Tom Woods: Why the Greenbackers Are Wrong

One of the strident critics of the US Federal Reserve have been the Greenbackers. 

Greenbackers represent a left wing American political party backed by the ideology which embraces inflationism (hence “greenbacks” in reference to non-gold backed paper money) and who are opposed to the gold standard due to its deflationary outcome. Greenbackers desire the engagement of more money printing as a solution to social ills.

One of the Greenback movement’s most vocal spokesperson Atty. Ellen Brown has been repeatedly critiqued by Austrian economist Gary North.

At the 2013 Austrian Economic Research Conference, Austrian economist Thomas Woods points out of the basic economic errors of the Greenback’s ideology by dealing with money basics, which is why I posted his paper.

Here is a snip of Tom Woods’ paper:

One of Ron Paul’s great accomplishments is that the Federal Reserve faces more opposition today than ever before. Readers of this site will be familiar with the arguments: the Fed enjoys special government privileges; its interference with market interest rates gives rise to the boom-bust business cycle; it has undermined the value of the dollar; it creates moral hazard, since market participants know the money producer can bail them out; and it is unnecessary to and at odds with a free-market economy.

Unfortunately, not all Fed critics, even among Ron Paul supporters, approach the problem in this way. A subset of the end-the-Fed crowd opposes the Fed for peripheral or entirely wrongheaded reasons. For this group, the Fed is not inflating enough. (I have been told by one critic that our problem cannot be that too much money is being created, since he doesn’t know anyone who has too many Federal Reserve Notes.) Their other main complaints are (1) that the Fed is “privately owned” (the Fed’s problem evidently being that it isn’t socialistic enough), (2) that fiat money is just fine as long as it is issued by the people’s trusty representatives instead of by the Fed, and (3) that under the present system we are burdened with what they call “debt-based money”; their key monetary reform, in turn, involves moving to “debt-free money.” These critics have been called Greenbackers, a reference to fiat money used during the Civil War. (A fourth claim is that the Austrian School of economics, which Ron Paul promotes, is composed of shills for the banking system and the status quo; I have exploded this claim already – here, here, and here.)

With so much to cover I don’t intend to get into (1) right now, but it should suffice to note that being created by an act of Congress, having your board’s personnel appointed by the U.S. president, and enjoying government-granted monopoly privileges without which you would be of no significance, are not the typical features of a “private” institution. I’ll address (2) and (3) throughout what follows.

The point of this discussion is to refute the principal falsehoods that circulate among Greenbackers: (a) that a gold standard (either 100 percent reserve or fractional reserve) or the Federal Reserve’s fiat money system yields an outcome in which outstanding loans cannot all be paid because there is “not enough money” to pay both the principal and the interest; (b) that if the banks are allowed to issue loans at interest they will eventually wind up with all the money; and that the only alternative is “debt-free” fiat paper money issued by government.

My answers will be as follows: (1) the claim that there is “not enough money” to pay both principal and interest is false, regardless of which of these monetary systems we are considering; and (2) even if “debt-free” money were the solution, the best producer of such money is the free market, not Nancy Pelosi or John McCain.

Read the rest here

This portion where Mr. Woods deals with the how the banking system would be regulated by economic forces in a free market environment is particularly worth quoting:

as with every other industry, profit regulates production. The production of money, like the production of all other goods, settles on a normal rate of return, and is not uniquely poised to shower participants in that industry with premium profits. As more firms enter the industry, the rising demand for the factors of production necessary to produce the money puts upward pressure on the prices of those factors. Meanwhile, the increase in money production itself puts downward pressure on the purchasing power of the money produced.

In other words, these twin pressures of (1) the increasing costliness of money production and (2) the decreasing value of the money thus produced (since the more money that exists, ceteris paribus, the lower its purchasing power) serve to regulate money production in the same way they regulate the production of all other goods in the economy.

Once the gold is mined, it needs to be converted into coins for general use, and subsequently stamped with some form of reliable certification indicating the weight and fineness of those coins. Private firms perform such certification for a wide variety of goods on the free market. This service is provided for newly coined money by mints.

Banking services would exist on the free market to the extent that people valued financial intermediation, as well as the various services, such as check-writing and the safekeeping of money, that banks provided.

Quote of the Day: Distinguishing Property from Wealth

Property is a legal concept, whereas wealth is an economic concept. The two are often confused, but they should be kept quite clearly distinct. The one refers to a set of rights, the other to how people value such rights. The same legal claim to property may yield great wealth today and none tomorrow. Market exchanges change the values of property claims continuously, as Ludwig Lachmann explained clearly in his important essay on “The Market Economy and the Distribution of Wealth.”

This is from Cato Institute’s Tom G. Palmer, in the continuing debate over negative and positive rights at the Cato Unbound

Cyprus: From Deposit Taxes to Capital Controls; Russian Intervention Next?

