Auto Industry: Which will Prevail: The DoF on HB 5636 (Tax Reform) or the Law of Demand?

In a section of their website, the Department of Finance published an infographic attempting to debunk supposed “tax myths”

 

A brief purview of the prevailing conditions of the domestic auto industry prior to the enactment of HB 5636:

First fact. Since culminating in July 2016, the growth of unit auto sales has substantially been slowing in conjunction with auto loans. The financing of car sales has mostly been through credit.

Second fact. Based on the Philippine Statistics Authority’s October manufacturing data, auto production grew at double-digit rates in 2016 until the 1H 2017 but suddenly contracted by -.6% and -4.7% in September and October, respectively.

So how will the DOF’s claim measure with the law of demand?

The law of demand as defined by investopedia.com is “a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.” (bold added)

So…

Will politics successfully suspend the fundamental laws of economics (law of demand)? Or, will the DOF get shocked by the emergence of unintended consequences to the economy from the practice of the populist notion of “statistics equals economics”?

Headline (and Tweet) of the Day: Weak Philippine peso NOT Equal to Remittances Growth (August Remittances Shrinks!)

For the mainstream: Shiver me Timbers!!!! 

The above headline comes from the Business World. 

The August numbers signifies a sequel from July's data (as reported by media and as initially blogged here and explained here last September). 

The difference was July was a near zero growth. August was NEGATIVE!

And this seems like a virtual demolition of the mainstream agitprop which sold the weak peso as an elixir to remittances.

The following tweet from Channel News Asia's Haidi Lun

From my post which debunked the weak peso myths, early September:

Revenues of both OFWs and BPOs are SOURCED externally. This means OFW remittances depend on the INCOME of foreign employers. BPOs revenues depend on the INCOME of foreign based principals. This likewise means that the economic, social and political CONDITIONS of the nations serving as HOST to foreign employers and foreign principals essentially determine indirectly the REVENUES of OFWs and BPOs. 

Reality eventually prevails. 

New ADB Chief: Middle Income Trap is a Sham

Based on empirical studies, the new ADB chief proclaims the Middle Income Trap a “myth”

From Asian Nikkei:

The so-called middle-income trap, in which certain countries appear stuck at a middle level of development, is a sham, the new chief economist of the Asian Development Bank says.   

Although it has no formal definition, the "trap" is characterized by the inability of middle-income countries to advance to high-income status. In contrast, low-income economies are said to be able to easily move up to middle-income status and high-income countries are likely to sustain prosperity

"I have looked at the data -- this is ongoing research still -- but the data suggest to me that this is largely a myth: the notion of the middle-income trap," Shang-Jin Wei said in an interview with the Nikkei late last week…

Wei's assertion came after he looked at the economic growth history of "all countries in the world." He grouped them into five brackets: high-income, middle-income, low-income, poor, and extremely poor. He then looked at how they developed starting from 1960 and then 10, 20 and 50 years after.

In any bracket, Wei said, some countries advanced, some dropped, while some stayed the same, suggesting that there is nothing special with the middle-income level.

In 2012, I averred that the Middle Income Trap theory has only been an invention by interventionists or has signified a statist tool, and therefore a myth.

This is an example of how macro statistics can be used to mislead people. Countries essentially don’t fall into “traps”, it is the individual who make or unmake their respective wealth.

What truly restrains people from advancing is when productive resources are diverted into non-productive use. That’s basic, and is a matter of the law of opportunity costs or the law of scarcity.

And what induces non-productive use of resources are insatiable government spending, the welfare state, bloated bureaucracy and trade restrictions, anti-competition laws, bubble policies (or policies which induces consumption), inflationism (QEs) and all sorts of market distorting interventionism. Yes, all of them are interconnected…

In short, the more intervention, the lesser the capital accumulation or reduced economic growth. When politicians become greedy enough to divert much wealth into policy driven consumption activities then productivity diminishes. And that's where the so-called statistical 'trap' comes in.

Theory now supported by evidence.

