Typhoon Ondoy: Market Fallacies and Risks

``The controls are deeply and inherently immoral. By substituting the rule of men for the rule of law and for voluntary cooperation in the marketplace, the controls threaten the very foundations of a free society. By encouraging to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.”-Milton Friedman, An Economist’s Protest

Nothing captures the human mind more than the huge events.

And huge events frequently spawn oversimplistic explanations on everything that accompanies this.

For instance in the realm of the stock market, natural catastrophe or disasters have often been equated to lower prices, for the simple reason that such dislocations are deemed to “hurt” earnings or the domestic economy.

Plausible as it seems, however this exemplifies our populist “ipse dixitism”.

Fallacy of Natural Disaster Equals Lower Stock Prices

The Philippines is home to typhoons or tropical cyclones or “Bagyo” in local vernacular, where about an average 6-7 of them lay scourge to the country annually.

The table above from wikipedia.org enumerates on the deadliest and the most destructive of the typhoons that had afflicted the country in terms of deaths and estimated damages in Peso (albeit the estimates of Peso damage doesn’t specify whether prices are reckoned from current or constant “real” terms).

However this interesting trivia from wikipedia.org, (bold highlights mine)

``The most active season, since 1945, for tropical cyclone strikes on the island archipelago was 1993 when seventeen tropical cyclones moved through the country. There was only one tropical cyclone which moved through the Philippines in 1958. The most frequently impacted areas of the Philippines by tropical cyclones are northern Luzon and eastern Visayas. A ten year average of satellite determined precipitation showed that at least 30 percent of the annual rainfall in the northern Philippines could be traced to tropical cyclones, while the southern islands receive less than 10 percent of their annual rainfall from tropical cyclones.”

So how did the top 3 worst typhoons, which occurred mostly during the early 90s, impact the domestic stock market?

The worst in terms of fatalities would be Typhoon Thelma or codenamed Uring, which slammed the country in November 1991 with an estimated 5,000-8,000 death.

However in terms of estimated property damages, Typhoon Mike or codenamed Ruping (November 1990) and Typhoon Angela codenamed Rosing (November 1995) had been recorded as the largest, with over Php 10.8 billion each (with a marginal spread between the two).

Three noteworthy observations from these typhoons on the Phsix:

One, over the short term, the impact from these typhoons had generally been a carryover of the interim trend.

Typhoon Mike and Thelma traded sideways reflecting on the trends prior to their occurrences, while Typhoon Angela traded downhill also reflecting on the prior trend.

Second, in the wake of the three worst catastrophic typhoons, in the medium term (1-2 years) the Phisix surged!

A Pollyanna could even make a misleading conclusion that typhoons are ‘beneficial’ to the stock market! However, as a word of caution: correlation doesn’t imply causation.

And lastly, over the longer term, these typhoons merely reflected on the secular trend of the market.

Since all three typhoons were at that time operating under the secular bull market cycle from 1986-1997, hence the general trend was up.

In short, in contrast to the popular “available bias” of equating “calamity equals poor stock market”, the typhoon’s impact to the stock market has largely been immaterial over all timeframes considered and tends to reflect on the major trends from which undergirds the stock market cycle.

Typhoon Milenyo And 2004 Indian Ocean Earthquake As Added Exhibits

More proof.

Conditions of the 90s have been significantly less similar than today in the age of the iPod, twitter, facebook or the internet and the epoch of globalization (in spite of the recent crisis).

So we’d make two recent comparisons: one local and an international event.

The latest typhoon that appears to have an almost parallel degree of havoc to last week’s fateful Typhoon Ketsana or codename Ondoy, to the National Capital Region of the Philippines was Typhoon Xangsane or codenamed Milenyo in late September of 2006.

Again according to wikipedia.org, ``In all, Milenyo was responsible for 197 deaths and 5.9 billion Philippine pesos ($118 million, 2006 USD) in damage, mostly to personal property and agriculture.”

The difference is that most of the destruction and loss from today’s tempest had emanated from intensive rainfall that had induced massive instantaneous flooding than from Milenyo’s calamitous winds.

In addition, the death toll from Ondoy has now reached 280 as of October 1, according to the Inquirer. This would be larger than the Milenyo experience, but would still account as vastly lower than 9 out of 10 of the list in the top 10 of the most devastating typhoons to slam the Philippines.

Typhoon Ondoy seems closing in on Typhoon Babs or codenamed Loleng during October 1998 which ranked 6^th which tallied 303 deaths.

Typhoon Milenyo had basically the same traits as cited above from the “worst” predecessors as reflected in the Phisix.

The precursor trend determined the short term actions. The medium term move was a significant advance and the long term manifested the secular trend-up.

Incidentally, Typhoon Loleng of 1998 had the same short and medium term impact albeit the long term reflected anew on the major trend-down (that’s because 1997-2002 was the bear market cycle).

And fundamentally the same dynamics would even apply to one of the worst or deadliest natural disasters in recorded history over the world: December 2004 Indian Ocean earthquake.

Fatalities in the 2004 Indian Ocean Earthquake approximated 443,929, according to the wikipedia.org, which makes it the fifth worst.

The pecking order of the 5 worst disasters ever to hit human history ahead of the Indian Ocean Earthquake are: China’s 1931 Floods which took some 1-4 million lives, China’s 1887 Yellow River Floods which had some 900k-2 million deaths, 1556 Shaanxi earthquake again in China which tallied 830k of lives lost, and the 1970 Bhola Cyclone in Bangladesh which claimed 500k lives.

Indonesia took the brunt of the casualties from the December 2004 Indian Ocean earthquake which had been propelled by the secondary effect of the earthquake-a destructive tsunami.

According to wikipedia.org, ``The Sumatran province of Aceh was severely damaged by the earthquake and resulting tsunami. An estimated 167,736 Indonesians were killed and 25% of Achenese lost their source of livelihood. Banda Aceh, Aceh's capital, was the closest major city to the earthquake's epicenter, and many of its major libraries suffered extensive damage.” (bold emphasis mine)

[I would like to further disclose that wikipedia’s account of statistical figures varies: the list of natural disasters by death toll page indicates an estimated 443,929, while 2004 Indian earthquake page lists 230,000]

Nevertheless the important point is, while the impact of catastrophes is real which has significant economic implications, stock markets seem to have discounted the effects from such human losses and property destruction.

Jakarta’s major bellwether, the JKSE, even immediately rose in the aftermath of the disaster but traded sideways for most of 2005 until it eventually took off by the end of 2005.