After the botched attempt by scheming unelected Eurocrats to impose bank deposit levies in order to bail out the banking system, which had been foiled by the Cyprus Parliament, the EU now threatens to kick Cyprus out of the Union, followed by proposed measures to impose capital controls.

From Reuters

The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

So same dog but with a different collar.

Principally, capital controls would represent the same assault on property rights.

Notes the Zero Hedge: (bold and italics original)

As Europe wakes up to what could be a tumultuous day, Handelsblatt reports that the ECB has decided that, due to the "great danger" of a bank run once they reopen next week, it will enforce capital controls independently of Cypriot (elected) officials. With perhaps a nod towards negotiating some ELA funding for Cypriot banks next week (if the government accepts this ECB-enforced 'program'), the rather stunning restrictions on people's private property include:

-Freezing Savings - no time-frame (it's not your money anymore)

-Make bank transfers dependent on Central Bank approval (a money tzar?)

-Lower ATM withdrawal limits (spend it how we say?)

The capital controls will be designed "so that citizens have access to sufficient cash to go about their lives." So, there it is, a European Union imposed decision on just how much money each Cypriot can spend per day. Wasn't it just last week, we were told Europe is fixed?

Another interesting aspect the geopolitical consequence from the unfolding events in Cyprus.

While I have earlier noted that unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region may trigger a regional military conflict, Russia’s heavy stake in Cyprus could also spark a military conflagration.

Nearly a third or $19 billion of the 70 billion euros in deposits in Cyprus banks are reportedly held by Russians (supposedly from oligarchs to alleged mafias to political money). 

According to CNBC

One Russian bank, Alfa Bank, estimates that $70 billion of illegal capital flight from Russia in the past two decades may have found its way to Cyprus.

Moody's rating agency said last week Russian banks had about $12 billion placed with Cypriot banks at the end of 2012 and has estimated that Russian corporate deposits at Cypriot banks could be around $19 billion.

"We think that the $19 billion exposure is mostly wholesale - ie corporate," Eugene Tarzimanov, Senior Credit Officer at Moody's in Russia, told Reuters.

Some of Russia's largest banks have some credit exposure to Cyprus. VTB, Russia's second-largest bank by assets, had $13.8 billion in assets and $374 million through its Cypriot subsidiary, Russian Commercial Bank, at the end of 2011.

Political pressure has allegedly been building up for the Russian government to intervene

From Investmentwatch.com

From latest reports, the Cypriot banks might open on March 26th at the earliest. That’s two weeks after being shut down. That’s two weeks of unmet financial obligations, ie government employee salaries, public works financing, unpaid pensions etc etc…Expect unrest on the streets of Moscow

The EU/Germany are certainly aware that 95% of all Russian money goes through the Cypriot banks. Certainly they were well aware of the consequences this would lead to. Is this the first salvo in the new world war??

Dennis Gartman of the eponymous The Gartman Letters made a recent germane comment at the CNBC “Don’t Mess with the Russian Mafia”.

Next week will be very interesting.

Earth Hour: Keep Lights ON!

Many people will fall again for the demagoguery of celebrating “earth hour” purportedly for “saving” the environment. 

Most of them will simply follow “feel good” popular politically correct themes rather than understanding the real dynamics or “crony based” green energy politics behind them.  

This serves as example of the Bandwagon effects, not only in the marketplace, but also in the realm of the politics of environmentalism.

Earth Hour advocates avoid explaining the cost benefit tradeoffs between their populist pseudo-environmental interests (which are principally based on highly flawed computer simulations*) and the economic and social value of electricity to humanity. 

*people's lives are supposed to be determined by computer models which can't even predict economies and the markets! Queen Elizabeth even took to task the London School of Economics for failing to predict the 2008 crash.

They fail to take into account that “electricity is the backbone of modern life”. On the other hand, they elude discussing the costs of their themes from which life without electricity equals poverty and death.

North Korea or the medieval life are great examples of life without electricity.

So advocates of earth hour are basically misanthropists. They want people to suffer in the name of preserving the "environment" (ahem, promoting the interests of cronies and of the political class)

 

The following video from the Copenhagen Consensus eloquently showcases the benefits of electricity.

Danish environmentalist Bjorn Lomborg gives further explanations on the benefits of electricity at the Slate.com: (hat tip AEI’s Professor Mark Perry) [bold mine]

Electricity has given humanity huge benefits. Almost 3 billion people still burn dung, twigs, and other traditional fuels indoors to cook and keep warm, generating noxious fumes that kill an estimated 2 million people each year, mostly women and children. Likewise, just 100 years ago, the average American family spent six hours each week during cold months shoveling six tons of coal into the furnace (not to mention cleaning the coal dust from carpets, furniture, curtains, and bedclothes). In the developed world today, electric stoves and heaters have banished indoor air pollution.

