There is NOTHING that government can do to help the economy other than remove barriers to wealth creation and preservation that it itself created and allow the people the freedom to pursue their own ends. Since government creates nothing itself, all interventions interfere with what the people themselves desire and are nothing more than transfers of wealth for the benefit of some and the destruction of wealth for all. Yet wealth destruction may not be the worst thing that can happen. A nation can lose its freedom entirely when government doubles down and doubles down time and again in the pursuit of phantom fixes with ever increasing amounts of fiat money conjured out of thin air—Patrick Barron
In this issue:
The Medical Gulag Experiment: PSYEi Revenue and Income Crashed in 2Q as Debt Zoomed! COVID-19 Death Toll Mounts! Say’s Law In Action
I. The Medical Gulag Experiment: What Happened to Saving Lives? Covid-19 Death Soars!
II. The Medical Gulag Experiment: 2Q and 1H PSYEi 30 Revenues and Income Crash!
III. 2Q/1H GDP Understates the Real Economy Losses!
IV. PhiSYx Firms Borrowed at Record Levels to Survive! BSP’s Financial Repression Fuels Inequality
V. Say’s Law in Action: Desperate PCCI Calls For Liberalization
VI. Say’s Law in Action: PPE Manufacturing Group Cries Foul Over Imports
The Medical Gulag Experiment: PSYEi Revenue and Income Crashed in 2Q as Debt Zoomed! COVID-19 Death Toll Mounts! Say’s Law In Action
The goal of the medical gulag experiment has been about saving lives. Though researchers can come up with fantastic numbers to make the present figures small, mounting cases continue to claim a higher death toll.
Not only are lives being lost, but this medical social engineering has scuttled the economy, which had been reflected in the financial losses of listed firms composing the elite index.
Financial losses of listed firms point to the massive understatement of the GDP.
Firms of the headline index borrowed heavily to survive. A price they will have to pay for soon. But as elite firms had easy access to money, SMEs suffered.
The PCCI seeks a full reopening, decrying unsustainability from the political obstacles to the economy.
Another real-time example of uncertainties created by political choices, local PPE manufacturing firms grouse over imports.
I. The Medical Gulag Experiment: What Happened to Saving Lives? Covid-19 Death Soars!
Alas, lay witness to the imploding, self-destructing process of the big government bubble!
(all bold and bold-italics of news excerpts mine)
From the Inquirer (August 18): For National Task Force on COVID-19 chief implementer Carlito Galvez Jr., stricter lockdown or a modified enhanced community quarantine (MECQ) is “not a sustainable strategy” against the pandemic as it greatly affects the public’s livelihood. Galvez issued the statement after Metro Manila, Rizal, Laguna, Cavite, and Bulacan shift from MECQ to a more lenient lockdown or a general community quarantine (GCQ) starting August 19 until August 31. “Nakita po namin na MECQ is not a sustainable strategy,” Galvez said in an online Palace briefing. (We saw that MECQ is not a sustainable strategy.) “Ang way forward talaga po ay ‘yung granular implementation ng lockdown kasi po pag nag-MECQ po tayo, ang laki po ng collateral sa livelihood po ng mga tao po natin,” he explained. (The way forward is for us to utilize the granular implementation of lockdown because MECQ has huge collateral on our people’s livelihood.)
But for the leadership, because people’s lives are distinguished from livelihood or the economy, such served as justifications for the rigorous lockdown policy.
From the Manila Standard (July 27): President Rodrigo Duterte defended his government's response to the COVID-19 pandemic, saying he prioritized saving lives above other considerations amid criticisms that the country's lockdown – the longest in the world – has failed to flatten the curve as positive cases continue to surge. “When the pandemic struck, I decided to prioritize life over other considerations according to experts,” the President said in his fifth State of the Nation Address
Figure 1
Sadly, the administration’s “living experiment”, where the Philippine citizenry has served as a guinea pig for a social engineering medical program predicated on the ideological establishment command-and-control, and centrally planned economy, has boomeranged or backfired immensely.
As COVID-19 cases continue to soar, based on weekly and biweekly per million people rate of change, much less discussed in media has been the arrant failure of the purported populist policy of saving lives!
It’s been over 5-months and deaths have been mounting!
Though the pandemic will end somewhere down the road, the earlier gambit to contain and mitigate through the medical gulag experiment has failed.
