Economic Insights from My Weekend at the Hospital

I just can’t help it: economics is part of everything we do.

Some insights I gleaned from my weekend at the hospital.

1. Moral Hazard.

Free lunch is such a compelling idea. Financial intermediaries (health insurance) provide a huge incentive for both principal (doctors) and agent (patient) who sees ways to benefit from its use, even if confinement is not a prerequisite or a required procedure.

Said differently, when the cost of confinement is perceived as low (because it is paid for by a third party), then demand for its use is high.

The advantage (for us) is that health insurance financing provides the “confidence” factor arising from any lingering fears of serious diseases.

In our case, the goals were met: causality of the ailment had been ascertained and importantly the “confidence factor” was established. However, in my view, it would seem that my wife’s confinement as more representative of a placebo effect, because hospital procedures were more about the symptoms and that the treatment could have been done as an outpatient.

Translated into social policies. While private financial intermediaries are governed by profit and loss from the actuarial calculated premium and liability tradeoffs, extrapolated into social policies, free lunch from “universal” health insurance translates to massive demand for health resources. This would lead to rationing and resource allocation determined by the bureaucracy and subsequent skyrocketing prices in health related resources, aside from having less quality treatments.

2. Treating symptoms than the root of the disease.

I thought that I was conversing with an Austrian economist as one of the main attending doctors of my wife gave us a marvelous, or what I would deem as a medical, but economically sound insight: the importance of establishing the relevant causality in diagnosing health problems.

The veteran doctor said that symptom based treatment is a commonplace approach of typical doctors (for many reasons). From that approach, the risk could be one of misdiagnosis or a multitude of intake of prescribed medicines, from different doctors, that may lead to internal conflicts and or side effects which may be perceived by patients as serious ailment.

This very much reminds me of how mainstream economists and politicians recommend solutions to economic problems: they are mostly short term ‘symptom’ based whose solutions are predicated on the throwing money at the problem, changing the figurehead, or regulate or tax the problem—what I call the “Three Monkey Solution”.

So unforeseen consequences can be applied to individual health problems, in as much it is with social policies.

3. Murphy’s Law: Anything you try to fix will take longer and cost you more than you thought.

The fixation on ‘free lunch’ via third party financing was supposedly cost free on our part. At the end of the day, aside from the costs of dislocation, shuttling to and from the hospital to the house plus other petty cash items, a non-accredited doctor had to be paid with professional fees not covered by my wife’s policy—Murphy’s law applied.

4. Agency problem.

I don’t know how this applies with health industry participants (such as doctors) employed or enrolled with third party or financial intermediaries providing health care (in the case of my wife’s weekend experience).

While (principal) doctors aim to nobly serve the interests of their patients (agents), doctors are economic agents as well, who seek to be compensated for their efforts or through their services.

And I would suspect that as economic agents, there would be the underlying incentive to seek asymmetric gains from applying treatments; such as from having more procedures, or through confinement or through more consultations. Again, I can’t say how this applies to my wife’s case. But I am speaking in the general sense.

Aside from medical diagnostics, a lot of the professional fees also depends on the degree of social or interpersonal relationship with patients. In our case, the financial intermediary has built in fees covered with the policy which has not been reflected on the bill. Only the non-accredited doctor had to be paid for, but this is understandable.

This is not to disparage anyone, but the point is that individual incentives are very much in place even for the people in the health industry. (Incidentally, my wife had two great doctors)

And this could be one reason why many doctors, allegedly, resort to symptom based treatment (see #2).

The moral here is that we should be circumspect about dealing with free lunches (in anything), examine health problems via relevant causality (in cognition of the different incentives underpining the principal-agent relationship) and to judiciously weigh on cost-benefits of treatments.

After all, doctors like everyone else are just human beings.

And I thank the Lord that my wife is safe.

Blogging Hiatus, Again

A streak of unlucky months: my daughter got confined last December, now my wife.

I’d probably resume posting once conditions allow.

College Isn’t For Everybody

From Bloomberg (bold emphasis mine)

The U.S. is focusing too much attention on helping students pursue four-year college degrees, when two-year and occupational programs may better prepare them for the job market, a Harvard University report said.

The “college for all” movement has produced only incremental gains as other nations leapfrog the United States, and the country is failing to prepare millions of young people to become employable adults, said the authors of the Pathways to Prosperity Project, based at the Harvard Graduate School of Education in Cambridge, Massachusetts.

Most of the 47 million jobs to be created by 2018 will require some postsecondary education, the report said. Educators should offer young people two-year degrees and apprenticeships to achieve career success, and do more to ensure that students who begin such programs complete them, said Robert Schwartz, academic dean at Harvard’s education school, who heads the Pathways project.

Here in the Philippines, we share the same phenomenon.

The following charts from tradingeconomics.com...

College graduates constitute about 2/5 of Philippine unemployment!

13% of emigrants have been college graduates.

Both of the above represents fundamental evidences why “education is a right” fails.

More comments

-Education does not guarantee employment.

-Employment depends on Profits or the Rate of Returns on Investment, which is determined by many factors (mostly by the varying degree of government restrictions)

-Mass production of college graduates which doesn’t conform to the market’s demand (mismatching) leads to unemployment.

-Growing trade specialization patterns requires increasing skills specialization.

This also means tradition educational platforms will shift: where learning will occur from the unorthodox platforms (such as web based education) than from typical classrooms.