Similarly, electricity has allowed us to mechanize much of our world, ending most backbreaking work. The washing machine liberated women from spending endless hours carrying water and beating clothing on scrub boards. The refrigerator made it possible for almost everyone to eat more fruits and vegetables, and to stop eating rotten food, which is the main reason why the most prevalent cancer for men in the United States in 1930, stomach cancer, is the least prevalent now.

Electricity has allowed us to irrigate fields and synthesize fertilizer from air. The light that it powers has enabled us to have active, productive lives past sunset. The electricity that people in rich countries consume is, on average, equivalent to the energy of 56 servants helping them. Even people in Sub-Saharan Africa have electricity equivalent to about three servants. They need more of it, not less.

This is relevant not only for the world’s poor. Because of rising energy prices from green subsidies, 800,000 German households can no longer pay their electricity bills. In the United Kingdom, there are now more than 5 million fuel-poor people, and the country’s electricity regulator now publicly worries that environmental targets could lead to blackouts in less than nine months.

Today, we produce only a small fraction of the energy that we need from solar and wind—0.7 percent from wind and just 0.1 percent from solar. These technologies currently are too expensive. They are also unreliable (we still have no idea what to do when the wind is not blowing). Even with optimistic assumptions, the International Energy Agency estimates that, by 2035, we will produce just 2.4 percent of our energy from wind and 0.8 percent from solar.

To green the world’s energy, we should abandon the old-fashioned policy of subsidizing unreliable solar and wind—a policy that has failed for 20 years, and that will fail for the next 22. Instead, we should focus on inventing new, more efficient green technologies to outcompete fossil fuels.

If we really want a sustainable future for all of humanity and our planet, we shouldn’t plunge ourselves back into darkness. Tackling climate change by turning off the lights and eating dinner by candlelight smacks of the “let them eat cake” approach to the world’s problems that appeals only to well-electrified, comfortable elites.

So we can’t discount of the "conspiracy theory" where one of the other possible subsidiary reasons for the massive printing of money by central banks could have been meant as subsidies for green energy via the pushing up or inflating prices of fossil fuels, which should make "unreliable" "inefficient" and "costly" green energy "competitive".

Unfortunately, markets know better. The free-market based Shale energy revolution has been proving to be the likely “environmental friendly” alternative more than the politically blessed “green energy” that has been founded on disinformation.

Graphic of the Day: Fatalities Count from the Iraq War

This is from Reuter’s chart of the Day

According to a study released last week, the U.S. war in Iraq has cost $1.7 trillion with an additional $490 billion in benefits owed to war veterans. The war has killed at least 134,000 Iraqi civilians and may have contributed to the deaths of as many as four times that number. When security forces, insurgents, journalists and humanitarian workers were included, the war’s death toll rose to an estimated 176,000 to 189,000

On the other hand, Agora Publishing founder Bill Bonner at the LFB writes of the cost of Iraq war which have been far more than such mainstream estimates.

Mehdi Hasan, writing in the New Statesman:

“Between 2003-06, according to a peer-reviewed study in The Lancet medical journal, 601,000 more people died in Iraq as a result of violence — that is, bombed, burned, stabbed, shot, and tortured to death — than would have died had the invasion not happened. Proportionately, that is the equivalent of 1.2 million Britons, or 6 million Americans, being killed over the same period.

“…31% of the excess deaths in Iraq can be attributed to coalition forces — about 186,000 people between 2003-06. Second, most studies show that only a minority of Iraqi insurgents were card-carrying members of AQI [al-Qaeda Iraq]. The insurgency kicked off in Fallujah on April 28, 2003, as a nationalist campaign, long before the arrival of foreign jihadists, but only after U.S. troops opened fire on, and killed, 17 unarmed Iraqi protesters.

“Third, there were no jihadists operating in Iraq before our Mesopotamian misadventure; Iraq had no history of suicide bombings. Between 2003-08, however, 1,100 suicide bombers blew themselves up inside the country. The war made Iraq, in the approving words of the U.S. general Ricardo Sanchez, ‘a terrorist magnet… a target of opportunity.’

“‘Let me clear it up for any moron with lingering doubts,’ wrote the Iraqi blogger known by the pseudonym Riverbend on her blog Baghdad Burning in February 2007. ‘It’s worse. It’s over. You lost…You lost every sane, red-blooded Iraqi when the Abu Ghraib pictures came out…You lost when you brought murderers, looters, gangsters and militia heads to power…’

“In September 2011, a Zogby poll found that 42% of Iraqis thought they were ‘worse off’ as a result of the Anglo-American invasion of their country, compared with only 30% of Iraqis who said ‘better off.’ An earlier poll conducted for the BBC in November 2005 found a slim majority of Iraqis (50.3%) saying the Iraq war was ‘somewhat’ or ‘absolutely’ wrong.”

In terms of the financial cost, we estimated that the war in Iraq would cost $1 trillion when it was launched. Dear readers wrote to say we were crazy. It was a cakewalk, they said. They said it could be accomplished for pennies.