Moreover, the devastating earthquake in Indonesia last Thursday which has exacted 1,100 as of this writing left JKSE virtually unchanged as of Friday’s close.

So whether it is typhoon Thelma, Mike, Angela, Xangsane or today’s Ketsana (Ondoy) or the tsunamis from the December 2004 Indian Ocean Earthquake or even the Spanish Flu in 1918-1919 [as discussed in Swine Flu: The Black Swan That Wasn’t], these tragedies have had minor impact to the price movements of the stock markets.

Human Action And Monetary Policies Matter

So why would stock markets seem to overrule the popular impression that “calamity equals lower stock prices”?

We offer two explanations:

One is that this signifies the dynamics of human action.

It is natural for people to speedily work for the restoration of the economic structure.

John Stuart Mill has a magnificent explanation:

``This perpetual consumption and reproduction of capital affords the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.” (bold emphasis added)

While restitution from the natural disasters in rich countries can be financed by medical or insurance coverage on properties affected or on lives harmed or lost, in the poor nations, people rely mostly on social network for aid.

As in the wake of Typhoon Ondoy, it is why tremendous amounts of “private” sector charity (here and abroad) have poured into those afflicted areas.

It is also why there has been a large participation from the wide spectrum of the society to assist in the distribution of relief goods.

Unseen by most, these acts of social cooperation dynamics or the “bayanihan” spirit in local lingo is more than just a manifestation of self esteem or social work goals.

It represents exhaustive efforts towards swift societal rehabilitation for the economic interest of the community [as we explained in Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace]. It is in the interest of almost everyone to see the reversion to a semblance of ‘normalization’ of the community.

In other words, marketplace charity signifies as complimentary function to the recovery of capital impaired by the calamity.

Again John Stuart Mill, ``The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production.” (bold emphasis added)

Hence, markets could have discounted the adverse impact from these disasters as possibly representing an anomaly than from a permanent structural impairment in the economy.

In addition, markets may also have anticipated a relatively quick recovery from the collective rehabilitation efforts to restore the economy as reasons for valuation insouciance.

Another important unseen factor, which has always and seemingly intentionally been glossed over by the mainstream, is the impact of monetary policies on asset prices.

This appears true even amidst the turmoil brought about by natural disasters.

The red arrows in the chart courtesy of the economagic shows of the “Greenspan Put” policies instituted in response by the US Federal Reserve in the face of specific global crisis or to combat US recessions, such as the 1990-91 US Recession (left most shade) and Japan’s Bubble Bust (1990), the Mexican Tequila Crisis (1995), the Asian Crisis (1997), the LTCM (1998) and Millennium Bug scare (1999).

In other words, the easing of the monetary policies in the US which had been indirectly transmitted to Philippine equity assets by way of a secular boom cycle phase. Portfolio flows, which underpinned most of the secular trend, may have offset or cushioned the large scale of losses in the real economy exacted by the natural disaster shocks.

As one would note: The rallies in the Phisix, in spite of the calamity shocks, came in conjunction with the easing cycle of the US Federal Reserve.

It is likely that today’s market environment will trigger the same response as in the past, most especially that monetary easing isn’t just a conduct exclusive of the US Federal Reserve but from global central banks which means this includes the local central bank, the Bangko Sentral ng Pilipinas (BSP).

Further in the wake of the tragedy, I expect local monetary policies to further extend their easing cycle to politically justify on lending to the disaster victims.

Price Controls As Backdoor Entry To Tyranny

The real risks to the market arise NOT from the disaster itself, but from policies assumed by the incumbent government in the face of the calamity.

Considering that the stretch of the damage of Typhoon Ondoy has been significantly less than the damage from similar typhoons in the past, it would normally be a puzzle why a nationwide “state of calamity” had been promulgated by the government.

One of the alleged reasons for the nationwide scope of the state of calamity is because earlier impositions of price controls at selected typhoon affected areas haven’t worked. Producers or traders naturally opted to sell in places which had been free of regulatory controls.

Hence, a nationwide price control policy has been instituted, all aimed at controlling the “greed” of traders. Duh!

Given that our president hails from a respected economic professional background, such reactions wouldn’t be a stranger to her.

In addition, we wouldn’t question her familiarity with the hazards of employing the repeated historical precedents of the failure of price controls.

But alas! Political season is before us. And political expediency has taken precedence over economic priorities, thereby heightening the risks of exacerbating today’s crisis.

Yet mainstream media has virtually been stultified by discounting such government act as being connected to some other tangential electoral issues [see No To Price Controls! No To Despotism!]

Mainstream media have basically neglected the implication that a national price control implicitly “seizes” control of the factors of production.

This means that if such policies further get entrenched, we could be transitioning into etatism or a different flavor of “state” socialism.

In etatism, the largest industries will risk nationalization, especially those producing political goods or services. While the small and medium industries will probably retain their private identity, they will, in effect, eventually become extensions of government operations, whereby the amount of production and prices will all be ascertained by the government.

Further, the failure to control prices from nationwide price fixing would lead next to widespread rationing, universal price fixing (This means expanding the coverage of price controls from politically sensitive goods to general goods. Since shortages will force the public to consume substitutes outside of government controls which will likewise cause price increases, these will be areas which government will expand controls) and massive subsidies, all of which, I repeat, would only substantially aggravate today’s crisis.

Yet, any further signs of these occurring in the political theater, over the coming days, will be foreboding.

Media and the academic economic experts seemed to have forgotten that one way for a prospective tyrant to emerge is through the extensive use of price control instruments as political tool to grab power!

In short, price controls could serve as a backdoor entry into tyranny. Will we risk relapsing into a dictatorship or will we assimilate the socialist models of Latin America?

As Robert Shuettinger, Eamon Butler, Forty Centuries of Wage and Price Controls, ``In Egypt, government controls over the grain crop led gradually to ownership of all the land by the state. In Babylon, in Sumeria, in China, in India, in Greece and in Rome various kinds of regulations over the economy were tried and usually either failed completely or produced harmful effects. One of the most well-known cases of wage and price controls in the ancient world occurred in the time of the Emperor Diocletian. Thousands of people throughout the Empire were put to death before these futile laws were finally repealed.” (bold emphasis added)

And by taking over the reins of the major segments of the economy from the control of the “greedy” private sectors, our political leaders will then require extended police powers for the pervasive enforcement of such political objectives.

