How Will the BSP’s Dour 3Q Consumer Sentiment Survey Affect the Real World? High CPI Equals Loss of the Leadership’s Popularity?

Last week, the Bangko Sentral ng Pilipinas released its 3Q consumer expectations survey which was mostly morose (CES): [bold mine]

After eight quarters of positive consumer reading, the overall confidence index (CI)2 reverted to negative territory at -7.1 percent from 3.8 percent for Q2 2018. The negative index indicates that the pessimists outnumbered the optimists for Q3 2018. According to respondents, their negative outlook for Q3 2018 was mainly brought about by their expectations of: (a) an increase in commodity prices, (b) low salary/income, (c) higher household expenses, (d) high unemployment rate, and (e) no increase in income. Respondents also noted concerns on higher educational expenses3 and higher transportation expenses4 as reasons behind their gloomy prospects.

The sentiment of consumers in the Philippines for Q3 2018 mirrored the weakened confidence of consumers in Australia, Indonesia, Japan, South Korea, Switzerland, Taiwan, and United Kingdom but was in contrast to the more favorable views of those in Thailand and the United States, as well as the steady outlook in Euro Area and France.5

Interesting to note that b, c, d, and e have contradicted most of the government’s data. Also, external forces have had little to do with domestic factors affecting consumer perception

Figure 1

It is likewise interesting to note that the BSP’s CES (next quarter and next 12 months) appears to have coincided with the PSA’s real per capita household consumption data. (see figure 1)  Both peaked in 2Q 2016.

Since this pinnacle, both the per capita data and all three CES surveys went into a decline. Though the contours may not be similar, the general trend has been down.

 

Figure 2

The following real-world events demonstrate the relevance of BSP CES survey and per capita consumption:

-Payroll or salary loans climaxed in 2016 and have since turned lower. Payroll/Salary loans contracted in July (uppermost window figure 2)

-Auto sales growth likewise culminated in 2Q 2016 have declined since. The downtrend had been magnified by TRAIN 1.0’s excise tax. Auto sales trend has reinforced the BSP’s CES survey. (middle window figure 2)

-Aggregate retail sales of major retailers, namely Puregold, Robinsons Retail, SSI Group, Metro Retail, and Philippine Seven have also likely hit a turning point in 2016. However, income tax cuts from TRAIN 1.0 have boosted the top line of these firms in the 1H. (lowest pane figure 3)

Retail sales, in general, haven’t validated the BSP’s CES in the 1H of 2018.

However, in the 2Q the sales boost from TRAIN 1.0 on 24/7s appears to have been negated partly by the elevated CPI, as well as, the sharp downturn in payroll loans. Sales for this sector may turn significantly lower in the 3Q.

 

Figure 3

Now of course, if the BSP’s CES will have any relevance to the real world, the trade industry which has expanded massively, financed by the debt, will be faced with substantially weakening consumers. (figure 3)

Even the high-end group has supported consumption with an increasing use of leverage (See figure 3 and FSR explanation below).  The high-end group comprised 39.4% of household loans in 2015

Guess what will be the result?

Side notes: The household share of the GDP has been trending down while trade as a share of the GDP has risen.

Trade credit growth has recently exploded signifying massive investments while consumer credit growth continues to head south.

The Financial Stability Report 2017 noted:

Aside from consumer loans, the 2014 BSP Consumer Finance Survey (CFS) indicates that less than 14 percent of the households were borrowing from banks to finance the purchase of a residential real estate, motor vehicle or household appliance (p.22)

(FSR Figure 3.6)

More affluent households, on the other hand, had higher exposures to more expensive long-term debt, such as real estate and vehicle loans. These loans make them more vulnerable to movements in interest and FX rates, and are thus, subject to higher repayment, refinancing and repricing risks.

A decomposition of debt data among income quintiles showed that more affluent households (i.e., fifth quintile) had higher debt participation and, as anticipated, higher average debt compared to their counterparts (Figure E). Said biased access poses a measurement challenge in capturing total household debt since the underrepresentation of wealthy households in the FIES sampling design results in underestimation of household expenditures and debt. ( p.23)

Post Script:

Figure 4

How relevant has been financial health with populist politics? Though per capita GDP and consumption has dropped since 2016, this hasn’t affected the voting public’s perception of the leadership.