And because of this compulsory, learning will likely become shorter and not longer (as the Bloomberg article above shows) and this is why proposals impose regulations to extend years of education runs contradictory to the direction of the present trends and reeks of vested interests.

Education, writes futurist Alvin Toffler, will become more interspersed and interwoven with work and spread over the lifetime.

And this means trends towards learning through apprenticeship.

As Charles Murray of the American Enterprise Institute writes in a 2008 Wall Street Journal OpEd, (bold highlights mine)

Here's the reality: Everyone in every occupation starts as an apprentice. Those who are good enough become journeymen. The best become master craftsmen. This is as true of business executives and history professors as of chefs and welders. Getting rid of the BA and replacing it with evidence of competence -- treating post-secondary education as apprenticeships for everyone -- is one way to help us to recognize that common bond.

-Public funds spent for education that ends up in the unemployment statistics account for as enormous waste. Think 40% of unemployed, many of which comes from Public schools.

Further, the same unemployed will likely consume ‘safety nets’ which further bloats fiscal budgets. This should add to the lack of competitiveness which undermines investment and increases unemployment--thus a vicious cycle.

In short, the popular illusion that education automatically leads to jobs has been exposed. The welfare state fails.

-Even in the indoctrination to uphold state’s supremacy over the individual, technology has been eroding this, as information acquisition becomes increasingly decentralized.

-With lack of investment opportunities and the subsequent job opportunities, restrictions on migrations should be eased, if not lifted. This gives the people opportunity to learn and work where they think would best serve them or make them productive.

How Socialism Aggravates Harm from Natural Disasters: The Venezuelan Experience

The destructive side effects of Socialism are amplified by national disasters. Venezuela is an example.

Wall Street Journal’s Mary O’Grady writes, (bold highlights mine)

Most of Venezuela's democratic institutions have been destroyed by Mr. Chávez. But Caracas is still not Pyongyang or Havana, and a groundswell of popular dissatisfaction could yet unseat him. His favored strategy to deal with this risk is spreading government funds around and redistributing private wealth. Yet even as hundreds of millions of dollars have been reallocated under chavismo in the past decade, life for Venezuela's poor has been growing more difficult. Mr. Chávez's popularity has been dropping, as evidenced by the opposition's gains in Congress.

Then came the late November rains.

An estimated 130,000 people were left homeless when the northern tier of the country was hit with torrential downpours that lasted well into December. Their plight has become a main theme in all the president's speeches, and he has been scrambling to find them shelter. They have been sent to live in government clinics and offices, more than 150 hotels and even Miraflores, the presidential palace. At one point Mr. Chávez offered to pitch a Bedouin tent—a gift from the Libyan Moammar Gadhafi—in the garden of the palace to make room for flood victims in his home.

All of this has elevated a structural problem of housing shortages that many of Mr. Chávez's constituents expected him to solve when he came to power. Instead the problem has gotten worse.

According to Aquiles Martini, the president of the Real Estate Chamber of Venezuela, who I interviewed by telephone from Caracas last week, the growing population requires 80,000-100,000 new homes per year. But during chavismo, he says, the country has added, on average, only 40,000 units annually. Venezuela now has a housing deficit of two million units. This explains why so many Venezuelans live in fragile, shanty-town housing and suffer so greatly during natural disasters.

Mr. Martini says 2009 was a good year, with 92,000 new units added to Venezuela's stock. But in 2010 the number dropped to 50,000, and the forecast for next year is still fewer new homes. One reason is the nationalization of companies that produce cement and steel. Venezuelan steel output dropped last year by 40% and cement output by 12%, and this provoked shortages in construction materials.

There are other deterrents. Builders have traditionally protected against inflation, now 30% annually, by indexing their contracts with buyers to cover rising costs during construction. But in 2009 the government outlawed this practice. Last year, accusations that some builders were still trying to hedge led the government to threaten harsh penalties and even jail some individuals. Many private developers have since disappeared. Investors who might like to build an apartment for rental income have also withdrawn from the market because, according to Mr. Martini, landlords no longer have the right to evict if their tenants don't pay.

Natural calamity + a cocktail mix of inflation and many other forms of interventionism= More social suffering.

Egyptian Revolt: Web Censorship Fails

Learning from the Jasmine Revolution in Tunisia, the Egyptian government swiftly severed web connections.

But this hasn’t prevented Egyptian malcontents from going around recently imposed government controls.

From the computerworld.com, (bold highlights mine)

"When countries block, we evolve," an activist with the group We Rebuild wrote in a Twitter message Friday.

That's just what many Egyptians have been doing this week, as groups like We Rebuild scramble to keep the country connected to the outside world, turning to landline telephones, fax machines and even ham radio to keep information flowing in and out of the country.

Although one Internet service provider -- Noor Group -- remains in operation, Egypt's government abruptly ordered the rest of the country's ISPs to shut down their services just after midnight local time Thursday. Mobile networks have also been turned off in some areas. The blackout appears designed to disrupt organization of the country's growing protest movement, which is calling for the ouster of Egyptian President Hosni Mubarak.

"[B]asically, there are three ways of getting information out right now -- get access to the Noor ISP (which has about 8 percent of the market), use a land line to call someone, or use dial-up," Jillian York, a researcher with the Berkman Center for Internet & Society, said via e-mail.

