Video: Can the Federal Government Mandate Health Insurance?

The US Supreme Court is about to decide on the constitutionality of Obamacare or the Affordable Care Act by next week. The monumental decision is expected impact the US economy that could ripple to the world.

From LearnLiberty.org.

States can require people to buy insurance for automobiles and health care. So why can't the federal government? According to Professor Elizabeth Price Foley, the U.S. Constitution gives the federal government limited and enumerated powers that confine it. The Constitution gives different powers to the states than it does to the federal government. Just because states have the power to establish mandates for insurance does not suggest that the federal government has the same power.

Thanks to Learn Liberty's Tim Hedberg for the video.

Cartoon of the Day: Greece’s Pro-Euro Victory

This cartoon by Robert Ariail depicting the recently concluded Greece elections gave me a good laugh.

It’s hilarious but that’s the way the Euro crisis operates.

Thanks to Cato’s Dan Mitchell

Spotting Technology Winners is a Judgment Call

Forbes’ brilliant technology analyst and venture cap investor Josh Wolfe gives as a clue on how to identify winning technology innovation, (bold caps original)

And the stakes are always highest when the forces of technological disruption, oft too weak to be detected, catalyze massive industry change and become too strong to be resisted.

Common conception holds that brilliant inventions burst straight from research labs to take over markets. But in studying and investing in change, it becomes apparent that the enabling technologies have often been in existence for some time, developing quietly in the background in ancillary markets or other incarnations. It’s only at the confluence of parallel technological developments and shifting market forces that, often unexpectedly, “Aha!” – a new application takes hold. The combinatorial chemistry of industry and invention yields an explosive reaction, and then: everything changes. Thus we’re always hunting for two things: cutting-edge technologies and rapidly changing markets.

In short, the success of identifying winning disruptive technology innovators comes with the ‘right timing’. Technology may have been "in existence for some time", but markets may not be ripe for it.

This gives merit to Professor Peter Klein’s definition of entrepreneurship as one of speculative judgment.

At the Mises Blog Professor Salerno writes,

So, Klein maintained, the profit opportunity was not an ex ante fact waiting to be discovered; rather the profit opportunity was only realized , ex post, as the successful outcome of an action based on a speculative judgment. Whether or not the plans of economic agents are better coordinated and the economy is closer to equilibrium than before is “irrelevant,” Klein explained; the important point is that ex post profits indicate that resources have been reallocated from less valuable to more valuable uses from the point of view of consumers.

Anyway, Mr. Wolfe’s present candidate is the 3D printer.

I talked about the potentials of 3D printers at an earlier post.

I also share the view that 3D printers will function as one of the three major forces of the information age.

Belarus Hyperinflation: Money Abhors a Vacuum

I previously pointed out of the developing crack-up boom or hyperinflation in Belarus.

If money is being perverted by governments to the point where it triggers a total loss of confidence by the public, while gold and silver may be the best refuge, people will stampede to any real assets—when gold and silver are not available and on short notice.

Belarus Ruble: US dollar From XE.com

Simon Black of the Sovereign Man gives the evidence (bold emphasis mine)

More than two decades after the fall of the Soviet Union, the Iron Curtain is still alive and well in an often forgotten corner of Eastern Europe… albeit a kindler, gentler version.

Belarus has been ruled by the same person, Alexandr Lukashenko, practically since its independence in the early 1990s.

He has total control of every facet of the country, from media and information flow, to education, to the military and ‘State Security Agency’ (which is still called the KGB), to the centrally planned economy.

Perhaps nowhere is this more obvious than with respect to the nation’s currency, the Belarusian ruble.

In 2009, one US dollar bought roughly 2,200 Belarusian rubles. In 2010, that number rose to 2,800. A year later, over 3,000. And today, one US dollar is worth over 8,000 rubles. On the black market, it’s much, much higher.

(You can just imagine how much the ruble has lost against gold and silver over the same period.)

My friends here tell me that, last summer after another bout of devaluation, it became nearly impossible to purchase euros and dollars. The currency was falling too rapidly, and no trader was willing to take the risk. Even the central bank stopped exchanging its reserves.

Consequently, small businesses in Belarus couldn’t get their hands on the hard currency they needed to pay foreigners for imported goods. Store shelves, including groceries, emptied quickly.

And people took whatever savings they had and traded it for anything they could find– sugar, toilet paper, ironing boards… you name it. As I’ve been told, hand tools were especially popular as a store of value in some parts of the country.

This is the key difference between ‘inflation’ and ‘hyperinflation’. Inflation involves a lot of painful price increases that reduce the standard of living for most people in society.

Hyperinflation, on the other hand, is a complete loss of confidence in a currency.

Anyone here who has held on to the local currency has gotten completely screwed. The few people at the top making the decisions have held on to power and become very wealthy at the expense of everyone else.

Bottom line: Like nature, money abhors a vacuum. People will switch to any form of assets with real value.