Even more, the admission that "MECQ is not a sustainable strategy" and the subsequent piecemeal reopening of the economy, therefore, represents a gradual deconstruction of a failed policy!
Yet, who pays the price for such massive policy misjudgment?
II. The Medical Gulag Experiment: 2Q and 1H PSYEi 30 Revenues and Income Crash!
Headline GDP reportedly collapsed by 16.5% in the 2Q and 9% in the 1H.
But the GDP is just an estimate premised mostly from a menagerie of surveys.
It even counts public spending as net positive even when it produces nothing and extracts and diverts resources from the productive and wealth-producing sectors of the economy.
Nonetheless, published earnings and revenues by the major component members of the headline index, a club of companies owned by plutocrats, provide a better proxy of the scale of the damage from this grand social engineering experiment.
The ramification of the ‘saving lives’ strategy by the leadership produced a harrowing crash in the aggregate revenues and income of 32.5% and 85.34%, respectively, of the component members of the headline index in the 2Q.
The 2Q meltdown exacerbated the decline of the 1H revenues and income of the same firms, which tumbled 19.23% and 58.96%, correspondingly.
Figure 2
Though the property, holding, and industrial sectors took the brunt of the revenue and income losses in 2Q and 1H, the revenue and earnings meltdown had been broad-based.
In the 1H, only four companies escaped the income massacre, namely, Puregold (+20.14%), URC (+7.52%) PLDT (+1.54%) and Emperador (+1.37%).
But because of the regulatory and operational relief extended by the BSP on the banking and financial industry, the published Financial Statements may not be an accurate picture of the financial conditions of banks.
Furthermore, the enormous injections of liquidity by the BSP from the QE and RRR cuts, which pushed down rates and bolstered prices of fixed income instruments, provided accounting gains that cushioned banks from extensive losses.
Figure 3
The banking system’s accumulated gains in its financial assets jumped 115.5% to Php 43.7 billion last June, which helped cushioned the 22.5% decline of the banking system’s net income to Php 86.05 billion in the 2Q (YoY).
III. 2Q/1H GDP Understates the Real Economy Losses!
The aggregate revenues of the headline index, the PhiSYx, of Php 2.168 trillion accounted for 25.21% of the Nominal GDP (NGDP or the current priced GDP) of Php 8.6 trillion in the 1H. So while PhiSYx revenues tumbled 19.23%, NGDP fell by only 7.3% over the same period.
In the 2Q, PhiSYx revenues of Php 943.24 billion represented 22.73% of the Php 943.24 billion NGDP. Thus, while revenues of the elite firms collapsed by 32.5%, NGDP dropped by a mere 14.6%.
As a reminder, the published extensive losses are from the firms of the elites.
The crash in revenues in both the 2Q and 1H had been more than twice the NGDP contraction!
Part of the glaring gap between the NGDP and PSYei 30 revenues can be explained by the surge in public spending.
But still, it doesn’t explain the ocean of disparity, which likely points to a contraction in the economy that had been far more intense than had been captured by national income statistics.
Yes, you read it right. The GDP understates the actual losses of the real economy!
And this assumes accurate reporting from the said firms.
Yet according to the DTI’s MSME’s 2018 data, large companies contribute about 64% of the overall revenues or census value-added.
Given that MSMEs suffered most from the current recession, and since the PhiSYx had only a 25.21% share of the NGDP, while the large firm segment share of revenues accrued to an estimated 64%, which aggregate category or categories of non-PSYei and unlisted large companies filled the vacuum or had a larger share than the composite index?
Figure 4
In the meantime, even at 6,000, the PSEi isn’t a bargain.
Adding a 20% premium to the annualized EPS, in the assumption that the 2H would be better than the 1H, and excluding firms that posted losses in the 1H, the average eps for the main equity index was at 18.9. The top 6 firms with the largest market cap, excluding JGS, has an astounding PER average of 42.31!
And we’re supposed to believe everything will be hunky-dory?
IV. PhiSYx Firms Borrowed at Record Levels to Survive! BSP’s Financial Repression Fuels Inequality
And here’s more.
How did the PSYEi 30 companies survive the economic massacre?
In a word: DEBT!
