Green Jobs: The Anatomy of Government Failure

From the Washington Post, (bold emphasis mine)

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

President Obama has made “green jobs” a showcase of his recovery plan, vowing to foster new jobs, new technologies and more competitive American industries. But the loan guarantee program came under scrutiny Wednesday from Republicans and Democrats at a House oversight committee hearing about the collapse of Solyndra, a solar-panel maker whose closure could leave taxpayers on the hook for as much as $527 million.

The GOP lawmakers accused the administration of rushing approval of a guarantee of the firm’s project and failing to adequately vet it. “My goodness. We should be reviewing every one of these loan guarantee” projects, said Rep. Marsha Blackburn (R-Tenn.).

Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative-­energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.

“There are good reasons to create green jobs, but they have more to do with green than with jobs,” Princeton University economics professor and former Federal Reserve vice chairman Alan Blinder has said.

The loan guarantee program can also be unwieldy. It works like this: Companies negotiate with the Energy Department for a government loan guarantee, which means taxpayers will pay off bank loans if the project fails. Then the Office of Management and Budget must sign off on the guarantees, often changing terms…

Solyndra’s closure prompted concerns about whether the administration made good bets in the rest of its portfolio of clean-tech projects it had helped subsidize with taxpayer-guaranteed loans. The primary investors in Solyndra were funds tied to a major Obama fundraising bundler, Tulsa oilman George Kaiser.

My take:

Again the article proves that there hardly has been any qualm for political authorities to spend on other people’s money because they won’t be held accountable for decision failures.

The political process of picking winners does not guarantee success.

Wrong decisions by political stewards ultimately mean higher taxes which decreases the competitiveness of the economy. Oh don’t blame globalization for the effects of stupid domestic policies.

Importantly, this has been lucid evidence of how central planning fails and how politics can’t subvert the will of the markets.

With taxpayer guarantees, the political beneficiaries of loans (stimulus) from the government are not only protégés of the administration (crony capitalism) but notably have not been subject to the discipline of market forces, and thus, can or will recklessly handle finances even to the risk of finagling them. Call it corruption and moral hazard.

US in a Deflationary Environment, NOT! (In Charts)

The mainstream meme has been about the US economy being embroiled in a ‘liquidity trap’, therefore enduring a deflationary environment.

There have been many signs that the US economy seems flagging of late. (The following 2 wonderful charts from Bespoke Invest)

But there hardly seem signs of deflation with money aggregates skyrocketing (charts from St. Louis Fed)

M2…

MZM…

And credit environment has been conspicuously improving too.

For businesses…

And so with consumer loans…

Importantly, the current economic landscape has certainly NOT BEEN A PROBLEM OF CONSUMER SPENDING, which have much been bruited about by deflationists.

(chart below from Professor Mark Perry)

…but from the lack of investments. (See Robert Higgs magnificent explanation here)

Lastly, US CPI inflation keeps ascending (again from Bespoke)

…yet one would note that the calculation for the CPI index may not be accurate or has vastly understated the above inflation rates, perhaps for political reasons (Wikipedia.org).

The composition of CPI index has been disproportionately weighed towards housing.

Great chart above and below from DSHORT.com

And in looking at the performance of each of the components…

…we find that except for the apparel, the entire spectrum of goods and services in the CPI basket has been ascendant! With the only difference seen at the relative performance of prices.

Bottom line:

What Deflation, where?

NOT until central banks will cease and desist from inflating either forced by markets or by politics, and NOT until central banks will sacrifice to the alter of economics and the markets, the high privileged but beleaguered banking cartel.

Bonds markets have NOT been an accurate indicator, for the simple reasons of government designed financial repression and or government manipulation (QEs).

In planet earth, we see inflation as THE predominant theme or the prospects of a stagflation (which could transit into hyperinflation) risk.

And with global political authorities coordinating efforts to intensify inflationism in the hope that the liquidity therapy will solve the malady of insolvency, then expect MORE INFLATION ahead.

Deflation, which has signified as a bogeyman, will be further used to justify expanded inflationism which in reality has been designed to preserve the existing political order.

As the great Ludwig von Mises wrote

It is no answer to this to object that public opinion in the capitalist countries favors the policy of cheap money. The masses are misled by the assertions of the pseudo experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by saving. They are deceived by the fairy tales of monetary cranks. Yet what counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes and by credit on the bank books.

