confirmation of my assertion that the actions of central bankers represent as the main drivers of price trends and not chart patterns[19] can be seen in the above chart from stockcharts.com.

The price actions of the US S&P 500 segues from the bearish death cross, which now officially represents a failed chart pattern, that gives way to the bullish golden cross.

Above is another vital confirmation of my thesis against gold bears who claimed that December’s fall marked the end of the bull market[20]. Gold has broken out of the resistance level which most possibly heralds a continuation of the momentum that would affirm the bullmarket trend.

---

[1] See Phisix: Why I Expect A Rotation Out of The Mining Sector, May 15, 2011

[2] Wikipedia.org Richard Cantillon Monetary theory

[3] Rothbard, Murray N. 2. The Economic Effects of Inflation III. Government Meddling With Money What Has Government Done to Our Money?

[4] Machlup Fritz The Stock Market, Credit And Capital Formation p.94 William Hodge And Company, Limited

[5] Ibid p. 289

[6] See Global Equity Markets: Philippine Phisix Grabs Second Spot, January 14, 2012

[7] centralbanknews.info, Monetary Policy Week in Review - 28 January 2012, Bank of Albania Cuts Interest Rate 25bps to 4.50%

[8] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[9] Bloomberg.com Fed: Benchmark Rate Will Stay Low Until ’14, January 26, 2012

[10] Bloomberg.com Bernanke Makes Case for More Bond Buying, January 26, 2012

[11] See US Senate Approves Debt Ceiling Increase, January 27, 2012

[12] AFP Japan posts first annual trade deficit in 31 years, January 25, 2012, google.com

[13] Bloomberg.com Shrinking China Trade Surplus May Buttress Wen Rebuff of Pressure on Yuan, January 9, 2012

[14] Hülsmann Jörg Guido Deflation And Liberty, p.27

[15] Mauldin John, The Transparency Trap, January 29, 2012 Goldseek.com

[16] Polleit Thorsten The Fallacy of the (Super)Neutrality of Money, October 23, 2009 Mises.org

[17] Machlup Fritz op. cit, p 291

[18] Bianco James, Living In A QE World January 27, 2012 ritholz.com

[19] See How Reliable is the S&P’s ‘Death Cross’ Pattern? August 14, 2011

[20] See Is this the End of the Gold Bull Market? December 15, 2011

Twitter Yields to Selective Censorship

This is a sad development for social media: The popular Twitter has yielded to selective censorship

From New York Daily News,

Twitter service may be getting spotty in some countries.

The micro-blogging firm announced on the company blog Thursday that it plans to change its censorship policies to comply with different countries' regulations.

"As we continue to grow internationally, we will enter countries that have different ideas about the contours of freedom of expression," the post read. "Some differ so much from our ideas that we will not be able to exist there. Others are similar, but for historical or cultural reasons, restrict certain types of content, such as France or Germany, which ban pro-Nazi comment."

Users' tweets will be blocked in a country where they are against the law, but shown in nations where they are legal. For example, a pro-Nazi tweet may be scrubbed in Germany, but would appear on the user's account if read in the U.S.

When Twitter removes a comment, it says it will clearly mark when a Tweet has been censored and send it to the Chilling Effects Clearinghouse, which is creating a database of tweets deleted not only because of censorship but also as a result of cease-and-desist notices and copyright infringement.

Despite the setback, which I think is part of any struggle for change through attrition, I remain hopeful that internet freedom will prevail.

Chart of the Day: 8 Major Central Bank Balance Sheets as a percent of Global Equity Market Cap

That’s from Bianco Research (Ritholtz.com)

Some noteworthy aspects.

The scale of market interventions by global central banks since 2008 has been unprecedented. The ratio of central bank balance sheet relative to global equity market cap has exploded from about 12% to the current range (25% to a high of 37%).

Since the 2008 interventions, the dollar value of global central bank balance sheets continue to balloon but the appearance of the % decline signifies faster growth in the equity market cap than the former.

And since money enters the economy at certain points and at different times (from the leakages of bank reserves), there will be lagged (delayed) effects from the current round of increased central bank injections.

It is simply astonishing to see the evolving dependency of the price levels of the asset markets and central bank actions.

Quote of the Day: In Liberty, Institutions Matter

However that may be, the main point about which there can be little doubt is that Smith's chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it, as their French contemporaries wished, to "the good and the wise."

The chief concern of the great individualist writers was indeed to find a set of institutions by which man could be induced, by his own choice and from the motives which determined his ordinary conduct, to contribute as much as possible to the need of all others; and their discovery was that the system of private property did provide such inducements to a much greater extent than had yet been understood. They did not contend, however, that this system was incapable of further improvement and, still less, as another of the current distortions of their arguments will have it, that there existed a "natural harmony of interests" irrespective of the positive institutions. They were more than merely aware of the conflicts of individual interests and stressed the necessity of "well-constructed institutions" where the "rules and principles of contending interests and compromised advantages" would reconcile conflicting interests without giving any one group power to make their views and interests always prevail over those of all others.

