Quote of the Day: The Key Thing Poor Countries Should Do

In a eulogy to Sir John James Cowperthwaite, a British civil servant and the Financial Secretary of Hong Kong from 1961 to 1971, the quebecoislibre.org wrote (hat tip Bob Wenzel)

Asked what is the key thing poor countries should do, Cowperthwaite once remarked: "They should abolish the Office of National Statistics." In Hong Kong, he refused to collect all but the most superficial statistics, believing that statistics were dangerous: they would led the state to to fiddle about remedying perceived ills, simultaneously hindering the ability of the market economy to work. This caused consternation in Whitehall: a delegation of civil servants were sent to Hong Kong to find out why employment statistics were not being collected; Cowperthwaite literally sent them home on the next plane back.

Cowperthwaite's frugality with taxpayers' money extended to himself. He was offered funds from the Hong Kong Executive to do a much needed upgrade to his official residence, but refused pointing out that since others in Hong Kong did not receive that sort of benefit, he did not see why he should.

Cowperthwaite's hands off approach, and rejection of the in vogue economic theory, meant he was in daily battle against Whitehall and Westminster. The British government insisted on higher income tax in Singapore; when they told Hong Kong to do the same, Cowperthwaite refused. He was an opponent of giving special benefits to business: when a group of businessmen asked him to provide funds for tunnel across Hong Kong harbour, he argued that if it made economic sense, the private sector would come in and pay for it. It was built privately. His economic instincts were revealed in his first speech as Financial Secretary: "In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster."

Mr. Cowperthwaite’s contribution deserves even more credit. According to the Guardian

His example inspired the governments of Margaret Thatcher and Ronald Reagan, and was a key influence in China's economic liberalisation after the demise of Mao Zedong.

I add to my list of underrated and unsung heroes of capitalism Sir John James Cowperthwaite.

Poor and Middle Income Countries are ‘Happier’?

Based on self-reported happiness, poor to middle income countries have reportedly been happier than their rich counterparts

So says the Economist,

DESPITE the economic gloom, the world is happier than it was before the financial crisis set in (according to a recent poll from Ipsos which surveyed 19,000 adults in 24 countries). 77% of respondents describe themselves as "happy", three percentage points higher than in 2007. Those countries who report themselves as being the happiest tend to be in poor and middle-income countries, while the gloomiest are in rich countries (the figures for Italy and Spain were 13% and 11%).

Reasons? Again from the Economist,

Two conclusions emerge. Large, fast-growing emerging markets do not share rich industrialised countries’ pessimism. The already large “very happy” cohort rose 16 points in Turkey, ten points in Mexico and five points in India. Even rich-country pessimism is uneven. The share of “very happy” people rose six points in—of all places—Japan, defying tsunami and nuclear accidents. But growth amid global misery does not explain everything: the biggest falls in happiness also occurred in large emerging markets, in Indonesia, Brazil and—a perennial misery guts—Russia.

The second conclusion challenges the received notions of mankind’s moods. A tenet of political science is that happiness levels rise with wealth and then plateau, usually when a country’s national income per head reaches around $25,000 a year. “The richer a country gets,” argued Richard Wilkinson and Kate Pickett in “The Spirit Level”, an influential book of 2009, “the less getting still richer adds to the population’s happiness.” Many on the left have concluded that pursuing further economic growth is pointless. Even right-wing politicians such as Britain’s prime minister, David Cameron, and the French president, Nicolas Sarkozy, have set up projects to study “gross national happiness”.

I am tempted to say that polls like this seem to justify the political economy of fascism—since people are happier by being poor, then maintain their happiness by continued immersion to poverty. This by handing over economic opportunities to politicians and their cronies through “special interest group captured” political institutions.

Happiness is subjective or signifies an individual's state of mind or represent personal value scales expressed through expectations.

If the above account has some grain of truth in it, then I’d say that reference point matters: Poorer nations may have relatively lower expectations than those of rich economies. And trajectories of economic growth have been changing the underlying dynamics of expectations

With globalization (measured by trade volume and Industrial Production) at record highs (chart from Professor Mark Perry) economic opportunities have been brightening up for emerging markets compared to debt plagued developed economies.

In other words, optimism, for people who have been jaded or inured to poverty, have likely been derivative from increasing trade opportunities (through liberalization or more economic freedom) that has rewarded their drudgery.

Economic growth favors emerging markets; chart from another 2009 Economist article

Whereas people used or conditioned to living lavish lifestyles funded by intractable debt will have to face the realities of rebalancing their finances. So again, changes in expectations from base points seem to be shaped by the economic developments

There is another aspect: the welfare state. People in rich countries, many of whom are dependent on the welfare state may have seen a reduction in the essence of personal values; particularly family, responsibility, and value of work.

As economist Vedran Vuk writes at the Mises.org,

The agenda of the state is to break up the family. The more you depend on the state, the more you justify its existence, and the larger it grows. The idea that people can provide things for themselves either individually or through the family frightens the state. It delegitimizes its role. The role of the family is dangerous to its survival.

In contrast, the rewards in economic growth have not only been benefiting one’s material welfare, but importantly are magnified through personal values (again family, responsibility and work ethics) in lesser welfare dependent economies.

