Look Back in Anger

Doug Nolan

October 16 – Wall Street Journal (Alan S. Blinder and Mark Zandi): “Don’t Look Back in Anger at Bailouts and Stimulus… Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession. The Recovery Act and other stimulus measures were costly to taxpayers, and thus much-maligned. But the slump would have been much deeper without them. The Federal Reserve has also come under attack for its unprecedented actions, especially its quantitative easing or bond-buying programs. Yet QE lowered long-term interest rates and boosted stock and housing prices—all to the economy’s benefit. Yes, QE has possible negative side-effects, but for the most part they have yet to materialize. Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011 can hardly be considered flawless. Yet one major reason why the U.S. economy has outperformed the plodding European and Japanese economies is the timely, massive and unprecedented responses of U.S. policy makers in 2008-09. So let’s get the history right.”

Getting “history right” has been a CBB focal point From Day One. In last week’s media barrage, Dr. Bernanke repeatedly stated that fiscal policy had turned contractionary – (or at best neutral) suggesting that fiscal stringency was a key factor in the Fed sticking with ultra-loose policies. In Friday’s WSJ op-ed, Blinder and Zandi write, “Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011.”

Since the end of 2007, outstanding Treasury Securities (from Fed’s Z.1) have increased $8.302 TN, or 137%. As a percentage of GDP, outstanding Treasuries almost doubled to 83% (from 42%) in seven years. By calendar year, Treasury borrowings increased $1.302 TN (8.8% of GDP) in 2008, $1.506 TN (10.4%) in 2009, $1.645 TN (11.0%) in 2010, $1.138 TN (7.3%) in 2011, $1.181 TN (7.3%) in 2012, $858 billion (5.1%) in 2013 and $736 billion (4.2%) last year.

In nominal dollars, Federal expenditures increased from 2007’s $2.933 TN, to 2008’s $3.214 TN, 2009’s $3.487 TN, 2010’s $3.772 TN, 2011’s $3.818 TN, 2012’s $3.789 TN, 2013’s $3.782 TN and 2014’s $3.897 TN. Federal expenditures spiked during the crisis and remain about a third above 2007 levels.

“US Post Smallest Annual Budget Deficit since 2007” was a Thursday WSJ headline. “The deficit declined 9% from the prior year to $439 billion—around 2.5% of gross domestic product and below the average the U.S. has run over the past 40 years.”

I remember all too clearly the jubilation that surrounded federal budget surpluses in the late-nineties. Supposedly, a disciplined Washington had made tough choices and finally put its house in order. There was even talk of Treasury completely paying off its debts. It was, however, all a seductive Bubble Illusion. In particular, receipts were inflated by Credit excess-induced capital gains taxes (on inflating stock and asset prices) and booming incomes (especially tech and finance related!). Actually, it all seemed obvious even at the time. It didn’t make sense to me that the Fed and analysts were so prone to misinterpreting underlying dynamics.

Blinder and Zandi: “Yes, QE has possible negative side-effects, but for the most part they have yet to materialize.”

There are myriad deleterious side-effects, and anyone paying attention would agree that many have begun to materialize. One prominent consequences of Federal Reserve rate manipulation has been the loss of the markets’ ability to discipline policymaking. How does it ever make sense to allow politicians access to years of virtually free “money”? Ominously, despite Treasury paying basis point to service a large chunk of our outstanding debts, the federal government is still running significant deficits. While outstanding Treasury debt has increased almost 140% in seven years, 2014 interest payments were up only 8% from 2007 (to $440bn).

Government social payments, on the other hand, were up 48% from 2007 levels to $1.897 TN.

Slashing Treasury borrowing costs is not the only way the Fed has temporarily boosted the U.S. fiscal position. Funding a near $4.5 TN Fed balance sheet with virtually interest-free funding is (for now) a “money”-making endeavor. Last year the Fed remitted “profits” back to Treasury to the tune of almost $100 billion. Reflationary monetary policies have also been instrumental in resurgent Fannie Mae and Freddie Mac. A hiatus in loan losses allowed Fannie and Freddie to remit almost $140 billion in “profits” back to the Treasury (funds that should have remained as a capital buffer).

At this point, markets assume Treasury yields will not rise meaningfully in the foreseeable future. And, apparently, a deep recession remains out of the question. Yet Bubbles inevitably burst. Even a typical recession-induced slump in receipts and jump in spending would at this point see the almost immediate return of enormous federal deficits. Then ponder taking away Fed remittances to the Treasury and factor in another GSE bailout -and things deteriorate dramatically. A reasonable forecast would also incorporate a boost in defense spending. In a few short years federal debt would surpass GDP. Worse yet, at any time an unexpected surge in market yields would rather quickly endanger the balance sheets of the Treasury, the GSEs and the Federal Reserve – with nasty ramifications for the banking system, the economy and finance more generally.

