Central Planning Failure: China’s PBOC Edition

China’s central bank has reportedly been desperately seeking an accurate way to measure her ever changing money supply conditions

From the Wall Street Journal Real Time Economics Blog (bold mine)

Three years after China’s central bank unveiled a new measure to calculate the amount of credit in the economy, it may be going back to the drawing board.

Pan Gongsheng, a vice governor at the People’s Bank of China, said this week that the financial sector has rolled out so many innovative products in recent years that it has become much more difficult to calculate the nation’s money supply.

The PBOC didn’t name names, but recent financial innovations have included wealth management products and fast-growing online investment funds like Yu’e Bao – all of them offering investors higher returns than traditional bank deposits.

Such innovations “have affected the accuracy, completeness and scientific methodology of money-supply calculations,” Mr. Pan said Thursday at a meeting of financial regulators and academics. “Hence we need to improve the financial calculation mechanism so as to better serve macro financial regulation and prevent systemic risks.”

Mr. Pan said regulators would set up a unified and comprehensive calculation system for the financial sector, but didn’t give further details.

If this all sounds vaguely familiar – well, it should.

Three years ago, unhappy with its existing tools for measuring domestic credit, the PBOC rolled out what it called total social financing, or TSF, trumpeted as a more representative measure than total bank loans or M2 (broad money supply).

The explanation for the change was a good one: Bank loans are no longer the overwhelming source of credit in China’s financial system.  Last year, they made up only about 51% of total new financing.

“In recent years our financial aggregates have expanded rapidly along with a diversification of financial institutions,” the PBOC said when it introduced the TSF measure. “The number of financial products and financial tools has increased amid continuous innovation… There has been a marked upturn in off-balance sheet business, and that is replacing some of the role of bank loans.”

In addition to bank loans, TSF included newer categories such as trust lending, entrusted loans – or credits between companies – and bankers’ acceptances, to name a few items.

Since its introduction, the TSF measure has faced plenty of controversy in academic circles. Debate has focused on whether the gauge covers enough of the nation’s credit, whether it double-counts some components and whether it creates distorted data.

Two insights from the above

One. Markets are always a step ahead of the regulators, where the latter always play a cat-and-mouse dynamic.

Two. The above serve as another example why government statistics can’t be trusted or relied on.

The PBoC should heed the great Austrian economist F.A Hayek advice on central planning (Fatal Conceit)

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Quote of the Day: Democracy is a Joke

People will tell you that democracy requires a well-informed citizenry. Some will tell you, with a straight face and an earnest tone, that you have a “duty” to keep up with the news so you can participate in public affairs. Some countries – notably Argentina and Australia – even require citizens to vote.

But this presumes people have access to some set of relevant facts… and then make up their minds intelligently, applying the known facts to the public policy alternatives.

It is nonsense for two fundamental reasons.

First, there are no facts in public life, just memes and BS.

Second, even if there were meaningful facts, the individual citizen is hardly equipped to evaluate them. After so many millennia with no public life of any sort, we don’t know how to judge or master it.

Let me give you an example…

Candidate X tells us he is in favor of cutting government spending. Candidate Y tells us he intends to make the government more efficient. Candidate Z tells us we will all be better off, if the government spends more money to stimulate the economy.

And President Obama says he has a plan to improve the nation’s health-care system.

These are all “facts” – reported in the news media and widely debated in opinion columns and talk shows. But is there any way for the poor voter to know what the politicians really believe… or which public policy is likely to produce the best result?

Nope.

We know, after decades of experience, that public policy rarely improves our private lives. The more ambitious it is – as in the Soviet Union or Nazi Germany – the more it subtracts from our own hopes and plans…

Now, a young man can graduate from a leading university with a head full of public facts… and know nothing at all.

This is from Bill Bonner at Bonner & Partners

Video: Peter Klein on the Fundamental Flaws of Thomas Piketty’s view of Inequality

Professor and Mises Institute’s Executive Director Peter G. Klein exposes on the fundamental flaws of Thomas Piketty’s view of inequality. From the Mises Blog

I’d like to add more...

The above chart is from Picketty’s book. 

Editors of the New York Sun uses Picketty’s chart to expose on a major source of inequality—the fiat money standard—which unfortunately Mr. Piketty fails to account for.

From the Zero Hedge [bold fonts and underline original]

Well, feature the chart that Professor Piketty publishes showing inequality in America. This appears in the book at figure 9.8; a similar version, shown alongside here, is offered on his Web site. It’s an illuminating chart. It shows the share of national income of the top decile of the population. It started the century at a bit above 40% and edged above 45% in the Roaring Twenties. It plunged during the Great Depression and edged down in World War II, and then steadied out, until we get to the 1970s. Something happened then that caused income inequality to start soaring. The top decile's share of income went from something like 33% in 1971 to above 47% by 2010. 