Quote of the Day: Democracy is a Joke

People will tell you that democracy requires a well-informed citizenry. Some will tell you, with a straight face and an earnest tone, that you have a “duty” to keep up with the news so you can participate in public affairs. Some countries – notably Argentina and Australia – even require citizens to vote.

But this presumes people have access to some set of relevant facts… and then make up their minds intelligently, applying the known facts to the public policy alternatives.

It is nonsense for two fundamental reasons.

First, there are no facts in public life, just memes and BS.

Second, even if there were meaningful facts, the individual citizen is hardly equipped to evaluate them. After so many millennia with no public life of any sort, we don’t know how to judge or master it.

Let me give you an example…

Candidate X tells us he is in favor of cutting government spending. Candidate Y tells us he intends to make the government more efficient. Candidate Z tells us we will all be better off, if the government spends more money to stimulate the economy.

And President Obama says he has a plan to improve the nation’s health-care system.

These are all “facts” – reported in the news media and widely debated in opinion columns and talk shows. But is there any way for the poor voter to know what the politicians really believe… or which public policy is likely to produce the best result?

Nope.

We know, after decades of experience, that public policy rarely improves our private lives. The more ambitious it is – as in the Soviet Union or Nazi Germany – the more it subtracts from our own hopes and plans…

Now, a young man can graduate from a leading university with a head full of public facts… and know nothing at all.

This is from Bill Bonner at Bonner & Partners

Hard Lessons from the US Shopping Mall Bust

One of the popular meme has been to project domestic shopping malls as an impregnable investing theme for the Philippines, based on the presumed unlimited spending prowess of the Filipino consumer[1].

As previously discussed and which I won’t elaborate further[2] there that the two common objections against my controversial case on the shopping mall bubble. They can be summed up in terms of sentiment and habit.

The first has been based on the tenuous notion that “crowd traffic” or the “public park” paradigm alone equals store revenues and thus extrapolates to shopping mall revenues. The crowd traffic equals revenue echoes on the dotcom bubble where “eyeballs” or “page views” had been used as justifications to boost stock market prices. Of course in hindsight we know how these misimpressions ended.

The second has been based on the feeble idea that habits are unchangeable or cultural ethos has made shopping malls immune from the laws of economics. Again there is no such thing as people operating in a stasis, as everyone will change in accordance to the changes in the environment or technology or influences in politics or the markets. In the early 90s mobile phones had been a rarity, today mobile phones have become ubiquitous. Such is an example of change.

The ongoing experience of the US shopping mall bust demolishes these objections.

In the US, department stores which peaked in the 2000 have long been in a steep decline. Again the decline of department stores coincided with the dotcom bubble bust.

A recent flurry of job layoffs has been announced in the US shopping mall-big retailing industry

Retail bigwigs such as Sears, JC Penny, Macy’s, Target and Best Buy among many others have announced a wave of store closures and job eliminations. A CNBC article noted of a “tsunami” of forthcoming retail store closures[3].

Moreover, an estimated 15% of shopping malls or retail spaces are expected to be demolished or converted into non retail space within the next 10 years. In addition, one expert believes that half of America’s shopping malls are doomed to fail within 15 to 20 years[4].

Five reasons for the continuing slump in US shopping mall-big retailing arena.

One. As heritage from the 2008 crisis. Notes the Wall Street Journal[5],

Traffic to U.S. retailers was hurt during the financial crisis and recession, when job losses soared and shoppers kept a tight grip on their dollars. But nearly five years into the recovery, it appears many of those shoppers may never be coming back.

Consumers borrowed to spend more than they can afford to pay. Eventually they had pull back as the bills came due. 

Two. Uneven economic recovery. Again from the same article

A Target spokesman said shoppers are making fewer trips as "traffic has been impacted by the uneven economic environment," but are spending more when they do show up.

The FED’s implicit support on Wall Street via the Greenspan-Bernanke-Yellen Put (Zirp and QE) has driven a wedge between main street and Wall Street.

This resonates with the stagflation story for the Philippine consumers.

Three. US $ 1 trillion of legacy debt from the recent crash are coming due over the next three years which some specialty hedge funds have been trying to offer bridge finance[6].