The President remained very popular, well, that’s until the 1H of 2018. So there is an invisible threshold point of pain. That is if the surveys are believable.

No wonder the President will address the public tomorrow.

The Socialist Illusions of "Change": Ludwig von Mises on the Ethics of Capitalism

The election byword for any aspiring political candidate has always been about “CHANGE”.

Yet the problem of populist clamor for C-H-A-N-G-E has hardly been about the moral component of the individual, but rather such springs from INCENTIVES. In particular, the incentives generated by institutions/governance or political economic conditions: capitalism versus socialism or the market economy versus the welfare-warfare and bureaucratic state.

The great Austrian Economist Ludwig von Mises debunked the popular narrative of "change" via socialism (from Mises Wire) [bold mine]

In the expositions of Ethical Socialism one constantly finds the assertion that it presupposes the moral purification of men. As long as we do not succeed in elevating the masses morally we shall be unable to transfer the socialist order of society from the sphere of ideas to that of reality. The difficulties in the way of Socialism lie exclusively, or predominantly, in men's moral shortcomings. Some writers doubt whether this obstacle will ever be overcome; others are content to say that the world will not be able to achieve Socialism for the present or in the immediate future.

We have been able to show why the socialist economy is impracticable: not because men are morally too base, but because the problems that a socialist order would have to solve present insuperable intellectual difficulties. The impracticability of Socialism is the result of intellectual, not moral, incapacity. Socialism could not achieve its end, because a socialist economy could not calculate value. Even angels, if they were endowed only with human reason, could not form a socialistic community.

If a socialist community were capable of economic calculation, it could be set up without any change in men's moral character. In a socialist society different ethical standards would prevail from those of a society based on private ownership in the means of production. The temporary sacrifices demanded of the individual by society would be different. Yet it would be no more difficult to enforce the code of socialist morals than it is to enforce the code of capitalist morals, if there were any possibility of making objective computations within the socialist society. If a socialist society could ascertain separately the product of the labour of each single member of the society, his share in the social product could be calculated and his reward fixed proportionately to his productive contribution. Under such circumstances the socialist order would have no cause to fear that a comrade would fail to work with the maximum of energy for lack of any incentive to sweeten the toil of labour. Only because this condition is lacking, Socialism will have to construct for its Utopia a type of human being totally different from the race which now walks the earth, one to whom labour is not toil and pain, but joy and pleasure. Because such a calculus is out of the question, the Utopian socialist is obliged to make demands on men which are diametrically opposed to nature. This inadequacy of the human type which would cause the breakdown of Socialism, may appear to be of a moral order; on closer examination it turns out to be a question of intellect.

The Alleged Defects of Capitalist Ethics

To act reasonably means to sacrifice the less important to the more important. We make temporary sacrifices when we give up small things to obtain bigger things, as when we cease to indulge in alcohol to avoid its physiological after-effects. Men submit to the effort of labor in order that they may not starve.

Moral behavior is the name we give to the temporary sacrifices made in the interests of social co-operation, which is the chief means by which human wants and human life generally may be supplied. All ethics are social ethics. (If it be claimed that rational behavior, directed solely towards one's own good, should be called ethical too, and that we had to deal with individual ethics and with duties to oneself, we could not dispute it; indeed this mode of expression emphasizes perhaps better than ours, that in the last analysis the hygiene of the individual and social ethics are based on the same reasoning.) To behave morally, means to sacrifice the less important to the more important by making social co-operation possible.

The fundamental defect of most of the anti-utilitarian systems of ethics lies in the misconstruction of the meaning of the temporary sacrifices which duty demands. They do not see the purpose of sacrifice and foregoing of pleasure, and they construct the absurd hypothesis that sacrifice and renunciation are morally valuable in themselves. They elevate unselfishness and self-sacrifice and the love of compassion, which lead to them, to absolute moral values. The pain that at first accompanies the sacrifice is defined as moral because it is painful—which is very near asserting that all action painful to the performer is moral.