Blinder and Zandi: “Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession.”

I am reminded of an invaluable “Austrian” insight (paraphrased): “The scope of the down cycle is proportional to the excesses of the preceding Credit boom.” From this perspective, there is major problem with conventional “logic.” These so-called “proportional” monetary and fiscal responses have over the past 25 years fueled serial Bubbles - and attendant progressively more dangerous Boom and Bust Dynamics. Especially when it comes to monetary policy, it was recognized a long time ago that the problem with giving central bankers too much discretion was that policy mistakes would invariably be followed by greater blunders.

It’s sad to see Capitalism under such attack in the national discourse. Washington seems only somewhat less despised than Wall Street. Somehow socialist ideas appeal to a growing number of Americans – especially the young. On this score, I’m content to be repetitive: Federal Reserve activism and inflationism bear primary responsibility.

In this week’s Democratic debate, Hillary Clinton stated, “Sometimes Capitalism must be saved from itself” and “It’s our job to rein in the excesses of capitalism so that it doesn’t run amok and doesn’t cause the kind of inequities that were seeing in our economic system.”

I’ll argue passionately the notion that politicians must save Capitalism from itself is the materialization of a dreadful “negative side-effect” of monetary mismanagement. If politicians are determined to get involved, they should foremost insist on sound money. Since politicians have throughout history demonstrated their proclivity for the exact opposite, Capitalism has been essentially entrusted to sound central bank principles. And while this may have not yet materialized to most, central banking has failed. It goes back to flawed doctrine where the Federal Reserve refused to address inflating Bubbles, preferring instead a policy of aggressive post-Bubble reflationary “mopping up.” It goes back to the Greenspan Fed’s tinkering with the markets to the Bernanke Fed’s crisis management QE to the Bernanke/Yellen/Kuroda/Draghi central bank non-crisis open-ended QE.

Regrettably, I fully expect to be defending Capitalism throughout the remainder of my life. I’ll try to explain how Capitalism isn’t – wasn’t – the problem. The culprit instead was unsound finance and deeply flawed monetary management. In short, Capitalism cannot function effectively within a backdrop of unfettered cheap finance. Things appear miraculous during the boom, and then the bust discombobulates.

Contemporary central bank rate administration essentially abandoned the self-adjusting and regulating market system of determining the price of finance – so fundamental to Capitalism.

The results have been predictable: gross misallocation of real and financial resources, economic stagnation, financial fragility, wealth redistribution, rising social and geopolitical tension and central bankers absolutely incapable of extricating themselves from inflationism and market manipulation.

I doubt there are too many traders or hedge fund operators these days that would argue against the Monetary Disorder Thesis. While the major indices appeared more quiescent this week, there remains plenty of instability below the surface. The week saw the broader market underperformed the S&P500. The Transports dropped 2%, while the Utilities gained 2%. The Biotechs were again notable for their inability to sustain a rally.

The Brazilian real reversed hard to the downside, dropping 4.3% this week. Brazilian stocks sank 3.5%. The Malaysian ringgit and Indonesian rupiah both declined about 1%. The squeeze in commodities markets gave way to selling. Crude sank 4.8%, as the Goldman Sachs Commodities Index fell 2.7%. Gold and Silver bucked the trend, with these long-term stores of value gaining 1.8% and 1.3%. Also quietly trading more positively, the yen gained 0.7% against the dollar this week, briefly trading back to August highs. Meanwhile, the VIX dropped to a near three-month low 15. Treasury yields dropped.

The thesis remains that the global Bubble has been pierced. In a world of open-ended QE, unprecedented policy activism and Trillions of trend-following and performance-chasing finance, there will be erratic ebb and flow to market activity – including EM. There were more announcements of hedge funds closing shop this week. For the industry overall, I doubt the recent market rally has relieved much pressure. Many funds were likely caught up in the powerful equities, EM and commodities short squeeze.

It seems apropos to note that shorting is not really the inverse of investing on the long side. The risk profiles are altogether different. On the long side, risk is limited. If an investor is right on the research and is willing to wait out market swings, risk is generally manageable. It’s another story on the short-side. Risk is unlimited. You can be right on the analysis but still loose money in a hurry if caught in the vortex of a powerful short squeeze dynamic.

