The Israelite Joseph, son of Jacob, was asked by the pharaoh to interpret his dream. Joseph told the pharaoh that the dream was a forecast of seven years of abundant harvest to be followed by seven years of poor harvests. Farming in the Nile River delta depended on good rainfall in the highlands and mountains of central Africa to flood the delta area with fertile topsoil brought by the river. And no, it was not global warming/climate change that caused the famine. The pharaoh’s dream corresponds nicely with the nine- to 14-year sunspot cycle.

Joseph also told the pharaoh that the way the government could best handle the situation was to store grain during the first seven years so that the country would have grain during the drought.

During the time of abundant harvest, Joseph placed a grain tax on the farmers amounting to 20 percent of their crop, which he then stored in the government’s granaries. The people complained about the high taxes but it did not do much good to argue with the god-king pharaoh.

After the period of the good harvest, the drought caused the farmers to have a difficult time growing enough grain to feed the country. For the next six years, Joseph stopped taxing the farmers and the government sold the stored grain to the people.

In 1936 British economist John Maynard Keynes wrote The General Theory of Employment, Interest, and Money, the cornerstone of Keynesian economics. His ideas were not unlike what Joseph came up with. Keynes believes that the government can smooth the normal economic ups and downs similar to the way Joseph smoothed out the abundant and then scare harvest cycle.

Keynes is “hated” by those who believe the free market, without government intervention, is the best way to work through the good and bad economic times. Businesses that deserve to fail will fail when business turns down. Good business models will succeed better when economic conditions turn up. This economic survival of the fittest should produce a better overall long-term economy.

Like Joseph in Egypt, Keynes argued that the government should impose high taxes and spend very little when the business cycle is good, and then lower taxes and spend lots of government money to keep the economy strong when things go sour.

Friedrich Hayek, one of Keynes’s severest critics, even wrote, “I find myself in agreement with virtually the whole of it.” But he also said to Keynes, “Your greatest danger is the probable practical failure of the application of your philosophy in the United States.”

And therein lies the problem of the 21st century as in ancient Egypt; the policy-makers and, to a lesser extent, the people.

The purpose of government intervention is to smooth out the highs and the lows. During the boom times, the government is supposed to raise taxes thereby limiting the high. But this has been rarely followed because of its political unpopularity. No politician wants to be an economic killjoy because the people would vote those politicians out of office. Further, instead of saving, the government continues spending so that when the downturn comes, there is no money left to alleviate the economic slump. Keynes advised that the government go into debt, if needed, to spend for economic stimulation, anticipating that when the good times returned, they would pay the debt back. Current politicians ignore the “if needed” and the “pay the debt back” parts of Keynes’s theories.

In trying to dampen each successive downturn, governments have created super debt. As a result of this constant government financial support without raising taxes, the people have become comfortable with a constantly growing private and public amount of debt. The idea was that the government would never run out of private money to borrow. Italy, Spain and Greece found out otherwise.

Pouring money into the economy during the good times, like the Philippine government is doing now through very low interest rates, actually causes people to “hoard” cash rather than spend it productively. That is one reason the stock market is booming while economic growth is only just acceptable.

Sure, I want the stock market to go higher. But I completely agree with my fellow economic watcher Wilson Lee Flores that much more money should be invested in hard business assets. That is why I tell people, make big profits in the stock market, and then go buy some farmland, expand your business, or invest in a donut kiosk.

In other words, do not imitate bad government policies.

After the period of the good harvest, the crop was not large enough to feed the nation. For the next six years, Joseph stopped taxing the farmers and the government sold the stored grain to the people.

However, now things begin to turn nasty.

By the seventh year, the people were out of money and all they had left was their land. The pharaoh and Joseph, being part of the political ruling class, now took advantage of the situation to increase their power and wealth. Joseph tells the people to sell their land to the pharaoh for grain. Now the people are required to farm the pharaoh’s land and give the government 20 percent of their crop.

What begins as a government program to help the nation and its citizens turns into a scheme to bring the people under as much control of the government as possible, while telling them it is for their own good.

