HOT: ECB’s Draghi: ECB Will Do What’s Needed To Preserve Euro

Steroid starved financial markets suddenly found life from promises of more inflationism.

From Bloomberg,

European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.

“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”

Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds. Spanish politicians have called on the ECB to do more after yields on the country’s bonds soared to euro-era records this week.

Spanish yields slumped after Draghi’s remarks, with the rate on the 10-year bond dropping 32 basis points to 6.98 percent at 1:26 p.m. in Madrid. It touched a record 7.69 percent on July 22. The euro jumped and stocks rose. The single currency climbed as high as $1.2285 after trading at $1.2118 before Draghi spoke. The Stoxx Europe 600 Index (SXXP) gained 1.6 percent.

Bad news once again is read as good news…that’s until markets wakes up to the reality of either empty promises or real action—meant to buy time before the day of reckoning arrives.

Quote of the Day: Austrian Economics and the Courage to say the Unpopular Thing

The Austrian account of economic depression requires thinking on more than one level to arrive at the truth, whereas economists these days are more likely to be looking for obvious explanations and even-more-obvious solutions, even when these neither explain nor solve anything.

This puts the Austrians in an interesting position within the intellectual culture of any time and place. They must go against the grain. They must say the things that others do not want to hear. They must be willing to be unpopular, socially and politically. I'm thinking here of people like Benjamin Anderson, Garet Garrett, Henry Hazlitt, and, on the Continent, L. Albert Hahn, F.A. Hayek, and, above all, Ludwig von Mises. They gave up career and fame to stick with the truth and say what had to be said.

Later in life, when speaking before a group of economics students, Hayek bared his soul about this problem of the moral choices economists must make. He said that it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, simply because, in his experience, the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.

(bold emphasis added)

This is from Llewellyn H. Rockwell, Jr. from Economics and Moral Courage

Deepening Information Age: In the US, Public Education is being Undermined by the Internet

The internet seems on path to unravel 20th century welfare state institutions partly through the public education model.

Professor Gary North explains,

Parents are pulling their children out of the government schools. This is happening across the USA.

In city after city, enrollment is declining. This is not a recent development. It has been going on for a half a decade. It has taken place in half of the nation’s largest districts.

The trend looks irreversible.

As the Web offers better programs free of charge, the public schools cannot compete. The inner city schools are catastrophic. They are getting worse. As whites ans Asians flee the cities, the inner-city schools get worse.

The tax base shrinks. The teachers union demands more pay and smaller classes. The city governments are trapped. Solution: cut programs, fire teachers, and enlarge classes back to (horror!) 1959?s 33 students.

Nobody is supposed to talk about this. It is time to talk about it. Public education will not recover. The longer the decline takes place, the more parents will conclude that there is only one solution: pull their kids out.

At some point, voters will not pass any more bond issues. They will not consent to higher property taxes. They will let the public schools sink.

Read the rest here

Democratization (and the de-politicization) of education will become a global phenomenon as educational platform will mostly migrate to the internet.

One example:

Coursera a free internet educational platform that offers high quality courses from the top universities recently announced that 12 universities — including three international institutions — will be joining them particularly, the Princeton University, Stanford University, University of Michigan, and University of Pennsylvania in offering Coursera classes (Coursera Blog)

On Coursera, you will now be able to access world-class courses from:

• California Institute of Technology
• Duke University
• École Polytechnique Federale de Lausanne
• Georgia Institute of Technology
• Johns Hopkins University
• Princeton University
• Rice University
• Stanford University
• University of California, San Francisco
• University of Edinburgh
• University of Illinois at Urbana-Champaign
• University of Michigan
• University of Pennsylvania
• University of Toronto
• University of Virginia
• University of Washington

For traditional schools, it would be adapt or perish.

The salad days of the education bubble in the US or even in the Philippines have been numbered.

The Coming Global Debt Default Binge: Japan’s Pension Fund Sells Japanese Government Bonds (JGB)

The era of Japan’s low interest rates may be at an inflection point.

From San Francisco Chronicle/Bloomberg,

Japan’s public pension fund, the world’s largest, said it has been selling domestic government bonds as the number of people eligible for retirement payments increases.

“Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash,” said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). “To boost returns, we may have to consider investing in new assets beyond conventional ones,” he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63 percent of its assets, in domestic bonds as of March, according to the fund’s financial statement for the 2011 fiscal year. That compares with 13 percent in domestic stocks, 8.7 percent in foreign bonds and 11 percent in overseas equities.

Again the above represents the unintended consequences of the unsustainable welfare state. These could be incipient signs of the liquidation of Japan’s Santa Claus political institutions.

The lack of internal financing (from resident savings) means that Japan’s enormous debts will need to be financed by external (foreign) savings. This also means that Japan will be in tight competition with the Eurozone and the US to attract financing from the world. The nuclear option is that the Bank of Japan (BoJ) will become the financier of last resort.

Neo-Keynesians and Fisherians who claim that the world will undergo prolonged episodes of low interest rates based on historical experiences and from the prospects of deflation, fail to see that this has NOT just been about banking financial crisis, but about the crises of governments manifested through unsustainable debts.

Most of their analysis has been moored to historical banking-financial crisis, e.g Great Depression and Japan’s lost decade, rather than government debt crises.

It is dangerous to read the recent past as roadmap of the future. The above chart from the Economist shows that interest rates of major economies (US Germany Spain and Italy) had their volatile chapters.

When there will be inadequate or scant access to private sector savings, then the chances for a full blown debt crisis becomes a clear and present danger.

Once interest rates rises—out of the lack of financing and or from BoJ’s inflation financing—higher rates would mean higher interest rate payments which is likely to swell the existing debts.

