December 2013 – Page 231

Guest Post: The Cargo Cult Economy

Submitted by Gregory Cummings via The Ludwig von Mises Institute of Canada,

Last week, I heard about a particularly tragic example of the post hoc, ergo propter hoc logical fallacy, which Frederic Bastiat, the great 19th-century economist, called “the greatest and most common fallacy in reasoning.”

After the outbreak of World War II, many isolated islands located in the Pacific Ocean became staging grounds for Japanese and Allied forces. This development unfolded before the primitive indigenous peoples, including those on the island of Tanna, Vanuatu. According to Wikipedia:

The vast amounts of military equipment and supplies that both sides air-dropped (or airlifted to airstrips) to troops on these islands meant drastic changes to the lifestyle of the islanders, many of whom had never seen outsiders before. Manufactured clothing, medicine, canned food, tents, weapons and other goods arrived in vast quantities for the soldiers, who often shared some of it with the islanders who were their guides and hosts.

Sadly, this arrangement came to an abrupt end with the end of the war, when the Allied forces abandoned these temporary airbases. Once again, the islanders no longer had access to the myriad of consumer goods provided by visitors from distant advanced economies.

As a result, on Tanna island and elsewhere, local inhabitants formed so-called “cargo cults” in order to restore their lost prosperity:

In an effort to get cargo to fall by parachute or land in planes or ships again, islanders imitated the same practices they had seen the soldiers, sailors, and airmen use. Cult behaviours usually involved mimicking the day to day activities and dress styles of US soldiers, such as performing parade ground drills with wooden or salvaged rifles. The islanders carved headphones from wood and wore them while sitting in fabricated control towers. They waved the landing signals while standing on the runways. They lit signal fires and torches to light up runways and lighthouses.

In a form of sympathetic magic, many built life-size replicas of aeroplanes out of straw and cut new military-style landing strips out of the jungle, hoping to attract more aeroplanes.

The indigenous peoples of Tanna island observed that material goods arrived after the presence of landing strips and aeroplanes. This led them to falsely conclude that material goods arrived because of the presence of landing strips and aeroplanes. They failed to consider other causal factors, such as the war, and based their conclusion solely on the order of events. This is the essence of the post hoc ergo propter hoc logical fallacy.

This error in reasoning persists today, particularly in the realm of economics as it relates to the role of government. For example, relative to a hundred years ago, it is obvious that our standard of living has drastically improved. P.J. O’Rourke illustrated this brilliantly by observing, “When you think of the good old days, think one word: dentistry.” Quite simply, we owe this increased prosperity to staggering improvements in marginal productivity and the division of labour brought about by capital accumulation and savings in a society based on voluntary exchange and a price system resulting from the ownership of justly-acquired private property. There is no other path to prosperity.

In spite of this knowledge, there remain numerous court intellectuals and their acolytes who serve as apologists for government, falsely insisting that since we are more prosperous after such and such regulation or such and such measure of taxation (other factors not being equal), we are more prosperous because of such and such regulation or such and such measure of taxation. Therefore, they conclude, more and more economic intervention is needed to cure our accumulating economic woes. And so it is, that the post hoc ergo propter hoc fallacy reasserts itself.

But insofar as our well-being is concerned, government intervention in the economy is no more effective than the straw aeroplanes and wooden headphones of some bewildered “cargo cult.” In truth, it probably does more harm.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/B8HRwVBhWk4/story01.htm Tyler Durden

China Turns Labor Camps Into Forced Drug Rehab Centers

In an effort to appease human rights concerns over antiquated
and inhumane forms of punishment, China’s central government
announced last month that it will abolish its infamous forced labor
camps. The oppressive camps are not actually going away though:
they are being
turned into forced drug rehabilitation centers.

The announcment came after the conclusion
of the
Third Plenary meeting of the Communist Party, a
gathering of China’s top policymakers and political leaders, when
the government issued a press release detailing its plans to
curtail the country’s human rights abuses by enacting
“comprehensive reform.”