What might have happened if the pharaoh had just told the people of the impending drought? Some would have ignored the warning and eventually would be forced to sell their land to buy food. But some, perhaps many, would have built their own granaries or joined with other farmers in a cooperative effort to store grain. They, not the government, would have profited from selling their stored crop to the people both in Egypt and the neighboring countries.

While Joseph and the pharaoh may have “saved” the people from the worst effects of the famine, their plans increased government power, made the pharaoh richer and economically enslaved the people for generations.

Little has changed in 5,000 years.

Trillions of dollars of the people’s productive wealth have been spent to save the people from a collapse of the banking system. However, government debt to pay for the bailouts has been secured from money printing.

The US Federal Reserve is now buying virtually all the debt that the US government issues, a story you will not find in the financial press. The US government has run out of lenders and must “borrow” from the Federal Reserve. The Federal Reserve gets the money to buy the debt, $85 billion per month, by “printing” the money, simply making an accounting entry to its financial statement.

The people have been saved from the global banks going bankrupt and in return they have given up jobs, their personal wealth and even their homes.

European unemployment is at a historic high. US individual personal wealth has dropped to the same amount as it was 20 years ago. The percentage of Americans owning their own home is at the lowest level since the end of World War 2.

The US government has steadily and surely been taking over health care since the 1960s with government-funded health-insurance programs, a noble idea to be sure. But the results are as disastrous for the people now as in ancient Egypt.

The US now spends more on health care than Japan, Germany, France, China, the UK, Italy, Canada, Brazil, Spain and Australia combined. If government-funded health care is such a good idea, why is it then that 60 percent of all personal bankruptcies are caused by medical bills? Why do prescription drugs cost 50 percent more in the US than in other countries? Why does Greece have twice as many hospital beds per person than the US? And the overall quality of health care in Europe is no better than it was in the 1960s.

In 1960 an average of $147 was spent per person on health care in the US. By 2009 that number was $8,086, 1,300 percent higher than the inflation rate.

The insurance, health care and pharmaceutical industries have made hundreds of billions of dollars in extra profits since the government “helped” the people with government health insurance.

Even ordinary Egyptians, not just farmers, were forced to sell their land to the government to keep from starving. The priestly class was exempted and given food for free. Their job was to constantly remind the people that the pharaoh was a god-king who only had their best interests at heart.

In 1944 economist Friedrich Hayek wrote The Road to Serfdom. His argument was of the danger of the tyranny that inevitably results from government control of economic decision-making. “The power of government to act by taking money or property in pursuit of centralized goals destroys the rule of law and individual freedoms.”

However, we know that people would prefer that things do not change much if possible. We like “stable” even though intellectually, we know that all that good things come from change. That is why everyone anticipates the next and newest model of a car or gadget. Instability causes problems for the farmer who knows that a good harvest is not going to happen every season. Every business owner knows that they must constantly keep working to insure that revenues and profit keep growing. Even a parent knows that there must be preparation made for that inevitable fall off the bicycle or the finger that gets slammed in the door.

Economists since the Industrial Revolution, a change that brought its own instability, have tried to find methods to reduce the effects of the ups and downs of the business cycle. The downtrend in the business cycle is almost like an illness. But the models that try to explain the downturns do not work very well over time. Therefore, the emphasis has been on trying to “cure” the symptoms of the disease without knowing the cause. The predominant economic school of thought over the last 30 years has been that government intervention in the economy can provide the proper medicine.

Alan Greenspan is an American economist who served as chairman of the US Federal Reserve of the United States from 1987 to 2006. His goal was to stop the negative effects of an economic downturn and, in fact, quickly reverse it and he was successful at his objective. One observer described it this way: “The Fed had effectively smoothed the business cycle to the extent that the old days of boom and bust were gone. It was boom and boom and boom” and economic stability was achieved.

Hyman Philip Minsky was an American economist who attempted to provide an explanation of financial crises. He agreed with the techniques Greenspan and others proposed but in his research, he discovered an unintended side effect; stability is inherently destabilizing and will always lead to a greater financial crisis than found in the normal business cycle.

If people become accustomed to the “good times,” they inherently become greater risk-takers. The longer prosperity continues with increasing corporate and private cash flow and reserves, euphoria takes over leading to more highly speculative risk-taking and larger borrowing, which create a bigger bubble and a bigger crisis than found in a normal downturn.

