Inflation is a policy. And a policy can be changed. Therefore, there is no reason to give in to inflation. If one regards inflation as an evil, then one has to stop inflating. One has to balance the budget of the government. Of course, public opinion must support this; the intellectuals must help the people to understand. Given the support of public opinion, it is certainly possible for the people's elected representatives to abandon the policy of inflation—Ludwig von Mises
In this issue
Inflation Panic: Philippine Treasury Yields Rocket Across the Curve as Peso Plunge to 13-year Lows!
-Panicking over Inflation: The Political Spin and What Happened to Financial Stability?
-BSP Funded Public Spending as the Soul of Inflation!
-As Inflation Rages, TRABAHO Bill or TRAIN 2.0 Ratified at the House
-No Panic: Why the Price Controls? Which is Fake News: The Inflation Hysteria or Jobs Bliss?
-Philippine Treasury Markets Panicked! Yields Rocket Across the Curve as Peso Plunge to 13-year Lows!
-It’s Not Just Record Fiscal Deficit, the BSP Will Work On Bailing Out the Banking System!
-Bonus chart: This Week’s Incredible Pump and Dump!
Inflation Panic: Philippine Treasury Yields Rocket Across the Curve as Peso Plunge to 13-year Lows!
Panicking over Inflation: The Political Spin and What Happened to Financial Stability?
The nation’s chief economic managers went on a press conference to assuage the public over raging inflation, “We are not in a major crisis. It may be a serious problem for some people, but for the nation in general it’s not a major crisis,” Finance Secretary Carlos G. Dominguez III told reporters yesterday at the Senate.” (italics added)
Doesn’t this reverberate with their assessment of the current domestic financial conditions here?
From the FSCC’s FSR 2017:
While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.
Doesn’t this resemble a pattern?
That is to admit that a problem exists which they did not anticipate, expect and forecast, but deny the likelihood of its scalability.
When CPI from food inflation surged in 2014, erstwhile BSP Governor Amando Tetangco Jr. crowed about the BSP’s measures to maintain financial and economic stability (bold and italics original; underline mine)
Now you may ask, would you be seeing further action from the BSP? Let me just say that all the tools available to us in our "expanded tool kit" remain on the table. I reiterate that the BSP is fully committed to the inflation target and is prepared to deploy all policy tools as warranted.
At the same time, we will continue to coordinate with other agencies of government to address pressures from the supply side, including the timely importation of certain food products and tighter price monitoring to prevent speculative trading, to help ease price pressures. Other measures include: lowering logistics and shipping costs, increasing agricultural productivity.
On the exchange rate - The exchange rate will continue to be market-determined. But BSP will not hesitate to come into the market if there is a need to smooth out too much volatility in exchange rate movements.
On the banking sector - The Philippine banking system continues to maintain a strong performance. We will remain on track in adopting international standards, taking into account domestic market conditions, to ensure that the banking system becomes more resilient and is able to intermediate funds safely, efficiently, and effectively.
On external liquidity dynamics - We will retain a pragmatic approach to handling foreign exchange so that our current account continues to be in surplus, supported by overseas Filipino remittances, business process outsourcing (BPO) revenues, tourism receipts and exports. We will also manage international reserves as appropriate. Our strong external liquidity position will continue to provide a cushion against external shocks.
All these would help enable the Philippines to remain competitive and be able to hurdle the challenges as well as reap the benefits from the numerous opportunities of the forthcoming ASEAN integration of financial and goods markets. Granted, much more needs to be done to make the ASEAN story "whole", we find the initial conditions and our policy thrusts conducive to make this story come true….
Amando M Tetangco, Jr: Sustaining growth while riding the uncertainty August 18, 2014
Haven’t today’s problems been worse than in 2014, in spite of the adapted measures for “the Philippines to remain competitive”? And are these not the same areas, specifically, the exchange rate, the banking sector and external liquidity dynamics that have been under duress lately?
In just FOUR years, the promise to stabilize the financial and economic system transformed into “dislocations of crisis proportions”? Why? What went wrong?
Could it be because of the time inconsistent and asymmetric distribution of outcomes of the current and previous policies?