The reforms
include (allegedly) putting an end to forced labor camps, or the
“laojiao” system, as well as the one-child policy.

The laojiao system has been the subject of intense criticism
from human
rights groups and Chinese
citizens for decades. Established in 1957, the camps
detain petty criminal offenders, drug users, and political and
religious dissidents for up to four years without trial. Inmates
spend their days working long hours in unsafe factory conditions.
And they’re widespread: In a 2009 report to a United Nations human
rights forum, the Chinese government acknowledged
the existence of 320 facilities nationwide holding 190,000
people.

However, according to a new report from Reuters, the
camps will remain largely in tact for drug users. From the
report:

Many of China’s re-education through labor camps, instead of
being abolished in line with a ruling Communist Party announcement
this month, are being turned into compulsory drug rehabilitation
centers where inmates can be incarcerated for two years or more
without trial.

Human rights activists and freed inmates said drug offenders
were still being forced to do factory work, as has been the
practice under the re-education through labor system.

New York-based Human Rights Watch estimates more than 60 percent
of the 160,000 people in labor camps at the start of the year were
there for drug offenses. Those people were unlikely to see any
change in their treatment, it said.

“The drug detox people are doing exactly the same work,” said
Li, who spent 19 months in a labor camp in Kunming, the capital of
southern Yunnan province.

Government websites and
state media have detailed the transition, as many camps have
started to change their names and re-train staff. But they describe
the new policy as a form of compassionate treatment for addicts,
rather than a continuation of forced labor.

In the
Shanghai Daily, Kong Shuhua, director of
Xishuangbanna’s Justice Bureau, said, “The new rehab center
will provide compulsory drug rehabilitation treatment for addicts,
and help them find self confidence again.”

The policy is part of China’s escalating crackdown on illicit
drug consumers.

According to the
Atlantic, the influx of recreational drugs into China,
(which is a product of “more relaxed borders, increased wealth, and
greater individual freedoms,”) has resulted in frequent
record-breaking drug busts. In 2008, the government implemented an

anti-drug law that severely criminalized users. Anyone caught
using a classified drug, such as cocaine, heroin, or marijuana,
would be labelled an “addict” in the state’s official reigstry and
shipped to a labor camp.

In 2010, Human Rights Watch released a
report outlining the conditions in China’s drug
“rehabilition” centers:

Individuals detained in some drug detention centers are
routinely beaten, denied medical treatment, and forced to work up
to 18 hours a day without pay. Although sentenced to
“rehabilitation,” they are denied access to effective drug
dependency treatment and provided no opportunity to learn skills to
reintegrate into the community.

Jiang Tianyong, a human rights lawyer in Beijing,
told Reuters, “It’s wrong to say [the announced
end of forced labor camps] has no meaning, but it’s too optimistic
to think it will change a lot.”

“This is how power in this country operates,” he continued.
“They can’t use re-education through labor camps to control people,
so they just change the name and control people.”

from Hit & Run http://reason.com/blog/2013/12/02/chinas-step-into-modernism-turning-labor
via IFTTT

US Navy Ship To Play Role in Destruction of Syria’s Chemical Weapons

According to the
Organization for the Prohibition of Chemical Weapons (OPCW),
some of the “neutralisation operations” relating to Syria’s
chemical weapons will be carried out aboard a U.S Navy ship.

From the BBC:

The US naval vessel on which neutralisation will take place has
not been officially named but is believed to be the MV Cape Ray. It
is undergoing modifications to support the operations.

These should be completed by 31 December, the OPCW said.

The announcement is another strong sign that the timetable given
to destroy all Syria’s chemical weapons arsenal and capabilities by
the middle of next year could be achieved, despite its many
apparent difficulties, says the BBC’s Middle East editor Sebastian
Usher.

The news comes after officials in
Norway,
Albania, and
Belgium said that they did not want their country to host the
destruction of the Assad regime’s chemical weapons arsenal.

