Thursday, November 29, 2012

The Secret of Aquinomics: Bubble Economic Policies

In a self-congratulatory claim to the outperformance of the Asia’s 7.1% statistical Philippine economic growth, the administration has even coined “Aquinomics” to such alleged accomplishment.

The Inquirer notes
Finance Secretary Cesar Purisima said confidence in the way the government was being run had encouraged more people to do business in the country.

“The growth rate shows that the economics of good governance, or ‘Aquinomics’ works,” Purisima said in a statement.
But what is exactly the Aquinomics or the recipe to the newfound success?
Robust domestic consumption and higher government spending have helped cushion the economy from the worst of the global slowdown, while manageable inflation has allowed authorities to keep interest rates conducive to growth.
So “Aquinomics” seems all about boosting domestic consumption and higher government spending.

Let us examine both. 

First higher government spending.

The government is slated to spend next year, a record 400 billion pesos (US $ 9.8 billion) or about 4.4% of Philippine GDP (2011)

Think of it this way, if all it takes is for the government to spend in order to boost the economy, then why limit spending? Perhaps the government should spend 100% or more of the economy.

Ah, but the problem is who pays for the spending? This means that the government would have to tax, borrow or inflate its way to fund the spending.


I have no qualms about the progress of the Philippine government’s paring down of public debt. 

But if one would look at where the real “progress” lies, it looks as if Aquino government has done marginal comparable or relative to what had been "accomplished" by the much maligned past administration. 

Government debt to GDP has been trimmed from 71.4% in 2004 to 44% in 2010. This means that the incumbent administration has whittled down debt to 40% or by only 4 percentage points as against 27 percentage points by the past administration.[This is not to defend the past administration, but to show the facts]

Taking away the populist politics or political color from the above statistics, the current administration has simply been piggybacking on the “achievements” of the past administration.  Without the substantial reduction of debt, ‘Aquinomics’ would not have the leeway or leverage it has today to undertake "record" spending programs. 

Of course, part of that supposed financial success by the previous administration has been to increase VAT from 10% to 12% in 2006 which came at the expense of the consumers. 

And there is always the question of how government spending helps. How does government spending translate to increased productivity, if such would only transfer resources from productive to consumption activities which extrapolates to a reduction of revenues to a society (or the crowding out effect)?

As the great classical liberal Jean Baptiste Say known for the eponymous Say’s Law elaborated in A Treatise in Political Economy (p.471)
The privation resulting from taxation, whether voluntary or compulsory, affects the tax-payer in his quality of producer, whenever it operates to curtail his profits; that is to say, his income or revenue; and affects him in his character of consumer, whenever it increases his expenditure, by raising the prices of products.

And, since an increase of expenditure is precisely the same thing as a diminution of revenue, whatever is taken by taxation may be said to be so much deducted from the revenues of the community.
Yes government infrastructure (public works) spending signifies as consumption activities—they are not built for the purposes of generating revenues.

Moreover, there is the dubious assumption that central planners know exactly or with precision, the demands of the marketplace. This is aside from the actual implementation of projects which usually leads to cost overruns or “overcharging”.

And there will always be the concerns over the ethics of political privileges in the distribution of political projects, such as corruption, cronyism and etc…

The other aspect of the Aquinomics is consumption driven economy.

How does the government attain the desired consumption outside government spending and the informal economy (the latter of which I have been saying has been the undeclared key pillar of real economic growth)? 


As I previously pointed out, the Philippines has been the most aggressive in Asia in adapting easy money policies

The result of which is easily one which I have been predicting.  

As I previously wrote,
Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.
The effects of Aquinomics, from the same Inquirer article,
Among industries, construction posted its highest growth in at least six quarters, jumping 24.3 percent from a year earlier as Metro Manila enjoys the best property boom in two decades
And such boom has been powered by an expansion of credit, as the Oxford Business Group notes, (bold mine)
According to a report released at the end of September by Bangko Sentral ng Pilipinas (BSP), the central bank, lending to the real estate sector hit an all-time high in June. Banks’ exposure to the sector reached P561.6bn ($13.55bn) at the end of the second quarter, up 18.9% on 2011 and 4.4% higher than the end of the first quarter in 2012.