[bold highlights mine]

The great Friedrich von Hayek, in Individualism and Economic Order, debunked the need for individual reformation—as peddled by mainstream media “I am start [of change]” as a way to progress but is no less than a disingenuous camouflaged way of promoting collectivism predicated on organized and mandated violence—but for people to live in freedom under the parameters of established institutions which protects and advances a system of property rights. [hat tip Professor Pete Boettke]

And a possible enabling factor for this would be the rhetorical, ideological and cultural acceptance by the public or the "Bourgeois Virtues" for such institutions to emerge as Deirdre McCloskey has theorized.

Who Benefits from a US-Iran War?

Writes Professor Michael Rozeff at the lew Rockwell Blog

Which state, the U.S. or Iran, more likely wants a war with the other? It's the side that thinks it benefits from such a war. That side is the U.S. If this war begins, it will be entirely because the U.S. wants it and has decided that the time is right to instigate it or elicit actions from Iran that provide excuses for instigating it. Any U.S.-Iran war will be entirely the doing of the U.S.

Here's how we know this. Iran has nothing to gain because it will lose such a war, its power being so much less than the U.S. This is why Iran has tolerated, so far and to a remarkable degree, the intrusions of U.S. subversions and covert activities in Iran, the assassinations of scientists, the computer disruptions, the embargos, the sanctions, the U.S. warships, the U.S. threats, and the U.S. troops being placed nearby. By contrast, the U.S., in the view of the neoconservatives who are running foreign policy, stands to gain quite a lot, namely, undisputed hegemony over the Middle East, control of a country perched on central Asia, control of oil, support for Israel, and a rise in global dominance more generally. Therefore, when and if such a war starts, no matter by what incidents it is triggered, we can be 100% certain that the U.S. has caused and precipitated this war because it, not Iran, is the state that foresees the benefits of such a war.

There are costs, however, and these are restraining the U.S. from instigating this war at this time. These include war costs of several kinds, since Iran is not a pushover. Iran, if pushed into a war by the U.S., can respond in nearby regions, such as Iraq, Lebanon, Syria, Saudia Arabia, and the Persian Gulf. It can conceivably draw Russia into the war, or perhaps Pakistan. The U.S. will win a war with Iran, but it does not expect an easy win. If it did, it would already have started the war. The war on Libya was a recent warm-up exercise that shows what air power can do in this day and age, but Iran's forces are more formidable.

Like the Iraq war, developments won’t turn out as planned (e.g. Iraq war was thought to be short) and there could be unintended consequences such as more terror activities.

And so when might war break out between the U.S. and Iran? It depends on this balance of costs that the U.S. bears and that depends on actions by Iran. But this is all assuming rationality in the war-making process. It is possible at any time that a leader in Washington or in Israel will cast aside rational calculation and decide that now is the time or the time has come, or make a decision based on some trivial detail or happenstance or incident whose significance he or she mis-estimates. Similarly, it is possible that Iran's leadership will miscalculate or perceive themselves as being backed into a corner where war is the only way out.

The U.S. keeps raising the ante, and that dashes hopes for an eventual peaceful resolution. There is no way that Iran can appease the U.S. If it gives in on one thing, the U.S. will simply demand more and then more and more. The U.S. behavior toward Gaddafi shows what happens when a weak state attempts to cooperate with the U.S. Iran will not do likewise. Its leaders are on record as recognizing U.S. behavior going back for decades. They will not back down. The only hope for a continued standoff is, ironically, that Iran make itself strong enough to deter the U.S. and Israel.

I may add that a war with Iran benefits the US politicians by diverting people’s attention from the problems spawned by present interventionist policies, by rallying people to patriotism in order to get elected, justify the imposition of domestic fascist policies by expanding control over economy, rationalize higher taxation and protectionism, and most importantly, justify inflationary policies for the benefit of both the welfare-warfare state and their cronies.

The seeds to the war on Iran have already been sown. The economic sanctions imposed by Europe, possibly as part of the bailout package with the US, have provoked retaliatory economic policy response from Iran. And upping the ante may just be a trigger away (Middle East version of the Gulf of Tonkin Incident) from unleashing of a full scale war.

Quote of the Day: Knowledge Plus Inequality Equals Progress

The rapid economic advance that we have come to expect seems in large measure to be the result of this inequality and to be impossible without it. Progress at such a fast rate cannot proceed on a uniform front but must take place in echelon fashion, with some far ahead of the rest. The reason for this is concealed by our habit of regarding economic progress chiefly as an accumulation of ever greater quantities of goods and equipment. But the rise of our standard of life is due at least as much to an increase in knowledge which enables us not merely to consume more of the same things but to use different things, and often things we did not even know before. And though the growth of income depends in part on the accumulation of capital, more probably depends on our learning to use our resources more effectively and for new purposes.

The growth of knowledge is of such special importance because, while the material resources will always remain scarce and will have to be reserved for limited purposes, the users of new knowledge (where we do not make them artificially scarce by patents of monopoly) are unrestricted. Knowledge, once achieved, becomes gratuitously available for the benefit of all. It is through this free gift of the knowledge acquired by the experiments of some members of society that general progress is made possible, that the achievements of those who have gone before facilitate the advance of those who follow.

That’s from the great Friedrich von Hayek in the Constitution of Liberty.

Do People Intuitively Seek Government’s Help During Crisis? Not in Italy

A popular notion is that the default mode by the public during an economic crisis is to seek sanctuary in the nanny state.

But that’s not what seems to be happening in Italy.

