Video: The Power of the Undervalued $10 Trillion Informal Economy

Author Robert Neuwirth of Stealth of Nations: The Global Rise of the Informal Economy makes a great talk at the TED anent the vastly underrated informal or shadow economy

The TED introduces Mr. Neuwirth for his "out-of-the-box" thinking, or as challenging

“the conventional thinking by examining the world's informal economy close up. To do so, he spent four years living and working with street vendors and gray marketers, to capture its scope, its vigor--and its lessons. He calls it “System D” and argues that it is not a hidden economy, but a very visible, growing, effective one, fostering entrepreneurship and representing 1.8 billion jobs worldwide.

Mises Institute’s Jeff Riggenbach quotes Mr. Neuwirth’s definition of the informal economy based on his book…

This "informal economy," he writes, "produces, cumulatively, a huge amount of wealth.… It is how much of the world survives, and how many people thrive." And he has a name for it: System D.

"System D," he quickly explains, “is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man (or woman) is a débrouillard(e) is to tell people how resourceful and ingenious he or she is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of 'l'economie de la débrouillardise.' Or, sweetened for street use, 'Systeme D.' Thisessentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself or DIY economy.

The video from TED Ideas Worth Spreading (hat tip Professor Mark Perry)

Some highlights:

-“Something like this is totally open, it’s right there for you to find. All of this is happening openly and above board there is nothing underground about it. It is our prejudgment that it is underground”

-Governments dislike this

-“We are all focused on the luxury economy” ($1.5 trillion per year)

-“It excludes two-third of the workers of the world, 1.8 billion people work in an economy that is unregulated and informal”

-It is where employment is

-It engenders a more egalitarian world

In reality, the so called “prejudgment” of the informal economy has been part of orchestrated government campaign propaganda to derogate them, for the simple reason that the existence of the informal economy diminishes the importance of the role of governments.

More significantly, the informal economy represents the stark account of government failure

As John Sullivan of the Huffington Post writes,

The informal sector -- those businesses and entrepreneurs who work outside of the formal market economy -- is huge and largely undocumented in most developing economies. Almost everywhere, the root cause is the same: cumbersome, unresponsive, unfair, and overwhelmingly status quo-driven bureaucracy. People simply cannot get through the wall of red tape or the maze of regulations to gain access to the formal economy.

Moreover, author Robert Neuwirth points to the survivorship bias by public of focusing on the “luxury” economy (euphemism for consumption economy) which has been much smaller than the informal economy.

Again this represents the indoctrination by the mouthpieces of government conduits particularly through mainstream media.

Take the Philippines, hardly any serious study dwells with the informal economy. Every news exaggerates on the contributions of OFWs to the economy whose remittances accounts about 10% more or less of the economy.

When it comes to the informal economy, even when we deal with them or see them daily as a fact of life, they become a vacuum in mainstream’s eyes

The following excerpt is an example of one distorted perspective relative to OFW’s contribution to property development, the Global Property guide writes,

Overseas Filipinos’ remittances are powering the low-end to mid-range residential property market. They are snapping up housing projects and mid-scale subdivisions in regions near Metro Manila such as Cavite, Batangas and Laguna Provinces, while the expansion of the upper residential market, including the luxury market, is due to increased housing demand from BPO employees and expatriates, according to the World Bank.

Overseas Filipino Workers (OFW).account for around 17% to 18% of residential sales of Ayala Land, one of the country’s major developers. In the next five years Ayala Land President Antonio Aquino expects to double this, by branching out to the affordable and low-end market segment.

If OFWs account for say 20% of the housing or property demand, so what happened to the 80%? Which is mathematically bigger 20% or 80%? Since when has 20% become a dominant factor?

Let me add that OFWs also contributes to the informal economy, that is if the recipient families engage in unregulated or untaxed commerce.

This is why I have been repeatedly pointing out that for a country, whom according to mainstream has supposedly been living in Third World and has been allegedly 'poor', the Philippines hosts three of the largest malls in the world (Forbes 2008). Yet these malls, have not been like those ghost malls in China, as they have near full occupancy (which means profitable retail enterprises)

Further, the thrust of mall development in the Philippines has been spreading to the rural area which I recently argued, as suggesting of the deepening role of decentralization and of signs of the plateauing or the reversal of urbanization.

All these can HARDLY be supported by consumption spending by OFWs alone (or even if you add exports, which has been the favorite source of Keynesian influenced media).

The fact is that the informal economy has far been a larger contributor to the Philippines’ economic growth than has been projected.

Remember since the informal economy has been largely undocumented thus statistical estimates will bear significant errors.

Despite the survivalship bias practiced by the mainstream, Mr. Neuwirth’s putting into perspective of the real state and of the potentials of the informal economy appears to have been indirectly acknowledged by the World Bank,

the shadow economy has reached a remarkably large size with a weighted (unweighted) average value of 17.2 (33.1)% of official GDP. However, equally important is the clear negative trend of the size of the shadow economy over time. The unweighted average size of the 162 countries decreased from 34.0% of official GDP in 1999 to 31.0% in 2007; for the 21 transition countries from 36.9% in 1999 to 32.6% in 2007.

While the World Bank says the trend has been slowing, this has, I think, has mostly been a result of recent trends of globalization and economic freedom which tend to increase participation of the some erstwhile segments of the informal sector to the formal sector.

But such dynamics should not be construed as past performance determining future outcome. If the informal or shadow economy has signified as the public’s response to the politicization of the markets, then increased politicization means the tendency to shift economic activities towards the informal sector.

A quote from this Forbes article nails it…

“These are not really people oppressed by poverty,” says writer Stewart Brand. “They are getting out of poverty as fast as they can.” This isn’t to say that cellphones are about to save the world. But they have become the tool of choice for people who are determined to save themselves.

The informal economy, thereby represents free trade in motion and has been about people’s natural recourse to survival.