US to Deal with North Korea’s Dollar $100 bill Counterfeiting

A counterfeiter meets another counterfeiter: North Koreans printing unauthorized US $100 dollar bills

From Business.time.com (hat tip lew rockwell blog)

U.S. negotiators are heading into a second day of what have been dubbed “serious and substantial” talks with North Korean officials. Yet amidst all the discussion of how the U.S. will attempt to work with Kim Jong Un, there has been little (open) speculation as to whether Dear Leader Junior might crank up production of $100 and $50 bills. No, not North Korean 100- or 50-won banknotes, worth about as much as old tissues. I’m talking about fake greenbacks — or, as the U.S. Secret Service has dubbed them, “superdollars.”

These ultra-counterfeits are light years beyond the weak facsimiles produced by most forgers, who use desktop printers. As an anti-counterfeiting investigator with Europol once put it: “Superdollars are just U.S. dollars not made by the U.S. government.” With few exceptions, only Federal Reserve banks equipped with the fanciest detection gear can identify these fakes…

Forging $100 bills obviously gels with the regime’s febrile anti-Americanism and its aim to undercut U.S. global power, in this case by sowing doubts about our currency. State level counterfeiting is a kind of slow-motion violence committed against an enemy, and it has been tried many times before. During the Revolutionary War, the British printed fake “Continentals” to undermine the fragile colonial currency. Napoleon counterfeited Russian notes during the Napoleonic Wars, and during World War II the Germans forced a handful of artists and printing experts in Block 19 of the Sachsenhausen concentration camp to produce fake U.S. dollars and British pounds sterling. (Their story is the basis for the 2007 film “The Counterfeiters,” winner of the 2007 Oscar for Best Foreign Language Film.)

Superdollars can be viewed as an act of economic warfare, but Pyongyang’s motive is probably more mundane: The regime is broke. The 2009 attempt to raise funds by devaluing its already pathetic currency revealed not only the country’s fiscal desperation, but also the abuse Dear Leader was willing to inflict on his people. The won was devalued 100-fold, which meant 1,000 won suddenly had the purchasing power of 10 won. (Imagine waking up to a learn that a slice of pizza costs $250.) Officials set a tight limit on how much old money could be exchanged for new, so whatever value existed within people’s paltry savings evaporated overnight. Compared to devaluation, generating quick cash by counterfeiting some other country’s more stable currency looks downright humanitarian.

So part of the reason why the North Korean government counterfeits the US 100 Benjamin Franklin bills has been to put up a façade or a veneer on its rampant inflationism.

But counterfeiting is a twofold process. According to the great Murray N. Rothbard such process involves first, an increase of the total supply of money, thereby driving up the prices of goods and services and driving down the purchasing power of the money-unit; and second, the changing of the distribution of income and wealth, by putting disproportionately more money into the hands of the counterfeiters.

In short, counterfeiting is the finagling of the public’s wealth into the pockets of politicians or the counterfeiters who run the printing press. This essentially makes the US government, via the fiat money standard running on central banking operations, no different than typical counterfeiters except that US central bank operations are reckoned as legitimated.

And besides, North Koreans need not “undercut U.S. global power” because the US has already been working on path towards self inflicted perdition, through US dollar debasement policies.

Yet the US government disdains competition and will likely act to curtail them.

Again Professor Rothbard,

Whereas the government may take a benign view of all other torts and crimes, including mugging, robbery, and murder, and it may worry about the "deprived youth" of the criminal and treat him tenderly, there is one group of criminals whom no government ever coddles: the counterfeiters. The counterfeiter is hunted down seriously and efficiently, and he is salted away for a very long time; for he is committing a crime that the government takes very seriously: he is interfering with the government's revenue: specifically, the monopoly power to print money enjoyed by the Federal Reserve.

So will the counter-counterfeiting of the North Korean government serve as justification for war hungry US politicians to open a new front in the imperial theater of war?

Mobile Internet is the Future

Internet and mobile phones are in the process of (media) convergence

From comscore.com

“2011 proved to be a groundbreaking year for the mobile industry, with smartphones hitting the mainstream, tablets emerging as a formidable fourth screen, and consumers increasingly integrating mobile behaviors into their lifestyles. As the industry continues to innovate and more consumers look to multiple devices and platforms to consume digital media, we expect the mobile and connected device landscape to be shaken up even further in 2012,” said Mark Donovan, comScore Senior Vice President of Mobile. “As mobile channels present a more personal, social, and ubiquitous experience to consumers, advertisers and publishers have an opportunity to better engage target audiences, given an understanding of how to connect and leverage the unique characteristics of these emerging platforms.”

Key findings highlighted in 2012 Mobile Future in Focus include:

• Smartphones Gain Adoption Among ‘Early Majority’, Driving Mobile Media Consumption
  Nearly 42 percent of all U.S. mobile subscribers now use smartphones, along with 44.0 percent of mobile users across the EU5 (comprised of France, Germany, Italy, Spain, and the UK). Mobile media use – defined as browsing the mobile web, accessing applications, or downloading content – saw increased growth as a result, surpassing the 50-percent threshold in many markets, supported by the proliferation of high-speed networks and increased public WiFi availability.

