Contagion Risks: China Export Growth Collapses, Other Signs of Economic Slowdown

I have been repeatedly saying that the contagion risks should be seen as clear and present danger in spite of the recent hope-based surge from global stock markets.

And in contrast to mainstream expectations, it appears that most recent China’s trade data, aside from other economic figures, reveals of an unfolding substantial deterioration.

From Bloomberg, (bold added)

China’s export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening and raising the odds the government will step up measures to support expansion.

Outbound shipments increased 1 percent from a year earlier and imports rose 4.7 percent, the customs bureau said today in Beijing. New local-currency lending was 540.1 billion yuan ($85 billion), the central bank said, lower than all 30 estimates in a Bloomberg News survey, after 919.8 billion yuan in June…

“Monetary policy easing has to be more aggressive in the remainder of the year,” said Liu Li-Gang, Hong Kong-based head of Greater China economics at Australia & New Zealand Banking Group Ltd. He said there’s a risk of a “hard landing” and the government may lower banks’ reserve requirements as soon as today…

Separate reports showed industrial output growth unexpectedly slowed last month to 9.2 percent from a year earlier and retail sales rose 13.1 percent, trailing analysts’ forecasts…

New yuan lending in July compared with the median estimate of 700 billion yuan in a Bloomberg survey. It was the lowest monthly figure since September 2011. Growth in M2, the broadest measure of money supply, was 13.9 percent last month, compared with the median forecast for a 13.8 percent gain.

The growth in July exports compared with the 8 percent median estimate in a Bloomberg News survey and 11.3 percent in June. Analysts estimated a 7 percent gain in imports after a 6.3 percent increase in June.

The trade surplus was $25.1 billion in July compared with $31.5 billion a year earlier. The median projection was $35.1 billion.

Excluding distortions caused by the timing of the Lunar New Year holiday, it was the worst export growth since 2009. The figures put China further at risk of missing its 10 percent goal of trade expansion for the year. China is still “confident” of achieving the target, Gao Hucheng, a vice commerce minister, said at a briefing today.

As one would note growth of exports, bank lending, industrial output and even retail sales have all exhibited marked declines.

Of course, hardly any mainstream news today has been without the promises of government rescue (“bad news is good news”), the above has been no different. This typifies the proof by assertion fallacy based on Lenin’s famous aphorism on propaganda “A lie told often enough becomes the truth”.

Chart from The Wilder View

Nevertheless with the growth rate of exports by major Asian exporters (China, South Korea and Taiwan) encroaching on the negative zone, we should expect a hefty slowdown in world trade to be transmitted to the global economy. This essentially elevates the risks of a global recession.

Recently China’s Shanghai Index has posted a modest rally. These may yet represent an oversold bounce or a dead cat’s bounce or whose sustainability has to be established.

Be careful out there.

China’s Spontaneously Driven Economic Reforms

Paul Gregory, research fellow at the Hoover Institution, says that China’s economic miracle has been a product of spontaneous order.

At the Econolog Mr. Gregory writes,

China's private enterprise reforms began first in agriculture in 1978 and spread from there. Agriculture accounted for most of Chinese output and most of the labor force when Mao died in 1976 and the reform period could begin. The freeing of agriculture from collective farms is the most important untold part of the Chinese growth story.

Agricultural reforms began spontaneously from below, even before the "Reform" Party Congress of 1978 that installed reformer Deng Xiaping in power. A Chinese reform official later admitted: "In fact, reform wasn't discussed. Reform wasn't listed on the agenda, nor was it mentioned in the work reports." What became known as the "contract responsibility system" was sparked spontaneously by eighteen peasants from Xiaogang village in Anhui province. They secretly divided communal land in November 1978 and agreed to farm their plots individually, each contributing their share of the state quota. The state got its due and the peasants kept what was left over. The peasants' separation of their land from the collective farm was illegal, highly dangerous, and done without the approval of regional officials. Why did they take the chance?

Kate Zhou explains that the peasants had seen their parents and children die from starvation during the 1958-1961 famine of the Great Leap Forward. They understood they had to take care of themselves. The contract responsibility system spread like wildfire from village to village and from province to province, notably without endorsement by or encouragement from regional or national authorities.

As agricultural production soared, Deng Xiaping and his CPC realized that they should not resist something that was working. By 1982, more than 90 percent of rural dwellers worked under the contract responsibility system, but they were allowed only one- to three-year contracts on their land. It was only in 2003 that the state gave out longer-term leases.

The spontaneous reforms in agriculture meant that new supplies of food products needed markets and that markets needed infrastructure. Rural dwellers created a private trade network, and, within one year, most state food stores were out of business. Rural entrepreneurs then created new businesses, such as hotels, services, private restaurants, and small-scale manufacturing, through the three Fs (friends, family and fools). They bribed local officials to register their companies as "township and village enterprises." They created fake "red hat" enterprises, that is, private companies masquerading as state companies, and sham collective enterprises, or they used state enterprises to issue receipts and open bank accounts. Large private manufacturing firms developed first in predominantly agricultural provinces. China's largest agribusiness was founded by brothers who left the city to found their company in rural Sichuan. Rural entrepreneurs built the largest refrigeration and air-conditioning companies in China.

Read the rest here

That was then. Today’s conditions have been different.