But even $1 trillion was far too low. Nobel Prize winner Joseph Stiglitz may be an idiot, but he can add. And he puts the cost at over $5 trillion, perhaps $6 trillion, when the final bill for missing limbs and lifelong psychological care is tallied.

Will Events in Cyprus Trigger a War?

The Cyprus bank deposit tax fiasco could turn out to be more than just a domestic financial and economic morass; it could morph into a regional geopolitical quagmire or a potential tinderbox for an outbreak of military confrontation or war. 

Such are based on the Cyprus’ unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region.

Here is a snapshot from historian Eric Margolis at the lewrockwell.com:

But there’s much more to the Cyprus crisis than its dubious banks. Cyprus has bedeviled Europe and world diplomacy since 1974, then Greek Cypriot far rightists staged a coup and sought union – or "enosis" – with mainland Greece. Turkey promptly intervened with 30,000 troops to protect Turkish Cypriots in the north. Many Greeks fled or were expelled to the south.

Europe and the UN have been trying to sort out the Cyprus mess ever since. After decades of mind-numbing negotiations, former UN chief Kofi Annan proposed a sensible deal in 2004 for a Greek-Turkish federation. Turks accepted, but Greek Cypriots blocked it. Britain, which has two important air bases in Cyprus, backed the status quo.

In the same year, the EU committed the grave error of admitting Cyprus as a member without first insisting that Greek Cypriots agree to a peace deal and Greek-Turkish federation.

Northern Cyprus was left in limbo while the south became part of the EU, assuring the island’s ugly dispute would be come part of the European Union. Cyprus should never have been admitted to the EU.

Europeans who opposed Turkish membership in the EU used Cyprus as a pretext to delay admission, infuriating Turkey.

After decades of patient work developing normal relations after centuries of conflict, Greece and Turkey are again up in arms again over Cyprus. Their dangerous problem of overlapping air and sea claims in the Aegean has revived - just when Greece must slash its bloated military budget.

Read the rest here

All political efforts to save and preserve the interests of the political class and their cronies have only opened up old wounds and continues to fan the flames of social enmity.

Video: Murray Rothbard on the Benefits of Bank Runs

(hat tip: Lew Rockwell Blog)

Bitcoins: Safehaven from Cyprus Debacle and Officially Recognized by the US Treasury

I questioned yesterday the wisdom of mainstream’s assault on bitcoins, where the Economist calls bitcoins a “bubble”.

Well it figures that the recent spike in the public's interests on bitcoins has partly been a ramification or an offshoot to the Cyprus savings grab debacle

Here is Businessweek/Bloomberg,

Since Sunday, a trio of Bitcoin apps have soared up Spain’s download charts, coinciding with news that cash-strapped Cyprus was planning to raid domestic savings accounts to pay off a $13 billion bailout tab. Fearing contagion on the other end of the Mediterranean, some Spaniards are apparently looking for cover in an experimental digital currency.

“This is an entirely predictable and rational outcome for what’s happening in Cyprus,” says Nick Colas, chief market strategist at ConvergEx Group. “If you want to get a good sense of the stress European savers are feeling, just watch Bitcoin prices.”

The value of the virtual currency has soared nearly 15 percent in the last two days, according to the most-recent pricing data. “One hundred percent of that is due to Cyprus,” says Colas. “It means the Europeans are getting involved.”

So aside from gold, bitcoins appear to be a major beneficiary from the Euro crisis. So which shows more signs of a bubble: bitcoin or fiat money?

Yet for those who claim bitcoin lacks the widespread acceptance, well, they fail to take account that even the US Treasury now officially recognizes bitcoins.

From Bradley Janzen of Freebanking.org

Financial Crimes Enforcement Network (FinCEN) is the bureau of Treasury that enforces the Bank Secrecy Act (which requires banks to spy on their customers for the government).

FinCEN Issues Guidance on Virtual Currencies and Regulatory Responsibilities

To provide clarity and regulatory certainty for businesses and individuals engaged in an expanding field of financial activity, the Financial Crimes Enforcement Network (FinCEN) today issued the following guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. The guidance is in response to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use convertible virtual currencies or make a business of exchanging, accepting, and transmitting them. Convertible virtual currencies either have an equivalent value in real currency or act as a substitute for real currency. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN's definition of MSBs.

News Release: http://www.fincen.gov/news_room/nr/pdf/20130318.pdf

Guidance: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf

Welcome to the mainstream bitcoin.

Well, my favorite iconoclast Nassim Taleb has great words to say about bitcoins at the reddit.com: (hat tip Zero hedge)

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.

A sentiment I share. 

Bitcoins could herald the epoch of decentralization or the information age and importantly perhaps a transition to F. A. Hayek's denationalization of money

Argentines Flee to Gold on Financial Repression, Devaluation

Escalating financial repression implemented by the Argentina government has been prompting its citizenry to seek gold as safehaven. 

From the International Business Times:

Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg.