Yet given the Japan's insufficient economic growth from growing political interventionism, surging interest rates will negatively impact both Japan’s banking and financial system as the largest holders of JGBs and Japan’s government—a self-reinforcing spiral.

So the debt crisis, which has already been ravaging the Eurozone, may likely be transmitted to Japan. Unfolding events have been so fluid which means conditions may deteriorate swiftly beyond the public's expectations.

Be careful out there.

The Deepening Gold Markets of Asia: Hong Kong Opens New Gold Storage

Gold markets in Asia will get a huge boost from the opening of Hong Kong’s largest gold storage

From Bloomberg,

Hong Kong’s largest gold-storage facility, which can hold about 22 percent of the bullion now in Fort Knox, will open in September to meet rising demand from banks and the wealthy, according to owner Malca-Amit Global Ltd.

The facility, located on the ground floor of a building within the international airport compound, has capacity for 1,000 metric tons, said Joshua Rotbart, general manager for the Hong Kong-based company’s Malca-Amit Precious Metals unit. Two of the vaults may hold assets, including gold, for banks and financial institutions, and others will be used for diamonds, jewelry, fine art and precious metals, said Rotbart.

The move in Hong Kong reflects increased demand for gold in Asia even as the commodity struggles to sustain its rally into a 12th year. Gold-demand growth in China, the world’s second- largest user after India last year, is slowing, according to the World Gold Council. Vault charges will depend on each customer’s operations, according to Rotbart, who declined to give a figure for the venture’s cost beyond millions of dollars.

Reports attribute this to the growing wealth in Asia, from the same article…

Asia-Pacific millionaires outnumbered those in North America for the first time last year, according to Capgemini SA and Royal Bank of Canada’s wealth-management unit. The number of individuals in the region with at least $1 million in investable assets rose 1.6 percent to 3.37 million, helped by increases in China and Indonesia, according to the firms’ World Wealth Report, released last month. So-called high-net-worth individuals in North America dropped 1.1 percent to 3.35 million.

Gold markets in Asia will likely become more competitive, from the same article…

The new storage facility will compete with services offered by the Airport Authority Hong Kong, which began storage operations at a 340 square meter site in 2009 for government institutions, commodity exchanges, bullion banks, refiners, wealthy individuals and exchange-traded funds. Capacity is reviewed on a regular basis to ensure there is adequate storage over the medium term, the authority said in a statement.

Singapore’s Push

Singapore is also among economies in Asia vying for a greater share of the bullion trade. In February, the government announced a plan to exempt investment-grade gold, silver and platinum from a goods and services tax, starting from October. The aim is to raise the city-state’s share of the global gold trade to as much as 15 percent in five to 10 years from about 2 percent, according to IE Singapore, the external trade agency.

Competitive gold markets are signs of the burgeoning free markets in Asia.

Besides, gold has been embedded in the culture for many Asian nations (e.g. India, Vietnam, Malaysia, China, etc…), which I think is why the “gold as money” theme will be more receptive to Asians.

Yet this seems to exclude the Philippines, where much of the public still cling to the romanticized notion that the US dollar represents as THE ultimate currency—this seems tied to the popular social democratic mindset which gives mandate to the political economy of state (crony) capitalism.

I believe that the Asia’s blossoming gold market has been more than just about the showcase of wealth, but about gold as insurance…which essentially may pave way for gold to reclaim its role as money.

Perhaps this may signal that Asia may lead the world towards the restitution of sound money.

War on Terror: Inflation of Security Bureaucracy and Spending

Either terrorism has brought upon government paranoia or terrorism has been a product of foreign policies to justify the expansion security institutions, none the less war on terror has brought one sure thing: inflation in security expenditures.

Writes Tom Engelhardt at the Asia Times, (hat tip Sovereign Man)

Are you, for instance, worried about the safety of America's "secrets"? Then you should breathe a sigh of relief and consider this headline from a recent article on the inside pages of my hometown paper: "Cost to Protect US Secrets Doubles to Over $11 Billion."

A government outfit few of us knew existed, the Information Security Oversight Office or ISOO, just released its "Report on Cost Estimates for Security Classification Activities for Fiscal Year 2011" (no price tag given, however, on producing the report or maintaining ISOO). Unclassified portions, written in classic bureaucratese, offer this precise figure for protecting our secrets, vetting our secrets' protectors (no leakers please), and ensuring the safety of the whole shebang: US$11.37 billion in 2011.

That's up (and get used to the word "up") by 12% from 2010, and double the 2002 figure of $5.8 billion. For those willing to step back into what once seemed like a highly classified past but was clearly an age of innocence, it's more than quadruple the 1995 figure of $2.7 billion.

And let me emphasize that we're only talking about the unclassified part of what it costs for secrets protection in the National Security Complex. The bills from six agencies, monsters in the intelligence world - the Central Intelligence Agency, the Defense Intelligence Agency, the National Security Agency, the National Reconnaissance Office, the National Geospatial-Intelligence Agency, and the Office of the Director of National Intelligence - are classified. The New York Times estimates that the real cost lies in the range of $13 billion, but who knows?

To put things in perspective, the transmission letter from Director John P Fitzpatrick that came with the report makes it utterly clear why your taxpayer dollars, all $13 billion of them, are being spent this way: "Sustaining and increasing investment in classification and security measures is both necessary to maintaining the classification system and fundamental to the principles of transparency, participation, and collaboration." It's all to ensure transparency. George Orwell take that! Pow!

Now let's try the line again, this time with more gusto: That makes no sense!

