The Essence of True Charity

The Wall Street Journal’s Wealth Report writes,

The 50 top philanthropists last year gave away a total of $10.4 billion – up by more than three-fold from 2010. The Chronicle of Philanthropy says that 29 people gave away more than $50 million each in 2011.

The strange thing is, you’ve probably never heard of most of them…

But what’s striking about the pantheon of top American givers is how little we know about any of them. They’re not in the news for buying giant homes, yachts or planes. They’re not funding Super-PACSs or spouting off about how they would run the country. And they don’t have reality shows.

The top rich givers are quiet, small-town patriarchs who made their riches in unglamorous industries like steel, natural gas and metal frames. They carry their wealth quietly and they honor the responsibilities that come with great wealth. They care about creating opportunities for others, not just for themselves.

My comment:

Real charity is about anonymity. So has it been written in the Bible (Matthews 6:2 New International Edition)

So when you give to the needy, do not announce it with trumpets, as the hypocrites do in the synagogues and on the streets, to be honored by men. I tell you the truth, they have received their reward in full.

And importantly, true charity emanates in the absence of coercion

As libertarian economist Floyd Arthur Harper wrote,

True economic charity has three characteristics:

1. Charity requires the transfer of ownership from one person to another of something having economic worth. The receiver must get a clear title to it, or it cannot be charity. The giver must have had clear title to it, or the giving is like a gift of stolen property — which is not an act of charity. Private ownership at both ends of the transfer, never public ownership, is therefore required.
2. The transfer must be voluntary with both parties. If forced upon the receiver against his will, it is not charity. If taken from the source against the prior owner's will, it is theft rather than an act of charity.
3. True charity requires anonymity. This is difficult to attain, to be sure. But if the conditions of the transfer result in a personal obligation in any form or degree, it is a grant of credit and not an act of charity. Devices other than anonymity usually fail to prevent the creation of a personal obligation.

May the tribe of genuine philanthropists increase!

Warren Buffett versus his Dad Howard Buffett on Gold

Warren Buffett has long been averse to gold as an investment (and as part of his political philosophy), focusing on the polemics that gold does not account for a productive asset.

In a recent Fortune article he continues with this line of rant. (bold emphasis mine)

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while…

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

It’s bizarre to see Mr. Buffett argue about the non-productive role of gold yet imply of gold’s potential as a currency or as money.

Mr. Buffett ignores that, money, to quote the great Murray N. Rothbard, forges the connecting link between all economic activities. This only means that any massive debasement of the currency, which again is used as link to all economic activities, will undermine the division of labor which thereby erodes the productive capacity of an economy (and specifically Mr. Buffett’s or anyone’s investments or ‘capacity to deliver milk’).

In short, it would be a serious gaffe to think that economic activities can be isolated from the ever changing conditions of money. Thus, his objection that gold represents a non-productive asset is essentially a non-sequitur.

And obviously Mr. Buffett admits to such spurious reasoning through some of his actions in his flagship Berkshire Hathaway: (bold emphasis added)

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be.

So Mr. Buffett holds non-gold currency based investments in spite of his reluctance to incorporate them as part of his portfolio. So Mr. Buffett practices a deny but apply strategy.

And finally, here is another blatant inconsistency in his letter

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks

The folksy Mr. Buffett is not being candid at all.

Today, his investments have not been about taking on first-class ‘efficiently deliver goods and services wanted by our citizens’ but rather on businesses that heavily relies on government’s support. For instance Mr. Buffett has profited from Obama’s anti-competition energy policies such as the Keystone pipeline controversy, and earlier, Mr. Buffett also profited immensely by participating in the various bailouts conducted by the US government in the US financial system.

In short, Mr. Buffett has morphed from value investor to a political entrepreneur or a crony. This hardly represents the ideals Mr. Buffett has been preaching about.

And importantly the sage of Omaha’s actions runs to the contrary against the virtues espoused by his venerable father Mr. Howard Buffett, the staunch ‘old right’ libertarian.

My guess is that Mr. Buffett’s antipathy towards gold has really nothing to do with economics (which he uses as a flimsy cover or camouflage) but could most likely represent a personal issue—specifically based on an implicit division with his father (for whatever reasons)

Here is an excerpt on Mr. Howard Buffett’s celebrated treatise on “Human Freedom Rests on Gold Redeemable Money”

Far away from Congress is the real forgotten man, the taxpayer who foots the bill. He is in a different spot from the tax-eater or the business that makes millions from spending schemes. He cannot afford to spend his time trying to oppose Federal expenditures. He has to earn his own living and carry the burden of taxes as well.

But for most beneficiaries a Federal paycheck soon becomes vital in his life. He usually will spend his full energies if necessary to hang onto this income.

The taxpayer is completely outmatched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren't run according to his idea of soundness he had an individual right to protect himself by obtaining gold.

With a restoration of the gold standard, Congress would have to again resist handouts. That would work this way. If Congress seemed receptive to reckless spending schemes, depositors' demands over the country for gold would soon become serious. That alarm in turn would quickly be reflected in the halls of Congress. The legislators would learn from the banks back home and from the Treasury officials that confidence in the Treasury was endangered.

Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending.

I have only briefly outlined the inability of Congress to resist spending pressures during periods of prosperity. What Congress would do when a depression comes is a question I leave to your imagination.

I have not time to portray the end of the road of all paper money experiments.