Hmmm. What could account for that? Could it be the last broadcast of the “Lawrence Welk Show?” Or the blast off of the Apollo 14 mission to the Moon? Or could it have something to do with the mysterious D.B. Cooper, who bailed out of the plane he hijacked, never to be seen again? A timeline of 1971 offers so many possibilities. But, say, what about the possibility that it was in the middle of 1971, in August, that America closed the gold window at which it was supposed to redeem in specie dollars presented by foreign central banks. That was the default that ended the era of the Bretton Woods monetary system.

That’s the default that opened the age of fiat money. Or the era that President Nixon supposedly summed up in with Milton Friedman’s immortal words, “We’re all Keynesians now.” This is an age that has seen a sharp change in unemployment patterns. Before this date, unemployment was, by today’s standards, low. This was a pattern that held in Europe (these columns wrote about it in “George Soros’ Two Cents”) and in America (“Yellen’s Missing Jobs”). From 1947 to 1971, unemployment in America ran at the average rate of 4.7%; since 1971 the average unemployment rate has averaged 6.4%. Could this have been a factor in the soaring income inequality that also emerged in the age of fiat money? 

This is the question the liberals don’t want to discuss, even acknowledge…

The New York Sun’s conclusion

There is an irony here for Monsieur Piketty. It was France who gave us Jacques Rueff, the economist who had the clearest comprehension of the importance of sound money based on gold specie. He was, among other things, an adviser of Charles De Gaulle. It was De Gaulle who in 1965, called a thousand newspapermen together and spoke of the importance of gold as the central element of an international monetary system that would put large and small, rich and poor nations on the same plane. We ran the complete text of Professor Piketty’s book “Capital” through the Sun’s own “Electrically-operated Savvy Sifter” and were unable to find, even once, the name of Rueff.

The same kind of inequality induced by central banking fiat money bubble blowing policies plagues the Philippines.

It’s funny how the statist mindset works.

Step 1. Statists adapt bubble blowing policies. But when a bust surfaces, they blame capitalism for various societal ills such as “inequality” (straw man). This leads to Step two:  calls for more financial repression via inflationism and taxes which leads back to Step 1.

So the statist logic has all been about circularity or doing the same thing over and over again and expecting different results. Some people call this insanity.

130 bps Rate Hike Throws Cold Water on US Housing Boom

All it took was a 130 basis point rate hike to put a brake in the US housing market boom.

Writes David Stockman at his Contra Corner:

the domestic headwinds are already evident in the stunning roll-over in the housing market during the last several months. Now that the “flash” boom in housing prices is over owing to the hasty retreat of the big LBO funds from the short-lived “buy-to-rent” market, the underlying weakness of organic demand has become starkly evident.

Sales are now down significantly from year ago levels in major markets all across the country, and, as the following list makes clear, it was not the weather that did it. Instead, it was 130 basis points of interest rate normalization—-and that is just the beginning.

The salient fact of the matter is that the decades long era of “refi madness” is over. During the first quarter, gross mortgage originations totaled just $235 billion—the lowest rate in 14 years. Stated differently, the mortgage issuance run rate is now about $1 trillion on an annualized basis—-a level that represents just 30% of the normal volume since the mid-1990s.

And the stalled-out housing finance engine is not unique. Its just the leading edge illustration of what happens when credit-fueled rebounds no longer happen. Indeed, the crash of Q1 mortgage finance volumes shown below demonstrates that the very notion of “escape velocity”, or what in truth is really a euphemism for a credit fueled growth surge, is an obsolete relic of a bygone era.

March  sales volume remained the slowest since July 2012, when it was 4.59 million.

Major metros with decreasing sales volume from a year ago included:

1. 
   

   San Jose (down 18%)

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   San Francisco (down 15%)

1. 
   

   Los Angeles (down 14%)

1. 
   

   Rochester, N.Y., (down 14%)

1. 
   

   Sacramento (down 13%)

1. 
   

   San Diego (down 12%)

1. 
   

   Orlando (down 12%)

1. 
   

   Las Vegas (down 12%)

1. 
   

   Providence, R.I. (down 12%)

1. 
   

   Phoenix (down 11%)

1. 
   

   Riverside-San Bernardino, Calif. (down 11%)

1. 
   

   Hartford, Conn., (down 10%)

1. 
   

   Boston (down 8%)

In short, this time is different. The debt party is over. The era of financial retrenchment and living within our means has begun. It might even be that “selling the dip” is about to become the new normal.  Even this morning’s Wall Street Journal could not powder the pig.

The Zero Hedge also exhibit how the current real estate slowdown are being reflected on homebuilder stocks (including lumber)

And according to the US BEA data, finance, insurance, real estate and leasing accounts for the largest share of US GDP (in 2013 19.67% of Gross Value added) add construction’s share 3.6%, finance and housing accounts for one fifth of the statistical GDP. So a sustained slowdown in real estate industry will materially weigh on US GDP.

Add to this have been growing signs of strains in the technology sector.

Some have been banking on manufacturing to offset the above. Manufacturing has a 12.4% share to 2013 GDP. But the $64 trillion question is, manufacturing sold to whom? 

