2009: Go for Gold! Beware the US Treasury Bubble

``The world is lurching through a serious monetary disorder. The proximate cause is the collapse of the housing bubble and the subprime-credit crisis, but the ultimate cause is the inherently unstable monetary system foisted upon us by a banking cartel. Central bankers are called upon to act as lenders of last resort, but in their efforts to inflate their way out of the credit collapse, they risk igniting a hyperinflationary bonfire that will destroy the world's major fiat currencies. Gold was money once, and could become so again.”- Robert Blumen, Is Gold Money?

Except for Ghana (up 60%), Tunisia (up 10.6%) and Ecuador, which escaped the wrath of a global financial meltdown, all of the stock market benchmarks were in the red for 2008.

Nonetheless the other asset outperformers had been the US dollar and US treasuries both of which benefited from the forcible liquidation and served as the “safehaven” amidst the present deflationary scare, see figure 2.

Figure 2: Bespoke Invest: Gainers and Losers

According to Bespoke Invest, ``While it has been a horrible year for stocks (S&P 500 down 39%), it's been much worse for oil, which as we all know was up nearly 50% for the year back in July. While most asset classes are down big, the US Dollar has risen 6%, and Treasuries have skyrocketed. As shown, the 10-Year Treasury Note is up a whopping 21% this year, prompting the majority of market participants to call it the next bubble.”

This chart excludes another winner though, gold which racked up 4.95% in 2008 based in US dollar terms.

Yet, gold didn’t just gain against the US dollar. It likewise gained against most of the major currencies except for the Japanese Yen and Chinese Yuan see figure 3.

Figure 3: courtesy of James Turk of goldmoney.com: EIGHT years in a row

Why our fancy with gold?

Why our fancy with gold?

While we can cite growing demand supply imbalances amidst the present turmoil, our focus is on how global central bankers have been dealing with the present crisis.

Again while major global central banks have been force feeding the banking system with record amounts of money which is basically being eaten up by the losses of the highly financial leveraged system, eventually the seemingly endless tsunami of money being fed will overwhelm such losses. Of course, all this could take time but that would be in the assumption that we can time the markets. Nonetheless, the obvious effect will be risks of HIGHER inflation if not HYPERINFLATION. And inflation’s reappearance could be dramatic.

In addition, not all of the global economy has been ravaged by debt deflation. Economies in Asia for instance have been less leveraged or less affected, yet global governments including Asia and Emerging Markets have been adopting the same policies of currency debauchment. Stimulus programs that can’t be paid for by taxes or borrowed from taxpayers domestically or internationally will have to be met by the central banks’ printing or digital presses. Basically this implies inflation.

Again in the US, government fiscal deficits won’t only be about recapitalization and support of the financial industry but also about plugging of the shortfalls in tax revenues.

Figure 4: Nelson Rockefeller Institute: Deteriorating Tax Environment

The Nelson Rockefeller Institute projects tax collections “likely heading into negative territory for the first time since the last recession in 2002”.

So the amount exposed yet by the US government is likely to be a downpayment among other possible future installments.

Again all these sums up to a potential massive spillage of unsterilized money being churned out by global central banks and governments which the entire economic system will have to absorb.

Moneyness of Paper Money

Moreover, in a world where central banks are working to devalue their currencies overtime, any other currencies aren’t likely to assume the role of safehaven again because of implicit political interests.

Remember, paper currencies are basically IOUs issued and stamped by governments as “legal tender” and backed by nothing but FAITH in the issuer. Because paper money is an IOU, it bears counterparty risks.

Where money as a medium of exchange requires these characteristics: durability, divisibility, scarcity, portability, uniformity and acceptability, unlimited issuance of paper money essentially diminishes the moneyness quality of paper currencies. As we cited earlier given the massive and full scale deployment of the printing press globally, such the raises the risk of a potential of disintegration of the present financial architecture.

The chafing the characteristics of the moneyness of paper money, the gradual erosion faith over its LEGAL TENDER status, global currencies in a race to the bottom, potential upheaval of the monetary structure or the plain universality of economic law where the growth of supply of money is greater than economic output simply collectively means a loss of purchasing power of paper money against gold (and other real assets).

At best, gold, which bears no counterparty risks and functions as no one else’s liability, will be your insurance against the vast stealth tax employed by global governments. At worst, gold will regain its monetary luster or play a renewed role in reshaping the next global monetary regime (worst because of the unfathomable distress that the world will possibly undergo first before rediscovering gold’s importance).

This is why signs of shortages in physical gold has been offsetting the huge short positions taken by a few government controlled big banks (see Influencing Gold and Silver Markets, Backwardations Imply Higher Gold and Silver Prices), which is in my suspicion have been attempts to manipulate gold prices as to refrain from exposing the inflationary effects of their actions. Unfortunately, markets are larger than government can permanently control where manipulation can only influence price signals over a limited period.

