Global Markets Violently Reacts To Signs Of Political Panic

``Obviously the thing to do was to be bullish in a bull market and bearish in a bear market.”-Jesse Livermore

We don’t share the view with the Perma bears that this is the return of the bear market.

A technical trend break in chart trends does NOT automatically translate to a bear market. Besides charts are a menagerie of past information which does not suggest any infallible concept about the future outcomes.

And neither was last week about world credits being repriced nor about the adverse debt developments in the US.

Figure 4: Danske Bank: German short-sell ban rattles markets

To the contrary, sovereign debt papers of the US, Germany and Denmark were chief beneficiaries of last week’s turmoil (see figure 4 right window). So while we are seeing some emerging tensions in money markets via interbank funding rates (left window), they are yet substantially distant from the cataclysmic heights in post Lehman episodes of 2008.

Of course the $64 billion question is, are we headed there? My reply is a likely no.

Why?

Because most of adherents to this school sees markets as being immobilized by debt, which is simply not true.

To quote Murray Rothbard[1], (bold highlights mine)

``What deflationists always overlook is that, even in the unlikely event that banks could not stimulate further loans, they can always use their reserves to purchase securities, and thereby push money out into the economy. The key is whether or not the banks pile up excess reserves, failing to expand credit up to the limit allowed by legal reserves. The crucial point is that never have the banks done so, in 1990 or at any other time, apart from the single exception of the 1930s. (The difference was that not only were we in a severe depression in the 1930s, but that interest rates had been driven down to near zero, so that the banks were virtually losing nothing by not expanding credit up to their maximum limit.) The conclusion must be that the Fed pushes with a stick, not a string.”

UNLESS this time is different I simply can’t see how Zero interest rates combined with suppressed inflation will prompt for catastrophic markets.

Throughout Japan’s lost decade, as we previously discussed[2], we haven’t seen her market’s crash when interest drifts at the zero level.

While it may be true that government actions in solving today’s predicaments may be reaching diminishing returns, zero interest rates and dampened inflation provides government extended leeway to conduct activities as noted by Mr. Rothbard above.

And while Eurozone[3] and the UK[4] have been witnessing accounts of rising consumer price inflation to a 16 and 17 month highs respectively, they haven’t reached levels that could stymie government actions.

Moreover, as previously noted[5], the premise of diminishing returns is exactly the main reason why the scale of rescues have been constantly swelling. Unless we see global governments willing condescend to market forces, and accept the limits of central banking, this isn’t likely to happen yet.

But recent events only prove that this is exactly in the opposite direction.

Germany’s Signs Of Desperation

Just last week, the arrogance of trying to prevent markets from revealing the true nature of balance sheet impairments of subprime Europe prompted Germany’s chancellor, Angela Merkel, to slap a ban on naked short selling on credit derivatives, euro bonds and select financial equities[6].

European authorities similar to Filipino voters have little incentives to learn from past experiences. Never mind that the US tried the same approach in the wake of the Lehman bankruptcy that exacerbated if not helped triggered the October 2008 crash.

And we seem to be seeing the same market response.

According to the Danske Research Team[7], ``The reason for introducing the ban on naked short-selling is that BaFin wants to reduce the extraordinary volatility that has been witnessed but the immediate market reaction suggests that the contrary has been accomplished and the euro has weakened further against the dollar. In the credit market, sovereign CDS tightened dramatically (short covering) whereas the corporate indices widened – the reason probably being the uncertainty that has been created in the playing field.” (bold highlights mine)

So regulatory risks has been exacerbating the market’s meltdown.

To wit, there have been accounts of massive capital flight[8] from Germany to Switzerland, which according to some reports, prompted heavy foreign exchange intervention[9] by the Swiss National Bank (SNB).

Moreover, there have also been emerging signs of political schism in the Eurozone, the surprise ban on short sales, which had purportedly been meant to shore up political support for Germany’s approval of the Euro’s bailout, hasn’t been well received by France[10], while other EU nations remain undecided. The following day the Germany approved of the bailout[11].

Earlier much of EU’s actions have been tilted in favour of France; where Germany argued for Greece to solve her own problems while France favoured a bailout and where Germany was initially in favour of marginal support while France’s Sarkozy wanted a “shock and awe”.

According to Gordon Long[12], ``It's in Sarkozy’s interest to fight for a US-like Keynesian solution with excess money printing. This would "kick the can down the road" and avoid an impossible "austerity cuts" war with French unions and workers.”

Obviously we seem to be witnessing public choice theory at work anew, where political self-interest interests among policymakers continue to trump the markets.

So political risks from the discordant and unilateral policies seem to be worsening the uncertainties in the marketplace. And this has led to last week’s market carnage.

Moreover, one can infer that these actions signify as signs of panic and act of desperation by EU authorities. So while governments in panic can be indicative of a bottom or present itself as buying opportunities, the obverse side is that desperate actions can lead to reckless policies that could backfire. The ban in naked short selling is an example.

But as we have long been pointing out[13], politics will be the order of the day. And to this point we are being validated anew.

So until we see signs of restoration of order and confidence in terms of policymaking, the likelihood is for continued volatility in global markets.

But I’d like to reiterate that that this isn’t the 2008 meltdown, where most of the actions from last week seem to emanate from regulatory risks and from political risks rather than from a seizure in the banking system caused by quasi ‘electronic’ bank runs and the subsequent drying up of trade finance.

In short, the nature of market stress has been entirely a different animal.