This short squeeze dynamic has come to wield significant general market impact. With hedge fund and ETF industry assets each now at around $3.0 TN, the level of trend-following trading activity is unprecedented. In theory, one would expect such a backdrop to spur market overshooting both on the upside and down. Except that central bankers have repeatedly backstopped the markets to ensure that downside momentum does not gather pace.

In the past, the Fed and central banks used various backstop measures, including rate cuts, QE or simply talk of further policy loosening. Post-August “flash crash” market assurances have included the Fed delaying “lift off” and even chatter of negative rates. The ECB hinted at boosting QE. Chinese officials responded with a laundry list of stimulus and market controls.

By repeatedly intervening to arrest market downside momentum, the Fed and central banks nurtured a backdrop conducive to powerful short squeezes. The current exceptionally speculative marketplace plays right into this dynamic. After all, few (if any) market themes offer the quick trading profit opportunities as squeezing the shorts. And with the faltering global Bubble and elevated risk generally, short positions and bearish hedges had been mounting in recent months.

It’s worth recalling that Nasdaq went on its final speculative melt-up in early 2000, in the face of rapidly deteriorating industry fundamentals. Short squeezes and a dislocation in equities derivatives played prominently. And there were some decent squeezes and a collapse in the VIX just prior to the 2008 fiasco. Just because the market is within striking distance of record highs does not indicate that the downside of a historic Bubble period isn’t materializing. It would be much healthier if (self-adjusting) markets were capable of letting some air out gradually.

Why Americans Don’t Trust the Fed

Since the Revolution, the U.S. has been wary of both big government and big Banks

By Roger Lowenstein 

Andrew Jackson’s fight against the Second Bank of the United States becomes a battle with a many-headed monster in this political cartoon, circa 1836.
Andrew Jackson’s fight against the Second Bank of the United States becomes a battle with a many-headed monster in this political cartoon, circa 1836. Photo: UIG via Getty Images    

Antipathy to the central bank is a uniquely American tradition. No federal agency, except the Internal Revenue Service, is held in lower regard than the Federal Reserve, according to public opinion surveys. The left accuses the Fed of being too cozy with banks; the right says it is planting the seeds of a massive inflation.

Last month, Sen. Rand Paul took direct aim at the Fed’s mission in a Journal op-ed rejecting the “master fallacy” that “a handful of experts in Washington should be setting the price of borrowing money.” Such sentiments could have been uttered more or less anytime throughout the life of the republic.     

Back in 1791, Alexander Hamilton and Thomas Jefferson sparred over whether to create a government bank, further dividing the body politic into federalists and antifederalists, which has pretty much been the story of American politics ever since. Hamilton won that round, but in 1811, Congress let the bank’s charter expire.

Not long after, President James Madison, previously an opponent, argued that a bank could be useful, and Congress established the Second Bank of the U.S. But the Second Bank became the “object of intense hatred”—so wrote Alexis de Tocqueville, who famously toured America in the 1830s. The French political thinker was profoundly puzzled; back home, the Bank of France was viewed as a natural, uncontroversial arm of the state. In the U.S., a central bank aroused Americans’ deep fears of tyrannical government.

And even though the Second Bank strengthened America’s currency and finances, Andrew Jackson reviled it as a tool of privilege. He vowed to “kill” it, and did.

Tocqueville concluded that Americans “are obviously preoccupied by one great fear,” the fear of “centralization.” He was correct but incomplete: Americans not only mistrusted big government, they also mistrusted big banks. And a central bank embodied the worst of both worlds.

If antipathy to the federal government stemmed from our experience as colonial subjects of a distant king, the bias against bankers arose from our origins as a frontier people who mistrusted sophisticated city-dwellers. Virtue traditionally resided in the country and the small town—not in the cities back east. Early on, Jefferson idealized farmers and scorned financiers.

Bankers, by contrast, were slick and beguiling.

This attitude persisted into the 20th century. After the stock-market panic of 1907, President Theodore Roosevelt objected to the revulsion against bankers. True, the banking system had failed, and many bankers had behaved badly. But Roosevelt was disturbed that J.P. Morgan, JPM 0.87 % who was chiefly responsible for saving the system, was accused of plotting the panic. People were so disgusted by the trickery of bankers, the president wrote disapprovingly, that “they have begun to be afraid that every bank really has something rotten in it.”