Because of government intervention, the US stock-market bubble of the 1990s was smoothed over and then led to a bigger housing bubble of the 2000s. The big debt that fueled the first bubble was surpassed by the bigger debt that fueled the second.

In 1985 Americans had 18 percent of their liquid assets in safe, very low risk investments. By 2007 that had fallen to 8 percent. More stability means more risk-taking that eventually leads to bubble and collapse.

While the Philippines has never performed significantly well economically, the economy has not crashed like others have in the last 25 years. There have not been any bubbles. Why?

Perhaps it has been that the government itself has provided just enough instability and chaos to keep excess risk-taking in check. The Cory Aquino administration came to power in a period of chaos. The electric-power situation was a disaster that lasted until the end of the Ramos presidency.

The shortened Estrada administration was an unstable build-up to Edsa 2. Presidential power was tuned over once again in chaos to Gloria Macapagal-Arroyo whose administration bounced from “Hello Garci” to the ZTE controversy. Even now, the current administration has gone from the Corona trial to the Sabah situation.

Who, in their right financial mind over the last 25 years, would have thought conditions stable enough to take large financial and debt risks?

And today? Read any day’s newspaper headlines and tell me you are going to borrow money for one spin of the wheel of fortune. The stock market is not in a bubble because it is not rising on borrowed money. It is sensibly soaking up excess liquidity in the Philippines’s economic system.

The real-estate market is not in a bubble because here again very few are taking on excess and unmanageable debt to speculative. And face it; the majority of current housing in the country is terrible and sub-standard.

Economically and politically, a reasonable amount of chaos is a good thing.

Along with that concern is the side issue of whether local stock prices are in a price bubble that might necessarily burst causing a fall in prices far lower than should occur in a “normal” correction.

Therefore, any investor who is buying new positions or holding onto local stocks is either potentially buying a bubble or is doing some sensible investing even with the threat of a correction hanging over the market.

The Great Stock Market Debate of 2013 is the question of whether local stock prices are too expensive.

Both sides, including me, will bring out all kinds of data based on traditional stock-market price-valuation methods to try to prove their point. Unfortunately, even drawing on the wisdom of 100 years of stock-market experts, “expensive” is a personal concept when it’s your money on the table.

I am the guy who thinks paying P40 or P50 for a donut is “expensive.” And do not get me started on paying P1,500+ for a hotel dinner buffet. For that kind of money, I want waiters. However, once in my quest for the perfect one, I did spend P275 for a shawarma. Go figure what expensive really means. It all comes down to your money and how you want to spend or invest it.

Analysts and traders, too, often get their faces pressed so closely against the tree that they cannot see the forest.

The only question that truly matters for investors is, do you believe that PSE stock prices will be higher or lower by December 31, 2013? If the answer is lower, flip forward a few pages and follow the discussion if San Miguel should pull out from the PBA. I’ll see you again in 2014.

Now, if you believe that the local stock market has more room to go higher, then we must get into specific trading strategies to maximize profits and protect your capital. That is what I do for a living through my web site.

But let me answer the question. Of course, the stock market is in a bubble. So what?

I know a few gentlemen that made tens of millions selling generators and every other kind of gadget when we were having 12-hour brownouts under President Cory Aquino. I know another man who was (and probably still is) sitting on $1.5 million in over-priced used generators when President Ramos turned the lights back on.

One experienced trader, Oliver, said this to me: “I might be buying a bubble but I want to be in for the ride.” That is sensible investing.

Generators were selling quickly (and prices rising) in 1989 because of supply and demand. Local stocks are doing the same in 2013. When you see daily net foreign buying of P1 billion, that is an example of the large demand and the PSEi at 6,800 shows the limited supply.

This is what is happening in our stock market. Investor 1 is selling issue ABC because he thinks the price is too high. Investor 2 is buying ABC because she thinks the price is going higher. But then Investor 1 is next buying XYZ because he thinks that is where the next opportunity lies. Meanwhile, Investor 3 is bringing new money to the stock market and is buying Philippine Long Distance Telephone (PLDT) shares because the company is spending P2.5 billion for more fiber-optic cables and he knows that PLDT only spends money to make more money and he wants “to be in for the ride.”

