Cities, Mathematics and Human Action

Below is an interesting talk by physicist Geoffrey West at the TED forum on Cities.

Some points he makes;

-It’s hard to kill a city.

-He places tremendous emphasis on the scalability phenomenon where he connects size with social impact, e.g. bigger city bigger wealth more AIDs

-However he says that optimism bias tends to prevail over the city’s growth dynamics where people tend to see ‘wonderful things and forget the ugly and bad’

-He rightly points out that social networks are key to the growth of cities; ‘We are the city’ which is a result of people’s “clustering interaction”.

-Further he says that for cities to develop it needs ‘faster innovation in a continuous basis’.

-Lastly he says that he can predict the size of a city or company given the sublinear scaling from ‘sigmoidal growth’

Here are my thoughts

It’s interesting to see how mathematically inclined people try to quantify people’s actions.

In the past killing a city or a decline of relevance or marginal utility of a city comes in the form of war (Nineveh, Babylon, Selucia, Carthage, Rome, Pagan and Angkor Wat as examples), change in economic patterns (introduction of Cape Good lead to the decline of Venice) natural calamity (Pompeii) or cyclical-behavioral-political elements- such as overconfidence, which led to overexpansion or lack of diversity (fall of Rome).****

In addition, scale does not automatically translate to magnitude.

In history, autonomous small cities played vital role as Amalfi, Cadiz, Goa, Batavia, Geneva, Abu Dhabi and Monaco.*** Today we have semi-independent city states as (pre-China) Hong Kong and Singapore.

Social network is indeed important. But Professor West does not specify how social network would result to “clustering interaction”. Are cities politically or economically driven?

In the past, strong arm societies depended on the capability of leaders, such as Alexander the Great, Attila the Hun, Genghkis Khan, Timur, Akbar, and Kublai Khan***. When they passed away so did their respective empires and cities.

History shows that many cities emerged from trading routes and proximity thereof, particularly in coastal areas (Tripoli, Sidon, Carthage, Athens, Marseille, Syracuse, in recent centuries Venice, Famagusta, Genoa, Constantinople, Kafffa, Lisbon and etc.)***

Many factors are involved in city dynamics: some of the important ones are economic growth cycles, legal systems, economic freedom, infrastructure, adherence to property rights, (in the past) military power [Assyrians, Romans, Mongols], political climate or conditions (interaction between minority and majority, in the past conflict resulted to dislocations which have caused diasporas of Jews, Huguenots, Armenians) innovation and intellectual tolerance.

To quote the legendary investor Marc Faber***,

A dynamic society arises where there is also intellectual tolerance freedom of conscience, social mobility, freedom of ideas, and the expression of ideas which may be hostile to established beliefs or to the government. Where intellectuals, scientist, and philosophers were persecuted, imprisoned, tortured or murdered, they fled. But it is in their know-how on which progress depends.

Deidre McCloskey would call this the Bourgeois Virtue.

And it is upon this climate of free interaction by people which induces Professor West’s innovation dynamics.

An example from the local setting:

In the Philippines, Manila as the Philippines’ capital played a pivotal role economically (Manila-Acapulco Galleon Trade) and also had been politically important; under American rule Daniel Burnham planned a government center spanning Luneta to Taft which almost like every centrally planned projects failed.

Today, Manila’s relevance has been apparently declining, in terms of population growth and per capita income.

While Manila still has the second largest population second only to Quezon City, the growth rate has been stagnating and relatively underperforming against a vibrant Quezon City according to the 2007 census. The fastest growth rate is seen in Taguig, Paranaque and Kalookan City.

Manila still has the largest population density

However, in terms of per capita GDP, Manila ranks 5^th to the following order Makati, Mandaluyong, San Juan and Muntinlupa (Wikipedia).

The obvious point is that city scale and magnitude while having some correlation does not exhibit strong causation. The huge gap in Professor West’s talk is how social interaction has led to city dynamics.

I have stated why I am a skeptic of centrally planned urbanization as this runs contrary to the forces of technology enabled decentralization. The obvious evidence can be seen in several 'huge' but empty ghost cities in China which are products of politically induced bubble cycles.

Finally Professor West says that he can predict growth dynamics of companies and cities from “sublinear scaling”.

My guess is by now he should have bettered the record of Warren Buffett as an investor.

