In this Issue
Wow, BSP Chief Sees The Rise of Populist Politics/Retreat from Multilateralism as Scary Developments, Scary Stuff for 2017!
-Factors Influencing Populist Protectionism
-The Role of the US Dollar Standard
-BSP Independence, Really?
-Sleepless Nights From FED Rate Hikes????
-The BSP’s Addiction to Asset Bubbles
-Chaos Theory: Surging Bond Yields, Fourth Drop in BSP’s US Treasury Holdings and Falling OFW Remittances
-Internal Fragilities as Prime Risk Factor; Free Lunch Politics
-The BSP Chief as Economic Model
Wow, BSP Chief Sees The Rise of Populist Politics/Retreat from Multilateralism as Scary Developments, Scary Stuff for 2017!
It's easier to fool people than to convince them that they have been fooled
—attributed or misattributed to Mark Twain
Will 2017 redound to ‘sleepless nights’ for the highest paid government official (Php 13.957 million in 2015)?
Factors Influencing Populist Protectionism
Interviewed by Barron’s Asia, the BSP governor Amando Tetangco sees “scary developments” anchored on populist politics, retreat from multilateralism, protectionism and Fed rate hikes in 2017. The interview was republished by the Zero Hedge: “Central Banker Sees "Scary" 2017”
As always, the BSP uses the attribution bias or to suggest that risks from external factors—rather than from the internal developments—could impact the Philippine economy.
Some Q&A quotes (Bold mine)
Q: These populist winds are blowing though the U.S. as much as Europe these days. Has that affected how central bankers operate?
A: Yes, with this rise of populist politics, this talk about protectionism. These are scary developments, it’s scary stuff. As you mentioned, a few European countries are having elections either this year or next year, Italy and Austria just voted out the traditional politicians. Then France in the middle part of next year. And then you have, of course, the pronouncements of the newly elected U.S. president. How will he move from rhetoric to implementation? It is still up in the air and, as a result of that, it’s affecting business planning and financial market behavior.
In noting of the above, the BSP chief goes on to recite statistical talismans on the low exposure by the Philippine economy to external dynamics, particularly trade and investments, so as to downplay such risks. The impression limned has been that a closed economy is better than an open one. Yet contrastingly, he discusses of the risks from a retreat in multilateralism. So which is which sir???
Nonetheless the emphasis on the risk to BPOs:
“if Trump actually pursues what he said during the campaign, there could be an effect on the BPO (business-process outsourcing) sector in the Philippines. But the jobs that are being performed here are not in direct competition with America or jobs many American workers want to do”
Let us put it this way, jobs exported overseas have hardly been about indirect competition or “jobs many American workers want to do”. Any nationalist may claim that all jobs lost overseas are potential jobs for natives. Yet there is some superficial truth to such claim.
Hence, the BSP chief’s defense of domestic BPOs would signify a red herring.
Instead, outsourcing, which accounts for as services exports, like merchandise exports are a complex issue.
The present form of international merchandise and services trades are products of a mélange of various forces. Such includes free market traits of technology induced innovation, comparative advantages and division of labor. These factors are evident through the establishment of international supply chain networks.Apple’s iPhone should be a wonderful example of trade through “specialization”.
But yet these forces are subordinated to the US dollar seigniorage and the US Fed’s easy money policies, the main drivers of today’s geopolitical economy.
US domestic regulations such as labor mandates such as minimum wages also play a role.
The Role of the US Dollar Standard
The essence the US dollar standard is that FED issues bank notes while the US banking and capital markets issue credit instruments in exchange for goods and services produced elsewhere. Helped and bolstered by the Fed’s easy money, the outgrowth has been the financialization of the US economy or growing share of the finance industry to its economy.
Financialization represents the conversion of economic assets into tradeable financial instruments
Analyst Charles Hugh Smith has a better definition: Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage. Another wayto describe the same dynamic is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation. (bold original)
Said differently, because of the seigniorage privilege, US produced financial credit instruments, and through globalization, sold or exported these in exchange for goods produced by the world.
The US dollar seigniorage through financialization has allowed the US to operate on what French economist Jacques Rueff once wrote as the secret of having deficits without tears*,
It allowed the countries in possession of a currency benefiting from international prestige to give without taking, to lend without borrowing, and to acquire without paying. The discovery of this secret profoundly modified the psychology of nations. It allowed countries lucky enough to have a boomerang currency to disregard the internal consequences that would have resulted from a balance-of-payments deficit under the gold standard.
*Jacques Rueff, The Monetary Sin of the West p 23 Mises Institute. Mr Rueff then was referring to the Bretton Woods Gold exchange standards which benefited the US.