Unfortunately for us, political authorities and their zealots, fables are seen and adapted as reality, where we have to bear the consequences of their actions.

Hot: Major Central Banks to Jointly Offer US Dollar Liquidity

From Marketwatch.com,

Along with other central banks, the European Central Bank will undertake new operations to provide U.S. dollar liquidity. The operations will be conducted in coordination with the U.S. Federal Reserve, the Bank of England, Bank of Japan, and the Swiss National Bank. The operations will be conducted in addition to the ECB's ongoing weekly seven-day dollar operations announced in May 2010. The move comes amid worries about dollar-funding tensions in market amid the turmoil related to the euro zone's sovereign debt crisis

Here is what I wrote a few days back

And it wouldn’t signify a farfetched idea that a grand coordinated QE project or credit easing measures by major central banks something similar to the Plaza Accord as predicted by Morgan Stanley’s analysts could be in the works too. The Plaza Accord was a joint intervention in the currency markets by major economies to depreciate the US dollar in 1985. This time, perhaps, the biggest economies will all act in concert to devalue their currencies impliedly against commodities.

Global central banks and politicians have, in increasing signs of desperation, been intensifying the use of the nuclear option. Such concerted move is likely one of the many to come. Expect to see amplified market gyrations as consequence to the boom-bust policies of global central banks.

I told you so.

Video: Economic and Political Roles of Chain Stores

LearnLiberty.org presents another great educational video. Professor Art Carden explains the economic and political roles of chain stores to our society.

From Learn Liberty,

Are chain stores good or bad? According to prof. Art Carden, there are reasons to both like and dislike chain stores. The reasons to like chain stores include their ability to lower prices, increase variety, and reduce uncertainty. However, chain stores also do things to dislike such as pursuing special government privileges like subsidies and eminent domain.

Essentially, when chain stores respond to the incentives of the market, they create wealth for society. On the other hand, when chains stores respond to the incentives of the political process, they often produce detrimental effects for society.

With the Philippines hosting 3 of the top 10 largest malls in the world (2009), the above discussion seem quite apropos

Video: Differentiating Natural Rights from Legal and Constitutional Rights

The educational video below from LearnLiberty.org, explains the differences of rights.

From Learn Liberty,

Individuals have rights. But are they natural? And how do they compare and contrast with legal or constitutional rights? Are legal or constitutional rights similar to those inalienable rights mentioned in the Declaration of Independence? Professor Aeon Skoble distinguishes such constitutional rights, such as the right to vote, from the rights protected by governments and constitutions—natural rights not actually granted by governments themselves. He concludes that legal systems should create rights that are combatable with natural rights.

Media Bias and the REAL US Small Business Sentiment Survey

The reason I do NOT trust mainstream media has been due to their innate tendencies to manipulate information to dovetail to their political biases.

The recent survey of US small businesses which exhibited signs of declining optimism is just one good example.

Writes the Wall Street Journal Blog, (bold emphasis added)

“Nobody knows the trouble I’ve seen.” That’s the song small-business owners around the U.S. are singing. But it isn’t regulation, tax policy or credit constraints causing the woes. It’s the lack of customers.

The widely watched survey of small businesses done by the National Federation of Independent Business shows optimism in August was the lowest since July 2010 when the recovery last hit a soft patch. The drop to 88.1 was the sixth consecutive decline — a record string of declines in the index.

What the author would like to present is that the woes of small businesses has been due to the lack of aggregate demand (lack of customers). Because from the Keynesian perspective this means that government intervention should take the place of the private sector, thus justifying more stimulus.

But it’s a totally different story when seen from the actual National Federation of Independent Business report.

Here is the NFIB Economic Trend Report for September 2011 with commentary from William C. Dunkelberg and Holly Wade (bold emphasis mine)

The August survey was mailed out as Congress and the Administration reached their “deal” to curb spending and reduce the debt/deficit problems. Had this been a convincing one to “Main Street,” confidence would have improved and, likely, also spending and hiring. But, NFIB’s confidence measure took a dive as did the University of Michigan’s consumer confidence Index which produced its lowest reading since 1980. In particular, it was expected real sales gains and expected business conditions in 6 months that plummeted in the NFIB report. These two components by themselves lowered the Index 2.1 points versus the total loss from all 10 components of 1.8 points. With such a dim outlook, owners are not going to do a lot of hiring or expanding.