Debt Over Issuance Over Limited Capital Equals Treasury Bubble

Finally, it is obvious that in a world where losses have been mounting and where institutions have been seeking refuge in governments, that capital is in an apparent shortage. Yet, expected material slowdown of world trade and a projected global economic deterioration implies an erosion of economic output, and perhaps a reduction of real savings, especially as governments work to redistribute residual capital.

Nonetheless as global governments attempt to reinflate the global economy, this translates to an ocean of issuance of debt instruments which would effectively compete with the diminishing supply of “savings-based” capital. This means that the panic driven boom in US treasuries seems more and more like time bomb waiting to implode that could bring about the next crisis to US treasuries holders.

As an aside, the plan of the US Federal Reserve to buy long dated bonds in an effort to close the arbitrage windows for banks could bring opportunities for foreign owners of US treasuries, where about 55% of privately held US treasury securities are foreigners (CRS Report for US Congress), to gracefully exit the bubble. It’s a wonder if China and Japan will do so. And it is amazing how complex the world is and full of unforeseen possibilities.

Eventually capital will be seeking a premium over the sea of debts which means higher interest rates for the world.

2009: Phisix and Peso Will Advance!

``Whenever you see a successful business, someone once made a courageous decision.”-Peter Drucker

Unless one believes that the world is headed for a great depression, then the Phisix is unlikely to head lower.

The Phisix has lost 48.29% over 2008 and has been in a bear market territory for about 17 months in conjunction with global markets. On a peak to trough basis the Phisix have reached losses of about 56% from October 2007 until November 2008. This makes the Philippine benchmark on track with its previous bearmarket cycles over the past 22 years as previously discussed in Phisix: Learning From the Lessons of Financial History.

To give a short account of what we previously discussed the past four bear markets can be divided into two parts see figure 5:

One, a cyclical bearmarket under a secular bull:

1. August 1987 to October 1988- the Phisix lost about 45% and consolidated for 13 months before recovering and resuming another attempt to the upside. The trigger for the bear market in 1987 – ex-Col. Honasan’s August 28^th Black Friday’s botched coup d'état against erstwhile President Cory Aquino.

2. November 1989 to October 1990- the Phisix lost about 62% in about 11 months before convalescing. The trigger for the bear market of 1989 -November 30^th Makati coup again by ex-Col. Honasan…

Figure 5: Phisix: Bear Market cycles

Second, the long term bear market…

3. February 1997 to October 1998-the Phisix lost 66% in about 20 months. But following the election of President Joseph Estrada, the cyclical Presidential honeymoon period led to the Phisix rebound of 120%. This could be interpreted as the cyclical bullmarket within the secular bear market.

4. July 1999 to November 2001- the Phisix lost 62% in about 28 months for the culmination of the secular bear market cycle. Oddly, the Phisix appear to trace the developments in the US markets or when the Nasdaq dot.com bubble imploded in 2000, for a huge chunk of this cycle.

This makes the present bear market losses slightly under the typical 60% depth (characteristic of the cyclical bear) while the duration of 17 months makes it near the secular cycle.

Since foreign participants account heavily or over half of the trading volume in the Philippine stock exchange, it is natural to expect the losses of the Phisix to track global markets on the account of forcible liquidations due to the unraveling US debt deflation.

Remember, the Philippine Stock Exchange have less than 1% of its population invested in it hence the recent financial markets meltdown should have limited impact to household and company net worth, as well as to the national economy.

Yet, most of the damage would likely come from export trade and remittance linkages which constitute about 40% and 11% of the Philippine GDP (by expenditure share) respectively.

Besides, the Balance of Payment standings of the Philippines remain in a marginal surplus, despite the sharp turndown of global trade, coupled with a foreign exchange reserve at near records see figure 6.

Figure 6: yardeni.com: Philippine US Dollar Foreign Currency Reserves

This makes the Philippines less vulnerable to a liquidity crunch aside from being one of the least exposed to the world compared to our ASEAN neighbors.

Besides as we have pointed out, since the Asian Crisis internal balance sheets have been improving see figure 7.Figure 7: IMF Staff Report: Real Private Sector Credit and External indebtedness have been improving

Thus if a boom did NOT happen then a bust will NOT happen, since there have been NO bubble. This could be interpreted as a mixed blessing.

Today’s downturn have been PRINCIPALLY due to the spillover effects overseas and isn’t likely to morph into a rapid deterioration of the economic environment (unless a depression environment occurs) as debt levels have been improving and mostly tailored over a distribution of medium to long term liabilities (right window).

And equally, as the Phisix cratered out of the impact of debt deflation triggered meltdown, the Peso fell 13% in 2008 hamstrung by the compression of liquidity globally, portfolio repatriation and the closure of the global carry trade arbitrages.