Even the Federal Reserve’s swap facilities which it has recently reopened, has had less takers, if not entirely “no new demand”[14]. This hardly implies of credit stress but again most likely from political and regulatory oriented strains.

Furthermore, there is a chasm of a difference between administrative politics and the politics in the financial-economic sphere. The latter is where markets have been greatly influenced as the drama in the Eurozone has exhibited.

Contrasting China And EU’s Predicament

Finally I’d like to point out that there’s a big difference between the developments in China and the Eurozone.

In China, governments have been fighting a brewing bubble by attempting to contain surging asset prices, particularly property prices, from credit expansion. (see figure 5)

Figure 5: US Global[15]/ Danske Bank[16]: Money Supply and Inflation

In Europe, governments have been trying to contain the debt crisis by inflating the system.

In other words, you have two (set of) governments fighting different monsters with slightly opposite measures.

As you can see in the left chart, China’s money supply appears to be shrinking. And this may have prompted for the recent collapse in Shanghai Stock Exchange (SSEC) and a possible easing of her property markets.

And as pointed above, the bubble strains isn’t just being manifested in surging property prices but also in consumer price inflation (right chart).

Hence in my view, the odds of a bust look greater in China than in Europe at the present moment, considering that rising consumer price inflation and asset bubbles are likely to retrain the hand of the authorities. Although markets appear to be saying that both are in a bust now, I wouldn’t bet on it.

As noted above, governments coordinating to pump massive amounts of money into the system will have to go somewhere.

Moreover, austerity measures that should affect economies such as Greece is only a sliver to the economic recovery being seen in most of the Euroland, Spain and Italy included (see figure 6)

Figure 6: Danske Bank[17]: Euroland: Between robust data and political risk

Europe’s manufacturing indices PMI appears to be at an upside momentum while business surveys IFO remain positive, in spite of the unravelling crisis.

So unless you expect the markets to suffer from more convulsions out of concerted shrinking of supply of money, which will be the only way for a coordinated meltdown, possibly through simultaneous collapses in the banking system, I highly doubt this scenario would occur.

Especially not with governments putting implicit, if not explicit guarantees, in the banking system, and especially not with governments frantically throwing money at every known social problem.

Of course, the other major risk would be to severely impede or even restrict movements in the capital markets, but that would be opposing the interests of the banking system from which global governments have toiled so hard to save.

As previously shown, governments can put them to public trial for theatrics, but at the end of the day, they’d scamper to rescue once signs of distress emerge.

The recently passed new financial regulation bill in the US will hardly change the politics of banking cartels and the central banking system.

And as the EU drama shows, rules will be bent for political conveniences.

---

[1] Rothbard, Murray N. Lessons of the Recession Making Economic Sense p.220

[2] See What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?

[3] Bloomberg, European Inflation Accelerates, Exports Increase

[4] BBC.co.uk, UK inflation hits 17-month high

[5] See The Euro Bailout And Market Pressures

[6] See Germany Bans Short Selling, Another Scapegoating The Markets

[7] Danske Bank, German ban on short−selling dampens the mood

[8] Pritchard, Ambrose Evans Germany's 'desperate' short ban triggers capital flight to Switzerland

[9] Alloway, Tracy, Swiss franc intervention cost a billion a day in April, FT Alphaville

[10] Wall Street Journal, Taking the Naked Ban to a New Level

[11] BBC.co.uk, Germans approve euro rescue plan

[12] Long, Gordon T., What Will Come of the Euro Experiment?

[13] See Why The Greece Episode Means More Inflationism

[14] Wall Street Journal, Lack Of Demand For Fed Currency Swaps Plus For Markets

[15] US Global Investors, Investor Alert, May 14, 2010

[16] Danske Bank, China: Solid growth and higher inflation clear the way for revaluation

[17] Danske Bank: Euroland: Between robust data and political risk

KPMG on Tax Competitiveness

Here is an interesting report on Tax competitiveness from KPMG.

Using the US as the benchmark, KPMG finds that among 10 countries Mexico has the lowest total taxes (taxes include corporate, sales, property, capital, miscellaneous business taxes, statutory labor costs)

The above is the ranking....

Below is the composition of taxes...

The study incorporates 41 cities from these 10 nations.

Read the rest of the report here

A Speech That Will Inspire My Vote

One day I dream** to see Filipino politicians talk and act in this direction...

``This government is going to transform our politics so the state has far less control over you, and you have far more control over the state.

``This government is going to break up concentrations of power and hand power back to people, because that is quite simply how we can build a society that is fair....

``Landmark legislation, from politicians who refused to sit back and do nothing while huge swathes of the population remained helpless against vested interests.

``Who stood up for the freedom of the many, not the privilege of the few.

``And it's that spirit this government will draw on as we deliver our programme for political reform:

``A power revolution.

``A fundamental resettlement of the relationship between state and citizen that puts you in charge.

``Today I want to talk about how we'll get there.

``Three major steps, that will begin immediately:

``One: we will repeal all of the intrusive and unnecessary laws that inhibit your freedom.

``Two: we will reform our politics so it is open, transparent, decent.

``Three: we will radically redistribute power away from the centre, into your communities, your homes, your hands.

``Big, sweeping change.

``Not incremental, not bit by bit.

``Our democracy has suffered at the hands of encroaching centralisation and secrecy for decades.

``Take citizens' rights: eroded by the quiet proliferation of laws that increase surveillance, quash dissent, limit freedom.

