The principal methods by which governments inflate are: (1) huge governmental spending, particularly deficit spending; (2) monetizing the public debt; (3) pegging or forcing down interest rates; (4) ordering wage boosts; and (5) encouraging private credit expansion. The Truman caliphate has resorted to all these methods. The principal methods by which governments pretend to “fight” inflation are by price fixing and wage fixing, usually accompanied by allocations, rationing, and subsidies.—Henry Hazlitt
In this issue
June’s CPI Spike Upends PhiSYx’s Oversold Rally, The Only CPI Chart that Matters, Why Inflation’s Trajectory Will Persist
-The Only CPI Chart That Matters: BSP Debt Monetization vis-à-vis CPI
-Why Inflation’s Trajectory Will Persist
-Price Fixing Pumps Sends SM Group Share of the PhiSYx to a Record 30.43%!
-US-China “Trade War” is ON
The Only CPI Chart That Matters: BSP Debt Monetization vis-à-vis CPI
The oversold rally in the Phisix had been upended virtually by the National Government’s report on June’s CPI.
And practically absent in all of the media's narrative has been the most critical factor in driving up CPI. And that is what makes everything fun!
The financing of demand, an elementary ingredient of economics, has been ignored or dismissed in popular discussions purportedly about the economy.
Yet, a tight correlation has developed between the BSP’s debt monetization and CPI since 2015. A record BSP’s net claims on National Government has coincided with multi-year high CPI.
Everything but the kitchen sink, yes, save for BSP’s financing of the NG’s spending, has been mentioned. Oil, excise taxes, and mostly supply-side factors. Though these factors contribute to or aggravate the present conditions, supply will have to function concomitantly with demand.
Take the sugar industry. Because of magnified demand and higher compensations, many of the sector's workers have migrated or transferred to the public sector’s “build, build and build industries”. [See Bullseye! Crowding Out Effect in Motion: Sugar Farmers Move to the Construction Industry! Excise Taxes: Will Sardine Manufacturing Be the Next Coca-Cola? March 5, 2018]
The depletion of labor or manpower in the sugar industry has contributed significantly to the reduction of the sector’s output. [See Wow. Partly Through the Crowding Out, 9 Of 12 Sugar Refineries Stop Operations June 27, 2018]
So while demand for materials, equipment, and other auxiliary inputs increase for the “build, build and build” industries, which have consequently raised their prices, the reduction in output in the sugar industry, have also caused price pressures due to supply constraints.
The question is: how has demand for the build, build and build projects been financed? The most important chart of inflation provides the answer.
Prices thus rise in sectors affiliated with and within the “build, build and build industries” and in the sugar industry. And price increases in these sectors spread to the other parts of the economy for virtually the same phenomena: the distortive impacts of the crowding out syndrome. And such compounds on the contortions brought about by the credit-financed race to build supply in the bubble areas of the domestic economy
Cause and effect.
That said, because inflation bashing has become chic, a confused politician has thus called for an investigation of sugar prices.
Why Inflation’s Trajectory Will Persist
And intensification of price pressures should be expected soon.
There were numerous price increases announced last week: LPG prices, fuel prices, Meralco’s July electricity bills, and minimum fares for Jeepneys (+12.5%)
And that’s not all. Throwing gasoline into the inflation fire measures had also been declared.
To alleviate poverty, various welfare safety nets were activated. The government ratified a feeding program for undernourished kids. The Department of Social Welfare and Development (DSWD) launched a mobile crisis intervention unit designed to “bring crisis services” “within the reach of poverty-stricken families”.
Since these measures will contribute to the expansion of the National Government’s fiscal deficits, it would need to be financed by higher taxes, debt or more BSP’s monetization. Guess, among these alternatives, which will be preferred?
Calls for increases in minimum wages have amplified. A nationwide minimum wage hike could probably be announced, sometime soon, if not during the President’s Duterte’s SONA
The ruckus over street inflation has taken hold as one of the de rigueur political issues.
The political opposition has used inflation as a staging point to assail the administration. Various political personalities have likewise demanded solutions from the National Government like suspending the TRAIN law, increasing interest rates or any measures to curtail advancing price pressures.