When you see literally dozens of local companies spending P1 billion for expansion and projects like it was petty cash, you know that there is a tremendous amount of money in the system for every kind of investment, including the stock market.

In a world where there is a limited supply of everything except money, prices do not fall because of selling pressure. Prices fall when buyers stop buying. At this point, there is little indication that the long-term buying pressure is coming to an end. But it will eventually, perhaps for a short while; perhaps for an extended period.

Potential bubble or not, this is what Jose who is a very sensible investor said, “I find no use of timing in and out of PSEi when the overall direction and sentiment is very loud and clear.”

Forget the bubble. Enjoy the ride until it ends.

The leaders with strong personalities of the 1970s and 1980s—Reagan, Thatcher, Mahathir, Deng Xiaoping, Gorbachev, and yes, Cory Aquino—are no longer around and have been replaced with people who are certainly less impressive. Citizens of all nations are no different within the political and governing process than they are in ordinary life. We judge institutions based on the people we encounter within the institution and our feelings about them as individuals.

Have a bad experience with an agent when you have a problem with your cell-phone bill and you walk away hating the company.

There are “technological” reasons as we move farther and farther away from any personal contact with the primary face of government. There is an interesting scene in the movie Lincoln showing the hallway to the President’s office filled with ordinary citizens waiting to see him. It looked not unlike what you might see outside many Filipino mayors’ offices on an ordinary day.

But most direct access, certainly as you go higher up the power ladder, has been replaced by television and the Internet, which I suppose is acceptable since people are finding spouses in the same way as we evaluate our candidates and leaders.

Of course, government leaders are going to say that the people are pleased with them, otherwise they would not have been elected to office, in the first place. Further they will add, “Look at the good approval ratings about how I am doing my job.” Even when the polls go deeper and ask about trusting the political leader, the number might even be highly positive.

So then, why do the people not trust the government?

If you watch crime and cop shows on television, an investigation of a criminal suspect usually looks for the motive, the opportunity and the means to commit the crime. If you can prove you were a thousand miles away when the crime was committed, your alibi eliminates your opportunity. In 2008 a Japanese woman was tried for breaking into her ex-boyfriend’s house through a hole in the door. She was acquitted because she proved her large breasts prevented her from going through the hole. No means to commit the crime.

However, if there were two suspects that both had equal opportunity and means, the police as well as judges and juries will find the person with a motive as the primary suspect. The definition of “motive” is “a reason for doing something.”

Trust is built over time on the foundation of being able to both understand and accept a person’s motives behind an action and decision.

If you are a parent, you have had this conversation with your teenage child. “I want to go to the mall.” “No.” “Why not?” “Because I said so.” The acceptance and trust of your decision as a parent is the product of years of your child understanding your motives for the decision.

People do not trust the government because we do not know, understand, or trust the motives of the people running the show.

The ongoing controversy over how the Aquino administration handled the situation in Sabah is an example of a lack of trust because the people do not understand why official decisions were made and what the process was to arrive at those decisions.

You might not allow your child to go to the mall because you heard it was going to rain and a parent wanting to build trust for his/her motives will explain that to the child. Governments rely too much on “Trust me; I’m here to serve you.”

The Philippine government feels just as strongly as all other governments about a legal framework for disclosing otherwise privileged information. The purpose of a Freedom of Information Act is not to discover the secrets of how the government works, but the whys behind decisions.

Every government fights nearly to death to avoid explaining the process that leads to an official decision. And then they wonder why the institution and the individuals are not considered trustworthy. This goes far beyond thinking all politicians are crooks. This is fundamentally basic to the social and legal contract that exists between the governed and the government.

All governments, even dictatorships like North Korea, ultimately exist with the consent of the governed. Dictators much stronger and powerful than the fool in Pyongyang have been eliminated.

If a government wants the public’s trust, then “because I said so” is no longer an acceptable answer.

The other fact to consider is that the drop last week was partly attributable to PLDT going down, thanks to their paying a P112 cash dividend and speculative gambling issue Bloomberry Resorts falling 8.5 percent.

Yet, we cannot ignore the fact that banking giants Banco de Oro (BDO) and the Philippine National Bank decreased 9.2 percent and 7.5 percent, respectively. SM Development Co. (SMDC) did not help the market either, being sold down 11.5 percent.