And the feedback mechanism between more price controls and more police power would accelerate to cover more and more economic areas and eventually snowball into martial law powers as the whole economy falls into the ramparts of government control.

Considering the twilight of the incumbent political regime, emergency powers aimed to addressing calamity woes could function as fitting rationalization to short-circuit the electoral process.

Effects From Price Controls, Hoping Over Hope

Besides, we should realize that there is no getting around the natural law of economics which principally operates on the world of scarcity.

Eventually, out of the façade of short term fixes will surface the strains from the imbalances built upon superficial structures-the unintended consequences. And this could be vented through a political upheaval.

Moreover, increased used of price controls would eventually translate to heightened risks of inflation-where the real economy will suffer from specific and relative real good shortages combined with mass subsidies and an upsurge in fiscal expenditures for the expanded imposition and enforcement of regulations.

All these would also be expressed in the financial markets.

Although widespread use of said policies would naturally imply for a weaker currency or a weak peso, the Peso’s fate would greatly depend on the relative dimension, or which of the country will do least worst in the race to the bottom. In the Philippines, the conventional exchange rate pair is the US dollar-Philippine Peso.

In addition, we should expect to see below par economic growth, spikes in unemployment, political restiveness and perhaps a lagging stock market-in view of nationalization risks, as investors turn risk averse.

We can only hope that forthright “sensibilities” will sink into consciousness of our political leadership.

And that the temptations of egotistically extending political tenures, by means of maneuvering economic policies as political instruments, would immediately be abandoned.

Aside from lifting price controls, the only way to rebalance the calamity distorted prices is by the liberalization of local trade barriers so that interim shortages will met by a barrage of supplies in response to temporary surges in price signals, which would bring back prices to normal levels.

Hence, the risks of wastage will all be borne by “greedy” entrepreneurs.

And for the genuinely concerned political leadership, these measures would mitigate the burdens of taxpayers by minimizing extravagant and unproductive redistribution and ultimately shield society from the ravages of inflation.

Politics Dictating The Affairs Of The Market, Outlook

For market observers and participants, while many continue to look for entertainment value instead of the real drivers of the marketplace, the role of politics has increasingly deepened its entanglement here and abroad, thereby generating more marketplace distortions that affect both the real and financial dimensions.

Hence we suggest that policy actions will continue to strongly determine the fate of the local and global markets, the local and global economy and even our society’s agility to recover from the recent disaster.

Traditional way of thinking has been loaded with theoretical lapses (e.g. devaluations doesn’t solve disequilibrium simply because currency values are not everything, instead inflationary actions aggravates them), confused definitions (e.g. macro thinking sees the world as operating from one kind of good or product, labor and capital, hence prescribe on simplistic set of solutions cloaked with technical jargon) and selective facts to confirm on tenuously held biases (e.g. rising US unemployment is deflationary to the Philippines!!?? Excuse me).

Domestic political uncertainty, as clearly shown above, and not the deflation menace is the risk for the local financial markets. A move towards a Honduras (political turmoil) or Venezuela (deepening socialism) risks upending present gains.

While Venezuela’s IBVC appears to be up over the past 5 years as seen from the chart above from Bloomberg, the tragedy is that stock market gains are wiped out by the huge spikes of inflation as seen from the chart below from tradingeconomics.com.

This should serve as a basic example on how inflationary policies from socialism will harm investors and the rest of the population or the economy alike than to enable them to achieve fraudulent “noble” social goals.

And political risks equally apply to the international marketplace than from the premises of traditional valuation. (e.g. growing murmurs of a military strike on Iran)

While we still remain net positive on asset prices mostly from the transmission effects from global and local monetary policies, we will have to keep a close vigil over the direction of the present political winds where the risk towards a recidivist dictatorship could constitute as political shock and rattle local markets regardless of exogenous developments, or if present actions have been cosmetically designed at embellishing the highly unpopular political credibility over the interim.

Jim Rickards: Federal Reserve needs to cut US Dollar in half over next 14 years

Jim Rickards managing director of market intelligence for scientific consulting firm Omnis, sees the US dollar cut in half over the next decade or so, in a CNBC Interview. [Hat Tip: TruthFN]

Some notes and excerpts:

Expect: 4% inflation in 14 years that will cut the US Dollar in half
Explains SDRs as solution to the Triffin Dilemma
recommends 10% gold 90% cash
SDRs-printing money but still nothing behind it
No solution for national security implications
Central banks are hoping for a "stable steady" decline of the US dollar and not a collapse


“Unannounced product of G20, the IMF anointed as global Central bank...
"IMF is issuing Debt for the first time in history"
“Displace the dollar with SDRs
“If you own Gold you are fighting central banks in the world. Central banks hate gold because it limits their ability to print money. But the market is the market, the market will do what it wants even the central banks are not bigger than the market.”



My comment:

It seems odd for an expert to prescribe a portfolio of 90% cash and 10% gold when the risk of a dollar collapse is construed as significant.

A dollar collapse means the loss of the basic function of the currency as medium of exchange, store of value and the unit of account on an international scale.

That would only mean inflation going berserk. Who would want to hold cash (US dollar) in an environment where money is rapidly losing purchasing power?

This would seem self contradictory.

Paul Volker: Growth In Emerging World Is Like The US In Terms of Impact To The World

Former Federal Chairman Paul Volker recently interviewed by Charlie Ross at the PBS discussed sundry of topics from the US economy, global economy, global imbalances, the US banking system, emerging markets, US dollar, the Obama administration, taxation and etc...

Here are some excerpts on emerging markets and the US dollar:

``It’s pretty unusual but symbolic in the change of the world, instead of the emerging world being the hardest hit by this crisis, emerging world has been coming out pretty well. Now they’ve built out big reserves so they weren’t financially hit…

``But the growth in the emerging world is quite remarkable and amidst of this turmoil the emerging world together, you know, is like the United States in terms of the impact on the world economy, you couldn’t have dreamed of that 20 years ago, 30 years ago…

``It’s good, on the other hand, it is symbolic or more than symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, in terms of intellectual

``“I don’t know how we accommodate ourselves to it…You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

``They want to be at a table, but coming to table doesn’t create consensus.

``We will wanna import from China we will export to China, we gotta get more balanced relationship too but I don’t think that balanced relationship is inherently antagonistic…[Not a zero sum game] not at all

``But I don’t think no substitute to the Dollar now, unless we screw up and I hope we don’t, but that will the real danger for the dollar…

``The world needs a currency, the financial world is globalized, they are very much interconnected…

``It’s very convenient to have something that you can use right away for another payment and that’s what the dollar serves and that’s why people hold so many dollars…because it is convenient. And it is reasonably stable and convenient and useable and it won’t go away in a hurry."

