Last week’s rally came amidst a very volatile peso. While the Peso closed the week significantly higher to 44.565 per US dollar, Friday’s closing doesn’t tell of the bigger picture. That’s because the peso had a very wild rollercoaster ride. Monday, the peso almost covered the year’s loses by firming to 44.43. The peso ended 2013 at 44.4.
On Thursday, all gains seem to have been erased as the peso drastically fell to 44.78 per USD.
But Friday, the peso saw a last minute surge as seen in the above chart from Bloomberg. Has the BSP been responsible for pushing the Peso higher?
Yet such exchange rate volatility would signify a nightmare for domestic companies engaged in external trade, particularly for smaller companies with little or no access to currency hedging (mostly forward derivatives contract). Who cares about the small invisible guy/gal who pay the taxes which the VIP rely on?
Yet it would seem ironic if not absurd to see analysts predict a strong peso when the BSP has been inflating the money supply at ridiculous rates. Well it is natural for officials to say things positive, that’s because saying negative will mean self-incrimination. Moreover, their job is to also sell interests of the political leaders, their employers or they lose their privileges
Most analysts see effects of money printing on the prices as neutral. This means that they see the distribution from bank credit creation or from direct monetization by government of deficits as having proportional effects. In short, money printing and credit creation has little bearing or influence on the economy. If it does it is just a one-time event.
So for them, bubbles from credit expansion exist in a vacuum. And if there should be any bubbles they are an offshoot to psychological aberrations rather than from political interferences.
So if one notices the mainstream’s or officialdom’s defense, say that the Philippines has been overheating from soaring Philippine money aggregates, they deflect on the idea by selectively picking on irrelevant statistics to dismiss such a risk, or bringing up a stawman to beat them up. They hardly deal with the issue of debt as if they are non-existent or have no effects.
Now if there are signs of price inflation they glibly turn to supply side factors such as citing disruptions from Typhoon Yolanda. Funny how one economically depressed region can spark a national contagion via price increase of goods which can easily be solved by trade liberalization.
These people hardly realize that money has relative effects depending on the entry points and on people who first receive them (Cantillon Effects[1]). And because they have relative effects, the impact on the economy’s production and capital structure comes in relative time intervals. Some sectors, the first beneficiaries of money benefit from lower prices compared to later recipients of money. As the money circulates and spreads economy wide, prices go higher relatively. Earlier beneficiaries see this as profits. Later recipients suffer from reduced purchasing power.
Price changes from money inflation come in condition where the relative production rate remains lower than the growth of money. This is why some areas are more sensitive to price increases. And throw into the cauldron of myriad regulatory restrictions on specific segments of economy we thus have market prices driven by demand and supply operating on such politicized environment. Distorted prices mean embedded imbalances.
This also means monetary inflation undergoes stages. And such stages will be reflected on what the convention interprets as corporate fundamentals whether earnings or cash flows or other financial metrics, or even micro economics, where negative real rates induce a change in people’s preference to hold money, particularly to indulge in speculative activities that would have eventual horrible consequences.
These are things which the mainstream can’t see or won’t even give an effort to see. So they are surprised when volatility emerges in the face of their “stable” projections.
For instance, the outflow from BSP’s Special Deposit Accounts (SDA) to the banking system—as the central bank has reduced the banking system’s access (due to BSP losses) to what was intended as a liquidity mopping up program—will likely extrapolate to even more the incentives for banks to lend[2]. So all these credit creation will mean higher inflation and higher interest rates, especially to the underdeveloped economy (pretending to be a developed economy), whose limited exposure by the general household to banking and financial sector, would extrapolate higher degree of vulnerability to price inflation due to low productivity.
So unless the BSP tightens significantly, which will come at a big cost to the statistical economy and the subsidized privileged sectors, given the already present stagflationary environment, the peso will weaken.
Thus the BSP’s interventions, which if true and if sustained, will likely be seen via lower Gross International Reserves (GIR) data in February.
Importantly despite the interventions, the economic forces will upend any artificially based prices.
[1] See Phisix and the Rotational Dynamics January 30, 2012
[2] See Phisix: Escalating Risks from the Region and from Internal Bubbles December 9, 2013
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