Still, BDO is up nearly 48 percent since last October and SMDC rose 42 percent in February alone.

But a major concern is that the market is entering a corrective phase or perhaps even a bubble ready to burst.

This is being written prior to the week’s trading action so maybe we are down another 2.5 percent already and the streets of Makati and Ortigas are now filled with stock market “blood” and losses.

As you no doubt have read in the newspapers, one reason for the selling last week was that a couple of major international stock brokerage firms have put out a “sell” recommendation for the Philippine Stock Exchange (PSE).

Who are we mere mortal investors to argue with the great gods of the international financial markets? Didn’t they have a sell recommendation prior to the 2007 stock-market free-fall? Didn’t they call for crude oil dropping from $150 per barrel to $40 per barrel in 2008?

Well, actually they did not forecast either of those market movements. Several of the “gods” were still recommending a “buy” or “hold” on Lehman Brothers 10 days before the company went out of business. Goldman Sachs was still advising that crude oil would trade between $200 and $250 after the $150 top, which, incidentally, I called here the week that oil topped out. Lucky guess, I guess.

Having literally been a Wall Street stockbroker since 1976, my skepticism of any major financial firm’s recommendation is very great.

Back then when humans and not computers ran the stock market and online trading was decades in the future, every morning on the desks of all 3,000 stockbrokers of the largest, most influential stockbroker in the US was a piece of paper from the firm’s research department.

On the top were the names of three listed companies under the title “buy,” and below the word “sell” was usually one issue. The stockbrokers were expected to call all their clients with those recommendations and were given a cash bonus for orders placed on those issues.

While we are led to believe that stockbrokers merely act as a middleman between two investors executing their buy and sell orders, a substantial amount of brokers’ income is generated from them trading their own money. On a trade confirmation slip in the US, the stockbroker must indicate whether he acted as a “broker” or “dealer,” a dealer trading from his own account.

The “buy” recommendations on the daily research report I mentioned above were usually shares sold from the broker’s own trading account. That is how they were able to pay the stockbrokers extra commission. They wanted to get out, and they recommended the stock as a “buy” to their clients as a way to have ready buyers. There is nothing legally wrong with that, but morally there is a problem.

Often the “sell” recommendations were shares they wanted to quickly buy for their own account.

Further, a buy or sell recommendation is easily justified by using the concept of “fair value.” An example. One PSE issue is trading near its historic high price reached in 2007. Certain brokers are saying the shares are now over-valued. Since 2007, earnings per share were up 64 percent. The price earnings ratio in 2007 was 25; now it is 16. I am buying since I think the “fair value” is 25 percent higher.

“Fair value” assumes share price will reflect corporate financial fundamentals. Nothing could be farther from the truth, both up and down. That assumes that the stock market will eventually reflect true “fair value.” Maybe, but in the meantime, prices move contrary to “fair value” on a daily, weekly, monthly and yearly basis. That is how we profit investing in stocks.

Maybe the stock-market ride is over. Maybe not. In the meantime, I will do my own homework and make my own decisions independent from all the stock-markets gods. My experience tells me not to trust them.

With the help of the European Central Bank (ECB) and the International Monetary Fund (IMF), the world has had Cyprus on its mind, if not heart, since last Friday. That is when the ECB and the IMF, with the concurrence of the leaders of the European Union (EU), decided to confiscate up to 10 percent of bank depositors’ money to help fund the bailout of Cypriot banks.

Of course, the ECB and IMF do not consider it confiscation because funds taken from depositors’ accounts will be replaced with shares of stock in the banks that are failing. It is more of a mandatory government investment program like Social Security.

A little background on the situation.

As the Cayman Islands have been an offshore banking destination of the Americas and Hong Kong here in Asia, Cyprus has replaced Switzerland as the place to go to when you wanted to get your cash out of your home country. Cyprus has become “The Bank” for foreigners from those three continents that the Cyprus Tourism Organization talks about. Oil sheiks, terrorist organizations and Russian billionaires have all found a new banking world in Cyprus.