As the distinguished Austrian economist Percy Greaves Jr. once said,

For men, life is a series of choices by which we seek to exchange something we have for something we prefer. We know what we prefer. No other man or bureaucrat is capable of telling us what we prefer. Our preferences are our values. They provide us with a compass by which we steer all our purposeful actions. Because few people fully understand this, we have some serious economic problems…

Anything that raises cost or hinders the free and voluntary transactions of the market place must keep human satisfactions from reaching their highest potential. Today the greatest obstructions to the attainment of higher human satisfactions are the well-meaning but futile political interferences with the mutually beneficial transactions of a free market economy.

So any obstacles placed against activities which facilitates people’s survival will intuitively lead to the informal economy.

This is common sense.

Unfortunately common sense has been unavailable to politically brainwashed mindsets.

Video: Adam Smith on the Folly of Central Planning (Man of System)

In the following short video, Yeshiva University Professor James R. Otteson explains how Adam Smith assailed the idea of the "Man of System" or the folly of central planning.

Here is a prologue from LearnLiberty.org (again Thanks to Tim Hedberg)

How do you like being told what to do? If someone tells you to do something you find enjoyable or fulfilling, you may not mind. What if you are told to do something contrary to what you would choose for yourself? What if the government was the one telling you to do it? Adam Smith, the philosopher and father of economics, talks about a "man of system," a central planner who believes he can orchestrate the lives of others, like chess pieces that can be moved at will. As Professor James R. Otteson illustrates, society suffers when the man of system attempts to force his desires on the lives of individuals in ways that contradict their own desires. According to Smith, people are not chess pieces to be moved on a board; they are living and thinking and have their own wills. Individuals pursuing their own desires will constantly be in conflict with the desires of any central planner.

Here is Adam Smith excerpted from the Theory of Moral Sentiments

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

Since individuals are fundamentally unique (have different values, preferences, biases, cultural, spiritual or educational orientation, level and specificity of knowledge, and etc...) and have competing interests, this only means that the "principle of motion" will always be "of its own" or different from that envisioned by the man of the system.

Video: Jim Rogers is Very Worried About 2013

The legendary investor Jim Rogers recently interviewed by the Reuters. (courtesy of JimRogersChannel).

Some interesting highlights:

-EU rescue will “absolutely not” work.
-I’m very worried about 2013, more worried about EU in 2014
-I’m worried about "everybody" in 2013
-US has recession every 4-6 years; 2013 is after elections and between 4-6 years, so US will have a slowdown on 2013
-Next time there will be a US slowdown, the problem will be a whole lot worst
-Recession is coming and it’s gonna be worse
-Raising taxes will make things worst, US needs to cut spending “with a chainsaw”.
-US should be cutting taxes and spending
-China has been trying to slowdown the economy for three years; by design, by purpose
-Problems in US and America in 2013: When two of the world’s largest economy is having problems, everyone will get affected
-I don’t know anything "safe"
-Generally short stocks, long commodities.
-Owns Swiss franc, Japanese yen and Chinese yuan
-Interested in agriculture
-Owns gold and would buy more gold when prices fall
-Can’t "conceive" of the current prices of technology stocks
-"Most exciting thing I know is Myanmar" (like China in 1979)
-North Korea is going to merge with South Korea in next 5 years.

Jim Rogers seems in the same camp of Dr. Marc Faber. Dr. Faber sees 100% chance of a global recession in 2013 and even a potential market crash ala 1987.

Public Work Failure: US Stadiums Burn $4 Billion

Devotees of public work (infrastructure) spending, who see such measures as necessity to lift statistical economic growth, should learn from the experience of US taxpayer funded stadium spending binges.

From Bloomberg,

New York Giants fans will cheer on their team against the Dallas Cowboys at tonight’s National Football League opener in New Jersey. At tax time, they’ll help pay for the opponents’ $1.2 billion home field in Texas.

That’s because the 80,000-seat Cowboys Stadium was built partly using tax-free borrowing by the City of Arlington. The resulting subsidy comes out of the pockets of every American taxpayer, including Giants fans. The money doesn’t go directly to the Cowboys’ billionaire owner Jerry Jones. Rather, it lowers the cost of financing, giving his team the highest revenue in the NFL and making it the league’s most-valuable franchise.

“It’s part of the corruption of the federal tax system,” said James Runzheimer, 67, an Arlington lawyer who led opponents of public borrowing for the structure known locally as “Jerry’s World.” “It’s use of government funds to subsidize activity that the private sector can finance on its own.”

Jones is one of dozens of wealthy owners whose big-league teams benefit from millions of dollars in taxpayer subsidies.Michael Jordan’s Charlotte, North Carolina, Bobcats basketball team plays in a municipal bond-financed stadium, the Time Warner Cable Arena, where the Democratic Party is meeting this week. The Republicans last week used Florida’s Tampa Bay Times Forum, also financed with tax-exempt debt. It is the home of hockey’s Lightning, owned by hedge-fund manager Jeffrey Vinik. None of the owners who responded would comment.

$4 Billion

Tax exemptions on interest paid by muni bonds that were issued for sports structures cost the U.S. Treasury $146 million a year, based on data compiled by Bloomberg on 2,700 securities. Over the life of the $17 billion of exempt debt issued to build stadiums since 1986, the last of which matures in 2047, taxpayer subsidies to bondholders will total $4 billion, the data show.

Those estimates are based on what the Treasury could have collected on interest from the same amount of taxable bonds sold at the same time to investors in the 25 percent income-tax bracket, the rate many government agencies assume. In fact, more than half the owners of tax-exempt bonds pay top rates of at least 30 percent, according to the Congressional Budget Office. So they save even more on their income taxes, a system that U.S. lawmakers of both parties and President Barack Obama have described as inefficient and unfair.

There hardly are major nuances when government undertake projects in the form of Public-Private Partnership, monopolies or public outsourcing to private contractors, or other forms of concessions to the politically favored private enterprises. The incentives guiding private enterprises will be directed towards attaining political objectives of the political masters rather than servicing the consumer.

Importantly, not only have these been a waste on taxpayers money, they become sources of rent seeking, corruption and other unethical relationships.