Further in the article, Mr. Gregory points out some very important factors

-Today Chinese economy has been roughly split 50-50 between state owned and privately owned enterprises

-State companies use political means of “higher taxes, stricter regulation, and bureaucratic meddling” to “drive out private competitors”

-State banks discriminate in terms of lending where “only four percent of their loans to private businesses”. Thus, the recourse of private businesses has been through the informal or shadow banking systems. Ironically, transacting with unofficial credit markets “can be a criminal offense punished by long jail terms or worse”

The implication of the above is that much of China’s present day economy remains influenced by political forces. This means we cannot trust statistical figures to show real economic growth as they may likely be manipulated for immediate political goals.

This also means that a substantial segment of the nation’s resources have been utilized inefficiently which entails of massive wastages and of capital consumption.

Ghost cities, empty malls and stadiums are evidences of these.

While it may true that the private sector may have been outperforming the state owned companies, the latter’s substantial share extrapolates to the crowding out of the private sector.

Also, political authorities through state owned enterprises have used politics to undermine their private sector counterparts.

And in order for the private sector enterprises to survive and compete they have gone beyond the ken of authorities through the underground/informal economy (e.g. shadow banking). But doing so means having to take upon greater legal and regulatory risks.

All these goes to show how China has been discriminating against the private sector while favoring state owned enterprises.

Ever wonder why China has been a hotbed for 'fake' and or inferior goods?

Apparently globalization has been a key dynamic in forcing the reluctant hands of China's political authorities to liberalize.

And so far the good news has been that political trends appear to signal the emergence of the entrepreneurs as a political force.

This seems evident in the realm of China’s financial markets.

Over the past few months China authorities has undertaken a flurry of liberal oriented reforms; particularly China has recently eased on restrictions on Exchange Traded Funds (ETFs), has lowered transaction fees on share trading, has proposed to ease delisting rules, and seeks to increase the participation of foreign investors into China’s equity markets by expanding the Qualified Foreign Institutional Investors (QFII).

Nonetheless political trends will determine if China’s economic miracle will continue, put to a halt or reverse. All these will rest on China's appetite for economic freedom.

10 Advantages of Austrian Economics

This is wonderful post citing the advantages of Austrian economics relative to the mainstream, authored by Jakub Bożydar Wiśniewski (Original link here) and published by Daniel Sanchez at the Mises Circle Bastiat Blog.

I wish I had written this. (bold added)

1. Austrian economists make it their priority to make sure that the theorems they formulate are derived from self-evident axioms and constructed according to the proper rules of logical deduction. These considerations are at best of secondary importance to their mainstream colleagues.

2. Austrian economists make it their priority to make sure that the assumptions they base their theorems on are thoroughly realistic, i.e., corresponding to the state of the world as it is. Mainstream economists, on the other hand, admit that their hypotheses are based on deliberately false assumptions.

3. Austrian economists make it their priority to make sure that the theorems they formulate elucidate exact causal connections between economic phenomena, rather than deliberately assuming away their existence or importance by falling back on the physics-inspired notion of mutual determination.

4. The predictive track record of Austrian economists is incomparably superior to that of their mainstream counterparts (see, e.g., here and here).

5. The theorems and conclusions of Austrian economics are perfectly comprehensible to every intelligent layman, which cannot be said about the mathematical puzzles of mainstream economics.

6. In terms of their views on the method and aims of economic theorizing, Austrian economists have a much better claim than their mainstream colleagues to being the heirs and successors of the classical economists, such as Smith, Hume, Say, and Bastiat.

7. Austrian economists never tire of emphasizing the strictly value-free character of their discipline. Thus, unlike their mainstream counterparts, they never presume that the existence of any non-voluntary extra-market institution is justified, and, a fortiori, never make any “public policy recommendations” based on such presumptions. On the contrary, they confine their scholarly research to investigating the logical origins and outcomes of various economic processes and phenomena as they are, not as they would like them to be.

8. Identifying the concept of demonstrated preference as the keystone of economic analysis allows Austrian economists to avoid the twin pitfalls of behaviorism and psychologism, which their mainstream colleagues cannot navigate in any principled and methodologically robust manner.

9. Austrian economists reject academic and professional hyperspecialization in their discipline, thus stressing the holistic, integrated nature of the science of economics. In the words of F. A. Hayek, “the physicist who is only a physicist can still be a first-class physicist and a most valuable member of society. But nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger”.

10. Austrian economists cannot retreat into the safe haven of epistemological nihilism when the logic of their arguments turns out to be faulty. Mainstream economists, on the other hand, when the facts fail to correspond to their hypotheses, can always claim that “this time things are different”, which is a straightforward implication of the fact that any given set of sufficiently complex empirical data is compatible with a number of mutually exclusive empirical (but not logical) interpretations.

Wealthy French Mull Exodus in Response to Class Warfare Policies

“Soak the rich” socialist policies of French President François Hollande has been prompting many wealthy French citizens to consider the exit option

Reports the New York Times

The call to Vincent Grandil’s Paris law firm began like many others that have rolled in recently. On the line was the well-paid chief executive of one of France’s most profitable companies, and he was feeling nervous.

President François Hollande is vowing to impose a 75 percent tax on the portion of anyone’s income above a million euros ($1.24 million) a year. “Should I be preparing to leave the country?” the executive asked Mr. Grandil.

The lawyer’s counsel: Wait and see. For now, at least.

“We’re getting a lot of calls from high earners who are asking whether they should get out of France,” said Mr. Grandil, a partner at Altexis, which specializes in tax matters for corporations and the wealthy. “Even young, dynamic people pulling in 200,000 euros are wondering whether to remain in a country where making money is not considered a good thing.”