From the Dollar Vigilante (via LewRockwell.com)

This week saw the launch of a popular uprising in Sicily, by a group known as the ‘Movimento dei Forconi’ or ‘Pitchfork Movement’. This is not an uprising of self absorbed youth who want more government handouts; but of producers who are being pushed into poverty by government taxes and regulation. The organizers are middle aged and older; this is significant, as most power and wealth is held by this generation and they have now drawn a line in the sand.

On the 16th of January these protesters began "Operazione Vespri Siciliani", a blockade of the Island of Sicily. Within two days the transportation of all goods was stopped. Over the next week, nothing entered or exited Sicily. This was no mean feat given that Sicily is not a small Island; it has a population of over five million people and a surface area of 25,711 km2.

These are some of their demands:

-The arrest of all corrupt politicians.

-To reduce the number of parliamentarians.

-To remove the provincial bureaucracy, as most of these politicians have been there for over forty years.

-To drastically cut the salaries and privileges of parliamentarians and senators.

-To restrict politicians two only two terms in office

Not one of Darth Monti’s “austerity” measures has touched the political caste; in fact in classic Italian style, the press has dug up some very dirty scandals concerning two of his fellow tax-feeders.

Read the rest here

Media and mainstream education has brainwashed the public to think that we should all run to the governments to seek refuge. In reality, the state operating on self-interests, use crisis as an excuse or opportunity to exploit on people’s fears which then gives them the rationale to expand power and control over society. In other words, crisis and wars are often used to justify the state’s predatory existence in the name of security and welfare.

And when economic imbalances exposes on the dysfunctional nature or the unsustainability of such systems, popular upheavals follows. The popular uprising in Sicily, which ironically demands for the reduction of government, appears to play into such motion.

Moreover, the upheaval looks very much a manifestation of the forces of decentralization gnawing at the foundations of the industrial age welfare state.

As Law Professor Butler Shaffer writes, (bold emphasis mine, italics original)

Alternative schooling, dispute resolution, and health-care practices; political secession and nullification movements; the decentralization of management in business organizations; news-reporting moving from the centrally-controlled, top-down model of traditional media, to the more dispersed, horizontally-networked Internet; individualized technologies such as personal computers, cell-phones, iPods, video cameras, and other innovations that enhance person-to-person communication, are just the more evident examples of how our social systems are undergoing constant centrifugation. If the successful practice, in a number of European cities, of abandoning government traffic signs in favor of a motorist-controlled system does not impress you, perhaps you will recall the collapse of the Soviet Union.

To express this phenomenon in terms of solid geometry, the pyramid is being replaced by the sphere. Plato’s hierarchically-structured world directed by philosopher-kings – long the favored model of the intellectual classes who fashioned themselves fit to sit at the institutional apex – has proven unfit for ordering the affairs of human beings. It is not better ideas that are transforming how we organize with one another, but real-world pragmatism: the life system simply cannot operate on the principle of being directed by centralized authorities!

So despite the mass media indoctrination, the technology enabled and facilitated horizontal flow of information, will impress upon the public of the mounting futility of centralized institutions. And such transition will be magnified by the persistence of the current crisis which may eventually lead to the collapse of welfare states.

Also this should extrapolate to a shift in people’s expectations on the role of the state.

US Senate Approves Debt Ceiling Increase

From the New York Times,

The Senate voted on Thursday to allow a further increase in the federal debt limit, permitting President Obama to borrow $1.2 trillion more to operate a government that spent about 55 percent more than it collected in revenue last year.

The 52-to-44 vote generally followed party lines, with Democrats supporting the increase in borrowing authority and Republicans opposed.

In the House last week, Republicans passed a “resolution of disapproval” to stop the increase in the debt limit. But the Senate refused on Thursday to take up that measure.

The upshot is that the debt limit will rise immediately to $16.4 trillion, from the current ceiling of $15.2 trillion.

Here is a very relevant quote from the great Professor Ludwig von Mises

What the doctrine of balancing budgets over a period of many years really means is this: as long as our own party is in office, we will enhance our popularity through reckless spending. We do not want to annoy our friends by cutting down expenditure. We want the voters to feel happy under the artificial short‑lived prosperity which the easy money policy and a rich supply of additional money generate.

Ever wonder why the world will continue to experience crisis after crisis?

Video: Stephen Roach: Central Bankers Pulling the Wool Over Our Eyes with ZIRP and Magical QE

[hat tip ZeroHedge]

In the interview with Bloomberg’s Tom Keene at Davos, Morgan Stanley Asia’s Stephen Roach is right to point out that central bankers have been pulling the wool over our eyes with ZIRP and magical QE, which for him does little to sustain economic recovery, and that central bankers have been mired in a policy trap—or commitments to up the ante on current policies to produce short term outcomes.

However Mr. Roach eludes the political aspects of why central bankers have been pulling the wool over our eyes with these monetary nostrums, which palpably has been designed to save the skins of bankers and their political patrons.

And Mr. Roach glosses over the fact that current monetary panacea, which have brought upon the 2008 crisis and which continues to linger today, has real effects to the economy, through accretion of imbalances or malinvestments which engenders another bust down the road. What this means is that boom bust cycles has distortive effects to a large segment of an economy.

Also policy traps are representative of the priorities of typical political agents.

