Special privilege is any item of income or of position in the market for goods and services where the amount paid and received fails to reflect the judgment of "the judges of the market place" as to its worth. It is where the judgment of the voters in the economic market place is overruled by their political servants; it is where persons are forced to pay for a thing beyond their opinion of its worth, through the device of an authority backed by the taxing power or legal penalty. Among the things that fall in this class of special privilege are monopoly, prohibition of competition through force, fixing of prices by governmental decree or protection of others who do the same thing, the forcing of payment for work not wanted done, and the prohibition of the free movement of goods across political borders—F. A. Harper, Liberty: A Path To Its Recovery
In this issue
Five Reasons Why Stagflation Risks Will Dominate the Philippine Economic Landscape in 2021
I. Touché! A Mainstream Admission of the BSP Instigated K-Shape Recovery!
II. Mainstream’s Incredible Forecasting Blindness! In 2021: Economic Turmoil Shifts from the Shutdown to the Backlash from the Bailout Policies
III. Public and Infrastructure Spending Down Again in October as DBCC’s Downgrades 2020 GDP Again!
IV. Stagflation Has Arrived! Why the Surge in the CPI Will Be Sustained
V. Disruption of Say’s Law: Be Careful of What you Wish For; The BSP’s Inflation Tax
VI. Growing Risks from Inflating Bubbles, Treasury Markets Signal Inflation and Emergent Risks of Stagflation
Five Reasons Why Stagflation Risks Will Dominate the Economic Landscape in 2021
I. Touché! A Mainstream Admission of the BSP Instigated K-Shape Recovery!
From an earlier note…
A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession, according to Investopedia. For instance, the net worth of American billionaires zoomed in 2020, even as the economy has struggled. That's mostly from record highs in the US stock markets fueled by the US Fed’s liquidity expansion.
Here, the distribution of ownership of listed securities at the Philippine capital markets, as well as the distribution of trading participants should give us a clue of the main beneficiaries of the central bank liquidity pumps.
In the US, it is called Wall Street versus Main Street.
Ten Signs of a Frothing Speculative Mania in the Philippine Stock Exchange! November 15, 2020
And…
In doing so, the Php 1.9 trillion liquidity bonanza has effectively been subsidizing big-time corporate borrowers at the expense of savers while simultaneously amplifying credit risks as signified by the growing divergence in the bond spread of corporations and the domestic treasuries.
Philippine Elites Urge the BSP to Double Liquidity Injections as 3Q Corporate Debt Swells while Revenues and Income Plunge! November 29, 2020
Then last week…
From the ABS-CBN News (December 1): MANILA - The head of Ayala Corp on Tuesday said the country’s recovery from the disruptions of the COVID-19 pandemic will likely be uneven, with big companies quickly bouncing back while smaller businesses continuing to face challenges. This was in contrast to the projection of the Department of Trade and Industry which sees a strong V-shaped recovery next year…“We recognize that the recovery in our country will not be the same for everyone. In fact, we already see today that while capital markets are open to large, established institutions who thus have more options to endure the downturn, the drop in consumer demand has left many MSMEs in a more challenged position,” Zobel said during a virtual forum on foreign investment in the post-pandemic Philippines. “Those already most vulnerable stand to become even more so,” Zobel told participants in the 9th Arangkada Philippines Forum.
Touché!
The financial and economic ramifications of BSP policies of zero-bound rates and the current bailouts are not neutral and subject to the Cantillon Effects, viz. early receivers of newly created money or monetary inflation are the primary beneficiaries coming at the expense of late receivers of money. That is, the injection of new money to the financial channel or the government (direct QE) unevenly influences the structure of money prices, which reflect on the distribution of resources and wealth of the economy in their favor, in the short-run and over time. The limited participation/penetration levels of MSMEs and individuals in the formal financial system compounds such effects.
And the fact is that since a significant portion of their revenue streams, and supply chains as well as financial claims and vice versa, are entwined with MSMEs, firms of the elites don’t operate in isolation either. This means that unless the elites use such a void to gain a greater share of the economy, which should lead towards monopolization, the present economic fallout will linger on.