Part 1 (if video won't activate pls click on the "part 1" link)

Bloomberg has also an account of the interview here.

Part 2 (if video won't activate pls click on the "part 2" link)

No To Price Controls! No To Despotism!

Here’s a letter I sent to the editor in chief of the Inquirer7.net.

It’s a modified version of my earlier blog post: Price Freeze Policies Will Hurt Consumers

While I don’t expect to have my longish letter published, my intent is to nudge mainstream media of government’s creeping attempt to utilize today’s calamity via the declaration of the State of Calamity as an opportunity to expand despotism.

Mainstream media's fear appears misdirected, it is less likely about having to "raise funds for next year’s general election". But the worst possible risk is to use today's calamity as an opportunity to extend their political tenure.

Ergo, the right question that needs to be asked is: could the Presidential 2010 elections be in jeopardy?

Permit me to express my disenchantment over our government’s thrust to resolve today’s crisis in the face of Typhoon Ondoy’s calamity via the repeatedly failed age-old political tool of price controls. As an old saw goes, ``the road to hell is paved with good intentions.”

In mainstream media, entrepreneurs or business entities have been predominantly depicted as generally "greedy" while government portrayed as “equitable”.

This isn’t generally true; some indiscreetness by capitalists doesn’t apply to all. Beside, consumers are inherently empowered to render discipline to errant entrepreneurs via competition.

In contrast our government had been ranked as one of the worst in corruption in Asia, which would make our government relatively “greedier”.

Yet the important difference largely unappreciated by the public is that given the police power derived monopolistic function of governments, greedy entrepreneurs would have less of an impact to undermine society than a greedy official…unless the entrepreneur have been mandated by government privileges via state capitalism.

Next, officials try to make the public believe that they can subvert the natural laws of economics and allocate resources better than the marketplace.

They refuse to admit that governments are the least effective way to direct resources for its optimal use. They should learn from the recent lessons of Cuba's failed collective agricultural policies or from forty centuries history on price controls.

Price controls or "anti price gouging regulations" in contrast to popular wisdom worsens, and does not enhance, society's predicament.

How?

One, these regulations are likely to serve as disincentive for producers or providers of goods and services to sell. Probably, they would rather hoard their stuff instead.

Two, it prevents pricing signals to spur production or supply side responses to changes in demand. This would lead to more shortages.

Three, when prices of goods or services are legally constrained to sell below market levels, the tendency is to induce significant increases in demand.

As Henry Hazlitt explains in Economics in One Lesson,

``Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.

``If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply."

Fourth, since demand and supply balance can’t respond through pricing signals, black markets are likely to emerge out of the shortages.

Fifth, more regulations will breed more corruption. Some officials will probably keep a blind eye on entities selling at "high" prices but with a "take", or by themselves undertake such actions, directly or indirectly.

Lastly, restrictions in the marketplace will even lead to further restrictions, distortions and shortages in the economy.

This means that a feedback loop mechanism will arise from existing price controls as the shortages exacerbates.

And this would lead to expanding more government controls over production, via rationing, subsidies, cost-controls and or universal price fixing, all at the expense of entrepreneurs and capitalists, the latter of which understands how resources should be better allocated from their “local knowledge” through the marketplace.

Importantly, all these economic distortions will compound to translate to inflation, a concealed tax to the population.

Now when governments own and control the factors of production this is known as socialism.

It is unfortunate that while we would like to believe that our society operates under the political process known as “democracy”, we seem to deceive ourselves into believing that economic freedom function disparately from our political “democratic” process.

Worst, the raft of economic controls signifies our incremental retrogression into the morass of despotism, placing our fragile democracy at heightened risk. What’s next, martial law?

Lastly, such knee jerk regulatory responses may not even be targeted at attaining the enhancement of our economic weal, but as political advertisement for the coming elections.

In analyzing government policies, noble motives must always be matched with economic reality, failing to do so, we should go for reality.

I say NO to Price controls.

Benson J. Te

Update: Email address to the editor I sent has expired.

Typhoon Ketsana (Ondoy) In Pictures

Boston.com's The Big Picture captures the wrath of Typhoon Ketsana (Ondoy) in a deck card of pictures.

Here are two samples:

See the rest here

Ron Paul On The Daily Show with Jon Stewart

Hat Tip Wall Street Journal

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Ron Paul
www.thedailyshow.com
Daily Show Full Episodes Political Humor Ron Paul Interview

BRIC Horse Race: Russia Leads, China Trails

Bespoke Invest shows of the relative (horse racing) performances of BRIC countries.

According to Bespoke, ``After leading the BRIC countries (Brazil, Russia, India, China) in year-to-date performance by a wide margin a few months ago, China is now doing the worst... Russia's stock market is now doing the best in '09 with a gain of nearly 100% (98.5%). India is up the second most at 77.5%, followed by Brazil at 62.4%, and finally China at 52.6%. And while the other three BRIC countries remain in nice uptrends, China looks quite the opposite."

It would appear that Bespoke likes to "pick" on China for unknown reasons.

Nonetheless, we would like to add that Russia's RTSI earlier fell almost 30% from its MAY 2009 high prior to this recent outperformance. So the May decline served as a "bear trap" for any BRIC skeptics.

And considering the still loose monetary environment, China's market via the Shanghai index could replicate Russia's performance.

Ticker tape reading today's activities into the future isn't guaranteed.

Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace

This cordial comment from Dave Llorito of World Bank practically captures how the local community has responded to the recent calamity brought about by typhoon Ondoy,

``Despite the difficulties, the response to the crisis was immediate and heartwarming. Government, in particular the National Disaster Coordinating Council, immediately mobilized its rescue teams. Citizens’ groups, media organizations, civil society, universities, church organizations, and private business—organized through text messages and social media websites like Facebook and Twitter—responded by organizing their own volunteer teams to rescue trapped victims or bring food, water, clothes, medicine, and blankets. Help from the international community also poured in." (bold emphasis mine)

So have the entrepreneurs been "greedy" as earlier depicted by media and politicians? The answer is clearly no.

Remember it is in the vested interest of the private sector to be charitable.

This is not only due to self esteem or social purposes but for sustaining the economic environment.

