The Philippine Government’s New Method of Controlling Inflation: Censorship of Inflation Reports! Another Sy Led Historic PUMP!

The Philippine Government’s New Method of Controlling Inflation: Censorship of Inflation Reports! Another Sy Led Historic PUMP!

In the National Government’s (NG) attempt to manage the fiscal policy of ‘spend, spend, spend’, I wrote last May: [See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt! May 6, 2018]

5) The last option would be for the NG and BSP to manipulate markets and statistics in the hope that the markets will conform and comply with their political targets.

A principal repercussion of the fiscal policy of spend, spend and spend has been street inflation. The NG’s statistical CPI has also manifested the government-made fiat-money inflation or the effect of the NG’s aggressive spending financed by the BSP and banks on the prices.

As such, desperately looking for a scapegoat, Department of Finance (DoF) officials have trained their guns on establishment economists.

From the Inquirer (December 19, 2018) [bold added]

Finance Secretary Carlos Dominguez III said the government would continue to keep tabs on economists’ inflation and economic growth forecasts next year to make them accountable for their projections which were used as basis for consumer and business decisions.

Dominguez told reporters Monday night that the Department of Finance (DOF) only wanted to compare projections with actual numbers.

 “All I want is the score. [For example, as in basketball] we want to score how many of the three-point shots of Curry go in,” Dominguez said, referring to basketball star Stephen Curry.

While these forecasts have margins of error, Dominguez said analysts and economists should be made accountable when they put their projections out in public.

Early on, DoF officials went into a verbal scrimmage with mainstream analysts.

From the Bloomberg: (December 16, 2018)

The Philippines Department of Finance blamed analysts for "faulty" forecasts that drove up inflation expectations. Now some analysts are fighting back.

The fracas started on Sunday when the finance department issued a statement saying projections by analysts and economists from 13 institutions were “off the mark” by as much as 0.4 percentage points from the official inflation rates for January to November. It suggested the estimates were "weak".

 “These forecasts have also driven inflation expectations that, as we know from global experience, have a tendency tobecome self-fulfilling prophecies,” Finance Undersecretary Karl Kendrick Chua said.

The response was swift. In a country where the central bank uses social media to communicate policy, the financial community isn’t shy about challenging the official view on the same platforms.

Analysts were quick to point out that the government itself has had to revise its own forecasts for inflation, economic growth, and trade.

The next day, mainstream experts gathered forces to scoff at the DOF’s accusations.

From the Business Mirror (December 18, 2018)

LOCAL economists have dismissed the results of the study released by the Department of Finance (DOF) that the “off-the-mark” forecasts of over a dozen analysts actually served to fuel inflation in the past few months, saying it was not right for the government to point fingers at this time.

Yogi Berra once said “It’s tough to make predictions, especially about the future.”

I am reminded of the government of Argentina which has been notorious in the manipulating statistical CPI.

Back in 2011, the Argentine government even “fined two private consultancies $120,000 over the publication of inflation estimates that more than double the official rate”, according to Reuters.

Has the Argentine government been successful in controlling CPI by punishing forecasters?

Argentina’s CPI climbed in 2011 and continued ascent up to the present. Argentina’s information controls or censorship hasn’t thwarted the laws of economics.

Of course, the Philippines isn’t Argentina. But what would matter is of the policies undertaken by the government. Since the Philippines has embraced a socialist path reminiscent of the latter, similarities in outcomes have surfaced.

Or, the Philippines may end up like the latter unless there would be substantial changes in the direction of the present socio-political-economy path. 

So the subjugation of CPI forecast would signify an exercise in futility

And here’s the thing.

The establishment's bickering over the CPI exposes their perspective on inflation: a statistical contraption!

Perhaps such information bears significance for the finance world and the businesses of the elite.

But do street vendors, the sari-sari and carinderia store owners or small and medium business scale enterprises use the GDP and CPI in their business calculations?

Up to what extent have the GDP and CPI been used by entrepreneurs for making decisions?

The DOF gives too much credit to these analysts for their “self-fulfilling prophecies”.

By such allusion, have these analysts attained rock star status? 

According to the BSP’s deposit liabilities, Php 12.152 trillion in total deposits are from 47.54 million depositors who maintain some 59.6 million deposit accounts as of June 2018

With half of the population not having deposit accounts from the banking system, the thrift, and rural and cooperative banks, how (the heck) can these ‘experts’ hold sway on the public’s inflation expectations?

Like Argentina, the DOF is looking for a fall guy for their policy failures.

Yet, of course, the other policy perspective here is control of information. The NG wants to filter out politically unacceptable forecasts. It believes force is necessary to control economic outcomes which play by the book of totalitarianism.

Here is an interesting side note.