This would represent the flight into real values as warned by the great Professor Ludwig von Mises,

with the progress of inflation more and more people become aware of the fall in purchasing power. For those not personally engaged in business and not familiar with the conditions of the stock market, the main vehicle of saving is the accumulation of savings deposits, the purchase of bonds and life insurance. All such savings are prejudiced by inflation. Thus saving is discouraged and extravagance seems to be indicated. The ultimate reaction of the public, the "flight into real values," is a desperate attempt to salvage some debris from the ruinous breakdown. It is, viewed from the angle of capital preservation, not a remedy, but merely a poor emergency measure. It can, at best, rescue a fraction of the saver's funds.

Fiscally Pressured Governments go for Crony based Privatizations of ‘Public Goods’

Money pressured governments are looking to privatization of parts of politically sensitive functions such as security services.

The Telegraph reports,

Private companies will be running large parts of the UK's police service within five years, according to the world's biggest security firm.

David Taylor-Smith, the head of G4S for the UK and Africa, said he expected police forces across the country to sign up to similar deals to those on the table in the West Midlands and Surrey, which could result in private companies taking responsibility for duties ranging from investigating crimes to transporting suspects and managing intelligence.

The prediction comes as it emerged that 10 more police forces were considering outsourcing deals that would see services, such as running police cells and operating IT, run by private firms.

Privatization of government functions are akin to Public-Private Partnership (PPP) enterprises on political controlled or regulated sectors. They really NOT about free markets but about cronyism.

As I previously pointed out

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

In the US even Keynesian high priest, Paul Krugman, who I vehemently disagree with on most issues, resonates with our perspective over the issue of phony privatizations (in Krugman’s case he refers to New Jersey’s “new kind of privately run halfway house” prison systems).

From Paul Krugman (hat tip Bob Wenzel, bold emphasis added)

So what’s really behind the drive to privatize prisons, and just about everything else?

One answer is that privatization can serve as a stealth form of government borrowing, in which governments avoid recording upfront expenses (or even raise money by selling existing facilities) while raising their long-run costs in ways taxpayers can’t see. We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.

Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.

But the main answer, surely, is to follow the money. Never mind what privatization does or doesn’t do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. As more and more government functions get privatized, states become pay-to-play paradises, in which both political contributions and contracts for friends and relatives become a quid pro quo for getting government business. Are the corporations capturing the politicians, or the politicians capturing the corporations? Does it matter?

The point, then, is that you shouldn’t imagine that what The Times discovered about prison privatization in New Jersey is an isolated instance of bad behavior. It is, instead, almost surely a glimpse of a pervasive and growing reality, of a corrupt nexus of privatization and patronage.

Additional thoughts:

This is proof that governments have really been getting desperate over their state of finances.

But, privileges are hard to let go. Instead, politicians have used austerity from today’s crisis as opportunity to dispense concessions to friends, allies or favored special interest groups for political goals. This signifies a form of economic fascism

Politicians use accounting trickery to shield reforms.

Moreover, such privatizations represent fundamental admissions that even the most sensitive ‘public goods’, whether security or defense and prison services, can be delegated or outsourced to the private sector. This implies that these services can be depoliticized and delivered, through the competitive marketplace or (hold your breath) even without government.

The answer isn't to privatize (euphemism for fascism-cronyism) but to depoliticize and liberalize the sector.

Lastly, these are writings on the wall in favor of the growing forces of decentralization.

When governments become totally bankrupt then the de-politicization or decentralization process of political functions will become apparent.

ECB Eases Collateral Rules as Banking System Runs out of Assets

From the Wall Street Journal,

The European Central Bank said Friday it will widen the range of securities it will accept from euro-zone banks in exchange for its loans with the aim of helping boost lending to companies and households.

The ECB will now accept certain mortgage-backed securities, car loans and loans to small and medium-size firms.

The measure is seen as an attempt by the ECB to provide much needed liquidity to Spanish banks, which possess a large quantity of mortgage-backed securities after its real-estate bubble burst. Spain's government is expected to submit a formal request Monday to the European Union for a bailout of up to €100 billion ($125.4 billion) to help recapitalize its distressed banks. On Thursday, two independent consulting firms submitted results of stress tests conducted on 14 Spanish lenders, which put total capital need for the banking sector of Spain at up to €62 billion.

The ECB's step will reignite worries over a deterioration of the ECB's balance sheet, which is already at an all-time high after the ECB injected more than €1 trillion into the region's banking system in December and February to avert a credit crunch.

The German central bank, the Bundesbank, which has repeatedly criticized the ECB for the continued easing of its collateral rules as the euro-zone's debt crisis deepened over the past two years, was quick to respond.

This practically is an admission of the depletion of assets as collateral for loans in the Euro’s banking system.

And this also implies that ECB has been stuffed with ‘toxic’ assets and how rules has been easily changed or altered to accommodate interests of the political class and of the economic interests of the privileged politically protected few.

Eventually, the ECB may resort to directly accepting equities (or even commodities) as collateral.

Also, collateral rule adjustments may be a precursor to a coming 'shock and awe' policy coming from the ECB that would likely have a short lived 'buy another day' outcome.

All these reveals of the extent of desperation by EU officials, and more importantly, the current heavy state of distortions in the global financial markets.

Libertarianism: Political Career and Risks

When society has been lobotomized or programmed into believing that government is a “given”, and that the individual is not only branded as immoral (e.g. greed) but more importantly, nonexistent (e.g. nationalism), then looking for a political career from the standpoint of liberty seems almost close to nil.