A chill is wafting over France’s business class as Mr. Hollande, the country’s first Socialist president since François Mitterrand in the 1980s, presses a manifesto of patriotism to “pay extra tax to get the country back on its feet again.” The 75 percent tax proposal, which Parliament plans to take up in September, is ostensibly aimed at bolstering French finances as Europe’s long-running debt crisis intensifies.

But because there are relatively few people in France whose income would incur such a tax — an estimated 7,000 to 30,000 in a country of 65 million — the gains might contribute but a small fraction of the 33 billion euros in new revenue the government wants to raise next year to help balance the budget.

The French finance ministry did not respond to requests for an estimate of the revenue the tax might raise. Though the amount would be low, some analysts note that a tax hit on the rich would provide political cover for painful cuts Mr. Hollande may need to make next year in social and welfare programs that are likely to be far less popular with the rank and file.

And class warfare politics has negatively affected business sentiment as well. Again from the same article,

Many companies are studying contingency plans to move high-paid executives outside of France, according to consultants, lawyers, accountants and real estate agents — who are highly protective of their clients and decline to identify them by name. They say some executives and wealthy people have already packed up for destinations like Britain, Belgium, Switzerland and the United States, taking their taxable income with them.

They also know of companies — start-ups and multinationals alike — that are delaying plans to invest in France or to move employees or new hires here.

Politicians and their apologists fail to realize that they are dealing with people who will respond adversely to their foolish repressive measures.

That's why there such a thing called the law of unintended consequences, or as per Wikipedia.org, used as an adage or idiomatic warning that an intervention in a complex system tends to create unanticipated and often undesirable outcomes

So far the concurrent panic in the peripheral crisis stricken Euro nations have been prompting for a stampede into French 10 year bonds. This despite the deteriorating fiscal conditions of the French government.

The French equity bellwether, the CAC, has also been in a rally mode since ECB President Draghi’s promise to do whatever it takes to save the Euro

Given the fluidity of events, current market actions may swiftly and drastically change.

And once the exodus of the wealthy French transforms into reality, then we should expect a selloff in both the bond and the equity markets.

Class warfare politics through taxing or soaking the rich serves only as camouflage to the real consequences—taxing everyone else including the poor, except for the political class—or myth of the Santa Claus Fund.

As the great Ludwig von Mises explained, (bold emphasis mine)

High surtax rates for the rich are very popular with interventionist dilettantes and demagogues, but they secure only modest additions to the revenue. From day to day it becomes more obvious that large-scale additions to the amount of public expenditure cannot be financed by "soaking the rich," but that the burden must be carried by the masses. The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will themselves have to foot the bill. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population. [p. 858]

The situation in the employer-employee nexus will be analogous. The popular doctrine contends that wage earners are reaping "social gains" at the expense of the unearned income of the exploiting classes. The strikers, it is said, do not strike against the consumers but against "management." There is no reason to raise the prices of products when labor costs are increased; the difference must be borne by employers. But when more and more of the share of the entrepreneurs and capitalists is absorbed by taxes, higher wage rates, and other "social gains" of employees, and by price ceilings, nothing remains for such a buffer function. Then it becomes evident that every wage raise, with its whole momentum, must affect the prices of the products and that the social gains of each group fully correspond to the social losses of the other groups. Every strike becomes, even in the short run and not only in the long run, a strike against the rest of the people.

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

French class warfare politics essentially serves as the death warrant for the Euro.

In Zimbabwe, Coin Shortages can mean Life or Death

The scars from the ravages of Zimbabwe’s recent episode of hyperinflation has been evident through the effects of coin shortages.

From the AFP

Shouting matches and even physical fights break out each time a mini-bus pulls up in downtown Harare as passengers battle to ensure they are not short-changed in coin-starved Zimbabwe.

Hyperinflation forced Zimbabwe to trash its worthless local currency three years ago in a move that brought much needed relief to the crippled economy but created a surprising new headache: a lack of coins.

"Change is a big problem, and at the same time passengers are impatient with us. I have been slapped a few times for not having change for them," said a bus conductor Walter Chakawata.

The US dollar and the rand from neighbouring South Africa are Zimbabwe's main adopted currencies. The dollar, however, is preferred and all prices are pegged to it.

But there is not enough US small change in circulation. The result is that prices are either rounded off -- making goods and services more expensive -- or customers brace themselves for a fight to get their change.

The average city commute costs 50 cents. But the dearth of coins means passengers -- handing over bills -- are always owed change. Some bus drivers pair the passengers, handing them a dollar bill in change and leaving the two riders to sort the rest out themselves.

Often their only alternative is to buy an item worth a dollar that they can then share -- a packet of cookies, a pie or anything they agree to.

But that has not gone down well with many, who feel obliged to make an unnecessary purchase. Others complain it forces them to spend time with a total stranger. Or what if one is in a hurry? And in a country where many live on less than $2 a day, 50 cents still remains a decent sum, not to be wasted.

The fights have at times turned deadly. Last year, independent papers reported that a state security agent pulled out a pistol and shot dead a bus conductor after he failed to give him change.

Markets don’t operate on a vacuum however. From the same article…

Not all merchants buy coins, however. Ice-cream and yoghurt vendor Locadia Chimimba conceded that "the situation is better these days because you can buy change if you want" but she herself does not and still asks customers to buy more to make up the difference.