Piqued by some of the public's reaction for the BSP to call for an emergency meeting over the latest inflation numbers, the same officials mocked their critics: “Mr. Dominguez, who sits on the central bank’s Monetary Board, also said the board, which sets rates, will not be holding any emergency meetings ahead of the scheduled gathering on Sept. 27. “It was decided that there will be no off-cycle (meeting). You really think we are panicking? You are panicking, not us. That’s why you have to have perspective,” he said.”
So what perspective were they exactly referring to? “Mr. Dominguez added: “You have to take a long view of inflation. When you take the long view, you will realize that we are the administration with the second-lowest peak inflation rate since Cory (Aquino). You have to take a long view. Not every bump you are going to take is going to be a major crisis.” They presented government data indicating that President Corazon C. Aquino’s government experienced peak inflation of 21.2% in August 1991, followed by 13.9% in February 1994 under the Ramos administration; 10.7% in January 1999 for the Estrada administration; 10.5% in August 2008 for the Arroyo administration; and 5.2% in October 2011 for the government of Benigno S.C. Aquino III.”
That’s right. By the crude use of statistics as an intuitive base for comparison, the underlying circumstances of the past were reduced to imply shared traits as today. Current inflation rates, thus, should not be a cause of panic.
As explained last week, one can misrepresent statistics by framing comparisons on mere numbers while disregarding circumstances behind them. Because CPI rates were higher in the past than today, rising CPI shouldn’t be a cause for concern.
That’s how to spin inflation!
Bullseye!
Bullseye! The BSP-Led FSCC’s Financial Stability Report Confirms Almost ALL the Risks I Raised on the Banking System and on Asset Bubbles September 9, 2018
But who has been panicking?
Earlier this week, some quarters accused economic authorities of manipulation of inflation figures. The NEDA chief went public toclarify their position: “A miscalculation initially pegged the August inflation rate at a higher 6.6 percent year-on-year, but was spotted early on and corrected by authorities. Socioeconomic Planning Secretary Ernesto M. Pernia clarified Saturday there was no manipulation of the latest inflation data, contrary to rumors circulating among traders in the market as its release got delayed by over an hour on Wednesday.”
However, the Philippine Statistics Authority parted ways with NEDA. They said instead that the problem behind the late announcement was due to internet connectivity: “The PSA released major statistical reports simultaneously on 05 September 2018 a) the July 2018 Labor Force Survey, b) the July 2018 Monthly Integrated Survey of Selected Industries and c) the August 2018 CPI and Inflation Rate. Because of this, the PSA webserver was not able to cope with the high volume of users accessing the website, thus, making it inaccessible.”
NEDA: Miscalculation. PSA: Website inaccessibility. The public is made to believe that everything is about statistics.
Remember this?
5) The last option would be for the NG and BSP to manipulate markets and statistics in the hope that the markets will conform and comply with their political targets.
[See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt!May 6, 2018]
BSP Funded Public Spending as the Soul of Inflation!
But price pressures aren’t a statistical problem as projected by officials!
Inflation is a political problem principally even before it is about economics.
Inflation is a policy. It is a deliberate policy that forcibly transfers resources and purchasing power from the populace to political leaders, the bureaucracy and their cronies for political goals.
Take the build, build, build projects. Who are the beneficiaries? Have they not been the elites like the NAIA consortium orrelatives of a top official who has cornered many projects in the south?
And take a look at the who’s who in the Forbes wealthiest list, and one should have an idea of the leading beneficiaries of the effects of redistribution from present day inflationary policies. Because of artificially depressed rates, debt levels of many of the flagship firms of these elites have grown astronomically. And many of them have been deeply involved in government projects.
By enabling the same politically privileged groups to bid up resources first, mainly financed by the BSP or by the banking system, they benefit, not only from early access to scarce resources but more importantly, from lower prices. The accelerated demand from these groups ultimately ripples into a broader swath of prices which eventually raises the general price levels or what is popularly known as “inflation”.
Since the early receivers of money can buy more, spending power for this group has been amplified. Since the late receivers of money can buy less, spending power for this group has been reduced. In effect, the early receivers of money benefit from the invisible transfer of purchasing power, enabled and facilitated by inflationary policies, from the later receivers of money.
Such invisible transfers function as free lunches for the government. As the great Ludwig von Mises explained
The existence and popularity of inflationism is due to the circumstance that it taps new sources of public revenue.Governments had inflated from fiscal motives long before it occurred to anybody to justify their procedure from the point of view of monetary policy. Inflationistic arguments have always been well supported by the fact that inflationary measures not only do not impose any burden on the national exchequer, but actually bring resources to it.