PSYEi non-financials borrowed a staggering 10.4% or Php 441.273 billion in the face of a meltdown in revenue and income! (see figure 1 & 2)
That’s 62.3% higher than the Php 271.91 billion annual borrowings of the same PSEi firms for the entire year in 2019!
As a result, cash holdings of the elite firms, including banks, jumped 17.8% to Php 1.68 trillion about 50% of the cash reserves of the banking system.
If future income will pay for the current surge in borrowings, how can overleveraging translate to a robust recovery of the corporate bottom line, and therefore, the GDP?
To quote Lacy Hunt, fund manager of Hoisington Investment Company, in a Bloomberg interview: The pandemic will eventually go away, but the debt will remain. It’s been my view that over-indebtedness ebbs economic growth. Debt is a double-edged sword: It’s increasing current spending in exchange for a decline in future spending unless it generates an income stream to repay principal and interest. (bold mine)
Despite interest rates at a historic low, bank lending growth materially slowed last June. It grew by only 9.9% on the back of laidback production loans of 8.83% from 9.83% last May, and household loans at 26.7% down from 30.2% a month ago, according to BSP data.
Again, bank reports at this juncture are less reliable indicators of its underlying conditions.
Curiously, the growth of the banking system’s Total Loan Portfolio net or inclusive of Interbank Loans (IBL) and Reverse Repos (RRP) fell sharply to 4.3% from 6.7% a month ago. So while the BSP reported an aggregate growth of 9.9%, banks reported that their loan portfolio increased by only 4.3% (net) and 7.0% (gross exclusive of IBLs and RRPs).
And if we rely on the BSP’s Bank Lending report, borrowings by non-banking members of the composite index of Php 441.3 billion accounted for a whopping 54.7% of the YoY nominal credit growth of Php 806.3 billion last June.
Do you see the difference?
While firms to the elites survived on continued access to cheap credit, which has been a product of the BSP’s financial repression, borrowings of firms outside this privileged group, including the SMEs, had materially slowed. Such uneven access to credit represents an implicit or invisible TRANSFER of resources from the public to the GOVERNMENT and the ELITES, courtesy of the various methods of financial repression used by the BSP to infuse liquidity into the banking system. Financial repression fuels inequality.
Though there are reports that some banks have issued bank credit to MSMEs, we will see the overall picture once the BSP publishes the banking system’s report card on July.
Because rescue packages on supposedly targeted industries/groups from the recently ratified Bayanihan 2.0 will be politically based, it will further widen inequality.
Aside from the BSP’s liquidity injections, the political and economic uncertainties have accelerated growth in savings deposits growth in the 2Q quarter. Savings deposit grew at a higher 12.7% last June from 10.8% a month ago.
And yet, despite the lowest interest rate in history, faltering bank loan growth confirms Milton Friedman’s interest rate fallacy in motion, viz., low rates, as popularly embraced by authorities and the consensus, are NOT stimulus.
Even some in the BSP admits to this.
From the CNN Philippines (August 20): "Monetary policy cannot push on a string – meaning no amount of monetary easing or liquidity injections can push businesses and consumers to spend if the confidence is not there," BSP Director Dennis Lapid added, noting that government's health response is mainly the focus, alongside fiscal interventions.
We part ways with the suggestion that confidence or the animal spirits are key to the lending process.
V. Say’s Law in Action: Desperate PCCI Calls For Liberalization
Animal spirits function as products of policies.
For instance, the influential and the largest business group recently lobbied for its inclusion in the IATF and a full reopening of the economy.
From the CNN Philippines (August 21): The Philippine Chamber of Commerce and Industry specified there should be an efficient resumption of businesses and unhampered movement of workers to keep the country’s economy back to its feet again. “We understand the precarious situation of our medical workers and frontliners. But we also need to stress that the longer our economy stays in its current state where businesses cannot function 100 percent, nor even up to 75 percent, the more protracted the recession that will follow and the more people will be permanently out of jobs” said PCCI President Benedicto Yujuico in a statement. Yujuico emphasized that owners of micro, small, medium, and large enterprises are worried about the national government’s wariness to fully open the economy. They are also concerned about incoherent regulations of the Inter-Agency Task Force on Infectious Diseases and local government units. The PCCI president added business owners are apprehensive on the stringent guidelines for businesses that are allowed to operate under a general community quarantine. These include public transportation regulations that curtail the workers’ mobility, mandatory use of face shields for workers, observance of two-meter physical distancing, and designation of an isolation room for every 200 employees.“(It) is simply not realistic in a production-line setting,” stressed Yujuico. PCCI also pointed out that the additional cost to comply to some minimum health standards bears down on the already meager incomes of the informal sector.