In supermarkets, when the grocery bill does not add up neatly to a round figure shoppers are offered sweets, match boxes, chewing gum and even condoms to compensate.

So markets grope to find a substitute on such coin shortages. This should mark a transition phase.

But why the coin shortages?

Authorities considered importing US coins but the idea was dropped when shipping costs proved too expensive -- costing two dollars for a batch of coins worth one dollar, experts said.

Bottom line:

People’s psychology and behavior are materially influenced by changes in monetary conditions.

Monetary disorders spawns disruptions in the division of labor which incites violence.

Coins function as insurance against the corruption of money. This is why some of the political authorities have considered a ban on coin collection.

Video: The Difference between Free Markets and Pro-Business Policies

Free markets or laissez faire capitalism has frequently been mistaken as being "pro-business"

In the following video from LearnLiberty.org, Professor Steve Horwitz explains their differences (thanks to Learn Liberty's Tim Hedberg for sending the video)

The following digest from LearnLiberty.org

In this video, Professor Steve Horwitz advocates for free market economic policy. He refutes the often recited claim that "What is good for General Motors is good for America" by explaining that pro-business legislation encourages behavior that is not beneficial to society or the business itself. He suggests that, in a free market, factors such as profit and competition encourage behavior that ultimately benefits society. Professor Horwitz illustrates that pro-business legislation restricts progress and therefore caters to the interests of industry rather than to consumers, whereas "supporters of free markets are ultimately pro-human and pro-people because it is through markets that we get the most innovation and we get the most goods and the cheapest prices."

Inflation Targeting Fails: Thailand’s Central Bank Chairman Admits

The Chairman of the central bank of Thailand says that inflation targeting has no longer been effective.

From Businessweek/Bloomberg,

Bank of Thailand Chairman Virabongsa Ramangkura comments on inflation targeting. He made the remarks during a speech late yesterday in Bangkok.

Thailand’s central bank has used inflation targets since 2000 and aims to keep core inflation, which excludes fresh food and fuel prices, between 0.5 percent and 3 percent.

“Central banks should change their ideas. Inflation targeting is no longer effective because inflation has been globalized. The world is more open and we are a member of the World Trade Organization. Commodity prices are driven by global supply and demand, not policy of a particular country.

‘‘So monetary policy shouldn’t be used to deal with inflation because we can’t do anything. Monetary policy should be used to support economic growth and reduce unemployment, which we call inclusive growth.”

“The source of instability for emerging countries is foreign exchange, not inflation. The stability of the foreign exchange rate depends on capital movements. If our interest rates are higher than dollar rates, that will open a loophole for attackers. This creates financial instability. So, monetary policy should take care of this, not inflation.”

Virabongsa says his views run counter to those of Governor Prasarn Trairatvorakul.

Ineffective, here, represents euphemism for failure

In truth, central bank inflation targeting has failed and will continue to fail, not because of asymmetric levels of “foreign exchange rates that depends on capital movements”—which accounts for a verbal sleight of hand in order to shift the blame to the capital markets—but rather from the following:

1. Central banks don’t know where and how their interventions—via money printing—will end up.

2. Central banks cannot ascertain where exactly is the so-called invisible “equilibrium price level”.

3. Because they don’t know both 1 and 2, central bank inflationism leads to excesses which produces boom-bust cycles and raises the risks of intractable (consumer price) inflation

4. Most importantly, inflationism has always been about promoting the political interests of the political authorities and their cronies.

And political goals principally conflicts with economic reality. Example: repeated bailouts of crony firms end up consuming the capital of the economy. Long term has been sacrificed for the short term. Productive capital wasted on unproductive politically supported undertakings.

Yet bailouts, has been, and will be justified through the camouflage of economic technical gobbledygook called “aggregate demand”.

To quote economic professor Antony P. Mueller,

Inasmuch as central banks dominate the discourse about monetary policy, there is almost no debate going on about the thesis that inflation targeting is not only defective in guaranteeing monetary stability but that it also provided the conditions for the current financial crisis to happen.

The episode that was praised as the great moderation was a great delusion, which has become the nightmare of a long stagnation.

There is a vital need to establish a sound monetary system. Its consequence would be moderate deflation and the avoidance of extreme booms and busts.

The main barrier against sound money is neither intellectual nor practical but political. The resistance comes from the public sector because the chief casualty of an institutional change to sound money would be the modern inflated government along with its warmongers, debt pushers, and all the rest of the spin doctors of deceitful promises who form part of this kingdom.

Yes inflationism or “something from nothing” policies via central banks has essentially been grounded on the politics of the Santa Claus principle.

So whether viewed from the knowledge problem of centralized institutions or from political dimensions or incentives guiding the political authorities, inflation targeting have been destined to fail.

Resource Curse: Rare Earths bankroll North Korea’s Despotism

Abundance of natural resources can serve as deterrent to economic development, a phenomenon which has widely been known as the resource curse.

That’s because plentiful resources provides the wherewithal to the political class to thrive on a politically repressive system without the need for economic liberalization reforms.

Thus the tendency for resource rich nations has been concentrate wealth on the politicians and their cronies at the expense of the nation.

Apparently rare earth exports may have bankrolled North Korea’s isolated economy which has so far allowed the regime to survive.

From the Asia Times Online,

In fact, North Korea is sitting on the goldmine. The northern side of the Korean peninsula is well known for its rocky terrain, with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals, of which deposits of coal, iron ore, magnesite, gold ore, zinc ore, copper ore, limestone, molybdenum, and graphite are the largest and have the potential for the development of large-scale mines.