Egyptians with dial-up modems get no Internet connection when they call into their local ISP, but calling an international number to reach a modem in another country gives them a connection to the outside world.

Centralization under fire.

The Economic Roots of Egypt’s Revolt

Zachary Karabell, at the Wall Street Journal, spells out the economic aspects of the ongoing revolt in Egypt.

He writes, (bold emphasis mine)

The country ranks 137 in the world in per-capita income (just behind Tonga and ahead of Kirbati), with a population in the top 20. And while GDP growth for the past few years has been respectable, averaging 4%-5% save for 2009 (when all countries suffered), even that is at best middle of the pack in a period where the more competitive dynamic nations have been surging ahead.

Egypt has long been famous for crony inefficiency. Yet Hosni Mubarak was graced with nearly $2 billion in annual U.S. aid, another $5 billion from dues from the Suez Canal, and $10 billion in tourism, so he could buy off a considerable portion of the 80 million Egyptians...

What allows China to thrive for now (and Brazil and India and Indonesia, among many others) is that its citizens believe they have some control over their material lives and a chance to turn their dreams and ambitions into reality. They have an outlet for their passions that is not determined for them, and an increasing degree of economic freedom.

The young in Egypt—two-thirds of the population is under the age of 30—believe that they have no future, and in many ways they are correct. Under Mr. Mubarak, their food and housing is subsidized and they are placed in jobs or left in unemployed limbo, not starving but without any hope of anything but years of numbing sameness.

These realities alone don't cause revolution. Many countries are poor and quiet. But Egypt has had all the marks of a tinderbox. The future could bring worse, with radical regimes or chaos. But for millions who have concluded that their dreams for a better life would expire unfulfilled, nothing could be worse than the present.

My comments:

1. The welfare state strips out the self-worthiness or self esteem of people, as the public’s sense of achievement from trade and production has been limited to a few. Web connectivity may have reinforced this perception and incited for this seemingly widespread clamor for political change.

2. Since economics drive politics, the imbalances from a closed system or state (crony) capitalism eventually gets vented on politics. What is unsustainable won’t last.

3. Political systems built around the industrial age (Second Wave) are feeling the strains of the transition towards the information age (Third Wave)

Today the elites can no longer predict the outcomes of their actions. The political systems through which they operate are so antiquated and creaky, so outraced by events that even when closely “controlled” by the elites for their own benefit, the results often backfire.

This does not mean, one hastens to add, that the power lost by the elites has accrued to the rest of society. Power is not transferred; it is increasingly randomized, so that no one knows from moment to moment who is responsible for what, who has real (as distinct from nominal) authority, or how long that authority will last. In this seething semi-anarchy, ordinary people grow bitterly cynical not merely about their own “representatives” but—more ominously—about the very possibility of being represented at all.

From the underrated but highly prescient author Alvin Toffler in his 1990 book The Third Wave.

Phisix: Panicking Retail Investors Equals Buying Opportunity

“Without education we are in a horrible and deadly danger of taking educated people seriously.” G.K. Chesterton (1874-1936), English author

One of the important sentiment indicators that I use in examining short term trends is measuring the actions of small retail investors.

This group comprise mostly the unsophisticated market participants, whose decisions are mostly swayed by emotions. Market tops (greed) and bottoms (panic) are frequently associated with aggressive actions undertaken by them.

Pigs Get Slaughtered

And there’s even this famous Wall Street axiom which alludes to them: “Bulls and Bears make money, but pigs get slaughtered”.

Pigs, according to Investopedia[1], are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due dlligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.

While I don’t have sufficient data to substantiate this phenomenon today, except that market breadth has considerably deteriorated, my sense is that the recent correction in the local markets may have incited some retail investor’s into panic selling.

Figure 1: Net Foreign Trade

Since the peak of the Phisix in October, foreign trade have been mixed (figure 1).

Last week foreign trade reported net buying, reversing almost half of the outflows seen from the previous week. This means that most of the selling pressure came from local investors. With the broad deterioration of the market’s breadth, this likely signals panic selling by retail investors.

And for whatever reasons which may have prompted for their actions I see this as an opportunity to accumulate rather than to flee.

Where weak hands dominate the activities, taking the contrarian stand would be the most prudent path. It seems almost the same case where we successfully called for “top” in the US bonds and the “bottom” in US stocks[2] based on the activities of the Pigs.

Phisix (and ASEAN)-Global Market Divergences

We have to remember market actions have never been a one-way street, as buyers and sellers reacting to perpetually changing conditions, always struggle to tip the scale of balance in their favor.

I’d have to admit that over the short-term even global markets may take a reprieve. As to whether this would materially influence the actions in the local equity market, which appears to have foreshadowed the global trend, is something I can hardly predict.

And gold prices, which in my view, has functioned as a very important barometer of global equities, seems to have augured for this hiatus (see figure 1).

But the point is: the major drivers of global financial marketplace, particularly inflationism and globalization, remain intact which means likely a consolidation phase first, as a consequence to last year’s fiery run up, before the next leg up.

Figure 1: Growing Divergences In The Financial Marketplace?

One thing we can observe, so far, is that the Philippine Phisix, along with our Southeast Asian contemporaries, which has been one of the world’s best performers in 2010[3], appears to be diverging from the trends of the global equity markets[4].