Our bet is if the debt deflation phenomenon subsides, even amidst a period of heightened volatility out of global recessionary pressures or even under greater inflation, the Peso and the Phisix are likely to improve year on year with steady acceleration of such advances going into 2010, the Philippine Presidential cycle.

2008 Trivia: Lobby, Bailouts and Losses

2008 ushered in a season for lobbying, bailouts and record losses…

First, amidst the present financial crisis, the lobbying business is now booming as Washington decides the winners and losers…

This from thehill.com, ``At the top of the economic agenda, however, is an economic stimulus package that could reach $850 billion, ranking among the biggest federal expenditures in history. Democratic leaders are drafting the package now in hopes of passing it before Obama takes the oath of office.

``With so much money on the table, lobbyists are working late into the holiday season to pitch their clients’ needs to the bill’s authors…

``Tony Podesta, a high-profile Democratic lobbyist, said it’s too risky for companies to cut their lobbying budgets when Congress is poised to pass landmark legislation. If anything, he said, it’s time to increase spending.

“Lobbyists and discounters may be the only people who grow,” he said"

Two, the lobbying interests has been expanding to cover almost every industry.

Some projects or programs floated or proposed by state and local officials include (Washington Post):

· $4.8 million for a polar bear exhibit in Rhode Island.

· $100 million to redevelop land for a casino in Philadelphia.

· $13 million in improvements in Las Vegas, much of it for a pedestrian bridge at the Tropicana hotel-casino.

· A yet-to-be-determined amount for a proposed $50 million museum in Las Vegas devoted to organized crime.

· $6 million for snow-making and maintenance facilities at Spirit Mountain, Minn.

So former President of Federal Reserve Bank of St. Louis, William Poole is absolutely right when he said, “Everyone knows that a policy of bailouts will increase their number.”

Next, across the pond, the bailout response has likewise been a contagion; the floundering “native” cheese making industry of Italy is getting rescued too! Italy’s government will be buying nearly 200,000 wheels cheese to be distributed to charity.

Courtesy of the Independent.co.uk

According to the Independent, ``Parmigiano Reggiano, Italy's King of Cheese, is in trouble. Robust in flavour and crumbly, it is a classic of Italy's artisan food traditions, made by hand by 430 craft producers around the city of Parma. But with Italian consumption falling as costs soar, almost a third of producers now face bankruptcy. Now Italy's Minister of Agriculture, Luca Zaia, has come to the rescue, promising to buy 100,000 Parmigiano Reggiano cheeses, and also 100,000 of its less costly competitor, Grana Padano.

``This is Italy's big cheese bailout. Essentially, the government will be gobbling up 3 per cent of Parmesan production at an estimated cost of €50m (£44.7m) and distributing it to the needy. Each 35kg wheel of Parmigiano costs between €8 and €8.50 to make, but the wholesale price has declined for the past four years even as the cost of milk and energy has soared.”

Of course, not everyone will be pleased since others belonging to the same industry won’t be as privileged. From the Telegraph, ``Producers of Italy's other celebrated cheese - buffalo mozzarella - are looking on enviously after suffering an 18 per cent drop in sales in the last year. "We've asked for help too," said Vincenzo Oliviero, the head of Italy's mozzarella producers association, which has yet to receive an injection of state aid."

See what we mean by government deciding the winners and losers?

Going back to the US, the government spending binge has also been creating some sets of new problems in terms of project efficacies, transparency and accountability.

This from Yahoo.news, ``Government officials overseeing a $700 billion bailout have acknowledged difficulties tracking the money and assessing the program's effectiveness.

``More broadly, the officials discussed "the difficulty of isolating the effects" of the bailout program "given the variety of policy actions taken by the U.S. government to support financial stability and promote economic growth."

``The officials also noted the "difficulties associated with monitoring the use of specific funds" provided to individual financial institutions, according to the document…

``The government has pledged to provide $250 billion to banks in return for partial ownership. The goal is for banks to use the money to boost lending. However, a recent review by The Associated Press found that after receiving billions in aid from U.S. taxpayers, the nation's largest banks can't say exactly how they're spending the money. Some wouldn't even talk about it.

``The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have leeway to use the money for other things, such as buying other banks, paying dividends to investors or bonuses to executives. That's touched a nerve with some lawmakers and other critics."

Talk about first few signs of unintended consequences.

The year won’t be complete without the tabulation of government money earmarked for rescue and stimulus programs and of estimates for market and economic losses from the financial crisis.

Some excerpts from the tally sheet of Bloomberg’s Alexis Leondis,

``$30: Approximate amount, in trillions, erased from the value of stocks worldwide.

Bloomberg: World Market Cap index

``$8.6: Amount, in trillions, of taxpayer money the U.S. government has pledged to prop up cash-strapped financial companies as of Nov. 25, according to data compiled by Bloomberg.

``$61,871: Maximum amount the bailout could cost each taxpayer, based on 139 million tax returns filed last year.