Banco Ciudad is the only bank left that trades in gold after Fernandez  banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading.

There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.

Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.

Watch Bloomberg’s news video on this here

I must say that Argentina’s inflation rate must have been severely understated by the mainstream. Price controls have been distorting real conditions in Argentina. The Argentine government even recently banned advertising as part of price controls.  Official inflation rates are way below private estimates. Argentina’s government has also been censoring private sector economists from making inflation forecasts.

Argentina’s “blue dollar” or the nickname for the US dollar based on the black market rate has fallen to a new low yesterday, at 8.27 from 8.07 last Monday or a decline of about 2.4% in just a few days. The Peso is far from the official rate of about 5.1. The gap between the black market rate and the official rate continues to widen.

The increasingly desperate government has imposed more capital controls through a 15% tax hike on the use of credit cards abroad aside from new 20% levy on airline tickets.

Unlike Venezuela, so far, Argentina’s stock market has yet to manifest symptoms of hyperinflation. The Merval index has been up 22.23% year to date, as of Friday’s close, and nears a milestone breakout.

We should not confuse rising stock markets with prosperity or even bubble cycles, when they serve as evidence of worsening monetary disorder. Nonetheless a breakout of the Merval along with increased panic buying on gold will could mean a tipping point towards hyperinflation and a crisis.

Warren Buffett: Bet on Natural Juices of Capitalism

For all the repeated calls of taxing the rich and the need for interventions, former value investor and now political entrepreneur (crony) does a U-turn and unexpectedly praises capitalism

From Bloomberg, 

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said investors should bet on the “natural juices” of capitalism in the U.S. even as lawmakers struggle to narrow the budget deficit.

People tend to “focus too much on what the government’s done, and to give them either credit or blame,” Buffett said in an interview conducted by the chief executive officer of Business Wire, the Berkshire subsidiary that distributes press releases. “The real credit belongs to our system.”

Buffett, 82, has used annual letters to shareholders and public appearances to highlight the prospects for the world’s largest economy, where most of Berkshire’s operations are based. He’s also called for an increase in taxes on the wealthiest individuals to help reduce budget deficits and forestall cuts, an approach that Republicans say would hurt growth.

The U.S. economy “is coming back because of the natural juices of capitalism and not because of government,” Buffett told Business Wire’s Cathy Baron Tamraz in a video interview posted online today. “We have a wonderful system that eventually is self-cleansing and always moves forward.”

Perhaps Mr. Buffett could just be rationalizing his actions due to the recent bullish bets he made, part of such acquisitions involved 28 newspapers for $344 million. Yet this should be an example of how people use "capitalism" when it is convenient for them.

Or perhaps he may just have read the book package sent by Austrian school of economics in fulfillment of his father’s request.

Japan’s Ticking Time Bomb: Worsening Streak of Current Account Deficits

We have been told by mainstream media and experts that PM Shinzo Abe’s inflationist policies popularly coined as “Abenomics” will deliver economic “competitiveness” .

Yet even in the short term, where the magic of inflationism should work best, Abenomics fails. 

Exports which supposedly should have been boosted by a devalued currency shrank, while imports continue to surge.

From Bloomberg,

Japan posted its longest run of trade deficits in three decades as exports fell in February, underscoring challenges for Bank of Japan (8301) Governor Haruhiko Kuroda in reviving the world’s third-biggest economy.

Shipments dropped 2.9 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg News was for a 1.7 percent decrease. Imports rose 11.9 percent, leaving a trade shortfall of 777.5 billion yen ($8.1 billion).

Kuroda, who began his tenure as governor yesterday and will give his first press briefing this evening, is pledging more aggressive monetary easing that may further weaken a yen down about 10 percent against the dollar this year. While the currency’s decline boosts the outlook for exporters in coming months, it’s already swelling the nation’s import bill as nuclear-plant shutdowns force bigger imports of fossil fuels.

Apologists for Abenomics say that a “time lag” exists for such policy to create “traction”. But contrary to such an absurd idea, rising input or producers prices, e.g. energy, will neutralize any gains from the supposed currency panacea. (chart from tradingeconomics.com)

Yet consumers have also been exhibiting signs of a squeeze in purchasing power through reduced spending.

And a string of worsening current account deficits will parlay into a drawdown on savings or increasing reliance on foreigners that amplifies the fragility of Japan’s precarious fiscal balance. As I previously wrote,

Worst, a sustained deterioration of current accounts means that Japan will increasingly rely on foreign capital and or draw down from the her pool of savings which has been estimated at $19 trillion and which could also extrapolate to a reduction of assets held overseas or $4 trillion net foreign investment position.

And given the deliberate debasement of the yen, I am not inclined to see a reduction of foreign assets by Japanese households. Instead, Japan’s private sector will likely increase their exposure overseas couched under euphemism of Foreign Direct Investment (FDI) or portfolio flows when in reality they account for as “capital flight”.