• Smartphone Platform Wars Intensify As Android and Apple Take the Lead in Most Markets
  The Google Android and Apple iOS smartphone platforms emerged as the leaders of the U.S. smartphone market in 2011, with Android just a few points shy of capturing half of the smartphone market and iOS accounting for nearly 30 percent of the market. In the EU5, Android saw similarly significant gains, unseating market leader Symbian in 3 out of the 5 European markets measured.

• Surge in Mobile App Usage Shapes a Dual Mobile Browsing Experience, Fueling Category Growth
  In 2011, both the U.S. and EU5 saw the growth in mobile app use exceed the growth in mobile browser use, leading to both markets seeing the same percentage of their mobile audience use both apps and browsers to access mobile media. Health ranked as the fastest-growing mobile media category in the U.S. in 2011, followed by Retail and other commerce-related categories such as Electronic Payments and Auction Sites.

• Mobile Retail Information Leads to Emergence of Smartphone Shopping Behaviors
  More than half of the U.S. smartphone population used their phone to perform retail research while inside a store in 2011, illustrating the emergence of savvy smartphone shoppers who bring online shopping behaviors in-store – a trend seen in other markets as well. At the end of 2011, nearly 1 in 5 smartphone users scanned product barcodes and nearly 1 in 8 compared prices on their phone while in a store.

• Mobile Devices Fuel Social Networking On-The-Go, Driving Real-Time Online Interaction
  64.2 million U.S. smartphone users and 48.4 million EU5 smartphone users accessed social networking sites or blogs on their mobile devices at least once in December 2011, with more than half of these mobile social networking users accessing social media almost every day. While mobile social networking users showed the highest propensity to read posts from people they knew personally, more than half of those in the U.S. and nearly half in the EU5 also reported reading posts from brands, organizations, and events.

• Mobile Connectivity and Connected Devices Encourage Cross-Platform Digital Media Consumption among ‘Digital Omnivores’
  Tablets quickly rose in popularity in 2011, taking less than two years to account for nearly 40 million tablets in use among U.S. mobile users and outpacing smartphones which took 7 years to reach the same. By the end of 2011, nearly 15 percent of U.S. mobile users also had tablets – a trend seen across other markets as well.

Download the complimentary copy of 2012 Mobile Future in Focus here

Are Surging Oil Prices Symptoms of a Crack-up Boom?

Dr. Ed Yardeni thinks that there has been a mismatch between oil prices and oil demand

Dr. Yardeni writes

The price of Brent crude oil is up again this morning over $124 a barrel. It’s up from $107.65 at the end of last year as a result of increasing tensions with Iran following the imposition by the US and Europe of tough new sanctions on Iran. They are already reducing the ability of Iran to export crude oil. Last year, Iran exported about 2mbd. That is likely to get cut by half or more. That’s not enough to explain why oil prices are soaring given that global oil supply is around 88mbd. Of course, concerns are mounting that the diplomatic and economic confrontation with Iran could turn into a military conflict that would disrupt oil traffic coming out of the Persian Gulf. This certainly explains why oil prices are rising.

Global oil demand, on the other hand, is weakening and suggests that oil prices could fall sharply if the Iranian issue can be resolved without push coming to shove. As I’ve explained previously, I believe that the sanctions are rapidly crushing Iran’s economy and may force the Mullahs to give up their ambitions to build nuclear weapons. This may take some time, of course. Meanwhile, if oil and gasoline prices continue to rise, I expect that the Obama administration will coordinate a global release of supplies from the Strategic Petroleum Reserves, as occurred last summer in response to the drop in Libya’s exports.

While tensions over Iran partly contributes to the elevated state of oil prices, there are deeper factors involved as previously explained

Importantly when mainstream economists talk about demand they usually refer to consumption demand and ignore the second type of demand—reservation demand.

The distinguished dean of the Austrian school of Economics Murray N. Rothbard explained,

The amount that sellers will withhold on the market is termed their reservation demand. This is not, like the demand studied above, a demand for a good in exchange; this is a de­mand to hold stock. Thus, the concept of a “demand to hold a stock of goods” will always include both demand-factors; it will include the demand for the good in exchange by nonpossessors, plus the demand to hold the stock by the possessors. The demand for the good in exchange is also a demand to hold, since, regard­less of what the buyer intends to do with the good in the future, he must hold the good from the time it comes into his ownership and possession by means of exchange. We therefore arrive at the concept of a “total demand to hold” for a good, differing from the previous concept of exchange-demand, although including the latter in addition to the reservation demand by the sellers.

Yet what prompts for an increase in reservation demand?

Again Professor Rothbard

an in­crease in reservation demand for the stock may be due to either (a) an increase in the direct use-value of the good for the sellers; (b) greater opportunities for making exchanges for other purchase­-goods; or (c) a greater speculative anticipation of a higher price in the future

Speculative activities also drive the increased demand to hold a stock of goods. Or in the case of oil prices, increased speculation has also been responsible for the recent spike.

This means that monetary policies designed to ease credit via zero interest rates and quantitative easing have been responsible for encouraging, not only consumption but speculative activities too, by increasing people’s time preferences.

One would note that oil prices and stock market prices (S&P 500) have been ramping up. These are symptoms of an inflationary boom.

Of course, inflationary boom extrapolates to a boom bust cycle or to a crack-up boom.