This can be seen in based on the actions of the Dow Jones World Index (DJW) and Dow Jones Asia Ex-Japan (P2DOW), which means bourses of major economies have been sustaining the rise of global markets, via the DJW, aside from the other non BRIC emerging markets.

In fact, many of the today’s best performers have been last year’s laggards, which only implies of the rotational effects on equity asset prices as corollary from central banks inflationism.

Yet with most countries still showing advances more than those suffering from losses measured on a year to date basis, it’s hard to argue for bearishness unless current conditions dramatically degenerate.

Peso-Phisix Divergence

Another source of a slight divergence appears to be in the tight correlation of the Phisix and the Philippine Peso (see figure 3)

Figure 3 Peso-Phisix Divergence?

Almost each time we see the Phisix fumble, the Peso follows. The chart demonstrates this relationship where a peak in the US dollar coincides with the bottom of the Phisix and vice versa.

This week we saw a sharp rally in the Peso even as the Phisix just eked out inconsequential gains. This implies that foreign investors buttressed Phisix as locals sold the market resulting to a broad based selloff.

My point is that if foreign investors increase their accumulations in the equity markets as the locals sell, we should see a consolidation (bottoming).

And where negative sentiment eases, and locals reverse from selling, we’d probably see a substantial recovery.

By then the Pigs will likely jump on the bandwagon.

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[1] Investopedia.com Stocks Basics: The Bulls, The Bears And The Farm

[2] See US Markets: What Small Investors Fleeing Stocks Means August 23, 2011

[3] see How Global Equity Markets Performed in 2010, January 14, 2011

[4] See Global Stock Market Update: Advancers Still Dominate, January 25, 2011

Gold Fundamentals Remain Positive

``Gold, on the other hand, is a much-needed safeguard against the barbarism of monetary authorities. Historically, the international monetary system, imposed after World War II by the Bretton Woods agreements, gave the dollar a central role. It was considered "as good as gold" because it was the only currency that maintained a link with the yellow metal. Gold thus acted as economic actors' safety valve against American monetary authorities' abuse of inflationary expansion.” Valentin Petkantchin Gold and the Barbarians

I have always emphasized that gold has proven to be quite a reliable thermostat of the global equity markets[1].

Gold has not escaped the short deflationary episode in 2008 nor has it eluded the recession in the early 2008. Thus gold, as we have repeatedly argued here[2], isn’t likely to function as a deflation hedge for the simple reason that gold isn’t part of the incumbent monetary architecture unlike during the Great Depression days of the 1930s. In short comparing gold in the 30s and gold today would be like comparing apples to coconuts.

The implication of this is that a sustained fall in gold prices could suggest of contracting money supply or a resurfacing of recessionary (deflationary) forces. Thus, a sustained fall or a dramatic collapse of gold prices should be mean alarm bells for us.

As a side note, not all recessions have been deflationary as alleged by some, and this has been evident in the stagflation era of the 70s (see figure 4).

Figure 4: Economagic: Stagflation

In the 70s, even as the S&P 500 (green line) fell, the consumer price (blue line) index continued to surge. Meanwhile, precious metals (red line) peaked amidst the 1980 recession.

But of course, like money, gold is also subject to demand and supply balanced by prices. Thus given the 10 successive years of gains, gold is certainly not immune to plain vanilla profit taking.

The point is—we should ascertain if any fall in the price of gold constitutes structural or countercyclical forces at work.

Monetary Disorder Remains The Dominant Theme

When we learn that China intends to issue 1 trillion yuan ($151 billion) this year[3], the the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money[4] and that the US monetary aggregate M2 has been surging by biggest weekly amount since 2008[5], we don’t seem to see any substantial or structural changes that should impact the long term price trend of gold materially.

In short, global central banks continue to pump money like mad, and this should be bullish for gold.

Figure 4: St. Louis Federal Reserve: Bank Credit

To add, as I have rightly been predicting[6]; the steep yield curve would influence the US credit markets positively, though at a time lag, as I previously wrote “the US yield curve cycle has a 2-3 year lag period from which we should expect it to generate “traction” by the last quarter of 2010.”[7]

And they seem to performing as expected (see figure 4), as the US credit market appear to show signs of improvements.

The risk here is that with record “excess” bank reserves or banks' base-money holdings minus required reserves that is either held in their vaults or on deposit with the Federal Reserve, given the fractional reserve system, these reserves can multiply credit and money supply that may amplify or accelerate the rate of inflation.

In other words, even what may be read as a positive ‘economic’ sign could represent a prospective hazard—an offshoot to the previous policies.

Thus, the recent volatility in gold prices for me would account for profit taking and certainly not a reason to see a reversal.

Yet part of the recent fall in gold prices has allegedly been traced to a speculator-trader, who massively levered up on huge (long- short) gold positions, which turned out to be unprofitable and had been forced to liquidate.

The ensuing liquidation resulted to what the Wall Street Journal reports as the biggest single reduction ever[8]in gold contracts.

So with the possibility that this event may have already passed and or could have been discounted, gold could regain its lustre over the coming sessions.

Gold And The Web Enabled Middle East Political Revolutions

Friday’s huge rally in gold, which media attributed to Egypt’s worsening political crisis and had likewise been adduced to the heightened risks of a regional political upheaval—where dictatorships and the entrenched aristocracy appear to be facing a comeuppance from the long disgruntled populace, a revolution apparently enabled by the web[9] and partly triggered by surging food prices—appear more like rationalization.