``$882: Amount, in billions, of U.S. currency in circulation, according to Bloomberg data.

``$613: Amount, in billions, listed as liabilities when Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in U.S. history.

``$150: Amount, in billions, of taxpayer money pledged to help American International Group Inc.

```11.7: Number, in millions, of households that owe more on their mortgages than their homes are worth, according to Zillow.com

Read the rest here.

From New York Times

Additional losses from hedge funds and stock mutual funds, as noted by Bloomberg, ``It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in U.S. history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out.

``Hedge funds lost 18 percent of their value for the year through November, the worst year since record-keeping began in 1990, according to Chicago-based Hedge Fund Research Inc. Morgan Stanley estimated that, by year end, at least 620 hedge funds will have closed.

``At bottom, the debacle amounted to a loss of faith, especially for individual investors. They pulled $215.7 billion from stock mutual funds in the first 11 months of the year, according to Investment Company Institute, a Washington-based association. That compares with a $91 billion inflow of funds for the same period of 2007.

``As a result of those withdrawals and market losses, the total net assets in all types of mutual funds fell by $2.67 trillion in the first 11 months of 2008, the institute reported.”

Yet to complete the year’s amazing finish, Forbes presents a list of Billionaires shedding some of their networth with isolated accounts of billionaires going to a net worth of ZERO. (no intentional schadenfreude here but to depict that today's crisis hurt even those at the highest strata)

From Forbes “Billionaire Blow ups”,

``More than 300 of the 1,125 billionaires we tallied on our annual list last March have since lost at least $1 billion; several dozen lost more than $5 billion. The 10 richest from our 2008 rankings dropped some $150 billion of wealth, dragged down by steel tycoon Lakshmi Mittal, estranged brothers Mukesh and Anil Ambani and property baron K.P. Singh, who together dropped $100 billion. America's 25 biggest billionaire losers of 2008 lost a combined $167 billion.”

Click here for

In Pictures “Billionaire Blow Ups”

In Pictures “America's 25 biggest billionaire losers”

Jim Rogers: 2009 Preparing For the Worst

Jim Rogers outlook for 2009 in an interview at Bloomberg (hat tip Barry Ritholtz )

Some interview highlights:

-This is probably gonna be the worst since the second world war…it’s gonna be very bad for all of us.

-In 1929….the politicians around the world started to make horrendous mistakes which turned it into a Depression, it would have been a normal recession otherwise…everybody got into act and that seems to be happening this time too.

-I am certainly prepared for the worst and if it happens I hope I take the appropriate actions…

-Our new President Mr Obama has said…he is going to tax capital. This is a period where the world is desperately short of capital what a genius! And then he is going to protect America, protectionism lead to the great depression in the 1930s, so we’ve got a man now who says, he is in favor of protectionism and taxing capital. If that happens then…it’s all over.

-[on world economic order] If America continues to make mistakes you’re gonna see that quick a transition.

-I did move to Asia because I see enormous opportunities there…I am convinced that China is the great country of the 21<sup>st</sup> century.

-The American government is printing gigantic amounts of money, that in the ends is going to be the worst problem…it has led to inflation and in some cases to runaway inflation

-Faith is a terrible way to invest…I hope I don’t invest on faith, at least invest on facts.

-I like to own things forever

-Oil is going to make a huge comeback when it does. The international energy authority, who makes the studies of much of every oil field in the world came to the conclusion that oil reserve are declining at the rate of 7% a year…in 15 years there won’t be any oil left! Unless somebody discovers a lot of oil quickly at very accessible areas, the price of energy has to go to the roof again!

-Basically agriculture is agriculture and the force of one affects the other…so they are interconnected but maybe not directly

-You know, we have now nearly a shortage of everything in agriculture…shortage of tractors, tractor tires, fertilizers, seeds, farmers…

-I see a rally for awhile into 2009…then I expect to see more problems again in the markets into 2009. So, I am holding off these things as prices go up, I hold off buying if I see selling climaxes again or panic selling then I’d probably buy more.

-the last bubble left…the Federal Reserve is buying bonds, everybody’s pumping bonds like crazy, it’s clearly a bubble.

-The best way to buy China is to buy commodities, because you don’t have to worry about corporate governance or money supply…

-Mao Tse Tung ruined agriculture. The Chinese government is now spending hundreds of billions to repair agriculture, infrastructure, rebuilding China….

-Many areas of the Chinese economy which are going to be unaffected by the recession in the West, they won’t care what happens in the West.

-I wish they [Chinese Central Bankers] were running our central bank instead of Dr. Bernanke who doesn’t have a clue what’s going on. So far the Chinese have done a better job.

The Austrian Economics Quiz: Nearly An Austrian

The Ludwig von Mises Institute recently proposed a quiz at their website "Are You An Austrian?", which I recently took....

Pls. click on the image to direct to link

According to Mises.org editor Jeffrey Tucker, "the purpose of the quiz is to highlight the difference between the Austrian School (not just theory) and the other schools of thought (Marxist/institutionalist, Keynesian/neoclassical, Chicago/RatEx) and these schools do not regard their theory and policy as separate."