As Professor Ludwig von Mises wrote

The boom could continue only as long as the banks were ready to grant freely all those credits which business needed for the execution of its excessive projects, utterly disagreeing with the real state of the supply of factors of production and the valuations of the consumers. These illusory plans, suggested by the falsification of business calculation as brought about by the cheap money policy, can be pushed forward only if new credits can be obtained at gross market rates which are artificially lowered below the height they would reach at an unhampered loan market. It is this margin that gives them the deceptive appearance of profitability. The change in the banks' conduct does not create the crisis. It merely makes visible the havoc spread by the faults which business has committed in the boom period.

Neither could the boom last endlessly if the banks were to cling stubbornly to their expansionist policies. Any attempt to substitute additional fiduciary media for nonexisting capital goods (namely, the quantities p3 and p4) is doomed to failure. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. However, as a rule, the banks in the past have not pushed things to extremes. They have become alarmed at a date when the final catastrophe was still far away.

While a crack-up boom is not imminent, current monetary policies have brought us into this direction. The more governments engage in reckless policymaking in our monetary affairs, the greater risks of spiraling commodity prices.

Rising oil price, thus can be seen as symptoms of a chronic disorder in the current state of money.

Transparency Issues on the US Federal Reserve

Former IMF chief Economist Simon Johnson takes the US Federal Reserve to task for their lack of transparency,

The Wall Street Journal reported on Tuesday that during the 1980s the Fed’s board held 20 to 30 public meetings a year, but these dwindled during the Greenspan years to fewer than five a year in the 2000s and “only two public meetings since July 2010.” At the same time, “the Fed has taken on a much larger regulatory role than at any time in history” — including “47 separate votes on financial regulations” since July 2010, The Journal said.

This high level of secrecy is a concern. It is particularly alarming when combined with the disproportionate access afforded to industry participants in the arguments about what constitutes sensible financial reform.

Just on the Volcker Rule — the provision in Dodd-Frank to limit proprietary trading and other high-risk activities by megabanks — Fed board members and staff members apparently met with JPMorgan Chase 16 times, Bank of America 10 times, Goldman Sachs nine times, Barclays seven times and Morgan Stanley seven times (as depicted in a chart that accompanies the Wall Street Journal article).

How many meetings does a single company need on one specific issue? How many would you get?

For example, Americans for Financial Reform, an organization that describes itself as “fighting for a banking and financial system based on accountability, fairness and security,” met with senior Federal Reserve officials only three times on the Volcker Rule. (Disclosure: I have appeared at public events organized by Americans for Financial Reform, but they have never paid me any money. I agree with many of its policy positions, but I have not been involved in any of their meetings with regulators.)

Americans for Financial Reform works hard for its cause, and it produced a strong letter on the Volcker Rule — as did others, including Better Markets and Anat Admati’s group based at Stanford University.

Based on what is in the public domain on the Fed’s Web site, my assessment is that people opposed to sensible financial reform — including but not limited to the Volcker Rule — have had much more access to top Federal Reserve officials than people who support such reforms. More generally, it looks to me as though, even by the most generous (to the Fed) account, meetings with opponents of reform outnumber meetings with supporters of reform about 10 to 1.

According to those records, for example, the Admati group has not yet managed to obtain a single meeting with top Fed officials on any issue, despite the fact that the group’s members are top experts whose input is welcomed at other leading central banks. To my definite knowledge, they have tried hard to engage with people throughout the Federal Reserve System; some regional Feds are receptive, but the board has not been – either at the governor or staff level…

I do not understand the Fed’s attitude and policies — if it is serious about pushing for financial reform. No doubt they are all busy people, but how is it possible they have time to meet with JPMorgan Chase 16 times (just on the Volcker Rule) and no time to meet Anat Admati – not even for a single substantive exchange of views?

People’s actions are driven by incentives or purpose behavior. So are the actions of those running government bureaucracies. The fundamental difference is that the incentives of bureaucrats are prompted for by political exigencies against market participants who are guided by profits and losses.

Researcher Jane Shaw expounds on the public choice theory

Their incentives explain why many regulatory agencies appear to be "captured" by special interests. (The "capture" theory was introduced by the late George Stigler, a Nobel Laureate who did not work mainly in the public choice field.) Capture occurs because bureaucrats do not have a profit goal to guide their behavior. Instead, they usually are in government because they have a goal or mission. They rely on Congress for their budgets, and often the people who will benefit from their mission can influence Congress to provide more funds. Thus interest groups—who may be as diverse as lobbyists for regulated industries or leaders of environmental groups—become important to them. Such interrelationships can lead to bureaucrats being captured by interest groups.

The political relationship between the regulator and the regulated always impels for a feedback mechanism, such as lobbying, as the regulated will always find ways to circumvent or to relax on the rules which restricts or inhibits their actions. And the typical outgrowth to such relationship has always been the lack of transparency, revolving door relationships (Wikipedia: movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies), logrolling and corruption. Such "conflict of interests" relationships frequently make regulatory agencies “captured” by special interest groups.

And what is the ultimate cause for this?

To quote Milton Friedman in Capitalism and Freedom

Any system which gives so much power and so much discretion to a few men that mistakes – excusable or not – can have such far-reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an "independent" central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an "independent" bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers.