It is worse than just the high prices that you have heard about. Monetary chaos was followed in Germany by a Hitler; in Russia by all-out Bolshevism; and in other nations by more or less tyranny. It can take a nation to communism without external influences. Suppose the frugal savings of the humble people of America continue to deteriorate in the next 10 years as they have in the past 10 years? Some day the people will almost certainly flock to "a man on horseback" who says he will stop inflation by price-fixing, wage-fixing, and rationing. When currency loses its exchange value the processes of production and distribution are demoralized.

For example, we still have rent-fixing and rental housing remains a desperate situation.

For a long time shrewd people have been quietly hoarding tangibles in one way or another. Eventually, this individual movement into tangibles will become a general stampede unless corrective action comes soon.

Mr. Warren Buffett is being exposed for his rhetorical sophistry. Besides, the markets will eventually expose on his equivocation, which apparently he has taken on some 'deny and apply' insurance. He should instead pay heed to his Dad's wisdom, if not at least follow his Dad's legacy of honesty.

Inflation Watch: World Food Prices Jump Most in 11 Months

And speaking of markets forcing the hands of central bankers, current developments in the commodity markets seem to be providing us some clues.

From the Bloomberg,

Global food prices rose 1.9 percent in January, the biggest gain in 11 months as the cost of oilseeds, dairy and grains increased, the United Nations Food and Agriculture Organization said.

An index of 55 food items climbed to 214.3 points from a restated 210.3 points in December, the Rome-based FAO said on its website today. All commodity groups in the index advanced, according to the UN agency.

Costlier food is driving up living costs in China, home to about a fifth of the world population. Chinese inflation unexpectedly accelerated in January on the back of food prices, which rose 10.5 percent last month compared with a year earlier, up from 9.1 percent in December, the country’s National Bureau of Statistics reported today.

“International prices of all major cereals with the exception of rice rose in January,” the FAO wrote. “Prices of all the commodity groups that compose the index registered gains, with oils increasing the most.”

Despite the 2008 crisis which has proven to be a reprieve and the temporary hiatus from last year’s slowdown, FAO’s food index (chart from Bloomberg) has resumed its ascent as global central banks embark on a negative real rate environment while central banks of major economies rev up on quantitative easing measures.

And it is not just in food, in the pump prices in the US has also began to inch higher.

(From Wall Street Journal Blog)

Consumer price inflation has already been staring in the faces of the mainstream experts and authorities, mostly of the Keynesian-Fisherian 'deflation' persuasion, who remain in deep denial……perhaps until CPI index goes berserk.

Bank of England Adds 50 billion Pounds to Asset Buying Program (QE)

Again as predicted, central banks of major economies has been accelerating policies of inflationism with more asset purchases or Quantitative Easing (QE).

The Bank of England (BoE) adds £ 50 billion to her existing program

The Bloomberg reports,

Bank of England officials pumped another 50 billion pounds ($79 billion) into the U.K. economy to protect a nascent recovery from the threat posed by Europe’s debt crisis.

The nine-member Monetary Policy Committee raised the target for bond purchases to 325 billion pounds, more than a quarter of current outstanding gilts, according to a statement in London today. The increase was forecast by 34 of 50 economists in a Bloomberg News survey. Fifteen economists forecast a 75 billion- pound increase and one no change. The MPC also held its benchmark interest rate at a record-low 0.5 percent.

“A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy,” the central bank said. “But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.”

The stimulus expansion suggests policy makers remain concerned that Europe’s failure to stem its debt turmoil poses a risk to Britain. While U.K. services, manufacturing and construction all showed growth in January, the government’s budget squeeze and rising unemployment are acting as a drag on growth and officials forecast that inflation will slow to below their 2 percent target by the end of this year.

What allegedly has been meant for the economy is in reality a policy booster or protection for the beleaguered banking industry. Global central bankers will push inflationism to the limits until the markets forces their hands.

Doug Casey on the Morality of Selfishness

Investing guru Doug Casey on the morality of selfishness and money

let me say one more thing about the issue of selfishness – the virtue of selfishness – and the vice of altruism. Ayn Rand might never forgive me for saying this, but if you take the two concepts – ethical self-interest and concern for others – to their logical conclusions, they actually are the same. It's in your selfish best interest to provide the maximum amount of value to the maximum number of people – that's how Apple became the giant company it is. Conversely, it is not altruistic to help other people. I want all the people around me to be strong and successful. It makes life better and easier for me if they're all doing well. So it's selfish, not altruistic, when I help them.

Read the rest here

Graph of the Day 2: The Iranian Threat

From Lew Rockwell Blog

Quote of the Day: Redistributional Effects of Bernanke’s Monetary Policies

One of the direct results of the Federal Reserve’s zero interest rate policies has been a massive reduction in interest income going to households. Since 2008, household interest income has fallen by about $400 billion annually. That’s $400 billion each year that families have not had to spend.

Now of course you can also argue that families interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one’s person expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate.

As interest income/expense is not the only item on the household balance sheet, the Fed does try to make us feel richer via changes in asset prices. The problem, however, is that the change in many asset prices can also have little more than distributional effects. If owners feel richer because their house prices have gone up, or not fallen as much as they would have otherwise, then renters are poorer as they need to save more to by the same house. The same holds for commodity prices. Monetary driven increases in the price of food might be great for farmers, or speculators, but it makes households poorer by the same amount it increases the wealth of commodity holders. If the Fed truly wished to help our economy get back to “normal” then it would allow the free choices of individual borrowers and savers to determine the interest rate. It would also end its implicit practice of picking winners and losers in our economy. Unlike Fed driven changes in asset prices and interest payments, voluntary exchange between savers and borrowers increases the welfare of all parties involved.

From Mark Calabria at the Cato Blog.

In short, driving people towards speculative activities is not the same as encouraging production.

