Different Trading Partners And The Currency Option

Another reason why proposed mercantilist policies particularly based on the currency valve option are not likely to work: different trade partners by different states or regions.

This from the Wall Street Journal Blog, (bold emphasis mine)

But the dollar’s impact will not be equal on each state or region. That’s because, for instance, Texas ships more exports to Mexico while New York sends more exports to Canada. Understandably, then, the health of Texan exporters depends more on changes in the dollar-peso rate while New York exporters care more about the U.S.-Canadian exchange.

To gauge the regional impact of exchange rates, the Federal Reserve Bank of Dallas has developed a real trade-weighted value of the dollar index for each state.

Foreign-exchange markets tend to focus on the dollar’s value versus the euro or yen. But for state exporters, the exchange rates in emerging nations and our NAFTA partners Canada and Mexico are probably more important.

“National exchange rate indexes do not always reflect individual state experiences,” the report says. “States at times face sharply different effective exchange-rate shifts, often provoked by economic or financial crises.”

This should not even be limited to the state or region level.

Competitiveness can be analytically regressed to independent enterprises where each firms operates on distinct cost structures, have different fields or areas of specialization and of the idiosyncratic competitive advantages, [even if they come from the same industry and operate in the same territory].

Where exchange rates could have diverse effects from the micro level from the different location of trading partners, the transmission mechanism of proposed exchange rate policies are likely to be ambiguous.

The other way to say this is that one size fits all exchange rate option is a political gamble undertaken by technocrats with society’s equity at stake.

Philippine Classical Liberalism and Libertarianism: Unpopular But Remarkable

I find the message of my favourite marketing guru, Seth Godin, especially relevant to my political economic perspective.

With reference to Lady Gaga, Mr. Godin writes, (bold emphasis mine)

Do you think it bothers her that I don't listen to her music and wouldn't recognize her if she stopped by and said hi?

It shouldn't.

Even if you're a pop star, you don't need everyone to be a fan or a customer. And especially if you're not a pop star, worrying about whether everyone laughs at your jokes, buys your product or even likes you is counterproductive.

Unless you're running for something that requires a unanimous vote, it's a mistake to focus on the frowning guy in the back of the room or the dolt who doesn't get your subtle references or the miser who isn't going to buy from you regardless...

You're on the hunt for sneezers, for fans, for people willing to cross the street to work with you. Everyone else can pound sand, that's okay. Being remarkable also means being ignored or actively disliked.

BTW, I'm virtually certain that Lady (do her friends call her that?) doesn't read my stuff, so we're even.

I feel that this applies also to contrarians or fringe thinkers, who have been frequently ostracized, reviled, despised and dismissed for their unorthodox and unconventional ideas, despite being trenchantly correct for most occasions. (yes even in the financial market's standards)

That’s because conformity represents as the social norm or the need to get accepted, regardless if this means embracing popular delusions. In short, the implicit herd mentality.

Yet it would take so much mettle and grit to stand up to challenge such falsehood. A challenge only a few will likely partake of.

Nonetheless, not all contrarians share similar insights. [Think communists.]

And in this occasion I would like to credit my domestic classical liberals and libertarians colleagues, who despite the odds, have taken this challenge to expose mainstream delusions and have made some critical inroads in expanding awareness, organizing a niche/tribe for people with similar persuasions and the spreading of knowledge in the local community. I once thought that I operated alone. Not anymore.

The great Ludwig von Mises assimilated a passage of Latin poet Publius Vergillius Maros, or popularly known as Virgil, as his motto: Tu ne cede malis sed contra audentior ito ("Do not yield to the bad, but always oppose it with courage."); a motto, which I think, is worth carrying over.

So despite our unpopular stance, your passionate efforts have made fighting for such a cause, remarkable and inspirational.

Merry Christmas.

iPhone Shows Why Global Imbalances Will Remain

Mercantilists are simply wrong.

The are mistaken in arguing for the "currency valve" policy option to address global ‘imbalances’. That’s because these mercantilists read or interpret trade as operating simplistically in an “aggregate” manner.

Yet as this study based on the iPhone’s business process shows, trade hasn’t been that simple.

Trade has been swiftly evolving in such a way that has deepened the role of specialization (division of labor) and national comparative advantages which has affected how “imbalances” are being shaped.

To add, current statistical aggregates tend to overlook many important data points which have been used for policy analysis. This makes many of these politically sensitive data unreliable.

Illustration from Wall Street Journal Blog

The following conclusion from Yuqing Xing And Neal Detert on their paper “How iPhone Widens the US Trade Deficits with PRC” (all bold emphasis mine)

In this paper, we use the iPhone as a case to show that even high-tech products invented by American companies will not increase US exports, but to the contrary exacerbate US trade deficits.

Unprecedented globalization, well organized global production networks, and low transportation costs all contribute to rational firms such as Apple making business decisions that contributed directly to the US trade deficit reduction.

Global production networks and highly specialized production processes apparently reverse trade patterns: developing countries such as PRC export high-tech goods—like the iPhone—while industrialized countries such as the US import the hightech goods they themselves invented. High-tech products such as iPhones in this context do not help increase the US exports, but instead contribute to trade deficits.

In addition, conventional trade statistics greatly inflate bilateral trade deficits between a country used as export-platform by multinational firms and its destination countries. In the case of iPhone trade, China actually contributed only 3.8% of the United States’ US$1.9 billion trade deficit, the rest was simply a transfer from Japan, Korea, and Taipei,China.

If the US high-tech companies, such as the Apple, are willing to share their profits with low skilled American workers by keeping assembling jobs in the US, it would be more effective in reducing the US trade deficits than targeting the exchange rate policy of PRC.

University of Michigan Professor Mark J. Perry has a nice illustration of the composition or breakdown of revenues of the iPhone per location/geography as shown above.

He also notes that

“only about $6.54 (a little more than than 1%) of the full $600 retail price of an iPhone goes to China and more than 60% goes directly to Apple and other American companies (see chart above), according to a "teardown report" by iSuppli that was featured in a July New York Times article. It also doesn't mean that your purchase of an iPhone contributed very much to the U.S. trade deficit, even though that's what the government trade statistics tell us.”

So despite being assembled or "made in China" most of the profits still accrue to the US.

Bottom line: Globalization equals “imbalances”. That’s because of the fast evolving supply chain platforms or networks which has been determining the trading patterns globally.