I am reminded by the admonitions of the great Ludwig von Mises of relating natural sciences with social or human actions,

Nothing could be more mistaken than the now fashionable at­tempt to apply the methods and concepts of the natural sciences to the solution of social problems. In the realm of nature we cannot know anything about final causes, by reference to which events can be explained. But in the field of human actions there is the finality of acting men. Men make choices. They aim at certain ends and they apply means in order to attain the ends sought.

***Nury Vittachi Doctor Doom Riding the Millennial Storm

Interactive Graph of the European Crisis

Here is a nice interactive chart from the Economist partially depicting the region's strain from the current PIIGS crisis


For a better view and for the complete article please proceed to the Economist page here

Global Foreign Exchange Market Now at $4.71 Trillion

Average daily global foreign-exchange turnover has grown to $4.71 trillion according to a Dow Jones Newswires analysis, underscoring how currencies continue attracting liquidity and growing as an asset class despite the uncertain state of the economy.

The Dow Jones estimate, which is higher than the $3.98 trillion daily foreign-exchange number published in the Bank for International Settlements' 2010 report, takes into account official information compiled from Australia, Japan, Singapore, North America and the U.K.--all of which released updated figures Monday.

The Dow Jones numbers also include estimates for trading data from the rest of the world, based on previous BIS annual data. Taken together, the data illustrate how currency flows expanded across the globe over the last year.

That’s according to the Wall Street Journal.

The news didn’t specify the breakdown or the contribution share of the currencies traded.

Nonetheless to me these are:

-Signs of the deepening and growing sophistication of financial markets (growth led by high frequency and retail traders)

-Evidences of growing interconnectedness of financial markets or technology enabled financial globalization

-Symptoms the profusion of liquidity from inflationism (bailouts, QEs and circulation credit)

Fed Audit Reveals US Federal Reserves’ $16 Trillion Bailouts of Foreign Banks

A staggering $16 trillion of bailout money had been extended to foreign banks by the US Federal Reserve during the last crisis!

That’s the finding from the audit commissioned by US Congress through the GAO

From New American

During a 2½ year period starting at the end of 2007, the Federal Reserve provided more than $16 trillion in secret bailouts to banks and other companies around the world, according to a government audit of some of the U.S. central bank’s operations.

Much of the Fed's largesse was lavished on banks in Europe (such as Barclays, left) and Asia, the audit revealed. More than $3 trillion, for example, went to financial institutions in just five European countries. Trillions more flowed toward some of the biggest banks in America. Institutions from Brazil and Mexico to South Korea and Canada also benefited.
The 266-page report, produced by Congress’s non-partisan investigative service known as the Government Accountability Office (GAO), has already sparked intense outrage since its release on July 21. Fed apologists, however, have been quick to defend the actions, saying they were “necessary” to “save” the economy and justified under the Federal Reserve Act.

“The scale and nature of this assistance amounted to an unprecedented expansion of the Federal Reserve System’s traditional role as lender-of-last-resort to depository institutions,” the report stated.

And the crisis had been also used to extend financial privileges by the politically connected. Again from the same article,

According to the analysis, more than 80 percent of the Fed’s largest contracts to manage the programs were awarded without bidding.

Many of the companies that received the contracts were also being showered with central-bank bailouts at the same time. And more than a few insiders were granted “waivers” to hold investments in companies that were being rescued by the Fed.

This serves as more evidence that governments only work to protect powerful vested interest groups and would mainly act to preserve the current central bank-banking system-government cartelized political arrangement.

With the US Federal Reserve’s implicit role as the lender of last resort (aside from other financing roles as guarantor, liquidity provider, buyer, market maker and etc…) for most of the ‘too big to fail’ banking system and central banks worldwide, which has been funded mostly by inflationism, the decadence of the US dollar standard is almost assured.

Is The Island of Dr Moreau Becoming a Reality?

In a creepy parallel to the H.G. Wells’ science fiction novel “The Island of Doctor Moreau”, UK’s public and independent schools have secretly “created more than 150 human-animal hybrid”

From the Daily Mail,

Scientists have created more than 150 human-animal hybrid embryos in British laboratories.

The hybrids have been produced secretively over the past three years by researchers looking into possible cures for a wide range of diseases.

The revelation comes just a day after a committee of scientists warned of a nightmare ‘Planet of the Apes’ scenario in which work on human-animal creations goes too far.

Last night a campaigner against the excesses of medical research said he was disgusted that scientists were ‘dabbling in the grotesque’.

