Everyone loves an early inflation. The effects at the beginning of an inflation are all good.There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.” Jens O. Parsson, Dying of Money: Lessons of the Great German and American Inflations p .28
Another Bullseye!
Last June*, I suspected that the sudden reversal in the downtrends of the banking system’s loan portfolio, and consequently, M3 (domestic liquidity), which had been a function also of a U-turn domestic yield curve from tightening to a sharp steepening—had been a product of the BSP’s silent stimulus.
In a follow-up post**, I pointed to the intense ballooning of the BSP and the banking system’s balance sheets as additional circumstantial evidences of the undeclared or silent stimulus.
Now I provide direct evidences of the BSP’s furtive actions.
In the BSP’s data of depository corporations survey, the net claims on central government have skyrocketed to 2009 levels in % (2Q 2016) and the highest level ever in nominal values (today) as shown in the charts below.
The BSP defines*** Net Claims on Central Government as consisting of “domestic securities issued by and loans and advances extended to the national government (NG), net of NG deposits.”
In short, the Net Claims on CG shows of the BSP’s exposure to credit instruments issued by the national government.
In 2009, the BSP engaged in the same stabilization measures, but that was in response to the Great Recession or the Great Financial Crisis.
So what’s the reason for the current ‘emergency’ set of actions????
The BSP’s Net Claims on the central government made a volte-face and began its ascent in June 2015.
That’s about the time when the BSP’s measure of CPI sunk to 1.2% and lower. The official CPI plunged to a low of .4% in October 2015.
And that’s about the same period when net claims on the private sector (bank lending) cratered (see lower window red trend line). Net claims on the private sector tanked to a low of 11.6% (September) from its traditional range of 15-20%.
The fall in bank lending similarly reflected on the collapse of M3 (green trend line lower pane). M3, which had a simmering 30+++% growth rate in 2H 2013 and 1H 2014 or for 10 successive months, dropped to single digits over the same period.
(As a side note the BSP’s NCCG picked up pace and speed at the time when Philippine stocks crashed to a low in January 2016—the reason for the meltup! The BSP panicked over the crash in the PSEi to have momentarily “saved” it)
The risks of credit deflation, my friends, have scared the heck out of the BSP!
Proof?
During the same period, the BSP chief was all over talking about deflation. In fact, in a speech, the BSP governor even lectured journalists to write about them.
Back then, I suspected that the BSP’s repeated deflation spiels signaled their intent to ease. I wrote****,
Has all these deflationary chatters have been about expectations of bouts of volatility? Has the BSP been using financial market volatility as camouflage to send interest rates down? Or could it be that they are using external factors as an excuse to talk down the markets? Or could the BSP even possibly use exogenous events as escape clause to exculpate them from accountability in case of a reemergence of volatility?
The problem was that an interest cut would be an admission of slowing statistical GDP, which would be a no no no no in the politically correct theme of G-R-O-W-T-H!
And remember, the essence of easy access to someone’s resources (credit) have all been pillared by G-R-O-W-T-H.
So instead of interest cuts, the BSP engaged in a massive government bond buying operation—or the local version of QE!!!!!!!! The BSP actually did cut rates this June under the cover of the interest rate corridor.
So I have been proven right, the BSP eased again.
The chart at the upper window above shows of the nominal Net Claims on the central government which has been at a stunning RECORD high!!!!
(see how history is in the making???!!!)
To consider: In 2009, the BSP’s actions were reactionary to a 7% crash in government revenues. But more than the BSP, the national government used fiscal spending, which grew by 12% that year, to “stabilize” the GDP. Hence, the deficit blowout.
The BSP, thus, monetized the government spending through open market operations or bond buying in 2009.
Fast forward today.
There has been no crash in government revenues yet. Government revenues have instead suffered a considerable slowdown.
So the implicit aim for such bond buying binge has been to raise NGDP, partly through bank credit expansion and partly through higher price inflation, so as to increase NOMINAL government revenues!!!!
In short, the BSP expanded its subsidy to the National government first, and to the oligarchy (main users of credit and asset prices—as collateral for credit).
But there is no such thing as a free lunch.
Nonetheless, from the trough of 2014, the annual fiscal deficit has started to swell.
And the response by the BSP has been to repeat what they believed that magically worked in 2009—today!
Again, there hardly has been any perspective on balance sheets and the people’s purchasing power.
Back then or in 2009, household and corporate balance sheets were relatively better conditioned than today’s high leverage exposure.
The BSP hopes that a rise in NGDP won’t affect the purchasing capacity by Pedro, Juan and Maria.
But they’re flagrantly wrong.
In fact, the BSP’s present responses have been to treat symptoms of which have signified repercussions from the 10 months of 30+++% M3 growth rates which have signified as one of their own making (negative ‘trickle down’ real rates). Or it’s an irony for them to just double down on what has been emerging as a failed policy. It’s like fighting fire by pouring gasoline on it!!!!
Yet the BSP’s Net claims on the central government signified about 17% of M3 last October, and this compares to Net claims on the private sector (bank credit) which represented about 69%.
With both BSP operations on NG debt and bank system’s lending activities running on full throttle, it’s why even the government’s GRPI and CPI have been on an upsurge—even if these numbers have meaningfully diverged in scale for political reasons! [Why Inflation Statistics Matter: Incredible. General Retail Price Inflation Skyrockets to Near 2014 Highs as BSP’s CPI Remains Muted! December 9]
And more importantly, it’s also why the risk for another sharp upturn or an explosion in M3 (similar to 2013-14) has only been amplified. And this would have a feedback mechanism with prices in the general economy similar to 2014. And once prices reach a point of political sensitivity, the BSP WILL BE COMPELLED TO TIGHTEN!
The BSP doesn’t even need to act, the market itself will!
For instance, in spite of the BSP’s bond buying, the belly of the yield curve, the 5-10 year domestic sovereigns, has been inverted for the fourth straight Friday! So it has not just been in stocks or the peso, even bonds have been experiencing convulsions!
The BSP is just repeating the same mistake it did but insanely expects a different outcome.
As further proofs, the Philippine central bank’s and the domestic banking system’s balance sheets remain at record highs!
And with all such massive CG debt monetization by the BSP, compounded by the banking system’s seething credit expansion, just where do you think the peso will be headed for????????
It’s sad to see of escalating signs of the peso’s role as sacrificial lamb at the altar of the political religion.
***Bangko Sentral ng Pilipinas, Depository Corporations Survey FAQs
****Phisix 7,800: Record Phisix as the BSP Continues with Deflation Spiel! March 9, 2015; available online via Before It’s News
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