Deposits with over Php 2m have grown fastest even when they represent the smallest share of the total accounts. In contrast, growth in the 5k and below accounts, which consists of the biggest share of total accounts, continues to ebb. Such highly skewed distribution of bank deposit liabilities reveals of the dispersion of wealth in favor of the “have’s”.

Finally, it’s hideously naïve for anyone to expect precise outcomes through quantified forecasting in the same manner as predicting natural sciences.

Economics isn’t natural science.

As the great Ludwig von Mises explained,

Economics can predict the effects to be expected from resorting to definite measures of economic policies. It can answer the question whether a definite policy is able to attain the ends aimed at and, if the answer is in the negative, what its real effects will be. But, of course, this prediction can be only "qualitative." It cannot be "quantitative" as there are no constant relations between the factors and effects concerned. The practical value of economics is to be seen in this neatly circumscribed power of predicting the outcome of definite measures.

And of course, economic theory shouldn’t be confused with econometrics. As Economic blogger and Professor Donald J. Boudreaux wrote,

The ultimate test of any theory is not how impressive it looks or even how well its predictions are borne out by the quantitative data.  Rather, the ultimate test of any theory is how well it improves our understanding of reality.  

And one last thing.

The PhiSYx attained a second record today!

That milestone embodies another historic PUMP!

What can’t be attained in the regular session will have to be accomplished by an orchestrated move at the close!

53.3% of today’s gains from an eight-company pump. The Sy group having the largest market cap were the main beneficiaries aside from the stunning JGS push (+5.84% to deliver 87.5% of the 6.67% gains of the day! Awesome!). The 8-firm pump had a total market share of 55.54% as of the day’s close.

Desperate times calls for desperate measures!

And yes, the CPI forecasting censorship is tied with the brazen stock market manipulation: these are designed to control, by force, the laws of economics!

Parallel Universe: Record US Stock Markets and Falling Estimates of Corporate Earnings

With many benchmarks of US stock markets at record highs, conventional wisdom tells us that this must have been about beating earnings, perhaps also at record levels.

The Dow Jones Industrials (top pane) has clearly passed the 2007 threshold, while the S&P 500 (lower pane) has marginally breached through same levels. (chart from Bigcharts.com)

But conventional wisdom seems out-of-place or has been rendered irrelevant in today’s era of central banking wizardry.

The percentage of companies beating earnings (top pane) and revenues (bottom pane) expectations continues to be in a downtrend (chart from Bespoke Invest).

And such dynamics hasn’t been a short term anomaly, rather these has been THE trend since 2006 (green lines). The decline in the % of companies beating earnings and revenue estimates has been worsening since 2010 (red lines).

This deterioration in earnings and revenues can even be seen from a different perspective, or relative to the historical averages.

They show the same results.

The % of companies that missed estimates have jumped (left window top). Average earnings surprises has materially declined (top right window) as average revenue surprises turned negative (bottom window). All charts above from Zero Hedge

So it seems that a speculative frenzy has been in motion in US equity markets. The above also reveals of the parallel universe or of the flagrant disconnect between fundamentals and market prices.

This suggests that the orthodox wisdom where “corporate fundamentals” drive market prices seems to have been falsified by the actions of central bankers.

I mentioned above that the % of companies beating earnings and revenue estimates has been worsening since 2010, this seems to coincide with the re-acceleration of the Fed’s QE program from QE 2.0 in 2010 (chart from the Cleveland Federal Reserve).

And again this exhibits the substantial influence of central bankers or the US Federal Reserve in determining the direction of stock markets.

This also reminds me of the stock markets of two Latin American nations, Argentina (Merval-left) and Venezuela (IBVC-right), where both economies have been experiencing hyperinflation but in different degrees.

Skyrocketing stock markets for these countries are signs of monetary disorder or a blossoming of a currency crises rather than an economic boom or a credit bubble. (charts from Bloomberg). 

I am not suggesting that US markets have been suffering from the same bout of hyperinflation, rather I am saying that the record rise in US stock markets are most likely symptoms of monetary distress.

It pays to recognize the difference.

Bernanke’s Devaluation Is About Debt Deflation, Tenuous Link Between Weak Currency And Strong Exports

A devaluation, however, is always couched in terms designed to make people believe that the government has performed some sort of fiscal miracle. What, in fact, it has done is announced that it is reneging on its debts.-Robert Ringer, The True Cause of Inflation...

Rising financial markets amidst a world where the US dollar flounders seem to have set loose growing cacophonous voices in support of such politically induced environment. The general theme is: A falling US dollar (via devaluation) translates to surging exports and bigger profits from multinationals, hence are seen as a good development for the markets and economy.