Yet interventionist policies based on easy fixes are likely to backfire since they do not address the business and micro realities of trade.

Philippine Justice System on the Vizconde Massacre Case: Letter of the Law Over Spirit of the Law

This from today’s Inquirer, (bold emphasis mine)

The decision of the Supreme Court clearing Hubert Webb and six others of criminal liability in the 1991 Vizconde massacre is not a vindication of them, the tribunal’s spokesperson said Wednesday.

Speaking at a news briefing, Midas Marquez said the acquittal of Webb et al. did not mean they were innocent of the charges. He said the high court voted 7-4 to acquit them because of the prosecution’s failure to prove their guilt beyond reasonable doubt and because of infirmities in the testimony of star witness Jessica Alfaro.

“The court said there was not enough basis to [affirm] the conviction of the accused. The court did not say they are not guilty,” Marquez stressed.

“The magistrates did not say that they were innocent and that they did not commit the crime,” he said.

In short, technical issues or legal loopholes prevailed.

Yet in looking at how laws should be complied with, we found this from wikipedia.org

The letter of the law versus the spirit of the law is an idiomatic antithesis. When one obeys the letter of the law but not the spirit, one is obeying the literal interpretation of the words (the "letter") of the law, but not the intent of those who wrote the law. Conversely, when one obeys the spirit of the law but not the letter, one is doing what the authors of the law intended, though not adhering to the literal wording.

"Law" originally referred to legislative statute, but in the idiom may refer to any kind of rule. Intentionally following the letter of the law but not the spirit may be accomplished through exploiting technicalities, loopholes, and ambiguous language. Following the letter of the law but not the spirit is also a tactic used by oppressive governments. (bold emphasis on this paragraph mine)

Bottom line: as we previously argued, arbitrary laws and regulations, as well as, arbitrary interpretation of laws signify as symptoms of a much deeper structural malaise known crony capitalism or legal protectionism of the political economic elite.

Migration Twist: Many Britons Desire Relocation While Filipinos Want To Stay Home

It would seem as no news for us to hear people from developing nations yearn to emigrate to developed nations mostly to seek greener pastures.

For instance, the Philippines has been a major exporter of labor or manpower (OFWs), thus the popular desire by locals to work or move permanently abroad has been embedded into my expectations.

Yet recent surveys appear to contradict this—only about 1 in 10 Filipinos, according to ABS-CBN, say that they would like to migrate to another country. This has been significantly down from about 3 in 10 in 2006. The apparent optimism has been reportedly associated with high expectations on the political economy from the new political administration.

But what surprised me most was this poll from Gallup which reported that in UK, 1 in 3 Britons wanted to migrate to another country. (see below chart from Gallup)

Gallup says that this hasn’t been related to the recent crisis, where “high level of desire to migrate permanently cannot be attributed to the recent global economic crisis or the country's own recession”

And it’s not just the UK, although she ranks the highest, but also among major European contemporaries, as Germany (21%), France (23%), Sweden (19%), Netherlands (18%) and others, all of which registered high levels of desire to migrate.

For Britons, the target places for relocation are Australia, Spain, US and Canada.

While the local survey may not square with Gallup’s survey, enough for me to make a strong conclusion, I suspect that such developments appear to be indicative of a twist: people from developed nations could likely help deepen the globalization of labor or population mobility worldwide.

Importantly, this shows how people’s reaction could be fickle and can’t be aggregated and that meaningful changes could be happening at the fringes.

Nonetheless, it’s a development worth monitoring.

Warren Buffett Is Human

What I mean is that investing guru Warren Buffett makes mistakes like anyone else.

Joe Mont writes, (bold emphasis mine)

In a recent annual letter to Berkshire Hathaway (BRK-A) shareholders, an eagerly awaited piece of investing insight, Buffett cops to several mistakes. Among them: authorizing the purchase of a large amount of ConocoPhillips stock when oil and gas prices were near their peak. A dramatic fall in energy prices soon followed.

"The terrible timing of my purchase has cost Berkshire several billion dollars," Buffett wrote, segueing into regret over a $244 million parlay in two Irish banks "that appeared cheap" but soon incurred an 89% loss on the initial investment.

"The tennis crowd would call my mistakes 'unforced errors,'" Buffett said.

When a Buffett, Bill Gross or Larry Fink publicly discusses bad decisions, it makes headlines. But there is hardly an investor, pro or amateur, who doesn't have some woeful tale of a sure thing that wasn't or can't-miss advice that did. The key is learning from mistakes and moving on.

The main difference between the pros and the tyros is the ability to accept the emotional and self-esteem angst of making wrong decisions and consequently adapting remedial measures. Yet for many, investing is like a one way street: cash in on profits (or brag about success) and long the losses (or deny the errors).

Another aspect here, aside from human frailty issue, could be one of “karma”.

I have pointed out that Warren Buffett seems to have been transformed from a value investor to a political entrepreneur or an agent who directly profits from government actions/concessions (such as bailouts). Apparently this time investing on such special political conditions engineered by the government (Irish banks) didn’t work.

Since bailouts signify redistribution of resources to political benefactors at the cost of taxpayers, then Mr. Buffett’s loss could be construed in the light of poetic justice.

Rising US Treasury Yields: Credit Quality Concern or Symptoms of Bubble Cycle?

The Wall Street Examiner writes,

For those who argue it does matter, one number being tossed around is the level at which debt service equals 30% of tax revenues. Once interest payments take 30% of tax revenues, a country has an out-of-control debt-trap issue. When you think clearly about it, this just makes sense as the ability to dodge, weave, and defer is pretty much removed, as is the logic that it will be repaid in a low-risk manner. The world is going to be a different place when the US is perceived to be in a debt trap.

I suspect the problem will rear its ugly head well before this 30% number is hit as markets start discounting the trajectory by hiking interest rates because of poor credit quality and/or inflation (or more accurately stranguflation). Naturally that question should be asked in terms of the recent and sudden uptick in Treasury note and bond rates that appeared strongly correlated to the latest round of tax “stimulus” and handouts, and the “unexpected” reaction to QE2. The latter is nothing more than a brazen, dangerous gamble to monetize the debt. Sure, one crowd is claiming economic growth is the causa proxima, but that feels like utter nonsense. Could it be that the markets at long last are anticipating a very bad result from QE2 and even more government largess? (emphasis added)

Although I sympathize with this observation, in my opinion, this looks more like a cart before the horse analysis when it comes to forecasting.