Ludwig von Mises, The Theory of Money and Credit II.13.37
Inflationism does not only act as an additional fount of public revenue to finance political boondoggles; it helps subsidize domestic public liability by reducing its real value. Public debts denominated in pesos are paid with lesseramount of pesos in real terms.
Figure 1
Since inflation rates have been higher than the yield of the 1-year Local Currency Treasury notes, the negative real rates function as subsidies to the National Government. (figure 1)
Even the IMF sees high inflation as one of the four criterions in identifying a fiscal crisis
It is important to note, however, that fiscal crises may not necessarily be associated with external debt defaults. They can be associated with other forms of expropriation, including domestic arrears and high inflation that erodes the value of some types of debt (Reinhart and Rogoff4, 2009 and 2011)… (p.8)
Implicit domestic public default (e.g., via high inflation rates). This reflects periods where governments have difficulty meeting their obligations and resort either to running domestic payment arrears or printing money to finance the budget. (p.8)
Svetlana Cerovic, Kerstin Gerling, Andrew Hodge, and Paulo Medas Predicting Fiscal Crises August 2018
To put bluntly, record deficit spending represents the soul of today’s inflation! The bubble economy is its heart!
The NG and the BSP is banking that inflation would minimize the macro risks from its gambit with record deficit spending!
As Inflation Rages, TRABAHO Bill or TRAIN 2.0 Ratified at the House
The NG is dead set on gambling with a public spending binge!
So while the rice crisis and CPI controversy continues to draw on the public’s attention, the National Government persists to push for the passage of TRAIN 2.0 or the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill which was ratified by the House for the third and final reading last week.
In response, Japanese firms represented by the Japanese Chamber of Commerce and Industry of Cebu, Inc. (JCCICI) threatened to slash or pullout investments from economic zones in Cebu.
The Joint Foreign Chambers of the Philippines (JFC) echoed the sentiment of the JCCICI. The Trabaho bill, which seeks to rationalize incentives for exporters, the JFC alleged, would not address the country’s trade imbalance.
Like TRAIN 1.0, the Trabaho bill or TRAIN 2.0 is designed to expand the tax base by removing tax incentives. And like TRAIN 1.0, it dangles income tax cuts.
And tax cuts in the face of burgeoning deficits means HIGHER taxes ahead.
Meanwhile, to alleviate on price pressures, Employers Confederation of the Philippines (Ecop) said “the government should keep from further implementing fuel tax hikes under Train law, the first tax reform package of the Duterte administration”.
At the same time, some members of the opposition in the House of Representatives have “filed a joint resolution calling for the immediate suspension of the increases and scheduled increases in excise taxes for fuel products under the Tax Reform for Acceleration and Inclusion (TRAIN) law”.
The inexorable push for TRABAHO bill or TRAIN 2.0 accentuates the magnified funding the requirements for the record deficit spending. The administration appears to be willing to take the exodus of many foreign firms as collateral damage.
And like the CPI, to offset public dissent on TRAIN 2.0, the BSP and the PSA have paraded statistical data on foreign investments which showed robust growth!
And it seems hardly appreciated by the public that the fundamental issue stems not from “increases in excise taxes” but on record public spending. Tax increases were meant to pay for such expanded spending.
Needless to say, stripping away excise tax increases will only balloon the record fiscal deficit beyond government targets.
Once the fiscal deficits explode, a fatal fiscal crisis would likely emerge. (see IMF above)
Just consider the financing options available to the NG-BSP.
Aside from diminished systemic liquidity, the other risks from an outright dependence of debt financing would be an unsustainable debt load (FSCC FSR's 3Rs: Repricing, Refinancing and Repayment) and reduced market access.
On the other hand, the risks from total dependence on the BSP to finance record deficits would be runaway inflation and a peso meltdown
Yet, the intensifying competition for access to savings and or the crowding out of the peso through money printing will cause interest rates to rise substantially.
While the NG and the BSP have been walking a tightrope to attain a financial mix which would deliver an optimal outcome, they have been operating in a room with a very limited margin of error.
And should they miss in the same way as they have with the inflation and the banking system, the house of cards will crumble.