This is the supply side angle of the first factor: Commercial Real Estate or shopping mall or big retail developers built malls or retail outlets MORE than the consumers can afford to spend on, or simply stated, an overexpansion spree financed by debt.

Again bills have been coming due. This is more relevant to the Philippine shopping mall case.

Fourth, change in consumer preference where online sales have become a major alternative channel (again from the WSJ)

Online sales accounted for just 5.9% of overall retail sales in the third quarter, according to the Commerce Department, but they have an outsize impact on how shoppers use stores and what they will pay.

While online sales have been rapidly growing they haven’t entirely been able to replace lost physical retail sales. Nonetheless online sales will cannibalize on costly physical malls or retail space. Online sales I believe will become a dominant force.

Lastly, change in consumer preference in terms of physical stores from CNBC

One big shift in store closings has come from retailers shying away from indoor malls, instead favoring outlet centers, outdoor malls or stand-alone stores. Although new retail construction completions are at an all-time low, according to CB Richard Ellis, the supply of new outlet centers has picked up in recent quarters.

Yes Filipino consumers may not be technically the same as Americans. But the point is economic conditions, technology and shifts in social preferences will impact local habits, activities and buying patterns.

Think of it, if the US, which has a nominal per capita income of $51,704 (IMF 2012) combined with her power to tap the credit from the banks and capital markets that extends her purchasing power, have not able to sustain a debt financed shopping mall boom, how could a lowly economy like the Philippines with a measly $2,611 (IMF 2012) or a mere 5% of US per capita, seemingly parading herself as a pseudo developed economy and whom has frenetically been building malls at a rate that even Americans can’t sustain, be capable of doing so? 

Here is one prediction. Something will have to give.

Finally pls don’t entertain thoughts that today’s giants will remain so or that these so-called blue chips are impervious to any crisis of internal or external in origin. All one has to do is to think about the fate of former titans Lehman Brothers, Bear Stearns, Washington Mutual or General Motors or Enron all of whom ended up as the largest bankruptcy cases in the US[7].

And be reminded, even billions can go to zero in just a year or two as in the case of Brazil’s Eike Batista, who in 2012 was worth $30 billion and today or in less than two years has reportedly a “negative net worth”[8]

---

[1] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[2] See Phisix: Escalating Risks from the Region and from Internal Bubbles December 9, 2013

[3] CNBC.com A 'tsunami' of store closings expected to hit retail January 22, 2014

[4] Business Insider America's Shopping Malls Are Dying A Slow, Ugly Death January 31,2014

[5] Wall Street Journal Stores Confront New World of Reduced Shopper Traffic January 16,2014

[6] Bloomberg.com Hedge Funds Preparing for $1 Trillion Property Bill: Mortgages February 6, 2014

[7] Wikipedia.org Largest cases Chapter 11, Title 11, United States Code

[8] Wikipedia.org Eike Batista

The Myth of Low Currency Equals Strong Exports: Brazil Edition

Low currency equals cheap exports. That’s the mainstream’s resonant “incantation” as if such a claim represents an a priori irrefutable truth.

In reality, such a claim has really been a myth though. They signify nothing more than propaganda to promote anti competition regulations via Mercantilism that works to favor of vested interest groups (politicians and their allies).

This has been debunked even as far back in the 18th century by Scottish philosopher Adam Smith in his classic Wealth of Nations

As a recent example I pointed out that since Japan’s adaption of Abenomics, such so-called boost to exports through destroying the yen has failed to come about meeting their objectives. Instead this has generated record trade deficits via exploding import growth. The update of charts of the Japan’s exports, imports and trade balance here. 

What Japan’s yen debasement program has only achieved has been to inflate a stock market bubble which has benefited the financial system at the expense of the consumers.

We see the same falsehood being exposed in Brazil where the weak real has brought about faltering exports backed by a decline in industrial production.

From Bloomberg’s chart of the day:

The biggest monthly plunge in Brazil’s industrial output since December 2008 shows policy makers’ confidence that a weaker real will stimulate manufacturing is proving misguided.