And here is my quiz result...

Perhaps this makes me... "Nearly an Austrian"

Marc Faber: 2009 Very Volatile Environment

Some of Dr. Marc Faber's outlook for 2009 (hat tip: gold of the moon)

-global recession will last very long time

-2009 is going to be a catastrophic economically speaking

-monetary polices over the past 10 years are responsible for financial crisis

-treasury bonds bubble

-Asian stocks are probably ok, but can go down more because of global recession

-very volatile environment, huge swings

-less about investing than about trading at the present time

-Chinese economy will suffer very badly they’ll have a bad recession

-geopolitical tensions are up

-rebound may occur in Emerging Markets more than in the US markets

-Dollar is a disastrous currency, but others are not much better

-All currencies will lose value against hard assets

-bullish on: gold, gold miners, oil, oil companies, big mining companies

Part 2

The Myth of the Great Rebalancing

The "great rebalancing" is a concept where trading partners of the US should be required to adjust domestic policies in order to "rebalance" the large discrepancies in the global current account.

The "Great Rebalancing" is a fantasy conjured by liberals.

We can’t have a “great rebalancing” under the US dollar standard. Why? Because the US dollar standard operates on the principle of FREE LUNCH. Back to basics tell us that US issues (bank) notes in exchange for goods and services of the world. So essentially the US gets something (real goods-imports) for nothing (Dollars as IOU-exports). And because it operates on a something for nothing platform, you’d naturally have DEFICITS because the US doesn’t need to or simply WON’T produce enough. Why produce when I can acquire goods with my IOUs? And to fund balance of payment (BoP) deficits means increasing sales or exports of more IOUs in terms of either US dollars, US treasuries/agencies or US private financial claims. This is elementary.

So the idea that China should follow the dictates of the Keynesians and Hamiltonists to revalue their currency to INCREASE internal demand is a fantasy. Why should China or the rest of the world need to do so if isn’t in their perceived interest? It’s like getting services of a prostitute, where after being satisfied I DON’T pay up. Naturally the next time around, either the hooker won’t agree to service me or ask to pay upfront first, unless she falls in love with me! For China and others to follow the advices of these sacrosanct liberals is like getting forcibly screwed repeatedly for FREE!

And the Chinese recognize this. Proof? From Gao Xiqing president of the China Investment Corporation in an interview by James Fallows ``People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.

``We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living.”

Today’s private sector deleveraging doesn’t change the equation. The leverage simply shifts to the public sector but the principle remains the same- a free lunch US dollar standard. Forcing adjustments on US trading partners to accommodate ‘rebalancing’ will only extend the unsustainable free lunch operations. It’s a beggar thy neighbor prescription, which only punishes those that have not engaged in reckless speculation in the same way present global central bank policies are doing. Yes sir, Pope Benedict, central bankers are FORCING PEOPLE to borrow and speculate or to be “greedy”!

Of course, because constituents benefiting from the “something out of nothing” privilege, the natural consequence is for them to turn into to speculation-that’s why the US had the “dot.com” bubble, and that’s why it shifted to today’s imploding “real estate bubble” and now to the US treasury bubble.There simply is little incentive to produce.

Thus, the principle of free lunch begets the illusions of perpetual wealth based on consumption over production, expanding leverage and speculation or the “inflation mentality”, all of which fosters a psyche of entitlement.

Besides, importantly the lack of self adjusting discipline mechanism from the US dollar standard ensures the perpetuity of humungous BoP imbalances.

In short, the free lunch principle of the US dollar standard means perpetual BoP deficits for the US, because there are less incentive to produce goods. And perpetual deficits mean that the US will depend on rest of the world to provide goods and financing. And because deficits means the continual selling of financial claims, it thus perpetuate bubble conditions. Remember, IOUs for goods and services.

Ultimately, the Mises moment deals with the structural imbalances of the free lunch principle of today’s currency standard, the ultimate Ponzi scheme. If the system can’t bear enough of free lunches then it will collapse, similar to the unmasking of Bernard Madoff and the unraveling of today’s Ponzi financing mortgage securitization credit bubble.

The "great rebalancing" is predicated on false premises and thus a fairy tale that can’t survive the real world order.

Nassim Taleb is right about these so-called experts, ``The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.”

Happy New Year!

Amazing video from Disney.. Happy New Year to all!

The US-China Symbiosis: The Natural Outcome of the US Dollar Standard

This is an interesting depiction of the tightly intertwined political economic dynamics of the US and China from Mark Mark Landler for New York Times and International Herald Tribune.

First the wonderful Charts….

Next, some excerpts from the article (emphasis mine)…

``A new economic dance

``The United States has been here before. In the 1980s, it ran heavy trade deficits with Japan, which recycled some of its trading profits into American government bonds.

``At that time, the deficits were viewed as a grave threat to America's economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world's major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.