Ben Bernanke’s policies essentially represents boom bust cycles.

Video: World Bank Promotes Africa's Trade Liberalization

Something to cheer at: The World Bank, along with the African Union, promotes trade liberalization in Africa.

Dr Maxwell Mkwezalamba, Commissioner African Union Commission:

Trade is actually an engine of growth (2:24)

More signs of bullish prospects on Africa

Arbitrary Laws: ex US President John F. Kennedy on Cuban Cigars

Here is an example of how politicians make use of, or arbitrage regulations to their advantage.

From the Daily Mail, (hat tip Professor Russ Roberts)

President John F Kennedy ordered an aide to buy him as many Cuban cigars as he could just hours before he authorised the U.S. trade embargo - which subsequently made them illegal.

Kennedy asked his head of press and fellow cigar smoker Pierre Salinger to obtain '1,000 Petit Upmanns' on February 6, 1962, so he could have them in his hands before they were deemed contraband.

Then, seconds after he was told the next morning that 1,200 of Cuba's finest export had been bought for him, he signed the decree to ban all of the communist state's products from the U.S.

As Edmund Burke once said

Law and arbitrary power are at eternal enmity

Graphic of the Day: Share of World Market Cap by Country

From Bespoke Invest

Just a reminder: The state of today’s global equity markets have substantially been dependent on central bank steroids, especially for major economies. This means that rankings of the share of market cap can drastically change when major shifts will be made in central bank policies. Of course, given the huge margin, US equity markets will remain the leader for sometime. The important point to observe will be the change in variance .

False Choice from US Military Presence: US or China?

In the realm of politics, the public is being hoodwinked with a false choice.

From the Bloomberg,

Obama is realigning Asia-Pacific forces as his administration moves to blunt China’s expanding influence in an area that accounts for half the world’s economy. At the same time, the Pentagon is seeking to cut about $490 billion from projected spending over a decade.

“The U.S. is shifting its projection of power to the Pacific region amid China’s rise,” said Tomohiko Taniguchi, a former Foreign Ministry official and a visiting professor at Keio Universityin Tokyo. The revised agreement is a “logical consequence” from the Futenma deadlock, he said.

False dilemma or false choice, according to Wikipedia.org, is a type of logical fallacy that involves a situation in which only two alternatives are considered, when in fact there are additional options (sometimes shades of grey between the extremes).

Today we are presented with having to choose between two supposedly opposing sides—either with the US or with China. Obviously a false choice.

Instead, the world should be asked to trade than to instigate war.

Yet, the world and the Philippines can do without having to indulge with confrontational (brinkmanship) politics, or worst, go into actual combat.

And as previously pointed out, except for Spratly’s and Senkaku, China has largely maintained a foreign policy based on trade, investments and non-aggression whether in Africa or in Asia.

China has been aggressively expanding trade in the region and has even been selling the idea of the yuan as the region’s reserve currency. Such actions does not square with supposed aggressive policies. Perhaps unless provoked.

China also knows she can’t win a conventional military war with the US which makes any militant actions senseless.

And as previously argued, China has been using these controversial islands mainly to extract geopolitical leverage. Other reasons may include flexing her military muscles or response to encirclement strategy or testing the region’s reaction.

Thus, the China threat seem more like a strawman.

On the other hand, the US has been engaged in a series of illegitimate wars—which have not been approved by US Congress—such as in Libya, Afghanistan, Iraq and others, has been saber rattling on Iran, and now, on China.

As Judge Andrew P. Napolitano writes,

In the last 50 years, the United States has seen a parade of wars that don’t serve our interests. We fought the Korean war at the behest of the United Nations. We fought in Vietnam because the French wouldn’t. We entered the First Gulf War because of the United Nations and of course that led to the Iraq War. Even in Afghanistan, while we entered under the pretext of hunting down the masterminds of 9/11, that war soon became an imperial exercise akin to the Soviet or British occupations of Afghanistan. The Constitution gives the power of declaring war to the Congress. But today in America, that power is effectively the President’s. President Obama has waged war in Iraq, in Afghanistan, in Libya, in Pakistan, in Somalia, and in Uganda; all without a declaration of war. The last time Congress declared war was December 8th 1941.

So it isn’t a choice between China or the US but a choice being rammed on our throats for the benefit of those in Washington [who may partly be diverting public’s attention from the problems of the real economy, the mounting unwieldy fiscal deficits, the unsustainable welfare-warfare state and from the Federal Reserve’s inflationist policies], Washington’s military industrial clients and for local imperial lapdogs or sycophants who would use the war scare to exercise more political control over society.

Yet for a political economy considerably dependent on the war industry, there will always have to be an adversary to be invented as US advisor and diplomat George F. Keennan once warned

People who are egging for war should get enlisted and be brought to the front lines along with their families to prove their worth than to senselessly bluster. President Obama can do the honor.

Other than the above, invented wars are required to justify the preservation of the warfare state along with their huge budgets.

Revolutionary 3D Printing Technology: Jawbone Replacement

The speed of technological advances is just amazing and 3D printing technology seems to be showing the way.

From Discoverynews.com (hat tip Mark Perry; bold emphasis mine)

When surgeons replaced the infected lower jawbone of an 83-year-old woman, they needed a fast replacement tailored to fit the patient's existing bone structure, nerves and muscles. That medical dilemma inspired a world-first achievement -- creating a customized jawbone from scratch with 3D printing technology.

The "printing" process used a laser to heat and melt metal powder in the shape of the jawbone. That process, carried out by Belgian manufacturer LayerWise, allowed the 3D printer to sculpt and build up the patient's medical implant layer by layer. A bioceramic coating ensured that the patient's body would not reject the implant.