I highlighted the fact that the OPCW was open to having chemical
weapons destroyed at sea
last month. In that post, I mentioned comments made by chemical
weapons disarmament consultant Ralf Trapp, who told the AP that
dealing with chemical weapons at sea comes with some
challenges:

Trapp told the AP that using a sea-based facility would have
numerous advantages, including the ability to position it far from
populated areas.

But he said there were many problems to be addressed beforehand,
including restrictions in the U.N. Convention on the Law of Sea
intended to protect the marine environment, and how to transport
the highly toxic cargo so it presents a minimal risk for sailors,
other maritime traffic and the oceans in general.

United Nations diplomat Sigrid Kaag outlined the logistical
details of getting the chemical weapons put on the American
ship.

From the
AP:

The international organization’s director general, Ahmet Uzumcu,
said in The Hague that the U.S. government will contribute “a
destruction technology, full operational support and financing to
neutralize” the weapons, most likely on a ship in the Mediterranean
Sea. The weapons are to be removed from Syria by Dec. 31.

The weapons and chemicals “will not be [destroyed] in Syrian
territorial waters,” Kaag said at a news conference in
Damascus.

Separately, Sigrid Kaag, appointed as the go-between for the
United Nations and the OPCW on destroying Syria’s chemical weapons
stockpile, laid out some logistical details. Importantly, the
weapons will first be packaged and transported from multiple sites
within Syria to the country’s largest port, Latakia. Then they will
be loaded onto ships owned by other OPCW members before a second
handoff to U.S. vessels.

US Navy Ship To Play Role in Destruction of Syria's Chemical Weapons

From the BBC:

The US naval vessel on which neutralisation will take place has
not been officially named but is believed to be the MV Cape Ray. It
is undergoing modifications to support the operations.

These should be completed by 31 December, the OPCW said.

The announcement is another strong sign that the timetable given
to destroy all Syria’s chemical weapons arsenal and capabilities by
the middle of next year could be achieved, despite its many
apparent difficulties, says the BBC’s Middle East editor Sebastian
Usher.

The news comes after officials in
Norway,
Albania, and
Belgium said that they did not want their country to host the
destruction of the Assad regime’s chemical weapons arsenal.

Trapp told the AP that using a sea-based facility would have
numerous advantages, including the ability to position it far from
populated areas.

But he said there were many problems to be addressed beforehand,
including restrictions in the U.N. Convention on the Law of Sea
intended to protect the marine environment, and how to transport
the highly toxic cargo so it presents a minimal risk for sailors,
other maritime traffic and the oceans in general.

United Nations diplomat Sigrid Kaag outlined the logistical
details of getting the chemical weapons put on the American
ship.

From the
AP:

The international organization’s director general, Ahmet Uzumcu,
said in The Hague that the U.S. government will contribute “a
destruction technology, full operational support and financing to
neutralize” the weapons, most likely on a ship in the Mediterranean
Sea. The weapons are to be removed from Syria by Dec. 31.

The weapons and chemicals “will not be [destroyed] in Syrian
territorial waters,” Kaag said at a news conference in
Damascus.

Separately, Sigrid Kaag, appointed as the go-between for the
United Nations and the OPCW on destroying Syria’s chemical weapons
stockpile, laid out some logistical details. Importantly, the
weapons will first be packaged and transported from multiple sites
within Syria to the country’s largest port, Latakia. Then they will
be loaded onto ships owned by other OPCW members before a second
handoff to U.S. vessels.

Welcome To The Riskless Market

Authored by Anthony Peters of SwissInvest, via IFR,

Risk is a four-letter word

The markets seem to think we live in a largely riskless world.

RISK IS A funny old thing at the best of times, and even funnier when it is supposed to be correctly priced.

Most of us grew up with the understanding that the correct price for credit – my main area of expertise – was a function of the default probability, adjusted for the expected recovery rate.