Two observations:

the analysis does not say how such mayhem would be triggered, except to presuppose intuitively that rising rates signifies implied doubts on on credit quality and

second it also does not say how authorities are likely to respond to such environment.

For instance, the claim that rising rates from economic growth feels like utter nonsense may not seem consistent with a seemingly tranquil credit environment in many parts of the world.

An environment manifesting concerns about of the credit quality would look like this…

In other words, the rising interest will be accompanied by turbulent credit markets (e.g. rising CDS) perhaps globally.

Yet we are not seeing this today YET (see below chart)

charts above courtesy of Danske Bank research

While the PIIGS episode today could likely foreshadow the milieu of tomorrow’s crisis, the difference is that the interest rate, credit and other financial markets have, for now, demonstrated benign reaction.

And this has allowed governments to continue with the current orthodox responses to the crisis—bailouts and the flooding of liquidity in the system.

A full blown crisis would likely occur when global government’s hands are tied.

And there are two likely series of events that would pose as trigger: accelerating inflation on a worldwide scale (symptoms-consumer, producer, commodity), and or another major bubble bust elsewhere around the globe (China?, Emerging markets?).

In my view: rising US treasury yields appear to be indicative of a brewing bubble cycle (in many parts of the globe) that is likely being transmitted from the disparities in monetary policies between developed economies and the emerging market economies.

One Source of Wealth Inequality: Government Owned Or Controlled Corporations (GOCCs)

Those promoting class schism by presenting misleading arguments on wealth-tax inequalities deal with superficial analysis, instead they should rant about is this:

GOVERNMENT WASTAGE AND INEFFICIENCY THAT LEADS TO HIGHER TAXES.

Today’s news headlines provides a magnificent example.

This example from the Inquirer,

Another government-owned and -controlled corporation (GOCC) has been found to have granted its officers and employees millions of pesos in unauthorized allowances, bonuses and other benefits.

Despite owing the government over P7 billion in concession fees and other liabilities, Philippine National Construction Corp. (PNCC) last year gave its board of directors, officers and employees over P57 million in allowances that lacked legal basis, according to the Commission on Audit (COA).

PNCC whose president is Theresa Defensor also gave some P261.33 million in unauthorized cash advances to its employees, the audit agency said in its latest report on the GOCC.

The COA said the corporation should have first settled its obligations with the national government before improperly providing “huge” allowances to its personnel.

On Sept. 8, President Benigno Aquino III ordered the suspension until Dec. 31 of all allowances, bonuses and incentives of board members of GOCCs and government financial institutions (GFIs).

Here, media’s framing of government’s wastage seem to be angled only from the morality aspects.

Yet one noteworthy statement from the same article…

The COA said these disbursements had no authority from the DBM or the Office of the President.

My comments:

1. Legality seems to be determined according to the unilateral political discretion of the incumbent leadership, where arbitrary rules equate to subjective actions by the regulators or administrators.

As Ludwig von Mises pointed on the inherent weaknesses of bureaucratic organizations… (bold emphasis mine)

There are, of course, in every country’s public administration manifest shortcomings which strike the eye of every observer. People are sometimes shocked by the degree of maladministration. But if one tries to go to their roots, one often learns that they are not simply the result of culpable negligence or lack of competence. They sometimes turn out to be the result of special political and institutional conditions or of an attempt to come to an arrangement with a problem for which a more satisfactory solution could not be found. A detailed scrutiny of all the difficulties involved may convince an honest investigator that, given the general state of political forces, he himself would not have known how to deal with the matter in a less objectionable way.

This also means that since the administration of these organizations are mainly politically determined, management actions may be directed at the rewarding or dispensing of favors to political allies or adherents, or trying to attain high approval ratings by projecting control, or other non-market based actions.

2. Spending someone else’s money has always been the easiest thing to do. And that’s what bureaucracies essentially stand for.

This from GMA TV,

Government-owned and –controlled corporations (GOCCs) got P15.95 billion in subsidies in the 10 months to October, up by 54 percent from P10.36 billion a year earlier, the Bureau of Treasury (BTr) reported Wednesday

3. Bureaucracy isn’t concerned with profitability, but with fulfilling regulatory, or as stated above, specific political goals for the benefit of the political leadership.

This from ABS CBN

Goverment owned and controlled corporations (GOCCS) are bracing for a major shakeup as the state plans to abolish some of these agencies.

Budget Secretary Florencio Abad said on Monday that some of the 14 GOCCs being monitored by the goverment, may have to be folded up.

The abolishment of losing and redundant GOCCs is part of the government's overall strategy to trim the bureacracy and stop the bleeding of its coffers through huge subsidies to these agencies.

There seem to be little concerns, except for paying lip service, on the trimming the leviathan. Also there seems hardly any discussions on the justifications for the continued existence of these political enterprises, aside from looking at financial conditions.

In addition, there also seems hardly any reckoning on the adverse impact on the economy by, not only misallocation of resources, but as privileged competitor at the expense of the private sector (yes, some GOCCs are profitable. That’s because they are monopolies of strategic sectors, e.g. Bangko Sentral ng Pilipinas, Government Service Insurance System, Social Security System, Philippine Deposit Insurance and many more).

Yet these enterprises represent anti market or totalitarian tendencies by the state.

Again from the great Professor von Mises (bold emphasis mine)

Those who criticize bureaucracy make the mistake of directing their attacks against a symptom only and not against the seat of the evil. It makes no difference whether the innumerable decrees regimenting every aspect of the citizen’s economic activities are issued directly by a law, duly passed by Congress, or by a commission or government agency to which power has been given by a law and by the allocation of money. What people are really complaining about is the fact that the government has embarked upon such totalitarian policies, not the technical procedures applied in their establishment.

Bottom line: Finger pointing on the rich is one wrong way to address equality issues. Instead we should deal with the system that promotes on such inequality. The system where politics has been empowered at the expense of the markets, and a system that encourages waste, inefficiency, corruption and wealth redistribution from the economic-productive class to the power hungry political class.

The Fallacy Of “ The Richest Filipinos and the Biggest Taxpayers are not the same”

In the eyes of the mainstream, prosperity or utopianism can easily be achieved by simply being virtuous, i.e. the assumption that virtuosity can be unambiguously categorized or defined and collectively practiced by everybody.

One good example is an email I recently received which apparently has been circulating in the cyberspace.