On the other hand, maybe it helps to think of this as the Complex's version of inflation. Security protection, it turns out, only goes in one direction. And no wonder, since every year there's so much more precious material written by people in an expanding Complex to protect from the prying eyes of spies, terrorists, and, well, you.
The official figure for documents classified by the US government last year is - hold your hats on this one - 92,064,862. And as WikiLeaks managed to release hundreds of thousands of them online a couple of years ago, that's meant a bonanza of even more money for yet more rigorous protection.

You have to feel at least some dollop of pity for protection bureaucrats like Fitzgerald. While back in 1995 the US government classified a mere 5,685,462 documents - in those days, we were practically a secret-less nation - today, of those 92 million sequestered documents, 26,058,678 were given a "top secret" classification. There are today almost five times as many "top secret" documents as total classified documents back then.
Here's another kind of inflation (disguised as deflation): in 1996, the government declassified 196 million pages of documents. In 2011, that figure was 26.7 million. In other words, these days what becomes secret remains ever more inflatedly secret. That's what qualifies as "transparency, participation, and collaboration" inside the Complex and in an administration that came into office proclaiming "sunshine" policies. (All of the above info thanks to another of those ISOO reports.) And keep in mind that the National Security Complex is proud of such figures!

So, today, the "people's" government (your government) produces 92 million documents that no one except the nearly one million people with some kind of security clearance, including hundreds of thousands of private contractors, have access to. Don't think of this as "overclassification," which is a problem. Think of it as a way of life, and one that has ever less to do with you.

Now, honestly, don't you feel that urge welling up? Go ahead. Don't hold back: That makes no sense!

How about another form of security-protection inflation: polygraph tests within the Complex. A recent McClatchy investigation of the National Reconnaissance Office (NRO), which oversees US spy satellites, found that lie-detector tests of employees and others had "spiked" in the last decade and had also grown far more intrusive, "pushing ethical and possibly legal limits." In a program designed to catch spies and terrorists, the NRO's polygraphers were, in fact, being given cash bonuses for "personal confessions" of "intimate details of the private lives of thousands of job applicants and employees ... including drug use ... suicide attempts, depression, and sexual deviancy." The agency, which has 3,000 employees, conducted 8,000 polygraph tests last year.

McClatchy adds: "In 2002, the National Academies, the nonprofit institute that includes the National Academy of Sciences, concluded that the federal government shouldn't use polygraph screening because it was too unreliable. Yet since then, in the Defense Department alone, the number of national-security polygraph tests has increased fivefold, to almost 46,000 annually."

Now, think about those 46,000 lie-detector tests and can't you just sense it creeping up on you? Go ahead. Don't be shy! That makes no sense!

Or talking about security inflation, what about the "explosion of cell phone surveillance" recently reported by the New York Times - a staggering 1.3 million demands in 2011 "for subscriber information ... from law enforcement agencies seeking text messages, caller locations and other information in the course of investigations"?

From the Complex to local police departments, such requests are increasing by 12%-16% annually. One of the companies getting the requests, AT&T, says that the numbers have tripled since 2007. And lest you think that 1.3 million is a mind-blowingly definitive figure, the Times adds that it's only partial, and that the real one is "much higher." In addition, some of those 1.3 million demands, sometimes not accompanied by court orders, are for multiple (or even masses of) customers, and so could be several times higher in terms of individuals surveilled. In other words, while those in the National Security Complex - and following their example, state and local law enforcement - are working hard to make themselves ever more opaque to us, we are meant to be ever more "transparent" to them.
These are only examples of a larger trend. Everywhere you see evidence of such numbers inflation in the Complex. And there's another trend involved as well. Let's call it by its name: paranoia. In the years since the 9/11 attacks, the Complex has made itself, if nothing else, utterly secure, and paranoia has been its closest companion. Thanks to its embrace of a paranoid worldview, it's no longer the sort of place that experiences job cuts, nor is lack of infrastructure investment an issue, nor budget slashing a reality, nor prosecution for illegal acts a possibility.

A superstructure of "security" has been endlessly expanded based largely on the fear that terrorists will do you harm. As it happens, you're no less in danger from avalanches (34 dead in the US since November) or tunneling at the beach (12 dead between 1990 and 2006), not to speak of real perils like job loss, foreclosure, having your college debts follow you to the grave, and so many other things. But it matters little. The promise of safety from terror has worked. It's been a money-maker, a stimulus-program creator, a job generator - for the Complex.

The above only reminds me of the great H.L. Mencken whose prescient warnings seem relevant today…

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

Do We Need Central Banks?

Tim Price at the Sovereign Man asks why the need for a central bank? (bold emphasis original)

A typical if feeble answer is that we need a lender of last resort. To which the answer is… Why? Why do we need a government-appointed entity to support banks that get in over their heads?

A typical answer is that if our banks start failing, our society starts going down the toilet. (It already has, but never mind.)

So now we have the worst of all possible worlds. Our banks are already failing, in the sense of no longer functioning according to the principles of offering an economic rate to depositors and offering economic funding to borrowers.

Plus, now we have ended up with a handful of quasi-nationalised banking group zombies that appear to be being run for the sole purpose of being granted dollops of money that they are free to hoard whenever the central bank deems it appropriate to depreciate our currencies some more.

If our banks were free to fail, a) we would have no need of a central bank, and b) we would have no need for banking guarantees.

Banking deposit agreements would simply come with a giant ‘Caveat Emptor’ on them, and depositors might be able to start earning a positive real interest rate on their savings again.

Abolishing central banks and their core functions would have the happy and non-trivial side effect of reintroducing something akin to sound money into the world economy, rather than live with permanent inflation and have the entire economy held hostage by banking interests.

In reality central banks exists as backstop financiers to the welfare-warfare state. For instance, wars has been facilitated and enabled by the existence of central banks.

