``Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen." Ludwig von Mises, Human Action The Place of Economics in Learning
Recently an amusing article in a local business broadsheet predicted that the Peso will likely fall to Php 52 against the US dollar at the end of the year. The article anchored its prediction from the analysis of a prominent economist, whose assessment was rooted on “remittances”.
Simplistic Analysis Equals Misdiagnosis
I say it is “amusing” because journalistic reporting projects the operational nature of the marketplace as seemingly so simplistic. The Peso’s path is deterministically portrayed as one dimensional. It assumes that “remittances” which only account for 11% of our GDP as the most powerful driver (survivorship bias-focusing on the popular or winners at the expense of the rest) and further assumes that its “pair”, the US dollar, is a fixed or non-dynamic state (selective perception bias).
Importantly, as Nassim Taleb of the Black Swan fame wrote in Fooled by Randomness, ``The problem with information is not that it is diverting and generally useless, but that it is toxic”. (bold highlight mine)
And as the public gets flimflammed over the perceived linearity of the causal relationship, they develop false impressions or notions that “simplistic” markets can ultimately be tamed or mastered by the state. And this applies to everything else. Think rice, meat, LPG and etc….
And this is why local media never fail to impress upon the public of the significance of government control over prices, which almost always don’t work.
What is Popular Isn’t Necessarily Economically Viable
The fact that prices, through money, exists is a manifestation of scarcity. And money functions as the medium of exchange meant to bridge on such deficiencies.
For example, if you have pizzas and I have beers, then we can make a trade. How many pizzas in exchange for beers will be determined by our relative values, i.e. how much a pizza is worth to me and how much a beer is worth to you. And where our relative values meet, these allow us then to conduct such exchange. You have (x quantity) beers and I have (y quantity) of pizza. Thus, we are both satisfied.
That’s because pizzas and beers are scarce goods. And exchanges of scarce goods or service are the natural state of the markets. Hence, satisfaction is derived by voluntary exchange. Alternatively this means, in a world of abundance, ipso facto, we don’t need money (markets or prices at all).
And where the allocations of scarce resources are implemented by the state, in order to attain efficiency requires the comprehensive and foolproof understanding of (marginal utility) the values or priorities of each individual within its constituency (e.g. the number of pizzas or beers you and I would have for a day, month or year) and the perfect assessment of the balance of supply and demand.
In short, this essentially requires omniscience- a trait only attributable to God.
Going back to our example; if the government ascertains a fixed rate of exchange for pizzas against beers and vice versa, which goes against the perceived pleasure or benefits of the producers, then the tendency is to produce less (quantity) and or inferior (quality) products. The end result is product shortages, black markets, higher prices and dissatisfied consumers.
Yet, the purported government predominance over the marketplace signifies nothing less than a GRAND DELUSION constantly peddled and perpetuated by politicians, so called economic “experts” and mainstream media used to gain mileage for tacit political or financial agenda.
Rationalization Meant For Political Agenda
Going back to the Peso, we’ve long been a skeptic over the Peso-remittance connections, as we wrote years ago in Philippine Peso And Remittances: The Unsecured Knot or What Media Didn’t Tell About the Peso, where experts have incessantly broached the causal relationship of the advancing Peso with remittance trends.
And as we earlier noted, while economic experts boisterously bruit about the multiplier impact of remittance growth to Philippine consumption, none of these experts or even the local authorities have given an estimate of the presumed multiplier or how much of local consumption has been captured by remittances.
Yet, this is the reason why populist “Keynesian” experts continue to blazon on a “depreciating Peso” as a virtue, which means printing of more money, bigger government, more redistributive policies from the productive and competent sectors to the non productive incompetent sectors and a rent seeking and dependency culture which ultimately leads to higher prices and more (not less) poverty. Nonetheless, if currency depreciation is a virtuous act then Zimbabwe should be the world’s richest country today.
One must be reminded that misdiagnosis extrapolates to false prescriptions.
On the other hand, the same school of thought disingenuously lambastes or assails on corruption as the principal and proximate cause of our miseries. Yet none of them have the audacity to decry the association between how CORRUPTION is correlated to BIG government. And this concerns NOT just the bureaucratic nightmare but also government spending and general economic intervention.