So “Abenomics” will mean that Japan will transition from a net savings-net creditor nation to eventually a net debtor country overtime or a sordid tale of from riches to rags, if such policies continue.

And given the nation’s colossal debts, any signs of funding stress will mean a jump in interest rates which should further aggravate highly vulnerable Japan’s fiscal balance. This increases Japan’s potential transition to a crisis whether through a debt or through a currency strain, depending on how policymakers will react.

One recent positive development though is Shinzo Abe’s proposal for Japan to join the Trans Pacific Partnership Free Trade Agreement (FTA). 

Yet it remains to be seen if gains from expanding trade will be enough to offset the negative effects from massive interventionist measures of monetary easing and fiscal stimulus.

Quote of the Day: Free Migration would be Great for the World

If First World governments simply respected everyone’s right to accept job offers from willing employers, most of the world’s poor wouldn’t need charity. They could take care of themselves. Any able-bodied person living in poverty would be free to sell his labor to the highest bidder in the world. Instead of paying years of income to coyotes, the global poor could migrate for the cost of a bus or boat ticket. Instead of crossing the border in fear to compete for illegal jobs, the global poor could cross the border openly to compete for any job they’re qualified to do.

Wouldn’t this simply drive First World wages down to Third World levels? No. Basic economics tells us that trade barriers don’t just redistribute wealth; they destroy wealth. Confining able-bodied workers to the Third World is like confining agriculture to Antarctica. Standard economic estimates say that open borders would roughly double world output. While trade liberalization never benefits absolutely everyone, free migration would be great for the world and great for the world’s poor.

(italics original)

This is from Professor Bryan Caplan in a debate over “negative and positive rights” at the Cato Unbound

Which is a Bubble: Bitcoins or Fiat Money?

The mainstream sees the exploding public interest on bitcoin as a threat and brands it a “bubble”.

Here is the Economist,

NOT MANY fund-managers have heard of Bitcoin, let alone put any of their clients’ money in it. But over the past few months, the world’s first “crypto-currency” has become one of the world’s hottest investments. Since September, when The Economist last wrote about it, the price of a unit of Bitcoin as recorded by Mt Gox, a popular Bitcoin exchange, has soared. Unlike other online currencies—such as the new Amazon Coins—the supply of Bitcoin is not determined by any central issuing authority. Instead, new coins are generated according to a predetermined formula by thousands of computers solving complex mathematical problems. As more coins are generated, these problems get ever more complex, increasing the cost of computing power necessary to generate them, and so setting a floor underneath the price. Mimicking gold, the currency is designed to be deflationary. However, there is every reason to think that the current Bitcoin boom will shortly bust. As the chart shows, online interest in the currency has spiked in recent months. Though an increasing number of legitimate businesses are adopting the currency—one Finnish software developer has offered to pay its employees in Bitcoin—it still has relatively few users. Its primary commercial use is probably to buy drugs from Silk Road, a sort of pirate eBay hidden in the “deep web”. This suggests that the new users are buying Bitcoin as an investment, not as a means of exchange. For any currency to thrive it needs users, not just speculators.

The idea that bitcoins “still has relatively few users” ergo a bubble simply begs the question. This doesn’t establish the bubble properties.

The transition towards “moneyness” is a market process and doesn’t come instantaneously. Since the article admits that bitcoin attempts to "mimic gold", then the process entails the expansion of the commodity’s marketability which may have partly been exhibited by the chart.

As the great dean of Austrian economics Murray N. Rothbard explained,

Once a commodity begins to be used as a medium of exchange, when the word gets out it generates even further use of the commodity as a medium. In short, when the word gets around that commodity X is being used as a medium in a certain village, more people living in or trading with that village will purchase that commodity, since they know that it is being used there as a medium of exchange. In this way, a commodity used as a medium feeds upon itself, and its use spirals upward, until before long the commodity is in general use throughout the society or country as a medium of exchange. But when a commodity is used as a medium for most or all exchanges, that commodity is defined as being a money.

In this way money enters the free market, as market participants begin to select suitable commodities for use as the medium of exchange, with that use rapidly escalating until a general medium of exchange, or money, becomes established in the market.

Paradoxically the article mentions a Finnish software company offering to pay employees based on bitcoins.

 

Another good example for this could be Iran. Hammered by trade and financial embargo, part of the embattled nation’s economic activities have shifted to using bitcoins. 

So expanding public interest on bitcoins does not necessarily entail a bubble.

The reality is that the ECB and other central banks see bitcoins as threat to their monopoly over Seigniorage privileges and thus engage in negative publicity or propaganda to besmirch a potential market based competitor.

The essence of bubbles is really a “something for nothing” or a "free lunch" dynamic.

If Bitcoins are generated with a huge cost, “As more coins are generated, these problems get ever more complex, increasing the cost of computing power necessary to generate them, and so setting a floor underneath the price”, then compare this with exploding balance sheets of global central banks, whom are simply digital entries as determined by political authorities to the banking system.