The message incorporates two articles from high profile mainstream analysts Business Asia’s Tony Lopez and Philstar’s Boo Chanco, whose respective original articles can be found here and here.

The central message: Philippine elites have not done their “rightful” share in contributing to the Philippine society by paying “due” taxes.

This signifies the typical liberal argument against capitalist ‘greed’.

These articles are representative of political talking points that assume a moral high ground but have largely been premised on the fallacy of reductio ad absurdum.

Let me first quote Tony Lopez,

Now, compare the Top 40 Richest Filipinos based on the Forbes list with the Top 40 Taxpayers of 2008, based on the BIR list, and make your own conclusions.

BNA got hold of the 2008 list. It is a very interesting and revealing honor roll. It is veritably the roster of current heroes of the Philippines. Two conclusions:

First, people who you think are among the country’s richest are not in the Top 500 Taxpayers list. So, too, are prominent and fabulously rich people who often rant about the need for good governance and having good corporate social responsibility.

Second, the most rewarding jobs are not in business or top management. They are in entertainment, broadcasting and movies.

Here Mr. Lopez confuses correlation with causation. He implicates that the top 40 richest Filipinos should mechanically equate to the top 40 taxpayers. This perspective is skewed for the simple reason that domestic taxes are fundamentally NOT a one-size-fits-all application.

Although I am a NO tax expert, this Commission on Audit guideline would illustrate that domestic income taxes are NOT applied equally.

For instance, dividends, which largely make up the assets of “elite” classes have NOT been subject to income tax. So local elites may not be dependent on salaries or wages, but on dividends. And the dearth of taxes on dividends may have depressed the tax contribution statistical data from which has resulted to such perceived imbalances.

[Important Caveat: It may be tempting to argue to plug the loophole with higher taxes on dividends, yet doing so would retard the incentive for enterprises to invest, hence higher tax rates may result to lesser taxes.]

Furthermore, the percentages of tax rates are applied differently depending on the classification of activities, such as capital gains or interest on any currency bank deposit and other monetary substitutes or etc..., and these are the activities frequented by the elites.

The point is: The elites are hardly the major culprits. They are simply responding to the incentives provided by the current tax structure, virtuosity aside. That’s because what matters is the interpretation of tax laws applied to the individual taxpayers. In short, paying less taxes does not translate to political iniquity as unduly portrayed by these self-righteous analysts.

Yet what is largely ignored is that it is the inequitable construct of the incumbent tax laws that represents as the major factor in the current tax leakages or shortfalls.

Laws engender incentives for people’s action. Period. Whether the consequent actions are positive or negative is beyond the scope of this rejoinder. The reason why the law of unintended consequences exists has primarily been due to its having greater costs (negative effects) from the impact of the imposed laws or regulations than from its desired or intended benefits. A video example here.

In short, many laws do not capture people’s responses to a mandated environment.

Perverted Interpretations

Another misguided interpretation is where “most rewarding jobs” had wrongly been classified as “not in business or top management”. That’s because the cited examples basically contradicts this assertion.

Mr. Lopez writes,

In serious business, mining is very remunerative. The highest-paid tycoons are miners—Philex Chief Executive Officer (CEO) Walter Brown with P26.83 million tax (No. 9) and Rio Tuba Nickel CEO, lawyer Manny Zamora Jr., with P19.96 million tax (No. 12).

Behind them are owners and CEOs of conglomerates: San Miguel Corp. Chair and CEO Eduardo “Danding” Cojuangco Jr., with P18.98 million tax (No. 13); PLDT Chair and Meralco CEO Manuel V. Pangilinan, with P18.55 million (No. 14); former Meralco President Manolo Lo-pez, P17.49 million (No. 16); Unionbank Chair and CEO Justo Aboitiz Ortiz, P15.2 million (No. 19); and SMC President and Petron CEO Ramon S. Ang, P14.85 million (No. 20). Trailing them are ePLDT and TV5 CEO Ray Espinosa, P12.27 million (No. 22) and GMA Network and dzBB broadcaster Mike Enriquez, P11.94 million (No. 23). [my comment-are these personalities not “top management” or businessmen?]

This makes Enriquez the country’s highest paid media-man. He finds it funny, if not ridiculous, that he paid more taxes than the owners of the two largest TV stations. “That means I pay the correct taxes,” he notes. His channel 7 colleague, Mel Tiangco, is No. 45 with P8.9 million in income taxes paid. That makes her the highest paid female broadcaster.

Television is a big moneymaker.

Four of the country’s 10 biggest taxpayers work in TV entertainment. Willie Revillame leads the pack as No. 2, with P58.6 million in tax payments. He used to make P1 million a day while hosting his hugely popular Wowowee noontime show. Actor Piolo Pascual is No. 3, with P55.8 million tax payments; Kris Aquino, No. 8 with P25.44 million; and Michael V., (Beethoven del Valle Bunagan in real life) No. 10 with P22.26 million.

Boxing’s Manny Pacquiao, the No.1 taxpayer, is by his lonesome self, with P125 million in tax payments. In June 2009, Forbes magazine estimated the Filipino boxing great’s 2008 income at $40 million or P1.778 billion.

He paid P7 of tax for every P100 of income, a tax rate of 7 percent Revillame had a higher tax rate, P58.6 million out of P365 estimated gross for a 16 percent tax rate.

To be sure, 2008 was a crisis year for Philippine business. It was the year the world went into the deepest recession in 80 years.

And along the lines of the erroneous assumption of one size fits all nature of taxation, celebrities and high echelon representatives of business entities can hardly be classified as operating on the same tax levels. So basically this would account for an “apples to oranges” comparison. Classifying people in aggregates reveals its stark shortcomings.

To add, the last statement can be construed as an exaggeration—the claim that 2008 had allegedly been a crisis year for Philippine business. This is patently unfounded.

According to ABS CBN (bold highlights mine)

In a statement Sunday, the PSE reported that the combined net income of publicly listed firms dropped to P198.91 billion in 2008 from P281.54 billion in 2007, a banner year...

Lim noted, however, that revenues of listed firms grew 12.8 percent to P2.67 trillion from P2.37 trillion.

The recent data were culled from the latest financial statements submitted by 233 out of 246 listed companies. Of the 233 reporting firms, 159 posted net gains while the remaining 74 posted net losses.