From the discovery of this confusion we can see why various sentiments and actions which are socially neutral or even harmful come to be called moral. Of course, even reasoning of this sort cannot avoid returning furtively to utilitarian ideas. If we are unwilling to praise the compassion of a doctor who hesitates to undertake a life-saving operation on the ground that he thereby saves the patient pain, and distinguish, therefore, between true and false compassion, we re-introduce the teleological consideration of purpose which we tried to avoid. If we praise unselfish action, then human welfare, as a purpose, cannot be excluded. There thus arises a negative utilitarianism: we are to regard as moral that which benefits, not the person acting, but others. An ethical ideal has been set up which cannot be fitted into the world we live in. Therefore, having condemned the society built up on "self-interest" the moralist proceeds to construct a society in which human beings are to be what his ideal requires. He begins by misunderstanding the world and laws; he then wishes to construct a world corresponding to his false theories, and he calls this the setting up of a moral ideal.

Man is not evil merely because he wants to enjoy pleasure and avoid pain—in other words, to live. Renunciation, abnegation, and self-sacrifice are not good in themselves. To condemn the ethics demanded by social life under Capitalism and to set up in their place standards for moral behavior which—it is thought—might be adopted under Socialism is a purely arbitrary procedure.

Cartoon of the Day: Dilbert Explains the Difference Between Economic Ignorance and Political Movement

Dilbert on populist politics (hat tip: NYU Professor Bill Easterly)

Facebook Posts of the Day: Socialism Sounds Great in Speech Soundbites, US Populist Vote Against the Establishment

The first post on socialism comes from Russian Chess Grandmaster and former World Chess Champion Garry Kasparov (hat tip Cato's Dan Mitchell)

The next post comes from iconoclast author and risk analyst Nassim Taleb

By the way, due to time constraints I haven't opened my facebook account for a number of months now, but such has not been a hindrance from reading great posts like the above.

Quote of the Day: Against Political Romanticism

At the Cafe Hayek, Professor Don J Boudreaux explains why he isn't a political romanticist

I’m afraid that I don’t share your enthusiasm for politics, be they democratic or not. Where you “see citizens [at the polls] selecting our leaders,” I see people voting on which power-mad person will crack the whip over those same people and brand and herd them like cattle. Where you are “inspired by candidates campaigning openly to win the election,” I am frightened to realize that one of those hubris-slathered men or women will actually come to possess such power that no man or woman is, or ever will be, fit to possess. Where you are “charged” by the “vigorous debates” among candidates, my stomach is sickened and my intelligence is insulted by the economics-free, fact-strained, and too-often-vacuous talking (and shouting) points that pass for a serious discussion of issues.

And where you say that you “trust voters” more than I trust them, that depends. You’re correct that I distrust people as voters, for in that capacity they largely express opinions on how other people’s (their fellow citizens’) money should be spent and on how other people’s lives should be led. But I trust – perhaps more than you do, and certainly more than do any of the candidates – those same voters as individuals each to spend his or her own money wisely and to lead his or her life well, each according to his or her own lights, without interference or direction from any of the officious, arrogant, and venal candidates seeking power over the lives of other people.

Quote of the Day: How Democracy Made Central Banking Possible

Prior to democracy, loans were undertaken by monarchs, who were personally responsible for their loans. As Meir Kohn of the economics department at Dartmouth University writes:

The debt of a territorial government was essentially the personal debt of the prince: if he died, his successor had no obligation to honor it; if he defaulted, there was no recourse against him in his own courts.

Sometimes princes paid their loans, and sometimes they didn’t. For example, the Peruzzi were a leading Florentine banking house in the 14^th century. At one point, they lent Edward III of England 400,000 gold florins, which, for a variety of reasons, was never repaid. This led to the collapse of the Peruzzi Bank in 1343.

Deals were quickly made when a prince died, of course, but the bankers had a weak position. They had to negotiate the balances and promise to make more loans in the future.