After China, North Korea's magnesite reserves are the second-largest in the world, and its tungsten deposits are almost the world's sixth-largest. Still the value of all these resources pales in comparison to prospects that promise the exploration and export of rare earth metals.

Rare earth metals are a group of 17 elements found in the earth's crust. They are essential in the manufacture of high-tech products and in green technologies, such as wind turbines, solar panels or hybrid cars.

Known as "the vitamins of high-tech industries," REMs are minerals necessary for making everything that we use on a daily basis, such as smartphones, flat-screen TVs, and notebook computers. Some rare earth metals, such as cerium and neodymium, are crucial elements in semiconductors, cars, computers and other advanced technological areas. Other types of REMs can be used to build tanks and airplanes, missiles and lasers.

South Korea estimates the total value of the North's mineral deposits at more than US$6 trillion. Not surprisingly, despite high political and security tensions, Seoul is showing a growing interest in developing REMs together with Pyongyang.

In 2011, after receiving permission from the Ministry of Unification, officials from the Korea Resources Corp visited North Korea twice to study the condition of a graphite mine. Together with their counterparts from the DPRK's National Economic Cooperation Federation they had working-level talks at the Kaesong Industrial Complex on jointly digging up REMs in North Korea. An analysis of samples obtained in North Korea showed that the type of rare earth metals could be useful in the manufacture of liquid crystal display (LCD) panels and optical lenses.

The joint report also revealed that there are large deposits of high-grade REMs in the western and eastern parts of North Korea, where prospecting work and mining have already begun. It also reported that a number of the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors. The North built a REM reprocessing plant in Hamhung in the 1990s but has been unable to put the plant into full operation due to power and supply bottlenecks.
Rare earth minerals are becoming increasingly expensive, as China, the world's largest rare earth supplier, puts limits on its output and exports. In February, China's exports of rare earth metals exceeded the price of $1 million per ton, a nearly 900% increase in prices from the preceding year.

China, which controls more than 95% of global production of rare earth metals, has an estimated 55 million tons in REM deposits. North Korea has up to 20 million tons of REM deposits but does not have the technology to explore its reserves or to produce goods for the high-tech industry. Nevertheless, in 2009 the DPRK's exports of rare metals to China stood at $16 million, and as long as someone invests, exports will continue to expand.

This growing rise in REM prices and strong demand gives the young leader Kim Jong-Un a good chance to improve the economic standing of North Korea without actually reforming its economy.

Any “improvements of North Korea’s economic standing” “without reforming its economy” will likely reflect on statistically chicanery rather than from real economic growth.

Real productivity gains through trade and capital accumulation, and not from overdependence on finite resources and redistribution, are the way to lasting economic progress.

The idea that resources will function as a wealth equalizing elixir will be exposed as a socialist’s dogmatic fantasy as it has always been.

Government Spending: Like a Valium for Lethargic Economies

To the fans of economic ‘pump priming’ or government stimulus for economic growth, the distinguished economist Art Laffer writes a splendid spoiler at the Wall Street Journal, (bold highlights mine)

If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.

But all of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments. Today, even stimulus spending advocates have their Ph.D. defenders. But there's no arguing with the data in the nearby table, and the fact that greater stimulus spending was followed by lower growth rates. Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.

Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers. In other words, the spending was more like a valium for lethargic economies than a stimulant.

Just to add: “government spending is counted in official GDP numbers” represents just one of the many reasons not to trust GDP numbers as they have been designed to promote the crony capitalist-mercantilist-welfarism framework based from the highly flawed Keynesian theory backed social policies.

Flooding from Heavy Monsoon Rains Exposes Central Planning Failure

From the Manila Bulletin,

Malabon City government officials are criticizing the Camanava Area Flood Control and Drainage System Improvement Project for “failing to meet the expectations of the residents.“

After the meeting with Engr. Carla Bartolo, head of the project, Acting Malabon City Mayor Antolin Oreta III said the Camanava flood control project, “did nothing as regards to the perennial flooding particularly in Malabon.“

The Php 5.2 billion project also covered nearby areas in Caloocan, Navotas and Valenzuela, but a big bulk of the amount was purportedly utilized for constructing pumping stations, navigation gates and polder dikes in Malabon, according to Malabon City Engineer Edgar Yanga.

Two pumping stations were supposed to serve Caloocan, Malabon and Navotas areas, Yanga said.

The city officials noted some “flaws“ in the construction. Yanga said, “Ang expected na gagawin ay hindi ginagawa, paunti-unti. No target completion.“

He added: “The project is very much delayed. Five years na delayed.“

The project was started in 2003 and was supposed to be fully operational by 2007.

In the meetings with city officials, including 21 barangay chairmen, Bartolo attributed the delay of the project to the presence of some informal settlers covered by the project and changes in the conditions of the locations.

Oreta said the city continues to experience floods, citing some barangays which were affected by the heavy rains spawned by typhoon “Gener“ and recent tropical storms.

First of all, the nature of politics has all been about the blame game, where political agents benefit from stepping on someone’s shoes. Critics make the cavalier presumptions that under their guidance such problems will unlikely emerge.

Second, censures become the mechanical reaction once an event has already taken place. The usual culprit has been the private sector, but in one of the unusual case above, one government agency excoriates another.

But since politics has mainly been about the fetish for short term problems and fixes, fleeting popular concerns leads to intuitive shifts in policy directions.