Professor Gary North explains

The sinews of war are strengthened by central banking. This is why textbooks praise the Bank of England. It let the British fight longer wars and more destructive wars. The message: get a central bank for your nation, so that your politicians can declare war more readily and stay in that war far longer.

Central banks signify as central planning and the politicization of money. They are part of the 10 planks of Karl Marx’s Communist Manifesto.

Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

Yes it's a delusion to equate capitalism with 'communist' central banking.

Central banks also promote the interests of the banking and political class at the expense of society through inflationism which not only causes boom bust cycles, but importantly has been diminishing the purchasing power of our currencies. This why a huge amount of the public’s resources have been funneled to insolvent “zombie” banks and bankrupt states.

And this is why once zombie institutions become desperate they resort to other measures of financial repression and take the political route towards despotism. And this is also why the private sector will always become the scapegoat for policy errors. That's until people don't understand the essence of central banking.

Yes, I agree Mr. Price, we need the de-politicization of money or the return to sound money through the free markets.

End the Fed. End all central banking.

What the Political Rhetoric “You Didn't Get There on Your Own” Means

When a politician preaches that “you didn't get there on your own” they may only be half right. That’s because our world operates on the principle of division of labor where no one really produces things on their own.

No one, on his own, even knows how to make a simple product like the pencil, as Milton Friedman explained

But what the politicians really mean is that every entrepreneurial success (wealth) has been owed to the government.

The distinguished Thomas Sowell exposes such myth or deception {bold emphasis mine]

Let's stop and think, even though the whole purpose of much political rhetoric is to keep us from thinking, and stir our emotions instead.

Even if we were to assume, just for the sake of argument, that 90 percent of what a successful person has achieved was due to the government, what follows from that? That politicians will make better decisions than individual citizens, that politicians will spend the wealth of the country better than those who created it? That doesn't follow logically -- and certainly not empirically.

Does anyone doubt that most people owe a lot to the parents who raised them? But what follows from that? That they should never become adults who make their own decisions?

The whole point of the collectivist mindset is to concentrate power in the hands of the collectivists -- which is to say, to take away our freedom. They do this in stages, starting with some group that others envy or resent -- Jews in Nazi Germany, capitalists in the Soviet Union, foreign investors in Third World countries that confiscate their investments and call this theft "nationalization."

Freedom is seldom destroyed all at once. More often it is eroded, bit by bit, until it is gone. This can happen so gradually that there is no sudden change that would alert people to the danger. By the time everybody realizes what has happened, it can be too late, because their freedom is gone.

All the high-flown talk about how people who are successful in business should "give back" to the community that created the things that facilitated their success is, again, something that sounds plausible to people who do not stop and think through what is being said. After years of dumbed-down education, that apparently includes a lot of people.

Take Obama's example of the business that benefits from being able to ship their products on roads that the government built. How does that create a need to "give back"?

Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

What about the workers that businesses hire, whose education is usually created in government-financed schools? The government doesn't have any wealth of its own, except what it takes from taxpayers, whether individuals or businesses. They have already paid for that education. It is not a gift that they have to "give back" by letting politicians take more of their money and freedom.

When businesses hire highly educated people, such as chemists or engineers, competition in the labor market forces them to pay higher salaries for people with longer years of valuable education. That education is not a government gift to the employers. It is paid for while it is being created in schools and universities, and it is paid for in higher salaries when highly educated people are hired.

One of the tricks of professional magicians is to distract the audience's attention from what they are doing while they are creating an illusion of magic. Pious talk about "giving back" distracts our attention from the cold fact that politicians are taking away more and more of our money and our freedom.

Bottom line: Reading between the lines helps to protect one from getting hoodwinked by political glib talkers.

US Social Mobility Hamstrung by Taxes and the Welfare State

One principal reason to expect future default and high interest rate environment can be seen from the micro level.

In the US, the repressive tax regime and the welfare state has deepened the public’s incentive to become unproductive and dependent on the government which comes at the expense social mobility.

Writes the Business Insider, (hat tip Sovereign Man) [bold added]

Upward mobility has been a foundation of America’s self-image since the 18^th century.

If you work hard enough, nothing can stop you from getting ahead. That, at least in the minds of many Americans, is what distinguishes us from much of the rest of the world.

Yet, according to my always-provocative Tax Policy Center colleague Gene Steuerle, our tax and spending priorities not only fail to promote mobility for those who are starting at the bottom, but they often actively discourage the hard work and savings that help us climb the socio-economic ladder.

Oh, the federal budget is loaded with subsidies that encourage work and savings. But they are almost always aimed at improving the lot of middle- and upper-income households, not those who most need a leg up.

In testimony last week to the Senate Finance Committee, Gene estimated that of the nearly $750 billion in mobility-enhancing tax and spending programs in 2006, $540 billion–or nearly three-quarters– went to higher income households. Those with low-incomes received only about 2 percent of the benefit of subsidies for home ownership and almost none of the benefit of employer-related work subsidies or incentives for savings and investment.

Some of these programs not only fail to help poor and lower middle-class households, they actively hurt them. For instance, if home ownership is a key to upward mobility (an arguable proposition, but one many believe), we need to acknowledge that subsidies such as the mortgage interest deduction inflate home prices and make it harder, not easier, for poor families to buy.

Worse than that, Gene argues, once low-income households reach poverty level, government policy discourages work. True, social welfare programs provide a valuable safety net for the very poor. For instance, the Earned Income Tax Credit and the Child Tax Credit are important income supports for low-income families.

But because these safety net programs phase out as incomes rise, some people face marginal tax rates as high as 80 percent for getting a better job or even a raise. A new Urban Institute calculator shows how this works.