The BSP said the country’s 38 universal and commercial banks accounted for P434bn ($10.47bn), or 77.3%, of overall exposure, while 71 thrift banks accounted for the remaining 22.7%, worth P127.6bn ($3.08bn). Thrift banks are institutions offering basic banking services, focusing on deposits and mortgage financing, which play an important role in the Philippines’ banking system.

The lion’s share of exposure, some 97.3%, or P546.5bn ($13.18bn), consists of real estate loans, with the remaining 2.7% (P1.2bn, $28.94m) accounted for by securities issued by property companies. These segments grew 4.3% and 8.4%, respectively, during the second quarter of 2012.

The P22.3bn ($537.89m) of new loans issued in the second quarter was split between P11.9bn ($287.04m) of residential lending and P10.4bn ($250.85m) in the commercial segment. Investment in real estate securities included P12.1bn ($291.86m) in debt and P3bn ($72.36m) in equity.

This has not only translated to a credit induced bubble in the real economy but likewise in a boom in the stock market led by the property-finance and holding companies (latter has been due to the former two). Financials are intertwined with the property sector where the former, as pointed out above, provides the chief source of financing to the ballooning property boom.

Again validating my prediction, when the property sector has underperformed last year.
The upcoming rebound would not only close the underperformance gap but would also power this sector as one of the best performers.

The Philippine property sector as I earlier predicted will see a boom phase] (again barring any exogenous shocks). Real estate or property booms have traditionally functioned as the centrifugal force from a monetary induced bubble cycle. This has been very evident in China. And likewise became the ground zero for the US mortgage-banking crisis.
Of course, such property boom has been a regional dynamic (ASIA and ASEAN), not limited to the Philippines. Hong Kong has even a parking lot bubble. Grand and elaborate signature projects have hallmarked what seems as a Skyscraper curse in the region

Finally, the credit boom has been giving this administration the political capital facelift it needs for the coming elections. 

Nevertheless credit bubble policies will give an interim economic superficial boost but would come with wretched macroeconomic side effect in the fullness of time.

And as I previously wrote such bubble policies are addictive especially to the incumbent political agents, 
All these talks about curtailing bubbles again represents authorities superficially dealing with symptoms. In reality, they are pretentious actions. They are intended to paint the imagery of the politics of “do something” in the assumption that they “know” or fully comprehend the situation.


Bubbles serve to bloat statistical economic growth. This gives media mileage and approval ratings for the incumbent authority. They also enrich the political as well as the politically favored economic class whom are usually the first recipients of easy money policies.

So why they should political authorities curb a bubble? Should they kill the goose that lays their golden eggs?
This reminds me of the great dean of the Austrian school economics who warned.
Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.
But all has not been bad news though

I do hope that they would indeed adapt real reforms on easing “the cost of doing business” which should have been the primary thrust. Add to this the “tapping of the country’s record foreign reserves to pay its foreign debts”.

But I am troubled to say that both seems more about rhetoric than forthcoming actions. 

Remember massive government spending means more debt or higher taxes or higher consumer prices in the future. And credit upgrades only add to this incentive to borrow rather than to institute real reforms.

All these suggest that the new economic paradigm or "Aquinomics" has been anchored on increasing debt levels whether from government (via public works) or the private sector (via asset price bubbles and malinvestments). 

In my view Aquinomics hardly differs or seems parallel to typical Keynesian bubble policies. 

New Picture (26)

This chart which exhibits the stages of bubble chart also demonstrates the attendant the bubble mentality.

Guess in what phase of the bubble cycle has the “new paradigm” been associated with?

**economic charts above from

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