The hollowing out of say “manufacturing jobs” in the US has been mainly because of this subsidy to Wall Street. Why make and sell goods when one can sell papers and earn more?
Besides, credit booms artificially inflate everything for a while, thus the change in production structures.
Nevertheless, the abuse of money has spawned significant real world consequences.
Or the inflationism from US dollar standard has only resulted to bubble cycles everywhere. And the bust phase of the bubbles has caused significant economic hardship for the average citizens. And such prolonged economic stagnation has only spurred the current wave of (nationalist-protectionist) populism.
Or present form of populism represents a backlash against the invisible redistribution scheme that favored, or that continues to subsidize the “establishment”—banking system, central banks and governments.
A splendid example of the consequences of US seigniorage financialization has been the Financial Crisis of 2007-2008. The US finance industry sold or exported subprime mortgages to the world but mainly to Europe’s banks. The effect was that European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009 as estimated by the IMF (Wikipedia)
And bailouts and rescues (through zirp, negative interest rates, QE/PPP/TLTRO) of the establishment have been carried over today with little real economy progress. Hence years of economic stagnation has led to an evolution towards radical politics.
Also US dollar seigniorage and financialization has led to the rise of credit based wholesale finance (the Eurodollar system, repos, swaps, swapoptions and other forms of derivatives) which risks central bankers have little appreciation of.
BSP Independence, Really?
Yet it has been a curiosity to see Mr. Tetangco assert that the BSP has remained “independent” of the government
So far this administration, just like the previous ones, has essentially left monetary to the central bank and I believe members of the executive have a good appreciation of the importance of independence of the central bank. At the same time, I think the BSP also built up a good reputation and remains credible.
The huge unannounced bond buying operations or domestic version of QE imposed by the BSP in 1H 2016 in support of sinking government revenues has signified a sign of “independence”??? [WOW. Silent Stimulus Confirmed: The BSP Launched a Massive Bond Buying Operation in 1Q 2016!!! December 11, 2016]
Truly???
Team Tetangco has been lucky because almost everyone have been too short sighted to see through the BSP’s actions. And also, almost everyone have been blindsided by the artificial boom boom boom, and presently, political controversies from the actuations of the leadership.
But what has been new? The route the BSP has taken has signified as the same episodes encountered by many others (Japan, US, Europe) whom are now experiencing its diminishing returns. In fact, easy money has been a path that has led to 1997 Asian crisis. Yes, nothing has been new. It’s just the beneficiaries or the objects of bubbles that have changed.
And importantly, the BSP has bankrolled the system (banks, media, academe and politics) to keep stealth redistribution out of the public’s knowledge reach. Yet eventually, truth will be out.
As for credibility and reputation, this represents “a pat in the back” characterization that describes current conditions…and not conditions under severe stress.
Changes in conditions affect perceptions. This shows why mainstream economics has all been about salesmanship, sales copywriting and marketing couched on economic variables and statistics.
Sleepless Nights From FED Rate Hikes????
Now to the gist.
Q: When you look ahead to 2017, what keeps you awake at night?
A: Short term, the Fed rate hikes -- the timing and the magnitude. Of course, this would be related to the policies that the new U.S. administration will adopt. Medium-to-long term, the retreat from multi-lateralism. That is related to the performance of the global economy - the major and various economies, and emerging markets like China.
Q: Have zero-rate policies outlived their usefulness?
A: Perhaps at some point these policies tend to be less effective. But my own assessment is that this will likely continue for some time to come. Rates will stay very low. The thing is we have to be mindful of the financial stability impact of very low interest rates. Corporates and financial institutions can be encouraged to take on more risk. And we will need to monitor that. In fact, a lot of countries are now focusing on the increase in corporate leverage in their economies.
Interestingly, just why should rate hikes by the FED pose any risks to the Philippines, if indeed the Philippines has been “sound” or has sufficient buffer against external risks????
In 2004-2006, the Fed increased interest rates by a whopping 425 bps or from 1% to 5.25%. Then Philippine GDP was hardly rattled (see upper window). Yes GDP fell from about 6% to over 3%. But that was it. Domestic GDP even picked up speed when FED hiking culminated.
So what changed today?
In a word: LEVERAGE.
Unlike 2004-2006 present conditions exhibits an explosion of central bank asset and M3 money supply growth (lower window)!!!
So sustained rate hikes by the FED would pull up rates around the world including the Philippines. And this would adversely impact the much ballyhooed ‘domestic demand’!