This known as the time inconsistency dilemma, as per Wikipedia.com,

situation where a decision-maker's preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another point in time

Yet since experts cannot predict on the precise dislocations from weather disturbances, social policies result from “whack the mole” dynamics or from “fighting the last war” or to shifting priorities. So there will never be an end to central planning failures on reactionary based populist social policies.

Third, finger pointing will always be about mismanagement, deficiency of funding and or the lack of regulatory oversight.

In reality, since government treats the symptoms than the problem, the outcome will always be a gamut of unintended consequences.

Paradoxically, failures and inefficiencies (and corruption) will be rewarded through demands for more taxpayer expenditures.

Yet the biggest fundamental flaw emanates from the public’s mysticism over the infallibility of the nanny state.

Ironically many, if not most, have been jaded to the reality of serial failures of central planning, as I previously wrote:

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.

Most of the dogmatic belief on the ascendancy of the state emanates from economic ignorance and mass indoctrination.

As the great Professor Ludwig von Mises warned

What makes many people blind to the essential features of any socialist or totalitarian system is the illusion that this system will be operated precisely in the way that they themselves consider as desirable. In supporting socialism, they take it for granted that the "state" will always do what they themselves want it to do.

Online Scammers: Sophistication in Stupidity

Online fraud like the Nigerian Email Scam has been a growing billion industry, where victims has reportedly lost a hefty $9.3 billion in 2009 which has been up from $6.3 billion the year before.

Yet scammers ‘specialize’ on their predation, as their ‘marketing’ activities focus on duping on the most vulnerable of the society.

From the Wall Street Journal, (bold emphasis mine)

So why do the scammers persist in blanketing the world with outlandish propositions, announcing that they are from the very country whose name has become synonymous with online fraud?

Cormac Herley, a computer scientist at Microsoft Research who specializes in security issues, provides a convincing answer in a paper presented at a conference in Berlin and recently published on his website. In it, he analyzes the con mathematically, using an approach called signal detection theory. His crucial insight is to look at the situation not from the victim's point of view but from that of the scammers. Their challenge is to hook only people who will get sucked in deeply enough to send a significant amount of money—the "true positives." They must minimize the effort they devote to "false positives" (targets who might seem like dupes but are suspicious and/or never pay up).

It costs the scammers virtually nothing to spam the world, but it costs them a lot (especially in terms of time) to conduct all the follow-ups necessary to reel a sucker all the way in. The people behind "Captain Mbote" spent six months pursuing their quarry before he started wiring money to them.

A proposal offering a more realistic scenario might generate more replies, but most of them wouldn't pan out. The effort of sorting through them to find the real suckers would undermine the scheme's profitability. Instead, by screaming "This is another absurd instance of the familiar Nigerian scam," the fraudsters are filtering out what to them is spam—responses from suspicious people they don't want to deal with—and "letting through" only those most likely to play along. The fewer potential victims in the world, the more precisely the scammers must target them, and thus the more absurd and easy-to-spot the attacks should be.

The Nigerian scammers aren't alone in using this approach. Phishing attacks, like the urgent emails from the "IT Support Team" requesting our passwords to avert some Internet calamity, are so hackneyed that they likely ensnare only the extremely naive or credulous.

Mr. Herley's analysis of the Nigerian scam suggests a counterintuitive way to fight back. Most efforts to reduce Internet fraud focus on reducing the number of people who reply to scammers—by educating users or by filtering out the scam emails. But some attacks inevitably slip through, and some Internet neophytes inevitably fall prey.

A more effective solution, Mr. Herley suggests, would require considering the goal of the scammers. Increasing the number of responses to their emails, he shows, can reduce profits, as long as those responses come from people who never send money. Such "scam baiters" already exist (the community website "419 Eater," named after the Nigerian law that governs fraud, offers tips and support). The more scam baiters, the lower the average return to the scammers on each attack and the less incentive they have to continue the scam.

Perhaps clever artificial intelligence researchers could create automated scam-baiter bots that would simulate gullible victims, drawing out the interaction as long as possible. The most convincing victim-bot would possess sophisticated knowledge of how the scammers think and behave—precisely the knowledge that tends to elude us when we look at the world only from our own perspective. Similarly, the profitability of phishing scams could be reduced by sending bogus account numbers and other data back to the scammers.

As Mr. Herley's paper shows, what seems stupid can actually be quite sophisticated. It's only by imagining the situation with the roles reversed that we can see what we've been missing.

The growing size of the illicit industry accounts for a sad state of societal affairs which means there have been that big a number of precision targets or "suckers" in the world.

Yet “something out of nothing” has been the basic trap laid out by scammers for unsuspecting victims.

Ironically, “something out of nothing” is the same principle that undergirds politics—only that they come in the jargon of “free lunch” or the “Santa Claus fund”.

The difference is that politics has been rationalized as having to provide the services of “public goods” whereas online scams have been outright frauds.

My guess is that these two may have important causal connections; personal responsibilities may have likely been relinquished for the dependence on the welfare state, making many people vulnerable and highly sensitive to predation.

Nevertheless, knowing what you are getting into, understanding that there is no such thing as a free lunch, critical thinking, conducting research to self-educate, and importantly, self discipline will always serve as the best insurance against fraud of any kind—online scammers, stock market (e.g. boiler rooms), Ponzi schemes and etc., and most importantly, against political tomfoolery.