But this shouldn’t stop passionate freedom loving disciples from preaching the truth. Austrian economist Bob Wenzel writes,

And that's what libertarians need to know about running for office. It's not about compromising your principles to gain more votes, its not about hiding your true views on taxes and minimum wage laws to gain more votes, it's about running to get the hardcore libertarian message out.

It's about hoping that after you give a speech where you denounce minimum wage laws, all taxes and the local public fire department, that at least one person, maybe two, wander over to you after your speech and tell you that what you said sounded interesting. It's about losing the election, but at the same time advancing the libertarian cause.

In other words, it's okay for a libertarian to run for office, if it's the Ron Paul way. If it's about losing the election but spreading the word. If it's about writing op-eds, appearing in debates and being interviewed on radio about hardcore libertarianism.

Libertarians aren't close to getting elected in most places with just a libertarian message. But the message can be spread. Ron Paul has proved that. If this is done in enough places, enough times, the message can be spread even more, and more people will catch on.

Then some day, perhaps five years from now, perhaps ten, we may hear of people sticking completely to libertarian principle and winning here and winning there. That will be the signal that large numbers of people at that time want liberty and understand what liberty is.

Embracing the principle of freedom confronts mountains of sacrifices and risks, particularly the risk of ostracism and of losing social privileges in the face of massive tentacle of influence by governments in almost every aspect of our lives.

The great Ludwig von Mises sets a shining example of this fight of principle over convenience; Professor Mises sacrificed a glamorous teaching career.

In an encomium, one of the greatest student by Professor Mises, the preeminent dean of the Austrian school Murray Rothbard reveals of the career life of Mises,

But it remains an ineradicable blot on the record of American academia that Mises was never able to find a paid, full-time post in any American university. It is truly shameful that at a time when every third-rate Marxoid refugee was able to find a prestigious berth in academia, that one of the great minds of the twentieth century could not find an academic post. Mises's widow Margit, in her moving memoir about life with Lu, records their happiness and her gratitude that the New York University Graduate School of Business Administration, in 1945, appointed Mises as Visiting Professor teaching one course a term. Mises was delighted to be back at university teaching; but the present writer cannot be nearly as enthusiastic about a part-time post paying the pittance of $2,000 a year. Mises's course was, at first, on "Statism and the Profit Motive," and it later changed to one on "Socialism." This part-time teaching post was renewed until 1949…

Likewise, in the face of Keynesian revolution, the great Mises stuck to his convictions when the rest sold out, again from Professor Rothbard,

It must have been galling to Mises that, in contrast to his shabby treatment at the hands of American academia, favorite former students who had abandoned Misesian doctrines for Keynesianism, but whose only real contributions to economics had come as Misesians, received high and prestigious academic posts. Thus Gottfried Haberler was ensconced as full professor at Harvard, and Fritz Machlup went to John Hopkins and later to Princeton. Oskar Morgenstern, too, landed at Princeton. All of these high academic positions were, of course, paid for by the university

Well, even the soul of American revolution Thomas Paine, known for this famous passage…

Society in every state is a blessing, but government, even in its best state, is but a necessary evil; in its worst state, an intolerable one.

…had a melancholic-tragic ending.

Author George Smith accounts for Mr. Paine’s demise,

The man who inspired the country to secede from a corrupt state had six people in attendance at his funeral, none of whom were dignitaries.

The struggle for the cause of liberty is a tall order.

But I think the information age will most likely tilt the balance from the dominant political mindset towards liberty.

Quote of the Day: Ethical Defense of Liberty Knows NO Borders

an ethical defense of liberty, as well as an economic defense of liberty, applies equally to both sides of any national border. Anyone who claims to defend market liberty for his own people should be equally prepared to defend market liberty for the people on the other side of the national border. This is the doctrine of the rule of law. This widespread acceptance of this principle has made the West rich.

This is from Professor Gary North from his excellent article on the immorality of tariffs or why tariffs are undeclared acts of war against other nations.

Video: The Economics of Drug Prohibition, Why Prohibition Laws Fail

Holier-than-thou politically inclined people always like to preach about how we should prohibit drugs legally to "save society".

Despite the mountains of regulations, and the multitude of arrests and incarcerations, drug use has been rapidly expanding globally. On the contrary, these constitutes as failures of such regulations.

Yet this is does not just apply to drugs but almost to every other instances of prohibitions on social vices, e.g. smoking, prostitution, gambling (e.g. Philippine jueteng) and etc...

[As a side note, I might add that people who argue from the high perch of morality are those mostly out there to get social acceptability or "likes" from the uninformed than to objectively discuss the merits or demerits of such regulations]

The following video from LearnLiberty.org explains the economics of prohibition and why such laws engenders adverse unintended effects than what is supposed to be accomplished. (hat tip Professor Mark Perry)

In its history, America has experienced two major periods of drug prohibition. This first was the Federal alcohol prohibition from 1920-1933. The second is the current war on drugs, which began in 1971.