After the 1907 panic, many cried that Wall Street was too powerful and called for more dispersed financial control. This grossly misread recent experience. In fact, American banking suffered from a chronic lack of centralization. In other countries, a central bank held a reservoir of gold and dispersed credit to banks as needed, especially in times of financial stress.

In the U.S., however, each bank kept its own reserve. When credit was scarce, each institution self-protectively tightened credit, accentuating the scarcity. Frequent money shortages and panics were the result.

Reformers such as Paul Warburg, an immigrant financier, and Frank Vanderlip, head of National City Bank (predecessor of Citibank), argued that for the U.S. to take its place among the world’s economic powers, it needed a central bank. But the term couldn’t be uttered in public. Reformers despaired that they were trapped by history, as if battling “the ghost of Jackson.”

When Woodrow Wilson ran for president in 1912, he was forced to declare himself “opposed to the idea of a central bank”—though in his heart, he was an avid supporter. Rep. Carter Glass, a Virginia Democrat, drafted a bill to restructure the banking system along regional lines. Not unlike Sen. Paul a century later, Glass didn’t trust Washington experts. But Wilson, after his election, insisted that Glass’s bill include a Reserve Board under federal control.

The Federal Reserve Act, which Wilson signed in 1913, traveled a tortuous legislative path. Westerners and farmers worried that the new bank would crimp the money supply, preventing farmers from raising prices. But many bankers feared that the Fed would print too much money.

Today, these groups have switched sides. Wall Street has largely supported Fed Chairwoman Janet Yellen’s low-interest-rate policy while populist critics have castigated the Fed for promoting inflation.

Still, inflation remains low; a basket of goods that cost $20 a decade ago costs $24.41 today. And with the U.S. economy growing (albeit at a modest rate) for six straight years, credit eminently affordable, and the dollar still prized world-wide, it is hard not to conclude that the Fed is doing at least a reasonable job.

But if the Federal Reserve didn’t exist, Congress would have a hard time enacting it now. Gary Gorton, a banking expert at the Yale School of Management, says that if the Fed were designed today, “It would have severely restricted powers. It might not be independent at all.” This is what several bills that are now before Congress attempt to bring about.

Current criticism of the Fed is basically twofold: Some object to ultralow interest rates, fearing that they will lead to economic distortions, while others resent the bailouts and other programs designed to ease the 2008 financial crisis.

Acting as this sort of “lender of last resort” was the Fed’s original purpose, of course, but many Americans still think that the Fed has too much power. Jackson’s ghost lives on.

—Mr. Lowenstein’s latest book is “America’s Bank: The Epic Struggle to Create the Federal Reserve,” to be published Tuesday by the Penguin Press.

Will Technology Kill Convergence?

Kemal Derviş

Flag of Brazil hanging on terrace.