On top of that, many rulers simply refused to pay loans they had taken. Probably the most prolific deadbeat was King Philip II of Spain. He refused to pay back his loans at least a dozen times.

Because of this, banks were seriously limited. They developed techniques of dealing with sovereign defaults, but central banking as we know it was more or less impossible. Bankers didn’t dare make the kinds of loans they do now.

Democracy, however, solved that problem for them. Under democracy, loans are not debited to an individual, but to the nation as a whole. All the citizens, and their children, become responsible for repaying the loan.

From the institution of democracy onward, loaning money to a government gave the banker a claim against the taxes of the people… a claim that never expires.

This was a clever trick: The person who signs for the loan ends up bearing almost no responsibility, and gets to spend all the money. At the same time, millions of people who never approved the debt—who probably had no way of even knowing about it—are left holding the bag… and passing on the obligation to their children.

(italics original)

This is from Free Man’s Perspective author Paul Rosenberg at the Casey Research

I would add that when persons X and Y votes to spend on person Z’s money, then such free lunch politics would extrapolate to more redistributive spending than what taxpayers (or the Z’s) can afford. Central banks, thus, basically assumes the indispensable role of bridge financers to the inadequacy of resources forcibly extracted from the public through taxes due to populist 'democratic' politics.

At the same time, the banking sector plays the fundamental function of intermediaries--as collection agents (as crucible for the public’s savings and or as tax collectors) and also as distribution agents (government debt sold to public)--of political institutions which central banks supervise and whose existence have even been guaranteed.

Government Failure: Thailand’s Rice Subsidies

File this under another grand moment of government failure: Thailand’s rice subsidies

From the Wall Street Journal Real Times Economic Blog (bold mine)

Under the program, the government offered to buy rice from local farmers for up to 50% above the market rate in a bid to boost incomes and spending among a key constituency. The premise was that by hoarding rice Thailand would be able to force up rice prices globally, reaping a larger profit when the stocks were eventually sold.

But the program backfired as India and Vietnam ramped up their own rice exports, knocking Thailand from its spot as the world’s top producer and forcing prices down.

State warehouses were flooded with an estimated 10-15 million tons of rice that Ms. Yingluck’s administration was forced to sell in order to pay farmers after the plan’s financing became unsustainable, driving down prices further. Still, many farmers went unpaid for months, and a few committed suicide after finding themselves unable to pay off debts.

This seems like a wonderful depiction of central planning failure and of the political economic lesson called “There is no such as a free lunch”

The former populist governments of Thailand bought the farmers votes by providing rice subsidies. That’s because about 2/3 of Thai’s population have reportedly been rice farmers. The government eventually came to realize that their grand scheme of influencing world markets backfired which is classic example of the fatal conceit from central planning. 

And most importantly, the government eventually awakened to the reality that taxpayer resources has LIMITS!!!

So the parasitical dependency relationship which had been nurtured from Thai’s rice politics caused financial havoc to many farmers where many were left unpaid which prompted a few to commit suicide.

Thai’s rice politics seem to ring a bell with the Philippine setting whose very costly counterpart carries a slogan “rice self-sufficiency” program. Like in Thailand, spending by the government continues to bulge, part of which has been financed by ballooning debt.

The article’s intent has been to report that the junta government has “officially confirmed” the end of the controversial subsidy program under its regime. This should be a welcome development. But the military government said that the decision for its continuance “could be left to the new interim government”. This means for now Thai's rice subsidy has conditionally been placed in the backburner subject to future political exigencies. Politics has always been about smoke and mirrors.

The Pope and Populist Politics

Pope Francis plays populist politics by supposedly taking on an economic stand.

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” Francis wrote in the papal statement. “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacra­lized workings of the prevailing economic system.

Harvard’s Greg Mankiw’s reaction (hat tip Mark Perry)

First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.

Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the "soak-the-rich" theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

Third, as far as I know, the pope did not address the tax-exempt status of the church.  I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down.

Wall Street’s Mary O’Grady on Venezuela as example of the Pope’s model.