Essentially rationalizing devaluation as the best alternative path for economic recovery is clearly a manifestation of the reflexivity theory-a reinforcing feedback loop mechanism where people interpret prices as signifying real events, and where real events reinforce these price signals. The positive temporal effects from a weak dollar have been construed as blessings. Hence the appearance of asset price and economic recovery seem to have drawn in a growing number of weak dollar fans.

Yet oblivious of the present dynamics, the mainstream fails to take into the account that asset pricing today hardly reflects actual demand and supply balances but importantly signifies as the various degrees of government interventions in the marketplace aimed at “patching” the system.

In short, growing misinterpretations from rising asset prices by a system surviving on straps of band-aids leads to false confidence.

Inflation Is Not A One Size Fits All Formula

The mainstream seems baffled by the genuine reasons behind why US policy appears to be directed towards a lower US dollar. Programs such as the nationalization of the US mortgage market by the immensely expansionary roles of GSEs as Fannie Mae, Freddie Mac and FHA, an extended period of zero interest rate regime, equity stakes at key financial institutions, centralization of Fed powers, large fiscal deficits, a broad alphabet soup of makeshift programs aimed at providing marketmaker, lender, buyer or investor of last resort and importantly “money printing” Quantitative Easing programs, have all contributed to the falling US dollar or the “devaluation”.

Many have erroneously moored their views on the alleged necessity to restore “imbalances” of the US economy (e.g. wage differentials, nominal GDP, unemployment) allegedly targeted to enhance competitiveness relative to the world via devaluation. However, such perspective camouflages on the authentic but implied reason: To forestall systemic deflation from unwieldy debt aggregated within the system.

We have repeatedly been saying that Federal Reserve Chairman Ben Bernanke has made this campaign against deflation as the foremost incentive for today’s policy action, as noted his famous November 2002 Helicopter Speech Deflation: Making Sure "It" Doesn't Happen Here.

Yet Mr. Bernanke’s sweeping examination of the Great Depression as model for today’s policy guidance, from which his panoply of antidotes has been devised from, emanates from mostly the monetarists’ dimension. However, this framework diminishes the weight of influence from wage and price controls instituted during the New Deal era.

The US recovered from the Great Depression not from inflationary policies, as Mr. Bernanke perceives, but from the massive attendant price and wage adjustments. Importantly ``a partial dismantling of the regulatory infrastructure that had grown up during the Depression and the war; in effect, it was a rediscovery of the market and a new birth of freedom for entrepreneurs and workers” notes Professor Art Carden, post World War II.

This means that throughout history, devaluation, as Henry Hazlitt rightly exposes, is the modern euphemism for debasement of the coinage. It always means repudiation. It means that the promise to pay a certain definite weight of gold has been broken, and that the devaluing government, for its bonds or currency notes, will pay a smaller weight of gold.”

In other words, policies dealing with tacit debt repudiation should be seen in a different light compared with that from the adjustments from economic imbalances.

Theoretically, in order to solve unemployment government can hire everyone (communist model). But this would be different from preventing systemic deflation from outsized debt by concentrating taxpayer resources on the banking system as seen today. Because the objectives and policy recourse actions are different, hence the repercussions from current policy actions will be different. So it would be a folly to lump debt repudiation and economic imbalances as a “one size fits all elixir”.

Presently, the global governments’ collective approach has been to substitute constricting private sector debt fueled consumption (from economies blighted by the recent bubble) with its own.

As Morgan Stanley’s Spyros Andreopoulos rightly observed, ``This time around, however, eroding the debt through faster growth may not be an option. Instead, growth in many developed countries is likely to slow significantly going forward as labour forces shrink due to the demographic transition. Worse, population ageing will impose added pressure on public expenditure through higher pensions and healthcare costs. If outgrowing the debt is unlikely, and if governments lack the resolve to cut spending and/or raise taxes sufficiently, the remaining options are default and inflation. No policymaker in the developed world - and, by now, few in the developing world - would want to countenance default as an option. This leaves inflation.” (bold emphasis mine)

So while mainstream engages in data mining of facts in order to fit in to their preferred bias/s with its accompanying outcome, the reality is that policy actions have been concentrated on managing the intractable debt burdens.

Dismissing The Benefits Of Devaluation From Empirical Evidence

Figure 1: New York Times: China Grabs Export Leadership

The post hoc fallacy assumption that a falling currency is a boon to international competitiveness, as represented by export growth, can easily be disputed from the reference point of today’s roster of biggest exporters.

Simplistically this suggests that top exporters have weak currencies.

Figure 2: Economagic: Currencies of Major Exporters

Seen from the perspective of the Euro (blue line-top window; currency of Germany, Netherlands, France, Italy and Belguim) and the British Pound (red line top window), aside from the Japanese Yen (blue line, lower window), except for the 2008 meltdown, these currencies have been on a long term appreciation, in spite of their roles as the world’s largest exporters.