And this obsession for public spending explains the dogged pursuit by the government to expand the tax base and to increase consumption tax rates
No Panic: Why the Price Controls? Which is Fake News: The Inflation Hysteria or Jobs Bliss?
The popular idea is that government spending contributes productively to the economy. Hence, the inflation blame game usually falls on the supply side factors, or TRAIN 1.0.
Though experts talk about raising rates, the link between interest rates with demand has barely gets covered.
And if interest rates have been discussed sparsely as a function of demand, the financing of fiscal deficit, especially by the BSP, would be like looking for water in the Saharan and the Atacama Desert.
Because of this political obsession to spend our way to prosperity, the people are hurting!
This Bloomberg/Businessworld article captures the zeitgeist of the crux of inflation predicament. (bold added)
FILIPINOS queuing for hours to buy cheap rice from the government. Families eating fewer meals a day to save money. Locals venting their anger against President Rodrigo R. Duterte on social media.
These are the images and stories that have dominated media coverage in the Philippines after inflation soared to more than six percent in August, far higher than the rest of Asia.
Pressure started at the beginning of the year with higher oil prices and tax increases on fuel, sugary drinks andcigarettes, and quickly moved to rice, the nation’s staple food, because of supply shortages.
Now, everything from electronic gadgets to haircuts to t-shirts cost at least 10% more than a year ago, according to anecdotal evidence in Manila.
Alongside an almost eight percent slump in the currency this year, consumers are hurting.
A sentiment index contracted for the first time in more than two years, a worrying signal in a country where private consumption makes up about 70% of gross domestic product.
Consumers like Nica Aguilar, 30, are either switching to cheaper brands or changing daily routines to adapt. The energy compliance officer, who works in the Ortigas business district in Metro Manila, said she now uses part of her lunch break to cut down on her parking bill after hourly fees rose by 25%. She leaves her office to re-park her car, taking advantage of a cheaper rate for the first four hours.
Mr. Duterte’s government is now scrambling to get on top of the problem as mid-term elections loom next year.
Though the Department of Trade and Industry (DTI) have publicly dismissed it, implicit price controls have begun.
From the same Bloomberg/Businessworld article: “Trade Secretary Ramon M. Lopez said the police are inspecting warehouses, markets and grocery stores and arresting those who are raising prices unjustly. Officials also met with manufacturers to convince them not to increase prices yet and have considered further easing import rules for various staples such as rice, fish and sugar, he said.”
The DTI appears to implement price controls subtly first by convincing producers not to raise prices and by applying price standards. Raiding of warehouses comes last.
Not only does the administration’s implementation of price controls elaborate on the degree of political concern on inflation; it essentially demonstrates the crucial difference between statistical and street inflation.
The mere fact that price controls have become part of the present-day political process means that the National Government (NG) has panicked!
And since price controls reduce output, essentially, prices of controlled goods and services should march higher, all things being equal.
And the damage wrought by Typhoon Ompong should compound on the supply side woes.
The next convenient scapegoat: Typhoon Ompong!
And here’s the thing.
Aside from the government, surveys are being used to imprint on the mindset of the public that inflation, in spite of its tremendous coverage, is fake news.
Take the 2Q SWS survey that shows jobs are aplenty! Really? The same firm presented a survey that showed hunger incidencefall to decade-low levels and poverty rates down in the 1Q. Really? Rampaging inflation leads to lower hunger and poverty rates?
What are the people smoking?
Will street inflation’s diminished output, higher financing, and operating costs, reduced purchasing power, and compressed profits among the many other consequences mean more jobs???? Why the inflation hysteria? Have the people lost touch with reality to complain about a swift decline in purchasing power, if jobs and income were adequate?
Or which is the fake news? The avalanche of coverage on inflation? Or surveys showing economic bliss as inflation rage?
Philippine Treasury Markets Panicked! Yields Rocket Across the Curve as Peso Plunge to 13-year Lows!
Economic managers assert that they haven’t been panicking.
But they admit to being surprised by the emergence of “dislocations of crisis proportions”.
To allay apprehensions of an inflation scared audience, they have been all over media explaining how they will arrest the inflation malignancy.
They have already imposed partial price controls.
Policy rates have been increased by 100 bps in 3 meetings within four months (May, June and August).