Do you think that imposing MORE anti-business, and interventionist policies will bring about confidence and the Keynesian animal spirits to the business community?
Do you think that higher compliance costs and taxes will increase profitability, thereby increase risk appetite?
Do you think that more social-political mandates will reduce the costs of doing business, transaction costs, and diminish corruption? Or will it generate the opposite effect, thereby exacting a heavy toll on marginal businesses and reduce investments, and subsequently, wealth-generating activities? Won’t such regime foster quasi-monopolies and cartels?
Do you think that anti-market and price distorting policies will lead to efficiencies in the coordination and resource allocation that brings about productivity growth required for economic advancement?
How can the economy recover with policies that are “not realistic in a production-line setting”? Isn’t this Say’s Law in action where there can be no consumption without production?
With increased roadblocks to production, how are these supposed to increase discretionary income required to finance consumption and the service economy, such as tourism, real estate and consumer discretionary, among others?
Would a political-economic environment with uncertain protection of property rights entice more investments and bank credit transactions?
VI. Say’s Law in Action: PPE Manufacturing Group Cries Foul Over Imports
Recent events provide a relevant example.
From the Inquirer (August 22): The Department of Health (DOH) continued to import its PPEs such as coveralls and face masks, even after local manufacturers had developed their capacity to make affordable medical grade PPEs that could meet the demand of healthcare workers on the front line. It was the government that called for their help. The Department of Trade and Industry asked manufacturers in March, at the onset of the pandemic, to repurpose their facilities in order to make medical grade PPEs. Since then, five manufacturers with decades of experience in electronics and garment manufacturing sailed into unchartered waters — producing PPEs in the middle of a pandemic — and formed a new group called the Confederation of Philippine Manufacturers of PPE (CPMP). With 7,450 direct workers, the group is composed Medtecs International Corp. Ltd., EMS Components Assembly Inc., Reliance Producers Cooperative, Luen Thai International Group Philippines, Inc., and Tacca Industries Pty Ltd. After responding to the pandemic, the group now feels it was the government that fell short, when the DOH — through the Procurement Service of the Department of Budget and Management (PS-DBM) — continued to buy majority of its PPE requirements abroad.
Some factors to consider:
One. The government took control of PPE production, imports, and distribution by subverting the market-based allocation through price controls and rationing.
As an incentive, imports of medical supplies and materials for production had been granted initially with tax exemptions, which later was repealed.
Two. Had businesses been allowed to operate, would these companies have shifted their production line from electronics and garments to medical-grade PPEs?
If the answer is no, then these companies responded to the government’s call first to avoid losses from an operational stoppage, and next to have cash flows. In short, under this scenario, the group’s decision for a production change was about survival.
It also exhibits that the group undertook the production transformation from high-value output to a low value-added output, which depended solely on the government’s largesse than from competitive market forces.
The production shift involved changes in the group’s production process, reflecting the diversion of capital, again, from productive use to consumption.
Because the government picks winners and losers, the PPE producers have been bellyaching about the reduced access to political privileges, which entails likely financial losses and increased capital consumption for the group.
Yet, if the answer is yes, perhaps the group foresaw a critical transformation of the political-economic conditions that warranted the adaption of a crony-based business model dependent on government allocations. Hence, it took a gambit.
Nevertheless, the retooling of the production process involved the same conversion from high-value to low value-added output.
Three. The opportunity cost of the production substitution towards PPE manufacturing is to diminish producers for electronic and garment production and or reduce opportunities for other market-based economic activities.
Four. Under Say’s Law, political interventions have not only diverted production flows to lower value-added outputs, but such also aggravates economic distortions or imbalances of economic allocation, which inefficiencies would lead to reduced demand and further losses of capital over time.
Five. Because the government chooses winners and losers, politics will be the principal factor in the decision-making process of such economic allocation. On that spectrum, what were the political factors that swayed the influence of the government to import than to buy more from the group?
Last but not the least, the PPE imbroglio showcases the abject failure of a centrally planned, command and control economy.
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