It’s truly amazing to see experts repeatedly shout “domestic demand”. Domestic demand supposedly should serve as shield against external risks. In 2013, it was forex reserves. Today, domestic demand represents the vogue incantation used—when faced against evil spirits (risks). It’s a defense based on faith, rather than economics.
However, domestic demand just doesn’t fall from the sky. Domestic demand doesn’t appear out of computer screens too. Demand is infinite. But demand to be realized needs to be financed. And the possible sources are through income and or credit or savings.
Do these experts really know of what they speak of?
Yet the BSP chief has been engaged in an egregious self-contradiction.
He understands that low interest rates enhance credit risks “we have to be mindful of the financial stability impact of very low interest rates. Corporates and financial institutions can be encouraged to take on more risk”.
But then he seems to think that domestic entities would not fall for the same trap… that’s largely because he is in charge “we will need to monitor that”. This is a showcase of fatal conceit, the assumption that he knows and controls everything. Yet paradoxically he frets over the impact of the FED’s rate hikes to the domestic economy.
In short, the BSP chief thinks that credit risks can happen to any country but the Philippines. Great!
Crisis or negative black swan events happen because hardly anyone foresees its arrival. Or when people think the same, then no one is thinking, thus the unanimity of ignoring risks serves as the psychological foundations of a crisis. There will be no crisis if everyone is cautious. There will be a crisis if everyone is presumptuous and overconfident.
The BSP’s Addiction to Asset Bubbles
And here’s more. The BSP chief is a remarkable zealot of Keynesian free lunches… “at some point these policies tend to be less effective. But my own assessment is that this will likely continue for some time to come. Rates will stay very low.”
Yet such assertion runs in contrast with current developments including the BSP’s own actions.
His 2009 zero bound policies, which spurred 10 months of 30%+++ money supply growth rate in 2013-2014 that diffused into the economy through real prices or CPI at over 4% has prompted for a back-to-back response of policy tightening: the BSP raised interest rates, SDA rates and reserve requirements twice each. He also even had banks undergo stress tests in 2014.
In short, interest rates fought back against BSP policies.
Consequently, the surge in inflation combined by the BSP tightening led to the collapse in M3, CPI and a substantial downturn in credit absorption, decline in statistical GDP and stagnated eps growth of PSE firms in 2015.
The BSP honcho then repeatedly warned of deflation risks in 1H 2015.
By 4Q, the BSP began its silent stimulus operations that accelerated in 1Q 2016.
Haven’t these been signs that “these policies tend to be less effective”???? Or haven’t current events been indicative of diminishing returns for the BSP’s zero bound????
And if the US Fed continues to raise rates while the BSP bolsters “domestic demand” via credit financed money supply expansion directed at the “race to build supply” then just how will this not be ventilated on the peso?
So just how on earth can rates stay very low????
Chaos Theory: Surging Bond Yields, Fourth Drop in BSP’s US Treasury Holdings and Falling OFW Remittances
Even more, does the BSP honestly believe that only trade and investments are the connections with the world?
Yet I mistakenly thought that Mr. Tetangco embraced the chaos theory*: “This reminds me of how "chaos theory" is often described. As everyone here is aware, CHAOS THEORY is the study of nonlinear relationships where events that appear logically random are actually linked. It is said, a butterfly flapping its wings in the Amazon will affect the time of formation, exact location, and path of a hurricane several weeks later in North America. This "butterfly effect" is formalized in various fields like risk management, that's why this audience knows it, right? It underpins the very framework of Financial Stability used by the BSP but, in its simplest form, it is more commonly referred to today as "contagion".
*Amando M Tetangco, Jr: Navigating thru the waters of change... and butterflies September 29, 2016 BIS.org
The nicest part about politics is that one does not have or need to believe in what one would say.
Perhaps chaos theory was merely a tip from the BIS and an opportunity to demonstrate his erudition for ego purposes.
And speaking of chaos theory or the nonlinear relationships, contra to what Mr Tetangco has been projecting, it’s not just the peso, even Philippine 10 year bonds have recently been hit more than the neighbors (upper window).
Granted. This may be temporary.
Also, the updated October US treasury data reveals of what I suspected: “The likelihood is that the UST liquidations intensified as the peso weakened in October and November. And if I’m right, then this amplifies a USD liquidity drain for the BSP.” [Wow. Philippine November GIR Fell $2.38 billion to February Levels as Forex Position Spiked Anew! December 8, 2016]
US treasury holdings by the Philippine government or by the BSP continued to decline (US .4 billion) last October—although October’s decrease was the least in 4 months.
