Now what does this mean? Deficits! This means that the government spends more than it collects in taxes and in borrowing from the people; it means government spending for all those purposes for which the government wants to spend. This means inflation, pushing more money into the market; it doesn't matter for what purpose. And that means reducing the purchasing power of each monetary unit. Instead of collecting the money that the government wanted to spend, the government fabricated the money. Printing money is the easiest thing. Every government is clever enough to do it—Ludwig von Mises
In this issue:
Twin Deficits, Monetary Inflation and April’s Steady CPI, Manufacturing Stagflation or Deflation?
I. 1Q 2021’s Record Fiscal Performance; The Popularity of Inflationary Policies
II. Monetary Inflation and the CPI; April’s Unchanged CPI
III. Global Commodity and Food Prices Surge!
IV. Philippine Manufacturing: Deflation or Stagflation?
V. Import Boom: Restocking? Export Boom: Re-exports or Global Demand?
Twin Deficits, Monetary Inflation and April’s Steady CPI, Manufacturing Stagflation or Deflation?
The BSP has yet to publish data on domestic liquidity and bank lending, which was due last week.
Nevertheless, the 1Q GDP will be announced by authorities this week.
Aside from the data on domestic liquidity and bank lending, the financial statements of the banking industry are due for publication this week.
It is a futile exercise to analyze the CPI in relation to the financial system and the economy without the contribution of the money supply from credit and direct BSP interventions.
I. 1Q 2021’s Record Fiscal Performance; The Popularity of Inflationary Policies
Figure 1
2021 opens with a string of records.
From the CNN (April 27): The country’s fiscal deficit ballooned in March to more than double its size a year ago, as government expands expenditures while revenues from taxes and various levies continue to plunge. The budget deficit grew to ₱191.4 billion during the month, a big rise from the ₱71.6 billion in the same month last year, the Bureau of the Treasury reported Tuesday. Government spending rose by 22.3% annually, but revenue collections dwindled by 17.3% in the period under review.
The 50.6% plunge in non-tax revenues in the 1Q pulled down overall revenues, even as the BIR and the Bureau of Customs posted flat to marginal growth of .18% and 2.66%, respectively. Despite the lackluster growth, 1Q 2021 revenues reached a record Php 626.04 billion.
The CREATE law wasn’t the cause of the shortfall in fiscal revenues in the 1Q. Instead, the 50.6% plunge in non-tax revenues 1Q pulled down overall revenues, even as the BIR and the Bureau of Customs posted flat to marginal growth of .18% and 2.66%, respectively.
On the other hand, powered by National Government disbursements, public expenditures soared 19.86% in the 1Q from a year ago, the second-highest growth rate in at least 13 years to a record Php 849.231 billion.
Finally, strong spending in the face of the weak revenues resulted in a record Php 321.5 billion fiscal deficit in the same period!
With the GDP projected with 6.5% to 7.5% growth this year, the National Government sees a deficit of 8.9% or about Php 1.7 trillion. That’s about 24% higher than last year’s historic gap of Php 1.371 trillion. The 1Q deficit accounts for about 19% of the annualized target.
From the DBCC (December 20, 2020): Given the revised revenue and disbursement program, the deficit program for 2020 is narrowed down from 9.6 percent of GDP to 7.6 percent of GDP in 2020. This is adjusted to an estimated 8.9 percent of GDP in 2021 and 7.3 percent of GDP in 2022.
Figure 2
To finance this, the National Government raised a record Php 1.186 trillion in the first three months of the year, about a third of the over Php 3 trillion of financing targeted this year!
And as of the 1Q, the Treasury’s cash-at-hand stands at Php 602.5 billion, the second-highest in history.
As of March, the Bureau of Treasury’s unparalleled financing pushed up the overall debt stock to a landmark Php 10.774 trillion and counting! Foreign Debt accounted for 28.12% or Php 3.03 trillion.
And the cumulative carrying debt servicing cost of Php 521.5 billion from the debt stock of the previous period reached a stunning 54.2% of 2020’s record Php 962.5 billion in the 1Q alone!
In 2020, debt servicing accounted for 40.6% of the year’s revenues of Php 2.372 trillion which most likely will be eclipsed this year, as the growth of the debt stock outsprints the GDP.