Think of it, if retail store ABC's customer base have been blighted by the recent mass flooding, where a massive dislocation- population loss through death or permanent relocation to other places- would translate to an economic loss for the store, then, it would be in the interest of owners of store ABC to "charitably" or voluntarily provide assistance of various kind to the neighborhood in order to prevent such dislocation from worsening, or as a consequence from indifference, risks economic losses.

Hence, such acts of charity is of mutual benefit.

Moreover, charity is the province of the marketplace. That's because markets produce and provides the goods and services required by society to operate on. Whereas government essentially don't produce goods or services but generates revenues by picking on somebody else's pocket.

As Murray Rothbard wrote, ``it is hardly “charity” to take wealth by force and hand it over to someone else. Indeed, this is the direct opposite of charity, which can only be an unbought, voluntary act of grace."

Hence acts of government to redistribute reflects on politics and not of charity.

Price Freeze Policies Will Hurt Consumers

There is no better way to flaunt nonsensical populist policies than in the aftermath of a calamity.

This from today's Inquirer.net

``Profiteering businessmen, beware.

``The Department of Trade and Industry (DTI) has placed a ceiling on all prices of basic commodities in supermarkets and wet markets to prevent unscrupulous business owners from taking advantage of the shortage of basic commodities in the wake of Storm “Ondoy” (international codename: Ketsana).

``During Monday’s emergency meeting of the National Price Coordinating Council, Trade Secretary Peter Favila said that apart from basic necessities, he would ask President Gloria Macapagal-Arroyo to freeze the prices of prime commodities, including batteries and construction materials."

One, the article paints entrepreneurs or business entities as generally "greedy" while governments as equitable. Yeah, right...that's why our government had been ranked as one of the worst in corruption in Asia.

Two, officials believe that they can subvert the natural laws of economics and allocate resources better than the marketplace.

They refuse to admit that governments are the least effective way to direct resources to its optimal use. They should learn from Cuba's failed collective agricultural policies.

Price controls or "anti price gouging regulations" in contrast to popular wisdom worsens, and does not enhance, society's predicament.

How?

One, these regulations are likely to serve as disincentive for producers or providers of goods and services to sell. Probably, they would rather hoard the stuff.

Two, it prevents pricing signals to spur production or supply to respond to changes in demand.

Three, below market prices induces significant increases in demand.

As Henry Hazlitt explains in Economics in One Lesson,

``Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.

``If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply."

Fourth, black markets are likely to emerge out of the shortages.

Fifth, more regulations will breed more corruption. Some officials will probably keep a blind eye on entities selling at "high" prices but with a "take".

Lastly, restrictions in the marketplace will even lead to further restrictions, distortions and shortages in the economy.

Again from Henry Hazlitt, ``Some of these consequences in time become apparent to the regulators, who then adopt various other devices and controls in an attempt to avert them. Among these devices are rationing, cost-control, subsidies, and universal price-fixing."

For a professional academic economist serving as President of the country, who we presume is aware of these risks, the obvious knee jerk regulatory response reflects not for the economic wellbeing of its constituents, but as political advertisement for the coming elections.

Mark Mobius: The Stock Market Rally In Emerging Markets Has Legs

The UK's Telegraph interviews Templeton's Mark Mobius who says that emerging markets stocks will continue to rally.

This from the Business Insider,

``Templeton's Mark Mobius argues that the global rally still has legs. This is partly due to massive liquidity being created globally, via both government policy and derivatives.

``Moreover, Investors shouldn't time, nor flee from, any potential corrections along the way. More nerves of steel from the emerging markets perma-bull:

"Money supply is growing at a rapid pace, globally."

"Derivatives are not dead. There's $600 trillion dollars worth of derivatives out there."

"As you know, there are always corrections in a bull market. And the corrections can be very violent, and big... nobody knows when. And if you think that you're gonna catch it, forget it, because these things move very, very fast."

In short, guru Mark Mobius sees emerging markets in a secular bullmarket from which market "timing" could result to lost opportunities.

Watch video below

TARP's Neil Barofsky: Far More Dangerous Today Than A Year Ago

Huffington Post interviews TARP's Neil Barofsky.

From Huffington Post: ``Neil Barofsky is the man who tracks the historic bailout known as the Troubled Asset Relief Program or TARP. Named in December, the 39-year-old special inspector general monitors a dozen separate ...

The interview ends with Mr. Barofsky's chilling message on the US financial system: ``We may be in a far more dangerous place today than we were a year ago"

Investment Is Now A Gamble On Politics

``Central bank will not allow large banks to fail. This means that it will not allow the fractional reserve process to implode through bank failures and the contraction of the money supply.”- Gary North, 'Dr. Deflation' Changes His Mind After 27+ Years

What amounted to one month of rainfall gushed over the Philippine metropolis in just 6 hours! In the wake of typhoon Onyok, a vast part of Metro Manila have been turned into a virtual swamp, enough for the Philippine government to declare the affected areas in a state of calamity. According to news reports, the devastating floods from the typhoon Saturday, had been the worst in nearly 40 years.

From our perspective, this serves essentially as an example of a high impact, hard to predict rare event which classifies as a Black Swan, in terms of weather.

While one may argue that the approaching typhoon was predictable, the intensity of the rainfall, according to the local weather bureau, wasn’t.

In as much as Black Swans happens in nature, it also occurs in the marketplace. And this has been a contingent that we have been striving to prepare for, so as to achieve the entrepreneurial goal of optimizing profits via risk identification and damage control.

Of course Black Swans don’t just apply from the negative point of view but can also be seen from a positive light. Technological innovations are just vivid illustrations of these.

Nevertheless the important point is to identify where the larger distribution of risks lies as possible source of market based Black Swans.

Deflation’s Ipse-Dixitism

The recent weaknesses in many parts of the global financial marketplace have been used by the bear camp, mostly populated by the deflationistas, to extol on their “bear market rally” theme.

Figure 1: Stockcharts.com: Falling Markets

For varied indicators as the falling Baltic Dry Index (BDI), Friday’s slump in oil (WTIC) and gold (GOLD), rallying US treasuries and the struggling enfeebled market leader in China’s Shanghai index seems to have all converged.

The bear camp argues that the rally has ended on the corroding effects of stimulus, recessionary forces regaining an upperhand, prices acting “way too far, too fast”, possible escalation of trade war and the demobilized consumers from exercising their extenuated spending powers.