Figures seen by the Daily Mail show that 155 ‘admixed’ embryos, containing both human and animal genetic material, have been created since the introduction of the 2008 Human Fertilisation Embryology Act.

This legalised the creation of a variety of hybrids, including an animal egg fertilised by a human sperm; ‘cybrids’, in which a human nucleus is implanted into an animal cell; and ‘chimeras’, in which human cells are mixed with animal embryos.

Scientists say the techniques can be used to develop embryonic stem cells which can be used to treat a range of incurable illnesses.

Three labs in the UK – at King’s College London, Newcastle University and Warwick University – were granted licences to carry out the research after the Act came into force.

In the H.G. Well’s novel, Dr. Moreau was a scientist who conducted cruel experiments on animals attempting to create sentient beings out of animals

In the movie version (see above), Dr. Moreau embarked on using human DNA in animals to make them more humanlike and regress their animal instincts and make the divine human, free of malice and hatred. [Wikipedia]

In the fictional story, the experiment was conducted by a deranged doctor at a mythical island. In the above, similar experiments are being done by government personnel at legally mandated (public and independent) schools in UK.

If the story line ends the way as the novel played out, where their stealth experiments goes awry, then maybe we should expect zombies, Godzilla, King Kong, Mothra, satyrs, the abominable snowman, hydra, the Minotaur, the Kraken and other fictional or mythical monsters come to life. L.O.L.!

Telecommunication Boom: This Time for Africa

There’s an ongoing mobile technology economic boom in Africa that’s bringing in a slew of new enterprises from from banking to agriculture to healthcare

Here is Killian Fox of the Guardian (hat tip Mark Perry)

My survey underlined a simple fact: Africa has experienced an incredible boom in mobile phone use over the past decade. In 1998, there were fewer than four million mobiles on the continent. Today, there are more than 500 million. In Uganda alone, 10 million people, or about 30% of the population, own a mobile phone, and that number is growing rapidly every year. For Ugandans, these ubiquitous devices are more than just a handy way of communicating on the fly: they are a way of life.

It may seem unlikely, given its track record in technological development, but Africa is at the centre of a mobile revolution. In the west, we have been adapting mobile phones to be more like our computers: the smartphone could be described as a PC for your pocket. In Africa, where a billion people use only 4% of the world's electricity, many cannot afford to charge a computer, let alone buy one. This has led phone users and developers to be more resourceful, and African mobiles are being used to do things that the developed world is only now beginning to pick up on.

Read the rest here

Chart from McKinsey Quarterly

What’s even more interesting is that even in stateless and civil strife torn Somalia, the mobile industry has been flourishing. (much of this civil strife are due to foreign intervention, e.g. the US CIA has been exposed for maintaining several prison cells)

According to the BBC.co.uk (bold emphasis mine)

The business success story of the last 20 years has been the growth of the mobile telecommunications sector.

Somali telecoms expert Ahmed Farah says the first mobile telephone mast went up in Somalia in 1994, and now someone can make a mobile call from anywhere in the country.

There are nine networks to choose from and they offer services from texting to mobile internet access.

All this required investment in infrastructure, but, as Mr Farah argues, Somali investors were betting on the need for people to stay in touch in times of crisis.

More from Wikipedia, (bold emphasis mine)

Somalia now offers some of the most technologically advanced and competitively priced telecommunications and Internet services in the world. After the start of the civil war, various new telecommunications companies began to spring up and compete to provide missing infrastructure. Funded by Somali entrepreneurs and backed by expertise from China, Korea and Europe, these nascent telecommunications firms offer affordable mobile phone and Internet services that are not available in many other parts of the continent. Customers can conduct money transfers and other banking activities via mobile phones, as well as easily gain wireless Internet access.

After forming partnerships with multinational corporations such as Sprint, ITT and Telenor, these firms now offer the cheapest and clearest phone calls in Africa. These Somali telecommunication companies also provide services to every city, town and hamlet in Somalia. There are presently around 25 mainlines per 1,000 persons, and the local availability of telephone lines (tele-density) is higher than in neighboring countries; three times greater than in adjacent Ethiopia. Prominent Somali telecommunications companies include Golis Telecom Group, Hormuud Telecom, Somafone, Nationlink, Netco,Telcom and Somali Telecom Group. Hormuud Telecom alone grosses about $40 million a year. Despite their rivalry, several of these companies signed an interconnectivity deal in 2005 that allows them to set prices, maintain and expand their networks, and ensure that competition does not get out of control.