The South Korean won (red line lower window) which devalued by half as a result of the Asian crisis in 1997, has seen a recovery of its currency yet its exports exploded over the same period. One should note that the Bank of Korea used the Asian crisis as an opportunity to liberalize its capital account in two phases to offset the impact of the crisis.

Alternatively, if the weak currencies equate to strong exports: Zimbabwe, the Philippines or the previous hyperinflations episodes of Argentina or Brazil should have made them export giants of today. None of this is true.

Incidentally, Argentina used to be one of the world’s most prosperous countries in the world during the first quarter of the 20^th century or the “golden age of growth” (Library of Parliament). Its political and economic regression had been largely due to the protectionist and isolationist policies (wikipedia.org) post 1930 or the Great Depression.

Hence given the Argentine experience, devaluation and closed door policies make a lethal combination to lower the standards of living of a society.

Today, Argentina is classified as an emerging market.

Although one may point to Argentina’s export recovery following the 1999-2002 crisis, which saw the Peso massively fall anew, the fact is that Argentina’s exports has mainly been in commodities, agricultural (54%) and energy (12.2%). In other words, Argentina’s export recovery can be construed from less of the international competitiveness from a weak currency, but mainly levered from global demand for commodities which appears to be in a supply ‘shock’ following years of underinvestment.

So based on empirical evidences as shown above, the notion that weak currency equals greater international competitiveness is utterly unfounded and represents sloppy and an oversimplistic thought process meant only to justify government interventions.

Drug Decriminalization Caravan Gets Rollin'

In our earlier posts War on Drugs: Learning From Portugal's Drug Decriminalization and Nicolas Kristof: Why The War On Drugs Is A Failure, we opined that sentimentalism over "the war on drugs" has to give way to economic realities and a more humane oriented approach.

Resources uneconomically spent for prohibition and detention should instead be diverted into education, treatment and the protection of private property.

As New York Times' Nicolas Kristof in a recent highly articulate commentary, (bold highlight mine)

``Look, there’s no doubt that many people in prison are cold-blooded monsters who deserve to be there. But over all, in a time of limited resources, we’re overinvesting in prisons and underinvesting in schools.

``Indeed, education spending may reduce the need for incarceration. The evidence on this isn’t conclusive, but it’s noteworthy that graduates of the Perry Preschool program in Michigan, an intensive effort for disadvantaged children in the 1960s, were some 40 percent less likely to be arrested than those in a control group.

``Above all, it’s time for a rethink of our drug policy. The point is not to surrender to narcotics, but to learn from our approach to both tobacco and alcohol. Over time, we have developed public health strategies that have been quite successful in reducing the harm from smoking and drinking.

``If we want to try a public health approach to drugs, we could learn from Portugal. In 2001, it decriminalized the possession of all drugs for personal use. Ordinary drug users can still be required to participate in a treatment program, but they are no longer dispatched to jail.

``“Decriminalization has had no adverse effect on drug usage rates in Portugal,” notes a report this year from the Cato Institute. It notes that drug use appears to be lower in Portugal than in most other European countries, and that Portuguese public opinion is strongly behind this approach.

``A new United Nations study, World Drug Report 2009, commends the Portuguese experiment and urges countries to continue to pursue traffickers while largely avoiding imprisoning users. Instead, it suggests that users, particularly addicts, should get treatment."

Now, it appears that indeed several Latin American Countries have begun to assimilate the Portugal Experience; Mexico and Argentina has opened their doors for the less antagonistic option by decriminalizing drugs.

According to Juan Carlos Hidalgo of Cato, (bold highlights mine)

``Following in Mexico’s footsteps last week, the Supreme Court of Argentina has unanimously ruled today on decriminalizing the possession of drugs for personal consumption.

``For those who might be concerned with the idea of an “activist judiciary,” the Court’s decision was based on a case brought by a 19 year-old who was arrested in the street for possession of two grams of marijuana. He was convicted and sentenced to a month and a half in prison, but challenged the constitutionality of the drug law based on Article 19 of the Argentine Constitution:

``The private actions of men which in no way offend public order or morality, nor injure a third party, are only reserved to God and are exempted from the authority of judges. No inhabitant of the Nation shall be obliged to perform what the law does not demand nor deprived of what it does not prohibit.

``Today, the Supreme Court ruled that personal drug consumption is covered by that privacy clause stipulated in Article 19 of the Constitution since it doesn’t affect third parties. Questions still remain, though, on the extent of the ruling. However, the government of President Cristina Fernández has fully endorsed the Court’s decision and has vowed to promptly submit a bill to Congress that would define the details of the decriminalization policies.

``According to some reports, Brazil and Ecuador are considering similar steps. They would be wise to follow suit."

We, Filipinos, should learn from their experiences.