In early March I noted that the EM contagion has materially slowed down external trade which implies lower global growth. From the trade aspect my projection has been confirmed by the Netherlands Bureau for Economic Policy Analysis which noted that global trade in early 2014 registered its “first negative reading since October 2012”. 

Now we will see how this plays out with world’s statistical GDP

So far, the periphery-to-the-core feedback mechanism has been in progress as seen globally and within specific economies.

China’s Local Governments have been Addicted to Bubbles

I have been pointing out here how China’s bubbles are consequences of financial repression policies, with particular weight on inflationism.

Now comes a report saying that the main beneficiaries of blowing bubbles—the government, particularly the local government—have been hooked on the said policies.

From the Wall Street Journal Real Times Economic Blog:

Local governments in China are growing ever more addicted to revenue from land sales.

That’s the takeaway from China’s Ministry of Land and Resources, which issued its second-ever annual report on land resources in China this week.

According to the report, last year, local government officials sold 367,000 hectares of land, up 14% from the year before. The sales were a bonanza for local government finances, raising 4.2 trillion yuan ($682 billion), a 56% increase over the previous year.

Through bubble blowing policies, not only does the government get increased revenues from inflated earnings, such has also helped the local governments attain economic growth targets imposed by the national government partly through land sales.

Since local governments are responsible for about 70% of spending while receiving only 50% of tax revenues as shown in the left pane from the IMF, land sales signify as one important source of alternative funding for local government projects. The IMF chart in the right pane shows land sales as a share of revenues of select cities and of the national government.

Aside from land sales, the bigger source of local government bubble activities has been financed by debt.

China’s bubbles have been fueled by local government “investment” spending meant to attain economic growth targets. Much of these “investments” have been channeled through a construction binge, which became pronounced when the Chinese government launched a gargantuan (US $586 billion) stimulus as shield against the global crisis in 2008-2009.

And since local governments are legally not allowed to borrow, they have circumvented such rules by creating local government controlled special purpose units called LGFV (local government financing vehicles).

However when the national government tightened bank lending to LFGVs, the latter opted to secure financing via shadow banks. 

Bubble blowing activities by local government units in response to negative real rates and to a political system which imposes growth targets at the local level have led China's local government units to swim in debt reportedly to the tune of US$2.9 trillion as of June 2013 as earlier discussed. 

And this has not just been the local government, according to an analyst from Bank of America Merrill Lynch, compared with other countries, China’s private sector generated the most debt between 2008-2012

In short China’s economic 'state capitalism' model has been pillared by credit inflation which local governments has been chronically hooked to. Take away these artificial props and the whole credit house of cards falls. 

The article also reveals signs of failed central planning: (bold mine)

Meanwhile, the government also made significantly more land available for residential and commercial purposes last year, up 20% and 28%, respectively. Sales of both kinds of land are significantly more lucrative than, say, land used for infrastructure construction and land used for industry, mining and warehousing, two other categories mentioned in the report. The amount of land set aside for infrastructure fell by 6% in 2013, while the land for industry, mining and warehousing only increased by around 1%.

That’s a marked change. In previous years, the government tended to emphasize land for infrastructure more, setting aside 338,500 hectares of such land in 2012, a more than fivefold increase over what was dedicated to such use in 2008. During that same period, land for industry, mining and warehousing use increased 123%, compared with only 85% for residential land.

At the time, the hope was that construction of more industrial parks and infrastructure would attract investment. But for many cities, such dreams haven’t materialized. Instead, the result is densely packed city-centers surrounded by sprawling suburbs left to stray dogs and tumbleweed.

According to a recent report by the World Bank, if Shenzhen had the same urban density as Seoul, it could accommodate an additional 5.3 million residents.

Now, it appears, local governments are finding that lucrative residential and commercial land sales are a quicker way to make a buck. But such appetite—and the prospect of even more people being forced off their land—is worrisome to the central government, which wants to ensure the country remains agriculturally self-sufficient.

So China's national government will have a very challenging balancing task of shifting economic activities away from the local (and national) government and into the private sector while at the same time dealing with a system burdened by excessive debt without falling into a crisis.

But such transition will hardly be smooth since authorities will be hampered by the knowledge problem (they have some idea of the problem but they don't know the particulars of the millions of moving parts of economic activities operating within her boundaries), and importantly, as mentioned above, there are huge entrenched “addicted” interests involved.

Move Aside GDP, US BEA Introduces Austrian Economic Measure called “Gross Output”

The Keynesian demand side GDP statistical construct will now be counterbalanced with the introduction by the US Bureau of Analysis BEA of the supply side economic statistical measure called “Gross Output”. The Gross Output was long proposed by Austrian economist Mark Skousen. [Mark Skousen’s 2010 paper here]

Writes Mark Skousen at the Wall Street Journal [bold mine]

Starting April 25, the Bureau of Economic Analysis will release a new way to measure the economy each quarter. It's called gross output, and it's the first significant macroeconomic tool to come into regular use since gross domestic product was developed in the 1940s.