``Take executive authority: consistently increased by successive administrations to the point that we now have a neutered parliament and government that enjoys almost untrammelled control - over precisely the people who are meant to keep it in check.

``Take the welfare state: one of modern society's greatest liberators - now utterly different to that envisaged by Beveridge because of the sheer degree of centralised control and micromanagement.

``Britain was once the cradle of modern democracy."

That's a snippet from Deputy Prime Minister Nick Clegg's recent speech on political reform. (all bold emphasis mine)

Where liberty and freedom becomes the issue of focus, along the line of Mr. Clegg's speech, then I know the Philippines will be on path to true prosperity.

And that will be also the time when I will be an active voter.

**At the first statement of this post, I purposely used "dream" instead of "hope" for the reason that espousing politics of principles would be a near impossibility given the tendencies of almost all local politicians to resort to messianic nostrums as motivation to generate votes by popularity or enhance approval ratings.

Liberty and economic freedom is basically alien here. Everyone likes to be personally free, but desires the others to be unfree.

Moreover, Filipinos want to believe that they are free by virtue of elections, never knowing that after elections freedom shrivels.

When political freedom isn't accompanied by economic freedom and personal liberty, then I understand this to be an artifice; an illusion.

Hernando De Soto: Unclear Property Rights And Complex Rules Led To Market Crashes

In a recent interview, the illustrious economist Hernando De Soto, author of The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, suggests that complicated and opaque laws, which muddles up the property rights issue, has prompted for the latest market crashes.

On the rule of law...

"when it comes to property rights: most of the world is still in the 19th century. During that time period, the US put all their property information on paper. These "rule of law" standards identified who owned what property - this system is still viable today...

"when independence, solidarity and individuality function under the "Rule of Law, all players are on the same playing field; that is the rules apply the same to all [but note, this concept is non-existent in many parts of the world]. South American and African nations borrowed their laws from their colonizers. In contrast, anarchy has many laws within the same territory.

my comment: In an earlier post Are People Inherently Nihilistic?, we said that the term "anarchy" comes with different references. Here, Mr. De Soto appears to imply that anarchy (or perhaps defined as market turmoil) was caused by the many intricate laws within the same territory, which brings us to the next topic...

De Soto's view on property rights and rule of law's role in today's market crash...

``The basic problem with the financial meltdown today is that with all the convoluted derivatives, trades, bundling, etc. the US does not know where its financial paper is. Thus, the US cannot define who is solvent and who is not. The "Rule of Law" comes into play because property ownership is based on a paper trail. Since the paper trail is incomplete regarding detailed ownership of the property underlying the complex derivatives that were sold in the financial industry, no one knows who owns exactly what and what it is worth. As a result, trust plummets."

my comment: so the questionable application of the "rules" which has led to the ambiguous stance on ownership rights has prompted for a lost of trust or "anarchy".

Besides, excess and poorly defined regulations have prompted for regulatory arbitrage, regulatory capture, administrative lapses by regulators (because of sheer volume of laws, enforceability issues and possible confusion) and amplifies conflict of interest among participants or agency problems. And all these get to be reflected on distorted price signals. I'd like to add that inflation, as a hidden tax, is a major contributor to De Soto's property rights-rule of law dilemma.

In Greg Ransom's Hayek Center (where I sourced this, thanks Greg...) adds that... (bold highlight mine)

``My ancestors recorded property right claims with a central registrar in the no-mans land of Oregon when the region had no legitimately recognized government. The people of the region followed customs of law and governance share among the English and Americans, with the anticipation that their property rights claims would later be recognized by the U. S. government when the region became part of the United States. The story is recounted in Nimrod: Courts, Claims and Killing on the Oregon Frontier by Ronald Lansing of the Lewis & Clark School of Law. Yes, remarkably enough, the story is a murder mystery."

my comment: more evidence that property rights had been observed outside of the realm of government.

More Evidence On Liquidity Driven Markets

We have long asserted that markets have hardly been driven by 'fundamentals' but by either rising or ebbing tides prompted by inflation and inflation fueled psychology.

Today's market downside volatility appears to be showing the same manifestations in the US markets.

Let me quote Bespoke (bold highlights mine)

``One day in early April, 93% of stocks in the S&P 500 were trading above their 50-day moving averages while 7% were below their 50-days. Now the exact opposite is true -- 7% are above their 50-days, while 93% are below. And just like the reading rarely stays above the 90% level for long, it also rarely stays below the 10% level. As shown in the chart below, the indicator is currently at its lowest level since March 2009 when it hit 5%. During the depths of the collapse in late 2008, the reading got down to zero percent. At this point, investors have to decide whether or not they think things could get as bad as they did in late 2008."

So whether an upside or a downside, we seem to be seeing the same dynamics--where most of the movements of stock prices seem to be reflecting ebbs and flows of liquidity rather than individual performances based on micro dynamics.

To consider, US markets are deeper and more sophisticated as to supposedly exhibit more market pricing efficiencies, yet they appear to remain prone to changes in liquidity levels.

How much more with bourses of the lesser developed markets.

This reminds us of a quote from the legendary trader Mr. Jessie Livermore in Edwin Lefevre classic the Reminiscences of a Stock Operator

``Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature."

Yet, this seems to be another affirmation of our Machlup-Livermore paradigm

Japan's Deflation: Evidence of Rising Productivity

Is deflation a menace?

Not if we take it from Japan's recent economic performance.

This from Japan Times, (bold highlights mine)

"The economy grew at its fastest pace in three quarters as an export surge prompted companies to increase capital spending even as the nation endures persistent deflation at home.