Figure 5: Bloomberg[10]: Political Tremors In The Middle East

Although, stock markets in the Middle East had indeed been rattled by such fears (see figure 5).

Perhaps the embattled aristocracy could be scrambling to safekeep their wealth overseas by buying gold for laundering purposes or for absconding it, similar to reports where the First Lady of the deposed President of Tunisia was alleged to have fled with 1.5 tonnes of gold (worth $55 million)[11].

The spike in oil prices should be more of a natural side effect over concerns of supply side disruptions once political standoffs become exceedingly violent. But given that the political turmoil account for as domestic issues, I am sceptical over the prospects of prolonged violent stalemate.

For me, these so-called uncertainties are icing in the cake for gold.

Yet in my view, we should see these ongoing revolts as positive.

People appear to be emboldened in asserting their sovereignty over an increasingly derelict political structure built upon vertical hierarchies predicated on central planning and or political-economic fascism.

In short, the web has functioned as a pivotal instrument in counterbalancing or levelling or reducing the concentration of political power to a few or to the once powerful elite. The likelihood is that the rule of autocrats will be diminished, unless governments would be successful in introducing and imposing controls and censorship on the cyberspace.

With over 2 billion people now wired or connected online or “With the world's population exceeding 6.8 billion, nearly one person in three surfs online”[12], add to that the 5 billion mobile phone subscriptions or about 73% of the global population, it’s no wonder how the political playing field is being reconfigured to adjust to these new realities.

Governments in the future are likely to be more attuned to the public and would likely shed a lot of bureaucratic fats.

And these ongoing revolutions represent the aforementioned structural adjustments in the political process. Hopefully, these people power revolts will be alot less bloody than their counterparts in the early to mid 20^th century.

And if there should be any major force that could influence the current trend of gold it would likely be gold’s reversion to the new monetary framework which will likely be brought upon by people’s realization and intolerance of the abuses of central banking system.

So I unlike those who see a surge in the “event risks” from the current string of upheavals in the Middle East as a reason to sell, I see gold rebounding from these uncertainties, fed by the inflationism in central banks and eventually a rally in most of the global equity markets, including the Phisix.

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[1] See Gold As Our Seasonal Barometer, February 23, 2009

[2] See Gold Unlikely A Deflation Hedge, June 28, 2010

[3] People’s Daily Online Central bank to print 1 trillion yuan in paper currency, January 20, 2011

[4] Independent.ie Central Bank steps up its cash support to Irish banks financed by institution printing own money January 15, 2011

[5] Durden, Tyler M2 Surges By Biggest Weekly Amount Since 2008 As It Hits Fresh All Time Record, Zero Hedge, January 27, 2011

[6] See Influences Of The Yield Curve On The Equity And Commodity Markets, March 22, 2010, See What’s The Yield Curve Saying About Asia And The Bubble Cycle?, January 17, 2010

[7] See Trigger To The Inflation Time Bomb, October 7, 2010

[8] Cui Carolyn and Zuckerman Gregory Small Gold Trader Makes Big Splash, Wall Street Journal, January 28, 2011

[9] See The Web Is Changing The Global Political Order, January 29, 2011

[10] Bloomberg.com Bloomberg GCC (Gulf Cooperation Council) 200; The Bloomberg GCC 200 Index is a capitalization weighted index of the top 200 equities in the GCC region based on market capitalization and liquidity. The index was developed with a base value of 100 and is rebalanced semi-annually in April and October.

[11] MoroccoBoard.com Tunisia: Ex First Lady Absconded With 1.5 T Of Gold Bullions, January 17, 2010

[12] Physorg.com Number of Internet users worldwide reaches two billion, January 26, 2011

The Web Is Changing The Global Political Order

Here is futurist Alvin Toffler as interviewed by the Gartner fellows in 2006: (bold emphasis mine)

I also think there's going to be a great boom when we stop thinking about companies and start thinking about restructuring governments - and completely restructuring these gigantic pyramidal bureaucracies that we rely on and that no longer function. So I think that there's going to be a huge market for software in new kinds of organizations. Now, I'm not sure whether it'll still be called software or what, but as you no doubt read in the book, I expect to see one big institution after another collapse just like the Katrina experience with FEMA and the government and so on. That our corporate structures are designed for the industrial age - and that made sense then and Max Weber wrote about it in 1910 and so forth and so on - but they're clearly inappropriate to the systems that are now growing up, economic, social, cultural and all the rest.

The web became an instrumental tool in uprooting Tunisia’s dictatorship as shown here and here.

Sensing the same fate that might befall the 30 year authoritarian regime, Egypt’s President Hosni Mubarak swiftly orders communications cut as riots has escalated.

From Business Insider

From the New York Times

For the first time since the 1980s, Mr. Mubarak felt compelled to call the military into the streets of the major cities to restore order and enforce a national 6 p.m. curfew. He also ordered that Egypt be essentially severed from the global Internet and telecommunications systems. Even so, videos from Cairo and other major cities showed protesters openly defying the curfew and few efforts being made to enforce it. (emphasis mine)

Old political structures designed for the Industrial era appear to be crumbling exactly as Mr. Toffler predicted. This is only part of the ongoing adjustment towards the “knowledge economy”.

Update:

I’d like to add that the transition to the knowledge economy is being fed by the forces of decentralization brought about by connectivity and information dissemination. And this is what governments are afraid of.