"The new treatment method is a world premiere because it concerns the first patient-specific implant in replacement of the entire lower jaw," said Jules Poukens, a surgeon at the University Hasselt in Belgium

Poukens led the team of surgeons that implanted the new jawbone during a four-hour operation at a hospital in Sittard-Geleen in the Netherlands last June, according to the Dutch newspaper De Pers. The elderly patient made a rapid recovery.

"Shortly after waking up from the anesthetics, the patient spoke a few words, and the day after, the patient was able to speak and swallow normally again," Poukens said.

3D printing has already helped many DIY innovators create everything from robots to household items on demand based upon digital designs. But the combination of precise designs and rapid manufacturing could have even greater potential for creating customized body parts for medical patients -- especially when transplanted bone structures and organs suffer from short supply.

The revolutionary 3D printing technology reinforces the secular trend towards decentralization. But this won’t come smoothly as many politically entrenched groups or interests will figure out ways (from environmentalism to health regulations and others) to forestall 3D technology’s fabulous advances.

Also the political battlefield will shift from nations (with no more China or Japan to blame on) to technology. In short expect anti-free market politics to shift from mercantilism to neo-Luddism.

The illustrious Julian Simon once remarked about the growth of human capital

The essence of wealth is the capacity to control the forces of nature, and the extent of wealth depends upon the level of technology and the ability to create new knowledge

Politicians Spend Government’s Money to their Benefit

In the Philippines these are called Pork Barrel. In the US, these are known as earmarks.

From an investigative report by the Washington Post

A U.S. senator from Alabama directed more than $100 million in federal earmarks to renovate downtown Tuscaloosa near his own commercial office building. A congressman from Georgia secured $6.3 million in taxpayer funds to replenish the beach about 900 feet from his island vacation cottage. A representative from Michigan earmarked $486,000 to add a bike lane to a bridge within walking distance of her home.

Thirty-three members of Congress have directed more than $300 million in earmarks and other spending provisions to dozens of public projects that are next to or within about two miles of the lawmakers’ own property, according to a Washington Post investigation.

Under the ethics rules Congress has written for itself, this is both legal and undisclosed.

The Post analyzed public records on the holdings of all 535 members and compared them with earmarks members had sought for pet projects, most of them since 2008. The process uncovered appropriations for work in close proximity to commercial and residential real estate owned by the lawmakers or their family members. The review also found 16 lawmakers who sent tax dollars to companies, colleges or community programs where their spouses, children or parents work as salaried employees or serve on boards.

In recent weeks, lawmakers have acknowledged the public’s growing concern that they appeared to be using their positions to enrich themselves. In response, the Senate last week passed legislation that would require lawmakers to disclose mortgages for their residences. The bill, known as the Stop Trading on Congressional Knowledge (Stock) Act, would also require lawmakers and executive branch officials to disclose securities trades of more than $1,000 every 30 days. At the same time, the Senate defeated an amendment, 59-40, that would have permanently outlawed earmarks.

The House is scheduled to vote on the Stock Act on Thursday.

Read the rest here (hat tip Russ Roberts)

Whether in the Philippines or in the US or elsewhere we get the same behavioral dynamics by politicians within the political spectrum.

Most if not all of the decisions made by politicians and bureaucrats have (concealed or indirect) self-serving interest within the ambit of circumstances adjudicated.

The above represents legal but subtle (immoral) ways of using political means to wangle for personal economic benefit. In short, use laws for personal benefits or discreet corruption.

Lofty ideals where governments are seen as supposedly selfless and moral or virtuous represent a popular myth meant to promote the welfare state. People hardly realize that governments are populated by humans who are perpetually vulnerable to mortal influences.

I am reminded by this stirring quote by the great libertarian H. L. Mencken in Notes on Democracy

His business is never what it pretends to be. Ostensibly he is an altruist devoted whole-heartedly to the service of his fellow-men, and so abjectly public-spirited that his private interest is nothing to him. Actually he is a sturdy rogue whose principal, and often sole aim in life is to butter his parsnips. His technical equipment consists simply of an armamentarium of deceits. It is his business to get and hold his job at all costs. If he can hold it by lying he will hold it by lying; if lying peters out he will try to hold it by embracing new truths.

Cartoon of the Day: People Power

‎”I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.” -Étienne de La Boétie

(source Daniel Sanchez Mises Blog)

Japan’s Bubble Legacy: Airports Bleeding Taxpayers Dry

Japan’s financially floundering airports represent as classic examples of Keynesian policy of “socialization of investments” gone awry intertwined with the dynamics of a busted bubble.

From the Japan Times

Japan has 98 airports, and most of them are operating in the red as a result of exaggerated demand forecasts and rampant, costly and arguably pork-barrel construction projects.

The transport ministry hopes to mitigate the problem by selling off the management rights to 27 state-owned airports as soon as 2014. The ministry also plans to issue an airport reform blueprint by summer

And guess which among Japan’s airport business remains profitable?

Again from the same Japan Times article, [bold emphasis mine]

In most cases, the central and local governments manage the runways, aircraft aprons and other regulated facilities while private companies or joint public-private ventures run the terminal buildings and parking lots. Of the 98 airports, 28 are run by the central government and 67 by local governments…

Not all but most facilities specifically linked to flight operations are running at a loss, even though most terminal buildings and parking lots are turning profits.

Most of the income to cover the operations of runways, aprons and other aircraft-related facilities, however, comes from landing fees, which have suffered for years at airports nationwide amid the sluggish economy and lack of passengers.