"Gross domestic product rose 4.9 percent pace in the first three months of 2010 at an annual rate, less than forecast, a Cabinet Office report showed Thursday. So-called nominal GDP, which is unadjusted for price changes, increased 1.2 percent on a quarterly basis, the most in a decade.

"The Cabinet report shows that more than half of growth came from trade, with consumer spending contributing less than one-fifth to the expansion. Finance Minister Naoto Kan warned within minutes of the release that the economy continues to be in a deflationary state and kept up his pressure on the Bank of Japan to sustain its efforts to halt the slide in consumer prices."

Chart from Trading Economics

Falling consumer prices means MORE purchasing power. Stated differently, if you can buy more goods with the same amount of money how can deflation be bad?

Proof?

Again from the same report,

"The export-fueled rebound also started feeding into wages and the labor market. Earnings rose for the first time in 22 months in March and the ratio of job openings to applicants advanced for a third month."

So rising earnings, wages and more employment seem to be manifesting a productivity driven deflation dynamics or people are producing more than money is being printed by the authorities.

Yet mainstream experts and the media seem to be seeing it differently,

"The reliance on overseas demand may also be a vulnerability as Europe's debt crisis sparks concern about the durability of the global economic recovery.

"The best thing Japan can do is to bring inflation back to their economy," said Huw McKay, a senior international economist at Westpac Banking Corp. in Sydney.

As shown above, media through quoted mainstream analysts prescribe that the Japanese should earn less, pay for higher prices for consumer goods and services, go for debt driven expansion, see a boom-bust cycle and become less productive, which all translates to less prosperity.

As Ludwig von Mises rightly argued,

``Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."

Politics And Markets: Bangkok Burns Edition

How are financial markets and political turmoil correlated?

Not much if you ask me.

This would largely depend on the underlying issues involved. Financial markets appear to be more sensitive to financial issues such as capital controls or debt anxieties than simply compared to domestic political turmoil.

News headlines such as this, "Bangkok Burns Amid Army Crackdown", highlight the unfolding mayhem in Bangkok, Thailand.

Photo from Star-Telegram

The common impression built upon or associated with such chaos would translate to a collapse in the markets, going by media's logic.

But how true is this?

Thailand's SETI is still up year to date as shown in the above chart from stockcharts.com and seems insouciant to the ongoing violence.

And it would seem that Thai markets are even more correlated to the gyrations in the US (as shown by the SPX below). The right vertical line reflects on the latest correlation while the left vertical line marks the start of the year performance.

And it's not just in stocks, but likewise reflected on the Thai Baht (chart from yahoo). True enough there has been a little downswing in the Baht, but this occurred before the violence, and seems likely to reflect more on external factors than the present political predicament.

Nonetheless, the Baht appears to be advancing of late in spite of the Bangkok Burning edition.

Bottom line: Financial markets and political developments don't have strong correlations or the causal link is tenuous. In most cases, they are merely subject to the available bias fallacy by media, which is why the public should learn how to distinguish between real forces and mere rationalization.

The same holds true for the Philippines, which is why the local markets surged in spite of nonsensical chatters of election "failure" risk during the campaign period of the recently completed national elections.

Philippine Post Election Analysis: 2010 Election Theme and The Runoff Theory

My earlier post about election runoffs and the impossibility theorem have led me to ponder more about counterfactuals or how elections would have resulted if we had a majority based way of selecting our leaders.

Taking a glimpse at the survey leading to the elections, we find that Presidential candidate Noynoy Aquino as practically having maintained the same share level in voter preference from November to May, as shown by the chart courtesy of Social Weather Survey
And it would be further interesting to note that there seems little change in the distribution even prior to the declaration of candidacy by the other contenders last November.

This from Pulse Asia,

``Compared to the October 2009 Ulat ng Bayan survey, the support for Sen. Aquino III remains virtually unchanged. On the other hand, there is a significant improvement in voter preference for former President Estrada (8 percentage points, from 11% to 19%) and marginal increases in the support for Sen. Villar (+4 percentage points, from 19% to 23%) and Lakas-Kampi-CMD standard bearer Gilbert ‘Gibo” Teodoro (by 3 percentage points, from 2% to 5%)."

In short, the 2010 Presidential election THEME appears to have revolved around a pro-Aquino versus anti-Aquino camp. Unfortunately, the votes of the latter had been distributed among 8 contending parties. Therefore, the landslide victory by candidate Aquino.

While the elections did show the rankings of first preference of every voter, it doesn't reveal the second or third preferences needed to ascertain a mathematical estimate on the possible alternative outcome.

But the distribution presented in our original post and the discerned dynamics from the voting patterns (pro Aquino versus anti Aquino) seems to echo an outcome from Mr. Arrow's Impossibility Theorem.

Bottom line: under an election runoff or if the elections were reduced just to two participants, Mr. Aquino's victory isn't all that certain.

Philippine Elections: In A Hypothetical Runoff Elections, Will Noynoy Aquino Still Be The Winner?

Perhaps not.

That's if we base this on Kenneth Arrow's Impossibility Theorem.

Just a reminder, in the Philippines we have a plurality and not a majority representative government, therefore, runoff elections are precluded.

Runoff elections by definition is a "two-round system (also known as the second ballot, runoff voting or ballotage) is a voting system used to elect a single winner."

In other words, if we were to pursue a majority representation, then the top two contenders, Aquino and Estrada would have to compete again in a second round of elections to secure the top spot through a majority vote.