First of all, while indeed corporate profits of publicly listed companies, which represent the biggest firms of the country, dropped in 2008, they did not turn negative. They remained substantially up. [Caveat: We would like to remind everyone that specific reference points determine the contrast effect.] In addition 68% of the corporations reported positive gains.

On the other hand, despite the modest decline in profits as measured from 2007, top line revenues of major firms rose in 2008. This hardly places the Philippine business environment in a “crisis” mode.

And if seen via economic performance one would ask, crisis where?

The Philippines as shown by chart from tradingeconomics.com did not fall into a technical recession (two quarters of negative growth). There had been even NO instance of negative growth in 2008 or throughout 2008-2010.

To argue about such a crisis is to engage populist sensationalism. What has been true for most of the world, has NOT been true for the Philippines. What has affected the local stock market, does not represent a similar cataclysmic event for the domestic non-financial markets or the economy. We identify this argument as logical fallacies.

When people assimilate on interpretations of information that are hideously out of reality, then obviously this affects the public’s quality of thought.

And because we are aware that ideas have consequences, then it is part of our responsibility to refute such politically polluted outlook.

Another moralizing comes Philstar’s Boo Chanco who writes,

It is just frustrating that the burden of financing this government is placed on the middle class like us whose tax payments are mostly withheld at source or added on to the things we buy. And of course, we cannot afford to get top notch tax accountants and are at the mercy of BIR examiners. But if we are to help P-Noy succeed, he needs money and not just a lot of hot air from pontificating tycoons in the Makati crowd.

How about a voluntary lifestyle tax from say, everyone who can afford a Manila Golf, Alabang or Wack Wack share?After all, the minimum amount to get to the Top 500 list is just P2.1 million and the side bets in many golf games exceed that on any one day. It shouldn’t hurt to dedicate a Saturday’s side bet once a month to help P-Noy achieve his goals for our own good.

Oh well… let us just end with this quote Tony used from Oliver Wendell Holmes: “Taxes are what we pay for civilized society.” Otherwise, stop complaining about the anarchy around you.

Although we sympathize with the position of the tax ‘burden’ for the middleclass’, as I belong to this category, however when people argue that taxes extrapolate to “civilized societies”, then such presumption erroneously romanticizes the infallibility of government [which ironically in other occasions he criticizes].

This further presupposes one or a combination of the following conditions: people’s incomes are owned by the government or that taxes are spent wisely and efficiently by the political institutions that produces net productivity gains for the economy or that taxes are inviolable and sacred. All of which premises are false.

These people seem to forget that it is production that creates wealth. Taxes, which finances the coercive redistributive nature of governments-taking away resources from productive Pedro and giving these to non-productive Juan-leads not to prosperity but to entitlement and dependency. And these are hardly traits of a prosperous society but one of parasitism or feudal political society. Moreover, political distribution of resources triggers envy, and animosity (since politicians can’t please everyone) than from voluntary exchange.

So this represents not only a post hoc argument, but also one that is economically derelict.

Discriminatory Tax Laws

I’d like to add these articles represent as another example of misreading symptoms for the cause.

The articles hardly delve with how the nature of domestic politics has led to the current tax regime.

One, the gist of the problem of taxes is essentially government spending: the more the government spends, the more taxes would need to be raised sometime in the future. There is no way out. Thus the solution isn’t a ‘voluntary lifestyle check’ but to cut or reduce government spending. You can’t have both. Redistribution has its limits, as currently evidenced by the ongoing debt crisis in Greece. The laws of economics or scarcity ensure this. There is no free lunch.

Next, if we take a look at the roster of Philippine elite classes, many of them appear to have achieved their privileged status from political connections as manifested by monopolies, cartels, guarantees, government contracts, and other political based concessions. This postulates that many of the present laws had been erected to ‘protect’ these politically favoured private institutions from competition.

Alternatively this implies that because of the patron client nature of our political economy then obviously arbitrary laws are likewise subject to discretionary, if not political, interpretation in the implementation of these laws. Hence, these entities can afford “to get top notch tax accountants” to negotiate and strike a deal with BIR examiners, rather than be at their “mercy”.

In other words, these laws were set up precisely for such goals—to protect the interests of the favoured political economic class via legal anti-competition roadblocks and to extract added benefits via legal loopholes...where only the politically favoured parties will benefit at the expense of society. We call this crony capitalism.

At the end of the day, it’s easy to prop up a strawman or a fall guy or to blame the dearth of virtuosity on the economic elites for present government woes.

While the economic elites may not be entirely irreproachable, as many of them have formed unholy unions with the political class and has been instrumental in the institutionalization of these partisan and discriminatory laws (as lobby groups), they are not mainly responsible for the incentives provided by these laws or regulations that serve as the backbone for the operating tax regime.

Yet playing up the rhetoric of political class wars, from these sham representation of inequality, would be a popular way to connect with people who lack the understanding of how economics work.

A timely and pertinent reminder on systematic legal plunder from abusive laws, from the great Frederic Bastiat,

“Nothing can enter the public treasury for the benefit of one citizen or one class unless other citizens and other classes have been forced to send it in. If every person draws from the treasury the amount that he has put in it, it is true that the law then plunders nobody. But this procedure does nothing for the persons who have no money. It does not promote equality of income. The law can be an instrument of equalization only as it takes from some persons and gives to other persons. When the law does this, it is an instrument of plunder.

With this in mind, examine the protective tariffs, subsidies, guaranteed profits, guaranteed jobs, relief and welfare schemes, public education, progressive taxation, free credit, and public works. You will find that they are always based on legal plunder, organized injustice.”

Inequality isn’t mainly about greed of the marketplace, instead it is about greed for the power by political personalities and their followers using the marketplace as an excuse or justification to expand or usurp power. All the rest are gullible victims of their illusory propaganda.

Video: Law of Unintended Consequences-Best Intentions, Bad Results

Many bear this silly or oversimplistic notion that laws and or regulations are immaculate. And that all it takes is for people is to have the right sense of ethics to conform or comply with them.

They believe that the way to prosperity is no more than actions via best intentions. Such naive outlook ignores the fact that best intentions are defined or qualified differently by different individuals (value preferences).

And people are not automatons. People’s actions, operating in a world of scarcity, have intertemporal effects. This means some actions may have positive results over the short term at the expense of the long term and vice versa.This applies to laws and regulations as well.

Bottom line: many laws predicated on best intentions, produce bad results.