The CHART OF THE DAY tracks Brazil’s industrial production index, the real on a percentage-change basis and exports on a rolling six-month average. Output fell in December by the most in five years even as the exchange rate weakened 34 percent since the manufacturing index reached a record-high in May 2011. The currency is the biggest decliner against the U.S. dollar in the last three years among 16 major currencies tracked by Bloomberg after the South African rand.

President Dilma Rousseff said on Feb. 3 that a weaker real would help drive exports this year, an affirmation of Finance Minister Guido Mantega’s comments in September that a currency drop would make Brazilian products more competitive and boost manufacturing. Goldman Sachs Group Inc.’s Alberto Ramos said the government’s optimism isn’t warranted, as companies are hampered by rising labor costs and lack of incentives to modernize.

Low currency equals cheap exports represents a heuristic “oversimplified” way in looking at trade data. Such have been assumed to generalize that all trade are about “cheapness”. 

The reality is that trade, which is a largely function of the private sector conducting voluntary exchanges goods or services across geographical boundaries, are driven by manifold complex intertwined factors: such as subjective preferences of buyers (which are hardly about “cheapness” as cheapness usually indicates low quality or commoditized goods), availability and access to markets, availability and access to financing to facilitate trade, relative ease or convenience of conducting trade, security of transactions and or the institutional protection of market activities (sanctity of contracts) and more. 

Unfortunately “a lie that has been told to often to become a truth” doesn’t apply to mercantilist propaganda, that’s because economic forces will expose on them.

Emerging Market Turmoil: The Fallacy of Foreign Currency Reserves as Talisman

One fascinating populist meme about how specific emerging markets may survive the recent tantrums has been to cite foreign exchange reserves as talisman or amulet to a crisis. 

As reminder any balance of payment disorders are symptoms and not the source of crisis. The common denominator of every crisis is DEBT.

Central Bank Dilemma: To Use Foreign Currency Reserves or Not?

There have been two contrasting approaches adapted by EM central bankers to the current EM tantrums.

Instead of using forex reserves, Turkey’s government has opted to use the interest rate channel to deal with the current disturbance.

Turkey with a record of forex reserves at $ 149.7 billion, almost 2x the Philippines at $ 84 billion, surprised her financial market by massively raising key interest rates across the board to combat the sinking lira. The one week repo rate was increased by a stunning 550 basis points or from 4.5% to 10%! Read my lips FIVE HUNDRED FIFTY basis points. The lira had a one day celebration. Unfortunately the FED reduced monetary accommodation anew that wiped out the one day gains and even led the lira to set new record lows! The market seems to be saying that the current interest rate levels despite the increases have not been sufficient to compensate for the risks. This means more interest rates hikes or the Turkish government will have to begin using her record forex reserves.

Turkey is in dire straits as I discuss here[1]. Not only have the financial system been burdened by huge pile up of debt, they have about $ 160 billion of short term debt due this year. So a sustained lira depreciation and rising rates in Turkey’s creditor nations will mean a double black eye for deeply indebted transcontinental country.

Worst, foreign banks have $ 350 billion of credit exposure on Turkey’s financial system. How much of Turkey’s economy can absorb such tremendous spike in interest rate or a crashing lira before the economy tailspins? Should there be a credit event in Turkey how much of these $350 billion in debt held by foreign banks will be defaulted upon? What will be the repercussions? Are sinking stocks in Europe and the US signs of these? You think that Turkey’s conditions are merely signs of a “hiccup”?

The second approach has been to use forex reserves to fight off a crashing currency. This has been the case with Argentina whose currency has been collapsing whether seen from official rates or black market rates (left window).

The Argentinean government has been draining her forex reserves which have been down by a third now to US $29 billion[2]. This has forced the government to devalue to 8 pesos from 6 pesos last week, even when the black market has long been devaluing. Argentina’s government also raised interest rates by six percentage points[3].

The reason for the draining of reserves? Because the socialist government which nationalized many major industries have come short of securing financing. The Argentine government has massively increased spending by running down the reserves (right window). Argentina remains highly indebted and has still unresolved debt restructuring issues which has been a legacy from her default in 2002[4].