II. Mainstream’s Incredible Forecasting Blindness! In 2021: Economic Turmoil Shifts from the Shutdown to the Backlash from the Bailout Policies
And as the yearend nears, expect the mainstream to dish out fabulous predictions for 2021.
Here are two opposing forecasts. One is from a leading credit rating agency, the S&P Global Ratings, while the other represents a multilateral agency, the ADB.
From the CNN (November 30): The Philippine economy is on its way to bouncing back from the coronavirus pandemic, but recent typhoons caused a setback, S&P Global Ratings said. In a new set of forecast for Asia-Pacific economies, the global credit rater noted the slow downtrend in new COVID-19 cases in the country, which allowed for freer movement and more jobs as quarantine rules were relaxed. However, recent typhoons dampened the gradual pick-up in economic activity, S&P said. The country incurred billions of pesos in damage to agriculture and infrastructure in the aftermath of Typhoons Quinta and Ulysses and Super Typhoon Rolly. S&P maintained its projections for the Philippines: negative 9.5 percent for this year, and a recovery of 9.6 percent in 2021.
From the Inquirer (December 2) COVID-19’s impact on economies will spill over to next year such that the pandemic-induced economic losses in the Philippines would exceed 10 percent of gross domestic product (GDP) both in 2020 and 2021 especially due to a slow recovery in consumer confidence, according to the Asian Development Bank (ADB).
The following news excerpts reveal the track record of S&P Global.
From the Businessworld (February 20): In a note sent to reporters on Wednesday, S&P said it lowered its gross domestic product (GDP) growth outlook for the Philippines to 6.1% in 2020, from the already downgraded 6.2%. The global ratings agency maintained its Philippine growth forecast at 6.4% for 2022.
From ABS-CBN News (April 30) The Philippine economy could contract by 0.2 percent this year and credit will grow at its slowest pace as a fallout from the COVID-19 pandemic, debt-watcher S&P said Thursday. The lockdown, which started on March 17, covered Luzon Island home to roughly half of the country’s 100 million population which also accounts for 70 percent of the economy, said S&P Global Ratings associate director Nikita Anand.
From the Manila Times (June 27): S&P Global Ratings on Friday trimmed anew its estimate for the country’s gross domestic product (GDP) performance this year as it pointed to government-imposed, growth-disrupting lockdowns as the reason. “Economic activity has stalled and we expect the economy to shrink 3 percent this year, compared with growth of 6.0 percent in 2019,” the credit ratings agency said in a report.
The world’s leading credit rating agency revised its forecast by at least FOUR times this year! Amazing!
It speaks loudly on how they conduct their so-called ratings or appraisals of institutional or national credit profiles.
Now let us move on to the ADB.
From the ADB (April 3) In its annual flagship economic publication, Asian Development Outlook (ADO) 2020, ADB projects the Philippines’ gross domestic product (GDP) to grow at 2.0% in 2020 following an “enhanced community quarantine” imposed by the government in March to stop the spread of the novel coronavirus disease (COVID-19) in the country. But ADB expects a strong recovery to 6.5% GDP growth in 2021, assuming that COVID-19 infections in the country are curbed by June this year.
From the Businessworld (June 19): THE Asian Development Bank’s (ADB) outlook for the Philippines has turned grim, as it now expects the economy to shrink by as much as 3.8% this year. …“The forecast for 2020 is revised down to 3.8% contraction because household consumption and investment have slowed more than expected. The contraction in the global economy will continue to drag external trade, tourism and remittances,” the ADB said in the report…For 2021, the ADB kept its 6.5% growth forecast for the Philippines, “supported by public infrastructure spending and anticipated recovery in consumer and business confidence.”