From the perspective of the consensus, which sees the economy in the statistics of spending framework, 1Q’s robust growth in public spending will likely cushion the declines endured by the private sector.
Yes, but…
…since the government depends on the private sector for its sustenance, it exaggerates or overstates the economic performance, with its attendant costs—financial, coordination, and resource distribution—carried well into the future. The splendid growth numbers of debt and debt servicing bear these out.
More importantly, with the implicit goal of attaining centralization, the administration’s economic developmental paradigm has been anchored on debt-financed deficit spending.
Therefore, debt and budget deficits have swelled and are likely to balloon further under this path-dependent model of political governance. Don’t forget record debt and deficits emerged even before the pandemic. The difference is on the escalation.
This popular belief in a top-bottom, centrally planned political economy is not something that emerged out of a vacuum. It is essentially a product of the process of easy money policies of the BSP channeled through time.
First, an inflationary (easy money) regime creates false signals to the economy that bountiful savings and resources are available than it has. Through credit expansion that artificially lowers interest rates and misshapes the term structure of interest rates, such policies encourage the misallocation of resources and systemic mispricing.
As the dean of the Austrian School of Economics, the heroic Murray Rothbard wrote,
Inflation, therefore, tricks the businessman: it destroys one of his main signposts and leads him to believe that he has gained extra profits when he is just able to replace capital. Hence, he will undoubtedly be tempted to consume out of these profits and thereby unwittingly consume capital as well. Thus, inflation tends at once to repress saving-investment and to cause consumption of capital.
Murray N. Rothbard A. Inflation and Credit Expansion 11. Binary Intervention: Inflation and Business Cycles Man, Economy, and State, with Power and Market, Mises.org
Next, monetary inflation further affects people’s values and preferences over time. As the great Journalist Henry Hazlitt wrote,
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.
Henry Hazlitt, Chapter 22, The Mirage of Inflation, Economics in One Lesson p.189 Hacer.org
And so this incredible transformation towards a high time preference capital consuming political economy through the race-to-build supply bubble economy, and currently, the grand experiment with a neo-socialist state.
II. Monetary Inflation and the CPI; April’s Unchanged CPI
Inflation, from our perspective, is not the price changes of goods and services that have been peddled in public by the establishment. Further, the government’s statistical inflation represents a symptom than a cause.
This popular and politically sensitive benchmark barely depicts an accurate picture. Because of the variances of its utilities on individuals, one cannot average prices of different goods and services.
As the great Austrian Economist Ludwig von Mises wrote about inflation’s redefinition,
The semantic revolution which is one of the characteristic features of our day has obscured and confused this fact. The term inflation is used with a new connotation. What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless
Ludwig von Mises, Planning for Freedom p.79, Mises.org
Instead, inflation is about money supply growth, either from the BSP’s digital press or through its controlled banking system designed to support the political-economic system. The rate of change of monetary inflation measures the rate of change of the loss of purchasing power of the currency relative to individuals as part of the socio-economic pool.
To see media host a monthly guessing game of the CPI played by mainstream analysts is amusing. It is like the parlor game of “pin the tail on the donkey”. It provides neither value nor consequences but only signals their reverence to such statistic. It does not even establish the predictive capability of institutions.
Right or wrong, once the CPI is published, rationalizations, paraded as analysis, are conveniently provided.
From the Businessworld (May 6, 2021) INFLATION remained stable in April, while core inflation eased to a five-month low, leading economists to expect the central bank to keep rates on hold at next week’s policy-setting meeting. Preliminary data from the Philippine Statistics Authority released on Wednesday showed the consumer price index rose by 4.5% year on year last month, unchanged from March but faster than 2.2% in April 2020. This as price increases for food staples such as rice and vegetables slowed, helping offset a spike in transportation costs caused by higher oil prices. April headline inflation was lower than the median 4.7% in an analyst poll by BusinessWorld late last week, and settled within the Bangko Sentral ng Pilipinas’ (BSP) 4.2-5% estimate. Year to date, inflation averaged at 4.5%, slightly above the BSP’s 2-4% target, as well as its inflation forecast of 4.2% for the year. April was the fourth month in a row that inflation went beyond this year’s target.