And how the losses came about? [bold emphasis mine]

One key reason is overcapacity. The government built too many airports based on overrated demand projections, experts say.

Because airports are considered public infrastructure, profit is not the only consideration taken into account when building them.

The nation has many remote islands whose only transportation link to the outside world is by air, even when demand for travel is minimal and steers aviation operations into the red.

But the situation was compounded in large part by politics, with decisions made to build airports in rural, virtually no-traffic areas where turning a profit was never a realistic proposition but just a way to get voters government-backed jobs from more pork-barrel projects.

Another drawback has been the "pool system" of state budgetary allocation, a one-size-fits-all policy for financing airport operations that did little to clarify which airports were at risk of habitually losing money, experts say.

The more or less blanket operations of all state-run airports provided little incentive for individual hubs to seek more efficient operations, Sayuri Hirai, a senior consultant at Daiwa Institute of Research, told The Japan Times.

The easiest way to spend money is to spend other people’s money. Since politicians and their bureaucracy are not held accountable and are not disciplined by profits and losses and lack stakeholdings for their decisions, miscalculations, inefficient allocations and wastages are the common or typical outcome. This is exactly what has transpired with Japan’s airports which have been bleeding Japanese taxpayers dry. Hence the recent thrust to privatize parts of these.

Besides, political actions have mostly been about short term vote enhancing considerations, hence the proclivity to undertake on grand projects regardless of their feasibility such as “build airports in rural, virtually no-traffic areas”.

Not included in the report are the influences by vested interest groups on the decisions of policymakers, which again makes government spending sensitive to the allures of venality.

Moreover, politicians have not been incented to acquire or don't possess the knowledge to take upon viable projects for the same reasons—they are not subject to market forces. There hardly has been any efforts on these, as evidenced by “one-size-fits-all” financing.

Another reason for such massive scale of miscalculation and malinvestments had been that the real estate boom days may have influenced the decision of policymakers. Japan's bubble had been fueled by a credit boom that had been designed to offset the US dictated Japan's policy to appreciate the yen that gave the artificial impression of lasting prosperity which eventually was unmasked.

Also I would surmise that many of these projects had been from the pump priming or fiscal stimulus undertaken by the government to offset the economic decline. This again tells us how government dictated efforts results to resources mostly going down the drain.

As the great Ludwig von Mises wrote,

The fashionable panacea suggested, lavish public spending, is no less futile. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from commercial banks, it means credit expansion and inflation. Then the prices of all commodities and services must rise, whatever the government does to prevent this outcome.

Apparently Japan fell for the enticements of interventionism and still endures the consequences for their sins.

Peter Schiff Interviews James Rickards on the Currency Wars

Peter Schiff recently had an interesting interview with author James Rickards author of the sensational Currency Wars: The Making of the Next Global Crisis.

Find below the interview along with my comments [bold italics]

Peter Schiff: You portray recent monetary history as a series of currency wars - the first being 1921-1936, the second being 1967-1987, and the third going on right now. This seems accurate to me. In fact, my father got involved in economics because he saw the fallout of what you would call Currency War II, back in the '60s. What differentiates each of these wars, and what is most significant about the current one?

James Rickards: Currency wars are characterized by successive competitive devaluations by major economies of their currencies against the currencies of their trading partners in an effort to steal growth from those trading partners.

While all currency wars have this much in common, they can occur in dissimilar economic climates and can take different paths. Currency War I (1921-1936) was dominated by a deflationary dynamic, while Currency War II (1967-1987) was dominated by inflation. Also, CWI ended in the disaster of World War II, while CWII was brought in for a soft landing, after a very bumpy ride, with the Plaza Accords of 1985 and the Louvre Accords of 1987.

What the first two currency wars had in common, apart from the devaluations, was the destruction of wealth resulting from an absence of price stability or an economic anchor.

Interestingly, Currency War III, which began in 2010, is really a tug-of-war between the natural deflation coming from the depression that began in 2007 and policy-induced inflation coming from Fed easing. The deflationary and inflationary vectors are fighting each other to a standstill for the time being, but the situation is highly unstable and will "tip" into one or the other sooner rather than later. Inflation bordering on hyperinflation seems like the more likely outcome at the moment because of the Fed's attitude of "whatever it takes" in terms of money-printing; however, deflation cannot be ruled out if the Fed throws in the towel in the face of political opposition.

[My comment:

At this point policy actions by global authorities do not seem to indicate of a currency war or competitive devaluation as the olden days (as per Mr. Rickards scenarios].

While major central banks have indeed been inflating massively, they seem to be coordinating their actions to devalue. For instance, the US Federal Reserve has opened swap lines to major central banks and to emerging market central banks as well. Japan’s triple calamity a year ago prompted a joint intervention in the currency markets, which included the US Federal Reserve.

Current actions partly resembles a modern day concoction of Plaza Accord and Louvre Accord]

Peter: You and I agree that the dollar is on the road to ruin, and we both have made some drastic forecasts about what the government might do in the face of the dollar collapse. How might this scenario play out in your view?

James: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote - so the dollar collapse scenario must be considered.

Few Americans are aware of the International Economic Emergency Powers Act (IEEPA)... it gives any US president dictatorial powers to freeze accounts, seize assets, nationalize banks, and take other radical steps to fight economic collapse in the name of national security. Given these powers, one could see a set of actions including seizure of the 6,000 tons of foreign gold stored at the Federal Reserve Bank of New York which, when combined with Washington's existing hoard of 8,000 tons, would leave the US as a gold superpower in a position to dictate the shape of the international monetary system going forward, as it did at Bretton Woods in 1944.