Perhaps the simplest and cleanest example of risk pricing is to be found in the credit card industry, where your “bucketing” is of paramount importance. The lower your perceived risk is, the better a risk bucket you get lumped into and the lower your interest rate is. That’s banking 101, but it still isn’t clear to everyone that the net earnings from each bucket are expected to be similar, based on higher spreads being matched to higher defaults. Excess returns are generated when the expected defaults do not occur at the forecast rate.

So far, so good. But then how does one extrapolate that basic rule of lending to the way credit markets have been performing of late?

My old chum Suki Mann, living legend and credit strategist at Societe Generale here in London, highlighted the point – albeit probably not intentionally – in a piece he wrote this week. He asked, rhetorically, whether it would be possible for the credit markets to repeat this year’s performance in 2014 – wondering, in other words, whether a further 8.4% of returns on 220bp of spread tightening in high-yield or 2.4% returns with 22bp of spread tightening in investment-grade were possible.

“We’d concur with the former,” he wrote, “but up to 7% is not impossible off 100bp of spread tightening; while in IG, we think 2%-plus is possible with tightening in [iBoxx] index spreads of around 30bp.”

Although I don’t entirely disagree with Suki, I can’t detect too much science going into his pricing model, if that is what it is. The sole point of reference seems to be the all-time low spread of the iTraxx Main index, which was registered at 20bp in June 2007. As recently as early October it was trading at 100bp but is now marking around 75bp. Hence, his rather confident assertion that a further 20bp of tightening should not be a problem.

PERHAPS, BUT ONLY because the first rule of investing now appears to have become: if the worst is about to occur, then the monetary authorities will make sure that it doesn’t.

Let’s face it, Saint Mario Draghi did not only say that he will do “whatever it takes”, the bit of his assertion everyone remembers, but also, and perhaps more importantly, “…and believe me, it will be enough”.

In doing so, he removed huge swathes of what we once called risk – a concept that used to be known as a four-letter word. This raises the question: are risk assets now riskless assets or are they risk assets disguised as riskless?

What goes for bonds appears to go for equities too, even though we did experience something of a wobble in the summer when the US Fed seemed set to taper its bond buying programme. Since then, though, the Fed, in its own inimitable way, appears to have let equity markets believe that it will do nothing that might hurt share prices and hence shareholders. If anything, the velocity of the rally now appears to be increasing rather than decreasing.

Either the Fed is deceiving markets into believing that there is nothing to fear, or it is not making itself clear enough. To be frank, I doubt it is the latter.

SO WHAT HAS become of risk pricing? Well, one might try to argue that if there is no risk, then there can be no price for it. But that would be perhaps taking it a little bit too far – even for me.

Nevertheless, pricing risk has become so alien that even non-monetary policy-related risks are being disregarded. The little tiff between China and Japan (and by proxy the Americans) over a group of uninhabited islands never even caused a ripple in financial markets. And although it was written that oil prices had fallen in the aftermath of the interim agreement between Iran and the West, if one looks at the charts, WTI was trading well below its 300-day moving average long before the news broke – and the Geneva breakthrough doesn’t appear to have even registered.

Is there no risk or has the way in which authorities prevented the fallout from the credit bubble and the events that led to its formation led a generation of traders and investors to believe that it is a thing of the past?

One hedge fund manager once proudly stated that life is a bull market intersected by corrections. In the midst of the credit crisis I laughed at him.

Looking at the state of the world now, he might be laughing back, having concluded that the 2007 financial crisis and the 2008 fall of the House of Lehman were nothing more than bigger corrections and hence thumping buying opportunities that could only have been missed by idiots.

I guess that puts me in my place. Either that or there is something lurking out there that we have forgotten how to identify – and hence how to value.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xlrbeJKU6IE/story01.htm Tyler Durden

Record Numbers Of Homeless Flood Massachusetts Even As State Shelters Overflowing

In Bernanke’s centrally-planned, inverse Robin Hood world, record stock prices for the few unfortunately mean record homelessness for the many: this is what the state of Massachusettes found out the hard way after it was flooded with a record number of homeless families who are overwhelming the state’s emergency shelter system.