Mr. Roach speaks highly of China’s fine tuning of monetary policies, which he believes the recent gamut tightening measures has been effective enough for the Chinese authorities to allow for policy accommodation under current conditions. Mr. Roach also hopes to see central bankers imbue on the traits of ex-US Federal Reserve chair Paul Volcker. Lastly Mr. Roach says that capitalism built on Greenspan’s policies had been misplaced.

I am sure that Paul Volcker is an exception to the norm, given the environment of the yesteryears, but am not sure if Paul Volker today would apply the same set of policies. In short, I am sceptical of the time consistency of Paul Volcker’s policies.

Further given that Chinese authorities has been operating on Keynesian guided policies, then same boom bust cycles will apply. So far real pool of savings in China has deferred on the day of reckoning, but current policies which extrapolate to capital consumption will eventually expose these imbalances.

Lastly with due respect to Mr. Roach, central banking, or the politicization of money, does not in any way embody capitalism. Remember half of every transactions facilitated by legal tender imposed medium isn’t one determined by the markets but by government.

And neither does Greenspan’s unregulated financial system which has been anchored on manipulating interest rates and bailouts, and whose regulations has been gamed by the political and banking class.

Capitalism does not prevent market from clearing excesses, but to the contrary induces such dynamics. The persistency of the 2008 crisis, which extends today, has been due to policies which has been preventing the required adjustments from previously acquired malinvestments and distortions.

War on Outsourcing: The Specter of US Economic Nationalism (Protectionism)

The Malaya reports

President Aquino appears unfazed by US President Barack Obama’s endorsement of House Bill No. 3596 or "Call Center and Consumers Protection Bill" pending in the US Congress saying it may be an election-related statement.

"We have to take into account that this is an election year but at the end of the day, like any other country, the US would want to make their companies more effective, more competitive, etc. and outsourcing is one of the keys towards that," Aquino said in an ambush interview at the EXL Service Philippines Site at the Mall of Asia in Pasay City.

"At this present time, I was made to understand, that this was an issue that was brought up during the last elections in America and from that time which was four years ago and now, the situation has not changed. Perhaps there isn’t that much of a danger," Aquino said.

"I will assume that it (BPO) will continue, hopefully it will not change because that is one of our sunrise industries," he said.

Aquino said there are no plans at the moment to lobby against the passage of the bill and that he prefers to "cross the bridge" only when the bill is passed.

It’s good to know that Philippine President Noynoy Aquino recognizes what looks like an election ploy. It really takes one to know one.

But it’s unfortunate that President Aquino, beneficiary of the outsourcing boom, would remain passive on this issue. Never mind if America’s turn to protectionism might indeed harm the industry. It would seem better to be bullied into submission. Yet fawn over with plans by the US to expand military presence here.

President Aquino doesn’t seem to realize that the divide-and-conquer and class warfare strategies have been the hallmark of the Obama administration.

As Mike Brownfield of the conservative Heritage Foundation writes,

Obama enacted a purely progressive agenda with his expansion of the state under Obamacare, his trillion-dollar stimulus bill, the government takeover of the auto industry, the proliferation of regulations under the Dodd-Frank regulatory reform bill, the crony capitalism of the Solyndra scandal, and the illegal appointments to the unrestrained Consumer Financial Protection Agency and the National Labor Relations Board. The result: Some 13.1 million Americans remain unemployed, job creation has been abysmal for much of the past three years, and the President’s promise to turn around the U.S. economy has gone unfulfilled.

The difference is that Mr. Obama’s progressive agenda, during this election season, seems to have transitioned from a moderate to hard line stance.

Maybe’s this also part of the desperation to get re-elected considering the Mr. Obama’s near record low approval rating. (chart from Gallup)

Yet here is more proof of President Obama's protectionist urge.

From the Wall Street Journal,

China was dragged into the 2010 U.S. midterm elections, and President Obama is busy ensuring that it will be an even bigger political target during the 2012 campaign. In Tuesday night's State of the Union address, the President joined Republican candidate Mitt Romney in singling out China as a special trade violator.

In announcing that he will set up a new Trade Enforcement Unit to investigate "unfair trade practices in countries like China," Mr. Obama is promising to increase investigations against Chinese exporters. His Administration has so far brought five cases against China in the World Trade Organization (WTO). Late last year it began targeting China's solar industry, while last week it said it would investigate Chinese makers of wind energy towers.

By the way one looks at it, protectionism has been rearing its ugly head as politicians like President Obama and the mainstream Republican candidates appeal to the emotions of the uninformed via nationalism/patriotism to solicit for their votes.

Many are unaware that economic nationalism (or protectionism) fundamentally underpins the philosophy of war or of military conflicts. World War II, for instance has mainly been caused by rabid nationalism.

Again current events have been affirming the admonitions of the great Ludwig von Mises,

Economic nationalism is incompatible with durable peace. Yet economic nationalism is unavoidable where there is government interference with business. Protectionism is indispensable where there is no domestic free trade. Where there is government interference with business, free trade even in the short run would frustrate the aims sought by the various interventionist measures…

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war.

In short the President Obama’s war on outsourcing constitutes part of what seems to be an overall protectionist agenda, which translates to a war on trade against every nationality (including the Philippines).

President Aquino should negotiate to retain and expand free markets and abide by such principles. Otherwise, perhaps Marc Faber’s prediction may come true.