They have even become sources of public disasters.

And as I recently pointed out, the proposed 407 billion pesos spending by the Philippine government on infrastructure has been seen by media as signs of progress. They see this, under the impression that the incumbent government has been “clean” enough to undertake them.

All these signify a grand delusion. Populism ignores economic reality.

The public fails to understand that NO government have the requisite knowledge of the value scales and time preferences of individuals or of the the knowledge of the particular circumstances of time and place (Hayek) from which serves as the foundation of economic activities. Economic activities basically represent a bottom up phenomenon.

Second, government projects are likely designed under the influences of vested interest groups or cronies or if not by bureaucrats who will be designating them to the same groups for implementation.

Third, the private sector collaborators will benefit from the exposure of taxpayers money through guarantees or subsidies.

In many instances, both parties will find ways to game the system.

Moreover, money spent on public works focuses on short term political goals to promote media popular unproductive employment (to generate approval ratings and votes) at the expense of productive enterprises which provides real productive jobs.

As the great Henry Hazlitt wrote,

For then the usefulness of the project itself, as we have seen, inevitably becomes a subordinate consideration. Moreover, the more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment. Under such circumstances it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.

Of course, all these leads to higher taxes and to price inflation (if these debts will be funded by politically directed credit expansion).

Finally, as shown by the US Stadium experience, politicization of resource allocation leads not only to inefficiency, wastage, but to immoral relationships between officials and their private sector lackeys.

The impression where government will be “virtuous” enough to undertake “honest” public work spending has been founded on utopian fantasies.

Validating Bastiat: France’s Hollande Scales Back on Wealthy Taxes

Perhaps in the realization that many of the wealthy French, whom have been targeted by the President François Hollande’s “soak the rich” policies, have been exploring overseas refuge, the French government appears to have signaled the softening, if not a subtle backtracking of the proposed repressive taxes on the wealthy.

These mostly through the insertions of many loopholes that essentially enervates the proposed populist statute.

From the CNBC,

News reports in France today say the tax has been tweaked so that it will only effect 1,000 households. And that’s if it passes – which remains a big question.

The French newspapers Les Echos and Le Figaro both say today that the tax being considered would only be levied on income of more than 2 million euros. That’s double the original cut-off.

There may also be other changes. Rather than applying to all income, the tax may only apply to ordinary income from salaries. If investment income or capital gains is excluded, the wealthy French who make their money from investments need not worry.

The tax also makes special provisions for athletes and artists, carves out social security taxes and ... you get the idea. Pretty soon, it’s not anything like a 75 percent tax on million-plus earners.

Considering the precarious state of the French fiscal conditions, it would amount to absurdity for politicians and their imbecilic followers to think that tax increases by in itself would solve the looming risks of a debt crisis. The idea that people will behave like automatons, and fawningly submit to edict, is sheer fantasy.

chart from tradingeconomics.com

Taxes are always political.

They are instruments to what the great French classical liberal Frederic Bastiat called as “Government is the great fiction through which everybody endeavors to live at the expense of everybody else”

Yet people’s subjective take on taxes will mean a change on incentives to save, produce and consume or economic activities, as well as changes, in the approach towards treatment of taxation.

At certain levels, people may find taxes to become an unbearable burden and thus would work to preserve on their savings through circumventing actions, such as the employment of accountants and tax lawyers to exploit on loopholes, seek refuge elsewhere, bribe authorities, influence policies or even incite or join revolutions.

The inherent structural self-contradiction through promises of undeliverable benefits from the limitations of resources the state can generate from taxation, as wonderfully explained by the great Frederic Bastiat [Government, 1848] (bold added)

There is the public on one side, Government on the other, considered as two distinct beings; the latter bound to bestow upon the former, and the former having the right to claim from the latter, all imaginable human benefits. What will be the consequence?

In fact, Government is not maimed, and cannot be so. It has two hands - one to receive and the other to give; in other words, it has a rough hand and a smooth one. The activity of the second necessarily subordinate to the activity of the first. Strictly, Government may take and not restore. This is evident, and may be explained by the porous and absorbing nature of its hands, which always retain a part, and sometimes the whole, of what they touch. But the thing that never was seen, and never will be seen or conceived, is, that Government can restore to the public more than it has taken from it. It is therefore ridiculous for us to appear before it in the humble attitude of beggars. It is radically impossible for it to confer a particular benefit upon any one of the individualities which constitute the community, without inflicting a greater injury upon the community as a whole.

Our requisitions, therefore, place it in a dilemma. If it refuses to grant the requests made to it, it is accused of weakness, ill-will, and incapacity. If it endeavors to grant them, it is obliged to load the people with fresh taxes - to do more harm than good, and to bring upon itself from another quarter the general displeasure.

Thus, the public has two hopes, and Government makes two promises - many benefits and no taxes. Hopes and promises, which, being contradictory, can never be realized.

Mr. Bastiat also shows that unrealizable political promises leads towards unsustainable debt and bankruptcy…

These two promises are for ever clashing with each other; it cannot be otherwise. To live upon credit, which is the same as exhausting the future, is certainly a present means of reconciling them: an attempt is made to do a little good now, at the expense of a great deal of harm in future. But such proceedings call forth the spectre of bankruptcy, which puts an end to credit.

…as well as, the perpetual search for the elusive “something from nothing” elixir by the gullible public on promises made by politicians.

What is to be done then? Why, then, the new Government takes a bold step; it unites all its forces in order to maintain itself; it smothers opinion, has recourse to arbitrary measures, ridicules its former maxims, declares that it is impossible to conduct the administration except at the risk of being unpopular; in short, it proclaims itself governmental. And it is here that other candidates for popularity are waiting for it. They exhibit the same illusion, pass by the same way, obtain the same success, and are soon swallowed up in the same gulf.

Events in France and the Eurozone have simply been upholding Bastiat’s predictions, and mostly importantly, his classical liberal principles.

Video: Explaining The Tyranny of the Majority

Should majorities decide everything?