[my comment: the direction of current trends in policymaking is the destruction of the US dollar standard. The alternative would be the collapse of the banking system along with the welfare-warfare state. Policymakers are caught between the proverbial devil and the deep blue sea.]

Peter: You write in your book that it's possible that President Obama may call for a return to a pseudo-gold standard. That seems far-fetched to me. Why would a bunch of pro-inflation Keynesians in Washington voluntarily restrict their ability to print new money? Wouldn't such a program require the government to default on its bonds?

James: My forecast does not pertain specifically to President Obama, but to any president faced with economic catastrophe. I agree that a typically Keynesian administration will not go to the gold standard easily or willingly. I only suggest that they may have no choice but to go to a gold standard in the face of a complete collapse of confidence in the dollar. It would be a gold standard of last resort, at a much higher price - perhaps $7,000 per ounce or higher.

This is similar to what President Roosevelt did in 1933 when he outlawed private gold ownership but then proceeded to increase the price 75% in the middle of the worst sustained period of deflation in U.S. history.

[my comment: I don’t think current policymaking trends has entirely been about ideology, a substantial influence has been the preservation of the incumbent political institutions comprising of the welfare-warfare state, the politically privileged banking and the central banking system. True, the markets will eventually prevail over unsustainable systems]

Peter: You also write that you were asked by the Department of Defense to teach them to attack other countries using monetary policy. Do you believe there has a been an deliberate attempt to rack up as much public debt as possible - from the Chinese, in particular - and then strategically default through inflation?

James: I do not believe there has been a deliberate plot to rack up debt for the strategic purpose of default; however, something like that has resulted anyway.

Conventional wisdom is that China has the US over a barrel because it holds more than $2 trillion of US dollar-denominated debt, which it could dump at any time. In fact, the US has China over a barrel because it can freeze Chinese accounts in the face of any attempted dumping and substantially devalue the worth of the money we owe the Chinese. The Chinese themselves have been slow to realize this. In hindsight, their greatest blunder will turn out to be trusting the US to maintain the value of its currency.

[my comment: There are always two parties to a trade, if China would be “dumping” then there has to be a buyer. Question is who would be the buyer? If the world will join China in the US treasury dumping binge, then obviously the buyer of last resort would be the US Federal Reserve. If the US Federal Reserve does not assume such role, then there would be a freeze in the global banking system similar to 2008 or worst.

As to freezing of China’s account; that may happen after the US Federal Reserve consummates the transaction. This stage may not even be reached, unless the US will declare economic sanctions against China which would signify an indirect declaration of war.]

Peter: In your book, you lay out four possible results from the present currency war. Please briefly describe these and which one do you feel is most likely and why.

James: Yes, I lay out four scenarios, which I call "The Four Horsemen of the Dollar Apocalypse."

The first case is a world of multiple reserve currencies with the dollar being just one among several. This is the preferred solution of academics. I call it the "Kumbaya Solution" because it assumes all of the currencies will get along fine with each other. In fact, however, instead of one central bank behaving badly, we will have many.

The second case is world money in the form of Special Drawing Rights (SDRs). This is the preferred solution of global elites. The foundation for this has already been laid and the plumbing is already in place. The International Monetary Fund (IMF) would have its own printing press under the unaccountable control of the G20. This would reduce the dollar to the role of a local currency, as all important international transfers would be denominated in SDRs.

The third case is a return to the gold standard. This would have to be done at a much higher price to avoid the deflationary blunder of the 1920s, when nations returned to gold at an old parity that could not be sustained without massive deflation due to all of the money-printing in the meantime. I suggest a price of $7,000 per ounce for the new parity.

My final case is chaos and a resort to emergency economic powers. I consider this the most likely because of a combination of denial, delay, and wishful thinking on the part of the monetary elites.

[my comment:

I am less inclined to think of a global money (or second) scenario.

I think that the incumbent currency system may transform or morph into a regime of multipolar currencies and or with possible gold/silver participation.

Since I don’t believe that the world operates in a vacuum, even if a global hyperinflation does become a reality, people, communities, states or even governments will act to substitute a collapsing currency incredibly fast.

The currency crisis hasn’t happened, yet we seem to see signs of nations already taking steps towards self-insurance, partly by engaging in bilateral trade financed by the use of local currencies (Brazil-Argentina, China-Japan), and partly by increasing gold’s role in trade: Some US states have begun to promote the use of gold and silver coins also as insurance.

So the seeds to a transition of monetary standards are being sown]

Peter: What do you see as Washington's end-game for the present currency war? What is their best-case scenario?

James: Washington's best-case scenario is that banks gradually heal by making leveraged profits on the spreads between low-cost deposits and safe government bonds. These profits are then a cushion to absorb losses on bad assets and, eventually, the system becomes healthy again and can start the lending-and-spending game over again.

I view this as unlikely because the debts are so great, the time needed so long, and the deflationary forces so strong that the banks will not recover before the needed money-printing drives the system over a cliff - through a loss of confidence in the dollar and other paper currencies.

[my comment: debts are symptoms of prior government spending both from welfare-warfare state and rescues/bailouts of crisis affected institutions including governments]

Peter: I don't think this scenario is likely either, but say it were... would it be healthy for the American economy to have to carry all these zombie banks that depend on subsidies for survival? Wouldn't it be better to just let the toxic assets and toxic banks flush out of the system?

James: I agree completely. There's a model for this in the 1919-1920 depression, when the US government actually ran a balanced budget and the private sector was left to clean up the mess. The depression was over in 18 months and the US then set out on one of its strongest decades of growth ever. Today, in contrast, we have the government intervening everywhere, with the result that we should expect the current depression to last for years - possibly a decade.