World Press Freedom Rankings: Philippines 140th

Reporters without borders recently released the Press Freedom index.

The press release goes…

This year’s index sees many changes in the rankings, changes that reflect a year that was incredibly rich in developments, especially in the Arab world,” Reporters Without Borders said today as it released its 10th annual press freedom index. “Many media paid dearly for their coverage of democratic aspirations or opposition movements. Control of news and information continued to tempt governments and to be a question of survival for totalitarian and repressive regimes. The past year also highlighted the leading role played by netizens in producing and disseminating news.

Crackdown was the word of the year in 2011. Never has freedom of information been so closely associated with democracy. Never have journalists, through their reporting, vexed the enemies of freedom so much. Never have acts of censorship and physical attacks on journalists seemed so numerous. The equation is simple: the absence or suppression of civil liberties leads necessarily to the suppression of media freedom. Dictatorships fear and ban information, especially when it may undermine them.

It is no surprise that the same trio of countries, Eritrea, Turkmenistan and North Korea, absolute dictatorships that permit no civil liberties, again occupy the last three places in the index. This year, they are immediately preceded at the bottom by Syria, Iran and China, three countries that seem to have lost contact with reality as they have been sucked into an insane spiral of terror, and by Bahrain and Vietnam, quintessential oppressive regimes. Other countries such as Uganda and Belarus have also become much more repressive.

This year’s index finds the same group of countries at its head, countries such as Finland, Norway and Netherlands that respect basic freedoms. This serves as a reminder that media independence can only be maintained in strong democracies and that democracy needs media freedom. It is worth noting the entry of Cape Verde and Namibia into the top twenty, two African countries where no attempts to obstruct the media were reported in 2011.

Read the rest here. I didn’t read through the entire report though as to how the press freedom is treated or measured in terms of the cyberspace or the netizens.

But in many instance where many (in the local community) seem to believe that there has been much press freedom in the Philippines, the rankings (140th out of 179) would give them a disappointment.

Press freedom represents an indispensable or sine qua non element for civil liberties, a representative government, and especially, for market economies (economic freedom or capitalism)

As the great Ludwig von Mises explains,

A free press can exist only where there is private control of the means of production. In a socialist commonwealth, where all publication facilities and printing presses are owned and operated by the government, there cannot be any question of a free press. The government alone determines who should have the time and opportunity to write and what should be printed and published. Compared with the conditions prevailing in Soviet Russia, even Tsarist Russia, retrospectively, looks like a country of a free press. When the Nazis performed their notorious book auto-da-fes, they exactly conformed to the designs of one of the great socialist authors, Cabet.

As all nations are moving toward socialism, the freedom of authors is vanishing step by step. From day to day it becomes more difficult for a man to publish a book or an article, the content of which displeases the government or powerful pressure groups. The heretics are not yet "liquidated" as in Russia nor are their books burned by order of the Inquisition. Neither is there a return to the old system of censorship. The self-styled progressives have more efficient weapons at their disposal. Their foremost tool of oppression is boycotting authors, editors, publishers, booksellers, printers, advertisers, and readers.

A US-Philippines Bases Treaty (2012 Edition) in the Making?

From the Washington Post,

Two decades after evicting U.S. forces from their biggest base in the Pacific, the Philippines is in talks with the Obama administration about expanding the American military presence in the island nation, the latest in a series of strategic moves aimed at China.

Although negotiations are in the early stages, officials from both governments said they are favorably inclined toward a deal. They are scheduled to intensify the discussions Thursday and Friday in Washington before higher-level meetings in March. If an arrangement is reached, it would follow other recent agreements to base thousands of U.S. Marines in northern Australia and to station Navy warships in Singapore.

Among the options under consideration are operating Navy ships from the Philippines, deploying troops on a rotational basis and staging more frequent joint exercises. Under each scenario, U.S. forces would effectively be guests at existing foreign bases.

The sudden rush by many in the Asia-Pacific region to embrace Washington is a direct reaction to China’s rise as a military power and its assertiveness in staking claims to disputed territories, such as the energy-rich South China Sea.

“We can point to other countries: Australia, Japan, Singapore,” said a senior Philippine official involved in the talks, speaking on the condition of anonymity because of the confidentiality of the deliberations. “We’re not the only one doing this, and for good reason. We all want to see a peaceful and stable region. Nobody wants to have to face China or confront China.”

The strategic talks with the Philippines are in addition to feelers that the Obama administration has put out to other Southeast Asian countries, including Vietnam and Thailand, about possibly bolstering military partnerships.

What seems to be the common denominator between now and two decades ago when the Bases Extension Treaty was rejected by the Philippine Senate?

Well both has the Aquino administration (mother and son) taking on the side of—or has fought for an extension of—US foreign policy in the country.

Not that this about the Aquino administration being an American stooge, although they may well be, but about the developing trend in US foreign policy and the possible implications here.

Obama’s foreign policy has increasingly been militant just as the Presidential election approaches.

Last night at the State of the Union address President Obama threatened Iran with ‘no options off the table’ rhetoric. In addition, President Obama seems to having an on-off or love-hate affair with China with the latter being painted as a potential adversary.

Military aggression as China’s foreign policy path is unlikely, despite some caustic international incidences at the Spratlys Island.