Business expansion, the purchase of new equipment and vehicles and even hiring are “long term” investments. Most important to the decision process is the sales forecast, but against expected sales over the life of an asset, the owner must figure in labor costs, taxes, the cost of new regulations, financing costs and the like to decide whether or not an “investment” will pay off. This is one reason why “short term” stimuli don’t work. The planning horizon for the private sector is longer than the time to the next election!!! At this point, no one knows what their tax rate will be 6 months from now; no one knows what the health care will do to labor costs. Higher for sure, but by how much? Yes, the President suspended costly EPA rules that were going into effect, but you know that they will be back after the election if he wins

The NLRB is pushing the union agenda, card check, mandating owners to post notices of the right to unionize, interfering with Boeing’s business decision making (and the President’s Chief of Staff was on Boeing’s board when the South Carolina project was approved). Supporters of the Administration are pushing for another hike in the minimum wage and the new CEA chairman favors and wants a national sales tax to be imposed. It would take a book to itemize it all. Short-term fixes will not help, private sector decision makers think longer term – they do and they don’t like what they see, there is little clarity or certainty. Consumer spending is still a key factor and 9 of 10 people who want a job still have a job and would spend more if they were more confident about the future

And here is the NFIB’s press release calling for President Obama to repeal employer mandates (bold emphasis mine)

The National Federation of Independent Business is again pushing to repeal the employer mandate in the Patient Protection and Affordable Care Act (PPACA) on the heels of President Obama’s ask for bipartisan job creation. There is currently legislation in Congress to repeal the employer mandate, and the NFIB has long-supported and championed this important initiative.

“At the same time that President Obama is asking small-business owners to create jobs, his very health care law is preventing them from doing so,” said Susan Eckerly, Senior Vice President of Federal Public Policy at NFIB. “In fact, small-business owners will tell you that they are suffering a crisis of confidence right now that prevents them from expanding and hiring; how do they move forward with job creation when the unknown costs stemming from the policies of the past few years continue to stand in their way?

“Instead of advocating for more Washington spending bills that do little to help the situation that small-business owners are currently drowning under, Congress should immediately review and repeal some of the policies of the past few years that stand between an employer and an employee. Simply put, the repeal of the employer mandate is an important step toward sound, long-term job creation.”

Provisions of the health care law, such as the employer mandate, have left many small-business owners unable to expand operations as they brace for new costs and taxes coming out of Washington. The health care law requires that employers with 50 or more full-time equivalent employees offer “affordable, minimum essential [healthcare] coverage” beginning in 2014.

Lastly NFIB economist William Dunkelberg says in this video that in order to raise capital we need savings and not stimulus.

This has NOT been an issue of tax policy or government regulation? Duh!

So the Wall Street article either did not the read the report and instead arbitrarily replaced their conclusions over the NFIB's context, or has equivocated on the survey result of NFIB.

Nonetheless the biggest problem weighing on US small businesses, whom signifies as the largest employers of the US economy, generally can be described as “regime uncertainty” or the assault to private property rights through the legal and regulatory channels which heightens the economy’s risk climate and which subsequently reduces the incentive by entrepreneurs and business people to spend on investments required for job growth.

Regime uncertainty, best defined and enunciated by economist Robert Higgs, (as previously posted) as having to do (bold emphasis mine)

with widespread inability to form confident expectations about future private property rights in all of their dimensions. Private property rights specify the property owner’s rights to decide how property will be used, to accrue income from its uses, and to transfer these rights to others in various voluntary arrangements. Because the content of private property rights is complex, threats to such rights can arise from many different sources, including actions by legislators, administrators, prosecutors, judges, juries, and others (e.g., sit-down strikers, mobs).

Because of the great variety of ways in which government officials can threaten private property rights, the security of such rights turns not only on law “on the books,” but also to an important degree on the character of the government officials who administer and enforce the law.

Thanks to the internet we can weed out prevarications and or political propaganda.