Perhaps we can talk about more of this once the final outcome have been declared.

Anyway, what may be popular may not be the actual. Professor Don Boudreaux lucidly explains how under the "Impossibility Theorem" the outcome of the popular elections may dramatically change, under a runoff.

And when applied to Philippine national elections the outcome may be a surprise.

Here is Professor Boudreaux,

Suppose there are nine voters.

Voters 1, 2, 3, and 4 each prefer candidate A to candidate C and candidate C to candidate B. That is, each of these four voters ranks the three candidates as such: A>C>B.

Voters 5, 6, and 7 rank the candidates like this: B>C>A.

Voters 8 and 9 rank the candidates like this: C>B>A.

In the general elecation, A will receive 44.4 percent of the vote (4 of 9 votes cast); B will receive 33.3 percent of the vote (3 of 9 votes cast); and C will receive 22.2 of the vote (2 of the 9 votes cast).

[my comment- this looks somewhat like the distribution share of the still pending final count for Presidential election results- where Aquino has 40.19%, Estrada has 25.46% and Villar has 14.22% (wikipedia.org). To consider the above theory is based on 3 contenders while we have 9 contenders for the recent election!]

Because no candidate won a majority of the vote in the general election, a runoff election is held between the top two vote-getters from the general election: candidates A and B.

In the runoff election, candidate B will win 55.6 percent of the vote (5 of 9 votes cast). B will then be sworn into office, presumably as the voters’ preferred candidate.

But look more closely. Suppose that the candidate who received the fewest votes in the general election – candidate C – were to run against candidate B in a runoff election. Which of these two candidates would win? Answer: C. In such an election, C would win 66.7 percent of the vote (6 of 9 votes cast), thus trouncing candidate B! (Also note that if a runoff election were to pit C against A (the candidate who received the most votes in the general election), C would also defeat A: C would get 55.6 percent of the vote (5 of 9 votes cast) to A’s 44.4 percent (4 of 9 votes cast).

So is it correct to say that candidate B is the voters’ most-preferred candidate? Clearly not.

Nevertheless, Professor Don Boudreaux concludes, ``The point of this exercise is to make clear that describing the winner of any fair and honest election as being the ‘choice of the voters’ is fraught with potential inaccuracies."

Indeed.

Germany Bans Short Selling, Another Scapegoating The Markets

Governments almost always believe that market has been the culprit for most of the ills in society. And that when push comes to shove, their instinct is to resort to palliatives: throw money at the problem, regulate or tax.

Since the markets has not stabilized even after the Bazooka or Shock and Awe monster $1 trillion bailout, of the not only of Greece, but the entire Euro Union, last night, Germany banned short selling in European bonds and credit default swap and shares of select industries in the stock market.

This from Bloomberg,

``Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking anxiety among investors about increasing government regulation.

``The ban, which took effect at midnight and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said late yesterday in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said."

The problem is that these bans introduces more risks by not allowing the markets to reflect on the fundamentals via price signals.

Besides, excessive government spending financed by debt coupled with insufficient revenue, which is the source of the Euro's problem, hasn't been caused by the markets but by extant policies.

So the German government is simply looking for another scapegoat.

While the stockmarkets in Europe did react positively, perhaps due to some short covering on the issues affected by the ban, US stocks got slammed and the Euro cratered!

Regulators don't seem to realize that banning naked shorts hardly produces the intended effects and instead creates an aura of heightened uncertainty.

So aside from regulatory risks, these actions may suggests of an act of desperation or act of concealment of problems.

At the near climax of the Lehman episode in 2008, the US government reacted the same way, by instituting a ban on naked short selling in mid September as Lehman filed for bankruptcy.

And instead of the consequences going in the way of the regulators, the US markets collapsed! See below...

The blue arrows mark the time where naked short bans had been imposed.

Japan followed in November of the same year (above window), yet the results were the same...a failure to stem the hemorrhage.

The more governments manipulate the markets, the unstable they will be.

Banking System And Global Imbalances

This is an interesting observation from the Economist,


``The finances of banks are a mirror of the economies where they are based. In emerging markets, the surplus of customer deposits over loans (ie, excess savings) at listed banks was about $1.6 trillion in 2008, compared with a deficit of about $1.9 trillion at rich-world banks. Banks in emerging markets, which have vast branch networks to suck in deposits from thrifty families and companies, park their surplus with the state, by buying government bonds or keeping it in central banks. The state in turn acts as the international recycling agent for those excess savings: it lends them to Western countries through its foreign reserves or through a sovereign-wealth fund. Meanwhile, overextended Western banks do the exact opposite: they borrow from capital markets to plug the hole created by having more loans than deposits. In 2009, the funding gap was smaller, reflecting the slow rebalancing of Western banks' finances." (all bold highlights mine)

My comment:

The above shows the following:

-trade imbalances are offset by capital account transfers [see US-China Trade Imbalance? Where?]

-governments are shown here to be very inefficient intermediaries in the allocation of resources (finance or real). Allocations are fundamentally politically motivated, e.g. in the US, the homeownership bias in the 1990s to 2007 (ergo the bubble bust of 2008); today, the focus is on deficit spending.

-moral hazard from sustained subsidies to government (as recycling mechanism) has partly caused bubbles and will likely continue to do so.

-the overall problem basically seems due to the architecture of our monetary system, which have been premised on a cartelized banking system that revolves around central banking.

Are People Inherently Nihilistic?

For proponents of government the answer yes.