"Investment in the telecom industry is one of the clearest signs that Somalia's economy has continued to grow despite the ongoing civil strife in parts of the southern half of the country". The sector provides important communication services, and in the process thus facilitates job creation and income generation.

Somalia also has several private television and radio networks. Prominent media organizations in the country include the state-run Radio Mogadishu, as well as the privately-owned Horseed Media,Garowe Online and Radio Laascaanood.

Talk about how the free markets in telecoms has thrived and even blossomed under a stateless society. And how the beauty of competition has worked to give African consumers one of the lowest prices at best quality of services.

Filipinos should stop bickering over PLDT-DGTL buyout and study the lessons of Africa. If we want true competition then we should simply get government’s hands off the industry (repeal Congressional franchise, allow 100% foreign ownership and abolish the NTC)

As for the Mobile-telecom boom, Shakira in the music video below has an apropos theme for the mobile revolution boom in Africa: “This Time for Africa”

Quote of the Day: Bastiat on Symbolism

From James Grant’s review of Frédéric Bastiat’s works, (hat tip David Boaz)

Because nobody else can understand them, modern economists speak to one another. They gossip in algebra and remonstrate in differential calculus. And when the pungently correct mathematical equation doesn't occur to them, they awkwardly fall back on the English language, like a middle-aged American trying to remember his high-school Spanish. The economist Frédéric Bastiat, who lived in the first half of the 19th century, wrote in French, not symbols. But his words—forceful, clear and witty—live to this day.

Confirmation of the Phisix Breakout!

The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. — F. Scott Fitzgerald

The landmark breakout by the Philippine composite benchmark, the Phisix, has been confirmed!

It’s certainly not just that the local benchmark has treaded on fresh nominal record highs, importantly, we should expect momentum to continue if not accelerate.

Attempting to time the markets under these conditions will likely leave market participants with opportunity losses and remorse (regret theory), as broad market actions will likely be defined by sharp upside swings.

Again this phenomenon has not been isolated to the Phisix but can be seen as a regional dynamic.

While major ASEAN equity markets crawled away from the losses at the start of the year, the high octane rebound appears have been a recent phenomenon which only commenced last June.

Ironically, these has been happening on a post QE 2.0 environment (but with QE 3.0 officially on the table[1]), and despite various global market interventions, that initially had jolted global financial markets.

The milestone performance by the domestic bellwether [Phisix: PCOMP, red-orange line] seems coy compared to the breathtaking bullish renditions by Indonesia [JCI: orange line] and Thailand [SET: green line].[chart courtesy of Bloomberg]

Malaysia [KLCI: red line], whom earlier took a temporary lead has, over the interim, deviated from the group and appears to be weakening. This divergence could be a temporary phenomenon.

Nonetheless, all four ASEAN bellwethers have posted advances on a year-to-date basis. And notably, the gains by ASEAN ex-Malaysia appear to be progressing swiftly.

Breakout Confirms the Long Term Direction

The most important message from such this monumental breakout is the apparent continuing confirmation of my long held view of the evolving boom-bust cycle of the Phisix[2].

Patterns don’t play out because of fate or destiny, as some mechanical chartists seem to suggest, instead patterns play out because of real underlying forces that drive them. People’s choices and NOT patterns ultimately determine market actions or cycles.

We should never confuse patterns or historical experience with deterministic action in the way natural science behaves.

As the great Ludwig von Mises reminded us[3], (bold emphasis mine)

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.

The Philippines experienced its first modern bubble cycle which progressed during 1985-2003, an 18 year cycle. This cycle surfaced after the Philippines had been liberated from a tyrannical rule which had suppressed the local market and the economy.

The first bubble cycle saw the Phisix advance from around 150 to around 3,100 for a whopping gain of 19x. The advance had not been linear, though. Two bear markets interspersed the advance phase. These bear markets (orange and green ellipses) were both triggered by failed coup d'états.

Yet the advances coincided with then President Cory Aquino’s administration’s US $12 billion worth of bailouts of several politically connected banks that caused the old central bank to fold from the strain[4].

A topping process developed in 1994-1997, as Japan’s busted bubble redirected a gush of Japanese capital into ASEAN economies[5]. The regional or ASEAN inflation boom eventually unraveled and became known as the Asian Crisis[6].

The ensuing 6 year bear market accounted for as the market clearing process for the region and for the Philippines, part of which had been aggravated by a global recession[7] triggered by the US dot.com bubble bust[8].