Peter Schiff Schools US Congress: Government Spending Represents Shot of Monetary and Fiscal Heroin

Peter Schiff does a magnificent job lecturing Congress and their private sector ally in this testimony...

Part 1 On burdensome regulations

Part 2 On baneful impacts of government spending

Philippine Competitiveness: Marginal Improvements, More Required

From World Economic Forum (bold emphasis mine)

Up 10 places to 75th, the Philippines posts one of the largest improvements in this year’s rankings. The vast majority of individual indicators composing the GCI improve, sometimes markedly. Yet the challenges are many, especially in the areas at the foundation of any competitive economy, even at an early stage of development.

The quality of the country’s public institutions continues to be assessed as poor: the Philippines ranks beyond the 100 mark on each of the 16 related indicators. Issues of corruption and physical security appear particularly acute (127th and 117th, respectively). The state of its infrastructure is improving marginally, but not nearly fast enough to meet the needs of the business sector. The country ranks a mediocre 113th for the overall state of its infrastructure, with particularly low marks for the quality of its seaport (123rd) and airport infrastructure (115th). Finally, despite an enrolment rate of around 90 percent, primary education is characterized by low-quality standards (110th). Against such weaknesses, the macroeconomic situation of the Philippines is more positive: the country is up 14 places to 54th in the macroeconomic environment pillar, thanks to slightly lower public deficit and debt, an improved country credit rating, and inflation that remains under control.

In the other, more complex pillars of the Index, the Philippines continues to have a vast opportunity for improvement. In particular, the largely inflexible and inefficient labor market (113th) has shown very little progress over the past four years. On a more positive note, the country ranks a good 57th in the business sophistication category, thanks to a large quantity of local suppliers, the existence of numerous and well developed clusters, and an increased presence of Filipino businesses in the higher segments of the value chain. Finally, the sheer size of the domestic market (36th) confers a notable competitive advantage.

I would suggest that much of the aforementioned improvements may have been due to macro economic trends more than having been policy induced.

That said, the Philippines needs more economic freedom and less reliance on politics to improve trade competitiveness

Has Globalization been Responsible for US Economic Woes?

That’s the popular accusation thrown by progressives.

One example is from Jeffrey Sachs (Financial Times),

Globalisation has raised very serious adjustment challenges for the high-income world, and most high-income countries, notably the US, have failed to meet those challenges. The challenges include the loss of jobs and incomes of lower-skilled workers, a shift of manufacturing sector investments away from the transatlantic towards the emerging economies, a rise in energy costs occasioned by rapidly growing energy use in Asia, and an explosion of income and political power at the top of the income distribution, stoked by international tax havens and tax competition between jurisdictions.

Mr. Sachs essentially believes that political control must prevail over voluntary exchanges.

Here is the World Economic Forum’s (WEF) take on US competitiveness. (bold emphasis mine)

The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. On the other hand, there are some weaknesses in particular areas that have deepened since past assessments. The business community continues to be critical toward public and private institutions (39th).

In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th).

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.

In sharp contrast to Mr. Sachs, the WEF sees that expanding government interventions (arms length relationships, transparency issues, burdensome regulations, fiscal deficits...I would add to that list minimum wage, Obamacare, taxes, various job mandates, unemployment benefits and regime uncertainty) as major factors responsible for the declining competitiveness of the US economy.

I would also place policies that trigger boom bust cycles and the growing welfare state (example record food stamps) and warfare state as major contributors too.

In short, by ignoring the ramifications of domestic policies and political developments, Mr. Sachs seems as confusing effects as the cause.

BRICs Mulls Bailout of the Eurozone

From the Reuters,

BRIC major emerging markets are considering ramping up holdings of euro-denominated bonds in a bid to help European countries mired in a sovereign debt crisis, newspaper Valor Economico reported on Tuesday, citing a monetary official.

Valor reported a decision could be made at a Sept. 22 meeting of finance ministers and central bank presidents from Brazil, Russia, India, China and South Africa in Washington.

Brazil's central bank declined to comment on the story.

This comes on the heels of China’s proposed investment on Italy, yesterday.

From Bloomberg/Businessweek, (bold emphasis mine)

China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence.

Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today, declining to say exactly when the talks took place or what was discussed.

Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of China’s main investment destinations, without specifically mentioning Italy.

Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors. Stocks rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting impact…

Any Chinese purchases of euro-region debt to date haven’t produced a lasting cut in yield premiums for Greece, Portugal or Spain…

Any Chinese purchases of euro-denominated debt may help it diversify its reserves away from dollars. The biggest foreign owner of U.S. government debt has doubled its holdings of Treasuries in the three years through June to about $1.17 trillion.

China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Stamford, Connecticut-based Faros Trading in a June report. The European Union still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989.

My comments:

1. The above exhibits the bailout mentality prevalent among policymakers. It’s easy to spend money or resources that aren’t theirs, since the costs of the ensuing political actions are distributed or externalized or borne by taxpayers. Policymakers are essentially unaccountable for their actions.

2. This also demonstrates the implicit desire of global governments to preserve the status quo, again at the expense of local taxpayers.

3. The transfer of resources from productive to non productive entities will have temporary palliative effects. Over the long term, this weakens the productive capability of productive enterprises, as well as, heightens the risk environment of the global economic and financial system. Besides, such transfers distort price signals and resource distribution in the marketplace which only increases systemic fragility.

And since we are dealing with non-productive entities, i.e. governments, for BRIC political leaders, the above represents a choice between domestic or international ‘political’ expenditures.

Again go back to #1.

4. BRIC governments will be a part of the consortium that will rescue elite bankers of the Eurozone and the US. This only reveals how widespread the welfare government-banking-central banking cartel is.

5. For China, part of the incentive to conduct a bail out is to project her growing geopolitical influence; yet a very expensive way to signal success.

China will also use this opportunity to squeeze political deals with economic repercussions. Like any political concession, these would likely benefit the client cronies and the political patrons of the incumbent Chinese government.

6. Diversification of currency reserves out of the US dollars has been attributed as one of the motives for the rescue. But why the Euro, whom like the US suffers from the almost the same disease?

Notice that the current developments signifies as a continuing crisis since 2008. Despite repeated trillions of US dollars or Euro spent on a seemingly expanding breadth of bailouts, there are hardly any convincing signs that this crisis will be over anytime soon. Much of the present political actions have been meant to 'kick the can down the road', which means the likelihood of even larger crisis ahead.

None of the above shows that the BRIC's rescue will matter. Again the thumbprints gleaned from the above would likely be more inflationism.

Bloomberg Editorial: European Central Bank needs to Inflate Aggressively

The Editors of the Bloomberg write, (bold emphasis mine)

In the short term, then, somebody other than German Chancellor Angela Merkel and French President Nicolas Sarkozy will have to take on the task of avoiding disaster. The only candidate is ECB President Jean-Claude Trichet. Unlike Merkel and Sarkozy, Trichet is not constrained by short-term political concerns, and the ECB has access to an almost unlimited resource: the power to print euros. It has already demonstrated a willingness to use that power by purchasing tens of billions of euros in Spanish and Italian bonds to keep those governments’ borrowing costs from skyrocketing.

In its simplest form, ECB intervention would entail the central bank buying Greek and other euro-area government bonds. To keep countries’ borrowing costs in check until European leaders come up with a more comprehensive solution, such purchases would go far beyond the 440 billion euros available to the European Financial Stability Facility (the euro area’s bailout vehicle). The ECB would be buying bonds from banks at an artificially high price, leaving the central bank to suffer losses if and when some of the debts are written off.

The ECB could also be more activist, spurring governments to restructure their debts and get their fiscal affairs in order. The central bank, for example, could pledge to buy newly issued bonds at full face value only if governments adopt credible rules to balance their budgets over the economic cycle; the bank would guarantee existing euro-area debt at only half its face value. Market prices for existing debt would quickly fall to what investors believed governments could actually afford to pay, putting them in a position to negotiate debt- relief deals with creditors. As with the issuance of euro bonds, this approach would require governments to recapitalize banks that take heavy losses as a result of debt restructurings.

To be sure, ECB intervention would come at great cost, including threatening to undermine the central bank’s inflation- fighting mandate. It would not substitute for a real fix to the euro area’s flaws. Europe is reaching a point, though, where aggressive ECB action could be the lesser of all possible evils.

Well, the above sentiment are emblematic of what I had earlier written about,

That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.