With a budget that encourages consumption rather than work and savings, the gap between the American Dream of unfettered mobility and the reality will only widen, Gene fears. His solution: Rethink those tax subsidies and spending programs that too often hinder mobility, paradoxically in the name of enhancing it.

A deepening of the socio-political parasitical relationship will come with great costs. Such will be vented not only in the political economy but likewise on the financial markets.

The Coming Debt Default Binge: US Debt Surged $6,866,712,084,997.92 in 5 Years!

The policy of record debt financed spending in the US continues…

From CNSNews.com (hat tip Sovereign Man)

By the end of the third quarter of fiscal 2012, the new debt accumulated in this fiscal year by the federal government had already exceeded $1 trillion, making this fiscal year the fifth straight in which the federal government has increased its debt by more than a trillion dollars, according to official debt numbers published by the U.S. Treasury.

Prior to fiscal 2008, the federal government had never increased its debt by as much as $1 trillion in a single fiscal year. From fiscal 2008 onward, however, the federal government has increased its debt by at least $1 trillion each and every fiscal year.

The federal fiscal year begins on Oct. 1 and ends on Sept. 30. At the close of business on Sept. 30, 2011—the last day of fiscal 2011—the total debt of the federal government was $14,790,340,328,557.15. By June 29, the last business day of the third quarter of fiscal 2012, that debt had grown to $15,856,367,214,324.44—an increase for this fiscal year of $1,066,026,885,767.29.

In the fourth quarter of fiscal 2012, the federal debt has continued to accumulate, hitting $15,874,365,457,260.40 at the close of business on Thursday, July 19—marking a total increase so far in fiscal 2012 of $1,084,025,128,703.25.

In fiscal 2007, according to the U.S. Treasury, the federal government’s debt increased $500,679,473,047.25. But that marked the last fiscal year in which the federal government's debt did not increase by at least $1 trillion.

In fiscal 2008, the debt increased $1,017,071,524,650.01. In fiscal 2009, it increased $1,885,104,106,599.26. In fiscal 2010, it increased $1,651,794,027,380.04. And in fiscal 2011, it increased $1,228,717,297,665.36.

So far this fiscal year (which is a leap year of 366 days), the Treasury has increased the net debt of the federal government at an average rate of $3,699,744,466.56 per day. If that average were to hold up for the 73 days that remained in the fiscal year after July 19, the debt would increase in fiscal 2012 by a total of $1,354,106,474,762.13—a greater increase than last year.

At the close of business on Sept. 30, 2007--which marked the beginning of fiscal 2008--the total debt of the federal government stood at $9,007,653,372,262.48. At the close of business on July 19, it stood at $15,874,365,457,260.40--an increase of $6,866,712,084,997.92 in less than five years.

I find the argument of a sustained low interest environment from the intensifying growth of the current level of indebtedness as specious reasoning.

Japan in the 90s or the Great Depression days of the 1930s signify as apples to orange comparison for the simple reason that current degree of indebtedness has been global and has been unprecedented.

Again one cannot count on history alone (e.g. Reinhart-Rogoff) as an accurate roadmap for the future as everything will depend on how such dynamics will be dealt with. Will the growth rate of debt based political spending continue? Who will finance these? And up to what extent? If funded by central banks up to what point before (consumer price) inflation surfaces and becomes an economic menace (stagflation, if not hyperinflation)? Will governments strangulate the economy with more repressive regulations or will governments undertake “shock liberalization” (J. Cochrane)?

The current scale of debt implies that these countries will be competing with each other for limited savings from residents and non-residents for financing. (chart from Zero Hedge)

This is why we are seeing a crisis in the Eurozone…

…a crisis that will likely spillover to the rest of the nations encumbered by huge liabilities.

For crisis affected PIIGS, obviously a low interest rate regime has gone pfffftt. This is the revenge of the bond vigilantes.

The (liberal) counterargument will say that the crisis stricken PIIGS doesn’t have the same ability as Japan or the US to print their own money. That’s unalloyed hogwash.

Any argument that sees printing money as a way to prosperity IS delusional. Eventually such craving for the philosopher’s stone will be exposed for what they truly are: a fraud.

As the great Ludwig von Mises warned,

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.

Interest rates will eventually rise (everywhere) to reflect on either the disproportional distribution or imbalances between the level of savings and debt OR an inflationary surge (or perhaps even both). There is no such thing as a free lunch.

Quote of the Day: Freedom and Prosperity are Inextricably Linked

These places– Estonia and Lithuania in particular– are essentially devoid of natural resources. They’re tiny countries without oil or gold deposits.

And yet they’ve been able to achieve very high living standards simply because their governments got out of the way, especially compared to the rest of Europe.

It’s the same story in places like Hong Kong and Singapore… not to mention the multitude of examples throughout history.

Venice, for example, introduced something called the commenda in the 10th century; this was a sort of limited partnership in which one person (the commendator) was the passive investor in the arrangement, and the other (the tractator) was the trader who would go overseas and try to make a fortune.

When the commenda expired, the tractator would return home with a full accounting of the trip and split the profits in the way that was designated in the contract.

A lot of people became very wealthy through this system… and by extension, Venice became the richest place in Europe.

It didn’t happen because of government regulation, currency inflation, or spending intitatives. People prospered because the government got out of the way; they had the economic freedom to work hard and succeed from their own sweat, not handouts.

Of course, after a few hundred years, Venice managed to screw it up.

By the 13th century, a political elite had formed. They began to heavily regulate trade, nationalize some routes, impose heavy taxes on merchants, and even introduce a police force to do their bidding.

Devoid of the economic freedom they once had, Venice shrank into a shell of its former self.

This is, by far, one of the most important lessons from history: freedom and prosperity are inextricably linked. Free societies prosper… and as freedom declines, so does prosperity.