As pointed out before, such incidences could be indicative of China’s reaction to what seems to be an encirclement strategy being applied by the US and or the heated rhetoric by President Obama of charging China as a currency manipulator.

Also China could testing the responses of her neighbors to see where their loyalty lies and to what degree they have been, which could be part of 37 war strategies of “beating the grass to startle the snake strategy”, or that China could be flaunting her new weapons to signal her newfound geopolitical muscle.

But most importantly, I think China could be using the Spratlys to gain negotiation leverage.

In politics, what you see is hardly what you get.

Nevertheless, actions serve as best indicators of intent or what Austrian economists calls as the demonstrated preference.

China won’t likely kill the proverbial goose that lays the golden eggs for the simple reason that China’s trade with the region has been burgeoning substantially. (charts above from ADB)

To add, China has even taken further steps to increase the usage of her country’s currency as the region’s medium of exchange in the path towards regional integration.

China will surely not attain integration by invading her neighbors. Two major World Wars of the 20^th century should serve as painful lessons.

Integration can only be achieved through social cooperation via the division of labor or free trade.

And unless China’s leaders have lost their senses, perhaps out of desperation or becomes mentally deranged, a bellicose foreign policy would translate to their political suicide considering that today’s state of warfare. So this isn’t a rational or even a viable option.

In addition, the thought of foreign bases as functional deterrent to military aggression is essentially obsolete in a nuclear war.

In reality, military bases have mostly been used as a staging point for political interventions in local affairs and for justifying the maintenance and or growth of the defense budget for the US federal government.

And importantly, encirclement strategies to contain China’s so-called growing military capability are not helpful, they signify signs of (US) insecurity that only promotes antagonism that could lead to genuine confrontation.

The point is, any military base agreements will serve as a magnet for any prospective war or military hostility, incentivize more foreign interventions in local (Philippine) affairs and would create social friction between the average Filipinos and US military.

Military bases for whose benefit?

Again as stated earlier, wars benefit the military industrial complex who as rent seekers, needs politics induced wars to sell their products and services to generate profit. Peace is an anathema to them.

War and imperialist policies also benefit the (local and foreign) political class who use wars (or the threat of wars) to expand to control over society through various interventions and taxation, to curb civil liberties, and to justify the budgets extracted from society for their personal benefits.

As Murray N. Rothbard once wrote,

Imperialism will ensure for the United States the existence of perpetual "enemies," of waging what Charles A. Beard was later to call "perpetual war for perpetual peace." For, Flynn pointed out, "we have managed to acquire bases all over the world…. There is no part of the world where trouble can break out where… we cannot claim that our interests are menaced. Thus menaced there must remain when the war is over a continuing argument in the hands of the imperialists for a vast naval establishment and a huge army ready to attack anywhere or to resist an attack from all the enemies we shall be obliged to have

Video: Cato Institute on Obama's State of the Union Address

Cato experts straighten out many of the twisted political statements made by US President Obama at last night's State of the Union address.

To quote George Orwell on "BlackWhite" (bold emphasis mine)

this word has two mutually contradictory meanings. Applied to an opponent, it means the habit of impudently claiming that black is white, in contradiction of the plain facts. Applied to a Party member, it means a loyal willingness to say that black is white when Party discipline demands this. But it means also the ability to believe that black is white, and more, to know that black is white, and to forget that one has ever believed the contrary. This demands a continuous alteration of the past, made possible by the system of thought which really embraces all the rest, and which is known in Newspeak as doublethink.

As exposed above politicians are very good at propagating doublethink.

Gold Reclaims $1,700 level, US Federal Reserve Promises Low Rates Until 2014

As I keep saying, global central banks will continue to flood the system with a tsunami of liquidity, and this will be spearheaded by the US Federal Reserve.

And like a messiah, Ben Bernanke delivers the much sought after manna (stimulus bonanza) to her drooling followers (financial markets) as captured earlier by media’s sentiment, by promising to extend zero bound rates from 2013 until 2014.

From the Bloomberg,

“Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability,” the panel said in a statement. It also enhances “the committee’s ability to promote maximum employment in the face of significant economic disturbances.”

Policy makers declined to specify a goal for employment, saying that it “is largely determined by non-monetary factors.” The committee’s longer-run forecast for the jobless rate is 5.2 percent to 6 percent….

“The Committee expects to maintain a highly accommodative stance for monetary policy,” the FOMC said in a statement. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Of course this will be on top of the existing ones.

From the same report,

The Fed said it would continue to extend the average maturity of its $2.6 trillion securities portfolio, a move dubbed “Operation Twist.” The Fed also maintained its policy of reinvesting maturing housing debt into agency mortgage-backed securities.

Bernanke said that the extension of the “expected point of takeoff” for rising interest rates to 2014 implies that asset sales by the Fed would occur “later than previously thought,” and “presumably in 2015.”

The Fed vernacular about “asset sales” is actually a flimflam; financial markets as well as the financial and banking industry have been deeply conditioned or addicted to sustained injections of liquidity, where any reversal will only lead to intensive convulsions, a scenario which defeats or neutralizes the very intent of the current measures. Thus, the trajectory of central bank actions have greatly been tilted towards sustained inflationism.

This is because the FED officials (and the other central bankers) believes that they can manipulate interest rates with continuing success and without adverse consequences.