The BSP claims that 3Q posted a current account surplus. Yet why has it been that GIRs are being stuffed by record amounts of forward book-currency hedges?
Plus more…
And yes, after a fiery surge in August OFW remittance (16%) growth rate, October numbers fell back or regressed to negative (-2.8% cash and -3% personal).
In short, month to month vacillations hasn’t changed anything but has only reinforced the general trend of diminishing returns of OFW remittances. This can be seen in 8 year cumulative 10 months growth conditions (upper window), along with monthly and year to date cash and personal remittances (below).
For those who’d claim that rising USD vis-Ã -vis peso equals more household spending blarney, here’s theBSP on currency valuation effect of remittances: “The lower US dollar value of remittances in October may also be partly due to the depreciation of major host countries’ currencies vis-Ã -vis the US dollar, such as the pound sterling and the euro. Remittances from the UK dropped by 5.9 percent in October even as the volume of remittances in original currency (pound sterling) increased by 16.5 percent. The case of Italy, Germany, Greece, and the Netherlands, however, is different, as remittances in both US dollar equivalent and original currency recorded declines in October
So how would cascading OFW remittances stack up with the current account, domestic supply of dollars (GIRs) and the supposedly “impregnable” domestic demand???
Internal Fragilities as Prime Risk Factor; Free Lunch Politics
Finally, it’s not external but internal fragilities that matter most.
Proof?
What is great news for populism signifies a HORROR for economics.
Yet how will free lunch welfarism not impact the government’s balance sheets, and consequently, affect the peso and interest rates and the real economy?
I would modify this to say that at zero price, demand for education will translate into an avalanche. And this will be broadcasted and bragged about as “success”. Naturally! It’s free!
And because of “success”, the government will be forced to expand supply. Otherwise, populism will erode.
Now, up to what extent will the government accommodate the coming explosive surge in demand? Or to what degree will the government wantonly splurge to build supply?
And or, will they expand supply through increased educational service contracting “Expanded Government Assistance to Students and Teachers in Private Education, or GASTPE” so as to include private colleges and universities?
If the latter will be the focus, then will this not only lead to more government deficit spending but also to the skyrocketing of private sector college/university tuition fees?
Yes, private school deficits accrued from the “outsourced” public school students will be covered by, or paid for by paying students through higher tuition fees. I discussed this in the past. [See Showbiz S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top May 12, 2014]
And with rocketing tuition fees, will this not lead to LESS private sector school enrolment and thereby INCREASE demand for free education?
Moreover, how will free education be financed? By more of the BSP’s monetization? By more borrowings? By higher taxes?
Again, how will welfare free lunches affect the peso and interest rates?
Yes indeed, external risks are factors to consider. Interestingly, the BSP chief seems to have forgotten about China’s bubble.
But no, risks wouldn’t be about contagion.
Instead, risks would be about the exposition of fragility from cumulative domestic political-economic undertakings…such as zero bound induced credit financed economic maladjustments and malinvestments as seen via asset bubbles, massive increases in deficit spending on the warfare and welfare state, the bureaucratic state and the public works.
In short, external factors may serve as trigger to expose internal sins. Even if there will be no external influences, the ramifications of internal sins will surface. All actions have consequences. Hasn’t the peso been saying these?
At the day’s end, attribution bias won’t make domestic fragility go away.
This is what makes 2017 scary stuff indeed!
The BSP Chief as Economic Model
Post script.
Pardon this seeming ad hominem. I doubt if there would “sleepless nights” or would keep the BSP chief “awake at night” as misleadingly illustrated by Barron’s Asia.
The conversation was meant for public consumption which means it needs emotional appeal in order to sell.
Yet the reason Mr. Tetangco would not need to be awake at nights is because he is the main or principal beneficiary of the policies he has implemented.
If he gets reappointed, then the coming years of money printing by the banking system and or by the government should spillover to the BSP’s budget and thus should increase his earnings. This is regardless of the how the real economy performs. Yet just observe that any signs of economic downturn have only prompted the BSP to inflate its assets at record pace. The weaker the economy, the greater the money printing.
But if he opts to retire, then he gets his retirement windfall which should amount to likely hundreds of million pesos.
How can high ranking government officials be sleepless when they are the FIRST recipients of money printing??? Or how can high ranking government officials be impelled to stay awake at nights, when their earnings are considered risk free?????!!!!
Sleepless nights are fated for the most of the non-political entities whose income and earnings are attached to, or dependent on, the performance of the economy.
And the BSP chief serves as a model as to why being a tax consumer today could work as an insurance against an economic downturn….especially under a leftist government.