WASHINGTON, DC – At last week’s annual meetings of the World Bank and the International Monetary Fund in Lima, Peru, one topic that dominated discussions was the slowdown in emerging-economy growth. Hailed in the wake of the 2008 financial crisis as the new engines of the world economy, the emerging economies are now acting as a drag on global growth, and many argue that their era of rapid expansion – and their quest to achieve convergence with advanced-country income levels – is over. Are the doomsayers right?
There is certainly reason for concern – beginning in China. After decades of nearly double-digit growth, China appears to be experiencing a marked slowdown – one that some argue is actually worse than official statistics indicate.
As China’s growth slows, so does its demand for oil and commodities, with severe effects for other emerging economies that depend on commodity exports. Moreover, the benefits of lower commodity prices do not seem to have materialized among net importers, except perhaps India; if they have, they have been far from adequate to offset other growth-damaging forces.
Meanwhile, the advanced economies are tentatively recovering from the 2008 crisis. As a result, the differential between growth in the emerging and advanced economies – aggregated from IMF data, and including Hong Kong, Singapore, South Korea, and Taiwan in the emerging group – has declined considerably. Indeed, after averaging three percentage points for two decades and rising to 4.8 percentage points in 2010, the percentage-point differential fell to 2.5 last year and is expected to amount to just 1.5 this year.
The question, then, is whether the growth differential will remain as low at it is today. Those who believe that it will, typically rely on three arguments, all of which require some qualification.
First, they argue that much convergence has already taken place in manufacturing. This is true, but it neglects the increasing interconnectedness of manufacturing and services, and the changing nature of many services. An iPad, for example, must not just be built; it also needs coding services. In a sense, it is actually more the product of the modern services sector than of manufacturing. And there are plenty of untapped opportunities for technological catch-up in, say, health, education, and financial services.
Second, emerging-market bears point out that these economies have gained major productivity benefits from the migration of surplus rural labor to urban areas, a surplus that will soon be exhausted. This, too, is true. But it ignores the fact that there still is a huge reservoir of urban labor in the informal sector that, upon shifting to the formal sector, would provide an additional boost to productivity.
The pessimists’ third argument is that emerging economies are not implementing fast enough the structural reforms needed to support long-term growth. Again, there is some truth to this argument: structural reforms are needed everywhere. But there is no proven way to measure the pace of their implementation. As a result, it is difficult to argue that the emerging economies have collectively slowed in their structural-reform efforts.
But there may be a fourth mechanism at work, related to the changing – and seriously disruptive – nature of new technologies. A major driver of past catch-up, if only in terms of incremental growth, was the shift of many activities in both the services and manufacturing sectors from advanced economies to developing countries with lower wages.
Now, however, a growing array of activities can be automated. And coding-supported products often have lower costs per unit of output than even very cheap labor can provide. So, whereas call centers, for example, used to be mostly staffed in low-wage countries, now the computer-robot that does most of the talking can be located in New York.
That observation should not, however, overshadow fundamental economic insights – specifically, that trade and the location of production are determined by comparative, not absolute, advantage. A country will always have a comparative advantage in something; but that something changes.
Many advanced countries, for example, now have a comparative advantage in high-value-added activities. In other words, thanks to their highly skilled labor forces, they are better equipped than their developing-country counterparts for activities like the production of made-to-measure specialized goods or, indeed, anything that requires a highly trained team to work in close proximity.
But the technology-induced shifts that are underway could portend big disruptions in global value chains – disruptions affecting both developed and developing countries. In fact, we may have entered a period of fundamental change that could weaken growth everywhere, as the “old” shrinks before the “new” can occupy sufficient space.
To be sure, the creative destruction that is taking place seems to be affecting developing-economy growth proportionately more than advanced-economy growth, largely because the new technologies are being put to work where they were invented, and developing countries have not yet managed sufficient imitation. But I am not convinced that “catch-up” opportunities will remain diminished – not least because it will always be easier to imitate than to invent.
In fact, it could be argued that new “leap-frogging” may become possible. As experience in the telecommunications sector shows, the ability to adopt new technologies without first having to dismantle old systems can enable rapid progress.
The key to enabling continued convergence – even at a fairly rapid pace – is good political governance. Developing-country governments must implement policies aimed at managing the impending transformation, while maintaining social solidarity and cohesion. That is the challenge they must meet at this time of great disruption.

Emerging Latin America's Economies And Their Development, Part III

Peru shows a lot of growth.
Safety and easiness of doing business are weak points for Latin America.
Latest changes in the world economy show huge challenges to commodity producers.
Mexico and Chile.

This article is the third part out of three that covers my research to study the development of Latin America from the year 2000 to current day. This research was originally done for my master's thesis in finance, which I finished about a year ago. The actual thesis itself was named "Testing Value Investing Strategies And Analyzing Their Characteristics: Evidence From North And Latin America".

I have kept the text in its original form, even the notes for references are there so readers who are truly interested can go and find that source material here. This information is only one-year-old so it is still quite accurate and hopefully interesting reading for everyone. I have added new comments to update the situation if seen necessary.

Foreign Direct Investments

Foreign direct investments display clear differences between countries. The graph below, based on numbers by the World Bank, shows yearly values compared to the first value of the series to easily see how investment amounts have grown. Table 3 below shows those actual numbers.

Numbers are reported by the World Bank and the table below shows actual numbers from even years. Interesting detail is that, in 2004, Canada actually experienced an outflow of investments, but this was only during one year and recovery was quick. This might indicate that Canada is not trusted to be as strong economically as someone would first have thought, which creates its own set of difficulties and possibilities for international investors. Peru has experienced the largest growth, but it also had the lowest starting amount. What is one key point behind these numbers is that growth in foreign direct investments indicates that foreign investors find that country's growth to be credible and possessing room for new businesses.

(click to enlarge)
Figure 7. Growth of foreign direct investments

Chile, Colombia and Peru show the largest gains from their starting values and all South American countries show at least some level of growth. With Argentina, the situation is confusing, but lately it has been looking better than before. North America is the opposite, as South American countries are pulling in more investments, North American countries, Canada, the USA and Mexico, have all slowly gone downwards. With the USA, investors are probably expecting stronger signs of recovery before they return to the market again as they find new opportunities from many other countries, such as Peru. With Mexico, negative growth is surprising, as Mexico has supposedly been pulling investments from companies that want to offer their products to the USA and Canada but want Mexican workforce and low custom tariffs, or simply to offer their products to a population that is slowly getting wealthier.

