Will Holiday OFW remittances Boost the Philippine Peso? Forecasting the Fall of the Peso

Will Holiday OFW remittances Boost the Philippine Peso? Forecasting the Fall of the Peso

With the peso falling to a 13-year low, there have been attempts by the establishment to paint the peso in a positive light.

The peso, they assert, should benefit from the expected deluge of OFW remittances in the coming holidays.   

 

But what does empirical evidence reveal?

The turnaround of the USD-Php begun in 2013 when the domestic money supply growth soared by over 30% for 10 straight months.

From 2013 to 2017, in three out of the five years or in 60% of the time, the USD-Php has gained in the 4Q irrespective of the performance of the 4Q OFW personal remittances.

For instance, 4Q personal remittances boomed in 2013 (averaging 8.3% a month), yet the USD Php surged (+2.5%).

Last year, the USD Php fell (-2.25%) in the face of a remittance growth rate (averaging 5.2% per month) which was lower significantly than the growth rates of the pre-2013 years.

When OFW remittances registered their lowest growth rate in 2015 (averaging 4.07% a month), the USD-Php climbed by only .51%.

And a boom in OFW remittances hasn’t been in the cards.  4Q remittance growth rates have underperformed significantly its pre-2013 levels in 3 straight years

 

And general remittance trends have in a downtrend since 2014 as the USD peso soared.

Along with 2016, the 7-month growth trend for both personal and cash remittances have been the lowest since 2016.

The lesson is: USD Php price changes and 4Q OFW performance barely has any established statistical correlations. 

And the assumptions to arrive at such conclusions have been utterly misguided.

The focus on remittances assumes the price of USD-Php determined solely by USD flows or by USD supplies. But exchange rates are defined as a price of a nation’s currency in terms of another currency. Or, exchange rates operate in a pair.

From this perspective, whatever happened to the supply of the peso? Are changes in the supply of the peso neutral or irrelevant to the price of the USD-Php?

And what of the role of demand for the USD vis-à-vis the peso and vice versa?

Incidentally, London based Capital Economics predicted that the USD-Php would hit Php 58 at the close of 2019 due to the widening of the trade gap and elevated consumer price inflation.

“Totally unfounded” asserted a government official who ironically hasn’t seen the inflation rates explode and the peso wilt.

I offer an improvement to the forecast of Capital Economics.

For as long as the BSP keeps printing money, the Peso will fall.

The BSP will keep printing money to finance the grand political spending boondoggles, to prop up fiscal conditions, the welfare, and warfare state, the bubble economy and to rescue the banking system.

The pace of the downfall of the peso will depend on many factors, such as the rate of money printing, street inflation, BSP’s currency interventions, fx borrowings by the government, economic performance and etc.

There will be another factor which had been eluded by the consensus: capital flight. Once it has been recognized money printing has become a deeply embedded political imperative, capital flight should accelerate

For now…

The first rule of the Inflation Club is: You do not talk about the BSP’s contribution. The second rule of the Inflation Club is: Remember the First rule.

 

From a technical perspective, once the 2004 high of the USD-Php 56.45 breaks, the upside momentum of the USD should only accelerate.

For a chart reader, the breadth of the lows and the breakout point would be proportionate to the uptrend until its peak. Unfortunately, I am a not a chart reader.

Nevertheless, this wisdom from Ludwig von Mises should serve as my guide….

If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. It would still continue to be possible to exchange notes for commodities. Finally, the situation would reach such a state that people would be operating with billions and trillions and then even higher sums for small transactions. The monetary system would still continue to function. However, this prospect scarcely resembles reality (p.60)

While I don’t see hyperinflation as an imminent and inevitable risk, the path towards it has been rolling forward. It will take political will to stop this political addiction to free money.

Will it take a recession or a crisis for this to happen?

This means that I see USD Php 60 as a very conservative target.

Stay tuned.

In Socialist Venezuela, Even Money Printers Run Out of Money to Print

When governments spend more than the tax revenues and or resources it generates, they eventually first run out of money. And if they continue to do so, they then eventually lose access to credit or money.

And given the dearth of resources, desperate governments usually resort to internal financing or the monetization of political spending via the printing press or the modern day printers the digital press (inflationism).