In the fitting and resonant words of Henry Ford,

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.

The call to action for more intensive short term fixes had been predicted by the great Ludwig von Mises (Theory of Money and Credit), [bold emphasis mine]

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

So goes part of the political process aimed at conditioning the public for the acceptance of the ideology of ‘disguised absolutism’

Cartoon of the Day: Social Security and the Ponzi Scheme

Cartoon by Mike Lester

An apropos quote, which explains the cartoon above comes from Econolog’s Professor David Henderson

There are two main differences between Ponzi's original scam and the Social Security system. The first difference is that Social Security is run by government and, whatever its constitutionality and its questionable ethics, is legal. The second difference follows from the first: Whereas Ponzi had to rely on suckers, the government can and does use force.

Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders

ASEAN equity markets are among the world’s best performers.

Below is an updated year to date chart from Bespoke Invest

Indonesia, the Philippines and Thailand has thus far ranked 5th, 7th and 10th respectively, while Malaysia ranked 18th has been down by 4.78%, a notch below another ASEAN member Vietnam (down –4.48%).

Of the 78 nations on the roster, there are only 11 gainers, whereas 22 nations, mostly from the Eurozone, are in a bear market.

Clearly global markets have now been biased to the downside…

…where 6 of the top 20 largest world equity markets have also been treading on bear territory.

The distribution of losses are almost similar to the broader picture, but the gains have not been represented since the latter are from emerging and frontier markets.

To add, the US and Canada appears to outperform the average, even if they are likewise enduring losses.

In my view, outside a real recession, and with major central banks pumping money furiously, the current complexion, characterized by the dreary outlook, will likely improve going to year end.

Learning from the Financial Mistakes of Sports Celebrities

Ron Lieber of the New York Times offers 3 lessons to the financial blunders of sports celebrities (bold highlights mine)

Michael Vick will take the field on Sunday wearing the uniform of the Philadelphia Eagles, who took him in after his imprisonment for helping to run a dogfighting ring.

But thanks to his personal bankruptcy filing after he went to jail, he will also be playing for BMW Financial Services, Dodson Pest Control, Summertime Pool and the Monticello Woods Homeowners Association. They are not sponsors. Instead, they and many others have a claim on his future earnings.

Bankrupt professional athletes are a sad fixture on the sports scene, and Mr. Vick isn’t even alone among quarterbacks who have hit the financially injured reserve list. The former Cleveland Browns star Bernie Kosar and the current New York Jets backup, Mark Brunell, have had their brushes with bankruptcy, too.

Sports stars may or may not mess up more often than the average person who earns a lot of money really fast, but their troubles seem outsize because of their fame and the pathetic schemes they fall for. The stakes are high for football players in particular, since their average professional career lasts just four seasons or so and may leave lingering injuries and the health costs or physical limitations that come with them.

Mr. Vick is the rare athlete who is getting a second chance. His lucrative new contract with the Eagles should allow him to pay all of his creditors in full.

Read the rest here

Mr. Lieber’s lessons can be summed up as: avoiding “questionable schemes” of investments, limiting “outsize financial gestures” or largesse and seeking “professional financial help”

It is true that throwing money to businesses or to financial assets, where insufficiency of knowledge or comprehension to the undertaking dominates, does not represent investments, but gambling.

Also, it takes a lot of introspection to manage the ego. This would be the most difficult part, self-control. As Confucius once said, he who conquers himself is the mightiest warrior.

And lastly, professional help represents an option but not a prerequisite.

That’s because as I have previously stated

financial success depends on a simple equation:

Income – Expense = deficit or surplus

If spending is greater than income where constant excess spending is financed by drawing from future income (debt), one ends up consuming wealth…

It would need or take only common sense and self-discipline to observe this rule.

And common sense says that self-education should account for a vital part of the action to achieve self-discipline or emotional intelligence.

Only after financial goals and limitations have been established, is when the need for professional help arises. That’s because carte blanche delegation of personal finances would signify as high risk proposition, for the simple reason that a fund manager’s incentives may not align with those of the client.