This means that if a group of people gets stuck in a remote island outside of the ambit of civilization and government, the immediate reaction by the concerned is to instinctively go for each other’s throats.

In other words, since people are inherently nihilistic, chaos is the default response for everyone, whereby rules do NOT and CANNOT ever exist. You can picture this scene from the Mad Max movie series.

And for this camp, government is the only entity that can provide lasting peace and order among people.

The Hobbes Doctrine

This position has long been argued by English philosopher Thomas Hobbes in his book the Leviathan where he sees man’s innate “state of nature” is to resort to war for three reasons: competition, diffidence and glory

According to Wikipedia.org, ``Beginning from a mechanistic understanding of human beings and the passions, Hobbes postulates what life would be like without government, a condition which he calls the state of nature. In that state, each person would have a right, or license, to everything in the world. This, Hobbes argues, would lead to a "war of all against all" (bellum omnium contra omnes), and thus lives that are "solitary, poor, nasty, brutish, and short" (xiii).

Overtime, many philosophers, including the illustrious John Locke and David Hume, challenged the validity of the Hobbes "state of nature" doctrine.

Although it would probably take a book to respond to such philosophical themes, below are my simplified objections to the man-is-evil doctrine as an excuse for government.

Granted that man’s default nature is indeed nihilistic; since government is an organization composed by men, then obviously government will not last.

This is for the simple reason that leader-subordinate relationship will perpetually be in a state of turmoil, as government will be subjected to coups and counter coups or repeated upheavals. This, in effect, would be a Machiavellian utopia.

In short, if man is truly evil or barbaric, no amount of organization will stop him from revealing his chaotic nature.

And the same reasoning can be applied to the justification where man is inherently good. At the extreme where people are all angelic like in virtue then government will probably not be required.

But the propositions here doesn’t escape the fact that the real matter about the debate of the need for government or anarchism (defined in this statement as no government) isn’t because of good or evil, which is nothing but a floating abstraction, but because of scarcity.

It is the allocation of scare resources which serves as the foundation for a majority of politics.

Man As Social Animal

People are neither inherently good nor evil, but we certainly are social creatures.

And such social tendencies aren’t even limited to men, they can be observed in mammals, according to Wikipedia,

``All mammals (and birds) are social to the extent that mothers and offspring bond. The term "social animal" is usually only applied when there is a level of social organization that goes beyond this, with permanent groups of adults living together, and relationships between individuals that endure from one encounter to another.”

Wikipedia adds, ``A chief debate among ethologists studying animal societies is whether non-human primates and other animals can be said to have culture.” [As a side note, if non-human animals can have a culture, then obviously man with vastly more intelligence is likely to be more intuitively organized, formally or informally.]

And since we are the supreme specie in the animal kingdom, then the penchant is for more social cooperation and not militancy, as alleged by Hobbes, given the right environment.

Proof?

Hobbes wrote that people’s lives are “solitary, poor, nasty, brutish, and short”, which is obviously, as shown in the above charts from Google on life expectancy and population trends and Allyunintuitive also on populaton trends, is dead wrong.

Global population keeps growing while life expectancy has been expanding.

Think of it, if man’s genesis from a few thousand years ago emanated from 2 persons (Adam and Eve) or from a Darwinian evolution of primates (probably a few hundreds), then the explosion of population growth came amidst a transition of social arrangements, notably from tribal to feudal to the modern forms of government.

In short government or no government people’s population have continually grown.

So what has allowed man such expansive growth in population and life expectancy trends amidst scarce resources?

The obvious answer is the deepening trends of division of labor, comparative advantage and technology.

In short, real wealth has allowed society to grow in spite of government.

Chart courtesy of Australian Government The Treasury

True, we had episodes of nasty wars and vicious political experiments that have led to massive losses in life and wealth, aside from pandemics, but apparently this hasn’t stop people’s realization that trade makes for social cooperation.

Of course, social acceptance has been reflected on politics or governance, where the ensuing policies has accommodated more trade and integration as shown in the above chart.

Yet it is misleading to argue that governments has prompted for such a progress considering that government does not produce anything but to tax only her constitutes and engage in redistribution of wealth.

Anarchy In Different Perspectives

My other major objection is the use of the same false “Hobbes” doctrine to argue that anarchism (defined as no government in this statement) is even a worse alternative than communism.

It’s fundamentally a strawman fallacy.

First of all, I’m not committed to the anarchy position, but having followed the Austrian school of Economics, I have seen some of the merits of their theory. Besides not all Austrians are anarchists.

Second, there are four mainstream definitions to the word anarchy, according to dictionary.com:

1. a state of society without government or law.

2. political and social disorder due to the absence of governmental control: The death of the king was followed by a year of anarchy.

3. a theory that regards the absence of all direct or coercive government as a political ideal and that proposes the cooperative and voluntary association of individuals and groups as the principal mode of organized society.

4. confusion; chaos; disorder: Intellectual and moral anarchy followed his loss of faith.

It is important to distinguish between the carrying definition of the term anarchy or the reference of the word, so as not to lead to confusion and to wrong interpretations.

The commonly held impression of anarchy is the fourth definition; chaos and disorder.

And many have argued strictly from this sense of the word, without considering the other definitions, which is arrantly fallacious or misleading.

Example, the statement where property rights or rules of law cannot exist in anarchy as defined in chaos and disorder is perceptibly correct strictly under such assumptive parameters. Whereas property rights that cannot exist in anarchy as defined by no government is incorrect, as the Somalia’s experience will show.