Today, the Phisix has been playing out a seminal cycle.

The 2007-2008 bear market in the Phisix had been due to exogenous factors—a contagion from the US mortgage crisis. Yet the latest bear market resembles the earlier or first coup bear market of 1987 (orange ellipse).

This week’s breakout only confirms my long time claim that the recent bear market served as normative countercyclical phase representative of any major trends.

And that’s why I’ve been repeatedly saying that the Phisix will, in the fullness of time, reach 10,000.

It’s a long term trend that seems underway even for our neighbors.

With the conspicuous breakout for the Indonesia, Malaysia and the Philippines (as shown by the charts from chartrus.com), only Thailand, the hub of the Asian Crisis, has yet to reach all time highs.

My crystal ball does not have the surreal or metaphysical sophistication that would allow me to predict the exactitudes, or simply stated, “I can’t say when”. I am no Madame Auring.

All I know is that for as long as the primary forces which drives the Phisix or ASEAN markets—particularly the internal or domestic monetary policies and transmission mechanism from external monetary policies—both of which signify as bubble policies, globalization (which implies further development of the capital markets of ASEAN or of most of Asia) and the global wealth transfer (West-East) or convergence dynamics—remains intact, this advance phase should continue.

In my view, it would take an endogenous or a regional bust similar to 1997, or a reversal of one of these primary factors—through the materialization any of these ‘fat tail’ events: outbreak of global protectionism or a US dollar collapse that risks global hyperinflation or a war that involves the region or a deflationary banking collapse where central banks would not intervene or the adaption of a gold standard—that risks terminating this inflationary boom cycle.

In short, patterns are hardly ever conclusive or that they don’t play out because they have or need to. Since market actions are not historically determined, the realization of patterns would be conditional to the material similarities in the feedback mechanisms or stimulus response dynamics which operated then and which operates today.

If there is a single major nexus between then and today that could influence the fulfillment of said patterns, it is the path dependent nature of governments to inflate the system designed to safeguard the banking system and to preserve the cartelized tripartite patron-client relationship of the welfare state, banking political class and central bankers. The consequences of their actions have perennially led to business (bubble) cycles.

As to whether there will be another countercyclical trend [another provisional bear market] or that the Phisix might advance unobstructed is beyond my ken. Albeit if there will be a clear and present danger that risks another major crisis, I think this could emanate from China[9], instead of the the Eurozone or the US in contrast to mainstream’s expectation.

So far while there have been signs of strains[10] in China, they have not reached a point where I would need to increase demand for cash balances for myself and for my clients.

As far as the current signals from which price trends seem to have been telling us, the upside leg of this advance phase may not only continue, but would likely strengthen.

Breakout Confirmed by the Peso and Market Internals

The Philippine Peso has conjointly broken out of their resistance levels along with Phisix. I told you so.

The tandem’s working relationship has been pretty much solid and dependable. The correlation may not be perfect since the Peso’s action has been distorted by the sporadic interventions by the Bangko Sentral ng Pilipinas (BSP) nonetheless the causation has been strong. Both have been reacting to the relative demand for the Peso assets. The Peso has been driven more by the state of capital flux[11].

Also the Peso can be seen as pursuing less inflationary policies than the US dollar, but a lot more inflationary than the Swiss franc[12].

The simultaneous breakouts can be viewed positively.

Yet the pendulum of the market internals has swung decidedly in favor of the bulls.

This historic breakout has been backed by a hefty surge in volume (weekly volume; left window) which translates to more participation by the public and the pronounced aggressiveness by the buyers.

Foreign inflows, for the week, remained substantial but constituted only about 35% of total trades. This implies positive sentiment for both local and foreign participants.

Based on the average daily traded issues (computed on a weekly basis), the public’s trading interest reached nearly 80% of the 244 issues listed. This means that third tier formerly illiquid and dormant securities have been getting some attention and liquidity. Such spillover dynamics signals broad market bullishness.

It is rare to ever see such strongly linked or convergence of signals as this.

Except for the holding sector, every sector in the Philippine Stock Exchange posted gains.

This time the financial and the property sector tailed the overheated Mining sector both of which has contributed substantially to the advances of the Phisix.

Yet given the sharp pullback by the mining sector over the past two sessions (about 6% from the 2-day high), despite the weekly reported gains, the overstretched mining sector could enter a temporary corrective-consolidation phase.