And it’s a very slippery slope: the more prosperity declines, the more politicians try to regulate the economy through wage controls, price controls, capital controls, etc. And the more they regulate the economy, the faster prosperity declines.

This is from the Sovereign Man's Simon Black debunking the quack solutions peddled by the mainstream especially by a Nobel Prize winner.

Tax Avoidance: U.S. Banks Spawn 10,000 Subsidiaries Worldwide

Below is a great example of what is called as tax avoidance which Wikipedia.org defines as

legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.

For the politically endowed US banks, tax avoidance means establishing numerous subsidiaries around the world.

From Bloomberg,

The biggest U.S. banks created more than 10,000 subsidiaries in the past 22 years as they expanded, using legal structures to pay lower taxes and escape tighter regulation, according to a Federal Reserve study.

JPMorgan Chase & Co. (JPM), the largest U.S. lender, has the most units at 3,391, followed by Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. (BAC) with more than 2,000 each, the study by the Federal Reserve Bank of New York shows. Citigroup Inc. (C), the third-largest lender, has 1,645.

Critics including Thomas Hoenig, a Federal Deposit Insurance Corp. board member, say the biggest firms are too complicated to manage. The 2010 Dodd-Frank Act asked the FDIC and Fed to make sure the largest banks, if they get into trouble, can be wound down without collapsing the rest of the financial system. U.S. Senator Sherrod Brown has proposed legislation to force their breakup.

“When regulators are left to curtail the risk of trillion- dollar megabanks with hundreds of affiliates, we know that too big to fail is also too big to manage” said Brown, an Ohio Democrat and member of the Senate Banking Committee.

Well this is just the banking system, I would conjecture that many significantly sized companies, as well as, the wealthy, do the same. The rich according to CNBC has an estimated $21 to $32 trillion stashed overseas. Of course this claim has been made by political parasites eyeing to seize their property.

The lesson here is that people will respond to changes in tax regimes. So any puritanical statist idea of imposing taxes to generate revenue without considering people's responses are likely to fail.

Quote of the Day: Freedom is not Defined by Safety

Freedom is not defined by safety. Freedom is defined by the ability of citizens to live without government interference. Government cannot create a world without risks, nor would we really wish to live in such a fictional place. Only a totalitarian society would even claim absolute safety as a worthy ideal, because it would require total state control over its citizens’ lives. Liberty has meaning only if we still believe in it when terrible things happen and a false government security blanket beckons

This is from Ron Paul’s latest outlook Security and Self Governance

Brain Damage and Better Investment Decisions

Jason Zweig in his latest article at the Wall Street Journal cites a study which suggests that people with brain damage are likely to make superior investment decisions than normal people…

With computerized traders that "hold" stocks for only a few seconds at a time and markets that can swing wildly in a matter of moments, long-term investing seems to be on the verge of extinction.

Perhaps this is inevitable. It turns out that short-term thinking is deeply embedded in the workings of the human brain. New research suggests that in order to avoid trading your accounts to death, you must counteract some of the very tendencies that make Homo sapiens the most intelligent of all species.

In a study published last month in the Journal of Neuroscience, researchers from California Institute of Technology, New York University and the University of Iowa looked at how people use past rewards to predict future payoffs.

Directly behind your forehead is a region of the brain known as the frontopolar cortex. Much larger in humans than in other primates, this area is critical to such advanced mental functions as memory, exploring new environments and making decisions about the future.

In the new study, the researchers wanted to see how the frontopolar cortex contributes to predicting rewards. So they compared people with damage to the frontopolar cortex against two control groups of healthy people and those with injuries elsewhere in the brain (but not the frontopolar cortex)….

When confronted with the unpredictable, however, the frontopolar cortex refuses to admit defeat. It draws on all your computational abilities to search for patterns in random data.

In the absence of real patterns, it will detect illusory ones. And it will prompt you to act on them.

No wonder so many investors find it hard to muster the willpower to buy and hold a handful of investments for years at a time.

But if "buy and hold is dead," as growing numbers of investors argue, it isn't clear what else is alive. In the lousy markets of the past decade, various alternatives such as "tactical asset allocation" (or market timing), mathematical risk-reduction techniques and even plain old intuition haven't worked out all that well, either.

Most of the folks who say buy and hold is dead don't talk much about their long-term returns. Instead, they stress how they have done recently, a tactic that for many potential clients has the same irresistible appeal as the last couple of pulls on a slot machine.

The solution to short-term thinking isn't to bash yourself in the forehead with a hammer, of course. But you can use your brainpower to your advantage.

Every investing decision you make should be the result of a deliberate process.

The implication that it would take brain damage to make for a better investor would seem downright preposterous (the same goes with the theory of high IQs)

Pseudo scientific studies like the above disparages the individual’s distinctive capacity to deal with the ever changing circumstances we are faced with.

While it may be true that many people have the tendency to fall for cognitive biases, in reality all of people’s actions are driven by incentives

Incentives are shaped by the dynamic admixture of many factors—including genes and the environment, peer pressure and social status, educational background, culture, religion, technology and even to social policies such as zero bound rates—in relation to changes to the environment, social relations and the economy (even if some of their actions can be read as cognitive biases or heuristics—pattern seeking behavior).

This applies to short-term thinking.

Deliberate process is more about containing the urge for the dopamine to govern one’s action, or importantly, managing emotions through emotional intelligence (EI) to attain self-discipline.

Superior investing decisions can be attained even if you have a normal brain.

Anonymous Libor Expert Explains on How the Fed has Destroyed LIBOR

As explained by an anonymous Libor ‘trader’ expert, courtesy of the Business Insider, (bold emphasis added)

LIBOR isn't really based on a tangible number; it's based on a compilation of bank responses to the question, "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?"