This video from Reason shows some great examples

Blogging Hiatus

I will be on a blogging hiatus until my beloved daughter convalesces from her agonizing ailment and gets released from her confinement.

Until then thank you for your patronage.

QE 3.0: How Does Ben Bernanke Define Change?

News reports say that Federal Reserve Chairman Ben Bernanke is considering the next round of quantitative easing.

From the Bloomberg,

Federal Reserve Chairman Ben S. Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.

This is really no news for us.

Nevertheless the following looks like the kicker…

From the same article, (bold emphasis mine)

The Fed’s policy of purchasing Treasury securities shouldn’t be considered simply printing money, Bernanke said.

“The amount of currency in circulation is not changing,” he said. “The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”

Let me repeat: The amount of currency is NOT changing (chart above and below from St. Louis Federal Reserve)

Also, the money supply is not changing in a significant way.

Given the above graphs, the question that intuitively pops into my mind is how does Mr. Bernanke quantify change?

Like this?

That’s “change” in terms of the exponential growth in currency during the Germany’s Weimar Hyperinflation (chart from nowandfutures.com).

And above is the chart of how the hyperinflation unfolded.

For bureaucrats, change seems like an abstraction. (this applies to politicians as well).

Global Markets And The Phisix: New Year Rally Begins

"Real knowledge is to know the extent of one's ignorance." – Confucius

Here is my guess.

The current correction mode has culminated and that ASEAN equity markets could likely be headed higher going into the first quarter of 2011. In short, the next leg of the New Year rally could be here (See figure 1).

We have earlier asserted that the recent correction phase had simply been a function of profit taking[1] of which many have refused to accept.

Using current events as basis for discerning the cause and effect link to the actions in the marketplace, many mainstream opinion makers contrived unfounded ‘negative or adverse’ conclusions. We further pointed out that most of these rationalizations actually constituted cognitive biases.

Some permabears have even used the recent setbacks to declare a major reversal of the present upbeat trend. Apparently, gloomy predictions based on personal biases have turned out consistently wrong.

Figure 1: Second Wind of ASEAN Equity Markets?

ASEAN equity markets have been Christmas carolling since the 2008 nadir, as the major benchmarks appear to undulate in synchronicity, namely Indonesia’s JCI (yellow), Philippine Phisix (orange), Thailand’s SET (green) and Malaysia’s KSI (red).

And this hasn’t been limited to ASEAN markets, but to almost every major bellwether worldwide (see figure 2).

Figure 2: Global Equity Markets Rebounding

The world markets as seen by the Dow Jones World index (DJW), the Emerging Market index (EEM), Asian-Pacific market (P1-DOW includes ASEAN) and even the crisis affected Eurozone (STOX50) in what looks like a rejuvenation.

And the rally in risk assets has not also been limited to equities but likewise over to a broad range of commodities. (see figure 3)

Figure 3: Commodity Bull Run (stockcharts.com)

Agricultural commodities, represented by Powershares Global Agricultural ETF (PAGG), along with the precious metal group (DJGSP Dow Jones Precious Metals Index), the Industrial metal sector (DJAIN-Dow Jones-UBS Industrial Metals Index) and the Energy Sector (DJAEN-Dow Jones-UBS Energy Index) appears to have caught fire.

The Bond Markets Scream Inflation!

And it does not stop here.

Earlier, the divergence between falling bond yields and rising commodity prices/rising equity prices had been used by deflation exponents to justify of the supposed risks of a debt deflation bust which we have refuted in ad nauseam.

We have argued that bond markets were actively manipulated which means they had been relatively more distorted, while most of the other financial markets were less manipulated. Eventually, market forces will prove mightier than the visible hand of interventionism.

And the tide appears to have turned vastly in my favour (see figure 4).

Figure 4: Rising Bond Yields Amidst QE 2.0

In the US, yields of the longer end sovereign bonds or the US Treasury Notes as seen by the (TNX) 10 year yield and (UST30) 30 year yield have risen markedly amidst the efforts by US Federal Reserve to artificially suppress interest rates via QE 2.0. And rising yields has emerged in spite of the recent rally in the US dollar (USD) contravening the 2008 crash scenario from which many deflationists have anchored their outlook on.

Yet the steepening of the yield curve implies of an accelerating diffusion of inflation expectations from present cumulative policies of major developed economies.

Importantly, inflation protected securities as seen by the iShares Barclays TIPS Bond Fund (TIP) seems to be rising for most this year, which appears to reinforce this inflation cycle.

And rising interest rates presuppose one of the following drivers: increased demand for credit, concerns over credit quality, emerging scarcity of capital or the deepening inflation expectations.

And in looking at the big picture, the cumulative market actions point to the latter as the having the most of the influential factor in driving up interest rates, although demand for credit (even in the US see figure 5) and concerns over credit standings appear to also have some substance.

Figure 5: US Consumer Spends! (Chart from Danske Bank and St. Louis Federal Reserve)

As a consequence of debt deleveraging, mainstream perma bears have perpetually been pounding on the table over the death of US consumers. Yet US consumption has been expanding right after the deflation shock of 2008 (based on month to month changes-left window), even as consumer loans had faltered (right window). Now that consumer loans have exploded to the upside, this should serve as a tailwind for continued growth.

What the mainstream fails to comprehend is that credit, based on unproductive consumptive spending, does not drive growth, savings does. In addition, people respond to prices, which are not captured by model based aggregatism and thus the deflation shock of 2008 appears to have created buying windows which served as a floor.

Stocks Over Bonds

Nevertheless, lady luck seems to smile at me for having to accurately pinpoint on the timely reversal or the seeming inflection point in the US Treasury bond markets.

The excessively negative sentiment exuded by retail participants in the middle of this year prompted for a stampede out of the equity markets, and conversely, a dash for US treasuries. This appears to be the tipping point since the consensus outlook had been predicated on a ‘deflation outcome’. When a flaw in perception[2] (false reality) gets fused with populist actions then the most likely outcome is a trend reversal.

And as I wrote last August[3],

Retail investors are usually called the OPPOSITE of smart money.

That’s because they signify as the extreme of the crowd actions-the HERD.

They usually account for as the frenetic buyers during the euphoric top and panicky sellers during market depressions.

Thus, massive moves by retail investors could likely herald signs of INFLECTION points.

In this case, US retail investors have reportedly been FLEEING stocks and BUYING bonds. I’d suggest that, like always, they are wrong and betting against them (in stocks) would likely be a profitable exercise.