That's the question dealt by Duke University Professor Mike Munger in the following video at the LearnLiberty.org (thanks to Tim Hedberg for the video)

A synopsis from LearnLiberty.org

Under a democratic system of government, how is an individual protected from the tyranny of the majority? According to Professor Munger, democratic constitutions consist of two parts: one defining the limits within which decisions can be made democratically, and the other establishing the process by which decisions will be made. In the United States Constitution, the individual is protected from majority decisions. Professor Munger warns, however, that these protections are slowly being stripped away as American courts of law fail to recognize the limits of what can be decided by majority rule. Professor Munger uses the case of Kelo v. New London to illustrate the dangers of confusing majority rule with a democratic system.

It is important to note that the lessons from the above doesn't apply just to the US but has been universal through modern political institutions. For instance, Europe's unfolding crisis has substantially been influenced by the rule of the majority channeled through the populist welfare state.

In the Philippines, such dynamic has been evident through Pork Barrel "personality" based politics.

Yet all one has to do is to look at how media and politicians shapes public opinion. Even trivial events have been sensationalized to bring about political importance. Events are always projected to appeal to the majority's emotions subtly intended to mold and manipulate the public's sense of social morality e.g. collectivism via "selfless" nationalism "para sa bayan", which have been and will be used as basis for legal mandates premised on the rule of the majority.

The tyranny of the majority as the great Professor Ludwig von Mises warned, (Theory and History p. 66-67)

If public opinion is ultimately responsible for the structure of government, it is also the agency that determines whether there is freedom or bondage. There is virtually only one factor that has the power to make people unfree—tyrannical public opinion. The struggle for freedom is ultimately not resistance to autocrats or oligarchs but resistance to the despotism of public opinion. It is not the struggle of the many against the few but of minorities—sometimes of a minority of but one man—against the majority. The worst and most dangerous form of absolutist rule is that of an intolerant majority

In short, the ethical tenet embraced by democratic politics has been "Thou shalt not steal, except by majority vote". People essentially lose their "rationality" when they become overwhelmed by Groupthink dynamics applied to politics.

Importantly, the tyranny of the majority is just but one phase of the harsh political reality. Democratic politics has largely been about the rule of the political minority who uses and manipulates the majority as an instrument to acquire their self interested goals.

So democracy is essentially an illusion where the majority rules but through the palms of the privileged politically mandated minority.

China Joins Stimulus Bandwagon via Massive Infrastructure Spending

China’s government appear to have coordinated their moves with the ECB; they suddenly joined the stimulus bandwagon by announcing massive infrastructure spending programs over the past two days.

Curiously, the program did not specify the amount involved.

From Bloomberg,

China approved plans to build 2,018 kilometers (1,254 miles) of roads, spurring the biggest stock market rally in almost three years on signs the government is stepping up stimulus efforts to revive economic growth.

The government also backed nine sewage-treatment plants, five port and warehouse projects, and two waterway upgrades, according to statements on the website of the National Development and Reform Commission yesterday. No investment amounts were given.

The Shanghai Composite Index jumped as much as 4.5 percent, led by construction stocks, on speculation infrastructure spending will help bolster growth that’s cooled to the slowest pace in three years. The announcements came a day after approvals for subway projects in 18 cities, an earlier rise in the railway-building budget and increases in land supplies in cities including Guangzhou, Hangzhou, Beijing and Shanghai.

Gosh governments truly love the stock market.

chart from Bloomberg

Substantial gains from the combined ECB-China stimulus have not been limited to China but through most of Asia.

And “unlimited” or “open ended” options or “unspecified amount” seem to be the du jour condition attached to the rescue mechanism offered by governments.

It’s good news for stocks for the meantime.

Yet it’s a sign of a political desperation. Desperate measures may even lead to more desperate times.

Updated to add:

The Reuters say that China's latest infrastructure spending program tallies to about 1 trillion yuan ($157 billion), this is far short to, or more than a quarter of the 2008-2009 package of $586 billion

ECB’s Mario Draghi Unleashes “Unlimited Bond Buying” Bazooka, Fed’s Ben Bernanke Next?

So finally, the ECB via president Mario Draghi unleashed what seems as the penultimate “shock and awe” rescue mechanism for the EU: the supposed “unlimited but sterilized” buying of bonds.

From Bloomberg, (bold added)

European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.

The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt after the ECB held its benchmark rate at a record low of 0.75 percent. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”

Draghi has staked his credibility on the bond plan, which is the most ambitious yet in the central bank’s fight to wrest back control of rates in a fragmented economy and save the euro after nearly three years of turmoil. Now it’s up to governments in Spain and Italy to trigger ECB bond purchases by requesting aid from Europe’s rescue fund and signing up to conditions

“Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial-market circumstances and risks to financial stability exist -- with strict and effective conditionality,” Draghi said. The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, he added…

The ECB’s program, called Outright Monetary Transactions, will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length, Draghi said. Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, and the ECB will not have seniority, he said.

Note that ECB bond purchases have not truly been “unlimited” as they supposedly conditional to the requested “aid” by crisis stricken nations from the ESM and will be “fully” sterilized. Aside from conditionality on reforms.

As usual political terminologies matter.

The idea of full sterilization means that money will be drained from the other sectors and will allegedly be neutral. This could be the reason behind the underperformance and the tepid gains of gold and other commodities as oil and copper despite the ECB's opening of the inflation spigot.

Moreover, perhaps too, the ECB assumes that need for bond buying may be checked or will have the desired effect of providing carrot and stick approach for governments to take appropriate corrective fiscal measures.

Unfortunately this won’t likely be the case.

Not only is the bond buying going to be an incentive for delaying the necessary reforms for the PIGS (out of moral hazard dilemma), but the ECB’s sterilization activities will likely be also restricted.

University of Chicago Professor John Cochrane at the Bloomberg explains…...

If past were to rhyme, in November of last year, the ECB has missed sterilizing her purchases.