Banks need to find money to settle transactions denominated in other currencies or involving transactions abroad. Therefore they use instruments like Eurodollar futures, which allows them to borrow or lend dollars at banks outside the United States for a certain period of time.

The effects of any central bank action are felt directly in these markets. When the Federal Reserve wants to lower the federal funds rate, it uses open market operations—this means it states its intention of depositing more money in banks' accounts at the Fed, making it cheaper for other financial firms to get dollars.

In the years leading up to the financial crisis, the relative stability in rates allowed algorithmic traders to take advantage of very minute changes in LIBOR at various maturities, like those mentioned by Barclays traders in documents released by European regulators. The Fed and other central banks could control that rate by adjusting interest rates, but LIBOR moved pretty much in tandem with the federal funds rate.

"My colleagues and I, we say that [LIBOR] is 14 bps over the federal funds rate...as a joke," the trader told Business Insider, pointing to the uncanny correlation between the two rates up until 2007 and since 2009. When the rate at which banks lent to each other began to jump in late 2007, however, "the system couldn't take it at all," he added.

In the lead-up to and during the financial crisis, real interbank lending for any length of time beyond overnight practically stopped. Thus, saying that banks were pushing down their reports of the prices at which they could borrow is at best misleading, because the demand for lending long-term was nonexistent.

"We submitted a hallucination," said the source.

Central banks responded to the credit stress by offering massive lending facilities, which allowed banks to to access money—in particular, dollars—through a vehicle outside the traditional private money markets. That has changed the way the markets work.

The trader explained, "Since the crisis, banks don't fund themselves [through the traditional money markets] because they don't want to. It's really now about old contracts," that were purchased ahead of the crisis.

But while markets may have exited the crisis credit crunch, markets for securities determined by LIBOR have not, the trader told us. Instead, he says there's an implicit push by the Fed to keep the lending rate low, even though it should be much higher now.

By releasing interest rate projections and jumping to non-standard measures like quantitative easing and dollar facilities, the Fed destroys the incentive to actually exchange money via Eurodollar contracts. This means the Fed is refusing to let LIBOR function as a true, independent indicator.

"If you're long the TED [you believe there will be more financial stress] in a time of trouble, you buy T-bills and take the money offered to you, so you sell a Eurodollar." Essentially, you believe you'll be profiting off of higher lending costs for banks in the future. But if the LIBOR is kept artificially low, then you lose money on a Eurodollar futures contract.

But now, the Fed has become so committed to keeping interest rates down indefinitely—and has jumped so quickly to measures that distort the market—that it has completely destroyed any faith or interest in new contracts.

The trader believed that central banks have recognized that disaster happens when the LIBOR begins to deviate from its general relationship to the federal funds rate, and therefore the Fed (and perhaps other central banks) have suppressed it to make sure rising rates don't generate fear while it develops another money market system.

"I think what they want to do is make sure the system doesn't go crazy." Otherwise, he argues, "You're not just embracing a fantasy. You're embracing a fantasy that created the great credit bubble."

The above observation has basically been congruent with my earlier thesis

China’s Blossoming Peer to Peer Credit Industry

More proof that markets abhor a vacuum.

While we seem to be getting mixed signals about the real credit conditions in China, where I suspect that lending growth has been happening among State Owned Enterprises (SoE) but may have been contracting in the private sector due to the overleverage in the shadow banking system (mostly from financial vehicles setup by regional authorities), many of the average Chinese seems to be exploring direct credit transactions via the internet: Peer to Peer lending.

From Bloomberg,

Peer-to-peer lending is taking off in China as traditional methods of private lending among family and acquaintances, part of the country’s unregulated $2.4 trillion shadow-banking system, move online. More than 2,000 websites have been set up nationwide since 2007, China National Radio reported in May. Loans brokered online increased 300-fold to 6 billion yuan in the first half of 2011, the latest figures available, from the full year total in 2007, the report said.

’Innovative Lending’

Akin to LendingClub.com or Prosper.com in the U.S., China’s peer-to-peer lenders let individuals invest a minimum of 50 yuan in projects ranging from small-business expansion to funding newlyweds’ honeymoons for as much as 23 percent interest, the highest rate allowed under Chinese law. While the returns are higher than parking the money in bank accounts earning 3 percent, they’re dwarfed by some underground shadow-banking investment yields that can go as high as 100 percent.

“This is an interesting and innovative lending platform with a lot of goodwill,” said Liao Qiang, a Beijing-based director for financial institutions at Standard & Poor’s.

Existing outside of regulators’ jurisdiction, online lending sites aren’t without risks. The China Banking Regulatory Commission in September issued a warning about web-based brokers, cautioning that their bad-loan ratio is “significantly higher” than that of banks -- without specifying the figure -- and that they can cross the line into illegality such as fraud, funding illegitimate businesses or money laundering.

A Beijing-based spokesman for the banking regulator said peer-to-peer lending isn’t under its official purview.

“There is no discipline at all,” Liao said, calling it a “short-lived fad” that won’t affect the role banks play in the economy. “There’s no enforcement should borrowers default.”

P2P lending will hardly be a short-lived fad, as they are in reality representative of free markets and of the deepening trend of the information age.

It’s bizarre how the mainstream talks about the paucity of discipline when today’s over-indebted shadow banking in China has mainly been fueled by reckless local government units in pursuit of political goals. China’s shadow banking industry consists of the investment trust industry, pawn shops, guarantors, underground banks and wealth management products.

Politicians and their apologists always try to shift the blame on markets the monsters which are, in reality, products of their self-creation.