While we don’t belong to the camp which advocates more inflation since we think inflation is immoral and generally baneful to the society, as a market participant we understand inflation to be a political process- where policymakers make political decisions of picking winners or salvaging select interest groups or industries or companies at the cost of the taxpayers.

As Henry Hazlitt wrote, `` For inflation does not come without cause. It is the result of policy. It is the result of something that is always within the control of government—the supply of money and bank credit. An inflation is initiated or continued in the belief that it will benefit debtors at the expense of creditors, or exporters at the expense of importers, or workers at the expense of employers, or farmers at the expense of city dwellers, or the old at the expense of the young, or this generation at the expense of the next. But what is certain is that everybody cannot get rich at the expense of everybody else. There is no magic in paper money.” (bold emphasis mine)

In other words, for as long as the governments attempt to vehemently prevent the required market adjustments from previously misdirected allocation of resources, mostly by promoting credit expansion and spending, and by government directly purchasing assets with “money from thin air”, they are undertaking inflationary programs.

Yet this avowed policy direction by global authorities to inflate and the penchant by several participants to adamantly insist of a deflationary outcome seem quite self contradictory.

Why the deflation risk is a bogeyman?

For one, we have noted that central banks have the capacity to match or even exceed the issuance of money to offset every outstanding liability a political economy has been blighted with, for as long as the banking system remains afloat.

Two, macro analysis looks at problems on oversimplified basis or from one dimensional aspect of product, labor and capital. Moreover, money is often seen as a constant, where marginal supply of additional money into the economy doesn’t impact prices.

In addition, macro analyses have been predisposed to models that apply only to selective and not on general conditions.

In the case where money is construed as a constant, this fitting remark from Professor Gary North, ``Whenever an economic theory of how the world works makes an exception for monetary theory, the proposed monetary theory is incorrect, or the general theory is incorrect, or both are incorrect.” (emphasis added)

Three, inflation is fallaciously anchored as mainly a consumer dynamic.

Fourth, deflationists disregard pricing levels from a relative perspective. For instance, deflationists tend to ignore the impact from technology’s early adopter buyers. More importantly, they gloss over the fundamental law of pricing based demand and supply allocations, where low prices extrapolate to higher demand.

Fifth, deflationists discount the transmission mechanism from monetary policies given today’s US dollar currency standard platform. Remember, 23 countries (wikipedia.org) are pegged to the US dollar which means these countries are fundamentally importing Bernanke’s policies.

And since debt levels and capital structure vary from country to country, the impact of recessionary forces or debt deflation or consumer spending retrenchment from bubble afflicted economies will be different from those countries importing US policies. In addition, a further variance would be the effect from applying the same home based stimulus programs.

As CLSA’s high profile analyst Christopher Wood in a Bloomberg article, ``It’s wholly wrong to view Asia as a correlated train wreck with the U.S. consumer.”

Therefore, deflation in an absolute sense signifies as ipse dixitism or unsupported dogmatic assertion.

Unworthy Paradigms: Great Depression And Japan’s Lost Decade

Sixth, deflation proponents generally make comparisons with that of the Great Depression and the Japan experience even if both circumstances have been totally different from today.

The Great Depression was a byproduct of an amalgam of:

-Massive monetary contraction (30%),

-Regime uncertainty or investors’ reluctance to participate in a perceived hostile atmosphere resulting from a string of adverse policies imposed, which appears to have threatened property rights and prevented the necessary price adjustments, such as wages.

To quote Benjamin Anderson from Robert Higgs’ Regime Uncertainty “The impact of these multitudinous measures—industrial, agricultural, financial, monetary, and other—upon a bewildered industrial and financial community was extraordinarily heavy”, and

-high taxes and protectionism amidst a recession which metamorphosed into a depression [see earlier post Lessons From The Great Depression: Taxes, Protectionism and Inflation].

Japan's stagnation, on the other hand, which has been popularly but erroneously known as suffering from deflation (technically defined as contracting money supply), had likewise been a consequence of a mélange of regulatory mess, particularly high tax regime, policies that propped up the legacy of obsolescent zombie industrial companies [see Asia: Policy Induced Decoupling, Currency Values Aren’t Everything], reluctance to liberalize due to cultural idiosyncrasies (bad management of companies due to interlocking relationships among companies and the ``disdainful of the idea of shareholder value and of traditional profit metrics” notes James Surowiecki) and the conflict of interest issues from Japan’s bureaucracy which embraced state capitalism.

The recently victorious Democratic Party of Japan (DPJ) declared it would reduce the latter’s influence, but the question is always HOW?

Moreover, Japan’s lost decade has been largely insulated from the world as most of its liabilities had been denominated in local currency. The culturally high savings quirk by the Japanese financed most of the failed boondoggles during the nearly 2 decade long of stagnation. However, demographic issues (which has been depleting savings) and current conditions (weaning off from the US consumers and reorienting trade towards China and Asia) imply that the old model is about to make a major transformation.

MAD “Mutually Assured Destruction” Policies

Seventh, deflationists often switch gears from using the monetary aspects to excess capacities or current account balances or non-monetary (usually trade) dimensions in rationalizing deflation on a global scale or data mine facts to fit their arguments.

For instance, the Global Savings Glut theory has been prevalently used as an attempt to shield the US from policy flaws which pins the blame on “currency manipulation” by Asian savers.

Hardly anyone from the mainstream incorporates the role of the US dollar, as the world’s de facto currency reserve, in the discourse of the origins of today’s imbalances.

Professor Robert Triffin rightly predicted more than 40 years ago of the accruing imbalances that a reserve currency would endure. That’s because of the incremental tensions which would amass from conflicts of national monetary policies vis-à-vis global monetary policies (provider of international liquidity). This is known as the Triffin dilemma, where the reserve currency can remain overvalued from which it would continue to accumulate deficits or undergo proportional devaluation in order to stabilize or shrink deficits [see previous discussion in The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency].

So while the mainstream goes into a perpetual blaming spree alongside with their sanctimonious omniscient prescriptions, they don’t seem to realize that this has been the operating nature of reserve currencies, especially from a “paper money” standard.

Moreover, the recent trade dispute between US President Obama and China over increased tariffs over tires have breathed “protectionism” as an excuse for deflation.

Figure 2: BCA Research China: Tempest In A Teacup, For Now

While the risk of an escalation of a trade war appears plausible, I am predisposed to the view that these politically motivated actions has been designed to wangle some short term deal with vested interest groups, particularly the labor union-the United Steelworkers or protectionist policymakers.