These usually ends up with the destruction of the currency via inflationism—hyperinflation

All these goes to show that the more a society relies on government, the more funding pressures, the greater the risk of inflation or even hyperinflation.

Well, when it comes to impoverishing constituencies through inflationism, socialism provides many modern day examples.

And one of the shining template has been current developments at Venezuela

UK’s former Prime Minister Margaret Thatcher once said that “The problem with socialism is that eventually you run out of other people's money [to spend].”

In socialist Venezuela, Ms. Thatcher’s keen observations can be construed literally. To paraphrase: The problem with socialism is that eventually you run out of money to print.

From Bloomberg:

Venezuela’s epic shortages are nothing new at this point. No diapers or car parts or aspirin -- it’s all been well documented. But now the country is at risk of running out of money itself.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases. Most of the cash, like nearly everything else in the oil-exporting country, is imported. And with hard currency reserves sinking to critically low levels, the central bank is doling out payments so slowly to foreign providers that they are foregoing further business.

Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.

This article is based on interviews with a dozen industry executives, diplomats and former officials as well as internal company and central bank documents. All of the companies declined official comment; the central bank did not respond to numerous requests for interviews and comment.

Here’s more

The story began last year when the government of President Nicolas Maduro tried to tamp down a growing currency shortfall. Multi-million-dollar orders were placed with a slew of currency makers ahead of December elections and holidays, when Venezuelans throng banks to cash their bonuses.

At one point, instead of a public bidding process, the central bank called an emergency meeting and asked companies to produce as many bills as possible. The companies complied, only to find payments not fully forthcoming.

Last month, De La Rue, the world’s largest currency maker, sent a letter to the central bank complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming. The letter was leaked to a Venezuelan news website and confirmed by Bloomberg News.

“It’s an unprecedented case in history that a country with such high inflation cannot get new bills,” said Jose Guerra, an opposition law maker and former director of economic research at the central bank. Late last year, the central bank ordered more than 10 billion bank notes, surpassing the 7.6 billion the U.S. Federal Reserve requested this year for an economy many times the size of Venezuela’s.

The above shows of the continuing to collapse by Venezuela’s currency the bolivar

The following accounts for Venezuela’s implied inflation rates (monthly and annually). (charts from Cato's Troubled Currencies web page)

Socialism has populist appeal, but they are uneconomical or unviable. 

At the end of the day, the socialism equates to social decay. Venezuela should serve as a paragon.

Infographics: The World’s Most Famous Case of Hyperinflation: Weimar Germany (Part 1 & 2)

The World’s Most Famous Case of Hyperinflation (Part 1)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

From the Money Project/Visual Capitalist

The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect. 

Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

The Treaty of Versailles

Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

The terms of the agreement, which were essentially forced upon Germany, made the country:

1. Accept blame for the war

2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)

3. Forfeit territory in Europe as well as its colonies

4. Forbid Germany to have submarines or an air force, as well as a limited army and navy

5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.” – John Maynard Keynes, representative of the British Treasury

Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

The Catalysts

1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

This created two separate versions of the same currency:

Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.

In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

2. Heavy Debt

Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

3. Inability to Pay

The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

4. Invasion of The Ruhr 

After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone. 

On top of that, more and more banknotes had to be printed to pay striking workers.

Hyperinflation

Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished. Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2. 

Courtesy of: The Money Project

Part 2

Again from the Money Project/Visual Capitalist

Slippery Slope

“Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian. 

“As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

“There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

The Effects

Hyperinflation in Germany left millions of hard-working savers with nothing left.

Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

Who was affected?

-The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.

-Wealth was transferred from general public to the government, which issued the money.

-Borrowers gained at the expense of lenders.

-Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)

-The efficiency of the economy suffered, as people preferred to barter.

-People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

Stories of Hyperinflation

During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

“The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”

A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.

A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.

Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

Even Worse Cases of Hyperinflation

While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

Peak Inflation Rates:

Germany (1923): 3.5 billion percent

Zimbabwe (2008): 79.6 billion percent

Hungary (1946): 41.9 quintillion percent

Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

What would become of Germany after its bout of hyperinflation?

A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

“We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

Courtesy of: The Money Project