The mining sector has been up by a remarkable 15 of the last 17 weeks. This week’s advances marked the 5^th consecutive week which has elevated the sizzling hot year-to-date returns to an eye-popping 61.45% as of Friday’s close.

While the strong breakout and the bullish tailwind could mean that the Phisix could rise further, we can’t discount profit taking sessions.

And part of this phenomenon could highlight a rotation away from the mining sector and into the other laggards, perhaps to the finance[13] and the property[14] sector as the next major beneficiaries of the percolating inflation driven boom as previously discussed.

A Journey of a Thousand Miles by Single Steps

Greece received second round bailout package 159 billion euros ($229 billion) which has been larger “shock and awe” than expected by the public.

As the Danske Bank reports[15], (bold emphasis mine)

In particular, the elements of the second rescue package for Greece: EUR109bn in official funds, a EUR12.6bn debt buy-back programme, a lowering of interest rates to 3.5%, a lengthening of the maturity on future loans to Greece to a minimum of 15 years and up to 30 years with a 10 year grace period, as well as a lengthening of the maturity on existing loans.

Burden sharing with the IMF will proceed in line with standard practice (1/3 from the IMF).

The increased flexibility of the EFSF could result in more active intervention in the secondary market. The EFSF now takes on this role, which was previously played by the ECB, but will still be supported by ECB analysis.

Such announcement appears to have lifted the global equity market’s sentiment. That’s because we have another QE in place, but this time based on the Eurozone’s rescue, which has been hardly about Greece, but of the Euro (and US) banking system.

And if global equity markets continue to recover from the recent PIIGS crisis shakeout, where the direction of global equity markets may converge, then this should further intensify the bullish proclivities at the Philippine Stock Exchange or ASEAN bourses as foreign capital seek for higher returns or as safehaven on assets of currencies that have been less tainted by inflationists policies.

Under current circumstances it would be best to use pullbacks as buying windows and to refrain from “timing the markets”.

The gist of any relative outperformance portfolio gains or Alpha[16]--return in excess of the compensation for the risk borne—frequently comes from the magnitude of returns[17] and not from frequency of marginal returns which contemporary sell side analysts design their literatures for their clients or how we are traditionally taught even by academia. (I had to challenge my son’s professor on this)

Yet before we think of the Phisix at 10,000, we will need to see the local bellwether transcend the psychological threshold at 5,000, perhaps by the end of the year.

This journey of a thousand steps, to paraphrase Confucius, will be attained through a series of single steps.

Again, profit from political folly.

---

[1] See Ben Bernanke on QE 3.0: Not Now, But An Open Option, July 15, 2011

[2] See The Phisix And The Boom Bust Cycle, January 10, 2011

[3] Mises, Ludwig von Praxeology and History Chapter II. The Epistemological Problems of the Sciences of Human Action Chapter 2, Section 1 Human Action, Mises.org

[4] See Philippine Banking System: “Most Heavily Fortified Bastion of Privilege and Profit”, June 20, 2011

[5] See Capital Flows, Financial Liberalization and Bubble Cycles, July 22, 2011

[6] Wikipedia.org 1997 Asian financial crisis

[7] Wikipedia.org Early 2000s recession

[8] Wikipedia.org Dot-com bubble

[9]See Mark Twain and China’s Yuan, June 25, 2011

[10] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion June 28, 2011

[11] See I Told You So Moment: The Phisix At Milestone Highs, July 17, 2011

[12] See Is the Swiss Franc Better than Gold?, July 21, 2011

[13] See A Bullish Financial Sector Equals A Bullish Phisix? May 22, 2011

[14] See Expect a Rebound from the Lagging Philippine Property Sector, July 17, 2011

[15] Danske Bank EU summit delivers bold measures, July 22, 2011

[16] Wikipedia Alpha (investment)

[17] See Investing Guru Joel Greenblatt: Focus on the Long Term, July 9, 2011

Philippines Small Business: Unfortunate Victims of Political Distribution

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor. It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.- Frédéric Bastiat

In a few hours the Philippine President, Benigno Aquino Jr. will be making his second state of the nation’s address (SONA).

Yet like most speeches, much of what we will likely hear will be founded on emotive platonic rhetoric, mostly founded on logical fallacies and empty promises whose solution would require expanded political redistribution and more control over the economy and the sacrifice of civil liberties.

And most likely, the important real factors will be glossed over.