To Fix the Culture of Secrecy, Reduce Government’s Role in Society

Internet sites as Wikileaks and Anonymous has gone on exposing much of government “secrets” through "leaks", thereby putting immense pressure on governments to become more “transparent”.

For some politicians and experts in the US, the way to deal with a “culture of leaks” translates to the management classification of information.

This from the CNN,

At the end of July, the Senate intelligence committee marked up legislation drafted in response to recent high-profile leaks of classified information. The committee's chairwoman, Dianne Feinstein, claims that the bill will address the "culture of leaks" in Washington. But the leaks are a symptom of the intelligence community's culture of secrecy -- and the bill would make that problem worse in a host of ways.

Any insider will tell you that the government classifies far too much information. Top military and national security officials estimate that between 50% and 90% of classified documents could safely be released. That adds up to a massive amount of unnecessary secrecy when one considers there were 92 million decisions to classify information in 2011 alone.

The WikiLeaks disclosures featured some vivid examples, such as a cable from an American diplomat who classified his description of a typical wedding in the province of Dagestan.

Put simply, officials who routinely see innocuous documents stamped "Secret" lose respect for the system, and that puts all secrets, the real ones as well as the purely nominal ones, at risk.

Excessive classification also means that even low-level or nonsensitive government positions often require clearances. One in every 50 American adults now has access to classified information, not a winning formula for keeping secrets.

The Senate bill, however, does nothing serious to address the problem of overclassification. Indeed, it perpetuates the fiction that all classified information poses a dire threat.

The bill strips intelligence community employees of their pensions if the Director of National Intelligence decides they leaked classified information, even if the information reveals only that Dagestani weddings last three days. It revokes the clearances of officials who disclose the existence of classified covert operations -- even if the operations, like the raid on Osama bin Laden's compound, are in the past and could not possibly be jeopardized by disclosure.

Worse, the Senate bill extends the shroud of secrecy to encompass even unclassified information. Intelligence officials already must submit any publications that discuss their work to their agencies for pre-publication review and approval; under the bill, they must submit "anticipated oral remarks" as well. On its face, the provision could require pre-publication review for dinner party conversations.

This is an example of how politics addresses symptoms rather than the disease.

In reality, the political institution called the government operates on the principle of mandated organized violence.

And much of these acts of violence and repression have been deliberately concealed from the public for reasons which works to the interests or benefits of the political authorities.

It is only when violence has been seen as popular or politically expedient, when these are made public, or when they are uncovered or exposed by media.

In short, the political nature of governments has been one of advancing the culture of secrecy or of scapegoatism. Transparency, thus, is nothing but a political jingoistic charade.

SM Oliva, formerly of the Mises Institute, has this highly relevant quote

“Transparency” is a buzzword associated with all sorts of good-government movements. But it’s something of a libertarian Trojan horse. No government can ever be transparent, for that would rob of it of its very substance. All monopoly government is predicated on the ability to actively mislead and misdirect the majority — the public — away from the truth, whether it’s political truth, economic truth, or personal truth. Even government attempts at transparency are themselves usually little more than misdirection by another name. One can be transparent in such a way as to satisfy most inquisitors while revealing nothing that compromises the basic pillars of the state.

Bottom line: Managing information classifications will hardly solve on the issue of the “culture of secrecy” the latter of which signifies on the essence of government. To attain government “transparency” extrapolates to the vast reduction or retrenchment of government’s role in society.

And another thing; the pressure by Wikileaks and by other social media outfits on governments reveals of the process of the slomo ungluing of centralized political structure. Centralized institutions have been feeling the heat from, and or have been fervently fighting against, the forces of decentralization.

Quote of the Day: Criminals Write the Rules, Good People Go to Jail

Throughout it all, despite so many taxpayer bailouts and the damage that their fractional reserve system has caused to the global economy, the banking elite has still managed to maintain its wealth and status.

Sure, the oddball Madoff or Rajaratnam case occasionally surfaces, but for the most part, not a single member of the banking elite has been charged with a crime.

You know who has been charged with a crime, though? Gary Harrington. In case you haven’t heard of this criminal mastermind, Mr. Harrington was recently sentenced to 30 days in jail and fined $1,500 for a most heinous crime against humanity.

His transgression? NINE misdemeanor convictions of collecting rainwater on his private property. That’s right… this vile miscreant had the felonious intent to set up rainwater collection systems on his private property to capture water that falls freely from the sky… an obvious violation of Medford, Oregon’s 1925 law which awards ALL water to the government.

So Gary Harrington goes to jail for collecting rainwater. And every single banker who has been complicit in defrauding billions of people around the world walks freely on the streets. Or rather drives freely on the streets in their Maseratis.

There are countless other stories of what I call the ‘criminalization of existence’– people like Gary getting abused by the state for the most innocuous activities. There are so many laws, rules, policies, and regulations on the books, you can hardly breathe without violating one of them.

And yet, despite all of these rules and regulations, there’s not a single one that can be brought against those who lie, cheat, steal, and collude to defraud the entire world.

This is the nature of democracy today. It is the criminals who write the rules and the good people who go to jail.

This is from Simon Black at the Sovereign Man. Today’s justice system has been dictated by the political class and their cronies.