As the Boston Globe reports, citing a recent report from the Department of Housing and Urban Development, the number of homeless people in shelters and living on the streets in Massachusetts has risen 14 percent since 2010 to a record 20,000 in January 2013, even as homelessness has declined nationally.

Aaron Gornstein, the undersecretary for housing, said the surge has followed cuts in state and federal housing subsidies, soaring rents in Greater Boston, and still-high rates of unemployment and underemployment, particularly among lower-income workers.

“The state as a whole has recovered from the Great Recession faster than most other states, but in many ways we’re still struggling,” Gornstein said. “Federal budget cuts have made the situation worse.”

However, in what may be the most curious twist, and yet another example of how perverted the incentive and capital allocation system in the US is, the nearly 2,100 families who could not find place in shelters, were housed in motel rooms at a greater cost to all US taxpayers amounting to tens of millions.

An average of nearly 2,100 families a night — an all-time high — were temporarily housed in motel rooms in October, just about equaling the number of families in emergency shelters across the state, according to be the state Executive Office of Housing and Economic Development.

The demand for shelter is so great that the state has been temporarily sending homeless families from Boston to motels in Western Massachusetts, although state officials said many have been relocated back again, closer to home.

The rest of the story is largely well-known. “This jump in homelessness is another example of an uneven recovery. Even as stocks soar to new heights and real estate values rebound, many of the state’s poorest residents remain without jobs and homes four years after the last recession. The problems have been compounded by the dramatic federal spending cuts, known as sequestration, which have cut housing and food subsidies.”

“There’s no question, this is a continuing legacy of the Great Recession,” said Michael Goodman, a professor of public policy at the University of Massachusetts Dartmouth. “There’s more we can do to help, but it’s not likely, given where federal policy is. That suggests it’s going to be a very long winter for many.”

Whatever the reason for the record class disparity (and the reason is quite clear – Ben Bernanke – whose existence has made America’s legislative branch obsolete, and with it taken away the only thing that may help America’s poor: fiscal reform), one thing is certain: as tales of the hotel-housed homeless spread, everyone and their grandmother (quite literally) will scramble to join the ranks of people without a roof and be housed, on the taxpayers’ dime, in your friendly, local and quite comfortable hotel.

In the Western Massachusetts community of Greenfield, taxicabs pull up to the Quality Inn, but instead of tourists or business travelers with wheeled luggage, homeless families toting belongings in trash bags emerge.

Gretchen Vazquez is one of them. She moved into a room in the Quality Inn in October with her two daughters, 1- and 9-years-old, when the state subsidy for her Roxbury apartment ran out after the Legislature stopped funding a program called HomeBASE. The program was created to provide an alternative to emergency shelters.

The cramped motel, Vazquez lamented, is far from her evangelical church and her daughter’s school in West Roxbury. After missing about two weeks of school, her daughter enrolled in the public school system here.

“I’m stuck,” said Vazquez. “I don’t know what’s going to happen next.”

Massachusetts has one of the most extensive shelter systems in the country. Unlike most states, it offers emergency housing to anyone who qualifies. Many end up in shelters or living in homes that board families in rooms, known as congregate housing.

In the meantime, Massachusettes (and the homeless of course) are grateful for the generosity of America’s taxpayers.

Motels are one of the state’s most expensive options at $82 a night, almost as much as congregate housing’s $100 a night cost. In the past five years, state spending on motels has exploded to more than $46 million from about $1 million in 2008, according to state records

The average motel stay, state housing officials said, is about seven months, although some families live in motels for a year waiting for affordable housing.

Libby Hayes, executive director of Homes for Families, a Boston advocacy group, said it is not surprising that low-income workers with fewer skills cannot make ends meet since even college graduates are struggling to find work.

Naturally, the people are angry:

“The economy is not working,” Hayes said. “How do we expect people from the lowest income tier to make it if people who have had opportunities can’t?”