The government’s CPI numbers of 5.2% and 5.7% appear to be understated substantially for political denunciation of inflation to crescendo or to garner media's front page treatment.
And as the National Government becomes more desperate to solve its inflation dilemma, I spelled out a fifth option: manipulate statistics [See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt! May 6, 2018]
From Reuters: “Finance Secretary Carlos Dominguez said he would consider removing tobacco from the basket of commodities used in calculating inflation, which has a weighting of 0.9 percent in the consumer price index versus food’s 35.5 percent. The proposal needs to be discussed as it involves a change in methodology, Philippine Statistics Authority head Lisa Grace Bersales told Reuters.
You see, it is happening!
In the meantime, BSP Governor Nestor Espenilla Jr. has admitted that the surge in the CPI signified a “setback”. Thus, the BSP has “hinted at a more aggressive action to contain the accelerating pace of domestic price increases”.
Having been dependent on the elixir of easy money, the BSP won’t make any aggressive action unless forced to by the markets.
And it has even been worst today, given the economy’s growing dependence on the acceleration of public expenditures which will have to be funded by debt or by the BSP. A real tightening will vacuum liquidity off the financial system which would starve credit finance to the spend, spend and spend and to the race to build supply bubbles.
That ain’t gonna happen.
Any act of tightening by the BSP will be a pantomime.
And you know why current developments have been fun? Because with the absence of public discussion of the BSP’s debt monetization, such eludes scrutiny.
More of its usage will occur in the absence of scrutiny.
Ergo, whatever superficial tightening measures imposed, a corresponding easing will be applied. At the day’s end, there can be no weaning away, unless current sting will accelerate to push interest rates significantly higher and the peso substantially lower.
A tightening would mean to end the economy’s chronic addiction to inflation. The pangs from a withdrawal syndrome from such policy reversal would not be permitted.
Until the markets and the economy pushes back, the path dependence on the unsustainable policy of inflation will persist.
Price Fixing Pumps Sends SM Group Share of the PhiSYx to a Record 30.43%!
These dynamics have been evident in the stock markets.
The stock market has been used as a prop to signal developmental progress and prosperity. However, instead of allowing the markets to function as an efficient resource allocator, engineered pumps and price fixing has caused tremendous imbalances within the capital sector.
Mark the close pumps were responsible for 106.49 points or +1.48%. The PSYEi 30 closed the week down by a measly .1%. Without those pumps, the index would have been lower.
For the week, because the SM group (SMPH +1.95%, SM +.46% and BDO +2.39%) pushed essentially the index higher, while the top Ayala Group (ALI -3.17%, AC -2.39% and BPI -1.13%) members pulled it lower. As such, the market cap share of the SM Group soared to a fresh record of 30.43%.
So yes, the PhiSYx continues to become captured by the SM group and juxtaposed to it, mounting concentration risks.
It is fun until isn’t.
US-China “Trade War” is ON
As a final thought, the US-China “trade war” officially started at noon of July 6th Friday.
The “trade war” (“the biggest trade war in economic history”-China) involves the imposition of 25% tariff on US$ 34 billion worth of each other’s goods and is likely to spur considerable disruptions on the global supply and distribution chain networks. And as the leading source of various supply inputs, the impact of the trade walls won’t be limited to China but would instead spillover to the region. Even more, such economic stalemate would magnify the fragility from China’s debt financed economy.
And such economic spat won’t be confined to trade, cross-border investments and capital flows will most likely be directly or indirectly affected which should exacerbate on the region’s offshore dollar liquidity strains.
That said, it would be interesting to see if the ongoing economic impasse would likewise affect global central banking’s collaborative efforts. If so, the region’s monetary policies could become more fragmented thereby exacerbating the region's financial fragility.
And an escalation of an economic standoff amplifies the risk of spillovers to the geopolitical arena.
Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do. Protective tariffs are asmuch applications of force as are blockading squadrons, and their object is the same—to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.
Can the stock market price fixing and sustained inflation remedy the dislocations in the production structure caused by protectionism?
We are living in interesting times indeed.
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