In truth, it was the Russians that made Cyprus the banking haven of the region, created by the Russians, for the Russians, and funded from the Russians. The biggest bank, the Bank of Cyprus Group, has 194 branches in Russia, more than anywhere else.

Cyprus had become so successful that foreign-fund inflows are seven times as large as the annual Cypriot gross domestic product. By comparison, it would be like the Philippines receiving $1.5 trillion of “hot” money inflow. That is about P63 trillion. Consider that the Philippine budget for 2013 is only P2 trillion. With that size of foreign-currency inflow, there would be heads exploding at the Bangko Sentral about how to keep the peso from going to 10 to 1 against the US dollar.

But not in Cyprus. The Russians are not dumb. Cyprus is a member of the EU and, therefore, uses the euro as its currency so there is no currency appreciation problem. Because it uses the euro, this gives the Russians the ability to use the euro currency mechanism without having to be part of the EU.

But giving bankers too much money is like giving a drug addict too much drugs. An overdose and death will certainly follow. The banks in Cyprus went out and overdosed on Greek government debt among other brilliant investments and are now broke, needing a bailout.

But the central bankers and the IMF know that Quantitative Easing, money printing, for bailouts is getting out of hand. So they decided that this time, the people, specifically the Russians, should directly fund the bailout. The ECB and IMF figured that a few hundred million euros taken from a Middle Eastern arms dealer or a Russian drug-cartel boss was small change to people who are worth $10 billion. Take P100 from a man worth P1, 000, he will curse you. Take $100 million from a man worth billions, he will bomb your house. It is likely that a few Cypriot bankers and government officials will disappear in the next weeks.

The IMF and ECB plan has been called stupid, evil and dangerous. Not really. Ok, maybe it is stupid, evil and dangerous but, viewed in the bigger picture, it is reasonable and expected.

US President Gerald Ford said, “A government big enough to give you everything you want is a government big enough to take from you everything you have.” Taking the people’s money to bail out the banks makes sense. For over 40 years, European governments have subsidized food prices. The government has decided how much vacation time the people get. Wages are determined to a large degree by the government. Health care is provided by the government. The government decides what ingredients go into sausage and how large the eggs have to be. The government sets the interest rate the bank pays on a deposit.

Forcing the people to directly pay for the bank bailout is a perfectly logical extension of the government policies that the people have wanted and voted for through two generations.

As of this writing, the Cypriot parliament has rejected the bailout plan. But this is far from over. No bailout means Cyprus goes bankrupt and will be forced to leave the EU. Spain and Greece could easily be next. But now people know that the government can and will “take from you everything you have.” We have entered uncharted territory of government control of the people. We live in interesting times.

The ultimate argument in favor of any policy or person is to declare that policy or person of being pro-poor.

The problem is that we have not come to any understanding of what “anti-poor” and “pro-poor” mean outside the context of the speechmaking. A mining development or shopping mall that employs people might be considered “anti-poor” while an eco-resort or factory might be considered “pro-poor.” It seems like “anti-poor” and “pro-poor” are often easily interchangeable depending on whose financial interests are at stake.

The first pro-poor law was enacted under King Edward III of England in 1349 called the “Ordinance of Laborers.” The Black Plague had recently wiped out 40 percent of Europe’s population and the law said that everyone under 60 had to go to work. Oddly enough there were a number of people who actually preferred begging to working. In 1495 they passed a law that said, if you did not get a job, you were put in the stocks for three days and whipped.

King Henry VII in 1530 issued a proclamation requiring that every one had to have a job. I would think that King Henry would have been called “pro-poor” for making sure all the people were employed. This proclamation was a bit of a breakthrough in that a distinction was made between the “impotent poor,” the old, the sick and the disabled who were allowed to beg, and the “sturdy beggar” who preferred a “less formal” work environment.

The problem was that after nearly 200 years of pro-poor laws (that is what they were called at the time), about 35 percent of the people lived in poverty and the situation was becoming worse. Most of the “impotent poor” had been cared for by the Catholic Church, but King Henry had closed all the monasteries, so by 1601, despite all the government’s “pro-poor” polices, poverty had become so widespread that another law, the “Act for the Relief of the Poor,” was passed.