Reported investments to Mexico should be growing in a few years. Brazil and Argentina could possibly face an outflow of investments if their situations continue to seem darker. If this could then affect the rest of the Latin American countries is a difficult question to answer; on some scale, the answer is yes.

An example is a news concerning Volkswagen's (OTCQX:VLKAY) North American investments that were mainly focused to Mexico (Reuters 2014; Wall Street Journal 2014). 2012 was a sudden quiet year for Mexico and this can be expected to change as Mexico is updating its laws to be more open for foreign and private investments. This is something Mexico did recently with their oil and gas field rights to boost their economy (Bloomberg 2014; BBC 2014c). As Economist explains (Economist 2014), emerging countries continue to be the target of many multinational companies, but not all have gotten their share of the success and even some previously successful companies are lately starting to experience slowing growth.

Table 3. Foreign direct investments in billions of USD
(click to enlarge)

Human Touch on Business Success

Following paragraphs look at a few indicators such as corruption and easiness of starting a business to especially see some human-made obstacles that these countries need to handle in order to get closer to their maximum potential. Let's look at easiness of starting and doing business in these countries to understand whether countries with slow foreign direct investment growth have a clear reason for it. In a study of 189 economies (World Bank Group), it states that these eight countries are in following order: Canada (rank 19 of all 189 for doing business; rank 2 for starting a business), the USA (4; 20), Chile (34; 22), Mexico (53; 48), Peru (42; 63), Colombia (43; 79), Brazil (116; 123), and Argentina (126; 164).

Let's also note that the average for a high-income OECD country is 11.1 days for a business application to be processed. Average for Latin America and the Caribbean is 36.1 days, so there we can see a clear obstacle hindering birth of new businesses in Latin America. Canada, the USA, Mexico and Chile are already relatively friendly for businesses, but last four are surely missing out on a large number of foreign direct investments until they lessen their bureaucracy (which can also mean bribery but most of all unnecessary paper work). Until this process is made easier, by for example eradicating corruption and eliminating sending of unnecessary application papers, Latin America as a whole is indeed slowing down its economical development.


In succeeding paragraphs, I will look at some other statistics outside economics: Corruption, political stability and homicide rates. This is done because corruption can set varying obstacles for a company to set up and run its business. Political instability, such as constantly changing governments makes it challenging to run a country or a business effectively and this creates uncertainty in people, as they cannot know how their future will be affected. Homicidal rate, on the other hand, marks safety of that country and this sets other kinds of obstacles or possibilities in areas such as the security industry.

Based on a report by the United Nations Office on Drugs and Crime (2013) that lists countries' homicide rates per population of 100,000 for 2012 (or latest available value): Colombia 30.8, Brazil 25.2, Mexico 21.5, Peru 9.6, Argentina 5.5, the USA 4.7, Chile 3.1, and Canada 1.6. There we can see a clear difference between developed and emerging countries, as Canada with 1.6 is quite far from Colombia. What could be considered surprising is that Chile is next safest on the list, before USA's 4.7, which is also closer to Argentina than Chile. Safety is something everyone wants for themselves and their family. It is one clear factor that makes people leave their country and outflow of brainpower is something no emerging country can afford.

Corruption perceptions index done by Transparency International (TI 2013) lists 177 countries according to their level of corruption compared to each other. On this list, countries followed by this thesis are given following ranks among all the countries (country with the smallest rank is the least corrupted and vice versa): Canada 9, the USA 19, Chile 22, Brazil 72, Peru 83, Colombia 94, and lastly Argentina and Mexico share position 106. Again, we see the USA and Canada at the top and Chile being close behind the USA. This tells us that if an investor wants to avoid corrupted governments in the emerging markets, then Chile is a top candidate as only a few underdeveloped countries manage to place better in the whole list. According to Economist (2014), Latin Americans also have very low public confidence level in their justice systems with high corruption, low conviction rates and in many cases growing murder rates.

To measure political instability, I use the Political Instability Index that covers period 2009/10 (see Table 4). This information is collected and published by the Economist Intelligence Unit (EIU 2011). The index combines measures of economic distress and underlying vulnerability to unrest. For comparison, the most corrupted country, according to the list, is Zimbabwe with vulnerability to social unrest being 7.5, to economic distress 10 and combined index then is 8.8 (in parentheses is index score from 2007). Least corrupted country was Norway with ratios of 0.4 / 2.0 / 1.2 (0.2).