Of course, another major factor that contributes to this societal discontent has been inflationism- seen through rising politically sensitive commodity prices.

As we have long been saying, these are two major forces in collision.

Commodities And The Good Life

In a book review, the ever brilliant Matt Ridley narrates how commodities has contributed to economic progress and our good life.

An excerpt…

The discovery of the elements shadows and to some extent explains this evolving history of specialisation. The ancients knew of just seven metals: gold, silver, copper, tin, iron, lead and mercury. By giving each specialised roles, they improved their living standards—tin for hardening bronze, lead for moulding, silver for coinage and so on. By the modern era only one more metal—zinc—had joined them (although platinum was known to natives of the Americas). But then came a steady flow of new metals, each of which finds its particular role in technology and society: tungsten for hardness, aluminium for lightness, chrome for polish, neodymium for magnets, barium for medicine. Each finds its niche as surely as each profession and vocation does in human society. Just as our story is one of specialisation, so the story of chemistry is one of purification.

Each metal marches into our lives along a path from novel to banal, says Aldersey-Williams. Aluminium was once so difficult to make that Napoleon III used aluminium cutlery for only his most favoured guests and gave his son, the Prince Imperial, an aluminium rattle. Then it became so cheap that it was considered, well, cheap. Titanium, once rare and exotic, is becoming ubiquitous. For niobium and tantalum, Aldersey-Williams writes, “the journey is just beginning.” This is a tantalising thought. There are so many elements whose talents we have barely begun to use.

Do Chinese Lack A Sense of Value?

Over at Minyanville, Kristin Graham makes strong and sweeping statements against the Chinese, she writes, (bold emphasis mine)

First, the Chinese lack a sense of value. Wealth is accumulated rapidly and in many cases, without taking on much risk since the government stands by its people’s side. Real estate, frequently earned via unorthodox means, turns average workers into wealthy citizens without lifting a finger. The Chinese don’t always associate high income through hard work and therefore don’t value the ability to purchase a luxury item.

Second, the lack of a distributed class system results in a consumer market where you’re either too poor to afford premium goods and services or you’re so wealthy that you can afford just about anything. With no scale of wealth, consumers do not gradually get priced out of the market as prices rise.

Third, the Chinese tend to view a direct connection between price and quality. The higher the price, the better the product. The best example is the housing market: structurally poor apartment buildings that deteriorate at rapid rates continue to escalate in value. The quality of the inside of an apartment is rarely a determining factor of its market value.

Lastly, wealthy Chinese are very materialistic and status oriented. This has a lot to do with the fact that China is all new money. For example, a young co-worker’s parents purchased her a car a few months back. She claimed she didn’t have a driver’s license and was unsure what she should actually do with the car. It was purchased purely for the fact she could say she owned it.

A recent quote from a Chinese dating game show, “I’d rather be miserable sitting in BMW rather than happy on a bicycle”, sums up the Chinese mentality.

Clearly, the Chinese mindset is far different than in the US. Regardless of level of wealth, most rich Americans will think twice before a purchase and evaluate the value of what they are paying for goods or services. In China, money is spent with little to no consideration of value. It’s spent because it can be spent.

My comments:

“Lacking a sense of value” does not seem to be the appropriate phrase here.

When people take action that ignores “risk”, based on the expectation that “government stands by its people’s side”, this is known as “moral hazard”, a common feature seen in economic bubbles.

And moral hazard doesn’t make the Chinese any different from the Americans who were the epicentre of the worldwide tremors felt from the most recent US housing bubble crash.

From Wikipedia.org

Besides, it isn’t just the Chinese who “became materialistic and status oriented”, as Americans levered up their houses just to speculate on McMansions and SUVs.

McMansions as defined by Urban Dictionary, is “the epitome of waste in America, and is nothing more than a status symbol for many pretentious suburban Americans who work to death trying to pay the mortgage and keep up with the Jones'.” (emphasis added)

So it isn’t the just the Chinese who seem to have lost their sense of values or where demand and supply appears “inelastic” but likewise the Americans, or for that matter, anyone else experiencing the narcotic effect of a blossoming bubble episode.

In other words, bubbles are not limited by national identity, as these signify as the sociological sideeffects of government or politically based policies.

In bubbles, what would appear irrational would look like the norm, that’s because mob psychology would be dominant enough to transform what seems rational to losing “contact with reality”. And that’s precisely what the writer has been witnessing in angst.

The bubble cycle in China has been palpable enough such that a poll recently revealed that 45% of global investors expect a bust within the next the 5 years. I share this conviction.

Unfortunately, instead of objectively examining the unfolding events, the writer applies undeservingly self-righteous prejudices.

Corruption In The Philippine Military: What Else is New?

Today’s headlines reported a 'surprise' bombshell-a corruption expose within the Philippine Military.

This from the Inquirer, (bold emphasis mine)

A retired lieutenant colonel on Thursday made a surprise appearance at the Senate and disclosed how he and his ex-bosses allegedly amassed wealth, with a large portion of the loot taken from soldiers’ salaries.

Seated on a wheelchair following a stroke, George Rabusa dropped a bombshell: that Angelo Reyes, a former Armed Forces chief of staff, received a send-off gift (“pabaon”) of “not less than” P50 million when he retired in 2001.