``The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan's rapid growth. The lesson of the Plaza Accord was not lost on China, which at that time was just emerging as an export power.

``China tied itself even more tightly to the United States than did Japan. In 1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to the dollar, a level that remained fixed for a decade.

``During the Asian financial crisis of 1997-98, China clung firmly to its currency policy, earning praise from the Clinton administration for helping check the spiral of devaluation sweeping Asia. Its low wages attracted hundreds of billions of dollars in foreign investment.

``By the early part of this decade, the United States was importing huge amounts of Chinese-made goods, toys, shoes, flat-screen televisions and auto parts, while selling much less to China in return.

``"For consumers, this was a net benefit because of the availability of cheaper goods," said Lawrence Meyer, a former Fed governor. "There's no question that China put downward pressure on inflation rates."

``But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.

``It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency, primarily dollars, that they earned from foreign trade and investment.

``As foreign trade surged, this hoard of dollars became enormous. In 2000, the reserves were less than $200 billion; today they are about $2 trillion.

``Chinese leaders chose to park the bulk of that in safe securities backed by the American government, including Treasury bonds and the debt of Fannie Mae and Freddie Mac, which had implicit government backing.

``This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise be. For years, China's government was eager to buy American debt at yields many in the private sector felt were too low.

``This financial and trade embrace between the United States and China grew so tight that Ferguson, the financial historian, has dubbed the two countries Chimerica.

Finally, my comment:

One very important matter missed out by this insightful article is that these prevailing dynamics operate under the principle of FREE LUNCH or “something out of nothing” concept of the US dollar currency standard.

Basically, the US issues its notes backed by the “full faith and credit” of the US government in exchange for real goods and services from the rest of the world. Thus the natural consequence from the operating platform is to see enormous current account imbalances from the global economy framework-again, where the US exports financial claims (US dollar and US dollar assets) to fund its balance of payment debt driven deficits while it import goods and services elsewhere.

And one major consequence has been the aberrant global “vendor financing scheme” which had been quoted by Mr. Landler at the prologue of the article as…``Usually it's the rich country lending to the poor. This time, it's the poor country lending to the rich."- Niall Ferguson.” (Hey Pope Benedict, don’t you think your campaign against greed should to start with this greed fostering "something for nothing" system?)

And it is also the principal reason behind the serial bubble (inflate-deflate) cycles around the world...

In Japan then…

[M. Landler] ``At that time, the deficits were viewed as a grave threat to America's economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world's major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.

``The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan's rapid growth…

And in the world today...

[M. Landler] ``This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise be. For years, China's government was eager to buy American debt at yields many in the private sector felt were too low.”

And because of the boom bust character emanating from such framework, trade policies have accordingly been shaped to the operating environment.

[M. Landler] ``But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.

``It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency, primarily dollars, that they earned from foreign trade and investment.

And so the idea being peddled by some experts that trade protectionism needs to be raised via the currency “lever”, aimed at improving the state of global balance of payments, doesn’t square with the realities of the operating framework of the present system which NATURALLY prompts for these anomalies. The fundamental reason is that the present monetary system lacks the self-adjusting mechanism traditionally seen in the gold standard.

Blaming simplistically the US for “overconsumption” or China for “exporting overcapacity” via the currency "manipulation" channel seems like the proverbial “pot calling the kettle black” and deals with cosmetic issues.

Yet the policy prescriptions from these experts appear directed at salvaging the statusquo of inflation driven economic growth models of the US dollar standard system. [M. Landler] ``"It is sometimes hard to change successful models," said Robert Zoellick, who negotiated with the Chinese as a deputy secretary of state. "It is prototypically American to say, 'This worked well but now you've got to change it.' "

In short, for as long as the US dollar functions as the backbone of the world's financial architecture, we should expect to see the persistence of the phenomenon of highly skewed global balance of payments and “mercantilist” policies which help shapes them.

Desires to remedy such imbalances without dealing with operating platform of the present global currency standard seems likely a "tooth fairy" approach. This unsustainable system will likely persist until it crumbles under its own weight (like a Ponzi house of cards), possibly fast tracked by the adoption of destructive policies recommended by the "omniscient" liberals, or by a concerted political thrust to overhaul the system.

But since governments are typical reactive agents and where a systemic reconfiguration translates to an admission of a shift in the distribution of geopolitical power, the latter option seems unlikely.