UPDATE: I would love to compare how these numbers have changed, but sadly I haven't managed to find newer information that is available without charge.

Table 4. Political stability

Because these numbers are 2009/10 and compared to 2007, I cannot make direct conclusions as to what these numbers are today. A common theme for countries on the list has been that their index score has grown bigger from 2007. Because these are the years right on the financial crisis period, I believe this is the controlling reason behind this growth. By looking at the evidence above, it can be seen that since 2009 many indicators have again become much more positive, therefore it is reasonable to expect that index scores have gone down since, but later perhaps rose again in certain countries like Argentina (due to economic instability), Mexico (personal safety issues due to drug cartels) and the USA (growing government debt).


It is impossible to look at data and know for certain what the future of these countries be. Large part of their future is up to the international demand for their resources and know-how. This is something that is impossible to predict in the long term. Hopefully, these emerging countries manage to move more to the know-how as their resources cannot last forever. Some sort of change in Latin America, in general, is needed to motivate more growth to happen. For that, easiness of starting a business is one indicator that is important, but it is not the only one that requires attention and improvements. Though, it could be one of the easier ones to improve.

Some other issues, such as safety and corruption are critical to improve, but those take time and constant effort on many areas.

UPDATE: Sadly commodity prices have been going down for a long time, and that is bad news for all emerging countries (like Brazil and Peru) where commodities like oil and minerals are important to the economy. Only time will tell what are the consequences and how governments manage to go around this problem.

For the USA and Canada, their main problem is growing government debt that should be turned around. Behind this, however, many complicated problems are found (which can be military spending, nonworking parliament, education system, etc.). At the moment, international investors don't see that there is a real problem (indicated by good credit ratings) but rising debt is something that eventually would be a problem if not properly handled before.

Problems behind it have to be improved and effort has to be put to improve positive factors as well. Of course, that calls for strong political will and decision-making. In countries as wide in geographical and business terms, it requires strong cooperation from local leaders to first acknowledge common problems and then achieve nationwide results to achieve actual results.

Latin America's problems are more widespread. Chile is by many terms the best of the six. It is certainly closest to a developed country and can be expected to be the first to be called such of all Latin American nations. Peru and Colombia are growing well but do have many problems they need to be able to handle. Those problems are many and it will take time, but I would not be surprised to see these countries continuing to provide best growth rates in the near future.

Mexico has plenty of potential, such as a young workforce that is still unleashed, and the country should at least grow faster with the economic demand and help they get from their northern neighbors.

UPDATE: Now that I have been following the world economy since writing this, I am more pessimistic with my expectations. The USA is looking good for now and its demand will help especially Mexico. On the other hand, China is expected to need lesser minerals for its growth and this can be very bad for commodity-dependent countries like Brazil and Peru. In the end, it all comes down to how world economy develops, and at the moment, things are looking positive.

Considering factors such as indebtedness of developed nations and recent stock market behavior, I continue having pessimistic expectations for Latin American nations.

Argentina is a case of its own, being haunted by its past that won't let go. If a sudden improvement happens concerning the debt situation, we might see big changes in a short period.

However, we must remember previously mentioned education levels and also corruption levels.

Brazil's short-term future is also a question mark now due to latest reports telling it is officially in a recession (BBC 2014). A recession might hold Brazil's growth down for a few years, giving other countries time to catch up with its development and possibly overpass it in some sectors.

Overall, Latin America presents a great potential. Though there are still many obstacles to be improved upon, eventually those would be resolved and these countries would achieve a new level of prosperity. This leads to great investment opportunities for individual investors and western companies with steady enough direction, as hesitation or speeding to the market without a solid plan can all lead to a quick and an easy failure.

UPDATE: Overall, I hold very positive long-term expectations for Latin America. Chile is a good example of a country where things have been done right and Mexico is in a good situation (economically and geographically) to grow much more. In the end, it comes down to how world economy changes, and if the direction continues to be positive, it will benefit emerging markets everywhere.

California Mayor Forced to Hand Over Belongings at Airport…Compares U.S. to Nazi Germany

by Nick Giambruno

The U.S. government is so out of control that even mayors are speaking out…and comparing what’s happening to Nazi Germany.

Recently in San Francisco, California, Stockton mayor Anthony Silva experienced a travel delay that too many Americans can relate to. Silva had attended a mayor’s conference in China. On his return, federal agents detained him and confiscated his belongings, which included electronics and a cell phone. Silva told the press the most alarming part:

Unfortunately, they were not willing or able to produce a search warrant or any court documents suggesting they had a legal right to take my property….In addition, they were persistent about requiring my passwords for all devices.