So if the ECBs action to sterilize are encumbered, then this means either that the ECBs buying will have short run effects, or that designated conditions represents smoke and mirrors which may pave way for the massive unsterilized actions or monetary inflation.

Nonetheless, I think the ECB’s unlimited option has been coordinated with the US Federal Reserve.

Just a few days back, four Federal Reserve presidents discussed of the same open-ended buying option.

From another Bloomberg article,

Federal Reserve Chairman Ben S. Bernanke says the U.S. economy is “far from satisfactory.” His colleagues are moving to embrace policies that will stay in place until he’s satisfied.

Four Fed presidents have come out in favor of an open-ended strategy for bond buying, with three calling for the program to begin now. Rather than specify a fixed amount of bonds to purchase by a certain date, such a strategy would leave the Fed able to announce a pace of purchases that it could adjust as the economy gets closer to Bernanke’s goals.

“You would be able to react to the incoming data in an incremental way and not be in a situation where you have to either drop the bomb or do nothing,” St. Louis Fed President James Bullard said in an interview last week during the Fed’s annual monetary policy symposium in Jackson Hole, Wyoming.

Bernanke used the forum to defend unorthodox policies such as bond purchases and made the case for further action to reduce an unemployment rate that he called a “grave concern.” Stocks and Treasuries jumped after the speech as investors increased bets the Fed will opt for further easing as soon as its next meeting Sept. 12-13.

I am inclined to the view that the FED will move to compliment the ECB for political reasons. I think that Bernanke’s tenure depends on President Obama’s re-election and thus would work to ensure of policies that will be “stock market friendly”

And as I previously said, the combined actions by central banks will eventually lead to deepening stagflation manifested through high consumer prices and the real risks of a food crisis that amplifies risks of social instability, as well as, overseas bubbles.

Central bank fixes has only short term narcotic effects, that risks long term unintended consequences.

As the great Professor Ludwig von Mises presciently warned,

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

For now, the risk ON “orgy of speculation” environment may have been activated based on a partial fulfilment of market’s addiction for central bank steroids.

But given the vagueness of conditionalities from the ECB program and of the response by other central bankers to real economic events, the sustainability of such risk ON conditions remains unclear.

We are approaching the Mises moment.

Has Communism been Shaped by Karl Marx’s Self-hatred?

Not to be accused of Tu Quoque “you too” fallacy, experience plays an important part in influencing our outlook and personal philosophy. Has self-hatred been the cornerstone of Karl Marx’s political philosophy known as Communism?

Here is an excerpt of the narration by Murray N. Rothbard of Karl Marx’s path to Marxism, (bold added)

Also prefiguring the man was a trait that Marx developed early in his youth and never relinquished: a shameless sponging on friends and relatives. Already in early 1837, Heinrich Marx, castigating his son Karl's wanton spending of the money of others, wrote to him that "on one point … you have wisely found fit to observe an aristocratic silence; I am referring to the paltry matter of money." Indeed, Marx took money from any source available: his father, mother, and throughout his adult life, his long-suffering friend and abject disciple, Friedrich Engels, all of whom fueled Marx's capacity for spending money like water.

An insatiable spender of other people's money, Marx continually complained about a shortage of financial means. While sponging on Engels, Marx perpetually complained to his friend that his largess was never enough. Thus, in 1868, Marx insisted that he could not make do on an annual income of less than £400-£500, a phenomenal sum considering that the upper tenth of Englishmen in that period were earning an average income of only £72 a year. Indeed, so profligate was Marx that he quickly ran through an inheritance from a German follower of £824 in 1864, as well as a gift of £350 from Engels in the same year.

In short, Marx was able to run through the munificent sum of almost £1200 in two years, and two years later accept another gift of £210 from Engels to pay off his newly accumulated debts. Finally, in 1868, Engels sold his share of the family cotton mill and settled upon Marx an annual "pension" of £350 from then on. Yet Marx's continual complaints about money did not abate.

As in the case of many other spongers and cadgers throughout history, Karl Marx affected a hatred and contempt for the very material resource he was so anxious to cadge and use so recklessly. The difference is that Marx created an entire philosophy around his own corrupt attitudes toward money. Man, he thundered, was in the grip of the "fetishism" of money. The problem was the existence of this evil thing, not the voluntarily adopted attitudes of some people toward it. Money Marx reviled as "the pander between … human life and the means of sustenance," the "universal whore." The Utopia of communism was a society where this scourge, money, would be abolished.

Karl Marx, the self-proclaimed enemy of the exploitation of man by man, not only exploited his devoted friend Friedrich Engels financially, but also psychologically. Thus, only three months after Marx's wife, Jenny von Westphalen, gave birth to his daughter Franziska in March 1851, their live-in maid, Helene ("Lenchen") Demuth, whom Marx had "inherited" from Jenny's aristocratic family, also gave birth to Marx's illegitimate son, Henry Frederick. Desperately anxious to keep up haute bourgeois conventions and to hold his marriage together, Karl never acknowledged his son, and, instead, persuaded Engels, a notorious womanizer, to proclaim the baby as his own. Both Marx and Engels treated the hapless Freddy extremely badly, Engels's presumed resentment at being so used providing him a rather better excuse. Marx boarded Freddy out continually, and never allowed him to visit his mother. As Fritz Raddatz, a biographer of Marx, declared, "if Henry Frederick Demuth was Karl Marx's son, the new mankind's Preacher lived an almost lifelong lie, and scorned, humiliated, and disowned his only surviving son." Engels, of course, picked up the tab for Freddy's education. Freddy was trained, however, to take his place in the working class, far from the lifestyle of his natural father, the quasi-aristocratic leader of the world's downtrodden revolutionary proletariat.

Marx's personal taste for the aristocracy was lifelong. As a young man, he attached himself to his neighbor, Jenny's father Baron Ludwig von Westphalen, and dedicated his doctoral thesis to the baron. Indeed, the snobbish proletarian communist always insisted that Jenny imprint "nee von Westphalen" on her calling card.