Guess which is unsustainable and has the character of a bubble?

10th Year of the Invasion of Iraq: 20 Popular Lies

Yesterday marked the 10th anniversary of the Invasion of Iraq which had been dubbed as Operation Iraqi Freedom. A war fundamentally founded on deceit and political mendacities.

Glen Rangwala and Raymond Whitacker at the Global Research explains them

Here’s a snippet.  (bold and italics original)

Falsehoods ranging from exaggeration to plain untruth were used to make the case for war. More lies are being used in the aftermath

1 Iraq was responsible for the 11 September attacks

A supposed meeting in Prague between Mohammed Atta, leader of the 11 September hijackers, and an Iraqi intelligence official was the main basis for this claim, but Czech intelligence later conceded that the Iraqi’s contact could not have been Atta. This did not stop the constant stream of assertions that Iraq was involved in 9/11, which was so successful that at one stage opinion polls showed that two-thirds of Americans believed the hand of Saddam Hussein was behind the attacks. Almost as many believed Iraqi hijackers were aboard the crashed airliners; in fact there were none.

2 Iraq and al-Qa’ida were working together

Persistent claims by US and British leaders that Saddam and Osama bin Laden were in league with each other were contradicted by a leaked British Defence Intelligence Staff report, which said there were no current links between them. Mr Bin Laden’s “aims are in ideological conflict with present-day Iraq”, it added.

Another strand to the claims was that al-Qa’ida members were being sheltered in Iraq, and had set up a poisons training camp. When US troops reached the camp, they found no chemical or biological traces.

3 Iraq was seeking uranium from Africa for a “reconstituted” nuclear weapons programme

The head of the CIA has now admitted that documents purporting to show that Iraq tried to import uranium from Niger in west Africa were forged, and that the claim should never have been in President Bush’s State of the Union address. Britain sticks by the claim, insisting it has “separate intelligence”. The Foreign Office conceded last week that this information is now “under review”.

4 Iraq was trying to import aluminium tubes to develop nuclear weapons

The US persistently alleged that Baghdad tried to buy high-strength aluminum tubes whose only use could be in gas centrifuges, needed to enrich uranium for nuclear weapons. Equally persistently, the International Atomic Energy Agency said the tubes were being used for artillery rockets. The head of the IAEA, Mohamed El Baradei, told the UN Security Council in January that the tubes were not even suitable for centrifuges.

Read the rest here.

Here is Daily Reckoning’s Bill Bonner’s take

The trouble with the Iraq War is that the people who made the mistake have learned nothing. The lies and delusions behind the war never blew back into the faces of those responsible for them. Instead, soldiers, taxpayers, and innocent Iraqi civilians paid the price. Politicians, the military brass, and the pundits — notably Thomas Friedman — who promoted the war still walk on two legs and sleep soundly at night.

Read the rest here

How Free Trade Promoted Peace in Mindanao

It is refreshing to read about anecdotes of how the largely unappreciated free markets works unnoticeably in the Philippine setting

Dave Llorito World Bank’s communications officer at World Bank’s East Asia blog writes

“It was a war zone, one of the most dangerous places on earth.” 

That’s how Mr. Resty Kamag, human resource manager of La Frutera plantation based in Datu Paglas (Population: 20,290) in Maguindanao (the Philippines) described the national road traversing the town from the adjacent province.

Residents and travelers, he said, wouldn’t dare pass through the highway after three in the afternoon for fear of getting robbed, ambushed or caught in the crossfire between rebels and government soldiers.

“That was before the company started operations here in 1997,” said Mr. Kamag. La Frutera operates a 1,200-hectare plantation for export bananas in Datu Paglas and neighboring towns, providing jobs to more than 2,000 people.

“Today, the town is peaceful,” he said. “Travelers now come and go without fear of getting harmed. People have better things to do.”

La Fruta Inc. is the Philippines largest banana exporter, whose chairman and president Senen Bacani was conferred the 2006 Entrepreneur of the year award in 2006 by the SGV Ernst and Young (wiki Pilipinas).

And to promote trade, the private sector led by La Fruta and other private firms made huge investments in the region’s infrastructure.

Again Mr. Llorito:

A joint project by foreign investors (Unifruitti group) and Filipinos including Toto Paglas, a charismatic Muslim leader, La Frutera spent millions building roads, bridges, irrigation systems and other facilities.

The company infuses the local economy with 11 million pesos of monthly payroll, encouraging local entrepreneurs to set up retail shops, banks and small businesses. Other companies like Del Monte followed suit establishing agribusiness plantations in other parts of the province.

Today, paved highways cut through thriving towns and fields planted to rice, corn, coconuts, palm oil, rubber trees, and bananas.

The point is that markets on its own will invest and finance on infrastructure projects without the need for taxpayer exposure and for government directive.