George Carlin on Airport Secuirty : One More Way of Reducing Your Liberty

(hat tip: Lew Rockwell Blog)

Information Age: How Blogs Transforms Attitudes

From a paper written by David McKenzie and Berk Özler of the World Bank

There is a proliferation of economics blogs, with increasing numbers of economists attracting large numbers of readers, yet little is known about the impact of this new medium. Using a variety of experimental and non-experimental techniques, this study quantifies some of their effects.

First, links from blogs cause a striking increase in the number of abstract views and downloads of economics papers.

Second, blogging raises the profile of the blogger (and his or her institution) and boosts their reputation above economists with similar publication records.

Finally, a blog can transform attitudes about some of the topics it covers

(hat tip Mark Perry)

My take:

Blogs offer alternative channels to access to information and knowledge.

Blogs provide unofficial channels of education.

Blogs challenges the vertical flow of information which mainstream institutions have been based upon.

Blogs democratizes self-expression and the conveyance of information and knowledge.

Blogs are where ideas mate and procreate.

Blogs have signified as instruments of free markets in the realm of idea markets.

Phisix-ASEAN Equities: Staying Afloat Amidst Global Financial Market Hurricane

The chart below is an update of the current outperformance of the Philippine Phisix (and of ASEAN bourses) relative to global bourses.

Over the past two years, the Phisix (PSEC) remains on an uptrend while equity indices of developed economy bourses as represented by the US S&P 500 (SPX), the European Stoxx 50 (stox50) and the iShares MSCI All Country Asia ex Japan Index Fund (AAXJ) seems to have broken down.

The European Stoxx50 technically has segued into a bearmarket, down by 24% from the February 2011 peak, while the US S&P (-15%) and the MSCI Asia (-16%) seems at the verge of gradating into one. A bearmarket is defined as a downturn of 20% or more in multiple broad market indexes, according to investopedia.com[1]

Global equity markets have essentially been severely dampened by the reemergent and intensifying debt crisis in the Eurozone as contagion risks escalates.

Chart from Danske Bank

The bond spreads of Greece relative to Germany has widened extensively (left window). Credit Default Swaps have now priced Greece bonds with a 92% probability of a default[2]. CDS prices of European financials have eclipsed the 2008 highs[3] (right window). This means that the financial market stress levels at the Eurozone has been far worse than the Lehman episode in 2008.

Adding to the current woes has been the conventional wisdom that sees heightened recession risks for the US.

So far, the market turbulence overseas has had modest impact on the ASEAN equity markets.

Over the short term or during past two months, the correlation of Phisix and ASEAN indices with that of distressed global equity markets have evinced formative signs of tightening or reconvergence.

As I have been saying, divergences in market performance may persist for as long as a global recession is not in the horizon.

One must remember that decoupling signifies as an unproven thesis that can only be validated during a full-blown crisis. It’s a theory that I have been sceptical of, considering the concurrent interconnectedness and interdependence of global economies.

To prove this point, the degree of globalization or interconnectedness with the world, as measured by the merchandise trade as % to GDP[4], Malaysia and Thailand seems far more exposed to a global recession and or contagion risk compared to the Philippines and Indonesia.

One would note that the ordinal rankings of the year-to-date performances of ASEAN equity markets (as of Friday’s close) have partially reflected on such dynamic, where less globally exposed Indonesia and the Philippines has outclassed Thailand and Malaysia

But this variable alone does not convincingly or entirely explain the conspicuous aberration of the ASEAN’s performance relative to global equities or even among her Asian peers. For instance, India has the lowest merchandise trade compared to the ASEAN majors but her equity market is down 17.7% year-to-date.

Chart from US Global Investors/BCA Research

Of course there are other external links such as remittances and investment (capital account) flows to consider. These, as well as, many domestic variables as savings and investment responses to current fiscal and monetary policies, degree of economic freedom and etc… For instance, government expenditures as a ratio of GDP[5] remain low for the Philippines relative to her developed economy contemporaries and major Emerging Market peers. And where the financial markets have been attuned or fixated to debt levels and government spending, such relatively ‘better’ standings may have also been one of the many factors that has contributed to the asymmetric outcomes in global equity markets.

Although we have yet to see how the Phisix and ASEAN markets will respond to another major bout of developed market equity selloffs—the US Dow Jones Industrials -2.69%, S&P 500 -2.67% and European equity markets Stoxx 50 -4.15%, UK’s FTSE -2.35%—as seen last Friday.