I suggest a read of the entire article which is rather short and includes Karl Marx’s supposed conversion to "militant atheism"

The point being; people who in good intentions believe that public welfare can be acquired through the collectivist route via communism or related socialist branches thereto, are in fact running contrary to their desires. A philosophy founded on seeming self-hatred or founded on base human instincts will not bring about prosperity but perdition through violence.

Proof of this has been the harrowing 20th century experiment where about 94 million people perished, according to the Black Book of Communism, out of the desire to achieve a utopian communist society. In other words, it took 94 million lives to prove a failed experiment and an unfulfilled utopia. Yet many are still out there preaching the same.

US Federal Reserve Policies Promotes Anti-Market Sentiment in Hong Kong

Like Singapore, I pointed out that incumbent politicians have used symptoms of current bubble (negative real interest rates) policies to impose populist measures which in reality represent gradualist trend towards interventionism. This applies to Hong Kong too.

From Bloomberg,

Hong Kong’s new leader is taking up the battle his predecessor failed to win, seeking to overcome record low mortgage rates and an influx of Chinese buyers to make housing in the world’s most expensive city more affordable.

Leung Chun-ying, the property surveyor who took over as the city’s chief executive in July, on Aug. 30 said he’ll boost the supply of homes and start drafting laws giving preference to locals over buyers from mainland China. He’s trying to cool prices that surged 85 percent since 2009 even as predecessor Donald Tsang raised minimum mortgage deposits, added taxes and increased land sales in a losing bid to stem the boom.

Like Tsang, Leung has had to tweak demand and supply through curbs and land releases rather than monetary policy as Hong Kong’s currency peg to the U.S. dollar pushes borrowing costs to a record low. Banks, including HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN), are charging homebuyers an average 2.17 percent, less than half that of six years ago, fueling demand along with the rising wealth of buyers from China’s mainland.

Hong Kong dollar has been pegged to US dollar via the currency board managed by the Hong Kong Monetary Authority. This means that US monetary policies has had significant influences to Hong Kong’s monetary environment which has mainly been vented through a local property boom.

Again from the same article,

U.S. Federal Reserve Chairman Ben Bernanke has pledged to keep interest rates low until at least 2014 and on Aug. 31 made the case for further easing to reduce unemployment in the world’s largest economy. The Hong Kong Monetary Authority keeps its lending rate tied to the Fed to maintain the currency’s peg to the U.S. dollar…

Tsang raised the minimum deposit for some mortgages three times since August 2010, with borrowers now having to put down 40 percent for home purchases of more than HK$7 million ($902,000). He also introduced an additional stamp duty on residential units sold within two years of purchase.

While transactions are down, prices are up. The value of new mortgages fell 42 percent to HK$98.1 billion in the first seven months of this year, while the number of homes sold dropped 22 percent, according to data from the HKMA and the Land Registry. Home prices have gained 12 percent this year, according to Centaline Property Agency Ltd.

BOC Hong Kong Holdings Ltd. (2388), the biggest Hong Kong-based lender, has risen 33 percent this year, the best performer in the 12-member Hang Seng Finance Index. Hang Seng Bank Ltd. (11) has the second best return in the index with 19 percent. The two lenders accounted for a combined 32 percent of the city’s mortgage market, according to mReferral Mortgage Services…

Hong Kong home prices are 65 percent higher than Tokyo’s, the world’s second-priciest place to buy a home, according to a study by Savills Plc (SVS) published last September that compares prices in 10 global cities including New York and London.

Hong Kong’s negative real rate regime has been very pronounced. (chart from Tradingeconomics.com)

Yet instead of dealing with disease, the new leadership will practically will apply the same process of the politicization of land sales and distribution that has not only been ineffective but has promoted charges of cronyism.

As I previously wrote,

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

The point is that not only has the easy money policies of the US Federal Reserve been blowing Hong Kong’s bubble cycles, at worst such policies have been gnawing at Hong Kong’s relative free market environment by whetting or stoking on populist anti-market sentiment and the promotion of the mixed economy-welfare state. In short, bubble policies function like a political Trojan horse for destabilization

Hong Kong authorities should deal with the US dollar peg rather than intervene in the marketplace. Perhaps they should consider the proposal, which I earlier noted here, by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA), who is also one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies. They could also consider Yuanization or using mainland currency by scrapping the Hong Kong dollar altogether.

By the way, price actions of Hong Kong’s Hang Seng Index seems ominous.

(chart from Bloomberg)

The bearish head and shoulder pattern may become a reality if Hong Kong’s domestic bubble will implode or if China will endure a recession-financial crisis or if a global recession happens. Incidentally, thanks to Ben Bernanke and his global central bank colleagues, all three factors are seemingly in play.

Quote of the Day: Fiscal Cliff: The Dangerous Idea of the Permanence of Low Interest Rates

The current national debt is about $16 trillion. This is just the funded portion — the unfunded liabilities of the Treasury, such as Social Security and Medicare, and off-budget items, such as guaranteed mortgages and student loans, loom much larger. Our recent era of unprecedented fiscal irresponsibility means we are throwing an additional $1 trillion or more on the pile every year. The only reason this staggering debt load hasn’t crushed us already is that the Treasury has been able to service it through historically low interest rates (now below 2 percent). These easy terms keep debt-service payments to a relatively manageable $300 billion per year.

On the current trajectory, the national debt likely will hit $20 trillion in a few years. If, by that time, interest rates were to return to 5 percent (a low rate by postwar standards) interest payments on the debt could run around $1 trillion per year. Such a sum would represent almost 40 percent of total current federal revenues and likely would constitute the single largest line item in the federal budget. A balance sheet so constructed would create an immediate fiscal crisis in the United States.