From the Manila Times (July 24) The Asian Development Bank (ADB) expects the country’s gross domestic product to contract by as much as 5.3 percent this year, although it says there are encouraging signs that the worst may be over for the economy. In a virtual briefing on Thursday, ADB Country Director for the Philippines Kelly Bird cited the “ADB Outlook 2020 Supplement” report it released in mid-June in describing the 3.8-percent decline it forecast then as “the median of our range, which is 2.3 to 5.3 percent.”
From the ADB (September 15): The Philippine economy is forecast to contract by 7.3% in 2020 amid the coronavirus disease (COVID-19) pandemic before growth returns to 6.5% in 2021, according to a new report from the Asian Development Bank (ADB) released today.
Figure 1
ADB downshifted their projections by at least FIVE times!
This exercise shows how CLUELESS the mainstream has been.
Basic economic logic tells us that the near-total freezing of the division of labor will lead not only to a deep recession but also to a massive disruption of the production and pricing structure, such that the longer the freeze, the wider the swath, and the greater the scale of economic devastation.
Given that the Philippine Statistics Authority (PSA) 2019 GDP exhibits the share of the Luzon region, constituting about 70% of the GDP, it is stunning to see the mainstream predict only 3% (S&P Global June) or 3.8% (ADB June) annual contraction following a quarter of near-total shutdown!
Another important lesson is that the economy CANNOT be opened and shut like a water spigot WITHOUT incurring substantial damages that will have lasting effects. The failure to comprehend the complexity of the intertwined network effects of the economy have led to the historic debacle of the policy of lockdown socialism.
Moreover, because the shutdown only exposed the vulnerabilities from embedded imbalances, the National Government (NG), along with its monetary agency, the Bangko Sentral ng Pilipinas (BSP), has been impelled to launch an unprecedented bailout program with which consequences remain in the dark for them.
And obsessed with formalism through econometrics, because the economy is seen by the mainstream as only a construct of statistical numbers, to arrest risk aversion, authorities have tinkered with statistics and joined global central bank contemporaries to inflate risk assets to restore animal spirits.
The popular understanding is that throwing money via the printing press of the BSP to save the economy will work like magic.
But, two wrongs don’t make a right.
In 2021, the source of the economy's burden and suffering will shift or transition from the repercussions of the economic freeze to the adverse consequences or repercussions of this year's bailout policies.
Yet, hardly anyone from the mainstream sees any chance of this happening.
III. Public and Infrastructure Spending Down Again in October as DBCC’s Downgrades 2020 GDP Again!
Barely a month after the imposition of the ECQ, the administration promised to use "build, build and build" to fuel a bounce in the GDP.
Here is an example.
Metro Manila (CNN Philppines, April 13)— The administration's flagship infrastructure program "Build, Build, Build" will be a steady force in the Philippines' recovery plan amid the COVID-19 crisis, with a top official saying it will be the country's "fuel" for an economic "bounce back." Finance Secretary Carlos "Sonny" Dominguez III told CNN Philippines Monday that the government should likewise focus on infrastructure developments as a way of pump priming the economy.
Strangely, the administration appears to be pulling their punches.
After peaking in April, public spending continues to languish towards the yearend. It was down 6.84% in October, the first month of the fourth quarter, from a larger decline of 15.45% last September and grew by a measly .38% in August.
As such, public spending growth in the last 10-months slowed to 12.75%.
Figure 2
Construction wholesale prices, which include prices declared by the Department of Public Works and Highway (DPWH), National Housing Authority (NHA), and Subdivision and Housing Developers Association (SHDA), inched higher last October, but its price trend remains downhill. Growth of cement prices remained sluggish as cement production continues to shrink in the face of a flurry of bids on infrastructure-related stocks at the PSE since the nadir of March. (Figure 1, lowest pane)
So what happened to build, build, and build? Despite sustained informational media campaign, why the slowdown?
Yet, the supposed elixir effect on the economy continues to bombard media.