Rabusa said he personally delivered the cash to the “White House,” Reyes’ then quarters at Camp Aguinaldo, that year. He said he was accompanied by the then military comptroller, Lt. Gen. Jacinto Ligot.

“We had to convert [the money] to dollars because it was very bulky,” Rabusa said during the Senate blue ribbon committee’s initial hearing on the plea bargain between government prosecutors and ex-military comptroller Carlos Garcia.

On top of the purported “pabaon,” Reyes, who later became defense secretary, allegedly received a monthly take of at least P5 million—or around P100 million in his 20 months as AFP chief of staff. Rabusa said he and Ligot made the monthly deliveries.

Rabusa said Reyes’ office also received another P5 million monthly, but added that the amount was spent for office needs and was not necessarily pocketed by Reyes.

Yawn.

So what else is new?

Almost everyone would chime in to passionately condemn on such ‘repugnant’ act. But this perspective has been largely premised on the moral aspects of human frailties.

While people see this as something to seethe at, I see this more of a humdrum, if not an amusement. That’s because the mainstream hardly ever discusses on what incentivizes public officials to resort to such ‘detestable’ action. The assumption has always been premised on virtuosity and personality, and hardly on the system which fosters this.

People rarely see that corruption is mainly a product of the political distribution of resources.

A society whose economic opportunities have been controlled by politics would end up having the same or repeated repercussions, thus a vicious cycle—which is why there is nothing new.

As Ludwig von Mises wrote,

``Public opinion is not mistaken if it scents corruption everywhere in the interventionist state. The corruptibility of the politicians, representatives, and officials is the very foundation that carries the system.”

And government officials as human beings are tempted by the same follies as anyone else, except that they advantageously operate with the power of legal coercion behind them.

And a bloated bureaucracy, regardless of which government agency, tends to fall into the same trap, as political favors, concessions and privileges are extended or exchanged within the bureaucracy or with select entities in the private sector, under the aegis of political mandate, that frequently leads to the same ‘perverted’ incentives.

Here is a simple (Occam Razor’s-law of parsimony) solution: starve the beast and corruption should fade naturally.

Practicing What We Preach

Robert Wenzel on how anti-gold proponent Paul Samuelson got rich

Their academic nonsense says one thing, but their real world activities are quite different. In academia, Samuelson wrote about the efficiencies of the market and was anti-gold. In the real world, he sought out traders that could find the inefficiencies in the markets, and he owned gold.

Incoherence seems to be a familiar quality that can be observed with interventionists, or simply, not practising what they preach.

I’d further add the following:

Interventionists want higher taxes, yet they refuse to pay taxes or volunteer to pay taxes (or donate their earnings) outside of government edict. They want the others, specifically “soaking the rich”, to suffer the burden of higher taxes...but never on them.

Interventionists want “self sufficiency” or local production. Yet they ride in foreign made cars, buy foreign food, use foreign appliances, clothes, and many other foreign products or services. They even travel abroad or conduct business with foreign partners.

Interventionists spite free trade: Yet they engage in voluntary exchange...everyday! They even sell their advocacies via the markets (books, journals, speaking engagements etc…)!

Interventionists declare that war is a good way to buoy the economy. Yet they are afraid to go to the front lines to engage in combat!

Interventionists want someone’s activity regulated. It’s definitely not theirs!

Interventionists preach depression economics. Yet as experts ensconced in the ivory towers, they are compensated by institutions (school, Wall Street or media), sell books (!), or receive grants from government sponsored entities and can hardly take on market positions that supports their biases, something like how Paul Samuelson made his fortune.

In one of the episodes of the comedy series, Seinfeld, Jerry Seinfeld advised his friend George Costanza who seem to get everything wrong, “If every instinct you have is wrong, then the opposite would have to be right”.

This must be the unstated rallying slogan of the interventionists. Paul Samuelson looked like one.

Some Democrats Recognize The Value Of Free Trade

The following data and analysis comes from the website of US Democratic Party [the political party where one would hear a mouthful of anti free trade sentiment], the Democratic Leadership Council.

The article referred herein is about Russia as the largest country outside the WTO, and the prospects of increasing trade relations with her and the US through a membership in the WTO.

Here is the kicker from the DLC.org (bold emphasis mine)

Altogether this would mark the largest burst of economic reforms and liberalizations certainly since Russia's independence in 1991, and likely rival only the perestroika era of the late 1980s as Russia's most ambitious attempt to rejoin the world economy since the First World War and the Revolution.

For the other new WTO members, this has meant big jumps in imports -- America's own export growth to these countries has been double the pace of export growth to new FTA partners and four times the rate to the rest of the world.

Res ipsa loquitor

Will Traffic Cameras Bring Discipline To Philippine Motorists?

Philippine authorities and the local media think that they’ve found the antidote against erring motorists-traffic cameras!

From the Philippine Star,

The MMDA said its enforcers, armed with cameras and speed tracking guns, will man strategic portions of the highway to make sure motorists observe the speed limit. Violators caught on camera and tracked by speed guns will be sent notices within seven days, following the agency’s “no contact” policy.

Unfortunately, as always they are likely to be wrong. That’s because the relationship between speed cameras and accidents have been ambiguous.