Argentina’s economic data can’t be relied on as the government has threatened domestic economic industry of jail time if they published data which goes against the declaration of the government[5]. What has been evident is that the government’s spending spree and the shrinking access to the pool of global credit markets have been instrumental in inciting a currency crash.

You think Argentina’s dilemma poses as a knee jerk reaction?

Foreign Currency Reserves are Manifestations of Bubbles

I find it ludicrous for the mainstream to keep yelling “forex reserves!”, “forex reserves!”, “forex reserves!” as if forex reserves function as some quaint magical amulet against evil spirits.

But this is reality. The source of problems has not been due to a war with some bad spirits but rather excessive debts looking for a release valve in the face of rising interest rates.

Think of it, the world has $11.434 trillion of foreign currency reserves mostly in US dollars as of the 3^rd quarter of 2013, according to the COFER data from the IMF.

If “forex reserves!” equals the magical talisman then we would NOT be experiencing any of these volatilities at all. But this market revulsion has been HAPPENING. It’s been happening IN SPITE of the RECORD international reserve assets. And it has been happening REAL TIME!

The problem is that foreign currency reserves serve as real time manifestations of accrued imbalances rather than the cure to the problem. I can discuss that this as related to the Triffin Dilemma as I did before[6], but this will unduly extend this already prolonged discussion.

The bottom line is that the US dollar standard which financed the world with the FED’s printing machine has fuelled a business cycle in an international scale.

Americans built their comparative advantage via engineering of mostly tradeable debt instruments that has led to a massive growth in her financial industry known as financialization. 

The financial industry with less than 10% weighting in the S&P 500 in 1990 became the biggest industry in 2007 as she exported subprime mortgage papers around the world[7].

Meanwhile the world assembled a global network supply chain to supply the US with goods which ultimately transformed into globalization. And US Financialization helped fulfil demand by the world, who accumulated US dollars via trade expressed in record forex reserves, to recycle savings into US dollar assets. Of course the developed world also learned mimic their version of financialization. 

At the end of the day, the US dollar standard has brought about record debt levels not only for mature market economies (right window) but for the entire world—estimated by the ING in 2012 at $223.3 trillion or 313%(!) of the GDP[8]. EM debt has been estimated at $66.3 trillion or 224% (!) of GDP in 2012.

Accompanying record debt has been record financial assets[9] that have been galloping far away from global economic growth (left window).

Even more, the world’s ramping up of US dollar reserves by the printing local currency by domestic central banks has fuelled bubbles on a national scale.

Why forex reserves are manifestations of imbalances? Austrian economist Antony Mueller explains[10]. (bold mine)

The expansion of debt by the issuer of the international reserve medium augments the stock of international reserves and the increase of the reserves works like a growth of the global money supply. Central bank balance sheets show that the circulating domestic money forms a debit item, while foreign reserves are part of the credit side. All other things being equal, an increase in foreign reserves implies money creation. This way, foreign debt accumulation by the issuer of a global reserve currency impacts monetary demand through two channels: in the debtor country by the domestic spending of foreign savings, and in the creditor country by the accumulation of foreign exchange reserves which augment the money supply

Where the release valves from the stockpile of foreign reserves are to be expected? Again Professor Mueller (bold mine)

The country, which emits the international reserve currency, does not face a foreign exchange constraint; thus there will be no immediate limit for this process to go to its extremes. Additionally, an expansion of this kind must not be accompanied by price inflation right away. The prices for tradable goods may stay low for a considerable period of time and instead of a price inflation the bubble emerges in the asset markets. After all it is the transaction in the capital account of the balance of payments -- the buying and selling of debt instruments -- which lies at the heart of the process and it is here where the music plays in terms of the bubble. Bubbles, however, have the nasty habit of imploding because they are build on some unsustainable element. This factor within an international debt cycle concerns debt service payments, and this has consequences for international trade and economic growth

Has it not been that the outflows from EM local currency debt instruments and from domestic currency a reflection of troubles in the capital account of the balance of payments?

Eventually bubble enthusiasts will come to realize, that screaming “forex reserves!” “forex reserves!” “forex reserves!” will not serve as free passes to bubbles.