From the Businessworld (December 2): A CONSTRUCTION spending level equivalent to 5% of GDP will be the “magic number” that will likely drive an economic recovery, Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua, said at a construction industry conference. Speaking at the forum arranged by the Construction Industry Authority of the Philippines Wednesday, Mr. Chua said he expects a pickup in the sector with the government planning to ramp up spending on infrastructure projects to P1.12 trillion in 2021 and P1.018 trillion in 2022, equivalent to 5.5% and 4.5% of gross domestic product (GDP), respectively. “The magic number that we are targeting is 5% (of GDP), which is sufficient (for the) economy to rebound strongly. That translates to a lot of jobs,” Mr. Chua said.
Wow! If 5% translates to a lot of jobs, why not 50% or 100%? Wouldn’t we reach nirvana by then?
From John Maynard Keynes,
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
John Maynard Keynes, Chapter 10, Book 3; The General Theory of Employment, Interest and Money, Marxists.org
Sounds familiar?
But then who pays for these grand digging projects?
Because of constraints in public spending, the modest fiscal deficit of Php 61.36 billion last October has emerged principally from the revenue shortfall of 12.8% from collection deficits of the BIR (-14.2%) and the BoC (-12.3%). [Figure 2, upmost left pane]
In the 10-months of 2020, though the aggregate deficit hit a record Php 940.58 billion. [Figure 2, upmost right pane]
The lower-than-expected output has impelled the DBCC to prune down the deficit-to-GDP target from 9.6% to 7.6% in 2020. And perhaps because of the reduction in public spending activities through the yearend, the same budget agency revised down their GDP target for 2020 to -8.5 to -9.5%. Revised down again, then again and again.
Once again from our July outlook…
The point is not that they have been wrong, yes they have been consistently and flagrantly wrong, but rather, their rapidly shifting projections do not even seem to be even driven by data or by context.
The most important lesson, aside from the moving goalpost, has been that the NG subjected the population to a repressive social “health” policy when they were either clueless of its economic implications or had an unstated different agenda in mind.
The Failure of the Centrally Planned ECQ Health Policy, Statistical Charades, and 1Q Real Estate Divergences July 12, 2020
Oddly too, while the National Government appears to be backpedaling from its proposed fuel for economic recovery, it has been borrowing aggressively.
Last October, public debt jumped by an unprecedented Php 659 billion (month-on-month) to hit a milestone Php 10.028 trillion or about 56% of the annualized GDP (based on the revised DBCC target). [Figure 2, middle window]
If the NG is keeping a tab on public spending, why borrow aggressively?
Are they borrowing to pump public spending up in 2021?
Or are they expecting deficits to swell from the implementation of the CREATE bill, which passed the Senate last week, that would apply retroactively and thus, initially weaken the top-line of the income statement of the National Government?
Or are they fretful that a spike in public spending in the face of Php 1.9 trillion liquidity injections may combust street inflation?
Or is it a combination of the above?
As a final note, system leverage (public debt plus universal and commercial banking loans) reached a historic Php 18.726 trillion or a staggering 105% of the DBCC’s downgraded GDP target for 2020! [Figure 2, lowest pane]
As an aside, while cutting taxes should be a welcome development, it is inconsistent with a government indulged in record public spending and accommodating a ballooning fiscal deficit on a historic scale, funded by a colossal surge in debt stocks.
From the Inquirer (December 1): Dominguez earlier acknowledged that repaying these massive borrowings could require higher taxes in the future and possibly selling government assets, like mining sites and contracts, and selling gaming operations to the private sector.
Prolonged economic weakness, and or higher rates or reduced access to savings (here or abroad) will force the government to either raise taxes soon or accelerate the use of the BSP’s printing press. It may even do both simultaneously.
IV. Stagflation Has Arrived! Why the Surge in the CPI Will Be Sustained
From the Inquirer (December 4): Prices of basic goods and services accelerated beyond the central bank’s forecast range for November, due mainly to a spike in food prices caused by the recent spate of typhoons. Despite this, Bangko Sentral ng Pilipinas Governor Benjamin Diokno assured that the 3.3 percent inflation rate for last month was a temporary phenomenon. In a mobile phone message to reporters on Friday, the central bank chief said that the average inflation rate is still expected to settle “within the government’s target range of 3 percent, plus or minus 1 percent for 2020-2022, as the impact of supply disruptions due to recent typhoons is expected to be largely transitory.”