In short, the kernel of the transparency issues surrounding the US Federal Reserve has been about the negative ramifications from the centralization of power. Conflicts of interests and regulatory capture signifies as issues which won’t go away for as long political power (in relation to money, but applies elsewhere) remain concentrated to a few men. The more the power assumed by central bankers, the greater the risks of political indiscretions and secrecy.

Thus, the transparency issue can be resolved by the abolishment of central banks.

This means, yes, End the Fed.

Andrew Napolitano: What If Democracy Is Bunk?

Provocative stuff from Judge Andrew P. Napolitano

What if you are only allowed to vote because it doesn't make a difference? What if no matter how you vote, the elites get to have it their way? What if "one person, one vote" is just a fiction created by the government to induce your compliance? What if democracy is dangerous to personal freedom? What if democracy erodes the people's understanding of natural rights and the foundations of government, and instead turns elections into beauty contests?

What if democracy allows the government to do anything it wants, as long as more people bother to show up at the voting booth to support it than to oppose it? What if the purpose of democracy is to convince people that they could prosper not through the creation of wealth but through theft from others? What if the only moral way to acquire wealth – aside from inheritance – is through voluntary economic activity? What if the government persuaded you that you could acquire wealth through political activity? What if economic activity included all the productive and peaceful things we do? What if political activity included all the parasitical and destructive things the government does?

What if governments were originally established to protect people's freedom, but always turn into political and imperialist enterprises that seek to expand their power, increase their territory and heighten their control of the population? What if the idea that we need a government to take care of us is actually a fiction? What if our strength as individuals and durability as a culture are contingent not on the strength of the government but on the amount of freedom we have from the government?

Read the rest here

Video: Smoking Ban is a Ban on Freedom

Politicians make the gullible public believe that policies of prohibition, usually targeted at vices (like smoking alcohol, prostitution or drugs), have been designed for our betterment (health, environment and yada yada yada--as if we are all too obtuse to know what's best for ourselves).

In reality, these actions signify as their latent desire to expand political control over society by reducing our freedom.

The video below from LearnLiberty.org explains how smoking ban regulations assails people's property rights.


Here is a passage from LearnLiberty.org

According to Prof. Aeon Skoble, smoking bans are on the rise in America. At first glance, this trend seems to stage a battle of rights. The smoker claims to have the right to smoke, while the nonsmoker claims the right to clean air in "public" places such as restaurants and bars.

In an important way, however, restaurants and bars are private places. They have owners, just like homes. Skoble argues that restaurant and bar owners should be able to set smoking rules for their establishments, much like you can set smoking rules in your own household.

Nobody forces a customer into a particular restaurant or bar; drinkers and diners are free to choose among the alternatives available, each of which has a unique environment, including its set of smoking rules. Discussions about "smoker's rights vs. nonsmoker's rights" miss the fundamental issue: restaurant and bar owners' property rights.

Cartoon (s) of the Day: What Tattoos Say About You

Tattoos represent a form of social signaling.

The graphics below from cracked.com attempt to explain them (hat tip Prof Bryan Caplan)

Singapore: The Best Place to Own and Store Gold

The Sovereign Man’s Simon Black says that Singapore is the best place to secure ownership of physical gold

Mr. Black writes,

It’s official. Starting October 1, 2012, Singapore will be the best place in the world to store gold.

As a major international financial center, Singapore is rapidly becoming THE place to invest and do business in Asia. Why? Because it’s just so easy. Regulation is minimal, corruption is among the lowest in the world, and the tax structure is very friendly to businesses and investors. With one exception.

Traditionally, physical gold and silver purchases in Singapore have been taxed at a 7% GST rate (like VAT, or a national sales tax). The only legitimate exception was purchasing (and subsequently storing) at the Freeport facility, adjacent to the main airport.

In just-released budget documents, however, the government of Singapore announced that it will begin waiving GST on purchases of investment grade gold, silver, and other precious metals effective October 1st.

This is huge… and it should really make Singapore the best place in the world to buy and store gold. Prices are already incredibly competitive, with ultra-low premiums and very reasonable storage costs.

Thanks for the tip.

Has China’s Role as the ‘World’s Factory’ Coming to an End?

Has Europe taken over China’s role as the “new sweat shop”?

Writes Spiegel Online, (bold original)

It used to be that European carmakers opened plants to assemble their cars in China. Now the Chinese have turned the tables with the opening of their first factory in Bulgaria, an EU country with low labor costs and taxes. Increasingly, Chinese carmakers are setting their sights on the European and American automobile markets.

Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union in the latest move suggesting the country's carmakers are seeking to establish a beachhead into the European market.

Bulgarian Prime Minister Boyko Borisov on Tuesday attended the opening of Great Wall's new factory in the northern Bulgarian village of Bahovitsa. The plant is to be operated jointly by Great Wall and the Bulgarian firm Litex Motors.

For years, European carmakers like Volkswagen have established large joint ventures in order to gain footholds in the Chinese market, but now the tables appear to be turning.

"Stepping on the European market is our strategy," Great Wall CEO Wang Fengying said at the opening festivities.

Within three to five years, the company plans to produce an entire line of models in Bahovitsa to be sold in Europe, she said. Test assembly of the Voleex C10 and the Steed 5 pick-up truck, which sell for 16,000 to 25,000 leva (€8,200 to €12,800), began already in November.