Russian Ruble: A Domestic Outflow

As a final thought, I recently pointed at the unique case of the ongoing pressure on Russia’s currency, the ruble. Russia would have been seen by the mainstream as having a strong external finance conditions, since she has $510 billion of forex reserves (6x the Philippine reserves), has significant surpluses in both trade balance and current account balance (though the latter has been dwindling).

Yet Russia suffers from both property bubble fuelled by credit inflation and runaway local government debt. Lately one of the 200 largest bank in terms of assets the ‘My Bank’ suspended withdrawals for a week. Why would My Bank suspend withdrawals unless she has been financing some problem? Perhaps signs of a bank run?

And guess who’s been selling the ruble?

Well strange as it seems, it has not been foreign outflows as mainstream paints them to be. Russia continues to post foreign capital inflows from 2012 to 2013 (left window). It has been residents whom have been scampering off Russia at a pace that has been picking up pace (right window). There may be various reasons for this such as safehaven, alternative investments or even possibly signs of recognition of a bursting bubble as discussed here[11].

The point worth repeating is that every conditions are unique and that there are no “line in the sand” or specific thresholds before a revulsion on domestic credit occurs.

This brings us to the periphery to core dynamic. For every crisis the first manifestations will be via steepening and spreading of dislocations in the financial markets. Then this transitions into a liquidity squeeze. And finally liquidity squeezes will hit on the real economy possibly either through a credit event first before an economic recession or vice versa.

For those afflicted by the Aldous Huxley syndrome, keep in mind that in the 2007-8 global crisis, the Phisix fell by more than 50% even when the Philippines had floating exchange rate, record forex exchange reserves and low NPLs. The Philippines even narrowly escaped a statistical recession.

Of course one may argue that today’s problem has been different than in 2008. One might assert that today has been an emerging market problem. Part correct. But there are always two sides to a coin. Applied to current events, while one side of the coin is the emerging markets, the other side is the US-developed economies.

But don’t forget: Both of the two sides share the same coin: the DEBT problem coin. Example, just look at how entwined Turkey’s problem has been with foreign banks. The magic number:  $350 billion.

---

[1] See Turkey’s Central Banks Surprises With Huge Interest Rate Increases January 29, 2014

[2] Bloomberg.com The Price of Argentina's Devaluation January 30, 2014

[3] Bloomberg.com Argentine Bonds Plunge Most in Emerging Markets on Outflows February 1, 2014

[4] Wikipedia.org Argentine debt restructuring

[5] See Argentina Government Threatens Jail Terms for People who Question Inflation Data September 15, 2013

[6] See Will the Triffin Dilemma Haunt the Global Financial Markets? August 12, 2013

[7] Wikipedia.org Subprime mortgage crisis

[8] Wall Street Real Time Economics Blog Number of the Week: Total World Debt Load at 313% of GDP May 11, 2013

[9] Institute of International Finance Economic Recovery and Dependence on Asset Values January 8, 2014

[10] Antony P. Mueller Do Current Account Deficits Matter? Mises.org Journals

[11] See Behind Russia’s Central Bank’s “Unlimited Intervention” January 31, 2013

Quote of the Day: Trade is Not a Scoreboard

We need to do better a job explaining how trade does not lend itself to sports metaphors. Exports are not our “points.” Imports are not “their” points. The trade account is not a scoreboard. It is not Team America against the world. Trade is about mutually beneficial exchange between individuals in different political jurisdictions, and to the extent that those kinds of transactions are subject to the whims of politicians, more and more resources will be diverted from economic to political ends.

This is from Cato Institute director Daniel Ikenson debunking mercantilist myths

Lessons from Singapore’s Central Bank: Central Banks are Vulnerable to Bankruptcies

Mainstream media and their favorite experts continue to impress upon the gullible public that foreign currency reserves acts as a shield against the risks of a crisis.

Well based on this theory, Singapore’s humongous forex reserves (more than twice the Philippines) imply that the current meltdown suffered mostly by emerging markets should have Singapore the least affected. 

 

Reality has shown otherwise. 