Figure 3
While a supply shock from the recent typhoons may have been a contributor to the recent rise in statistical inflation, under the current scenario, it is doubtful that rising prices have signified a transitory phenomenon.
Nota bene: This author does not believe in the accuracy of the CPI simply because averaging different goods as potatoes, cars, laptops, and Netflix subscription fees represent a ridiculous and impractical exercise, and thus, do not reflect a realistic demonstration of price changes experienced by individuals writ large (community). Furthermore, since the CPI is a political-economic sensitive number, as per the PSA, "it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy", hence to advance the political-economic agenda of the incumbent such statistics are vulnerable to interventions. But anyway, using the lens of the mainstream, we extrapolate this data alongside the others to arrive at some clues of the political economy heading forward.
First, momentum and trend.
Since the short-bouts of deflation in September and October 2015, the headline CPI has been on an uptrend. It raged in 2018, peaked to multi-year highs in September 2018, marked by the rice crisis, then fell off the cliff to reach a bottom in September 2019, from which it began its grinding uphill climb.
The headline CPI consolidated for most of 2020 as the economy had been shut down, then accelerated upwards in November, breaking out of the said range, reinforcing the momentum and price trend. [Figure 3, upmost window]
The 5-year and 1-year uptrends have barely been in accord with the claim that November’s CPI represents a “transitory” phenomenon.
Meanwhile, the core CPI remains rangebound, highlighting feeble demand and the crucial shift in expenditures towards necessities.
Second, the CPI exhibits the massive disruption of the division of labor and Say’s Law.
Typhoons, a politically convenient and heuristic-based excuse, haven’t been the only source of supply shocks.
The National Government’s quarantine policy has caused a monumental structural disruption of the division of labor, which not only has curtailed and deformed the entwined, interconnected lattice networks of supply and demand chains but likewise, through price caps, has been reinforcing maladjustments.
The BSP-led Financial Stability Coordinating Council even admits to this in their latest Financial Stability Report: (bold original, italics mine) [p.26 to 29]
Wholesale and trade. The viability of big and bigger malls may have to be reconsidered. This is not just because of physical distancing norms, which will affect baseline assumptions about foot traffic. The bigger concern may be in the emergence of ecommerce, which has given retailers its internet-based platform to sell and market products. This provides consumers greater reach and enables households to purchase at the comfort of their homes, without being constrained with store hours or dreaded parking at the malls. With some products visible on the online market even before the pandemic, the quarantine was the trigger for the underlying, likely permanent change. Online transactions also adjust the employment frontier from the stores/retailers to the backroom services handling electronic orders. Physical stores may not be completely eliminated but a reconfiguration is likely.
Transportation-related services. The premium on space hits transportation significantly. Air travel needs to be reconfigured on the operating assumption that the baseline revenue-passenger kilometer (RPK)25 is adjusted downwards. With most airplanes currently acquired via a lease, the financing component necessarily must be addressed. Public transportation carriers are similarly impacted as passengers-per-trip is expected to decline even though the marginal cost (fuel and depreciation) is less dependent on the number of riding passengers as they are on the number of trips. Likewise, air and sea cargo are also not dependent on passenger traffic, but will nonetheless depend on market activity where intra-border activity is all the more important. Vehicles used for delivery services are expected to get a further boost from the shift to e-commerce and this will favor compact, maintenance-light designs.
Leisure activities and services. A global economy reeling from a pandemic will carefully weigh the timing and propriety of leisure-related activities. There will be a balance between treating leisure as a demand that can be postponed as against a needed outlet for built-up stress. The key will be in convincing the public that standard health protocols and hygiene practices are effectively and continuously applied, particularly for facilities that offer public use. Dine-in facilities and travel accommodations will likely see demand lag for some time, while current capacities and sprawling structures will have to be rationalized in light of the spacing and health concerns.