[my comment: indeed]

Peter: How long do you think Currency War III will last?

James: History shows that Currency War I lasted 15 years and Currency War II lasted 20 years. There is no reason to believe that Currency War III will be brief. It's difficult to say, but it should last 5 years at least, possibly much longer.

[my comment: past performance may not guarantee future outcomes]

Peter: From my perspective, what is unique about a currency war is that the object is to inflict damage on yourself, and the country often described as the winner is actually the biggest loser, because they've devalued their currency the most. Which currency do you think will come out of this war the strongest?

James: I expect Europe and the euro will emerge the strongest after this currency war by doing the most to maintain the value of its currency while focusing on economic fundamentals, rather than quick fixes through devaluation. This is because the US and China are both currency manipulators out to reduce the value of their currencies. In the zero-sum world of currency wars, if the dollar and yuan are both down or flat, the euro must be going up. This is why the euro has not acted in accord with market expectations of its collapse.

The other reason the euro is strong and getting stronger is because it is backed by 10,000 tons of gold - even more than the US This is a source of strength for the euro.

[my comment:

I don’t think the ex post gold holding under current monetary system will significantly matter.

Some countries (like crisis affected Europe) may sell gold while others (such as emerging markets) may buy gold. So gold ownership will be in a state of continued flux.

The crux would revolve around the following issues

-control of debt build up from government spending

-allowing markets to clear

-what governments does with their gold holdings or will governments reform their currency system by eliminating policy induced bubble cycles? How?]

Peter: You and I both connect the Fed's dollar-printing with the recent revolutions in the Middle East. This is because our inflation is being exported overseas and driving up prices for food and fuel in third-world countries. What do you think will happen domestically when all this inflation comes home to roost?

James: The Fed will allow the inflation to grow in the US because it is the only way out of the non-payable debt.

Initially, American investors will be happy because the inflation will be accompanied by rising stock prices. However, over time, the capital-destroying nature of inflation will become apparent - and markets will collapse. This will look like a replay of the 1970s.

[my comment: the $64 trillion question is inflate against who? Every major central banks seem to be engaged in synchronous-coordinated inflation.]

Peter: How long do you think China's elites will put up with the Fed's inflationary agenda before they start dumping their US dollar assets?

James: The Chinese will never "dump" assets because this could cause the US to freeze their accounts. However, the Chinese will shorten the maturity structure of those assets to reduce volatility, diversify assets by reallocating new reserves towards euro and yen, increase their gold holdings, and engage in direct investment in hard assets such as mines, farmland, railroads, etc. All of these developments are happening now and the tempo will increase in future.

[my comment: Dumping isn’t going to happen unless there would be a buyer. See my earlier comment above]

Peter: In your view, what is the best way for investors to protect themselves from this crisis?

James: My recommended portfolio is 20% gold, 5% silver, 20% undeveloped land in prime locations with development potential, 15% fine art, and 40% cash. The cash is not a long-term position but does give an investor short-term wealth preservation and optionality to pivot into other asset classes when there is greater visibility.

[my comment:

I would adjust portfolio according to the evolving circumstances.

Taking a rigid stance under current heavily politicized conditions could bring about huge market risks. For example, if hyperinflation occurs which Mr. Rickards sees as a “more likely outcome at the moment”, then cash and bond holdings will evaporate]

Quote of the Day: Why Business is (partly) Purer than Academia

One of the most recent post by my favorite iconoclast Nassim Nicolas Taleb on his Facebook wall.

I have made my case on why local elite private schools are predisposed to the political philosophy of social democracy

And here is the great Friedrich von Hayek on why Intellectuals are prejudiced to socialism

And here is the nexus between the US Federal Reserve and the Economic Profession

Global CDS Update: The Risk ON Environment

One substantial driver of the direction of interest rates would be the financial market’s perception of credit risks as measured on the credit standings of each nation.

The fierce start of the year rally seen in equity markets have likewise mirrored the actions in Credit Default Swap (CDS) markets

Writes Bespoke Invest (charts their too)

every country except one (Portugal) has seen its default risk decline in 2012. European countries have mostly seen the biggest drops in default risk, with Belgium leading the way with a drop of 31.6%. Greece -- while it still has by far the highest default risk -- has seen its default risk fall the third most in 2012 with a decline of 25.5%. (France ranks second at -25.7%.) The US currently has the lowest default risk out of all the countries shown by a wide margin.

Additional observations

The concerted accelerated massive credit easing programs undertaken by central banks of developed economies has so far soothed or bought off unsustainable debt concerns. Much of the deluge of liquidity apparently has diffused into the global equity and commodity markets through intensified yield chasing actions by market participants.

The easing environment has been complimented by central banks of emerging markets whom has been mostly slashing interest rates too.

The global financial markets have been heavily politicized and greatly relies on sustained central bank support. Given the heavy dependence on central bank steroids, we should expect sharp volatilities in both directions for the marketplace.

I wouldn’t read through the current façade as lasting. That’s because central banks would need further rationalization to pursue current policies. And the only pretext to do more of the same is to see markets undergo spasms anew.

I wouldn’t also interpret the low default risk of the US as sustainable. The US Federal Reserve has been expanding their balance sheet and has been running massive fiscal deficits which means current sanguine conditions are artificial and manipulated and most likely related to the coming US presidential elections.

One interesting observation is that ASEAN CDS are on the lower half of the table and has shown resiliency compared to many major emerging markets contemporaries and even to some developed economies (e.g. France).