Nevertheless, the following charts shows where the Philippines have gotten policies so wrenchingly astray.

The heart of any market economy is the small businesses.

In the US, small businesses have functioned as an indispensable force.

According to the US Small Business Association[1]

-Represent 99.7 percent of all employer firms.

-Employ just over half of all private sector employees.

-Pay 44 percent of total U.S. private payroll.

-Have generated 64 percent of net new jobs over the past 15 years.

-Create more than half of the nonfarm private gross domestic product (GDP).

-Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).

-Are 52 percent home-based and 2 percent franchises.

-Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.

-Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

China’s majestic renaissance also shares the same dynamics

Ms. Lydia So of Matthews Asia writes[2], (bold emphasis mine)

With the diminishing dominance of state-owned enterprises (SOEs), China’s private sector is increasingly becoming an important driving force for economic growth. Over the past few decades, these private businesses have been a large contributor to providing consumer-oriented goods and services, generating employment, and leading to innovation as well as increased productivity in China. These changes didn’t occur overnight. A favorable business environment is essential in fostering entrepreneurship in any country. While entrepreneurs in China got a relatively "late" start compared to their global counterparts, its achievements and contributions in driving the private economy have been impressive. To date, small and medium enterprises (SMEs) have become the dominant growth driver and a critical source of China’s expanding and evolving economy. In 2007, SMEs accounted for 55% of GDP, 60% of China’s industrial output, 65% of patent registrations and 70% of employment in urban areas.

Now, in contrast, the Philippines have shown a tremendous decline in registered small and medium sized business over the past decade.

Such dismal outcome have been in place despite the so-called manifold government assistance via (chart above and quote from ADB[3])

extension of financial support, enhancement of managerial and technological capabilities, tapping domestic and international markets, streamlining systems and institutions, and providing infrastructure and incentives

We understand that small businesses have not entirely vanished but have mostly gone underground or have operated beyond formal government.

This we know or call the informal economy.

The chart above from the ADB[4] shows that 43.4% of the Philippine economy has been operating underground or informally.

The other way to say this is that 2/5 of the Philippine economy exists outside of the ambit of government.

The multifarious reasons for the existence of an informal economy as I earlier pointed out are[5]

-high taxes,

-high welfare payments (social security)

-restrictions, mandates in the official labor market

-minimum wages

-a smothering web of government regulations (license requirements, labor market regulations and trade barriers)

-compliance and other regulatory related costs

In other words, an overdose of government regulations and tax and welfare burdens has pushed small businesses out to operate in the informal economy which has surmounted any trivial incentives by the government to promote them. What the left hand giveth, the right hand taketh away!

The simple reason is that operating in the formal economy has been so politically and economically exacting whose cost benefit rewards informal operations. Talk about the Philippine government sowing the seeds of self destruction!

The ADB chart shows almost the same concerns.

Corruption, as expressed by the surveys, is seen as the fundamental problem.

Yet the public has been virtually deluded to think that the roots of corruption have been about all about personal virtuousness.

Little realize that corruption, inefficient government bureaucracy, inadequate supply of infrastructure, policy instability, tax regulations, crime and theft and tax rates or at least 84% of the aforementioned obstacles for doing business have all been intertwined. You can even count in coups, labor regulations, inflation and foreign currency regulations as part of this.

Many people (vendors) pay bribe money just to be able to operate the informal economy which makes corruption an informal way of governance too. Except that bribe money goes directly into the pockets of the enforcers than the coffers of the government.

Yet people hardly realize that all these obstacles are consequences of predatory laws, as governments have been all about the power to plunder others and not about moral uprightness[6].

I reprise my previous quotation of the legendary investor Doug Casey on corruption[7] (bold emphasis mine)

As Tacitus said in the second century A.D., "The more corrupt the state, the more numerous the laws." It's absolutely predictable that as all these governments around the world – and I mean all of them – respond to the ongoing crisis with an ever-accelerating onslaught of new laws, there will be more and more corruption – and frustration with that corruption.

Tacitus was right. But he could just as accurately have said, "The more numerous the laws, the more corrupt the state," because lots of laws engender lots of corruption. In other words, corruption isn't the problem. The state and its laws are the problem, to which corruption is an unsavory and unaesthetic – but necessary – solution. Laws create corruption, and corruption engenders laws.

Anyone can operate on utopian illusions and fantasies, yet economic reality eventually prevails and slaps us in the face.