Nevertheless, the communist experiment in the last century left a wave of horror with an astounding estimated 94 million lives lost, according to the Black Book of Communism.

In addition, the other grand big government experiment which resulted to 2 major world wars at the cost of some 50-100 million lives had been extreme or Ultra nationalism.

We can observe that the repeated attempts to concentrate political and economic power through government leads to only more deaths and societal decadence.

For me, this exemplifies as systematized anarchy (as defined by organized chaos and disorder-in this statement) which led to a massive loss of lives, rampant poverty and general suffering. It’s even worse than having no government.

While there is NO existing society where a model based on libertarian anarchy [defined here as a society based on private institutions] can be made to make an adequate comparison with, the only country we see today which operates under an anarchic system [defined here as stateless society] is Somalia.

That’s because the Somalian military dictatorship government collapsed in 1991.

Somalia has a provisional government, the Transitional Federal Government (TFG), albeit this is more nominal, as the country operates free from formal government institutions. In short, Somalia’s anarchy [statelessness] emerged from its being a failed state [population threw out government and have yet to replace it].

True, there have been repeated violence in the country, but this has been due to attempts by foreign groups as the Islamic Courts Union (ICU) to foist a government on her. ICU’s splinter group, the Al-Shabaab, continues to harass Somalia today.

However, the death toll from these violent episodes in Somalia seems to be a mere fraction when compared to even the Pol Pot regime of communist Cambodia, where nearly a quarter of the population have been killed, considering that it has been more than a decade where Somalia has had a formal government.

If we go by the argument where people are inherently nihilistic then obviously Somalia would already have been non-existent today. This proves the fallacy of the assumption.

Yet the failed state-anarchy has reportedly a thriving economy, according to Wikipedia.org,

``Despite civil unrest, Somalia has maintained a healthy informal economy, based mainly on livestock, remittance/money transfer companies, and telecommunications. According to a 2003 World Bank study, the private sector grew impressively, particularly in the areas of trade, commerce, transport, remittance and infrastructure services, in addition to the primary sectors, notably livestock, agriculture and fisheries. In 2007, the United Nations reported that the country's service industry is also thriving. Anthropologist Spencer Heath MacCallum attributes this increased economic activity to the Somali customary law, which provides a stable environment to conduct business in.” (bold emphasis mine)

So a stateless society thrives amidst its own community based rules and regulations outside a formal government. In short, it simply is misguided to argue that societies cannot exist without government.

Somalia may not be prosperous on a relative scale when compared to the world but they seem to be better off than they were during a military dictatorship or compared to a systematized anarchy [defined as organized chaos] via a communist regime.

In addition, Somalia continues to survive for the simple reason that people, as a social creature, as shown above, will default to the fundamental laws of the land, which on the part of Somalis, has been the customary law, the XEER.

Based on the definition of Wikipedia.org, Xeer “is the polycentric legal system of Somalia. Under this system, elders serve as judges and help mediate cases using precedents. It is a good example of how customary law works within a stateless society and is a fair approximation of what is thought of as natural law. Several scholars have noted that even though Xeer may be centuries old, it has the potential to serve as the legal system of a modern, well-functioning economy.” (bold highlights mine)

Essentially this serves as the rule of law, where as we have quoted F. A. Hayek in Mainstream’s Three “Wise” Monkey Solution To Social Problems ``Political wisdom, dearly bought by the bitter experience of generations, is often lost through the gradual change in the meaning of the words which express its maxims...Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand.”

Of course the major difference why violence would have less incidence and casualties even in a nihilistic ‘Mad Max’ anarchy [defined here as complete chaos and disorder] compared to a frenzied communist or totalitarian states is because armaments are unilaterally held or that the coercive powers are strictly monopolized by the government. Hence, the conduct of violence is systemic, organized or wholesale as compared “Mad Max” anarchy where everyone fights to save his skin. Yet to remind you, nihilistic anarchy is different from libertarian anarchy.

Yet, if anarchy from a failed state did not wipe out Somalia from the face of earth, the same nihilistic Mad Max anarchy is not what comprises as libertarian anarchy.

This from Hans Hermann Hoppe,

``Rothbard's anarchism was not the sort of anarchism that his teacher and mentor Mises had rejected as hopelessly naive, of course. "The anarchists," Mises had written,

“contend that a social order in which nobody enjoys privileges at the expense of his fellow-citizens could exist without any compulsion and coercion for the prevention of action detrimental to society … The anarchists overlook the undeniable fact that some people are either too narrow-minded or too weak to adjust themselves spontaneously to the conditions of social life. An anarchistic society would be exposed to the mercy of every individual. Society cannot exist if the majority is not ready to hinder, by the application or threat of violent action, minorities from destroying the social order.”

``Indeed, Rothbard wholeheartedly agreed with Mises that without resort to compulsion, the existence of society would be endangered and that behind the rules of conduct whose observance is necessary to assure peaceful human cooperation must stand the threat to force if the whole edifice of society is not to be continually at the mercy of any one of its members. One must be in a position to compel a person who will not respect the lives, health, personal freedom, or private property of others to acquiesce in the rules of life in society.

``Inspired in particular by the nineteenth-century American anarchist political theorists Lysander Spooner and Benjamin Tucker and the Belgian economist Gustave de Molinari, from the outset Rothbard's anarchism took it for granted that there will always be murderers, thieves, thugs, con artists, etc., and that life in society would be impossible if they were not punished by physical force. As a reflection of this fundamental realism — anti-utopianism — of his private-property anarchism, Rothbard, unlike most contemporary political philosophers, accorded central importance to the subject of punishment. For him, private property and the right to physical defense were inseparable.”