As the great Ludwig von Mises wrote, (bold emphasis mine)

The hindrance that the monetary or circulation credit theory had to overcome was not merely theoretical error but also political bias. Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy

And true to the wisdom of Professor Mises, the policy of interest rate manipulation (to keep interest rates as low as far as possible or for its abolishment) has represented a deeply embedded creed or doctrine which central bankers worldwide piously apply.

Yet considering that every action has corresponding intertemporal consequences, the beneficial effects of the current measures will eventually be exposed as a quack.

And I think such dynamic is being revealed by the actions in the gold market.

Yet contrary to popular mainstream claims that the recent selloff constituted the “end of the bull market” (such as George Soros and Dennis Gartman who eventually flip flopped), gold prices has been affirming my rejoinder that it hasn’t.

Gold prices has reclaimed the $1,700 level!

Again, profit from political folly.

Quote of the Day: No Progress (on Liberty) Without Struggle!

Let me give you a word of the philosophy of reform. The whole history of the progress of human liberty shows that all concessions yet made to her august claims, have been born of earnest struggle. The conflict has been exciting, agitating, all-absorbing, and for the time being, putting all other tumults to silence. It must do this or it does nothing. If there is no struggle there is no progress. Those who profess to favor freedom and yet depreciate agitation, are men who want crops without plowing up the ground, they want rain without thunder and lightening. They want the ocean without the awful roar of its many waters.

This struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress...

Men may not get all they pay for in this world; but they must certainly pay for all they get. If we ever get free from the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by labor, by suffering, by sacrifice, and if needs be, by our lives and the lives of others.

-Frederick Douglass from An address on West India Emancipation (08-04-1857)-Wikipedia. Also Frederick Douglass on Slavery and Civil War: Selections from His Writings [hat tip Justin Ptak, Mises Blog]

Iran to Trade Oil for Gold to Bypass Sanctions

Iran reportedly plans to skirt US and Euro sanctions by trading her oil for gold with India and China

From Debka.com (hat tip lewrockwell)

India is the first buyer of Iranian oil to agree to pay for its purchases in gold instead of the US dollar, DEBKAfile's intelligence and Iranian sources report exclusively. Those sources expect China to follow suit. India and China take about one million barrels per day, or 40 percent of Iran's total exports of 2.5 million bpd. Both are superpowers in terms of gold assets.

By trading in gold, New Delhi and Beijing enable Tehran to bypass the upcoming freeze on its central bank's assets and the oil embargo which the European Union's foreign ministers agreed to impose Monday, Jan. 23. The EU currently buys around 20 percent of Iran's oil exports.

The vast sums involved in these transactions are expected, furthermore, to boost the price of gold and depress the value of the dollar on world markets.

Iran's second largest customer after China, India purchases around $12 billion a year's worth of Iranian crude, or about 12 percent of its consumption. Delhi is to execute its transactions, according to our sources, through two state-owned banks: the Calcutta-based UCO Bank, whose board of directors is made up of Indian government and Reserve Bank of India representatives; and Halk Bankasi (Peoples Bank), Turkey's seventh largest bank which is owned by the government.

If the major reason the US pushed for the invasion of Iraq and the overthrow of the Saddam Hussein regime was because latter had pushed for Iraq’s oil to be paid in Euros is true, then Iran’s oil for gold trade will likely presage a shared fate with her neighbor.

The other aspect here is the potential use of gold as money for transactions outside the incumbent banking-financial and political system or in the informal economy.

But of course, governments have already been restricting international gold flows. For instance South Korean authorities recently arrested men who tried to smuggle out gold by hiding it in their rectums.

Interesting signs of times.

Update: A source suggests that the DEBKA files or the source of the quoted news is run by Council of Foreign Relations (CFR), believed to a conspiracy group whose aim has supposedly been to uphold the interests of some well connected elites via control of governments, and some other network of war hawks. CFR has called for a war on Iran.

The implication is that I am not sure whether the news cited above represents a propaganda or a reported fact.

Saber Rattling over Iran is only Part of the Big Oil Price Story

Dr. Ed Yardeni writes at his blog,

Despite Iran’s saber rattling, the price of oil hasn’t soared. The price of a barrel of Brent has been hovering around $110 since last summer. That’s even after President Barack Obama signed a bill imposing tougher sanctions on Iran at the end of last year. The price didn’t go up after the Iranians publicly threatened to close the Strait of Hormuz and warned Saudi Arabia not to fill any expected gap in oil demand when the world stops buying Iranian crude. According to a report in today’s Al Arabiya News, Iranian boats with men armed with machine guns on board were recently sent to the waters near the Saudi oil-production areas. Yet the price of oil hasn’t budged much from $110. Spain’s foreign minister said on Monday that Saudi Arabia has promised that it will make up for supplies of oil lost as a result of EU sanctions on Iran, and will do so at the same price.

If it weren’t for all the saber rattling, the price of oil would probably be falling.

Saber rattling over Iran represents only a fragment of the big picture. In other words, the Iran controversy does not capture the major elements of oil politics which drives oil prices.

In examining the political structure of major oil producing economies, we find that there is a watershed level for these welfare states to survive, for instance Saudi Arabia requires some $88 per barrel to buy off their people, Iran some $ 80 per barrel and etc…

In short, anytime oil prices go below these threshold levels, you can expect the “Arab Spring” revolts to make a rip-roarin’ comeback.