Steven Landefeld, director of the BEA, says this new macroeconomic tool offers a "unique perspective" and a "powerful new set of tools of analysis." Gross output is an attempt to measure what the BEA calls the "make" economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product, and far more volatile.

In many ways, gross output is a supply-side statistic, a measure of the production side of the economy. GDP, on the other hand, measures the "use" economy, the value of all "final" or finished goods and services used by consumers, business and government. It reached $17 trillion last year.

The follies of demand side GDP:

But its focus on final output omits intermediate production and as a result creates much mischief in our understanding of how the economy works.

In particular, it has led to the misguided Keynesian notion that consumer and government spending drive the economy rather than saving, business investment, technology and entrepreneurship

Thus journalists and many economic analysts report that "consumer spending drives the economy." And they focus on retail spending or consumer confidence as the critical factors in driving the economy and stock market. There is an underlying anti-saving mentality in this analysis, as evidenced by statements frequently made during debates on tax cuts or tax rebates that if consumers save their tax refund instead of spending it, it will do no good for the economy…

Although consumer spending accounts for about 70% of GDP, if you use gross output as a broader measure of total sales or spending, it represents less than 40% of the economy.

Read the rest here

I do not expect vested interest groups and the political class to immediately adapt this, which instead they are likely to dismiss or ignore. However such alternative economic metric, which is likely to be more representative of the real conditions of the economy, will likely pave way for more divisions in the sphere of politics as boom-bust cycles and other distortions from myriad government interventions will become more evident.

This reminds me of the Hayek versus Keynes rap theme: Fear the Boom and the Bust

How 3D Printing has been Enhancing the Housing Industry

Take away the property bubbles for a moment. 

The use of 3D technology has been spreading. Today, with 3D Printer technology, housing will not only become more affordable, they can be built fast and according to one’s taste or 'custom fitted' housing.

In China a Chinese company has introduced mass housing via 3D printer technology. The said company “3D printed” 10 houses in 24 hours using recycled construction materials for $4,800 (Php 214,000). The houses were printed offsite and assembled at the site location. 

The Chinese company hasn’t been the first to join the race to build 3D printed houses in 24 hours, a researcher from a US based university has been working on such goals too. I believe there are more but have been undisclosed.

In Amsterdam, the world’s first onsite 3D printed house—which is actually intended as a museum and a research facility—is being built. House materials consist of layers of molten plastic which function like LEGO materials.

Three insights. Technology brings about “deflation”—something which authorities and the mainstream—have been deeply averse to. Yet "deflation", for consumers, means more affordability or more goods or services one can buy with a given currency unit—such signifies as an increase in real purchasing power (What money can buy). 

What the mainstream doesn't tell you is that the "deflation" they all so rabidly dread is credit deflation (bubble bust). So they all promote sustained debasement of the real purchasing power of money via bubble blowing or credit inflation policies  

The second lesson is competition. The quest for profits has not just led to the discovery of new technologies, but has also been impelling companies to innovate or to introduce new or improvised uses (applications) for a specific technology in order to satisfy consumers. 

Lastly the potentials of 3D Printing technology remains vast. 3D printing technology is yet in the early phase of expansion in terms of diffusion of applications to commerce and to households. So for me, this an industry worth monitoring.

[Disclosure: As of this writing, I have no equity holdings in 3D technology stocks]

In the US, Rising Input Prices are Symptoms of Deepening Malinvestments

The great Austrian economist Ludwig von Mises analogizes on how malinvestment develops. Professor von Mises:

The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.

Such “lack of the material needed for the completion of the structure” represents the developing resource crunch which will be expressed via higher input costs—and higher interest rates.

The New York Times/Associated Press reports:

Rising costs for materials and labor appear to be putting pressure on businesses, according to a quarterly survey by the National Association for Business Economics. During the first quarter, 31 percent of businesses surveyed reported higher material costs, more than double the 15 percent that said costs rose in the previous survey. In addition, 35 percent reported rising wages and salaries at their businesses in the last three months, up from 23 percent in the fourth-quarter survey. Yet those who said they raised their prices in the last three months remained unchanged at 20 percent, according to the survey, which was conducted from March 18 through April 1.

Oh by the way this comes as reports of more closure of retail outlets which the Zero Hedge says represents the “worst year for conventional discretionary spending since the start of the great financial crisis!” The Zero Hedge quotes a study from the Credit Suisse:

Since the start of 2014, retailers have announced the closure of more than 2,400 units, amounting to 22.6 million square feet, more than double the closures at this point in 2013…

Even dollar stores and drug stores, which combined have consistently built out hundreds of stores per year, are beginning to reel back on expansion, with Family Dollar and Walgreens both planning to shutter  underperforming stores.

While retail closures have partly signified changes in consumer preferences in terms of a shift towards online sales and on changes in physical location of retail outlets as previously discussed, a bigger force has been a reduction of disposable income due to deleveraging from previous debt financed consumption spree (chart from St. Louis Fed).