Real estate. This presents an enigma as several factors are at play. For one, the value of distancing and the preference for open spaces will create a premium for more “sprawling” developments and a discount on existing “cramped” locations. For another, as interest rates are expected to remain low for some time, financing real estate is relatively cheap at this point. Yet, there is that premium on liquidity as well. While developers have a strong desire to re-establish their liquidity, would-be buyers may also not want to part with their liquidity given market uncertainties. All these may boil down to a need versus a want on the buy-side while the sell side may have to prioritize liquidity for now in anticipation of a protracted recovery to an uncertain New Economy.
Professional services. Face-to-face meetings are still not the norm and increasingly, business dealings are held through virtual meetings. Advisory-type services are creating a demand for remote meeting apps, with the sustainability heavily depending on available IT infrastructures. Most professional services can be delivered through cyber means but at some loss of interpersonal interactions. Such interaction may be more important for some (for example, medical consultations and legal advice) than others (i.e. business transactions and consulting services). Webinars and e-learning facilities may now be the rave, but the network that one develops in face-to-face activities is as much value than the knowledge shared at these activities. In effect, the output can be delivered in cyberspace but cannot really be quite the same
The forcible shift to eCommerce and telecommutation (remote work or work from home), for instance, will have substantial adverse consequences on the brick-and-mortar economic model, most particularly, shopping malls or other commercial real estate projects. And not only will this entail losses and an upsurge in idle resources, but leveraged financing predicated on the previous race-to-build supply (malinvestments) will likely take a hit from such structural change.
The share of loans of retail, real estate, construction, and finance account for a whopping Universal and commercial banks 45.7% of the total banking loan portfolio net of Reserve Repos as of October. [Figure 3 middle pane]
While the BSP focuses on the services side of the economy, significant shifts have likewise covered the production side.
V. Disruption of Say’s Law: Be Careful of What you Wish For; The BSP’s Inflation Tax
According to Jean-Baptiste Say’s “the law of markets” or eponymously “Say’s Law”, production precedes consumption or demand is comprised by supply. Goods and services are paid for by other goods and services. Money, functioning as a medium, facilitates such exchanges. Hence, supply disruptions would redound to dislocations in demand or reduced production extrapolates to diminished income.
That said, given the current environment, where encompassing drastic political interventions, compounded by the radical change in consumer behavior and preferences have strained the supply side, prices of goods and services may surge to manifest improvements in demand (even on a partial scale) fueled by the BSP’s monetary inflation--channeled via public spending and or even a revival of bank lending.
And to counter this, imports would have to complement domestic supply, which should widen further trade deficits, and subsequently, exert pressure on the stock of US dollars and foreign exchange held by both banks and the BSP, which again should get manifested on the USD peso exchange rate.
Thus, the rosy projections for 2021 by the mainstream reverberates to a "Be careful what you wish for" moment.
Third, the BSP has been implementing an inflation tax.
When the BSP forces down its policy rates to attain a negative real rates regime, which represents an implied subsidy to the borrowers such as the National Government, the outcome has been typically a rising price trend for the CPI. The differentials between November’s CPI (3.3%) and the BSP’s ON RRP newly adjusted rates (2%) has only expanded and thus authorities have only deepened the use of Financial Repression or the inflation tax policies against the citizenry.
So while the BSP says that the higher CPI is only transitory, their actions underscore a policy to increase the confiscation of more resources from the public indirectly or through the BSP’s printing press.
Furthermore, while the job, revenue, and income losses from the massive dislocations of the networks of supply chains have recently capped increases in CPI, the intertemporal consequences to the BSP’s Php 1.9 trillion of liquidity injections, could be a spark to the unleashing of spiraling price inflation (CPI).