This law required parishes (similar to a Philippine barangay) to build workhouses. The workhouses were what we would call a “livelihood program” paid for by taxing the local landowners and businesses as much as needed to provide for the poor.

One of the unintended consequences of the 1601 law was that the “poor” would travel to the richer parishes where the housing and food was better. That parish would eventually run out of money and the poor would pack their bags and move on to the next rich parish, leaving behind a damaged local economy. Money had been used unproductively and, believe it or not, some people found it more advantageous to live in the workhouses rather than find other jobs.

The local parishes fought back by requiring the poor to prove that they were actually residents of the parish to receive benefits. If they could not supply the proper documents, they were physically moved away to another parish to start the process all over again.

After a few years, the poor were complaining they were not being helped by the government. The parishes were complaining they were paying for some place else’s poor. The local businesses were complaining that they could not get enough labor because too many people were on the move for the government benefits. And other businesses took advantage of the system to employ people through the workhouses because wages were subsidized by the government.

The trend of increasing government pro-poor programs continued through to the 20th century when England completely formalized government assistance to the poor. No longer were a series laws passed to tackle poverty, but pro-poor polices became an integral part of the government.

The reason for this silly examination of English history is this.

After 500 years of pro-poor policies and efforts, except during periods of extreme famine, the percentage of the population living in poverty remained the same. Even into the 20th century, the percentage in poverty remained fairly constant. Granted that the definition of poverty has changed through the decades, with the poor in England now someone with one car and not two who lives in a two-bedroom house rather than four, poverty is still a social fact of life.

Can government efficiently and cost-effectively reduce poverty by taking from the “rich” and giving to the “poor?” It appears that the answer is no.

One legendary trader, Jim Sinclair, said this: “In truth, the IMF disaster, which has just taken place in Cyprus is comparable to the assassination of Archduke Ferdinand that started World War I. This is a major event in history.”

The requirements set by the IMF is the most fundamental change in the history of modern banking system and is perhaps not coincidental that it comes in the 100th anniversary of the creation of the US Federal Reserve Bank. During the last 100 years, through the US Federal Reserve system, the power of the government over the banking system has increased to the point that the government has absolute control of the banks.

Cyprus is an insignificant financial player on the world stage. The amount of the bailout is really nothing. However, the banking system, both globally and nationally, can only function when depositors are confident of the bank’s ability to pay back depositors’ funds. This fact is even more critical now as the Western banking system is in trouble and depositor confidence is vital as the banks and governments try to work through the massive debt problems.

One important purpose of US banking policy is to protect depositors from any potential bank failure. To achieve this, the Federal Deposit Insurance Corp. was established by the Banking Act of 1933 requiring banks to pay into a fund that would then guarantee all deposits in US banks up to $250,000. Similar deposit guarantees have been established in almost all countries, including Cyprus.

The IMF decision to seize part of depositors’ money destroys the idea that money in a bank is guaranteed safe and protected by law and government action.

Now everything has changed and the IMF decision may unravel all the efforts the central banks have made through Quantitative Easing in the last five years. In the last few days, US Federal Reserve Chairman Ben Bernanke has even said that he may not continue as Fed chairman when his term expires in January 2014.

How the situation in Cyprus eventually plays out is unknown. There is talk that Russia may extend the $13 billion to Cyprus in return for concessions, including oil-exploration rights. But were this to happen, it would fulfill a centuries-old Russian dream to have and control a safe and defensible warm-water seaport. But that is another geopolitical story.

The financial world is holding its breath to see how the citizens of other European nations, primarily Spain and Greece, react to this development. The concern is that depositors in these and other countries, fearful of a forced takeover of their funds, will massively withdraw their money. If that happens, the European banking system may fail.

Can this kind of event happen in the Philippines? Theoretically, yes, and realistically, no.

However, for any bank depositor to rely on the wisdom of government policy and action is a dangerous path to follow.

Depositors have usually suffered only minor losses from a local bank failure as the larger banks have been able to take over the failed banks. But this is now being tested by the Philippine Deposit Insurance Corp. not being able to find a buyer for the recently closed Export and Industry Bank. That story also has yet to play out.