Nevertheless the pristine trend away from bonds and into equities appears to be gaining momentum (see figure 5).

Figure 5: US Global Funds/Weldon Financial: Stocks Over Bonds

As US Global Fund’s John Derrick observes[4],

You can see that the stock breakout over the past several months has finally broken the downward trend. This is a very bullish signal for stocks as money rotates out of Treasuries and back into equities.

For the nth time, none of these actions points to another deflation shock, which has been continually alleged by mainstream perma bears.

Overall, considering that with a few days left before the end of the year, it would be safe to say that my predictions that inflation would pose as a key theme for 2010[5] has been corroborated by the marketplace.

And we should expect such theme to continue and deepen throughout 2011. Central banks of developed economies will continue to remain accommodative and rollout direct and indirect rescue packages to their respective banking, whether it is in Europe, the US, UK or in Japan or elsewhere.

And all these will be vented on the marketplace and will transition into boom-bust cycles as it has always been or a crack-up boom which implies a flight from money towards assets.

For now, this would look like a great opportunity to reenter the equity markets.

---

[1] See Tumult In Global Markets: It Is Just Profit Taking, November 14, 2010

[2] George Soros’ description of the sequence of a bubble cycle. See How To Go About The Different Phases of The Bullmarket Cycle August 23, 2010

[3] See US Markets: What Small Investors Fleeing Stocks Means, August 23, 2010

[4] Derrick, John Investors Warm Up to Equities, Cool Down on Bonds US Global Funds

[5] See Following The Money Trail: Inflation A Key Theme For 2010, November 9, 2009.

Why EURO Skeptics Are Wrong

The big culprit in all of this is short-term debt. There would be no crises if governments had issued long-term debt to match long-term plans to repay that debt. If investors become gloomy about long-term debt, bond prices go down temporarily—but that's it. A crisis happens when there is bad news and governments need to borrow new money to pay off old debts. Only in this way do guesses about a government's solvency many years in the future translate to a crisis today. There are two lessons from this insight. First, given that the Europeans will not let governments default, they must insist on long-term financing of government debt. Debt and deficit limits will not be enough. Second, the way to handle a refinancing crisis is with a big forced swap of maturing short-term debt for long-term debt. This is what "default" or "restructuring" really means, and it is not the end of the world.- Professor John Cochrane 'Contagion' and Other Euro Myths

Since political developments have weighed heavily on the marketplace, it would a mistake to isolate politics or interpret the marketplace outside of the political dimensions. That’s because governments, which are socio-political institutions, are made up of human beings. And as human beings, their actions are driven by incentives and purposeful behaviour premised on their respective operating environments.

Additionally, as regulating bodies or agencies, they likewise interact with participants of the marketplace. Thus, any useful analysis must incorporate the role of the political economy.

Current Government Actions Validate Our Call

I am glad to say that it’s not only in the markets where our outlook appears to get substantial validation but likewise in our predictions of the political economy.

We have repeatedly argued that faced with a crisis, the predisposition or mechanical response or path dependency of today’s global political leaders is to inflate the system (or throw money at the problem). And these actions are primarily channelled through central banks.

As we declared last week[1],

And like the US dollar, the Euro will be used as an instrument to achieve political goals but coursed through the central bank (ECB).

Here are some recent evidences which corroborates on our call.

Central banks appear to surreptitiously encroach on the fiscal aspects of democratic governments in developed economies.

From Bloomberg[2], (bold highlights mine)

``European Central Bank officials tried to force Ireland to seek a bailout earlier this month and European officials are now trying to do the same to Portugal, Irish Justice Minister Dermot Ahern said.

“Clearly there were people from outside this country who were trying to bounce us in as a sovereign state, into making an application, throwing in the towel before we had even considered it as a government,” he told Irish state broadcaster RTE in an interview today. “And if you notice, they are doing the same with Portugal now.”

``Asked about who was pressuring Ireland, he said “quite obviously people from within the ECB.”

Markets do not only make opinion, importantly they affect policymaking.

Yet in a world where the morbid fear of deflation has been instilled by mainstream economics, governments would use to the hilt its inflationary magic wand.

Another news report from Bloomberg[3], (bold emphasis mine)

``The European Central Bank delayed its withdrawal of emergency liquidity measures and bought more government bonds as President Jean-Claude Trichet pledged to fight “acute” financial market tensions.

``Under pressure from investors to lead the charge against the spreading sovereign debt crisis, Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. As he spoke, ECB staff embarked upon a new wave of purchases, triggering a surge in Irish and Portuguese bonds.”

And bailouts of the privileged political class will never end until forced by the markets.

From Bloomberg[4],

``Belgian Finance Minister Didier Reynders said the euro region could increase the size of its 750 billion-euro ($1 trillion) bailout fund, breaking ranks with German Chancellor Angela Merkel and France’s Nicolas Sarkozy.

``Reynders told reporters in Brussels yesterday that the current cash pool could be increased if governments decide to create a larger fund as part of a permanent crisis mechanism in 2013. “If we decide this in the next weeks or months, why not apply it immediately to the current facility?”

``European officials are under pressure to find new ways to stop contagion spreading from Greece and Ireland amid concern the bailout package may not be large enough to rescue Spain if needed. While Sarkozy and Merkel rejected expanding the fund on Nov. 25, European Central Bank President Jean-Claude Trichet on Dec. 3 indicated governments should consider just such a move.”

A popular analyst misleadingly labelled the Euro a political currency[5] in the assumption that US dollar epitomizes as more of an “economic currency”.

Yet in contrast to such false claim, the recent disclosure by the US Federal Reserve on recipients of bailout money during the 2008 crisis suggests otherwise.

According to the Wall Street Journal Editorial[6],

``We learn, for example, that the cream of Wall Street received even more multibillion-dollar assistance than previously advertised by either the banks or the Fed. Goldman Sachs used the Primary Dealer Credit Facility 85 times to the tune of nearly $600 billion. Even in Washington, that's still a lot of money. Morgan Stanley used the same overnight lending program 212 times from March 2008 to March 2009. This news makes it impossible to argue that either bank would have survived the storm without the Fed's cash.