The silence is deafening. Naturally, an enlightened and empowered public could strip away their authority or means of control over the populace. Hence, self interest calls for looking at superficial measures as diversion than dealing with harsh cold reality.
What Peso-Remittance Relevance? Where?
It is hard NOT to associate the markets with political correctness as markets always function as the political scapegoat for government failures. Nonetheless it is ironic how these self-righteous all knowing pretentious experts claim to have the right solutions to deal exactly with our economic plight when they can’t even predict markets accurately in both short or long term basis.
Remember, markets function as signals to allocate the basic economic forces of demand and supply. This means that if they can’t read markets correctly, what additional qualifications have they to know the degree of distinctive individual values required to allocate resource efficiently? Mathematical models based on classroom conditions?
So under the remittances driven Peso concept, the reasoning or logic goes- growing remittances equals a stronger Peso. Inversely, negative remittances equal to a weaker Peso.
Here are the facts: The Peso in 2008 fell 15% even as remittance growth accounted for 15% for the first 11 months according to the IHT (estimated by World Bank to account for 18% growth for 2008). Growing remittances against a falling Peso, so how valid is this concept?
More Proof of inconsistencies?
Despite the present deterioration in macro economic conditions, World Bank estimates growth trends of remittances will decelerate and NOT grow negative see figure 1 (left window-gray line). However, the growth clip of East Asia and Pacific remittance trends have been on a decline since 2006. Yet when looking at Philippine economic growth composition (right window) where the services industry has allegedly been the primary beneficiary of remittances, services growth continue to surge in 2007 amidst a declining rate of growth in remittances. The services industry only began to moderate in the last 2 quarters of 2008. A case of lagged effect perhaps?
So, if the Peso should reflect the relative health of its economy with its comparable pair, then I am lost in ascertaining the said “steamy” correlations between remittance growth and the service industry.
In addition, since remittance trends could grind to a halt or even go negative, why does it seem that the Peso is consolidating if not appreciating (see figure 2) than declining? Has the currency markets been “discounting” the remittance factor?
Of course one may argue that it is still 10 months away from the day of reckoning.
But with some credit indicators materially manifesting easing conditions, some markets have begun to reflect these conditions. Again as shown above Asian currencies appear to be outperforming the other emerging market counterparts. Again further signs of brewing divergences.
Could it be that this isn’t mainly about remittances, or to include about trade account, but one from the diminishing impact of forcible selling in the developed world? Or could this possibly imply that the “spillage effect”, from nearly concerted inflationary policies abroad, may have began regain some traction in pockets of the economy? Or perhaps a combination of both?
If I would apply Winston Churchill’s ``Out of intense complexities, intense simplicities emerge" or adopt Occam Razor’s principle, ``one should not increase, beyond what is necessary, the number of entities required to explain anything” then I would have to say that the state of relative capital (accumulation or consumption) conditions will determine the fate of the currency.
This includes remittances, net trade and portfolio/investment flows- all of which constitutes the Balance of Payment (BoP), combined with forward contracts, derivatives, evolving economic and fiscal policies, the economy’s capital and production structure, national government and central bank balance sheets- all of which likewise contributes to the health of the domestic currency at varying degrees, dependent on the flux of the political economy.
In today financial crisis prompted global recession, the burden could possibly to shift to the extent of the degree of deployment of government resources to “fix” or “cushion” the economy. This means that relative accessibility of liquidity flows and inflationary policies could weigh more on currency values than the traditional metrics.
None of these suggests, however, that we are in denial of the incremental deepening of correlations between the price value of the Peso relative to remittances, and correspondingly, the latter’s intensifying role to the nation’s economic pie overtime.
Where we depart from the mainstream is the apparent patent overplaying of the causality of the said trends relative to the value of the Peso.
Nonetheless, such dramatization by the spinmeisters, as pointed earlier, has been vested with political-financial dimensions. Why? Because of the salability of the concept, which could translate to future votes, justification for bigger government spending on programs aimed to “benefit” the 11% of the GDP sector (against the 89%) or a wider audience for commercial gains.
The irony is that people always claim that they are after the truth, but the sordid reality is that instead of using economic common sense, they NOT only buy into rubbish information but the toxicity of politically slanted “expert” opinion as their version of facts, reality or truth.
Julius Caesar was right, ``People readily believe what they want to believe".
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