However we share the optimism with BCA Research when they wrote, ``However, there are good reasons to believe that the recent tensions are likely to be contained. For one, the amount of trade in question is a tiny fraction of total trade flows between the two countries. Chinese sales of tires and steel pipes to the U.S. amount to about US$4 billion a year (compared to $US230 billion of total Chinese exports to the U.S.). Meanwhile, Beijing’s action in taking the trade dispute to the WTO shows China’s willingness to resolve disputes within the legal framework of international trade rather than via direct bilateral confrontation. Overall, the Obama administration’s seemingly toughened stance towards China-related trade issues is mainly a maneuver designed to garner domestic political support rather than an outright intention to wage a trade war. The biggest risk that could significantly heighten trade tensions and economic confrontation is if the U.S. government and lawmakers once again challenge China’s exchange rate policy and tax rebates for its exporters. Bottom line: Chinese authorities will likely continue to focus on the big picture of promoting domestic growth, so long as there is no systematic challenge to the country’s trade and foreign exchange policies to complicate its growth-boosting strategy.” (bold underscore mine)

Put differently, the Tire tariff was perhaps meant as diversionary tactic or as a concession in order to diffuse far larger protectionist tensions held by some quarters in the august halls of the US congress. In short, if we are right, the controversial enactment of the Tire tariff appears to be more symbolic than of a real risk.

In addition, it would also be plain naive to extrapolate for the US to arbitrarily lure China into a trade war when US officials are aware that the Chinese holds the largest share, about $800 billion (as of July), of US treasuries or nearly a quarter share of the foreign owned pie see figure 3.

Figure 3: Wikipedia.org: Foreign Holders of US Treasuries

As the legendary trader Julian Robertson of Tiger Management says in a recent CNBC interview, ``“We’re totally dependent now on the Chinese and Japanese” [as posted in Julian Robertson: We are going to have to Pay the Piper].

In short, President Obama significantly depends on China, Japan and Asia’s largesse to sponsor his administration’s “borrow and spend” program.

This also means that it would be utter lunacy, if not suicidal, for Pres. Obama to engage in mutually assured destructive (MAD) policies, which should hurt more of the US than China. Further this would accelerate the inflationary process in the US (…unless this serves as an opportunity for the US to seize the moment from a hostile China response to be used as a Casus Belli to declare a default! But the US owes Japan and the rest of the world too.).

Since there will be lesser access to savings globally, the court of last resort will be Chairman’s Bernanke’s printing press.

Here, Mr. Robertson estimates 15-20% annual inflation rates for the US once China and Japan desists from financing the US.

Scared Of One’s Own Shadows

Last and most importantly, deflationists belittle the role of central banking in the economy and the economic ideology underpinning the global political leadership.

In short, deflationists rule out the ramifications from the political aspects of government intervention in the economy.

It is also kindda odd to see some deflationist scared to wits about the prospects of deflation when they have been influenced by the same ideology that espouse on government intervention that paves way for the inflation-deflation boom bust cycles. It’s analogous to being afraid of one’s own shadow.

Deflation basically comes in two forms. One is a consequence of inflationary policies. The other is an outcome of productivity, which means economic output greater than the supply of money. This had been much of the case during the gold standard based, Industrial Revolution.

Nobel prize winner Friedrich A. Hayek in a speech about Choice In Currency, A Way To Stop Inflation eloquently describes the shift from stability into today’s woes,

``The chief root of our present monetary troubles is, of course, the sanction of scientific authority which Lord Keynes and his disciples have given to the age-old superstition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment. It is a superstition against which economists before Keynes had struggled with some success for at least two centuries. It had governed most of earlier history. This history, indeed, has been largely a history of inflation; significantly, it was only during the rise of the prosperous modern industrial systems and during the rule of the gold standard, that over a period of about two hundred years (in Britain from about 1714 to 1914, and in the United States from about 1749 to 1939) prices were at the end about where they had been at the beginning. During this unique period of monetary stability the gold standard had imposed upon monetary authorities a discipline which prevented them from abusing their powers, as they have done at nearly all other times. Experience in other parts of the world does not seem to have been very different: I have been told that a Chinese law attempted to prohibit paper money for all times (of course, ineffectively), long before the Europeans ever invented it!”

So it is another deeply held erroneous belief that deflation is the greater evil, when 200 years of the gold standard brought about great prosperity. This is in contrast to today’s deepening intermittent boom bust cycles, which only enriches only certain segments of the society and hurts the rest of society when a bust transpires.

Deflation from an inflation bubble simply cleanses the system.

Yet the same camp of deflationists argues for more inflation.

From UK’s Prime Minister Gordon Brown (quoted by Bloomberg), ``The stimulus that we have still got to give the world economy is greater than the stimulus we have already had. What we want to do is safeguard a recovery from a recession we feared would develop into a depression.”

Moreover, the US Federal Reserve recently decided to extend and complete its $1.25 trillion buying program into the mortgage market. According to Bloomberg, ``The central bank has purchased $694 billion of mortgage- backed securities since January and plans to spend $556 billion more by April 2010 to keep interest rates down. The debt-buying is the biggest program in the Fed’s arsenal.”

Isn’t these powerful signal enough, a manifestation of both economic ideology and policy direction? It’s more than just words or propaganda, it reflects action in progress.

And as we argued in Governments Will Opt For The Inflation Route and last week’s A Deeply Embedded Inflation Psyche, for us, it has been a policy tool for the US Federal Reserve to juice up the stock market for the same reasons- economic ideology (to paint the impression of economic recovery by reanimating the irrational “animal spirits”) and policy direction.

As we previously pointed out, the US government today stands as THE mortgage market, why is this so? Aside from trying to “stabilize” the mortgage market, the US banking system holds tonnes of assorted mortgages on their balance sheets.

In short, the US government has been preventing the outright collapse of some important segments of its banking system by providing implicit guarantees on the banking system’s assets.

Moreover, the US government has also acquired ownership representation among the biggest financial institutions. This acts as another form of implicit guarantee.

Aside, the ownership accounts for interventions or interferences aimed at conveying its political objectives into the company’s business operations.

Further by undertaking quantitative easing, the US Federal Reserve reliquefies the marketplace by acting as market maker of the last resort to the illiquid markets.