If you are counting on a potential ‘decoupling’ by ASEAN relative to developed economies, the CDS markets will likely be the first area to emit such signals. So far, the CDS markets has been manifesting the same dynamics driving other financial markets--the rising tide lifts (almost) all boats.

Mercantilism: Economic Theories Founded on Biases of Special Interest Political Groups

In a recent quote of the day examining political virtues, I asked

Does 'mistaken theories' cause political "value and ideas" or the other way around (or biased "value and ideas" of special interest groups use the cover of mistaken theories to promote their policies)?

In terms of mercantilism Murray Rothbard has the answer

The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favored high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favored alliances with nobles and with cartelizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries.

Neither did the cartelizing companies need much of a theory to come out in favor of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles, or favored business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles, and monopoly export companies. And who does not want the supply of money in their pockets to rise?

Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist "theory" was a set of rationales designed to uphold or expand particular vested economic interests.

Graphic: “Fear Always Springs From Ignorance”

Another wonderful diagram made by the highly imaginative Ms. Jessica Hagy at the Indexed.

The diagram encapsulates one of my favorite quotes from Ralph Waldo Emerson “Fear always springs from ignorance”

The whole excerpt is from Mr. Emerson’s On the American Scholar, (bold emphasis mine)

In self-trust all the virtues are comprehended. Free should the scholar be—free and brave. Free even to the definition of freedom, “without any hindrance that does not arise out of his own constitution.” Brave; for fear is a thing which a scholar by his very function puts behind him. Fear always springs from ignorance. It is a shame to him if his tranquillity, amid dangerous times, arise from the presumption that, like children and women, his is a protected class; or if he seek a temporary peace by the diversion of his thoughts from politics or vexed questions, hiding his head like an ostrich in the flowering bushes, peeping into microscopes, and turning rhymes, as a boy whistles, to keep his courage up. So is the danger a danger still; so is the fear worse. Manlike, let him turn and face it. Let him look into its eye and search its nature, inspect its origin—see the whelping of this lion which lies no great way back; he will then find in himself a perfect comprehension of its nature and extent; he will have made his hands meet on the other side and can henceforth defy it and pass on superior. The world is his who can see through its pretension. What deafness, what stone-blind custom, what overgrown error you behold is there only by sufferance—by your sufferance. See it to be a lie, and you have already dealt it its mortal blow.

I don’t think this just applies to scholars but to anyone who undertakes the task of research and investigation.

Importantly, I would add passion to being ‘free and brave’ as ideal virtues.

My favorite marketing guru Seth Godin has a timely advice

Fear is the dream killer, the silent voice that pushes us to lose our passion in a vain attempt to seek safety.

While you can work hard to dream smaller dreams, I think it's better to embrace the fear and find bigger goals instead.

In working to attain our dreams, this means that we should become passionate with the pursuit of knowledge for us to overcome the barriers of fear and procrastination, as well as, in filtering out pretensions or politically slanted theories masquerading as reality.

More US States Seek New Gold and Silver Currencies

From the CNN,

A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System ... the State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make "gold and silver Coin a Tender in Payment of Debts."

The world does not operate on a vacuum. People act based on purported ends, or that people responds to incentives shaped by perpetually changing conditions—impelled by the environments, the markets, political policies or social relationships or on a blend of these [certainly not based on mathematical variables and equations].

If national governments continue to relentlessly debauch their currencies, then people will seek refuge in alternative currencies that would preserve their hard earned savings.

The function of money can be seen even in the prison environment where in absence of conventional money, exchanges takes place through spontaneously designated commodity medium by the inhabitants (not authorities).

Returning coins to circulation have even reached mainstream US politics as 2 senators have introduced a bill that would replace dollar bills with coins.

And this aligns with the actions of 13 US states above, who seems to realize of the growing fat tail risks of inflationism.

Swelling grassroots recognition of such risks seems to prompt for noteworthy changes on the fringes of the mainstream political spectrum.

Perhaps we will reach a tipping point where the periphery transforms into the popular. And this should apply not only to the US but importantly to the world.

Quote of the Day: Pedestrian Economics

Keynesianism is itself adorned in magnificent scientific costume and make-up, and its practitioners have built for themselves elaborate games to play that cause them to think that they’re engaged in something more than pedestrian economics. They can shift IS-LM curves, as well as aggregate-demand curves; they can calculate multipliers (“balanced budget” and otherwise); they can impress hoi polli with mysterious terms such as “liquidity trap,” “marginal efficiency of capital,” and “marginal propensity to consume.” But through it all, they – at least when doing Keynesian economics – ignore the very heart of the economy, namely, the goo-gob-gillions of daily adjustments that individuals make to changes in their knowledge, and the smaller – yet still large – number of creative acts that people do daily in hopes of improving their economic prospects. Paying far too little attention to these micro-level matters (or – what is the same thing – assuming these micro-level matters to be fixed and given in ways that, by assumption, leave demand as the only available variable to affect the economy), Keynesians of course can build impressive models that show how exogenous changes in demand will do this or that to the economy.

But these models miss 99 percent of the relevant action – and they miss all of the action that pedestrian economists never become aware of. No pattern of sustainable specialization and trade was ever created by aggregate demand. And no such pattern can be explained or understood by using a method of analysis that focuses only on what, in the final analysis, are largely the consequences of people’s success or failure at establishing patterns of sustainable specialization and trade.

Professor Donald J. Boudreaux expounds on the structural flaws of the Keynesian methodology.

I’d further add that pedestrian economics is in reality, heuristics (mental short cuts) paraded as economic reasoning that has been clothed with math models (mostly used or intended to justify an underlying uneconomic political belief.)