In short, a libertarian anarchy isn’t a world predicated on disorder and chaos from a false premise of the evil state of man, but on a system of private based institutions.

I am not here to argue about the merits of these private institutions, but the point is to put into perspective the argument about anarchy [as defined by nihilism], libertarian anarchy [system of private social institutions] and communism and totalitarianism.

The Strawman Fallacy

But one would point out, how about religious zealots, gangsters and other social misfits? Are they not reasons why we need government?

These arguments serve as a strawman for the simple reason of failing to account the cause and effect of why social miscreants emerge.

We do not argue that libertarian anarchism will bring about a society of perfection, as there would always be misfits or non-conformist, but as shown in Somalia, society can compel their constituents to act within traditional rules and regulations.

Religious extremism comprises only a fraction of the world’s population.

To consider, even as the world population growth has been swiftly expanding, where world religions has divergently dispersed as shown above, yet we aren’t seeing an explosion of religious wars.

The other way to see it is that while there are indeed some frictions or conflicts brought about by religious diversity, this hasn’t stopped the world from advancing or from globalizing.

However, as pointed out earlier, many of these religious frictions have not been due to ideologies from religion per se, but from external causes that has amplified a rift in religious standings or some sectors see policies undertaken as having undermined their religious interests.

A major reason of the global religious tensions has been caused by geopolitical interventions, Congressman Ron Paul says,

“According to our own CIA, our meddling in the Middle East was the prime motivation for the horrific attacks on 9/11. But instead of re-evaluating our foreign policy, we have simply escalated it...Shutting down military bases and ceasing to deal with other nations with threats and violence is not isolationism. It is the opposite. Opening ourselves up to friendship, honest trade and diplomacy is the foreign policy of peace and prosperity.” (bold highlights mine)

And we find the same reasons attributed to Osama Bin Laden’s war against America, who incidentally was a former ally.

Whyguide.com enumerates some of these: US Presence in the Middle East, US Support for Israel, Imperialism, Undermining Islam and Acts of Aggression.

In other words, cause and effect tells us that many of the terroristic activities which has been colored by religion, have been political ramifications from geopolitical interventionism or has manifested as retaliatory measures against perceived abuses by the government (the US government as in the above instances).

So government policies seem to be the source of the problem and not from inherent human action.

Besides to consider the diversity of religion or of culture, does this mean that a unified world government should exist to impose a "law among laws" in order to resolve such conflicts?

Yet, for many, only the visible is worth being interpreted. Lacking the reasoning to adequately explain societies’ troubles, they resort to oversimplification.

Many of society’s woes aren’t because of the natural state of man to be evil, in fact, many of society’s miscreants have been a manifestation of the consequences of poor, abusive, unilateral or skewed regulations, policies or government actions.

According to Murray N. Rothbard, ``the institution of the state establishes a socially legitimatized and sanctified channel for bad people to do bad things, to commit regularized theft and to wield dictatorial power. Statism therefore encourages the bad, or at least the criminal elements of human nature. As Frank H. Knight trenchantly put it: “The probability of the people in power being individuals who would dislike the possession and exercise of power is on a level with the probability that an extremely tender hearted person would get the job of whipping master in a slave plantation.”’ A free society, by not establishing such a legitimated channel for theft and tyranny, discourages the criminal tendencies of human nature and encourages the peaceful and the voluntary.

``Liberty and the free market discourage aggression and compulsion, and encourage the harmony and mutual benefit of voluntary interpersonal exchanges, economic, social, and cultural. Since a system of liberty would encourage the voluntary and discourage the criminal, and would remove the only legitimated channel for crime and aggression, we could expect that a free society would indeed suffer less from violent crime and aggression than we do now, though there is no warrant for assuming that they would disappear completely. That is not utopianism, but a commonsense implication of the change in what is considered socially legitimate, and in the reward-and-penalty structure in society.”

Summary And Conclusion

To sum up, our point is that people aren’t inherently bad or nihilistic.

The Hobbesean error has fundamentally been based on wrong or misplaced assumptions, where according to Rodney Long, (bold highlights mine)

``Well, Hobbes is assuming several things at once here. First he’s assuming that there can’t be any social cooperation without law. Second, he’s assuming that there can’t be any law unless it’s enforced by physical force. And third, he’s assuming you can’t have law enforced by physical force unless it’s done by a monopoly state.

``But all those assumptions are false. It’s certainly true that cooperation can and does emerge, maybe not as efficiently as it would with law, but without law. There’s Robert Ellickson’s book Order Without Law where he talks about how neighbors manage to resolve disputes. He offers all these examples about what happens if one farmer’s cow wanders onto another farmer’s territory and they solve it through some mutual customary agreements and so forth, and there’s no legal framework for resolving it. Maybe that’s not enough for a complex economy, but it certainly shows that you can have some kind of cooperation without an actual legal framework.”

And it’s a strawman to argue a case for government and against a libertarian anarchy model strictly based on the above premises- man is evil, societal misfits, anarchy equals communism.

So while there are many issues to discuss in the libertarian anarchy model or a society premised on privately held institutions, I guess I am stepping out of my bounds.

Nevertheless, there are tons of literatures that deal with objections to the libertarian anarchy model.

Perhaps when time allows, we can deal with this in the future.