According to Prof. Angela Dills, during these periods of prohibition in America, both homicide rates and police enforcement costs increased. This makes sense, as prohibitions never actually eliminate use. Rather, prohibitions convert peaceful and legal markets into black markets. In black markets, when disputes arise over sales territory, product quality, or money, the government legal system is not available. This forces drug dealers to resolve disputes on their own, which often leads to violence.

The violence of black markets, along with the enforcement of drug policy, attracts the attention of law enforcement. Law enforcement is costly, and the time spent enforcing drug laws could have been spent preventing other crimes like murder, theft, and rape. Drug prohibition not only generates more violence and increases the cost of law enforcement; it also distracts law enforcement and puts citizens at greater risk of crime.

In short, not only does prohibition statutes corrupt a society, at worst they kill.

Bear Market in Commodities Isn’t Bullish for Stocks

The Bloomberg reports that commodities have entered a bear market, (bold emphasis mine)

Commodities tumbled into a bear market as U.S. reports on manufacturing, jobless claims and home sales signaled a faltering economy after the Federal Reserve refrained from announcing another round of stimulus.

The Standard & Poor’s GSCI Spot Index of 24 raw materials fell 2.8 percent to settle at 559 at 3:56 p.m. New York time. The gauge has dropped 22 percent from this year’s highest close of 715.52 on Feb. 24, entering a bear market. Earlier, the measure touched 558.14, the lowest since November 2010. Metals and energy led today’s slump.

Manufacturing in the Philadelphia region contracted in June at the fastest pace in almost a year. Existing U.S. home sales fell more than forecast by analysts, and jobless claims topped estimates. Yesterday, the Fed, led by Chairman Ben S. Bernanke, reduced its 2012 forecast for economic growth, and policy makers decided against a third round of debt purchases.

“We got nothing significant from Bernanke, and data continues to paint a horrible picture,” said Steve Mathews, the chief investment officer of Flintlock Capital Asset Management LLC in New York, which manages $105 million of assets. “We have to wait until the next Bernanke event to know if the Fed will indeed do something to perk the economy.”

The GSCI index surged 92 percent from the end of December 2008 to June 2011 as the Fed kept borrowing costs at a record low and bought $2.3 trillion of debt in two rounds of so-called quantitative easing.

Let me put the the news into the proper perspective. Slackening economic developments in the US only aggravates the already existing weak conditions around the world.

As pointed out earlier, China’s markets continue to tumble on fresh accounts of sluggish manufacturing. This in spite of the recent tepid inflationist policies in ‘support’ of China’s economy (it’s really not the economy but the cronies).

Bear market in commodity prices (GTX) has more been consistent with actions of China’s Shanghai index (SSEC) than the US S&P 500 (SPX).

Add to the mix the Euro crisis, dwindling growth of emerging markets and most importantly, the seemingly irresolute or halfhearted central bankers, such as the US Federal Reserve’s miserly extension of Operation Twist, who may be tacitly wishing for a crash to justify their interventions, you’ve got a recipe for a reversal in expectations.

A reversal in expectations will mean bad news IS bad news.

Let me repeat what I have been warning about and what I said yesterday,

If GLOBAL political agents will continue to withhold steroids from the steroid-starved or stimulus-addicted financial markets, expectations will likely reverse soon.

And that reversal could be swift, deep and dramatically violent.

“We got nothing significant from Bernanke” are signs of growing demand for REAL actions and increasing frustrations with current set of political actions. The allure of promises appears to be fading.

This also implies of the possible inflection of market’s expectations on mere pledges and guarantees.

So seen from both the dimensions of consumption or from monetary inflation, a bear market in commodities cannot be bullish on (steroid dependent) global equities (including the Phisix).

Be very careful out there.

Quote of the Day: Understanding Classical Liberalism

Liberalism is no religion, no world view, no party of special interests. It is no religion because it demands neither faith nor devotion, because there is nothing mystical about it, and because it has no dogmas. It is no world view because it does not try to explain the cosmos and because it says nothing and does not seek to say anything about the meaning and purpose of human existence. It is no party of special interests because it does not provide or seek to provide any special advantage whatsoever to any individual or any group. It is something entirely different. It is an ideology, a doctrine of the mutual relationship among the members of society and, at the same time, the application of this doctrine to the conduct of men in actual society. It promises nothing that exceeds what can be accomplished in society and through society. It seeks to give men only one thing, the peaceful, undisturbed development of material well-being for all, in order thereby to shield them from the external causes of pain and suffering as far as it lies within the power of social institutions to do so at all. To diminish suffering, to increase happiness: that is its aim.

This is from the great Professor Ludwig von Mises, The Future of Liberalism, in Liberalism in the Classical Tradition

China’s Manufacturing Troubles Hasn’t Gone Away

More bad news from China: China's manufacturing woes hasn't gone away and has reportedly worsened.

From Bloomberg,

China’s manufacturing may shrink for an eighth month in June, matching the streak during the global financial crisis in a signal the government’s stimulus has yet to reverse the economy’s slowdown.

The preliminary reading was 48.1 for a purchasing managers’ index today from HSBC Holdings Plc and Markit Economics. Above- 50 readings indicate expansion. The lowest crisis level was 40.9 in November 2008, when industrial output grew 5.4 percent from a year earlier, compared with 9.6 percent last month.

Today’s report contrasts with comments by officials expressing confidence growth will rebound, with President Hu Jintao saying in remarks published June 17 that China has taken “targeted measures” to boost domestic demand. Asian stocks fell and the yuan weakened for a second day against the dollar.

“Beijing’s policy easing so far has not been enough,” Qu Hongbin, Hong Kong-based chief China economist for HSBC, said in a Bloomberg Television interview. “Probably more needs to be done if they really want to stabilize the growth.”

If confirmed on July 2, the gauge would be at the lowest since November 2011 and equal the run of below-50 readings from August 2008 to March 2009…

The Chinese government signaled a more-aggressive approach to sustaining expansion last month when Premier Wen Jiabao called for more efforts toward stabilizing growth. The People’s Bank of China on June 7 cut interest rates for the first time since 2008 and the economic planning agency is stepping up approvals of investment projects.

Apparently China’s interest rate cuts and stealth SOE based stimulus has yet to weave its magic.

As I have been saying, China persists to show signs of reluctance or has continually dithered to engage in aggressive stimulus, perhaps until the national elections this October.

The ongoing slowdown (or perhaps a bubble bust?) in China’s bubble economy has been consistent with the recent downdraft of commodity prices, despite the US Federal Reserve’s half-hearted extension of Operation Twist.

For now, BAD news is BAD news.

Much of Asia, as of this writing, has been in the red except for Japan and the Philippines. Most of the damage can be seen in China’s Shanghai index who seem to suffer from a technical breakdown.

If GLOBAL political agents will continue to withhold steroids from the steroid-starved or stimulus-addicted financial markets, expectations will likely reverse soon.

And that reversal could be swift, deep and dramatically violent.

Be very careful out there.

Public Choice in Action: Logrolling in the Philippine Mining-Tourism Policy

Well it seems that President Aquino will be delivering a compromise over the controversial (I would add nonsensical) mining-tourism squabble.

From the Inquirer,

A new mining policy expected to be issued Friday by President Benigno Aquino hopes to generate more revenues for the government in the face of a high demand for metallic resources while excluding about 78 more areas from mining activities.

Aquino said here on Wednesday that he hoped to come out soon with the much-awaited executive order (EO) spelling out the government’s revised mining policy in the midst of intense debate between industry leaders and environmentalists through the years.

Without going into details, the President said small-scale mining would be further regulated throughout the country under the new EO, which, he added, was undergoing “fine-tuning” in certain provisions for being “superfluous.”…

Asked how the new EO will be able to balance out concerns on environment protection and economic gains, Mr. Aquino said that one of its provisions would designate “roughly” 78 areas to be reserved for tourism “and mining cannot happen there.”

Extractive activities would be disallowed in agricultural and ecotourism areas, according to the source. At present, mining is barred only in areas under protected status.

The President noted that the provision in the draft EO that “mining cannot happen in prime agricultural lands” had also been stated in the law extending the implementation of the Comprehensive Agrarian Reform Program which, in turn, prohibited the conversion of irrigated lands.

There are lots of things to discuss here, particularly side effects of these policies, nevertheless, this represents another wonderful example of the public choice theory in action: a political compromise between two vested interest groups.

Here’s Professor Don Boudreaux and Dwight Lee on “logrolling” (bold emphasis mine)

democratic politics falls short of achieving optimal compromise not only because of immoderate ideological restraints imposed on representatives by voters, but also because it displaces voluntary market arrangements which achieve a far greater and more inclusive amount of compromise. In fact, politics stymies more beneficial compromise than it promotes. Politics should more appropriately be called the art of confining compromise--political compromises are confined to the relatively few parties with ample political power to participate in political bargaining.

The lesson here is that political mandates or edicts or regulations work in the favor of the interests of politically organized and politically connected groups than over the unorganized-invisible groups (yes, this means you, me and the rest of the Juans, Marias, and Pedros).

I call this political inequality.

[disclosure: I have equity exposures in the mining industry, but I favor free markets rather than 'compromises' or logrolling or the use of fiat to secure economic advantage over the rest]

Politics 101: Democracy

Democratic politics isn’t really about equal opportunity to express people’s opinion. Instead it is about the manipulation of the masses by vested interest groups to legitimize power grab.

Austrian economist Bob Wenzel lucidly explains the basics of democratic politics which you won’t hear or read from the mainstream institutions. (bold emphasis mine)

The late mafia leader John Gotti, who understood a thing or two about men, once told his daughter: "Regardless of how much a man tells you about how smart you are, he really has only one thing on his mind. You may see a certain man and think of him as grandfatherly, just remember, he has only one thing on his mind."

There is an analogous situation in the world of politics, no matter how much a politician tells you how he wants to fight for your cause, keep in mind that he has only one thing on his mind: getting or maintaining power.

No matter how well groomed or smooth he looks, no matter how well he delivers his lines, he has only one thing on his mind: getting or maintaining power.

In a democracy, in a two man race, a politician must be concerned with the percentage 50% plus one vote.(In a three man race, it's 33% plus one vote, but to keep things simple I will assume a two man race. In a three man race or more, the general idea is the same, just different percentages.) . To be a successful politician, a politician must look at each and every voter and determine whether that person is going to bring him closer to 50% plus one, and how much closer.

In other words, you as an individual voter are not very important to him. Think, I'm kidding? Try getting an appointment with one of your U.S. senators to discuss some tax loophole you would like for yourself, so that instead of sending 25% of your money to the IRS, you get to use the money on a three month per year trip to the Bahamas, which you then are able to deduct from your tax bill. Go ahead, call your senator now and try and get this done.

If you understand politician math and the importance of 50% plus one vote to a politician, you will understand that individuals, who represent large groups of voters, can get appointments with senators. A Citibank lobbyist, and other bankster lobbyists, are also going to be able to get meetings with senators. They bring money that the politician can use in his campaign that will help him advance toward 50% plus one vote. That's why banksters get tax loopholes and you don't…

Bottom line, it makes no sense for an individual to vote, endorse, or work for any politician, especially if you are a libertarian. Democracies are about power players and divvying up the lucre and power. If on the other hand you some how can deliver a vote of 10% or more because you have a following, you may be able to make a marginal incremental influence in favor of liberty. You won't get much, especially when you will be vying against other power players, who want to grab and take and steal and expand government power, but on a practical level, the mathematics work in that you may be able to get something.

Oh, this isn’t just in the US, but applies universally including in the Philippines.

And here is why politics is not only an utter waste of time but represents a destructive force in society…

Democracy, despite the reverence and lip service placed on "one man one vote", is really about power blocks, get out the vote machines and the power players who control the blocks, machines and money. It has nothing to do with the individual.

The individual is only served away from government. The only chance an individual has to get his unique quirk's met is not from government, where a quirk could never possibly result in a power block to influence government, but in the private property free market society where businessmen are out to serve all--not just the power crazed..

In comparison, unless you are super wealthy, or have a power bloc you can deliver, politics is a waste of time. This is even more the case for the libertarian, since politics is, in the end, mostly the fine art of delivering for the power players by destroying liberty, while talking gibberish about serving the people.

If you buy into the gibberish, you are a sucker.

You are much better off studying about freedom, practicing freedom and writing about freedom, than you are joining and working a political campaign for what ultimately must become a liberty destroying outcome.

I’d rather go on a vacation during election period than be a part of the delusional “one man, one vote” egalitarian society (myth of the rational voter)

Oh by the way, speaking of “one man one vote system”, I recall that there had been more NON-voters during the last or 2010 Philippine presidential election than the votes acquired by the winning candidate, today’s incumbent president. Yet mainstream institutions continually impress upon the public that plurality votes equates to the “madlang people” or to the collective.

Yes politics, abetted by media, have demeaned culture to the point of mangling linguistic content in order to peddle crass collectivism (of course to the benefit of the political class and also of crony media)

Politics indeed is a game of lies and machinations.

US Federal Reserve Extends Operation Twist, Commodities Drop

So Ben Bernanke and the US Federal Reserve finally gave the markets the steroids (Bernanke Put), which they have been desperately expecting.

From Bloomberg,

The Federal Reserve will expand its Operation Twist program to extend the maturities of assets on its balance sheet and said it stands ready to take further action to put unemployed Americans back to work.

The central bank will prolong the program through the end of the year, selling $267 billion of shorter-term securities and buying the same amount of longer-term debt in a bid to reduce borrowing costs and spur the economy.

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Ben S. Bernanke said at a news conference in Washington following a two-day meeting of the Federal Open Market Committee. “Additional asset purchases would be among the things that we would certainly consider.”

Policy makers moved to shore up the world’s largest economy as faltering growth leaves it vulnerable to fallout from the European debt crisis and looming fiscal tightening in the U.S. Fed officials today lowered their outlook for growth and employment, foreseeing a jobless rate of at least 7.5 percent at the end of 2013.

But there has been a material difference. Operation Twist 2 represents a little more than three quarters of the original $400 billion programme.

Yes, US markets declined marginally in response.

But the significant drops in gold and importantly oil prices (nearly or at the brink of breaking down), whether seen from a consumption or from a monetary inflation perspective, have not been consistent with, or supportive of, the actions of the sprightly stock markets. Said differently, the FED has pulled their punches and the commodity markets noticed them.

Be very careful out there.

Emerging Markets Eye Insurance Against the US Dollar, Euro

Aside from the pledge to assist in the rescue of the EU, key emerging markets led by the BRICs and South Africa discussed insurance options that goes around the US dollar.

From the China Money Report,

The BRICS countries said on Monday that they’re considering setting up a foreign-exchange reserve pool and a currency-swap arrangement as financial problems threaten to spread across the global economy.Leaders of the five-member group —Brazil, Russia, India, China and South Africa— also said BRICS is “willing to make a contribution” to increase the International Monetary Fund’s ability to rescue troubled economies. President Hu Jintao joined his counterparts from other BRICS nations on Monday morning in the Mexican resort city Los Cabos ahead of the start of the G20 Summit.

According to the Chinese Foreign Ministry, the leaders discussed the currency swap and foreign-exchange reserve pool ideas and tasked their finance ministers and central bank chiefs to implement them, according to China’s Foreign Ministry.

Swap arrangements, which allow nations’ central banks to lend to each other money to keep markets liquid, and the pooling of foreign-exchange reserves are contingency measures aimed at containing crises such as the one roiling the eurozone, analysts said.

Zhang Yuyan, director of the Institute of World Economics and Politics affiliated with the Chinese Academy of Social Sciences, said the new mechanisms established by the emerging markets themselves, who “know their current conditions and demands
much better”.

Amid the global economic slowdown, the pooling of foreign-exchange reserves will help BRICS countries to fight the lack of market liquidity, beef up their immunity to financial crises and boost global confidence, Zhang said.

Contributions to this “virtual” bailout fund, as Brazil’s Finance Minister Guido Mantega put it, would be tied to the size of each BRICS member’s currency reserves, he said. The five leaders also discussed BRICS’ participation in replenishing the IMF’s lending capital. Hu said the G20 should encourage and support the eurozone countries’ adoption of fiscal controls and spending cuts as efforts to improve confidence in world markets. The leaders also urged the IMF to carry out promised reforms of its quota and governance systems. Mexico, which was hosting the G20 Summit on Monday and Tuesday, has said it will use the meeting to press the world’s largest economies to increase IMF resources and build the fund’s capacity to intervene in the European debt crisis.

While these may be constitute added signs that much of the world seem to be getting antsy with the unfolding events in the developed economies, swaps and foreign reserve pools won’t do much when the whole paper money system goes into flame.

The reason for this is that much of the world’s banking and financial system remains anchored on fiat currencies of the western world, where the US dollar and the euro constitute 90% of global reserve currencies (see chart from Wikipedia.org).

Besides, the monetary system of emerging markets operates from the same fractional reserve system as their developed peers, which means that like their developed peers, EM politicians will be seduced to used inflationism to achieve political goals.

Instead, what these economies should do would be to ramp on gold acquisition, and possibly consider a quasi-gold standard possibly through a gold based currency board (as proposed by Professor Steve Hanke) or a return to the gold standard or allow for currency competition with the private sector (free banking, free currency competition as proposed by Ron Paul and Professor Lawrence White).

Since any of the proposed monetary reforms would entail restriction in political actions and simultaneously require massive liberalization of respective economies, these won’t likely be palatable with incumbent political agents, who under such circumstances, lose much of their current privileges (Europe’s deepening crisis are manifestations of these).

Thus, it would likely take a deeper crisis (most likely a currency crisis) to force real reforms in the system.

Quote of the Day: Libertarianism is the Philosophy of Freedom

libertarianism is simply the philosophy of freedom: freedom for one to do with his person and property as he chooses as long as in doing so he doesn’t aggress against the person or property of another. “The only freedom which deserves the name,” said political philosopher John Stuart Mill, “is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.” Or, in the simple words of Leonard Read, “anything that’s peaceful.”

That’s from the splendid review by Lawrence Vance of Judge Andrew P. Napolitano’s latest book It Is Dangerous to Be Right When the Government Is Wrong: The Case for Personal Freedom (Nashville: Thomas Nelson, 2011); 240 pages. (lewrockwell.com)

Judge Napolitano's book is on my wishlist.

The Diminishing Returns from Euro Bailouts Becoming Evident

Mainstream analysts gets to notice what I have repeatedly been warning about.

They measured and documented the market’s response from each of the bailouts, and observed that the positive impact has been lessening. Bailouts are being overwhelmed by the law of diminishing returns.

The Wall Street Journal Blog [quote below and chart above from the same article] (bold emphasis mine):

The protracted euro-zone debt crisis has caused market sentiment to swing back and forth like spectators’ heads at a tennis match. Any news that suggests a resolution to the situation has been greeted with risk-on reactions, while negative news has sent investors fleeing for safety.

The risk-on impact of good headlines is waning, however, say economists at the Royal Bank of Canada, which should put policy makers on notice.

The RBC group mapped out market reactions since August 2011 to news that was viewed as positive to curbing the debt crisis. As expected, positive news led to narrower spreads between the 10-year bonds of Spain and Italy versus 10-year German bunds.

But just as an addict comes down faster after each subsequent drug dose, the markets have shrugged off positive moves at a quicker pace. For instance, the implementation of the first long-term refinancing operations by the European Central Bank triggered a 44 basis-point narrowing in spreads that took 8 days to unwind. The second LTRO caused only an 23-bp drop which unwound in three days.

Tom Porcelli, RBC’s chief U.S. economist, says positive European events have become “a sugar high.”

Until global central banks unleashes the GRAND BAZOOKA, caveat emptor.

More Devaluation Myths

Investing guru Mark Mobius, executive chairman of Templeton Emerging Markets Group says,

In some cases, a devalued currency can be an engine for future growth. A lower currency price means the nation’s exports will be more competitive (less expensive) in the global market, and imports will become more expensive, so many companies can benefit.

A discussion about currency values should include a discussion about inflation, which is closely interconnected. Inflation has been problematic for many emerging economies, and while it does seem to be ebbing temporarily in some markets, it’s important to remain vigilant about it. High inflation can cause a strong public response (even a mass uprising), as consumer purchasing power quickly erodes.

It would be patently misleading to present devaluation as a different animal from inflation. That’s because devaluation IS inflationism. Consumer price inflation signifies as the effect of prior monetary inflation.

Professor Jeffrey M. Herbener explains,

When a government announces devaluation, as the United States did in 1934 and again in 1971, it is merely recognizing the reality of the consequences of its monetary inflation. Its inflationary policy has eroded the purchasing power of its currency which will be suffered both domestically, with price inflation, and internationally, with devaluation.

The undesirable effects of monetary inflation cannot be eliminated with floating exchange rates. Then the price inflation and devaluation occur gradually instead of being bottled up behind the government’s unsustainable peg. But whether the currency is pegged, as the dollar was in the 1920s and 1930s, or floats, as the dollar has since 1971, monetary inflation and credit expansion cause a boom-bust cycle.

Yet prescribing devaluation is tantamount to, or a euphemism of saying poverty promotes growth.

By having to lower standards of living, as a consequence of the transference of resources to politicians and their cronies, people are expected to work harder in order to generate growth.

So inflationistas are essentially moral schadenfreudes—finding satisfaction in the miseries of people.

Not to mention that inflation represents highway robbery (plunder) by governments of their people.

Even the divine inspiration of statists and facists, John Maynard Keynes admitted to these. (Wikipedia.org; bold highlights original)

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Let’s take the Philippines as example.

The Peso devalued from 2 pesos: 1 US dollar in 1960s to about 42 pesos to a US dollar today. This means the Peso devalued by about 4% annually.

From the perspective devaluation exponents, this should have made the Philippines an export giant. However the Philippines ranks only 57th based on 2011 data according to Wikipedia.org

Ironically, most of the top exporters are represented by ‘strong’ currencies from developed economies, and not from economies that has massively devalued their currencies as Zimbabwe.

It’s good news to see that the Philippine GDP per capital has skyrocketed from $257 in 1960 to $ 2,140.12 in 2010, according to Index Mundi.

But this only accounts for an average annual growth of about 1.7%. That’s way below the rate of devaluation (inflation) at 4%. Also the surge came amidst globalization. As a side note, to put a political spice on this, much of the increase came from the 2003 onwards.

And this has been the "magic" that has spawned PEOPLE exports or the Overseas Filipino Workers (OFWs) whom has been politically labeled as today’s economic heroes, out of the paucity of economic opportunities.

In reality, OFWs are MANIFESTATIONS of an uncompetitive economy borne out of interventionism and inflationism.

And much of that “economic growth” has not only emanated from OFWs, but from the INFORMAL economy which government statisticians downplays or deliberately hides behind the numbers. The informal economy has also been symptom of government failures and of the uncompetitive nature of the economy brought by sustained interventionism and inflationism.

Lastly the idea that exports or tourism benefit from the policy of poverty as a path to prosperity (devaluation) also misrepresents the reality. Devaluation or inflationism provides short term benefits at the expense of the long term.

The great Professor Ludwig von Mises exposes such deception,

If one looks at devaluation not with the eyes of an apologist of government and union policies, but with the eyes of an economist, one must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, favor them exclusively. A general acceptance of the principles of the flexible standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations' monetary systems.

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.

Legal plunder through currency inflationism or devaluation has neither provided long term (or lasting-sustainable) economic solutions nor has it been a moral one.

War on Credit Rating Agencies: EU’s Proposed Ban Eased

A stereotyped and knee jerk way politicians deal with crisis has been to shoot the messenger, particularly through various forms of price controls or through muzzling of information.

EU politicians believe that credit rating agencies help fueled the crisis and thus earlier moved to ban them.

From Reuters,

A central plank of European moves to rein in credit rating agencies was diluted by lawmakers on Tuesday, bowing to pressure from banks and companies who argued that proposals were unworkable or counterproductive.

An initial plan for ratings agencies to be rotated or switched every three years will be weakened to apply only to very specific types of credit and only every five years, the source said.

The pullback comes after Europe's biggest companies and banks warned that forcing them switch between so few global agencies could force them to use less well-known bodies carrying less credibility particularly with investors from the United States or Asia.

The proposed reforms come after the credit ratings sector, dominated by the "Big Three" of Standard & Poor's, Moody's and Fitch Ratings, was slammed for giving high ratings to securitised debt or ABS linked to U.S. home loans, leading to the market crisis of 2007 through 2009.

Policymakers worry ratings carry too much clout and have blamed the timing of Greek debt downgrades for making an EU bailout harder. The issue remains pertinent as Moody's is expected to downgrade some of the world's top banks this month.

Politicians believe they can censor away the crisis through price manipulation. Credit rating agencies help shape investors valuations and perceptions of financial securities and consequently their prices.

Although I have a beef with credit rating agencies over their integrity, as conflict of interests have hounded the industry (yes they functioned as institutional accomplices to the bubble blowing phenomenon of the US real estate boom), shooting the messenger will not solve the crisis rooted on an unsustainable and insolvent parasitical arrangement inherent in the structure of incumbent political institutions.