So as with the politics of subsidized renewable energy. Aside from environmental concerns, alternative energy requires elevated oil prices to remain an “attractive” alternative.

As this article from Scientific American says,

Today renewable technologies such as wind and solar are close to being competitive with fossil fuels. But we can say good-bye to that prospect if oil prices decline to $60 to $70 a barrel, which could easily happen in a recession, as we witnessed in October.

This means that many entrenched political groups (and their business allies or associates) are dependent on high oil prices.

From the above we come to the following conclusion

-Free markets don’t drive oil prices. Or that oil prices are greatly influenced by the political setting of mainly the oil producers (not on Iran alone).

-To maintain or preserve the current political environment, particularly welfare states of oil producing nations and the promotion of green energy, political measures would need to be resorted to in order to bring about the required oil threshold levels.

Such political measures will possibly include saber rattling (brinkmanship) politics, various market interventions by governments (to restrict supplies) as the Keystone Pipeline Controversy [also remember that 80% of oil reserves are held by governments or National Oil companies, so supply is very much sensitive to actions of political leaders since they control a significant majority of world's reserves], and importantly for global central banks to ramp up on money supply.

As you can see plainly looking at barrels consumed and barrels produced alone is grossly an insufficient way to study and assess oil economics. That’s because politics has an immense influence on how oil prices are being shaped.

Video: Amazing YouTube Statistics

This is a terse video on some amazing YouTube statistics. This only shows how social media networks, like YouTube, has been reconfiguring our lives.

More from onehourpersecond.com (hat tip Professor Mark Perry)

How Economic Freedom Erodes India’s Caste System

From Economic Times India, (bold emphasis mine)

On the face of it, entrepreneur Ashok Khade is just another one of India's growing wealthy, heading a successful $27 million infrastructure and oil and gas business group that employs 4,500 people.

But the 56-year-old is a rarity, as he belongs to India's dalit, or "untouchable" classes, who for centuries have been anchored at the bottom of Hinduism's caste system and remain among the most exploited and despised.

The opening up of India's economy has helped bring in some mobility in the rigid social hierarchy, leading to a gradual rise in jobs and opportunities for India's poorest and even created a new breed -- the dalit millionaire.

Khade, a first-generation businessman who now drives a BMW, battled poverty and discrimination as a child in a village near Sangli in Maharashtra state, about 400 kilometres (250 miles) from India's financial hub, Mumbai.

Not only has economic freedom been expanding people’s choice—to avail of or harness more economic opportunities—for them to advance (unless they are mentally resigned to comply with local customs), but has also been instrumental in reducing class discrimination or class inequalities by providing “some mobility in the rigid social hierarchy”. In short, economic freedom and free trade changes culture.

Quote of the Day: Nationalism

And this is what nationalism seems to mean. The individual gives up the effort to treat the world, material or human, as his oyster, and tries to put himself in mystical unity with his group, meaning the more or less racial, cultural “nation” which is already the object of his strongest political allegiance. Along with this growth in a kind of sentimental gregariousness, he swings from an active to a passive attitude toward society, and from a reflective to an emotional, impulsive attitude toward the world at large. He swings from “rationalism” to “romanticism.” In particular, the individual reacts from the notion of reaching validity by general discussion – which he has seen degenerate into a contest in “selling” – to a faith in “strong” individual leadership, which also represents a reaction from moral and intellectual equalitarianism to hero worship. The movement also involves a shift from the actor interest to the spectator interest in society, and in part to a merging of the two in an experience of mystical participation. Men want action, but by the group, i.e., the government or its outstanding personalities. They do not want to act.

That’s from economist Frank Knight in a 1934 essay called “Economic Theory and Nationalism”.

According to the source of the quote, Professor Donald Boudreaux, this is from page 322 of the 1951 Augustus M. Kelly reissue of Frank Knight‘s 1935 collection The Ethics of Competition where the essay was published.

Mobile Internet: Welcoming Dr. Smartphone?

I think the major springboard in the next wave of advances in the technology sector will be in the applications aspects of the mobile internet platform.

Aside from games, mobile health services along with Mobile banking and mobile commerce are likely the high growth areas to watch.

In terms of healthcare here is a clue where application development trends are headed for, from Reuters

Tired of long waits at the hospital for medical tests? If Korean researchers have their way, your smartphone could one day eliminate that -- and perhaps even tell you that you have cancer.

A team of scientists at Korea Advanced Institute of Science of Technology (KAIST) said in a paper published in Angewandte Chemie, a German science journal, that touch screen technology can be used to detect biomolecular matter, much as is done in medical tests.

"It began from the idea that touch screens work by recognizing the electronic signs from the touch of the finger, and so the presence of specific proteins and DNA should be recognizable as well," said Hyun-gyu Park, who with Byong-yeon Won led the study.

The touch screens on smartphones, PDAs or other electronic devices work by sensing the electronic charges from the user's body on the screen. Biochemicals such as proteins and DNA molecules also carry specific electronic charges.

According to KAIST, the team's experiments showed that touch screens can recognize the existence and the concentration of DNA molecules placed on them, a first step toward one day being able to use the screens to carry out medical tests.

As I have been saying, the information or digital age will change or reconfigure the way we do things.