In the midterm, Great Wall plans to assemble around 50,000 automobiles per year at the 500,000 square meter plant. The number of workers is expected to grow from the current total of 120 to 2,000. Initially, the company plans to sell its vehicles primarily in Bulgaria and neighboring Eastern European countries like Serbia and Macedonia, but it later plans to expand into other EU countries.

Attractive Labor Market

Bulgaria, the EU's poorest country, is attractive as a labor market because it is an oasis of cheap wages and low taxes. Workers are considered well educated and the country is ideal as the site for a company like Great Wall to launch. Given that wages for factory workers have risen considerably in China in recent years, assembly sites abroad have become increasingly attractive for some manufacturers.

While it may be true that China’s wages have risen over the past years, it is important to put into perspective that there has been an enormous chasm between European wages (yes despite Bulgaria's position as having one of the lowest wage in Europe) and China’s wages.

From Urbanomics

Europe hourly compensation in manufacturing is more than 30 times China!

From Ebandit

Chinese workers would take more than 8 years and 10 months to catch up with the annual European minimum wage earnings.

Even if the wage convergence trend does deepen overtime, where China’s wages continues to increase as Europe’s wages decline, it would take substantial changes, and possibly many many many years, if not decades, for this wage based differential to close.

And while the mainstream loves to tunnel on “wages” or “compensation” as the key reason for any shifts in investments [mainly to justify government’s actions for currency interventions or the imposition of mercantilist-protectionist policies], the reality is that wages are just part of the many factors driving the entrepreneur’s economic and financial calculations or business decision processes, such as access to markets, finance, infrastructure et al…, regulatory costs, tax regime, legal environment, political institutions and etc…

Perhaps too, some Chinese investors may just be courageous and far-sighted enough to use the recent crisis as an opportunity to position or that the same investors appreciates Europe's competitive and comparative advantages and acted to capitalize on these

Besides, one investment shift does not a trend make.

The last point is that this serves an example of how conditions are not fixed (past performance does not guarantee future outcomes) and that the world is highly complex.

Asia’s Fast Developing Bond Markets

The Economist writes,

Cross-border bank lending to Asia’s developing economies has been shrinking recently. European banks in particular have been retrenching as they seek to meet new capital targets. That may prompt many borrowers to turn instead to the capital markets--as they did during the last financial crisis. European bank lending to emerging Asia fell by over a fifth in the year to March 2009. In response, firms in these countries issued a flurry of bonds: over $240 billion in 2009, compared with $122 billion the year before. Asia's growing bond-markets may provide a useful "spare tire" in a region that still mostly bounces along on bank lending.

One would note from the above that declining cross border bank lending (mainly from Europe and the US) seem to impact AAA securities the most.

On the right window, since 2009 we can see a surge in BBB and BB and below rated securities. In my view, such lending dynamics seem consistent with the negative real rates environment. And my impression is that the recent decline in corporate bond activities may reverse soon, as negative real rates will likely reinvigorate lending activities. But the complexion of Asia's credit market will change.

I would further add that attributing Asia’s growing bond markets to a “spare tire” underappreciates the real dynamic.

The following charts from Asian Development Bank

In reality, since 1997 Asia’s bond markets have been exploding. Although government securities remain dominant, corporate and financial institutions have been grabbing a bigger piece of the outstanding regional bond market pie.

To further add, the gist of the growth in the region’s bond issuance has been in the domestic markets (local currency). This means that (domestic) savings have increasingly been funneled into the local economy through corporate and financial bonds.

Despite the risk of a ballooning bubble, the good news is that Asia’s capital markets seem to be rapidly developing. The bond and equity markets will provide meaningful competition to the banking system in terms of intermediating savings into investments.

Yet if such an explosive growth trend will continue, Asia will eventually give Europe and the US the proverbial run for one’s money.

Quote of the Day: Industrial Policies

From Bloomberg columnist Caroline Baum

Yes, other countries, such as China, have "industrial policies," with government subsidizing favored industries. History isn't on their side. In the 1980s, Japan was a manufacturing and exporting powerhouse, the envy of the world. Three decades later, where's the evidence of success?

How Mobile Texting Can Make People Stupid

From Kurzweilai.net

University of Calgary linguistics researcher Joan Lee, who interviewed texters in research for her master’s thesis. Texting is associated with rigid linguistic constraints that caused students to reject many of the words that non-texters knew, she found.

“Textisms represent real words which are commonly known among people who text,” she says. “Many of the words presented in the study are not commonly known and were not acceptable to the participants who texted more, or read less traditional print media.”

Lee suggests that reading traditional print media exposes people to variety and creativity in language that’s not found in the colloquial peer-to-peer text messaging used among youth or “generation text.”

She says reading encourages flexibility in language use and tolerance of different words. It helps readers to develop skills that allow them to generate interpretable readings of new or unusual words.

I warn my children that immersion to txt language may addle their language construction. Answering papers, quizzes or submitting reports partly blemished with txt formats can be embarrassing.

War on Gold: India’s Government Mulls Restraint on Gold Imports

The proverbial shot across the bow against gold holdings by India’s citizenry, has been fired by the Indian government.