Trade reduces war and promotes social harmony and cooperation due to the division of labor.  

As the great Ludwig von Mises wrote (Omnipotent government p.122)

Social cooperation and war are in the long run incompatible. Self-sufficient individuals may fight each other without destroying the foundations of their existence. But within the social system of cooperation and division of labor war means disintegration. The progressive evolution of society requires the progressive elimination of war.

Charts of the Day: World Military Spending and Arms Trade

Two related charts of the day

First world defense spending

The Economist speculates that if the current rate of growth persists, China will surpass the US in terms of military budget. 

AMERICA still spends over four times as much on defence as China, the world’s second-biggest military spender. But it has been clear for some time that on current trends China’s defence spending will overtake America’s sooner than most people think. What is less clear is when that date will be reached. It all depends on the underlying assumptions. The 2013 edition of the Military Balance published by the London-based International Institute for Strategic Studies (IISS) shows convergence could come as soon as 2023. That is based on extrapolating the rate of Chinese military spending since 2001—a 15.6% annual growth rate—and assuming that the cuts in the America's defence budget required under sequestration are not modified. The latter is more likely than the former. The latest Chinese defence budget is based on spending increasing by a more modest 10.7% annually. That would mean that China overtakes America in 2032.

However, if China’s headlong economic growth stalls or if more money is needed to serve the health and social needs of rapidly-ageing population, China might slow spending on its military by something like half its current projection. If that happens, the crossover point could be delayed by up to a decade. It is also possible (though at present America’s fiscal travails suggest otherwise), that as China rises, America will feel forced to start spending more if the security guarantees it currently makes to allies such as Japan, South Korea and Taiwan are to retain their credibility into the third decade of the century. Already, China spends more on defence than all of those three together. It is all very well for America to talk about a strategic rebalancing towards Asia, but if the money is not there to buy the ships, the aircraft and all the expensive systems that go with them, it will eventually sound hollow.

The Economist is right to suggest that this trend may not continue as this will likely depend on the state of the China's economy. Of course this will really depend on priorities of the Chinese government.

But what they sorely missed is of the real nature of “strategic rebalancing”, which is not supposed to be about military buildup but about trade.

They forget about Bastiat’s wisdom where “if goods don’t cross borders, armies will”

Second chart global arms trade.

The Reuters notes that China has taken the fifth spot in arms exports with Pakistan being the main recipient.

An arms race serves as dangerous signal for world peace. Such also functions as a thermometer of the desperate state of welfare-warfare governments, who by resorting to inflationism, attempts to divert domestic political economic problems towards geopolitics. And they do this primarily through nationalist overtones.

The sad part is that instead of the remedy of channeling resources into productive uses, an arms race means more economic hardship for society, aside from greater risk of war.

As the illustrious American author Ernest Hemingway rightly admonished,

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists

Unfortunately people hardly ever learn.

How Leverage Affected Brazilian Billionaire Eike Batista’s Fortunes

Here is a wonderful example of how leverage causes boom bust episodes even from an individual level.

Take it from Brazil’s billionaire Eike Batista

From Forbes,

Last year, Brazilian entrepreneur Eike Batista was the world’s 7th richest man, with a net worth of $30 billion. Batista, riding high on oil fever, even stated, “I will be the world’s richest man,” vowing to overtake Carlos Slim of Mexico, the world’s richest individual.

This year Batista is ranked No. 100, worth just $10.6 billion. His fortune is down an astonishing $19.4 billion, or 65%, making him the year’s biggest loser. Batista has been drifting further and further away from the top of the list. Now he is not even one of the top three richest Brazilians.

How leverage has translated to boom and the quasi bust for Mr. Batista

From the Bloomberg,

Eike Batista, the Brazilian billionaire whose oil-company shares fell to a record low last week, is close to selling a stake in MPX Energia SA (MPXE3) as he faces demands from creditors to boost collateral, people with direct knowledge of the matter said.

Among Batista’s biggest creditors is Sao Paulo-based Itau Unibanco Holding SA, with about 5.5 billion reais ($2.8 billion) in loans outstanding, said two of the people, who asked not to be identified because the matter is private. Batista borrowed about 4.8 billion reais from Banco Bradesco SA and 1.6 billion reais from Grupo BTG Pactual, not counting a credit line of $1 billion BTG provided earlier this month, the people said.

Batista, 56, used shares of his publicly traded companies as collateral for loans that helped build his empire of commodities and energy businesses, held as units of his EBX Group Co., the people said. Shares of his oil and gas company, OGX Petroleo e Gas Participacoes SA (OGXP3), plunged about 85 percent in the past year, and Batista is trying to reduce collateral requirements by selling assets to pay debt, the people said.

At least Mr. Batista still remains a billionaire but appears to be losing his fortune rapidly.

The lesson is that all leverage has a tipping point.

And when number of people suffering from the same malady rises, financial problems transits from the periphery to the core, then the crisis.