10 Year Singapore government bond yields continue to unsettle now at 3 year highs

The Singaporean Dollar has been sold off. The USD-SGD on an uptrend since December 2012.

The ASEAN meltdown has Singapore’s STI reeling from the ASEAN bear market forces.

While Singapore has technically not yet in a bear market, the break below the June lows and the recent ‘reprieve’ or tepid ‘suckers’ rally reveals of the STI’s vulnerabilities.

In my view, the stress in Singapore’s markets exhibits an ongoing deterioration of trade and financial linkages with ASEAN.

Now Sovereign Man’s prolific Simon Black propounds on how central banks can go bankrupt using the recent Singapore experience. (bold mine)

A few months ago, the Monetary Authority of Singapore (MAS), the country’s central bank, released its annual report for the fiscal year ending 31 March 2013.

And the results were ‘shocking’, at least for those of us who read central bank annual reports cover to cover like a Harry Potter novel.

The bottom line for MAS showed a mind-boggling S$10.2 BILLION loss (roughly $8 billion USD), about as much as General Motors lost in its worst year.

This is the antithesis of what one would expect from Asia’s dominant financial center. And it begs the question– how can a central bank, which has the power to conjure money out of thin air, even suffer a loss, let alone such a heavy one?

Simple. MAS was desperately trying to hold back the Singapore dollar’s rise against the US dollar.

Because Singapore is a trade-based economy and the US dollar is so central in international trade as the world’s reserve currency, MAS has been trying to keep the Singapore dollar somewhat restrained vs. the US dollar.

Essentially MAS was buying US dollars and then intentionally selling them at a lower price in order to create artificial demand for US dollars.

This was a completely failed strategy.

Singapore’s ultra-healthy economy attracts investment from around the world, and the natural tendency is for the Singapore dollar to rise.

This rise has been even more pronounced given Ben Bernanke’s journey into monetary madness over the last several years.

Since 2008, the Singapore dollar steadily appreciated by more than 20% from peak to trough as investors sought a more stable currency alternative. After all, Singapore is a very strong, growing economy with zero net debt.

Because of these factors, MAS lost a prodigious sum trying to prevent its currency’s natural rise; the S$10.2 billion they lost constitutes roughly 3% of GDP.

In fact, Singapore’s economy only grew by S$11.5 billion from 2012-2013… so MAS managed to blow through 87% of the country’s economic growth last year fighting Ben Bernanke. Crazy.

This is something that is clearly not sustainable. And while that term is a bit overused today, such losses cannot continue indefinitely.

A central bank CAN go bankrupt, often creating a major currency crisis. And this is what suggests to me, above all else, that the fiat system is on the way out.

Fiat currency has been the greatest monetary experiment in the history of the world. Four men control over 70% of the world’s money supply, giving them control over the price of… everything.

And this system is so absurd that, healthy nations like Singapore are forced to lose billions in order to keep playing the game.

That’s exactly what it is– a game. Like most nations, Singapore has been playing this game for decades while the US changes the rules whenever it sees fit.

And it’s becoming obvious that the cost of playing is now far exceeding the benefit it receives. The hard numbers are very clear on this point.

This spells one inexorable conclusion: game over.

Another interrelated consequence of this US dollar recycling (vendor finance scheme) by Singapore’s central bank has been to blow homegrown bubbles 

Growth in the loans to the private sector has virtually been skyrocketing

Singapore’s surging housing index has passed the 1997 Asian crisis highs!

And domestic credit to the private sector at 112% of GDP is about the highs of the 1980s and similarly approaches the Asian crisis highs of 1997.

I don’t have data on the claims to the banking system on ASEAN by Singapore and vice versa, but I suspect that there may be significant private sector exposures on the ASEAN investment corridor, as well as ASEAN investments in Singapore

Should the ASEAN meltdown continue or deepen then the risks of a regional crisis grows. 

We should thus be vigilant on the conditions ASEAN markets

And despite the denials of media and their clueless highly paid mainstream experts, we should expect the unexpected 

Mounting losses compounded by economic slowdown or recession will place central banks on the spotlight.

Caveat emptor