``The same goes for General Electric, which from late October to late November 2008 tapped the Fed's Commercial Paper Funding Facility 12 times for more than $15 billion. Thanks to the FDIC's debt-guarantee program, GE also sold $60 billion of government-guaranteed debt (with a balance left of $55 billion). The company finished a close second to Citigroup as the heaviest user of that program from November 2008 to July 2009. GE is lucky it was too big to fail, or it might have failed as smaller business lender CIT did.

``The blogosphere was hurling pitchforks yesterday because some foreign banks also took the Fed's money, including such prominent names as UBS, Barclays and BNP Paribas, and even names like Dexia and Natixis that most Americans might confuse with pharmaceuticals marketed on TV. But this was inevitable given the interconnectedness of the global financial system, and the fact that these foreign banks had U.S. subsidiaries. The Fed could not have quelled the panic by offering only U.S. banks access to these loan facilities.”

As seen above, the Fed bailouts were extended heavily to the banking system in the US and abroad, which shows of the immense reach of the political redistribution process, apparently designed to save the system or the status quo.

In effect, the US Federal Reserve can be said to have been transformed as lender of the last resort of the world[7].

Let me further clarify that instead of the whole banking system, the bailouts had been concentrated to the politically connected elite or the “too big to fail” banking behemoths.

This means the US dollar is even more representative of a political currency than the Euro (As a caveat all paper money are political in nature)

Bailouts Equals Crony Capitalism

For Euro bears, it is also a fatal mistake to imply of the political correctness of bailouts when done or executed geographically or within borders. To argue that Germans are unlikely to agree to a bailout of Greece or that Texans are unlikely to agree to a bailout of the Illinois seems like a strawman.

Bailouts, as shown above, hardly represent geographical boundaries. For instance in the case of the Euro, none EU members such as Sweden, United Kingdom and Denmark have even participated in the recent Irish bailout[8] while Norway[9] have offered to join the non-EU consortium. In other words, taxpayers of these non-EU nations have been exposed to credit risks.

Instead, bailouts function as a redistributive process in support of a politically favoured class regardless of territorial boundaries.

Bailouts, in principle, equates to crony capitalism. As Cato’s Gerald P. O'Driscoll Jr. explains[10]

(bold emphasis mine)

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

In short, bailouts signify a form of protectionism that only benefits the politically connected or the “insiders” at the expense of the public.

The act itself is condemnable, where boundaries do not mitigate its iniquities.

And apparently, as the Irish bailout and the Fed bailout of 2008 demonstrate, the global banking class has been the privileged insider.

The Endowment Effect And The Euro’s Regional Political Imperatives

Moreover, Euro bears seem to be afflicted by a cognitive bias known as the endowment effect. Such bias, according to wikipeida.org[11], is “where people place a higher value on objects they own than objects that they do not”.

Figure 6: Euro Zone Members as U.S. States[12] (Wall Street Journal Blog)

In other words, Euro bears could possibly be underestimating the deficiencies of the US dollar, while on the other hand, overestimating on the omissions of the Euro simply because many of these Euro bears are domiciled in the US.

Another way to vet such behaviour is to see such bias in the light of nationalism.

Yet in measuring the relative scale of problems (as shown in Figure 6), one would note that the problematic states of the US today[13], according to their pecking order: Illinois, California, New York and New Jersey, which ranks in terms of US GDP[14] 5^th, 1^st, 3^rd, and 8^th respectively, would dwarf the PIIGS of the Eurozone.

Seen in a different light, when ranked according to world GDP[15], Illinois is 21^st, California 8^th, New York 15^th and New Jersey 25^th compared to Portugal (58^th), Ireland (47^th), Italy (7^th), Greece (40^th) and Spain (8^th).

Figure 7: US Troubled States: Calm Before The Storm? (chart from Bespoke Invest[16])

Fortunately, the focus of credit quality concerns has yet shifted to the PIIGS rather than to these problematic states. Otherwise, whatever disintegration blarney that has been bruited by the Euro bears should also apply to the US.

Lastly, Euro bears seem to forget that the Euro or the EU was NOT forged overnight. The Euro was founded on the premise of the avoidance to indulge in repeated wars which has tormented her for last centuries as earlier discussed[17]. Thus, a free trading zone operating under a hybrid[18] of supranationalism and intergovernmentalism, was established to reduce tensions from nationalistic tendencies.

While we don’t see the Euro as an ideal currency, as she falls into the same “power inducing” trap that intrinsically haunts paper based currencies, the Euro ultimately will share the same fate of their forbears as with the US dollar.

However, at present the Euro has been less inflationary than the US, which serves as the main bullish argument for the Euro.

Moreover, these regional politics imperatives postulate that domestic politics will be subordinated, as reflected even by the actions of the non-EU members in facilitating for the Irish bailout.

Bottom line: Aggregate demand, deflation (whatever this means, that’s because for Euro bears deflation has many definitions which makes the term amorphous) and the inability to devalue a currency don’t make a strong case for the disintegration of EU.

---

[1] See Ireland’s Bailout Will Be Financed By Monetary Inflation, November 28, 2010

[2] Bloomberg.com ECB Tried to Force Ireland Into Bailout, Minister Says, November 30, 2010

[3] Bloomberg.com ECB Delays Exit, Buys Bonds to Fight ‘Acute’ Tensions, December 2, 2010

[4] Bloomberg.com, Reynders Says Bailout Fund May Be Boosted in Break With Merkel, December 5, 2010

[5] See Paper Money Is Political Money, December 4, 2010

[6] Wall Street Journal Editorial, The Fed's Bailout Files, December 2, 2010

[7] Bloomberg.com Fed May Be ‘Central Bank of the World’ After UBS, Barclays Aid, December 2, 2010

[8] Guardian.co.uk, Ireland bailout: full Irish government statement, November 28, 2010

[9] Reuters.com Oil-rich Norway may lend direct to Ireland, November 29, 2010

[10] O'Driscoll Gerald P. Jr. An Economy of Liars, Cato Institute, April 20, 2010

[11] Wikipedia.org Endowment effect

[12] Wall Street Journal Blog, Euro Zone Members as U.S. States, December 1, 2010

[13] See Global Debt Concerns Overwhelmed by Liquidity, October 15, 2010

[14] Wikepedia.org List of U.S. states by GDP

[15] Wikepedia.org Comparison between U.S. states and countries nominal GDP

[16] Bespoke Invest, State Default Risk Levels, December 2, 2010

[17] See Inflationism And The Bailout Of Greece, May 02, 2010

[18] Wikipedia.org European Union