And depressed consumer spending can be seen via the durable goods spending as % of the GDP where spending has collapsed during the last recession as US consumers deleveraged or gave priority to paying down debt. 

So if businesses continues to get squeezed by higher input costs in the face of an unimpressive comeback by consumer still hobbled by debt, then whatever stock market boom we have been seeing will eventually be dealt with harsh reality. 

In Pictures: Starved Global Investors Reaching for Yields

In his latest outlook, Dr. John Hussman writes

The Federal Reserve’s policy of quantitative easing has starved investors of all sources of safe return, provoking them to reach for yield in more speculative assets, including equities, leveraged loans, covenant-lite debt, and other securities. Having stomped on the pedal for years, all of these asset classes are valued at levels that are strenuously elevated from a historical perspective, and as a result, offer strikingly poor prospective returns for long-term investors.

I’d compliment Mr. Hussman’s observation by showing the updated 1^st quarter 2014 charts from the Institute of International Finance—a global trade group or association (cartel?) with over 450 members comprising world leading banks and financial houses, headquartered in 70 countries (Wikipedia)

From the IIF:

Global bond issuance continues with its record breaking streak led by Euro area bonds. While the Eurozone’s banking system remains broken as manifested by contracting banking loans and falling money supply, most of the Eurozone’s asset chasing dynamic have been financed by the rapidly growing bond markets.

Next global high risk mezzanine financing called “payment in kind” loans are at “a striking record highs”! Again a lot of this growth comes from the Eurozone.

Meanwhile another global high risk loan called “leveraged loans” (loans to highly indebted entities) have been running at growth rates at par with 2013. 

Indeed markets, starved for returns have been desperately chasing markets by expanding debt exposure. Yet such exposure has extrapolated to a substantial decline in credit quality

The IIF conveys her worries and noted that 

a rising proportion of corporate issuance has been done  by high-yield issuers, increasingly of lower credit quality such as CCC and rising proportion of corporate issuance has been done by high-yield issuers, increasingly of lower credit quality

Aside from high yield (lower credit rating) loans or what are known as junk bonds, Covenant lite loans are loans with less restrictions on collateral, payment terms and level of income. 

Any impression that emerging markets “reformed” following the latest tremors have been misplaced. While emerging market corporate bond issuance has marginally leveled off, government bond issuance soared to its highest level since 2005, mostly due to Eastern Europe.

In addition, international loan exposure by emerging market corporates led by the banks have materially increased since 2010.

So what we are seeing today has been a confluence of contradictory forces: rising risk asset markets being funded by ballooning debt—whose quality have been in a substantial deterioration—as bond yields suggest rising rates soon.

Such lethal combination inevitably indicates a forthcoming Wile E. Coyote moment.

Quote of the Day: What Easter Means

Freedom is the ability of every person to exercise his own free will, rather than be subject to the will of the government or anyone else. Free will is a characteristic we share in common with God. He created us in His image and likeness. As He is perfectly free, so are we.

When the government takes away our free will, the government steals a gift from God; it violates the natural law; it prevents us from having and utilizing the means to the truth. The moral ability to exercise free will to seek the truth is a natural right that all humans possess, and the government may only morally interfere with the exercise of that right when one affirmatively has given it away by using fraud or force to interfere with the exercise of someone else’s natural rights.

We know from the events 2,000 years ago, which Christians commemorate and celebrate this week, that freedom is the essential means to discover and unite with the truth. And to Christians, the personification, the incarnation, the perfect manifestation of truth is Jesus — who is the Christ, the Son of God and the Son of the Blessed Virgin Mary.

On the first Holy Thursday, Jesus attended a traditional Jewish Passover Seder. Catholics believe that at His last supper, He performed two miracles so that we could stay united to Him. He transformed ordinary bread and wine into His own body, blood, soul and divinity, and He empowered His disciples and their successors to do the same.

On the first Good Friday, the Romans executed Jesus because they were persuaded that by claiming to be the Son of God, He might foment a revolution against them. The revolution He fomented was in the hearts of men and women. The Romans had not heard of a revolution of the heart; nevertheless they feared a revolution that would disrupt their worldly power, and so they condemned Him to death by crucifixion.

Jesus had the freedom to reject this horrific event, but He exercised His freedom so that we might know the truth. The truth He manifested is that His acceptance of the destruction of His body would enable Him to die so that He could rise from the dead. On Easter, three days after He died, that manifestation was complete when He rose from the dead. By doing that, he demonstrated to us that while living we can liberate our souls from the slavery of sin and our free wills from the oppression of the government, and after death we can rise to be with Him.

Easter — which manifests our own immortality — is the linchpin of human existence. With it, life is worth living, no matter its costs or pains. Without it, life is meaningless, no matter its fleeting joys or triumphs. Easter has a meaning that is both incomprehensible and simple. It is incomprehensible that a human being had the freedom to rise from the dead. It is simple because that human being was and is God.