From the CNN December 3: The BSP has slashed the key interest rate — which is used by banks and other lenders in pricing loans — to a record-low of 2%, hoping to entice people and businesses to borrow and sustain their spending behavior to tide the economy through the recession. Strict bank rules on lending and liquidity have also been relaxed, which include lower reserve requirements, additional property loans, and more incentives to lend to micro, small, and medium enterprises. In sum, these interventions have injected an additional ₱1.9 trillion to the financial system, waiting to be taken up as retail or business loans or be reinvested. However, banks have been reluctant to grant credit as they turn risk-averse, while demand is also down as people and business owners are uncertain of their financial prospects. Diokno said the benign inflation trend, which is seen to stay below 3% until 2022, lets the central bank keep rates down. "This outlook provides the BSP with ample room to keep the monetary stance sufficiently accommodative to mitigate the strong downside risks to growth," he added…Diokno, who was Budget secretary before being appointed as BSP governor in March 2019, admitted the stimulus packages laid out by the national government are "relatively lower" compared to those rolled out by neighboring countries like Thailand, Malaysia, and Indonesia. "Even as BSP is prepared to implement additional policy measures, fiscal policy should play a more significant role in helping restore market confidence," the central bank chief noted.
Once again, prolonged economic weakness, and or higher rates or reduced access to savings (here or abroad) will force the government to either raise taxes soon or accelerate the use of the BSP’s printing press. It may even do both simultaneously.
Of course, the BSP thinks it can contain or manage any outbreak of the CPI with barely any costs. That is what they want us to believe.
Figure 4
Sadly, the recent peak of 4.75% from November 2018 to April 2019 in its ON RRP rates exposed the economy’s fragility and its eroding capability to handle leverage at such levels as soaring bank delinquencies followed (even before 2020). [Figure 4, upmost pane] Moreover, declining CPI and ON RRP had barely supported bank lending growth. [Figure 4, middle pane]
The BSP’s combined rescue operations have recently jolted money supply growth represented by M3, which culminated in May at 16.74% that subsequently juiced up the CPI. However, frail bank lending plus raging delinquencies appears to be offsetting the liquidity tsunami being foisted into the financial system by the BSP.
That being the case, the morbid consternation of monetary deflation will most likely also incent authorities to escalate the expansion of the domestic central bank’s balance sheet.
VI. Growing Risks from Inflating Bubbles, Treasury Markets Signal Inflation and Emergent Risks of Stagflation
Figure 5
Fourth, the BSP’s policy of inflating asset bubbles only underscores the aggravation of the misdirection of scarce resources. Surging money supply growth eventually feeds into the CPI and the stock market. So unlike recent mainstream rationalizations suggesting that lower CPI is good for stocks, ascending CPI has usually accompanied the increases of the headline index as today. [figure 5]
And as previously noted, the recent aerial acrobatics by the domestic equity benchmark, which has resonated with the world, has barely been accounted for by any significant improvement on the economy, rather, has signified the thrust by the BSP and global central banks to perk up the animal spirits or market confidence to keep deflation at bay, through sustained liquidity injections.
Yet aside from detachment from realities, asset bubbles have been driving an inequality wedge, which translates to increasing political division over time, and as pointed above, had been cited by an elite.
The zeitgeist of monetary inflation eloquently captured by this quote from John Maynard Keynes:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
John Maynard Keynes The Economic Consequences of the Peace 1919. pp. 235-248. PBS.org
The unwinding of bubbles will contribute to the general tightening of money that should add to the pressure of increasing rates.
Figure 6
Fifth and lastly, Philippine Treasury markets have been saying inflation ahead!
Curves across the treasury have been steepening. With rates rising faster at the farther end, this represents a “bearish steepener” or concerns over increased inflation ahead.
The odd thing is that despite the mainstream’s rhetoric, the few participants of the treasury market, which consists mainly of domestic financial institutions (private and public) appear to be defying expectations of a “benign inflation trend”, seen by the BSP “to stay below 3% until 2022”.
Again, an economic rebound in the face of the Php 1.9 trillion floating liquidity should mean higher inflation, which consequently translates to rising interest rates and a weaker peso. Such an environment should expose the underbelly of the banking system.
And again, even as signs of stagflation has already appeared, hardly anyone has been expecting such a dynamic to become the primary risk of 2021.