Doing your banking business with a stock-exchange listed company is better because these banks are subject to a slightly higher degree of financial scrutiny. These range in size from Banco de Oro to Citystate Savings Bank. Yes, there have been some failures of listed banks but you need all the protection you can get and this is one way. Another is to spread your deposits among several banks. And if you have an offshore bank account, particularly in the West, you may want to reconsider that idea.

Sensible money is not going to put up with even the threat of confiscation. Western money is going to flow to the East in increasing amounts and the Philippines will be a recipient. The government could prepare itself to take advantage of this by providing better foreign-investment opportunities but is unfortunately probably more concerned with the “Kris/James Affair” than the “Cyprus Affair.”

Yesterday was Holy Wednesday or “Spy Wednesday,” a reference to the day Judas met with the Sanhedrin to betray Jesus for 30 silver coins.

Is it a coincidence that credit-rating company Fitch Ratings awarded an investment grade to the Philippines on a day commemorating a dastardly betrayal?

It is worth noting that while the government is bragging how its wonderful policies have helped the country win the “BB-” investment-grade rating, the comments from Fitch are interesting: “The Philippines’s sovereign external balance sheet is considered strong relative to ‘A’ range peers, let alone ‘BB’ and ‘BBB’ category medians.” In other words: “Other countries that hold our ‘A’ rating are so bad financially and economically that it makes us look stupid to rate you guys below investment grade when you are doing pretty good.”

The investment-grade rating will give the Philippine government and local companies access to additional foreign funds at a lower borrowing rate. In one sense, it may increase direct investments in the country as much foreign money is not willing to—or cannot—invest in countries without an investment grade.

In another sense, it is probable that this new and cheaper borrowing will flood the economy over time with more money that will, and not could, fuel asset bubbles.

Everyone is worried that there is a stock-market asset bubble with the Philippine Stock Exchange as prices have gone up so much. But as American hedge fund manager James Chanos said: “Bubbles are best identified by credit excesses, not valuation excesses.”

It is not the price of stocks that matters; the money that will be used to buy these is, and that’s where the problem lies. Is the money coming from productive wealth creation or from borrowing and money printing?

One of the sharpest macroeconomic analysts I know is Benson Te, who writes at prudentinvestornewsletters.blogspot.com. This Maundy Thursday morning, he wrote that the rating upgrade “only reveals the deepening of the manic phase of Philippine asset bubbles.” He argues that the recent stock-market rise should have been factored into the prices. Instead, the market explodes on the news and ignored the common “buy the rumor, sell the news” idea.

Te went on to analyze the large growth of existing pre-upgrade credit, including loans for production activities that grew 15 percent in February. Consumer loans also increased 12 percent that month. While the February rate is slightly lower than in January, it can’t be denied that these loan increases are very large.

Overall money supply is increasing at nearly 10 percent annually, a clear indication that the Bangko Sentral ng Pilipinas is pumping fresh money from non-productive sources (money printing) into the economy. His conclusion is absolutely correct: “So you have debt growing a lot faster than the economy. Also, supply side debt has been outpacing the demand side.” Those factors are what caused the “asset bubbles.”

Benson writes: “Local markets seem to be saying ‘this time is different.’”

Intelligent economic observers know that the global debt situation is impossible and will lead to a collapse. They believe that there is no such thing as “this time, it is different.” But in fact, this time it is different.

Never in history has it been the stated policy of governments to further increase debt and inflate asset prices. The US Federal Reserve is “printing” a record-high $85 billion per month, bringing housing prices back to inflated levels. The current government of Japan was elected on the firm policy to inflate prices. China has created a debt bubble, building “ghost cities” and with its corporate debt at 150 percent of total gross domestic product. Philippine corporate debt is 36 percent of gross domestic product.

This global debt-fueled asset bubble will eventually burst. It should have already. But it could be many years as all governments are unwilling to change course.

Get used to the “New Normal.”

Make as much money as you can through paper assets such as the stock market. Then buy land, houses, expand your business, own a food kiosk and buy a taxi. Convert your paper-based profits into hard, income-producing assets.

We cannot fight against bad government economic policies. But we can protect ourselves from them and prosper from the foolishness. As John Greenleaf Whittier said: “Let fortune’s bubbles rise and fall; who sows a field, or trains a flower, or plants a tree, is more than all.”