The recent jump in homeless people signals that people have run out of alternatives, said Randy Albelda, an economics professor at the University of Massachusetts Boston. Many families were able to stay off the streets by living off savings, doubling up with family members, or sleeping on friends’ couches, Albelda said. But eventually their money or relatives’ good will “just runs out.”

“Families close to the edge have not been able to pull back from the edge in this recovery,” Albelda said. “That’s in part because the recovery has not affected the bottom 30 to 40 percent of people.”

However, something tells us that one of the proposed solutions…

Rather than warehousing families in motel rooms, said Jim Greene, director of the Emergency Shelter Commission of Boston, the state needs more long-term rental assistance programs that target families who are homeless or at risk of homelessness.

“That’s how you bring the numbers down, with the right social services,” he said. “Short-term programs don’t get people out of homelessness.”

… namely converting short-term help into long-term (read perpetual) state and government help, is hardly the solution either.

Then again, who really cares about the plight of a few thousand homeless families as long as America’s billionaires can tweet about a stock, and immediately become billionairish-er, in the process buying off however many politic
ians and regulators is required to keep behavior such as that legal.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3fzPEOIwS-I/story01.htm Tyler Durden

Ira Stoll on the Continuing Debate Between Edmund Burke and Thomas Paine

Thomas Paine

What sound like fights between capitalism and socialism or
between “religious traditionalism and secular cosmopolitanism,”
turn out to be battles between “progressive liberalism” and
“conservative liberalism,” echoes of the more than 200-year-old
dispute between Thomas Paine and Edmund Burke. That’s the argument
of Yuval Levin, whose The Great Debate: Edmund Burke, Thomas
Paine, and the Birth of Right and Left is published this week
by Basic Books. Mr. Levin provides a valuable service by dusting
off the writings of Burke and Paine and by clearly, concisely, and
accessibly summarizing them in a way that highlights their
relevance to contemporary politics and policy. The monarchist Burke
and the religious skeptic Paine, an early supporter of the bloody
French revolution, would seem to be unlikely models for today’s
American politicians of either party, concedes Ira Stoll. But Mr.
Levin has made a convincing case that, 200 years later, we can
still learn from both men.

View this article.

from Hit & Run http://reason.com/blog/2013/12/02/ira-stoll-on-the-continuing-debate-betwe
via IFTTT

Fast Food Workers Planning Strikes, Supreme Court Declines To Hear Obamacare Challenge, French Increasing Military Presence in CAR: P.M. Links

The French are increasing their military presence in the

Central African Republic ahead of an expected United
Nations-backed intervention intended to restore order in the
country that has been experiencing increasing unrest and disorder
since rebels removed President Bozize from power in March.
The Supreme Court declined to hear
Liberty University’s challenge to Obamacare without
comment.
Fast food workers in around 100 cities will hold a strikes this
Thursday over wages.
Egypt’s
new draft constitution will free the military from civilian
oversight.
A new study claims that a quarter of teens have been involved
in
sexting.
The trial of
two former cops in California accused of beating a homeless man
to death began today.

Follow Reason and Reason 24/7 on
Twitter, and like us on Facebook. You
can also get the top stories mailed to
you—sign
up here.

Have a news tip? Send it to us!

from Hit & Run http://reason.com/blog/2013/12/02/fast-food-workers-planning-strikes-supre
via IFTTT

Furoius Defense Of S&P 1,800 And Dow 16,000 Succeeds, For Now

Retirement is still on for now. Late-minute desperation (in EURJPY) dragged the Dow just back over 16,000 and the S&P limped above 1,800. Bonds were sold (though less aggressively than gold and silver) and the USD rallied as early exuberance gave way to an uglier realization that good-news-is-really-bad-news after all following today's data. Volume was average as VIX continued to rise to 14.3% – its highest close since mid-October as we see the 4th session in a row with selling into the close. Today was the worst frst-day-of-month for the S&P since May.

EURJPY and S&P 500 joined at the hip – clearly EURJPY was the algo lever to ensure an 1,800 close…