Sure, economic agents are the most convenient scapegoats for any price imbalances. Blame greed on them (Garlic traders in 2014, Rice hoarders in 2018 and Pig profiteers in the present)!
But have these agents been operating freely, or are they under a politically restrained environment? If the latter, how have the incumbent policies affected economic coordination and the allocation process of the industry? What are the trade-offs or opportunity costs? Compared to what?
Think mobility restrictions or price controls. How would these impact the production, distribution, consumption, financial, and capital formation process? What are its short and longer-term consequences? Are short-term political fixes sustainable? What are their costs?
How much of the current political environment has caused disruptions on Say’s Law or the Law of Markets (consumption is a function of production)?
Have business (producers and service providers) closures and disruptions not been the primary sources for income and job losses, as well as, dislocations of supply, aggravated by external factors (such as the ASF or the Suez Canal blockage)?
And while cost-push inflation from supply shocks serves as convenient excuses, demand is certainly not zero or close to it.
Hasn’t the jump in public spending been engineered to bolster aggregate demand? That is to say, most of the current demand stems from income and cash flows derived from the network of entities, in particular, the National Government and private enterprises, operating around public spending projects, including infrastructure. The 1Q data shows this.
And how about the banking industry, which continues to wallow and swim in cash from the BSP’s liquidity and relief programs?
Figure 3
Yes, April’s CPI steadied, said authorities. Food prices slipped. Core CPI also slid. But as part of the Core, the Transport CPI jumped, which negated some of these declines.
But the uptrend of the CPI remains intact.
Interestingly, as a significant segment of the economy endured another set of stringent lockdowns, the restaurant CPI surged with the NCR contributing most.
Authorities prohibited restaurants from operating at the onset of the stringent lockdown in April 2020. But then, the NCR’s resto CPI still posted gains! Perhaps, ghost consumers were responsible.
This April, only outdoor dining was granted to them. But NCR’s restaurant CPI spiked to 1.8% from 1.1% a month ago.
Back when food prices accelerated in the GCQ days of January to February 2021, NCR’s resto CPI bottomed. Strange numbers.
III. Global Commodity and Food Prices Surge!
Figure 4
The continuing restrictions in transport mobility have fueled the spike in the Transport CPI. But soaring international prices of oil have also abetted and accelerated its ascent. Yes, external forces have some influence too.
Also, booming food and commodity prices appear to be closing the window for arbitrages through imports for affordable supplies.
According to analyst Doug Noland, “After surging another 3.7% this week (lumber up 12%, copper 6%, corn 9%), the Bloomberg Commodities Index has already gained 20% this year. Lumber enjoys a y-t-d gain of 93% - WTI Crude 34%, Gasoline 51%, Copper 35%, Aluminum 26%, Steel Rebar 32%, Corn 51%, Soybeans 22%, Wheat 19%, Coffee 18%, Sugar 13%, Cotton 15%, Lean Hogs 59%...”
Global food prices surged for the 11th straight month in April, reported the UN’s Food and Agricultural Organization (FAO).
A spillover effect on prices from the tsunami of liquidity from the collective actions of global central banks has diffused from asset markets into commodities, raw materials, and food.
At any rate, escalating inflationary pressures are not only from domestic origins but also global.
The current dynamics exhibit the transmission mechanism of the inflation-deflation or boom-bust cycles around the world.
IV. Philippine Manufacturing: Deflation or Stagflation?
Here’s the thing.
To justify the current subsidies to the banking industry using financial repression policies, the establishment prominently uses cost-push inflation from a supply shock at the expense of the savers.
Only in the condition that markets are allowed to work, cost-push inflation should be transitory.
But current conditions do not fit the bill.
Authorities further tell us the manufacturing sector collapsed in March, marking the 13th straight month of sharp contractions.
Figure 5
The value and volume of domestic factories crashed in March.
According to the PSA: The Value of Production Index (VaPI) for manufacturing continued to drop at an annual rate of -74.2 percent in March 2021. This decline was faster than the reported downturn in the previous month of -46.4 percent and in March 2020 of -25.1 percent. The March 2021 annual growth rate was the fastest decline since September 2020. … The Volume of Production Index (VoPI) also remained at a downtrend with an annual rate of -73.4 percent in March 2021. This downturn was faster than the -43.3 percent decrease registered in the previous month. In March 2020, the annual rate of VoPI was recorded at -20.4 percent.