Heavy state intervention was supposed to produce justice for the poor in the breadbasket of South America. We all know how that turned out.

No Christian can doubt the love expressed in the pope's message, which aims to shepherd the flock away from materialism. But the charge that grinding poverty in the world is the outgrowth of "the absolute autonomy of the marketplace" ignores reality. To be sure, even prosperous economies regulate markets. But those that have a lighter touch do better. Human history clearly demonstrates that when men and women, employing their free will and God-given talents, are able to innovate, produce, accumulate capital and trade even the weakest and most vulnerable are better off.

Instead the pope trusts the state, "charged with vigilance for the common good." Why is it then that the world's most desperate poor are concentrated in places where the state has gained an outsize role in the economy specifically on just such grounds?

…

Venezuelans need a moral authority that defends their rights to run a business, make a living, own property and preserve the purchasing power of what they earn. In short, they need a champion for a rule of law that will limit the power of the state over their person. Mother Church ought to be that voice. In siding with Mr. Maduro, however inadvertently, she harms her cause in the region.

New York Stern Professor Mario Rizzo on the Pope’s omission of the scientific dimensions of social policies.

If we move beyond Jesus’ exhortations to individuals about their moral behavior to papal exhortations about government policies to achieve the goal of eliminating or reducing avoidable human suffering, a scientific dimension is added. Policies have consequences, often unintended. The social interaction of people is more than the acts of people taken individually.  There are complexities in these cases subject to scientific analysis.

The ultimate normative goals of action can be based on a religious insight or commitment. (I prefer to say on ethics.) But the means chosen to attain those goals are in large part a scientific question. Thus the proximate goals of action are largely in the domain of science. (An exception is where the means are considered intrinsically evil.)

The point is that policies are means to ends. They are not decrees about how the world should be. They can succeed or fail to achieve the desired moral ends. They can have consequences more undesirable than the problems they purport to solve. It is hard to see what the Church can authoritatively add to these discussions.  Issues like income redistribution, globalization and financial speculation, however, are either above or below the papal pay grade. As Jeremy Bentham said about the state, the job is basically to “be quiet.”

Obviously, for a Church wanting to be relevant in its growth areas in poor, less developed countries, this might not be enough. And yet there is more it can say about the state’s use of coercion, of its violation of the basic principles of just conduct in the creation of crony “capitalist” economies, of its secrecy and lack of accountability, of the use of torture, of trafficking in slaves, and war. The Church has to its credit tackled many of these. It will be seen, I suggest, that in most of these areas governments or others are violating the fundamental principles of individual just conduct: lying, cheating, stealing, physically harming innocent individuals, failing to aid others in distress (as opposed to failing to coerce people to aid others in distress), and even the use of force where turning the other cheek would be appropriate.

But where social policy is concerned, fundamentally scientific issues are crucially involved and the Church has no greater teaching authority than the rest of us. To confuse matters by combining superficial scientific analysis with strictly moral teaching does neither the Church nor the world much good.

Uttering feel good noble sounding populist political rhetoric with hardly a good understanding of the real social consequences from proposed repressive policies will do little to help society. For me, the Pope's major gaffe has been the failure to understand that the state is run by human beings who shares the same vulnerabilities as the rest.

As the great dean of the Austrian school of economics Murray Rothbard admonished:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Why the Pork Barrel Will Unlikely be Abolished

From today’s headlines:

In face-to-face interviews with 1,200 respondents aged 18 and above who were randomly selected nationwide, Pulse Asia also found that 67 percent believed that corrupt practices during the Arroyo administration involving the PDAF continued under the Aquino administration.

Most Filipinos, thus, approved of President Aquino’s announcement that the time had come for the scrapping of the pork barrel.

For about one in three Filipinos (32 percent), politicians were using the PDAF to get themselves and their relatives elected, while another 27 percent said the pork had given lawmakers an opportunity to receive bribes and commissions.

A fundamental reason why the Pork Barrel will unlikely be abolished (but will likely be transformed into another Pork with a lipstick) can be deduced from the consensus perspective which views the problem of Pork as having been based from personality virtues rather than an institutional-structural disease 

 

And media and their experts reinforce the populist belief that nirvana will be achieved (or the Pork will be of merit) once “angels” would run the government. 