This makes a crisis as the only catalyst for change. Here Secretary Paulson got it right, [M. Landler] ``"One lesson that I have clearly learned," said Paulson, sitting beneath his Chinese watercolor. "You don't get dramatic change, or reform, or action unless there is a crisis."

Broken Window Fallacy: The Vicious Hidden Costs of "Holiday Economics"

``There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

``Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”- Bastiat, Frédéric (1801-1850)

In the tradition of Frédéric Bastiat’s Parable of the Broken Window or the precept of “That Which is Seen and that Which is Unseen”, we apply this analytical methodology to the so-called “Holiday Economics”.

That Which is Seen

Public Holidays are declared to commemorate dates of historical, religious or cultural significance.

But by virtue of the current administration’s “Rationalizing the Celebration of National Holidays (R.A. 9492), public holidays have been made adjustable. The promulgated reason behind this law is to “to reduce disruption to business and production schedules, encourage domestic tourism and give employees long weekends.” (inq7.net)

In addition, the administration using moral justification, says the law would “encourage quality time” among members of Filipino families.

That Which is Not Seen

The zeitgeist of this law has been primarily economics, hence called as “holiday economics”. Weekends juxtaposed with holidays have been alleged as encouraging domestic tourism.

If one goes by the contribution share of the tourism industry to the Philippine economy we note of the following data from World Travel and Tourism Council:

In terms of GDP share, `` Philippines's T&T Direct Industry is expected to contribute 3.9% to Gross Domestic Product (GDP) in 2008 (PHP285.2 bn or US$6.8 bn), rising in nominal terms to PHP646.6 bn or US$10.9 bn (3.7% of total) by 2018. The T&T Economy contribution (% of total) should decline from 8.8% (PHP636.4 bn or US$15.1 bn) to 8.7% (PHP1,522.1 bn or US$25.7 bn) in this same period.”

In terms of employment, ``Philippines's 1,377,000 T&T Direct Industry jobs account for 4% of total employment in 2008 and are forecast to total 1,564,000 jobs or 3.7% of the total by 2018.The contribution of the Travel & Tourism Economy to employment is expected to fall to 3,541,000 jobs in 2008, 10.3% of total employment, or 1 in every 9.7 jobs to 4,119,000 jobs, 9.7% of total employment or 1 in every 10.4 jobs by 2018.”

Additionally, the Philippine government economic agency, the National Statistical Coordination Board (NSCB) further says that in 1994-1998, ``The share of internal tourism consumption to GDP was 5% and 7% in 1994 and 1998, respectively.”

In short, Holiday Economics arbitrarily promotes an industry which contributes to only about 9% of country’s GDP (5-7% of domestic tourism) and 10.3% (direct and indirect) to total employment coming at the expense of the OTHER industries with larger contribution to the domestic economy!!!

Inflationary Impact

Moreover, such distortive law is obviously inflationary or can contribute to higher prices of goods and services to the society and the further impoverishment of the society.

How?

In a non-working holiday, if a business decides to operate, it would have to absorb increases in labor wages as mandated by law. On the other hand, forced vacations mean suspensions of business activities in compliance to the fiat.

In other words, the said policy affects the production structure of the Philippine economy by

1) skewing capital investment incentives heavily to one industry,

2) increasing the costs of doing business,

3) lowering profit margins,

4) diminishing labor productivity and

5) reducing relative output.

The obvious economic implication is that of higher risk premium for the economy and stiff hurdle rates which diminishes the attraction of capital investments thereby raising the prospects of unemployment levels. Moreover, the policy induced economic imbalances will reduce production output which means pressures of HIGHER prices of goods and services.

Worst of all, the accrued negative impacts would suggest for GREATER government spending and MORE future interventions, as media will focus on the effects than the cause which will generate popular demand and pressure policymakers to oblige, and from which, politicians will willfully administer. But, beyond public knowledge, this should translate to the prospects of higher taxes, lower purchasing power of the Peso and lower standards of living.

On the government side, more intervention and more government budget for “welfare or entitlement” spending means more opportunities for corruption and the never-ending farcical investigations (turned into soap operas) aside from the economic dislocations emanating from such skewed political policy.

Moreover, the truth is that domestic tourism will be limited to the income capacity of Filipinos. Lengthening of vacations do not automatically translate to hefty progress in the domestic tourism industry if the citizenry's incomes remain marginalized. And any advances of the industry based on credit instead of genuine wealth creation will only lead to temporary booms followed by a nasty bust. Profligacy isn’t a sound way to enrich a country. Besides, the squeezing of other industries will only put a kibosh to Filipino incomes.

Think of it, instead of promoting education, Filipino children with reduced school hours will be cultured towards indolence, intellectual inertia and hedonistic lifestyles, which runs contrary to the avowed objective of attaining quality family time. The derivative value formation from such policies doesn’t signify as sound economics or translate to better economic prospects over the long run.

Fatal Conceit