Reports the Mineweb.com,

India's top policy advisory body, the Prime Minister's Economic Advisory Council headed by C Rangarajan, has urged government to discourage gold imports into the country and rather channel savings into formal financial instruments.

The Council made the recommendation in its review of the economy that the government discourage gold purchases and instead provide incentives for investment in financial assets because gold accentuates the current account deficit and hence, import of the yellow metal is unsustainable…

Massive gold imports have rung alarm bells with Indian economists, investment bankers and analysts stating that India's fascination with gold could be a reason why growth appears to be flagging. The gold import bill is expected to touch $100 billion by 2015-16, industry body Assocham (Associated Chambers of Commerce and Industry) has said. "Calculated on the basis of CAGR of period 2010-11 over 1999-2000, the gold import bill could total $100 billion soon. At these levels, gold imports are a huge burden on the balance of payments and accentuates the current account deficit," said Assocham secretary general D S Rawat.

What in reality has been unsustainable isn’t the average Indian’s fixation with gold, but rather the government’s insatiable spending habits.

chart from tradingeconomics.com

India’s fiscal balance has deteriorated sharply since 2008.

chart from tradingeconomics.com

And growing consumption activities, substantially out of government spending, has been reflected on the India’s trade and current account balance through ballooning deficits.

Besides, expansion in government activities essentially crowds out the private sector. This essentially reduces productive opportunities.

The great Murray N. Rothbard explains that fiscal deficits,

whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden…to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits

Yet the political agents abetted by mainstream experts wants the average Indians to shift their savings to financial assets which in reality are meant to finance more of government’s profligacy.

from tradingeconomics.com

The Indian government has last year embarked on monetary tightening policies where interest rates had been raised 13 times…

from tradingeconomics.com

…this has has led to a temporary drop in consumer price inflation, but whose long term trend remains up…

…and the tightening has likewise prompted for a decline in her stock market.

However, whatever discipline India’s government wanted to demonstrate appears to have been fleeting. India’s government recently announced the reversal of tightening policies, which has been instrumental to the vigorous rally of India’s stock market.

At the end of the day, a stirring revelation can be gleaned from gold prices based on India’s rupee over the long term

chart from goldprice.org

Aside from the cultural and traditional affinity with gold, the average Indians appears to have been hedging against government’s inflationism.

The rupee’s purchasing power against gold has fallen off the cliff, or seen conversely, gold prices in rupee terms have skyrocketed!

As the distinguished Henry Hazlitt wrote,

The next inflation hedge we have to consider is the purchase of gold. This seems to many the best hedge of all. They remember that in the great German inflation those Germans who consistently bought gold whenever and to the extent they could, and held it until the inflation ended, came out with at least their principal intact. From a strictly economic point of view, buying gold in a major inflation and holding it probably presents the least risk of capital loss of any investment or speculation.

The Implications of Cuts in Saudi Arabia’s Oil Production and Exports

In the light of $100 oil, Saudi Arabia, the world’s largest oil producer and exporter has reportedly cut production.

The CNBC reports,

The world’s top oil exporter, Saudi Arabia, appears to have cut both its oil production and export in December, according to the latest update by the Joint Organizations Data Initiative (JODI), an official source of oil production, consumption and export data.

The OPEC heavyweight saw production decline by 237,000 barrels per day (bpd) from three-decade highs of 10.047 million bpd in November, the JODI data showed on Sunday.

The draw-down was sharper for the actual amount exported, declining by 440,000 bpd, or 5.6 percent, to come in at 7.364 million bpd, the data also showed. The level would still be similar to exports after a steep ramp-up last June.

In its monthly report on February 10, the IEA put Saudi Arabia’s production number for December slightly lower at 9.55 million bpd, a disparity of 260,000 bpd versus the JODI data.

The actions of the Saudi Arabian government have profound implications.

Could it be that Saudi Arabia has been responding to the threat of Shale oil revolution? Recently Saudi halted a planned $100 billion expansion of productive capacity.

And considering that Saudi’s fiscal budget breakeven level stands at an equivalent of $90 oil, with current prices only marginally above the critical threshold, Saudi’s political stewards seem to anxiously sense of the growing risks to political stability or a threat to their grip on power. Hence the move to reduce oil production aimed at the preservation of the status quo or the incumbent welfare state.

Chart from Energy Insights

It could also be that Saudi’s reserve and production may also have reached a “peak”.

Last year, Wikileaks reported that cable correspondence by key officials from Saudi Arabia suggested that the kingdom may have bloated their estimated reserves by nearly 40%. Thus cuts in exports and production have merely been exposing the chicanery of oil politics.

The bottom line is that Saudi Arabia seems desperate to see higher oil prices.

So aside from production cuts, the bias for inflationary policies, the other alternative would be to promote a war on Iran using the obsession “with the need to prevent Iran getting nuclear weapons” as cover. The same applies to other autocratic Middle East oil producing welfare states.

Thus political languages conveyed by political authorities can be deceiving as they may not reflect on the realities intended.

As George Orwell warned,

Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind

How Reliable is CNBC’s Rankings of the Best Countries with Long Term Growth?