Jesus is the hypostatic union: not half-God and half-man, not just a godly good man, but truly and fully God and at the same time truly and fully man. When the Romans killed Jesus, they killed God. When the dead Jesus rose from His tomb, God rose from the dead.

What does Easter mean? Easter means that there is hope for the dead. If there’s hope for the dead, there’s hope for the living. But, like the colonists who fought the oppression of the king, we the living can only achieve our hopes if we have freedom. And that requires a government that protects freedom, not one that assaults it.

This is from Judge Andrew P. Napolitano at the LewRockwell.com

Happy Easter! (image source)

Quote of the Day: War is a Racket

War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses.

I believe in adequate defense at the coastline and nothing else. If a nation comes over here to fight, then we'll fight. The trouble with America is that when the dollar only earns 6 percent over here, then it gets restless and goes overseas to get 100 percent. Then the flag follows the dollar and the soldiers follow the flag.

I wouldn't go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights. War for any other reason is simply a racket.

There isn't a trick in the racketeering bag that the military gang is blind to. It has its "finger men" to point out enemies, its "muscle men" to destroy enemies, its "brain men" to plan war preparations, and a "Big Boss" Super-Nationalistic-Capitalism.

It may seem odd for me, a military man to adopt such a comparison. Truthfulness compels me to. I spent thirty- three years and four months in active military service as a member of this country's most agile military force, the Marine Corps. I served in all commissioned ranks from Second Lieutenant to Major-General. And during that period, I spent most of my time being a high class muscle- man for Big Business, for Wall Street and for the Bankers. In short, I was a racketeer, a gangster for capitalism.

I suspected I was just part of a racket at the time. Now I am sure of it. Like all the members of the military profession, I never had a thought of my own until I left the service. My mental faculties remained in suspended animation while I obeyed the orders of higher-ups. This is typical with everyone in the military service.

I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefits of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912 (where have I heard that name before?). I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested.

During those years, I had, as the boys in the back room would say, a swell racket. Looking back on it, I feel that I could have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.

(bold mine)

This excerpt is from a speech delivered in 1933, by two time medal of honor the late Major General Smedley Butler, USMC. (hat tip Marc Faber/Daily Reckoning). War is a racket has been transcribed by Mr. Butler into a book you can read it here. And you can see a video of his speech here.

Frédéric Bastiat on the Philippine Government’s Massive Infrastructure Spending Program

Today’s headline from one of the major newspapers screams that the Philippine government will undertake a massive infrastructure spending program (worth about Php 113 billion about  US $ 2.55 billion), “to make economic growth inclusive and lift millions out of poverty”

Last weekend I noted that aside from the critical pivot by the BSP in 2009 to reconfigure the direction of the domestic economy from a supposed 'external dependent' economy to a 'domestic demand' based economy via monetary blowing bubble policies and through fiscal expenditure projects (which is this massive spending program), I pointed out how the BSP chief also misstated the context of the great French free market champion Frédéric Bastiat on the latter's message from his work “what is  seen and what is unseen”.

Now I quote Bastiat’s  view of public work spending programs: (bold mine, italics original)

Nothing is more natural than that a nation, after making sure that a great enterprise will profit the community, should have such an enterprise carried out with funds collected from the citizenry. But I lose patience completely, I confess, when I hear alleged in support of such a resolution this economic fallacy: "Besides, it is a way of creating jobs for the workers."

The state opens a road, builds a palace, repairs a street, digs a canal; with these projects it gives jobs to certain workers. That is what is seen. But it deprives certain other laborers of employment. That is what is not seen.

Suppose a road is under construction. A thousand laborers arrive every morning, go home every evening, and receive their wages; that is certain. If the road had not been authorized, if funds for it had not been voted, these good people would have neither found this work nor earned these wages; that again is certain.

But is this all? Taken all together, does not the operation involve something else? At the moment when M. Dupin pronounces the sacramental words: "The Assembly has adopted, ...." do millions of francs descend miraculously on a moonbeam into the coffers of M. Fould and M. Bineau? For the process to be complete, does not the state have to organize the collection of funds as well as their expenditure? Does it not have to get its tax collectors into the country and its taxpayers to make their contribution?

Study the question, then, from its two aspects. In noting what the state is going to do with the millions of francs voted, do not neglect to note also what the taxpayers would have done—and can no longer do—with these same millions. You see, then, that a public enterprise is a coin with two sides. On one, the figure of a busy worker, with this device: What is seen; on the other, an unemployed worker, with this device: What is not seen.

The sophism that I am attacking in this essay is all the more dangerous when applied to public works, since it serves to justify the most foolishly prodigal enterprises. When a railroad or a bridge has real utility, it suffices to rely on this fact in arguing in its favor. But if one cannot do this, what does one do? One has recourse to this mumbo jumbo: "We must create jobs for the workers."

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes."