Eventually P2P credit markets will get significant volume enough to challenge the conventional banking and financial industries, where the latter would seek interventions to curb competition. Don’t forget that conventional banking and governments will strive to uphold their symbiotic relationship which has been backed by the central bank.

Nonetheless, again China’s blossoming P2P credit markets are growing evidences of the deepening of the information age and of the parallel free markets (free banking?) that can be accessed, in case the conventional political- interdependent banking system undergoes a seizure (similar to Lehman episode of 2008). if not a collapse.

Strength of Singapore Stocks Largely Depends on the US Equity Markets

The ASEAN 4 has been having an outstanding performance relative to the world. So as with ASEAN ‘developed’ economy Singapore.

From Bloomberg,

Singapore stocks have gained 13 percent in 2012 with volatility that is the lowest in Asia, luring the region’s biggest investors to a rally that trails only Denmark among developed nations.

The Singapore Straits Times Index (FSSTI) has risen 15 of the last 19 days while its 30-day implied volatility, a measure of risk derived from options prices, held below levels in Japan, Hong Kong, China, South Korea, India, Taiwan and Australia. Shares in the gauge yield 3.6 percent in dividends, compared with 3.2 percent for the MSCI Asia Pacific Index (MXAP), data compiled by Bloomberg show.

Nikko Asset Management Co. and Schroders Plc are finding bargains even after the Straits Times Index closed at its highest level of the year last week. Companies trade at 9.9 annual earnings, compared with 21 times for Denmark’s OMX Copenhagen 20 Index, the best-performing index among developed countries with a 21 percent gain. The MSCI Asia Pacific Index trades at 14 times profit, data compiled by Bloomberg show.

“Singapore equities are very, very cheap,” said Ng Soo Nam, Singapore-based chief investment officer at Nikko Asset Management, which oversees about $165 billion. “Valuations have been bashed down so much that the dividend yields are getting interesting even for Singapore banks, which are traditionally not dividend yield stocks.”

It has been true that Singapore, like her ASEAN ‘emerging’ contemporaries, has had a low beta relative to the world.

Chart from DBS Vickers.

A beta (based on CAPM) of less than 1 means that the security will be less volatile than the market (Investopedia.com)

But as caveat, past performance must not be read as future outcome as today’s conditions has been highly fluid and volatile which means correlations can shift in a finger’s snap.

As I recently pointed out, like the ASEAN-4, much of the strength of Singapore’s STI has been anchored on the US.

The bottom line is that the seemingly resilient stock markets of ASEAN, including Singapore, largely depends on the directions of the US counterparts.

All prices in the financial markets are relative: pricey issues may still become pricier, also cheap issues may become cheaper.

Prudent Investor Newsletters at Before It’s News

Some of my articles have recently been cross-posted at the Finance section of Before It’s News, a people powered syndication platform.

Although Before It’s News (via Sean Melehan) wrote me on this about a year ago, only recently have I noticed that many of articles got published and linked on their site.

You can visit the finance section of Before It’s News here.

Anyway thanks to Before It’s News (and to Sean Melehan)

Shoot the Messenger: Spain, Italy Ban Short Selling of Equities

When markets expose on the errant ways of the political system, the mechanical reaction by politicians has always been to shoot the messenger.

From the Bloomberg,

Spain and Italy moved to ban short- selling of stocks as prices dropped and the euro traded below its lifetime average against the dollar on concerns about the European Union debt crisis.

Spain’s stock market regulator, the CNMV, said it was banning short selling of all stocks for three months, amid “extreme volatility.” Italy’s Consob said its ban, scheduled to last a week, was introduced on some banking and insurance shares because of the “recent performance of stock markets.”

Today’s bans echoes decisions in August of last year by France, Belgium, Spain and Italy to temporarily ban short selling of financial stocks in an effort to stabilize markets after European banks, including Societe Generale SA (GLE), hit their lowest levels since the credit crisis of 2008…

The Spanish prohibition also covers over-the-counter derivatives, the CNMV said. Market making activities are excluded from its measures.

The underlying hope of politicians has been to reverse the lessons of the famous legend of King Canute who commanded sea waves “to advance no further”. King Canute tried to show “his flattering courtiers” that his power meant “nothing in the face of God's power”

The modern version is that politicians hope that by pinning or diverting the blame on the markets, and through edict or fiat, the basic laws of economics can be overturned.

Spain’s Bolsa de Madrid Index

Dow Jones Italy Stock Index

Note the article says, “Today’s bans echoes decisions in August of last year by France, Belgium, Spain and Italy”, yet both the charts of Spain and Italy, in spite of the last year’s ban, has been trading much much much lower than when the attack against the markets had been implemented.

As I previously wrote,

1. Bans hardly have been effective. Instead they are mostly symbolical as the “need to be seen as doing something”

2. Regulators react almost always too late in the game (which means that their markets may be at the process of nearly bottoming out.)

3. I would further add current policies have clearly or overtly been in support of the banking system and the stock market.

4. This only validates the theory that the policy direction of governments and global central bankers has primarily been anchored upon the Bernanke ‘crash course for central bankers’ doctrine of saving the stock market.

5. Importantly, applied policies have been meant to preserve the tripartite cartelized system of the welfare state, central banks and the crony banking system.

Except for #2 which does not seem to apply today as events seem to exhibit accelerating deterioration, everything else seem pertinent

I would further add that such bans are, in reality part of the price control mechanisms employed by desperate and frantic politicians that only aggravates the imbalances of the system.

Doing the same thing over and over again and expecting different results has been the stereotyped reaction by political authorities everywhere. Yet as one can observe, politicians never really learn, which is why we should expect the crisis to worsen. Also, this shows how politics has been mainly about short term fixes and the struggle to preserve of political entitlements. Someone once defined this as “insanity”.