The BSP has required foreign currency borrowers to disclose their financing plans for 2019, aside from reinstating a hedging currency tool used last during the height of the Asian crisis.
You see they haven’t been panicking. But they might soon.
Domestic financial markets appear to be rebelling against them.
The USD peso rose .45% to close the week at Php 53.97 after hitting a fresh 13-year high of Php 54.13 last Wednesday. It was the worst in Asian currency performer this week.
Even after massive rescue efforts, domestic stocks retrenched 2.44%. The PhiSYx also trailed its peers.
Figure 2
Well, panic did happen last week.
It happened at the treasury markets.
Up by 90 bps, yields of the 10-year sovereign catapulted to an 8-year high on Friday after the belly (10-5 year spread) inverted on Thursday!
The BSP has had a tight grip on the treasury markets. While it may control some segments of that market for a while, the non-liquid fixed income markets still hold sway of the overall convention.
The BSP has been holding down the 10-year yield for some time. Since rising yields at the front end would lead to a flattening or an inversion, which the latter occurred last week, the BSP let the 10-year find its level last week.
Or the BSP lost control of the curve. So yields spiraled!
It’s Not Just Record Fiscal Deficit, the BSP Will Work On Bailing Out the Banking System!
Stunningly, raging inflation has not only been increasing rates, it has been tightening the yield curve. (figure 2 lower window)
And this folks should spell MORE bad news for the banking system!
Here are some indicators…
-Tightening spreads mean narrowing interest margins.
Figure 3
-Higher rates will raise the cost of borrowing thereby eventually slowing demand. Credit growth volume will go down. Even as total asset growth dropped to 10.52% in July, the share of the total loan portfolio to asset now accounts for an amazing 58.33% signifying the banking system’s concentration risks (Figure 3, upper window)
-If banks don’t adjust deposit rates to reflect on market rates, the declining trend in deposit growth rate may accelerate. If they do, funding costs should rise to further compress interest margins. (figure 3, lowest window)
-Higher financing cost will increase NPLs. (pls note that the FSCC’s FSR 2017 reported on these)
-Rising rates will impel banks to jam-pack their investment portfolio with HTMs thus compounding the drain in the banking system’s liquidity. (figure 3, middle window)
-With liquidity shrinking, banks will have to compete with the NG for access to funding, thereby pressuring interest rates higher. (figure 4 upper window). Banks have been shifting funding requirements from the short term to the long term.
All these reveal another major factor why the BSP will increase intervention in the system.
The BSP will exercise its function as lender of last resort. It will work on bailout the banking system
Figure 4
The banking system’s most liquid asset Cash and Due Banks contracted 12.33% in July, signifying eight straight months of shrinkage!
The BSP’s two Reserve Rate Ratio (RRR) cuts, announced last February and May, have done little to ease the liquidity crunch
Growth in deposit liabilities fell to 10.04%, the lowest rate since December 2015. The decline in the growth rate of deposit liabilities was due primarily to peso deposits which registered 10.37% growth, likewise a December 2015 low.
M3 which grew by 10.98% in July, also a December 2015 low, affirmed the slowdown in banking originated liquidity.
So while increases in the BSP’s policy rates in May and June have barely affected demand for loans, the sizzling growth in the banking system’s loan portfolio (19.49% in July: production plus consumer) has hardly translated to increased liquidity.
Despite support provided by the BSP, soaring yields to multiyear highs of the front end or of T-Bills have not only been manifesting inflation, it reflects on the banking system’s liquidity conditions as well.
If banks can’t do their share in meeting the BSP’s inflation targeting, then this leaves the central bank to fill the gap.
The BSP thus targets to hit two birds with one stone. One. It helps finance the record fiscal deficit. Second. It provides liquidity to the financial system, in support of the banks, through deficit monetization.
Also, this reveals where liquidity has flowed into and where it will gravitate: the National Government. The NG’s record fiscal deficit continues to siphon away liquidity from the private sector.
The crowding out effect runs in full throttle.
To conclude.
2) If the NG will use the BSP option, the peso will fall steeply and inflation will rise, which again will ricochet or boomerang on bond yields.
Now both the banking system and the NG’s fiscal deficit will require massive interventions and injections from the BSP
Buy the USD!
Bonus chart: This Week’s Incredible Pump and Dump!
Figure 5
And they call this a stock market!