But as 4^th President of the United Sates and “Father of the Constitution” James Madison Jr. warned in the Federalist papers (Federalist 51),

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.

Government is about political power or the control of people and of resources by a few. Or political power is about the rule of men over men.

This means political power is hardly about righteousness for the simple reason that political power is about organized force. And to acquire and wield political supremacy means political agents will resort to all forms of manoeuvrings (which includes unethical means) for the purpose of acquiring the privilege of control over men.

The principle of economics tells us too that politicians and bureaucrats, like all the rest, are mere mortal human beings who are driven by self-interests (Public choice) and thus will be subject to the frailties and temptations of the common men.

But instead of promoting equality through opportunity and law, political power is about unjust coercive redistribution, as the illustrious economist Thomas Sowell says it best

The first lesson of economics is scarcity: There is never enough of anything to fully satisfy all those who want it.

The first lesson of politics is to disregard the first lesson of economics. When politicians discover some group that is being vocal about not having as much as they want, the “solution” is to give them more. Where do politicians get this “more”? They rob Peter to pay Paul.

After a while, of course, they discover that Peter doesn’t have enough. Bursting with compassion, politicians rush to the rescue. Needless to say, they do not admit that robbing Peter to pay Paul was a dumb idea in the first place. On the contrary, they now rob Tom, Dick, and Harry to help Peter.

In a related separate but related issue we see a variant of the Pork Barrel in action… (from another Inquirer article today)

In spite of widespread public outrage, the presidential body tasked with overseeing the pay and perks of state corporations justified Monday the bonuses that the Social Security System (SSS) had rewarded its managers while ramping up contributions of members, noting that 19 other state corporations have also handed out such management windfalls.

Paolo Salvosa, the spokesman of the Governance Commission for Government Owned or Controlled Corporations (GCG), talked to reporters after the panel members went to Malacañang to defend the much-maligned P1 million that the SSS board, headed by Emilio S. de Quiros as president and vice chair, ordered for each of its directors.

De Quiros announced at the same time that employees’ contributions to the SSS would be increased by 0.6 percent, raising their monthly salary contributions from 10.4 to 11 percent.

He said this would stretch pension funding capability “to perpetuity.” He indicated further increases in premiums were forthcoming.

The SSS chief has been roundly criticized, among others, for taking trips abroad, first class, all expenses paid, every two months since he took over the pension agency.

One may not be “corrupt” in the sense of 'kickbacks' and directly from pocketing of taxpayer funds, but the principle has been the all the same…

The politics of coercive redistribution is about the spending other of people’s money through the predation of Juan to pay Pedro and from the intermediation of political agents, who likewise benefits by getting a cut from such forcible transfer process. 

And Pork Barrel represents an element of the politics of coercive redistribution. It has been always easy to spend the toils and savings of other people in order to get elected or to maintain populist approval or for personal perks.

And in defense of the system, politicians run circles on the public by emitting smoke screens of putting the blame on previous administrations rather than to come clean by being transparent or by proving to the public of their alleged moral excellence by opening their earmarks (past and present) for scrutiny. 

Politicians also resort to legal technicalities to prevent such happening.

Bottom line: for as long politicians will be able to persuade their constituencies of the supposed necessity of spending other people’s money, the Pork barrel won’t likely be abolished.

The constituency should demand to scrutinize the Pandora’s Box as I earlier wrote

Yet the public should clamor for an independent non-partisan audit on earmarks (Pork barrel) of all incumbent officials (which should include previous tenures or positions) beginning with the highest to the lowest ranking.

This means abolishing the Pork may only happen from a radical reformation or transformation of public opinion. Or said differently, only when the public will be thoroughly convinced that the Pork is an incorrigible institutional defect will abolishing the Pork become a reality.

As the great Ludwig von Mises wrote (bold mine)

What determines the course of a nation's economic policies is always the economic ideas held by public opinion. No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology.