Turkish Banks offer Gold Deposit Accounts

Speaking of a reset in the global order monetary, one possible step towards the reintroduction of gold as money is for the banking system not only to accept gold as loan collateral but for people to be able to have gold deposit accounts which could pave way for payments and settlements services in gold.

Banks in Turkey seems to have lunged into this path.

From Mineweb.com

For centuries, Turks have flocked to the jewellery shops of Istanbul's labyrinthine Grand Bazaar to trade their gold - ornaments handed down through their families over generations, or bars stashed under mattresses as savings. But in recent months the shops have a new and unexpected competitor: banks.

The country's commercial banks are pouring their technical expertise and marketing resources into offering their customers gold deposit accounts. Customers hand their gold to a bank and can make withdrawals from their accounts in gold bars or the lira currency; the accounts offer interest rates that are substantially lower than those on normal time deposits.

Gold deposit accounts have been growing around the world, but Turkey's boom has made it a leader in the trend. This appears to have cut the amount of gold flowing to jewellers in the Grand Bazaar and elsewhere in the country, a trend which dismays the shop owners. In the long run, it could threaten their business model, which relies partly on turning scrap gold they buy into jewellery and selling it back to retail customers…

Gold is big business in Turkey, for cultural reasons and also because of the country's experience with bouts of high inflation over the past century. The metal is traditionally given as a gift at weddings and circumcision ceremonies, and demand for imports tends to surge during the summer months.

Turks are believed to have accumulated about 5,000 tonnes of gold in their homes, worth around $250 billion at current international prices, according to the World Gold Council, an industry lobby. It ranks Turkey's gold demand as fifth in the world for jewellery and eighth for retail investment, mostly behind countries with much bigger populations such as India, China and the United States.

I hope that Philippine banking system does the same.

Quote of the Day: Global Monetary Order is on the Verge of a Reset

The return to gold is unmistakably the product of a strategic, not merely a tactical, shift in global central banking policy. Central banks in the developed world have now altogether stopped selling bullion. This was foreshadowed by their behavior over the past decade, when they sold even less gold than they were permitted to under the anti-dumping Central Bank Gold Agreements. Clearly the concern about dumping gold was out of step with the trend. But more importantly, central banks in the emerging markets have been buying gold by the truckload.

Since the financial crisis of '08, nations as diverse as Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine, Russia, Saudi Arabia, and India have led the way back to gold as a primary reserve asset. Russia alone has added an impressive 400 tonnes of bullion to its reserves, most of it coming from domestic purchases. Mexico has added over 120 tonnes, including 78 tonnes from one mega-purchase in March 2011. The Philippines have bought over 60 tonnes, with 32 tonnes coming in as recently as March 2012. Thailand has added approximately 60 tonnes, and Kazakhstan just shy of 30 tonnes. Turkey amended its regulatory policy late last year to allow commercial banks to count gold towards their reserve requirements, adding over 120 tonnes to its official reserves. And bullion imports into mainland China through Hong Kong have been reaching all-time highs.

Finally, loyal US allies Saudi Arabia and India, in what is sure to leave particularly bitter taste in Washington's mouth, have been adding gold to their reserves by the hundreds of tonnes.

In short, the governments of emerging markets recognize that the global monetary order is on the verge of a reset. These emerging markets are the economic engines of the 21st century, and they're determined not to be undermined by Western fiat paper.

This is from Peter Schiff at the lewrockwell.com talking about the return to the gold standard

Does the Skyscrapers Curse Signal a coming Asian Crisis?

Austrian economist and professor Mark Thornton principal exponent of Skyscraper Index Model notes that skyscrapers has had a record of uncanny accuracy in the prediction of many crises which includes today’s Euro crisis.

At the Mises Blog, Professor Thornton writes,

The ECB has once again come to the rescue by cutting interest rates in order to forestall a collapse of the European economy. Also, in a “surprise” move, the Chinese central bank cut interest rates in response to a continuing slow down in economic activity.

When the Skyscraper Index issued a European crisis signal last summer the European stocks markets were riding a wave of optimism and the Euro was worth about a $1.50. Most European stock markets have lost considerable ground along with the value of the Euro. However, we can best visualize the economic trouble from where the skyscraper crisis signal was issued: in the London real estate market. The Shard Skyscraper (which issued the crisis signal by becoming the tallest skyscraper in Western Europe) opened its doors to a badly slumping real estate market. Its owners made the bad mistake of buying out one of its primary lessee at 70 pounds per square foot. Leases are now going for 55 pounds per foot and probably heading lower.

In addition to Europe, there has been a regional crisis signal in China and possible world crisis signals coming from both China and the Middle East.

As for the Middle East, the Burj Khalifa, the world tallest building at 2,717 feet (at the moment), which opened two years ago has now been considered a “distressed property”.

The crash of Dubai’s stock market serves as a harrowing reminder of the bubble bust.

Many of the other grand projects in the Middle East, after having been stricken by the crisis, had also been shelved.

Well, I have been repeatedly saying that the Philippines and ASEAN economies have been undergoing a business or bubble cycle.

And since skyscrapers and business cycles are almost joined to the hip, with skyscrapers as pathological manifestations of financial excesses, then current prestige based property trends could be ominous of a coming crisis with its epicenter in Asia, or even in Southeast Asia.

That’s because Asia has been the focal point of where most of the next generation of the world’s tallest buildings will rise.

China and South Korea tops the list, along with Indonesia and Malaysia who will be having their own signature towers.

However, the Middle East will still lay claim to the tiara of having the tallest, with Saudi Arabia’s proposed Kingdom Tower which which will be due for completion this 2018. Eerily, Saudi’s grandiose project seem to coincide with mounting financial pressures on Saudi’s welfare economy.

Some of the proposed tallest buildings in Southeast Asia and Korea (from Business Insider)

Menara Warisan Merdeka

Skyscraper City

Location: Kuala Lumpur, Malaysia

Height: 1,722 feet

The Menara Warisan Merdeka will serve as a residential, office, and hotel building.

The Menera is scheduled to be completed by 2015. When completed, it would be the tallest building in Malaysia, according to The Star.

Signature Tower Jakarta

Skyscraper Center

Location: Jakarta, Indonesia

Height: 2,093 feet

The Signature Tower Jakarta is a 119-floor building (with six floors below ground) that is scheduled to be completed in 2017.

The building will serve as a hotel and an office. If completed, it will be the world's fifth-largest building, according to The Jakarta Post.

Seoul Light DMC Tower

Skyscraper Center

Location: Seoul, South Korea

Height: 2,101 feet

The Seoul Light DMC Tower will be a hotel, residential, and office building.

It's scheduled to be completed in 2017. The building will use wind to power itself, and have interior gardens that act as "lungs" for the building, according to the tower's website.

For the rest of the list, you can see them here

The point is if the Skyscraper Index model’s accurate predictive capabilities should continue, then that time window of 2015-2017 could portend to an Asian Crisis 2.0

The relationship between the Skyscraper and the Austrian Business Cycle as explained by Professor Thornton [bold emphasis mine]

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies which in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital and technology-intensive industries. While this analysis concentrates on the U.S. economy, the impact of these crises was often felt outside the domestic economy.

It would be very easy to dismiss the skyscraper index as a predictor of the business cycle, just as other indicators and indexes have been rightly rejected. However, the skyscraper has many of the characteristic features that play critical roles in various business cycle theories. It is these features that make skyscrapers, especially the construction of the world’s tallest buildings, a salient marker of the twentieth-century’s business cycle; the reoccurring pattern of entrepreneurial error that takes place in the boom phase that is later revealed during the bust phase. In the twentieth century the skyscraper has replaced the factory and railroad, just as the information and service sectors have replaced heavy industry and manufacturing as the dominant sectors of the economy. The skyscraper is the critical nexus of the administration of modern global capitalism and commerce where decisions are made and transmitted throughout the capitalist system and where traders communicate and exchange information and goods, interconnecting with the telecommunications network. Therefore it should not be surprising that the skyscraper is an important manifestation of the twentieth-century business cycle, just as the canals, railroads, and factories were in previous times.

Denmark Cuts Interest Rates to Negative

Capital flight from the Eurozone has been giving Denmark’s central bank a headache.

So they experiment with negative rates—instead of the central bank (borrower) paying money to depositors (lenders), it’s now depositors (lenders) who pay the central bank (borrower) for safekeeping.

From Bloomberg, (bold emphasis mine)

Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx.

The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro.

“There’s no experience of how negative deposit rates will affect the financial markets and the krone,” Jacob Graven, chief economist at Sydbank A/S, said in a phone interview today before the decision was announced. “It’s a sign of the strong Danish economy. This is good. The opposite situation would be far worse, if the central bank would have to hike rates to defend the krone. We have a luxury problem.”

Denmark has stepped up its battle to prevent the krone from strengthening beyond its currency band as the nation’s haven status attracts investors. Danske Bank A/S (DANSKE), the country’s biggest lender, said last week it now has a risk scenario that envisages Denmark abandoning the peg should the cost of fighting currency appreciation grow too high. The bank doesn’t view this as a likely outcome, it said.

‘Absurd Scenario’

Negative rates were “until recently an absurd scenario,” said Christian H. Heinig, an economist at Realkredit Danmark A/S, the mortgage unit of Danske Bank. “Mortgage loan rates are already at record lows, and today’s rate announcement won’t have more than a limited effect here.”

The rate cut sent the krone to its weakest level since April 16 at 7.4427 against the euro. The currency was trading at 7.4396 as of 4:26 p.m. local time, compared with 7.4367 yesterday, according to prices available on Bloomberg.

Denmark has an agreement with the ECB to let the krone swing no more than 2.25 percent from central rate of 7.46038, though it maintains a tighter band in practice. Denmark’s foreign reserves climbed to a record high in June after the central bank tapped the currency market to weaken the krone. Reserves rose by 9.2 billion kroner last month to 511.6 billion kroner ($85 billion), the central bank said on July 3.

Of course there will an impact, even if they haven’t been visible to the economy now.

I’ve noted how Denmark’s 2 year bonds turned negative earlier here.

Such destabilizing capital flows are likely to spawn boom bust cycles.

And perhaps this may have began to manifest through Denmark’s equity markets.

Denmark’s major equity benchmark the Copenhagen 20 has been one of top world performers (18% year to date) and trails the Philippine Phisix by only a few percentage points.

No, this isn't about liquidity traps.

But this is the loony kindda o’ stuff you see only with the paper money system.

HOT: ECB Cuts Rate to Record Low, Deposit Rates at Zero

The European Central Bank, joins China and the Bank of England in moves to ease credit.

From Bloomberg,

The European Central Bank cut interest rates to a record low and said it won’t pay anything on overnight deposits as the sovereign debt crisis threatens to drive the euro region into recession.

Policy makers meeting in Frankfurt today lowered the ECB’s main refinancing rate to 0.75 percent from 1 percent, as predicted by 49 of 64 economists in a Bloomberg News survey. The ECB also cut its deposit rate to zero from 0.25 percent and its marginal lending rate to 1.5 percent from 1.75 percent. President Mario Draghi holds a press conference at 2:30 p.m. in Frankfurt to explain the decision.

With Europe’s debt crisis curbing growth across the continent and damping the global outlook, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction. While today’s moves may not stimulate demand, they will lower borrowing costs for struggling banks and could build on the confidence boost euro-area governments delivered last week when they took steps toward a deeper economic union.

Looks very much like a synchronized move.

Still, the doctrine of the euthanasia of the rentier that wages war against interest rates have become so incredibly prominent

Here is the premise for such action, from the same article…

A deposit rate of zero may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion euros ($1 trillion) is currently being deposited with the ECB each day.

The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. Today’s move may therefore lower the euro overnight index average, or Eonia, which stood at 0.33 percent yesterday.

This is really crazy stuff.

Debt has been the core symptom of the current crisis yet debt is still seen as the solution.

So there is hardly any meaningful reforms in the direction to allow markets to clear by transferring resources held by unproductive entities to the productive sectors at large price markdowns. Of course this means bankruptcy for both insolvent governments and banks, which is why political authorities have been doing the same things over and over again and expecting different, hopefully positive (wishful thinking) results.

Again as the great Professor Ludwig von MIses warned,

Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

The reality is that all these have been meant to shore up the cartelized debt based political system that has operated around the triumvirate: privileged bankers, the central bank and the welfare governments.

For these political and quasi political agents losing entitlements is non-negotiable…until forced upon by economic reality.

Kick the can policies has only been worsening the problem.

HOT: China Cuts Lending and Deposit Rates for the Second Time in 2012

Coordinated moves this seem to have been!

Just a few minutes back the Bank of England initiated the next wave of credit 'quantitative' easing policies, now comes China.

From the Marketwatch.com,

The People's Bank of China cut its benchmark lending and deposit rates late Thursday, its second rate cut since early June, according to reports. The Chinese central bank lowered its one-year yuan deposit rate 25 basis points and its one-year lending rate by 31 basis points, according to Dow Jones Newswires. The central bank also announced more relaxed rules on lending, allowing bank lending rates to fall to 70% of the benchmark rate, down from 80% currently.

So China’s political authorities have remained interventionists after all.

I believe that the People’s Bank of China’s (PBoC) response may have been triggered by today’s clobbering of her already beaten down equity markets. The Shanghai index fell by more than 1%.

It is also possible that global central bankers may have decided to coordinate or synchronize their “kick-the-can-down-the-road” responses.

If China’s banks and businesses have been stuffed with bad loans, then interest rates cuts may not be effective. So the next measures will either be asset purchases (ala developed economies) or fiscal stimulus.

BUT we will observe the reaction of China’s financial markets and the commodity markets to these measures.

HOT: Bank of England Reactivates QE

The Bank of England fired the first salvo to the much expected (or may I say much awaited) series of credit easing policies by global central banks

From the Bloomberg,

The Bank of England restared bond purchases two months after halting its expansion of stimulus as the deteriorating outlook spurred policy makers to ramp up efforts to kick start a recovery.

The Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds…

The resumption of quantitative easing is a part of a twin- pronged effort by the central bank to pull Britain out of a recession that includes a new credit-boosting program. With inflation easing and reports this week showing that factory,services and construction activity weakened in June, policy makers were spurred to act…

Policy makers also left their benchmark rate at a record low of 0.5 percent today, a move forecast by all but one of 50 economists in a Bloomberg survey. Within the QE survey, two forecast no change, one forecast a 25 billion-pound increase and eight predicted an addition of 75 billion pounds.

The ECB has likewise been widely expected to cut interest rates today.

The last time the BoE delivered the QE (BoE's balance sheet from the Bank of England), this boosted UK’s major equity benchmark, the FTSE, for about one quarter or for about the same time until the program expired.

The Bank of England’s action has not been about the economy but of the saving of the skins of bankers and stock market investors. This is the Bernanke Put in motion.

War on Education: ADB Disdains Tutoring, Seeks Regulation

The Asian Development Bank (ADB) detests private tutoring which they pejoratively calls the “shadow education”

From Yahoo,

Asian parents are spending billions of dollars on private tutors for their children, and the practice is growing despite doubts over its effectiveness, according to a study published Wednesday.

"Shadow education" is an expanding business not only in wealthy countries but also in some of the region's poorer nations as parents try to give their children the best start in life, the Asian Development Bank said.

Nearly nine out of 10 South Korean elementary pupils have private tutoring, while the figure for primary school children in India's West Bengal state is six out of 10.

"Proportions are lower in other countries, but throughout the region the shadow is spreading and intensifying," the study said, calling for a review of education systems to make such extra teaching less attractive.

Extra academic work is aimed at helping slow learners and supporting high achievers, and is seen by many Asian parents as a constructive way for adolescents to spend their spare time.

However, it can also reduce time for sports and other activities important for well-rounded development, as well as cause social tensions since richer families are able to pay for better-quality tutoring, the study said.

Funny, but are we not suppose to know more of our own interests or what is best for us and our family? Yet these haughty ADB people are saying otherwise...they know more about our children's welfare than us, the parents.

If a family finds that the “one-size-fits-all” educational standards implemented by incumbent institutions has not been sufficient in providing learning services for their children, would it be morally deviant to procure educational services outside of these institutions?

To consider, in the Philippines, nearly 4 out of 10 college graduates are unemployed and one in 10 of graduates go abroad. So how effective has traditional education been? Yet these are the standards which the ADB desires that our children be confined with.

I have to admit I have been a product of tutoring too, as my parents felt the need for me to learn more, when I was in grade school.

Education comes best from the self, as educator John Holt once said,

I believe that we learn best when we, not others are deciding what we are going to learn, and when we are choosing the people, materials, and experiences from which we will be learning

This has been true for me, where everyday is a learning day.

I would extend this idea to say that most of my learning came from self education or “deciding what to learn” and from indirect mentorship (Dr. Faber and the Austrian school for instance).

And I think that most of what I learned from contemporary education has been useless and merely went down the drain.

Yet here is what ADB wants to do…

The study called for state supervision and regulation of the industry, as well as a review of Asia's educational systems.

So the ADB wants to control and regulate the education of your children.

The truth of the matter is that they want our children to become worshipers of state.

Again John Holt,

Education... now seems to me perhaps the most authoritarian and dangerous of all the social inventions of mankind. It is the deepest foundation of the modern slave state, in which most people feel themselves to be nothing but producers, consumers, spectators, and 'fans,' driven more and more, in all parts of their lives, by greed, envy, and fear. My concern is not to improve 'education' but to do away with it, to end the ugly and antihuman business of people-shaping and to allow and help people to shape themselves

It may NOT just be the state, which the ADB promotes.

They may have secondary objectives. They may serve as mouthpieces or shills for established educational (politically connected) institutions whom have feeling the heat from online competition and from homeschooling.

The following video are the kind of stuffs which statists (like the ADB) hates:


Indian education scientist Sugata Mitra, in a TED talk, tackles one of the greatest problems of education—the best teachers and schools don't exist where they're needed most.

Some great quotes from Sugata Mitra:

1:41 children will learn to do what they want to learn to do

16:33 Education is a self organising system where learning is an emergent phenomenon

Like John Holt, the message from Mr. Mitra is simple: education is self determined.

Video: Marc Faber: Cosmetic Fix for the Eurozone

Investing guru, the publisher of Gloom Boom and Doom Report, Dr. Marc Faber has a great analogy for the proposed EU banking fix

Dr. Faber as quoted by LewRockwell.com

If you put one or 100 sick banks in a union, it does not change the fact that they're sick. In my view the markets are rallying because they were grossly oversold. When markets are grossly oversold, especially markets of Portugal, Spain, Italy, France, then any news that is not disastrous news propels stocks higher. Their cosmetic fix basically forces Germans to continue to finance people in Spain and Portugal and Greece that are living beyond their means.

Indeed a foolish thing is a foolish thing. Numbers don't change the essence of the problem.

Yet the common recourse for politicians and media has been to engage in verbal manipulation, particularly the appeal to the popular, in the hope that confidence may be brought back without the required reforms.

More from Dr. Faber

Saudi’s Welfare State In Jeopardy

The resource curse which has spawned Saudi Arabia’s welfare economy seems in jeopardy.

From the Business Insider,

The share of Saudi workers employed by the government increased to 90 percent in 2010, up from 83 percent in 2000, according to a profile in The Economist (via @steven_strauss).

Saudi Arabia also increased unemployment benefits and other handouts during the Arab Spring.

The combination of the resource curse and relatively low oil prices and geopolitical tensions is bad for the regime. Says The Economist:

Saudi Arabia’s rulers are painfully aware that, should the region’s democratic wave leave lasting change and a new order in its wake, the kingdom will stand out as a peculiar and seemingly untenable anomaly. Even if the wave recedes leaving nothing but a mess, it has undermined any assumptions of rule by divine right. At the same time the kingdom’s most important alliance, with America, may face increased pressure. The United States is no longer reliant on Saudi Arabia for more than a small fraction of its energy needs. It has pulled out of Iraq and, soon, Afghanistan. It abandoned Egypt’s Hosni Mubarak. This raises doubts about its strategic intentions.

Oil prices at $80 below, for a prolonged period, will exert tremendous financial pressure on the oil dependent welfare based political economy of Saudi Arabia. This is yet another example of how the abundance of resources prevents economies from being competitive and productive.

Also the shale oil revolution will alter the dimensions of geopolitical relationships.

The Business Insider also has an interesting presentation of conflicts that had been caused by the geopolitics of oil.

Chart of the Day: Alcohol Deadlier than Illegal Substance?

From the Business Insider

We've covered the study by former UK drug czar David Nutt that found alcohol to be the most dangerous drug in the country by far when 20 drugs were rated on how much harm each caused to users and to others.

Nutt just came out with a new book, Drugs Without the Hot Air: Minimizing the Harms of Legal and Illegal Drugs, and last week told the Guardian that research into mental illness is hampered by the prohibition of drugs such as psilocybin and LSD.

If true then this is yet another falsification of popular wisdom about the supposed lethality of drugs, and more importantly, the political justification behind the war on drugs.

Emerging Market “Liquidity” Conditions Deteriorate

Amidst all the external tumult, the Philippine stock market has amazingly defied the convention and continues to climb to new record highs. Because of this, many have come to believe of a ‘miracle’.

Yet the contagion from a global slowdown seems as being transmitted through deteriorating “liquidity” conditions in Emerging Markets which could pose as spoiler to the Phisix shindig.

Here are two views on the increasing risks of contagion through the “liquidity” channels

Canadian independent research outfit, the BCA Research seems bearish Emerging Market Stocks:

Recent data shows that the trade balance in emerging markets has continued deteriorating, a phenomenon that typically entails lower share prices. Falling commodity prices will support this negative trend for many EM countries.

One of the implications is that developing nations foreign reserves accumulation has slowed dramatically. In a number of countries, foreign reserves have in fact been depleted in the past year as authorities have sold international reserves to support their currencies, which, in turn, has squeezed domestic currency liquidity.

Additionally, liquidity will be squeezed as capital inflows to both resource-producing and commodity-importing EM countries deteriorate. FDI inflows into EM have topped out and based on M&A activities, are set to fall drastically this year.

More troublesome news from Zero Hedge (bold cap and underline are original)

The growth in Emerging Market 'External Liquidity' recently was only ever slower in the quarters either side of the crash in 2008. This is a very worrying sign. EM nations are highly dependent on 'external' capital inflows (to smooth current account deficits) and have empirically been exposed to the 'sudden stop' nature of these inflows. It appears that Europe's banking crisis and deleveraging is indeed having a critical impact on EM nations - which may oddly mean domestic policy adjustments will be necessary (raising rates to encourage capital inflows) that will further exacerbate the problems as global growth slows. This brings to mind our recent comments on the shadow banking system and the drop in deposits among traditional risk-hungry EM funding banks - as we note that the more deposit-free the banking system, the slower the funds will flow. The newer the debt- and asset-inflation-based 'capitalism', the faster it is impacted at the margin - and it appears many EM nations are being affected rather rapidly.

Both seem to be singing the same song.

For as long as central bankers of developed economies continue to dilly dally on the policy directions and for as long political deadlock remains, the risk of an escalation of these downdraft grows.

Will the Phisix continue to defy the world? I can't say.

For how long will hope prevail over reality?

Be careful out there.

S&P’s Philippine Upgrade: There's More than Meets the Eye

From Bloomberg,

The Philippines’ debt rating was raised to the highest level since 2003 by Standard & Poor’s, taking President Benigno Aquino nearer his goal of attaining investment grade.

The nation’s long-term foreign currency-denominated debt was raised one level to BB+ from BB, S&P said in a statement yesterday. That’s one step below investment grade and on a par with neighboring Indonesia. The outlook on the rating is stable.

The foreign currency rating upgrade reflects our assessment of gradually easing fiscal vulnerability,” Agost Benard, a Singapore-based analyst at Standard & Poor’s, said in the statement. “The rating action also reflects the country’s strengthening external position, with remittances and an expanding service export sector continuing to drive current- account surpluses.”

Emerging nations from Brazil to Indonesia have won credit- rating upgrades in the past year as governments contained budget deficits. A higher assessment for the Philippines will help Aquino as he moves to boost spending to a record this year and seeks $16 billion of investment in roads, bridges and airports to shield the economy from Europe’s sovereign-debt crisis.

This is exactly the reflexivity theory at work. Here is how I described it earlier

The foundation of this theory seems to be anchored on the confirmation bias, where changes in prices that reinforces the underlying trend, gives confidence or strengthens the convictions of people to undertake action in the direction of the same trend. Such action feeds into the price mechanism and thus the feedback loop.

Applied to the Philippine equity market, many people will interpret the current state of the Phisix, which is at fresh record levels, as positive changes in the real economy. Believers would see this as having raised confidence levels, which that merits further actions through additional investments. Again this eventually feeds into higher prices.

The reality is that whatever appearance of progress the Philippines has been experiencing has been impelled by internal (negative real rates) and external (negative real rates through Zero Interest Rate Policy, QEs and other forms of inflationism) monetary policies rather than real changes in the economy.

It would be a mistake to generalize surging prices asset markets as “economic improvement” when they are veiled symptoms of underlying bubble policies.

The other factor is about perceptions management. This can be called as PR work, or in political vernacular, propaganda.

Campaign to weed out corruption have mostly been superficial as these have not addressed the roots: arbitrary statutes. Unknown to the public, corruption is not about virtuosity but about the tentacles of crooked laws.

The huge informal sector and the reliance on OFW remittance are really NOT signs of progress. They are symptoms of regulatory failure.

The plight of the OFWs have converted into a publicity stunt meant to evince of a positive political light, when they are manifestations of the failure to create domestic jobs through stagnant investments and falling standards of living.

Look at media’s exaltation from the S&P upgrade…“higher assessment for the Philippines will help Aquino as he moves to boost spending to a record this year and seeks $16 billion of investment in roads, bridges and airports”…this is proof of the dearth of investments. Investors have been reluctant to provide capital, therefore jobs.

Yet the implication is that government spending is an elixir to the economy. In reality, this $16 billion of government spending will be taken off from the private sector. And this also means $16 billion money funneled to the cronies or political favorites of this administration. Also that would extrapolate to $16 billion of tax onus to the productive sector

So the S&P upgrade actually rewards cronyism and advocates more burden for the taxpayers.

What the S&P upgrade does is to SOW the seeds for future downgrades as the current administration goes into a spending binge.

Credit upgrades means only MORE debt acquisition by the Philippine government. This will be financed by the mostly the domestic banking sector and partly by foreign money (foreign banks). So more of local savings will be channeled into unproductive political ventures as public liabilities expand.

In the light of concerns over the growing shortages of global “safe assets”—government bonds, which in reality is a myth, I believe that credit rating agencies have been rushing in aid to the banking system of major economies in order to provide bridge “safe assets”.

Since the banking system of major economies have been in dire straits, they will be in need of “safe assets” to bolster their balance sheets. So emerging market debts, such as the Philippines, could provide temporarily some of the supply of “safe assets”.

Have we forgotten too that credit agencies had been party (or may I say functional stamp pads) to the US property and mortgage bubble which blew up in 2007-2008?

Also government debt spree will likely be accompanied by a private sector debt expansion on the belief of the sustainability of a boom or from capital flight from economies inflating away their debt problems or from “bridge” collateral or a combination of these.

So will likely there be a surge in hot money.

This would seem like a déjà vu of the Asian Crisis of the 90s (Wikipedia.org)

Thailand's economy developed into a bubble fueled by "hot money". More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power

Eventually the entire thing collapses.

Only when the tide goes out, to quote Warren Buffett, do you discover who's been swimming naked.

Party on. But be aware that this is a bubble and not about politically driven progress. Politics is about redistribution or a zero sum game--where someone's gains comes at the expense of another.

It is the markets that provide real growth.

Updated to add:

Below is an example of why credit rating agencies cannot be trusted:

From Bloomberg,

Morgan Stanley successfully pushed Standard & Poor’s and Moody’s Investors Service Inc. to give unwarranted investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court.

According to the plaintiffs, the documents reveal that what the ratings companies describe as independent judgments were actually unsupported by evidence and written in collaboration with the bank that was packaging the securities. Morgan Stanley and the ratings companies deny the allegations.

Declaring Independence from Big Government

A splendid message from Dr. Richard Ebeling,

Never before in history had a people declared and then established a government based on the principles of the individual’s right to his life, liberty, and property. Never before was a society founded on the ideal of economic freedom, under which free men may peacefully produce and exchange with each other on the terms they find mutually beneficial without the stranglehold of regulating and planning government.

Never before had a people made clear that self-government meant not only the right of electing those who would hold political office and pass the laws of the land, but also meant that each human being had the right to be self-governing over his own life. Indeed, in those inspiring words in the Declaration, the Founding Fathers were insisting that each man should be considered as owning himself, and not be viewed as the property of the state to be manipulated by either king or Parliament.

It is worth remembering, therefore, that what we are celebrating every July 4 is the idea and the ideal of each human being’s right to his life and liberty, and his freedom to pursue happiness in his own way, without paternalistic and plundering government getting in his way.

I hope that the torch of the freedom and the principle of upholding individual’s right to his life, liberty, and property will not just be an American ideal but for the entire world to espouse.

To my American readers, Happy Independence Day!

Don’t Expect the Government to Solve Social Problems Caused by Weather

Spot the mistakes of this article.

From Sunstar.com.ph (bold emphasis mine)

MALACANANG appealed for understanding from the public following another confusion in the announcement of class suspension in Metro Manila and nearby provinces that have experiencing heavy rains since Monday night.

Deputy presidential spokesperson Abigail Valte said since there is no storm signal, the responsibility of suspending classes is left to the discretion of the local chief executives.

“We will be asking for a little bit of your patience because it is a new devolved system and our local government units will need to also get used to that system,” she said.

To remind the local officials with their task, Malacañang again posted on the Official Gazette Executive Order 66, which authorizes municipal mayors, as respective chairpersons of respective Local Disaster Risk Reduction and Management Councils (LDRRMC), to cancel classes and work of government offices during inclement weather.

“We would like to take this opportunity to remind them that the responsibility to suspend classes in times of inclement weather when there is (sic) no storm signals belongs now to the local government officials,” Valte said.

She added it is stated in the EO that suspension of morning classes must be announced by 4:30 a.m. so as not to inconvenience students, school staff and parents.

Classes from pre-school to high school levels in Metro Manila were cancelled Tuesday morning due to continuous rains caused by a low pressure area last seen at 40 kilometers west of the capital.

Several parents, however, complained about the late announcement of class suspension as their children were forced to go to school early in the morning despite the flooding.

Local Government Secretary Robredo, in a radio interview, admitted the need to improve the local government units’ announcement of class suspension.

Robredo said mayors, village chiefs, and school principals should coordinate in making the necessary announcement regarding cancellation of classes during heavy rains since they are the ones who see the situation on the ground.

Ok this news is an ex-post observation of the recent flood. Hindsight is 20/20. It’s easy to finger point based on the past.

Yet the problem is tomorrow. The problem is accurately anticipating the weather and its potential impact in both quality and quantity dimensions to affected areas and the social policy response.

The next problem is that families expect schools to make the necessary announcements. Unfortunately schools have NO EXPERTISE in forecasting weather. So it will be judgment call for schools.

The same problem plagues the local government units, hardly any of them have the ADEQUATE knowledge of the impact of nature’s challenges. So it will be judgment call for LGUs.

This leads us back to the national government through the government weather bureau PAG-ASA. Again unfortunately, outside conventional storms, it seems that PAG-ASA hardly can forecast accurately the nitty gritty of the weather changes. So it will be judgment call for the national government through PAG-ASA.

Even in conventional storms, PAG-ASA has hardly been successful in accurately predicting the exactitudes of nature's disturbances.

All these reveal that the fundamental problem is the failure of centralization in weather forecasting. But media's and the political approach has been to finger point.

Two more important things to drive at:

The first is the KNOWLEDGE problem.

The fact is that while there are instruments to help predict the changes in the weather, that knowledge is limited. This means that policy responses will ALWAYS be insufficient, no matter what they do.

The second point is that these has been all about the HOT POTATO problem—everyone seems to toss the responsibility to another party.

Everyone has been HARDWIRED to EXPECT that the government must and shall deliver us from environmental disruptions and disasters.

Yet no matter the horrible track record, we maintain this illusion of infallibility.

People cannot seem to accept that government are composed by people, and like everyone else, has limitations in the possession of knowledge.

In reality, people should NOT depend on government for making these calls.

Everyone should take the responsibility to assess and act upon the tradeoff of allowing you and your family members to go to school or work during inclement weathers.

There are many risks attendant to bad weather e.g. leptospirosis and other diseases, potential accidents (falling trees, open manhole, electrocution among the many). This should be done individually and depending on the circumstances of the environment one operates on.

Government will never know the details of each and everyone of our lives.

Of course there are institutional solutions to these, such as not only the privatization of PAG-ASA but importantly to de-politicize them or subject them to market competition.

People or social institutions, such as schools, can reward or punish private institutions for providing accuracy in weather forecasting through the profit and loss system. Under the government monopoly, sustained mistakes should be expected.

Weather derivatives can also be used as an insurance against tail events or weather based calamities. Institutions can now make their calls based on appropriate assessment of cost and benefits.

There are many REAL things the markets can do that may alleviate the current predicament. But under the current popular mindset, such is a state of vacuum so the problem becomes reiterative or self-reinforcing

Thus the biggest among all the fundamental flaws is the public’s mysticism of government.

As Professor Don Boudreaux wrote,

Too many people, including otherwise very smart people, believe in secular magic. They believe that words written on paper by people, each of whom receive a majority of votes on certain days of the year of adult citizens living in certain geographic areas, and who utter ritualistic pronouncements under marble domes in buildings conventionally called “capitols,” are somehow endowed with greater understanding of society’s complexities and with superhuman capacities to care about the welfare of strangers. These priests preach devotion, dedication, and sacrifice to the One True State (your own government), even while each recognizes that legitimate disputes about the details of the dogma divide various cliques of the secular clergy. When they speak and act in their official roles, they expect – usually correctly – that the laity pay their words special heed as if these words have extraordinary power.

We will never improve on our approach to solve the weather predicament, until we come to realize of the existence of other alternatives…the markets.

Quote of the Day: Dignity is Worth Nothing Unless You Earn It and Pay the Price for It

A half-man (or, rather, half-person) is not someone who does not have an opinion, just someone who does not take risks for it.

My greatest lesson in courage came from my father — as a child, I had admired him before for his erudition, but was not overly fazed since erudition on its own does not make a man. He had a large ego, immense dignity, and required respect. But he was once insulted by a militiaman at a road check during the Lebanese war. He refused to comply, and got angry at the militiaman for being disrespectful. As he drove away, the gunman shot him in the back. The bullet stayed in his chest for the rest of his life so he had to carry an X-ray through airport terminals. This set the bar very high for me: dignity is worth nothing unless you earn it, unless you are willing to pay a price for it.

A lesson I learned from this ancient culture is the notion of as Megalopsychon (a term expressed in Aristotle’s ethics), a sense of grandeur that got superseded by the Christian values of “humility”. There is no word for it in Romance languages; in Arabic it is called Shhm —best translated as nonsmall. If you take risks and face your fate with dignity, there is nothing you can do that makes you small; if you don’t take risks, there is nothing you can do that makes you grand, nothing. And when you take risks, insults by half-men (small men those who don’t risk) are similar to barks by nonhuman animals: you can’t feel insulted by a dog.

This inspirational treasurable quote is from my favorite iconoclast and the profound thinker and philosopher Nassim Nicolas Taleb post at Facebook

Thank you Mr. Taleb.

My father (who was not a libertarian but I think had libertarian leanings) paid the price of dignity by steadfastly refusing to profit from politics--even when presented with such conditions.

I am carrying his principle over today.

Will France’s Fairness Doctrine Save the EU?

From Zero Hedge

With the Great June Socialist Revolution spilling over into July, here are some details as they become available from France:

• FRANCE TO HAVE NEW TAX RATE OF 45% FOR WEALTHY
• FRANCE TO TAX INCOME OF MORE THAN EU1 MLN AT 75%, AYRAULT SAYS
• FRANCE TO TAX CAPITAL INCOME AT SAME LEVEL AS WAGES
• FRANCE TO RAISE TAXES FOR LARGE COMPANIES, BANKS, OIL FIRMS

But... FRANCE TO ANNUL PLANNED VAT INCREASE PLANNED BY SARKOZY

After all, it's only fair. In other news, we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again.

Politicians believe the path to prosperity is only through confiscation and redistribution. They also believe that growth comes with subtraction and division and not from addition and multiplication

They further think that the wealthy are dingbats whose actions are limited by the dictates of politicians.

Professor Ludwig von Mises was right…

Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich…

Confiscations of capital through the legal form of taxation are neither socialistic nor a means to Socialism. They lead, not to socialization of the means of production, but to consumption of capital. Only when they are set within a socialist system, which retains the name and form of private property, are they a part of Socialism.

So the French government will spend MORE and get LESSER revenues as productive segments of society either reduces productive activities and or flee to other havens. Capital will be consumed at a more faster rate.

After all, money goes where it is best treated.

Yet under the sustainment of such political conditions, the Euro’s death warrant has been sealed.

Asia should welcome with open arms the prospective diaspora of French capital by implementing policies opposite to those embraced by the French politicians. Yes, such policy is known as economic freedom.

Barclay’s LIBOR Scandal: Is the Bank of England the Culprit?

Barclays chief executive Bob Diamond recently resigned over allegations of the manipulation of the LIBOR (London Interbank Offered Rate) or the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks (Wikipedia.org)

From Reuters (bold highlights mine)

Barclays chief executive Bob Diamond suddenly quit on Tuesday over an interest rate-rigging scandal that threatens to drag in a dozen more major lenders but suggested the Bank of England had encouraged his bank to manipulate the figures.

"The external pressure placed on Barclays has reached a level that risks damaging the franchise - I cannot let that happen," said Diamond, 60. The terms of his severance were not announced, though Sky News said the bank would ask Diamond to forfeit almost 20 million pounds ($30 million) in bonuses.

Politicians and newspapers have zeroed in on the scandal - which revealed macho e-mails of bankers congratulating each other with offers of champagne for helping to fiddle figures - as an example of a rampant culture of wrongdoing in an industry that stayed afloat with huge taxpayer bailouts.

Barclays released an internal 2008 memo from Diamond, then head of its investment bank, suggesting that the deputy governor of the Bank of England, Paul Tucker, had given Barclays implicit encouragement to massage the interest figures lower during the peak of the financial crisis in order to present a better picture of the bank's financial position.

Here is the principle, central banks are the only entities permitted to manipulate interest rates…

…but they need accomplices.

More from Zero Hedge

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS PROVIDES COPY OF DIAMOND'S CALL NOTE
• BARCLAYS SAYS DIAMOND DIDN'T BELIEVE HE HAD GOT INSTRUCTION
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

Hoping to take the political heat off what seems obvious, Barclay’s and Bob Diamond has served as BoE’s fall guy.

Chinese Builds Ghost City in Angola

China seems to have (allow me the metaphor) ‘exported’ her bubble policies to Africa

From the BBC, (hat tip Bob Wenzel)

A giant new Chinese-built city has sprung up on the outskirts of Angola's capital Luanda.

Nova Cidade de Kilamba is a brand-new mixed residential development of 750 eight-storey apartment buildings, a dozen schools and more than 100 retail units.

Designed to house up to half a million people when complete, Kilamba has been built by the state-owned China International Trust and Investment Corporation (CITIC) in under three years at a reported cost of $3.5bn (£2.2bn).

But on a recent trip back to Luanda, the BBC's former Angola correspondent Louise Redvers discovered that most of the buildings currently lie empty, as this footage she recorded shows.

Watch the footage from BBC here