In addition to making the debt service unmanageable, a return to normal rates of interest would depress the kind of low-rate-dependent economic activity that characterizes our current economy. A slowing economy would cut down on tax revenue and trigger increased government spending to beleaguered public sectors. Higher rates on government debt also would push up mortgage rates, thereby putting renewed downward pressure on home prices and perhaps leading to another large wave of foreclosures. (My guess is that losses on government-insured mortgages alone could add several hundred billion dollars more to annual budget deficits.) When all of these factors are taken into account, I think annual deficits could quickly approach, and then exceed, $3 trillion. This would double the amount of debt we need to sell annually.

Currently, foreign creditors buy more than half of all U.S. debt issuance. Most of these purchases are motivated by political reasons that are subject to change. The buyers, who legitimately can be described as “investors,” extend credit to the United States at such generous terms largely because of America’s size, power and perceived economic unassailability. If those perceptions change, 5 percent could quickly become a floor, not a ceiling, for interest rates. Given that America’s balance sheet bears more than a casual resemblance to those of both Spain and Italy, it should not be radical to assume that one day we will be asked to pay the same amount as they do for the money we borrow. The brutal truth is that 6 percent or 7 percent interest rates will force the government to either slash federal spending across the board (including cuts to politically sensitive entitlements), raise middle-class taxes significantly, default on the debt, or hit everyone with the sustained impact of high inflation. Now that’s a real fiscal cliff.

By foolishly borrowing so heavily when interest rates are low, our government is driving us toward this cliff with its eyes firmly glued to the rearview mirror. Most economists downplay debt-servicing concerns with assertions that we have entered a new era of permanently low interest rates. This is a dangerously naive idea.

This is from Peter Schiff at the Washington Times.

My impression is that once a recession becomes a reality, the likely actions by the US government will be to undertake bailouts of the politically favored institutions similar to 2008.

Such rescue efforts will easily bring to fulfillment Mr. Schiff’s $20 trillion debt target in no time.

Eventually the US will default directly (most likely path; read Gary North and Jeffrey Hummel) or attempt to default first indirectly through monetary inflation.

Keynesians, who look to the Great Depression and the Japan lost decade as model, fails to see or are blinded to the fact that today’s problem has not only been a banking based financial crisis but compounded by sovereign debt crisis which has been unprecedented.

The root of the problem hasn't been the lack of aggregate demand but from the sustained consumption of capital which mostly has been burned through serial political rescues, malinvestments from easy money policies and worsened by unsustainable welfare warfare systems.

World Competitiveness: Philippines Jumps to 65th Place

The World Economic Forum (WEF) recently released, The Global Competitiveness Report for 2012-2013 which attempts to measure relative competitiveness among 144 nations that provides “insight into the drivers of their productivity and prosperity”

It is important to highlight that the competitive ranking have been defined by the WEF as

as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to sustain growth.

Here is the roster of the top 30 most competitive nations.

Notice that the WEF says the ranking is about productivity, and not about “cheap labor”.

If competitiveness is about the “cheap labor” then the Philippines and Africa will be on top of the list. Unfortunately mainstream demagoguery has obstinately been focused on this, so as to justify the inflationist-interventionists doctrines.

Also notice that the most competitive nations have been developed economies. The GCI rankings have been closely aligned with the list of most economically free nations (Heritage Foundation: 2012 Index of Economic Freedom).

It is important to note that the above rankings are comparative or relatively based. This implies that changes in standings may not necessarily translate to advancement or deterioration in domestic policies but about quantified comparative measures.

First the good news.

According to the report, the Philippines leapt from 75^th to 65^th

Yet despite the huge gains, which obviously will be construed and used by the mainstream and political forces to grab credit as “achievement” for the administration, the Philippines trails vastly behind the ASEAN peers.

Curiously Africa’s Rwanda has even been ahead.

The bad news is that despite the remarkable gains, the gap in the per capita GDP figures has been widening relative to our developing Asian peers.

This means that yes the Philippines has shown material progress but such gains has not been enough to cope up with the scale of advancement in the region.

Lastly, the reason for the lag in productivity has been about over politicization of the domestic economy which has been manifested through a bloated bureaucracy, lack of infrastructure (which has been politically determined—see below), tax and labor regulations and high tax rates.

Of course corruption has still been the biggest deterrent to business. But, in truth, corruption signifies as symptoms of interventionism expressed through arbitrary policies and regulations, the bureaucracy, welfare-warfare state and state determined allocation of resources.

The informal economy, which is also a symptom of interventionism, takes up a huge chunk of economic activities. This is a clear manifestation of the failures of interventionism and of the incumbent political institutions.

Ironically the salutary conditions of the shadow economy could be suggestive of the alternative positive aspects of corruption, where people pay bribe money to authorities in order to do productive endeavors. This in spite of the major negative attribution on the survey.

The burgeoning informal gold mining sector, which comes mostly in response to recently imposed higher taxes should serve as a wonderful anecdotal example.

Yet the media and the social desirability bias afflicted pop culture cheers about the Php 407 billion proposed infrastructure or so-called “investment” spending without the realization that productive money will be diverted to the pockets of cronies (who will get the contracts), bureaucrats (who will pick the winners) and politicians (which most likely will be the source of electoral finance for the upcoming 2013 national elections).

chart from US Global Investors

All these supposed stimulus will only translate to greater inequality (enrichment of the political class and of the politically connected enterprises), more debts, higher taxes (for the middle class and the politically unconnected), more PRICE inflation (which will be blamed on the private sector) and importantly adds to the ballooning bubble dynamics driven by current easy money policies.

These so-called public work policies are a chimera, as the great Professor Ludwig von Mises explained.

The fundamental error of the interventionists consists in the fact that they ignore the shortage of capital goods. In their eyes the depression is merely caused by a mysterious lack of the people's propensity both to consume and to invest. While the only real problem is to produce more and to consume less in order to increase the stock of capital goods available, the interventionists want to increase both consumption and investment. They want the government to embark upon projects which are unprofitable precisely because the factors of production needed for their execution must be withdrawn from other lines of employment in which they would fulfill wants the satisfaction of which the consumers consider more urgent. They do not realize that such public works must considerably intensify the real evil, the shortage of capital goods.