If the US Federal Reserve hasn’t been the key influence of the stock market, why would issues, which accounted for most of the recent government rescues, have accrued most of the jump in the trading volume at the NYSE? (See figure 4)

Figure 4: William Hester: Without Phoenix Stocks, Volume Continues to Contract

According to William Hester of Hussman Funds (bold highlights mine), ``But almost the entire rise in volume during the last month and half has come from a handful of stocks. Examples include Fannie Mae, Freddie Mac, Citigroup, AIG, and Bank of America. These are just five. There are a couple of other stocks that are interchangeable with these companies and would produce similar results – but the characteristic they all share is that they are financial stocks that only recently were on the brink of collapse. And since the Government's rescue of these and other financial firms, the group has risen up from the ashes. For ease of reference, we'll call these Phoenix stocks.

``The rise in trading volumes in some of these stocks has been considerable. The shares of AIG now often trade with 15 times the volume they traded a year ago. Citigroup has traded at 12 times the amount from a year ago. This helps explain why the trades in these companies' shares are taking up a larger fraction of total share volume.”

Has US government zombie institutions been using their excess reserves or proceeds from the Fed’s QE reliquification program to trade their own shares or trade shares among themselves?

Figure 5: Andy Kessler: Monetary Base versus Dow Jones

Is it just merely a coincidence that monetary base has been growing while stock market has been rising (see figure 5)?

Some would argue, but the other money aggregates have turned south. However, what if banks haven’t been lending but instead speculating on assets?

Besides, there has been no clear agreement as to which of the monetary aggregates should serve as the true representative or as accurate indicator of money conditions in the US or globally. This makes the chart above “correlated but not causal”, as much as those arguing the opposite.

Further, the boom in the bond markets has also revealed that credit has been expanding but has been short circuiting the banking system.

By going direct through the capital markets, credit intermediation hasn’t triggered the banking system’s fractional reserve platform, hence hasn’t been reflected in traditional monetary aggregates.

All told, deflation seems more like a bogeyman widely used to justify more politicization of the marketplace.

Investment Is Now A Gamble On Politics

There are two more very significant developments the deflationists have sorely missed.

The recent weakness in the markets in gold, commodity and China hasn’t triggered a meaningful jump in the US dollar index to confirm the debt destruction and the impotence of central banking, similar to the meltdown of last year.

Moreover, it hasn’t reflected a general tightening of credit conditions out of default fears…yet.

Figure 6: Danske Weekly Credit

As you can see from the Danske Charts above, major credit indicators have all turned lower or has materially improved, all of which hasn't been emitting any trace of “deflation” tremors.

Moreover, there have been reports that the Fed has been exploring ways to tap the funds from the money market to implement its exit strategy. According to the Yahoo Finance ``The Fed would borrow from the funds via reverse repurchase agreements involving some of the huge portfolio of mortgage-backed securities and U.S. Treasuries that it acquired as it fought the financial crisis, the newspaper reported, without citing any sources. This would drain liquidity from the financial system, helping to avoid a burst of inflation as the economy recovered”. (emphasis added)

Yet analyst like Zero Hedge’s Tyler Durden sees this as one of the many subterfuges employed by the FED to “reflate” the system.

This from Mr. Durden (bold highlights mine), ``And the Fed finds a way to screw everyone over yet again. Contrary to expectations that the Fed will use reverse repos to remove excess liquidity (which, by definition, such an action would) it appears that Bernanke's wily scam is to push even more money out of money market funds and into capital markets. Even though banks currently have about $800 billion in excess reserves which the Fed is paying interest on, and which would be a damn good source of liquidity extraction as the Fed considers to shrink its ever expanding balance sheet, the Chairman is rumored to be considering money market funds as a liquidity source…All in all, the Chairman is determined, come hell or high water, to part consumers with their savings: whether it be through zero deposit interest rates, through money market guarantee removals, through talk of inflation or, ultimately, through actions like these. After all, America has gotten to the point where the Fed is beating the drum on the need to keep blowing the capital market bubble bigger and bigger: anything less, and just as Madoff investors discovered, the entire pyramid collapsed overnight, and where people thought there was $50 billion, there was really $0.”

In addition, even while the Fed has declared that it would undertake the completion of its $1.25 trillion QE program by buying $556 billion more on mortgages, there seems to be a problem, it is only left with an estimated $10 billion for US treasuries which is expected to be expire by October.

This implies that should foreign central banks continue to recycle their surpluses on short term Treasury bills, the yield curve should soon steepen as the long end rises (on condition that the Fed holds course by not additionally monetizing US treasuries).

And rising treasury yields places further constraints or pressures to the financing of US government programs.

This from Professor Michael S. Rozeff (all bold underscore mine), ``The government will have problems funding its programs. It will be under pressure to raise taxes and cut back on its programs. Since it will be reluctant to do either, the problems will fall upon the dollar and on the government debt. This will place the government in an untenable position because the higher interest costs of the debt will add to the deficit. A negative feedback cycle will occur in which deficits cause higher interest costs which cause more deficits which cause higher interest costs, and so on. No amount of taxation can solve the government’s fiscal problem that lies ahead. Greater taxes will only make them worse by slowing the economy. That option is foreclosed.”

Ultimately, this brings us to the potential outcome of deflation-inflation debate.

Again Professor Rozeff, ``The two problems – the dollar and debt – are joined. If the FED tries to save the dollar, it affects government debt adversely. The FED can relieve pressure on the dollar by deflating its bloated balance sheet. To do that it needs to sell off the mortgage-backed securities that it has accumulated and not buy the rest that it is now in the process of buying. If it ever does sell off these securities, it will pressure the government debt market. This is very unlikely. Instead I expect it to pay interest on reserves, which will not solve its problems and will only add to the government deficit and start an exponential process of increase in interest paid. If the government tries to save the debt market by having the FED support it as it is now doing, that affects the dollar adversely. The central bank and the government are between a rock and a hard place. One or the other or both of the dollar and the debt are slated to have problems. Enactment of Obama’s health care and energy measures, even in diluted form, will confirm the existing course. Their rejection will be more favorable for the dollar and for government debt. As the political winds shift, so will the fortunes of the dollar and the government debt markets. Investment is now a gamble on politics.”

In short, the US government, not the US consumers, has become the ultimate driver of marketplace. And investing returns would mean reading accurately from political tea leaves.

And once emergent weaknesses in the marketplace becomes increasingly pronounced, governments will be expected, given their Keynesian interventionist ideology, to massively re-inflate the system to the point where the political option would translate to the extreme choice of ‘Mises moment’ endgame: relative deflation possibly via a default or a currency crisis.