Don’t we ever realize why self appointed messiahs in uniforms always pop out somewhere with their reformist rhetoric[8] but whose goal is to only seize power?

Personality based politics which operates on the principle of plunder represents a vicious cycle that deals with the superficial or the symptom and won’t solve whatever ills we have.

The only way to improve the Filipinos’ standard of living is to adapt and promote economic freedom through the repeal of these byzantine arbitrary anti-competitive laws and regulations, by vastly reducing bureaucracy and government spending, by having an economic system based on sound money, by pruning political stranglehold over the economic distribution of resources, by promoting property rights and the upholding the sanctity of contract through the rule of law.

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[1] SBA.gov How important are small businesses to the U.S. economy?

[2] So Lydia, China's New Generation of Entrepreneurs, Matthews International Capital Management July 1, 2011

[3] Paderanga, Jr. Cayetano W. Private Sector Assessment Philippines 2011 ADB.org

[4] Martinez-Vazquez Jorge, Taxation in Asia 2011 ADB.org

[5] See Does The Government Deserve Credit Over Philippine Economic Growth?, May 31, 2011

[6] See Video: The Myth of Good Government, July 23, 2011

[7] See Doug Casey On Corruption: Laws Create Corruption And Corruption Engenders Laws, February 10, 2011

[8] Inquirer.net Marine colonel calls for Aquino’s ouster, July 16, 2011

Video: The Myth of Good Government

The animated video below explains the myth of good government, from the simulated perspective of a "King" [hat tip Jeff Tucker]

Capital Flows, Financial Liberalization and Bubble Cycles

Professor Arnold Kling excerpted the latest edition from the classic Charles Kindleberger book, “Manias, Panics, and Crashes”

One of the themes of this book is that the bubbles in real estate and stocks in Japan in the second half of the 1980s, the similar bubbles...in the nearby Asian countries in the mid-1990s, and the bubble in U.S. stock prices in the second half of the 1990s were systematically related. The implosion of the bubble in Japan led to an increase in the flow of money from Japan; some of this money went to Thailand and Malaysia and Indonesia and some went to the United States....When the bubbles in the countries in Southeast Asia implode, there was another surge in the flow of money to the United States...

The increase in the flow of money to a country from abroad almost always led to increases in the prices of securities traded in that country as the domestic sellers of the securities to foreigners used a very high proportion of their receipts from these sales to buy other securities from domestic residents...It's as if the cash from the sale of securities to foreigners was the proverbial 'hot potato' that was rapidly passed from one group of investors to others, at ever-increasing prices.

Harvard economists Carmen Reinhart and Kenneth Rogoff places the culpability of the global banking crises on financial liberalization

They write

Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

There are vast dissimilarities between political economic conditions of today and the yesteryears to simplistically impute the causal relationship of capital mobility and banking crises.

For instance, the pre-20^th century had mostly operated from precious metal based monetary system and had largely been without central banks compared to the 20^th century. Also today’s era can be characterized as having assimilated the Bismarckian welfare structured state than the pre-20^th century, which implies of a starkly different operating political system.

The economic environment had also been different. The pre-20^th century hallmarked the transition of the agricultural epoch to the industrial age. The 20^th century was the culmination of the industrial era which currently has been transitioning to the information age. There are so many many many more variables to consider.

For me, correlations like this should be meticulously scrutinized rather than just taken as “given”.

Although I won’t deny that liberalization could have been one of the many factors which may have contributed to historical episodes of banking crisis, perhaps this has not been the principal one.

However going back to the chart, one can note of the huge concentration in the incidences of banking crises (green circle) during the post-Bretton Woods; the de facto US dollar standard system of today. This comes after the Nixon Shock, a monumental event eponymous to President Nixon’s closing of gold convertibility in 1971.

The degree of concentration of banking crisis has been unprecedented when compared the cumulative interspersed banking crises of 1800-1970.

This lends credence to the “hot potato” dynamic as narrated by Robert Aliber co-author of the Charles Kindleberger’s classic.

As I have been saying here, the gamut of modern day or contemporary global bubble cycles represent as mainly the consequences of the central banking induced business cycles, the welfare state and the intensifying frictions or strains from the Triffin Dilemma that continues to plague the global fiat money system founded on the US dollar.

This “deficit without tears” paper money system which has privileged the US for the past 40 years has been unsustainable and won’t likely last (unless there would be drastic reforms on the political system).

The trend of gold prices has been showing the way.