The point is that there will be pockets of divergent market actions considering the nuances in the political responses by global authorities to the present chain of financial market imbroglios. This accentuates the point that today’s market conditions are manifestly dissimilar to that of 2008.

For instance, money supply growth in the US is at double digit rates or 15.6% annualized (three months through July) while the Eurozone is printing money at a significantly much slower pace at 2.1% annualized M2 over the same period[6].

So the present convulsions the Eurozone has been enduring can be traced to the ‘less’ aggressive ‘sheepish’ approach applied by the European Central Bank (ECB), the political divisions over monetary policies (as manifested by the resignation of ‘inflation hawk’ ECB Executive Board Member Juergen Stark[7] which might pave way for the ECB’s more aggressive stance towards inflationism) and capital adequacy regulations[8]

Nonetheless, given today’s vastly distorted marketplace, in times of heightened volatility, market correlations have the tendency to tighten or converge as the US equity markets[9] have been showing[10]. But again I wouldn’t bet on a 2008 scenario.

Resilient Phisix Equals a Sturdy Philippine Peso

One good way to assess general sentiment is to look at how market internals and the Philippine Peso have been playing out in the face of the current mercurial climate.

The resilience in the domestic equities has palpably been reflected on the Philippine Peso (left window) and Asian currencies as represented by the ADXY or the Bloomberg JP Morgan Asian Dollar Index (right window).

Even as there have been signs of mass liquidations abroad, so far, foreign investors have not been in a stampede mode out of Philippine assets.

The weekly ‘averaged’ net foreign trade hardly reveals of signs of heightened distress. This has, so far, worked in favour of the Philippine Stock Exchange. Foreign trades have accounted for a little over 1/3 of the current traded peso based volume.

True, Friday saw big declines in Asian currencies as the US dollar fiercely rebounded over a broad number of major currencies. This US dollar rally may see an extension this Monday (unless there will be declarations for major actions by US and European policymakers over the weekend).

However, the Peso closed relatively little changed on Friday at 42.49 (against the US dollar) compared to Thursday’s close at 42.47. The Peso was only been slightly lower (.8%) from last week at 42.14.

So far, the Peso and the Phisix has managed to brush off major shocks from developed world economies.

Rotational Process Means Market Consolidation

Market sentiment has also been manifesting signs of consolidation, through a rotational process instead of deteriorating market breadth.

Weekly ‘averaged’ Advance-Decline spread has been rangebound since the start of 2011. In seeming defiance of the Phisix which registered a 1.07% loss this week, market breadth appears to be improving from the troughs of the week of August 7^th.

So far, the worst conditions of August had even been far better than the conditions during the Arab Spring-Japan Calamity last February until March.

Also last week’s market consolidation phase seems to bring about my long held prediction that there would be a rotation out of the severely overbought mining sector.

The property and industrial sectors posted slight gains over the week as the financials, mining and services weighed on the Phisix composite.

The variances in sectoral performances corroborate the signals emitted by the market internals as explained above. In short, the decline of the Phisix does not imply for broad market corrosion.

On a year to date basis, while the mining sector remains the dominant leader, the gains of the Phisix has been partly shaped by miniscule gains of the financials and the holdings sectors, whereas the industrials, property and the service sectors have been laggards.

Consolidation and rotation has been principal theme of the current market actions.

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[1] Investopedia.com Bear Market

[2] See Greece’s Welfare State at Death Throes, Germany Prepares to Rescue Banks,

[3] Danske Bank Another week with the focus on Greece Weekly Focus, September 9, 2011

[4] World Bank World Development Indicators Merchandise Trade, Google Public Data Explorer

[5] Holmes, Frank Investor Alert - China Fears Much Ado About Nothing US Global Investors, September 9, 2011

[6] Wenzel Robert, The Just Released G7 Communique versus Reality Economic Policy Journal, September 9, 2011

[7] Reuters.com Top German quits ECB over bond-buying row, September 9, 2011

[8] See Why Capital Standard Regulations Will Fail, August 22, 2011

[9] See Applying Emotional Intelligence to the Boom Bust Cycle, August 21, 2011

[10] See More Evidence of Boom Bust Cycles Driving Equity Market Prices, September 10, 2011