Silva’s attorney told reporters that the agents wouldn’t allow the mayor to leave the airport without giving up his passwords. In response, Silva said:

I think the American people should be extremely concerned about their personal rights and privacy. As I was being searched at the airport, there was a Latino couple to my left, and an Asian couple to my right also being aggressively searched. I briefly had to remind myself that this was not North Korea or Nazi Germany. This is the land of the Free.

Longtime Casey Research readers are familiar with our warnings on how sociopaths in the U.S. government are wrecking what made America great in the first place.

And it’s not just at the airports…

Dozens of government agencies now have the power to lock up all your bank accounts in the U.S., all your brokerage accounts in the U.S., and even your home, based on the flimsiest hint that something might be wrong.

It doesn’t matter what the underlying allegation is about - taxes, drugs, food safety, the environment, or something else.

It doesn’t even take a real allegation to make it happen.

A single government employee’s suspicion or ill will is enough to push the bureaucratic launch button and start your nightmare.

They act without warning, and they can strip away all the cash from your U.S. bank accounts and all investments from your U.S. brokerage accounts without waiting for a hearing, a trial, or any other token of due process.

If it’s in the U.S., it’s theirs, whenever they say it is.

Yes, after they strike, you can go to court to get your property back - but how will you hire a lawyer if they’ve frozen your bank account? And how will you pay your bills while the legal process is grinding on?

Forget what you learned in civics class. Sometimes a government agency just wants the property.

The Institute for Justice concluded, “Under modern civil forfeiture laws…filling law enforcement’s coffers is often the primary purpose of the seizure.”

They can easily pick up any assets you keep in the U.S.

Sean Goldsmith recently left Stansberry to work alongside one of the most influential economists in the world today, Doug Casey. There’s probably not another American alive today who has done as many international deals and learned as much about global economies, currencies, and the inner workings of foreign governments. “Now,” says Casey, “we’re on the cusp of a new and major crisis here in America, one that’s going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009…” Goldsmith explains the full details here.

The Ultimate Protection from an Out-of-Control Government

If you’re alarmed by the growing threat - from your own government - to your personal freedom and financial health, I can’t blame you.

You’ve seen the crowded parade of new laws, taxes, and regulations recently passed or now in the works.

In fact, I’m afraid that, as financial resources shrink and government deficits rise, the grab for money will become more desperate. Governments will go beyond taxation and reach into retirement funds and into depositor accounts at banks to ask for help.

Events around the world show that capital controls, income tax hikes (to rates as high as 75%), debt monetization, nationalization of private pension vehicles, bail-ins and bank deposit confiscations, and other futile but destructive options aimed at your money will be used by cash-strapped governments.

No matter how well protected your government tells you your money is, how comfortable can you really be if it’s all in one country?

Most people understand that it’s foolish to keep all their eggs in one basket. Yet they fail to go far enough in applying the principle. Portfolio diversification isn’t just about investing in multiple stocks or in multiple asset classes. Real diversification - the kind that keeps you safe - means holding assets in multiple countries, so that you’re not overexposed to the economic and political risks that are present in every country.

Doug Casey, founder and Chairman of Casey Research, has said pointedly that spreading your political risk beyond a single jurisdiction is the single most important thing he can recommend today.

In short, international diversification is prudent because it frees you from absolute dependence on any one country. Achieve that independence, and events or policies in any country can never dominate your life.

Wealthy families have been doing it for centuries. Today, with modern communications, international diversification is within everyone’s reach.

You don’t even have to leave your living room to do it.

A big part of this strategy is to place some of your savings outside the immediate reach of the thieving bureaucrats in your home country. Obtaining a foreign bank account is a convenient way to do just that.

That way, nobody can easily confiscate, freeze, or devalue your savings at the drop of a hat or with a couple of taps on the keyboard. In the event the government imposes capital controls, a foreign bank account will help ensure that you have access to your money when you need it the most.

Your savings will largely be safe from any madness in your home country.

A foreign bank account will be beyond the reach of no-warning seizures by any of the many agencies that grab property first and then dare you to prove they’ve made a mistake. If you ever find yourself in a wrestling match with a government agency or with a frivolous lawsuit, you’ll have resources you can count on.

Despite what you may hear, obtaining a foreign bank account is completely legal. It’s simply about putting your liquid savings in sound, well-capitalized institutions where they’re treated the best.