Besides, “quality time” accounts for as a fallacious argument of “begging the question”. More vacations do not automatically guarantee more quality time for the family. Quality time stems from personal virtues of responsibility and time management than from government’s controlling of people’s action. If a person insists on staying with a paramour than with the legal or connubial partner and or the family, no amount of “vacation” will change the person’s preference or priorities. More vacation may, on the other hand, even further such an immoral lifestyle.

And it goes the same with business, the idea that government knows the interest of business more than the industry itself is a concrete example of the Hayekian “Fatal Conceit”. The law’s stated aim of reducing “disruption to business and production schedules” runs contrary to its goals. Raising the cost of business disrupts production schedules instead of facilitating them. And some business groups as the American Chamber of Commerce have raised this issue.

Finally there is also a cultural dimension for the “holiday economics” debate. The major reason for such holidays is mainly for the celebration of the historical significance of the particular dates. By moving these, with the aim of attaining tenuous economic goals, vastly erodes the meaning of such rites. What good is it to remember history, if we only opt to look beyond its very essence?

Holiday Economics is representative of the inflationary, distortive and bad economics which is what Frédéric Bastiat admonished against. At worst, it is prejudicial to the Filipino heritage. The unseen costs look patently greater than its superficial and immediate benefits. The law deserves to be repealed or revoked.

Happy Holidays!

The stock market recently formed a Christmas tree image from 2004-2008...

Source: Bespoke Invest

But the angel said to them, "Do not be afraid. I bring you good news of great joy that will be for all the people. Today in the town of David a Savior has been born to you; he is Christ the Lord. This will be a sign to you: You will find a baby wrapped in cloths and lying in a manger." Suddenly a great company of the heavenly host appeared with the angel, praising God and saying, "Glory to God in the highest, and on earth peace to men on whom his favor rests." Luke 2: 10-14

Happy Holidays!

Industry Trends During Recessions

The common impression is that when an economy undergoes recession, the entire range of industries sinks altogether. This isn’t always true since recessions signify a mismatch between the balance of goods and services in the economy. The industries that incur the gist of the imbalances or 'malinvestments' suffer most from the market clearing adjustments.

McKinsey Quarterly shows the shift in spending patterns during the previous 2 recessions 1990-1991 and 2001-2002.

To quote McKinsey Quarterly, ``Many companies can anticipate the performance of their sectors in a recession. McKinsey research shows that during the 1990–91 and 2001–02 downturns, for example, US consumers reprioritized their spending rather than cutting it across the board. Consumer spending dropped in discretionary categories like dining out, personal care products, and charitable donations. But expenditures for groceries, reading materials, and other options that substitute for more expensive ones actually rose. So did outlays on insurance, health care, and, above all, education.”

So basically NEED based industries tend to do well (as defensive industries) while WANT based industries bear most of the brunt (as people scrimp to adjust to the new environment).

Courtesy of Bespoke Invest (as of December 22<sup>nd</sup>)

Although if today’s stock market performance should be used as gauge of the overall activities of the economy, it would seem that in general every industry seems affected.

Boston.com: 2008 In Pictures

Check out nifty pictures on Boston.com’s Big Picture

Samples…

[in part 1]

"world's first man to fly with a jet-powered fixed-wing apparatus"

James Bond-like gadgets come to life.

in Part [2]

Hurricane Ike

Lonesome Survivor

in Part [3]

US Presidential Elections

Obama's Magic

Great stuff

Cartoon of the Day: The Madoff Model

source indystar.com varvelblog

Philippine Politics: Our Comments on ex-President Aquino’s Apology to ex-President Erap

Here are some of my comments on former President Corazon Aquino’s recent apology to former President Joseph Estrada for participating in the latter’s ouster during the past EDSA 2 revolution.

-``Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule - and both commonly succeed, and are right.”- by H.L. Mencken.

By the apology, President Aquino’s actuation can be read or interpreted as trying to undermine the present administration more than simply being remorseful. As one of the inspirational leaders of the People Power 2 revolution, doesn’t she deserve to equally apologize to the Philippine nation for calling on Erap’s ouster and thus ushering the unpopular and similarly "tainted" PGMA’s regime?

This reeks of odious politicking.

-There are no permanent allies and no permanent enemies, only permanent interests…especially when vested political interests are not in power!

-``It is fascinating to watch politicians come up with ‘solutions’ to problems that are a direct result of their previous solutions. In many cases, the most efficient thing to do would be to repeal their previous solutions and stop being so gung‐ho for creating new solutions in the future. But, politically, that is the last thing they will do.”-Thomas Sowell

Thomas Sowell's quote applied to the local politics,

“…politicians come up with ‘solutions’ to problems”: OUST PGMA.

“…direct result of their previous solutions”: EDSA II or Estrada’s ouster

“the most efficient thing to do would be to repeal their previous solutions”: avoid personality based politics

“…and stop being so gung‐ho for creating new solutions in the future”: adopt less dependence on government and expand economic freedom!

-``As for politicians, forget about expecting them to change. It's not going to happen. Just sit back, relax, and watch them fall, one by one. At least it makes for great entertainment.”-Robert Ringer

Exactly!