Let us get to the bottom of things. Money creates an illusion for us. To ask for co-operation, in the form of money, from all the citizens in a common enterprise is, in reality, to ask of them actual physical co-operation, for each one of them procures for himself by his labor the amount he is taxed. Now, if we were to gather together all the citizens and exact their services from them in order to have a piece of work performed that is useful to all, this would be understandable; their recompense would consist in the results of the work itself. But if, after being brought together, they were forced to build roads on which no one would travel, or palaces that no one would live in, all under the pretext of providing work for them, it would seem absurd, and they would certainly be justified in objecting: We will have none of that kind of work. We would rather work for ourselves.

Having the citizens contribute money, and not labor, changes nothing in the general results. But if labor were contributed, the loss would be shared by everyone. Where money is contributed, those whom the state keeps busy escape their share of the loss, while adding much more to that which their compatriots already have to suffer.

There is an article in the Constitution which states:

"Society assists and encourages the development of labor.... through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands."

As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects. It acts in the same way as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times.

As a permanent, general, systematic measure, it is nothing but a ruinous hoax, an impossibility, a contradiction, which makes a great show of the little work that it has stimulated, which is what is seen, and conceals the much larger amount of work that it has precluded, which is what is not seen.

From Mr. Bastiat’s point of view, the supposed populist aim to ‘lift of millions out of poverty’ through massive public work projects has been a ‘ruinous hoax’ that has been recycled overtime (Remember Mr. Bastiat lived during the 19th century). And that the only ‘inclusivity of economic growth’ here will be a NET transfer of resources from society to politicians and the cronies through 'foolishly prodigal enterprises', thereby lifting economic benefits again to a select politically privileged and politically connected few. Woe to the taxpayers and to the politically unconnected peso holders.

[As a side note: It's lenten holiday season so I will abbreviate my comment on this.]

Infographics: Taxes Around the World

(hat tip zero hedge)

Source: Online-Accounting-Degrees.net

Possibly one of the reasons for rising food prices in the world can be also be traced to Denmark's bizarre "Cow flatulence tax". 

Anyway, global tax on wages reportedly rose in 2013. The Reuters says that total world taxes on wages rose to 35.9% in 2013 from 35.7% a year earlier based on OECD data. 

You can see the graphic on tax wedge and unemployment rate of the OECD countries by clicking on the link here.

In the US, Food Prices have been Rising FAST

If you talk to members or read articles of the mainstream economic faith, they often imply to you that money printing does NOT lead to inflation. Aside, any discussion about consumer price inflation has mechanically been viewed as strictly a “supply side” issue.

Of course despite their rabid denials, price inflation has been very much present given that central banks around have been jointly blowing bubbles to ensure that bankrupt governments stay afloat.

The mainstream hardly recognizes that first we see monetary inflation expressed via booming asset prices, next we see the same dynamic eventually spillover to consumer inflation.

Since inflation is a political process and represents part of the grand political scheme of financial repression, the effects on the markets and the economy runs in different phases or stages too. Central bank manipulation of money and credit affect specific prices of assets and of goods and services in relative scale and time periods.

We are seeing such phenomenon at work even in the US

Cost of fresh produce are expected to move significantly higher according to a Wall Street Journal report. This supposedly has been  to a “three year drought in California” where the report adds that higher cost of fresh produce will lead to “overall food cost gains are expected to accelerate this year”

The Zero Hedge shows of spiraling prices beef, pork and shrimp. Note these are long term trends. But the recent rate of increases seem to have accelerated.

Another Wall Street Journal chart shows the spreading price inflation in basic commodities

In the US, food accounts for 14.9% of the CPI basket according to Doug Short.

The US Bureau of Labor reported last April 15th of the changes in US CPI stating that the “increases in the shelter and food indexes accounted for most of the seasonal adjusted all items increase. The food index increased 0.4 percent in March, with several major grocery store food groups increasing notably”

In early 2013 I predicted that rising home prices and rents will contribute to higher US CPI. So the US housing bubble is adding to CPI strains.

Finally rising food prices has not just been a US or Philippine phenomenon but a also global one. Again the mainstream blames this on the supply side particularly to weather and to deteriorating events in Ukraine

While this is not to deny that supply have contributed to rising prices, what has been a standard operation procedure for the mainstream has been to deliberately omit or obscure the demand side—which seems to operate in a vacuum—particularly demand that has been influenced by central bank policies 

For instance, as one would note from the FAO chart, dairy prices have been rising prior to the polar vortex or to the escalation of the Ukraine conflict.

The bottom line is that central bank inflationism has been increasingly spilling over to the real economy via rising food prices. And this is being aggravated by supply chain disruptions. This also means incidences of global hunger and poverty will rise. Such also implies of growing risks of a global food crisis.  

And importantly this signals why the era of asset inflation boom is bound to reverse soon as sustained pressures on consumer prices will eventually reflect on interest rates (whether in the US, Philippines or elsewhere).

Asia’s Richest Man Li Ka Shing has been in an asset selling binge in China

Watch what smart money does rather than what they say.