For media and the dumb downed (“madlang people”) electorate which sees this as good news hardly understands that effects of so-called government stimulus would be based on the illusions of statistics [mainstream economic statistics are based on Keynesian formula constructs] and not from real growth.

Thus, temporary good news will eventually become long term bad news.

However, despite such realities, the relatively better competitive standings today will likely continue to improve. Again, this is hardly because of internal ‘business friendly’ improvements but because of positional standings which will mostly be determined by the political responses to the unfolding crisis abroad.

Again the WEF’s GCI

The global economy faces a number of significant and interrelated challenges that could hamper a genuine upturn after an economic crisis half a decade long in much of the world, especially in the most advanced economies. The persisting financial difficulties in the periphery of the euro zone have led to a long-lasting and unresolved sovereign debt crisis that has now reached the boiling point. The possibility of Greece and perhaps other countries leaving the euro is now a distinct prospect, with potentially devastating consequences for the region and beyond. This development is coupled with the risk of a weak recovery in several other advanced economies outside of Europe—notably in the United States, where political gridlock on fiscal tightening could dampen the growth outlook. Furthermore, given the expected slowdown in economic growth in China, India, and other emerging markets, reinforced by a potential decline in global trade and volatile capital flows, it is not clear which regions can drive growth and employment creation in the short to medium term

The big picture gives us an objective dimension of the real developments rather than fall for trap to political demagoguery

Updated to add:

I was unaware when I wrote a few hours back that the competitiveness issue accounts for today's main headline story.

Quote of the Day: Politics Drives Social Divisions

The pathology of mass democracy translates into ugly social divisions. Great liberal thinkers from Bastiat to Mises have demonstrated that all classes have nothing to fear from one another in a market economy. Freedom of exchange results in the harmonization of interests. Politics, on the other hand, creates fissures that need not exist. Every minor issue becomes blown up into a Manichean struggle. This happens especially over relatively minor issues, because these are the only ones over which the mainstream politicians evince even a rhetorical disagreement. The truly foundational issues of our time—mass confiscation of wealth, IRS despotism, mass imprisonment, militarized policing at home and unending warfare abroad—unite both major parties behind an establishment agenda. They bicker instead over relatively small matters, each one of which becomes amplified into the greatest battle in the history of the world at election time.

This is from Anthony Gregory at the Independent Institute writing on US democracy.

This applies to the social democracy of the Philippines as well. Simply observe the scale of priorities from the way domestic media frames events. Or even the dominant pattern of comments on social media. Trivial matters are frequently moralized and sensationalized which becomes part of the national sports called politics. It’s pop culture that has been little different from the way gossip and slapstick entertainment have been aired on prime time. It’s also about Social Desirability Bias or the need to be seen favorably by others or status signaling. Yet most don’t realize that this obsession for the superficial makes us vulnerable to political manipulation. Politics does foster social divisions

Spain’s Capital Flight Intensifies

In Spain, political solutions have been prompting for a deepening crisis.

From the New York Times,

“The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”

Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout. But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain.

In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.

The deposit outflow in Spain reflects a broader capital flight problem that is by far the most serious in the euro zone. According to a recent research note from Nomura, capital departing the country equaled a startling 50 percent of gross domestic product over the past three months — driven largely by foreigners unloading stocks and bonds but also by Spaniards transferring their savings to foreign banks.

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight.

More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent.

According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted. That is a 25 percent increase from a year earlier.

“No doubt there is a little bit of panic,” said José García Montalvo, an economist at Pompeu Fabra University in Barcelona. “The wealthy people have already taken their money out. Now it’s the professionals and midrange people who are moving their money to Germany and London. The mood is very, very bad.”

It is possible that the outlook could improve if the European Central Bank’s governing council, which meets Thursday, signals a plan to help shore up the finances of Spain and other euro zone laggards by intervening in the bond markets.

Spain’s capital flight dilemma has mainly been symptoms from fears of devaluation (or rampant inflationism) from the possible reinstitution of the peseta. Such actions to preserve savings flies in the face of those who argue for the devaluation snake oil fixes.

And where “members of its educated and entrepreneurial elite” shifts money out of the system, Spain’s economic recovery will remain dim as productive capital seek refuge or allocate savings elsewhere.

Moreover, the political solution of perpetual bailouts [“plan to help shore up the finances of Spain and other euro zone laggards by intervening in the bond markets”], accounts for as doing the same thing over and over and expecting different results, have only been intensifying the predicament

Yet the above account represents as another sign where ground economic activities have been moving in the opposite direction relative to the actions of financial markets.

Eventually reality will be priced in.

Contagion Risk: US Manufacturing Index Falls

The risks of a global recession have been increasing.

Even the US economy has been feeling the pressure.

From the Northern Trust,

The US Purchasing Managers’ Index (PMI) of the Institute of Supply Management edged down to 49.6 in August from 49.8 in July, the third consecutive monthly reading that is below 50. Readings below 50 denote a contraction in factory activity. Indexes tracking new orders (47.1 vs. 48.0 in July) and production (47.2 vs. 51.3 in July) declined in August. The new orders index stands at the lowest level since April 2009. In addition, the index measuring new export orders (47.0 vs. 46.5) continues to hover below the cutoff mark of 50 for the third straight month. The decline in new orders combined with increase in the inventories index (53.0 vs. 49.0 in July) bodes poorly as it reflects soft demand conditions. The gain in the price index (54.0 vs. 39.5 in July) points to the impact of higher energy prices. The overall tone of the US factory survey of August and below 50.0 readings of the PMI for three straight months raises expectations of additional monetary policy support at the close of the September 12-13 FOMC meeting.

A deepening slump will surely add to the justification for the US Federal Reserve to inflate. But this won’t necessarily mean that such programs will reverse the course of the present dynamics. The exactitude, particularly the quantity, of the coming FED program will matter a great deal.

Of course price inflation pressures have been existing amidst the slowdown. Proof of this that gas prices in the US touched three month highs during the labor day.

So Fed policies will only complicate matters.

Be careful out there.