CNBC recently came out with a slide show depicting that troubles in the Eurozone and in the US has been prompting investors to search for new or alternative markets to invest in. And based on their selections mainly derived from demographics, natural resources or geography they came up with the following list:

10 Algeria

9. China

8. Egypt

7. Vietnam

6. Malaysia

5. Bangladesh

4 India

3 Peru

2 Ukraine

And the winner of CNBC’s best countries for long term growth…

…is the Philippines.

Given the endowment effect or home bias I should be screaming “yehey, buy buy buy the Philippines!”

Here is what CNBC has to say on the Philippines

1. Philippines

Projected annual growth: 7%

2010: $112 billion*

2050 projected GDP: $1.688 trillion

The Philippines has one of the fastest-growing populations in Asia. The population is set to jump by almost 70 percent over the next 40 years, and HSBC believes the combination of its powerful demographics and strong fundamentals will drive the economy to become the world’s 16th largest by 2050. That would mark a jump of 27 places from its current ranking of 43.

The country is one of the world’s largest exporters of labor, with over 9 million Filipinos working abroad, according to the latest data from the Commission of Filipinos Overseas. In 2010, almost $19 billion was sent back to the Philippines as remittances from Filipinos working abroad.

More recently, the country’s fast-developing business process outsourcing (BPO) industry has helped keep some of the workforce from leaving the country. Already 350,000 Filipinos are estimated to work in call centers, compared with 330,000 Indians, according to the Contact Center Association of the Philippines. The industry is projected to provide more than 1 million jobs within two years.

The economy’s focus on the services sector and domestic consumption, as well as a lower exposure to global financial markets, helped it to escape a recession following the 2008 global financial crisis.

It would seem as reductio ad absurdum to predict on long term growth based simply on variables of natural resources, demographics and or geography.

If these variables have been instrumental in generating prosperity, then the linkages should have been evident today.

Yet in looking at the world’s top 20 wealthiest nations based on per capita income from Wikipedia.org we see limited influences of abundant natural resources, young populations (demographics) or geography.

Why?

Countries with natural resources are usually afflicted by what is known as resource curse, which according to Wikipedia.org

refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).

In reality, the biggest reason why the resource curse occurs has been due to the cartelization of resource based industries by politicians and their oligarchic cronies. These have mostly led to a political economic regime that have been anchored on anti-competition regulations which inhibits external and domestic trade.

Also it would be pretty naïve to focus on geography when vastly improving modes of transportation have been reducing the attendant costs.

Transport, Insurance and freight costs as share of import cost have been on a secular decline

Mark Dean of the Bank’s International Economic Analysis Division and Maria Sebastia-Barriel of the Bank’s Structural Economic Analysis Division notes in the following study,

One of the most obvious costs to international trade is the cost of transporting goods from one country to another. Transport technologies are continually improving and transport services are also becoming cheaper through increased competition. The goods transported are also changing; some goods are now transported electronically, such as newspapers and magazines, due to improvements in communication technology and others are becoming lighter, for example mobile phones. All this should be reflected in lower transport costs.

In short, falling transaction costs diminishes the impact of geographic vantages.

Finally while I agree that “go forth and multiply” should generally be positive for the global economy; that link may not be obvious.

Most of the nations with the fastest population growth (table from Wikipedia) have hardly been the best economic growth performers. To the contrary most have been economic bottom dwellers.

The fundamental reason is that commercial activities have been severely restrained due to lack of property rights, deficiency in the rule of law, failure to protect contractual rights and limitations to voluntary productive exchanges. Also the political economic environment by many of these economies can be characterized as having been plagued by despotism and socialism. So the positive effects of population growth have been stunted, instead large populations morphs into a social burden.

Next, based on population growth, Indonesia has far outsprinted CNBC’s top 10 (chart from Google Public Data).

Indonesia has likewise been a resource rich country, and as our neighbor has been endowed with geographic advantages. So it would be a curiosity for me that Indonesia has been glossed over by CNBC.

And in terms of debt management, (chart from tradingeconomics.com) Indonesia has thus far bested the Philippines.

While this is both good news for the Philippines and Indonesia, the bottom line is that CNBC’s coverage hardly seems objective. There must be some undeclared biases in their methodology, such that even considering the few specious variables they can be amiss of other major potential contenders for investors, as Indonesia or Thailand.

And finally too much reliance on domestic consumption is unsustainable. This has been the Keynesian mantra embraced by mainstream media.

When excess consumption (government and private) in the Philippines will get manifested in the current account balance, which has still been positive today due to remittance and portfolio flows, the country’s declining debt to gdp trend will reverse and deteriorate.

Current negative real rates policies have already been adding to consumption activities via an artificially stimulated boom from domestic monetary policies by the BSP.

Yet the obverse side of a boom is a bust. And that’s hardly a long term positive growth proposition.

[As a caveat I don’t trust government statistics considering that almost two fifth of the Philippine economy is considered informal or underground or shadow. There are yet many factors not captured by statistical aggregates.]

Finally it should be a reminder that the key to prosperity is through attaining trade competitiveness (chart from the WEForum) via economic freedom or a deepening of the market economy or capitalism. The most competitive nations have almost reflected on the same standings as with the most prosperous nations.

To quote the great Ludwig von Mises

Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.

Apparently, that’s not in the equation of CNBC. When reality is dealt with a blackout occurs.