This from the Economist, (bold emphasis mine)

TRAFFIC cameras are always controversial. Proponents maintain that an increase in their number results in fewer deaths on the roads. Opponents grumble that they are merely money spinners for local governments at the motorist’s expense. Drivers in Edmonton, Canada, will be refunded for speeding fines issued since November 2009 because of a technical glitch with a particular camera. In Britain, the government’s claims over improved safety were rebuffed by the British Medical Journal, and local councils have begun to turn off cameras. Research carried out recently in Australia by Queensland University points the other way, showing cameras do reduce accidents. The arguments will continue. Our chart shows that the effectiveness of traffic cameras is inconclusive, perhaps because many other factors contribute to road safety, such as population density, the condition of vehicles and roads, and other pedestrian-protection measures.

Authorities are likely to underestimate people’s reaction towards new rules and overestimate on their power to control or regulate people’s behavior.

Yet such “do something” attitude would likely succumb to the ningas cogon trap (enthusiasm only at the start of the project) brought about time consistency problem (popular policies are put in place due to the public’s fickle demand for it) and political grandstanding by the authorities that would lead to inconsistent and arbitrary implementation (in pursuit of popularity, new policies and its implementation will be redirected towards issues or flavors of the day).

Bottom line: Government use of taxpayer resources on these “fashionable” policies will likely end up wasted, the government will fail to accomplish its goal, and at worst, such new policies risks unforeseen consequences.

Nascent Signs of Stagflation?

UK may be the first country to manifest symptoms of stagflation or “a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation” (investopedia.com).

chart from tradingeconomics.com

This from Businessweek-Bloomberg

Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest weather in a century in December hampered services and retailing.

Gross domestic product fell 0.5 percent in the three months through December after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Economists forecast a 0.5 percent gain, based on the median of 33 predictions in a Bloomberg news survey. Growth would have been “flattish” in the quarter without the impact of the weather, the statistics office said.

The U.K. recovery is losing momentum even before Prime Minister David Cameron’s government steps up its fiscal squeeze to cut the budget deficit. While the Bank of England left its key interest rate on hold this month to support the recovery, inflation has soared to an eight-month high and policy maker Andrew Sentance said late yesterday the “time has come to act” as price pressures intensify.

So economic contraction, which adds to unemployment amidst high inflation rates are signs of stagflation- a tradeoff which traditional Keynesian models have not incorporated.

Other developed economies are likewise seeing signs of emergent inflation

From the Economist:

Recently, however, rich-country inflation has also started creeping up: in December Britain’s consumer-price index hit 3.7%, while euro-zone inflation also rose above the ECB's target. Much of the blame has been put on the increase in commodity prices. But the impact on consumers differs widely between countries. A larger share of income is spent on food in poorer countries such as China (33%) and India (46%), so the rise in global food prices is the main driver of inflation there. By contrast, pricier energy is a bigger factor in the rich world, although it forms a relatively small component of consumer spending.

Given the near unanimity of policy directions by global central bankers, it is not deflation that we should worry about but stag- or super-inflation.

China’s New Paradigm To Economic Progress?

Some people, like Martin Jacques (see TED talk here, HT Jeff Tucker), thinks that China’s path to progress will be immensely different from that of the West. They could be right...overtime.

Chart from the Economist

However, for as long as the Chinese read and apply Western economic theories as their own policies, I doubt that Chinese cultural “uniqueness” will hold true. (chart from the Economist shows both Chinese and Americans learning to assimilate each other)

Proof?

This from yesterday's China’s People’s Daily, (all emphasis mine)

The People's Bank of China (PBC) will print 1 trillion yuan ($151 billion) worth of new bank notes this year, but officials refuted claims that the announcement had anything to do with inflation, the Xinhua News Agency reported Wednesday.

Ma Delun, deputy governor of the PBC, said Tuesday that the bank intends to replace old paper money floating in the market.

Ma said the amount of paper currency currently in the market is worth about 4.6 trillion yuan ($698 billion), and the central bank plans to replace them in five to seven years.

He said the central bank also plans to release more cash into the market during Spring Festival, but it has no plan to issue large-denomination currency and newly designed Renminbi notes.

Peng Sheng, an official with the Postal Savings Bank of China, told the Global Times that during Spring Festival, people spend more cash to buy gifts, travel, stuff them in red envelopes, while companies need cash for bonuses.

There was speculation that the PBC will print more money because of inflation.

Some points:

One, Chinese authorities justifies the policy of money printing to the perception of scarcity of money.

Second, Chinese authorities denies the causal linkages of money printing with that of inflation.

In the book When Money Dies: The Nightmare of the Weimar Collapse, authored by Adam Fergusson, we note of the following passage:

Most successful businessmen, however, stuck happily to the heresy that only by a continually falling exchange rate could Germany compete in neutral markets. After them, the deluge. Neither they, nor the politicians, nor the bankers — with distressingly few exceptions — perceived any direct connection between inflation and depreciation. And yet, as the printing presses churned out bank notes the exchange continued rapidly to fall. What impressed the ordinary politician was the danger of social unrest which would, in his opinion, inevitably arise if there were any scarcity of currency. He could not see, or intentionally ignored, the obvious danger which proceeded from continuous inflation. Social unrest appeared, just the same.

So basically, the incumbent Chinese leaders, Weimar politicians of the 1920s and the current day central bankers seem to share the same outlook, reasoning and policy directions.

While cultural quirks can influence diversity in people’s value preferences, this doesn’t mean they are immune to the laws of scarcity.

Finally, chatter about “new paradigms” scare the wit out of me because they usually herald a peaking of a bubble cycle.