Asia’s richest man has been in an asset selling spree in China. Sovereign Man’s Simon Black explains:

Here’s a guy you want to bet on– Li Ka-Shing.

Li is reportedly the richest person in Asia with a net worth well in excess of $30 billion, much of which he made being a shrewd property investor.

Li Ka-Shing was investing in mainland China back in the early 90s, way back before it became the trendy thing to do. Now, Li wants out of China. All of it.

Since August of last year, he’s dumped billions of dollars worth of his Chinese holdings. The latest is the $928 million sale of the Pacific Place shopping center in Beijing– this deal was inked just days ago.

Once the deal concludes, Li will no longer have any major property investments in mainland China.

This isn’t a person who became wealthy by being flippant and scared. So what does he see that nobody else seems to be paying much attention to?

Simple. China’s credit crunch.

After years of unprecedented monetary expansion that has put the economy in a precarious state, the Chinese government has been desperately trying to reign in credit growth.

The shadow banking system alone is now worth 84% of GDP according to an estimate by JP Morgan. The IMF pegs total private credit at 230% of GDP, jumping by 100% in the last few years.

Historically, growth rates of these proportions have nearly always been followed by severe financial crises. And Chinese leaders are doing their best to engineer a ‘soft landing’.

If they’re successful, the world will only see major drops in global growth, stocks, property, and commodity prices.

If they fail, the spillover could become pandemic.

This isn’t important just for Asian property tycoons like Li Ka-Shing. Even if you don’t know Guangzhou from Hangzhou from Quanzhou, there are implications for the entire world.

Read the rest here

Mr. Li Ka Shing’s last sale concluded last week, from wantchinatimes.com (bold mine)

Despite claims by Asia's richest man that he has not offloaded his mainland investments, Hong Kong multi-billionaire Li Ka-shing has got rid of over 20 billion yuan (US$3.23 billion) in Chinese property holdings since August last year.

The latest is the HK$7.2 billion (US$930 million) sale of Beijing's Pacific Century Place shopping center by Pacific Century Premium Developers, a company headed by son Richard Li. When the sale is completed in August, the company will have no more major investments in the mainland.

This comes amidst more signs of big trouble in the big China.

Officials of a local government have reportedly been scrambling to settle a troubled steel maker’s debt.

From Caixin online:

Officials in a city in northern China have been busy recently sorting out a steelmaker's debt mess that could involve as much as 20 billion yuan, even as the firm's owner avoids attending meetings on the matter, sources close to the situati0n say.

Highsee Iron and Steel Group Co. Ltd., which is based in Yuncheng City's Wenxi County, ceased production on March 18. It has seen a host of creditors including big banks line up to get their money back.

And the fractures from the humungous credit financed property boom has been accelerating or intensifying as vacancy rates have been ballooning even in prime areas. From South China Morning Post: 

According to property firm Jones Lang LaSalle, vacancies in Grade A office buildings in the area's major cities will stay high in the coming years due to weaker-than-expected demand.

While a loan default by a developer in Zhejiang sparked fears of a collapse of the residential property sector, the situation in the office sector appears to be even worse . Residential property developers can at least slash prices to dispose of flats to recover part of their investment. Half-empty buildings, however, are not just white elephants but financial black holes.

Jones Lang LaSalle found that at the end of last year, occupancy rates for Grade A office buildings stood at 58 per cent in Wuxi, Jiangsu, and 30 per cent in the Zhejiang capital, Hangzhou . In other major delta cities, which together make up the most vibrant and developed regional economy on the mainland, occupancy rates also hovered around 30 per cent last year.

In Wuxi, the vacancy rate was expected to stand at 48 per cent in 2016, it said. By the end of that year, the stock of prime office space in the city would nearly triple from last year's amount to 565,000 square metres

And here is what delusions that spawns a boom-bust cycle have been made of: (bold mine)

Over the past decade, delta cities have pulled out all the stops to launch one new town one after another. Located on the suburban fringes of each city, they are designed to accommodate millions of residents and attract more corporate investors.

The boom was based on officials' unshakeable faith that sustainable growth of delta cities would last for decades.

Developers splashed out billions of yuan to build office buildings, shopping malls and entertainment complexes in the new towns, believing an affluent population of 75 million would be enough to support their businesses. Unfortunately, reshuffles of municipal officials led to dramatic changes in urban development plans. New leaders would map out their own blueprints, earmarking more untapped land for new high-rise residential areas or industrial zones.

This resonates with what’s been going around in ASEAN including the Philippines. The difference is that China seems at an inflection point while the ASEAN contemporaries are approaching the inflection point where troubles in China (Japan, Ukraine or elsewhere) can hasten the process.

Nonetheless the estimated risks of transmission or contagion via merchandise trade with China from George Magnus (Business Insider)

The bottom line is that the mainstream has been severely underappreciating the risks from China’s boom bust cycle which could also be a major source for a global economic and financial Black Swan.