Quote of the Day: People's Access to State Power Results in Persecution

Basically, I contend that contrary to "religion" being responsible for the Crusades, the Inquisition, the St. Bartholomew's Day Massacre, the treason against the Waldensians, the purges in England, and the oppression in Geneva, to name but a few, it was the fact that these religious positions held a controlling interest in the State that resulted in the terror exacted upon innocents. For instance, Lutheran segregation in post-Luther Germany was a result of the marriage of church and State in that country, the oppression in England of differing religious positions was because of the involvement of the State in religion, Calvin's oppression was because his religion WAS the State, and, most egregiously, the Vatican itself IS a State, to which over a billion souls worldwide pledge (unwittingly, in most cases) their allegiance, even before their own home countries.

Thus, while religionists have played a significant role in the history of the world, it's always those people's access to State power that results in persecution. For instance, you'll never hear of Baptists, Quakers, or Amish oppressing other religions, as these groups (I am a Baptist) have never sought to control the political reins of any region or State. In fact, Rhode Island's charter was premised on the Baptistic doctrine of Soul Liberty, a Biblical principle that I would suggest is the foundation for the concepts of Liberty as taught by John Locke and his intellectual descendants.

(bold emphasis added)

This is from a comment by Vince LaRue at the lewrockwell blog, in reply to Professor Walter Block’s article on Religion and Libertarianism.

Will Swimming Bring Olympic Medals for the Philippines?

Overheard at a conversation: “The Philippines has a chance to win Olympic medals from swimming”

While I am not a supporter of Olympics, I occasionally do patronize the competition (when there is nothing to do).

Does the Philippines have a chance on swimming? I doubt so.

Why? Because like basketball, swimming is a sport which favors height.

To give examples of the recent Olympic Gold medalists:

US Michael Phelps 1.93 meters, 6 feet 4 inches

US Ryan Lochte 1.8 m, 6’2

China’s Sun Yang 1.98 m, 6’6

China’s controversial female Ye Shiwen 1.72 m, 5’8

US Missy Franklin 1.85 m, 6’1

Reason?

From BBC Sports Academy:

Because of the standing start, taller swimmers can often cover a greater distance before they've even entered the pool, meaning less work to do once they're in. This is particularly important in sprint events.

They can also cover a greater distance per stroke, and turn and finish with an outstretched hand.

From the New York Times:

Tall swimmers also have another advantage: because swimmers are horizontal in the water, their long bodies give them an automatic edge. “It’s the difference between long canoes and short canoes,” Dr. Joyner said.

But height may not be everything as other physical traits also contributes, this would be dependent on the swimming stroke, particularly for breaststroke and butterfly and even in women's freestyle and backstroke events.

Again BBC.

Key characteristics
Whatever your stroke, there are certain characteristics that make the body better suited to swimming:

• Wide shoulders
• Slim hips
• Large hands and feet
• Large arm girth
• High arm span to height ratio

The average height of Filipinos is 5’4 for male and 4’11 for female (disabled-world.com). I doubt if Filipinos have the other stated key physical features required for swimming to compensate for the height deficiency.

Nevertheless, Filipinos have been enthralled with basketball, even if there barely has been a chance to get international awards, because basketball has long been a political sport.

As an aside, here is a trivia or a graphic detailing the trail to Michael Phelps’ record 18 medals. (Zero Hedge)

In tennis: British Andy Murray vindicates Wimbledon loss by whipping record world champ ‘aging’ Roger Federer for gold (Washington Post).

Divergences: US Stock Markets Rally Amidst Weakening Market Breadth

Stockcharts.com regular weekly contributor Carl Swenlin of Decision Point thinks, as I do, that the recent rally of the S&P 500 has been poorly supported by market breadth.

Last night I wrote,

the strong Friday rally in the US stock markets may not be that convincing as market internals reveals of a “narrowing breadth” or declining participation of gains by key index issues. This means that the large gains posted by the S&P 500 have been mostly concentrated to a few index heavyweights.

Pardon me, I may be seen as guilty of confirmation bias (looking for views in support of my belief), but Mr. Swenlin’s post, as excerpted below, appears as somewhat a detailed validation to my claim above.

The “unhealthy rally” can be seen from Mr. Swenlin’s own constructed index "Blue Chip Top 10 Index”.

The index according to Mr. Swenlin (via stockcharts.com; bold original) is constructed

by calculating the daily change of the Index as being the daily average percent change of the securities in the Blue Chip Top 10 list. Stocks are tracked from the day after they enter the Top 10 list through the day they drop off the list.

The Top 10 Index is equally weighted, so theoretically one could only replicate the performance of the list with real money by reallocating an equal amount to each stock each day (and somehow avoid transaction fees in the process). More to the point, the Top 10 list are a good place to look for securities that will out-perform the market, but it will be impossible for you to duplicate the Index. You could also lose a ton of money if you are long these top ranked securities during an extended market decline.

Mr. Swenlin concludes:

In spite of upward movement of the SPX, the Blue Chip Top 10 Index tells us that the leadership of the market has been rotating too rapidly, which suggests confusion and weakness. By the time a stock reaches the Top 10, it loses momentum and drops right back out again. This is evidence that for a long time the internal condition of the market has been turbulent and confusing, in spite of generally rising market prices.

In contrast to my expectations, it’s even surprising to see that other stockcharts.com contributors as having an antsy outlook, because like Mr. Swenlin, they also have taken note of others signs of divergences between the performance of the US major bellwether S&P 500 and other indices (e.g. Russell 2000 vis-à-vis S&P 500: See Tom Baley).

Such murky outlook are simply consequences of distortions from political talk therapy (verbal interventionism through Pavlov’s conditioning and or Central banking signaling channel) aimed at artificially propping up of markets—mostly by surreptitiously assailing short sellers.