Despite the doldrums, input price deflation eased over the same period.
Outside the flat performance of February 2020, Philippine manufacturing has endured a recession since February 2019, or the industry registered contractions in 24 of the last 25 months!
And outside imports, the prolonged manufacturing recession translates to the using up or depleting of the existing inventories.
So from the PSA’s perspective, demand has been absent in the manufacturing sector as signified by the recession and input price deflation.
But the IHS Markit has a diametrical perspective of local factory conditions in April (May 3): As a result of tightening lockdown measures, many clients suspended their operations with demand faltering for the first time since December 2020. Domestic demand was especially subdued with the rate of reduction among the sharpest in the series. Higher sales to European markets which have begun to gradually reopen, reportedly led to a softer deterioration in exports, however. Firms scaled back on their hiring efforts during the month with a weak demand environment and voluntary resignations often mentioned as driving the decline in employment. Job shedding has now been seen in each month since February 2020, with the latest decline the quickest in four months. That said, a sustained period of depleting backlogs suggested sufficient capacity at Filipino manufacturers. Goods producers saw another severe decline in supplier performance during April with respondents noting that virus related restrictions had markedly increased lead times and limited raw material availability. Consequently, firms faced additional surcharges and higher freight costs. A renewed fall in output and new orders led companies to reduce their purchasing activity. The rate of decline was the fourth quickest in the series history. Meanwhile, pre- and post- production inventory growth moderated amid a weaker demand environment and greater raw material costs. Input shortages and higher raw material costs were widely reported in the latest survey period. Input price inflation accelerated for the sixth month running, with the latest uptick the strongest in over two-and-a-half years. In turn, this reportedly led to a faster uptick in output charges set by manufacturers, as firms sought to partially pass on greater costs to clients.
So demand stagnated on business closures while the labor force suffered more cuts. But price pressures on inputs and outputs remained significant.
Or, a stagnant output, high unemployment rates, and rising prices have plagued the sector. Have these not been called stagflation?
According to Markit, price pressures have spread beyond food and energy. Nevertheless, if demand is entirely weak, why the high prices?
To what extent has the BSP’s liquidity program been a factor?
V. Import Boom: Restocking? Export Boom: Re-exports or Global Demand?
And if domestic firms have been inadequate in providing supply, then the rest must come from abroad, right?
According to the PSA, “Total imported goods in March 2021, which amounted to USD 9.10 billion, increased at an annual rate of 16.6 percent.”
Perhaps, imports were not only for domestic consumption but also for re-exports.
Again the PSA, “The country’s total export sales in March 2021, amounting to USD 6.68 billion, increased at an annual rate of 31.6 percent from a decrease of -1.5 percent in the previous month. In March 2020, total export sales declined at a rate of -15.8 percent annually.” If local manufacturers were in a slump, then what’s the source of such exports?
The trade deficit slightly narrowed in March because of the stronger exports, “Balance of trade in goods (BoT-G) is the difference between the value of export and import. BoT-G in March 2021 amounted to USD -2.41 billion, representing a trade deficit with an annual decrease of -11.5 percent.”
Despite the export boom in March, the trade deficit remains significant.
Again, after months of stagnant imports and domestic production, inventories must have been depleted to have spurred a restocking last March.
Also, supply shortages abroad could have ramped up the level of exports. Sadly, neither data from the PSA nor Markit supports this scenario. Yet.
But should demand from segments of the economy show signs of (even minor) improvements, will current supplies be enough?
Or will this stoke and accelerate the uptrend in the CPI?
The twin deficits exhibit that the nation is spending far more than it earns. Thus, authorities are frantically borrowing and desperately adding liquidity to bridge gaps from an unsustainable economic development model.
Another story is that analyzing related government economic and financial statistics seems like placing the square peg in a round hole. They barely fit.
Perhaps, one can add interventions on the marketplace to justify the supposed soundness of the macroeconomic picture propped up by an inflationary easy money regime.
