Don’t Expect the Government to Solve Social Problems Caused by Weather

Spot the mistakes of this article.

From Sunstar.com.ph (bold emphasis mine)

MALACANANG appealed for understanding from the public following another confusion in the announcement of class suspension in Metro Manila and nearby provinces that have experiencing heavy rains since Monday night.

Deputy presidential spokesperson Abigail Valte said since there is no storm signal, the responsibility of suspending classes is left to the discretion of the local chief executives.

“We will be asking for a little bit of your patience because it is a new devolved system and our local government units will need to also get used to that system,” she said.

To remind the local officials with their task, Malacañang again posted on the Official Gazette Executive Order 66, which authorizes municipal mayors, as respective chairpersons of respective Local Disaster Risk Reduction and Management Councils (LDRRMC), to cancel classes and work of government offices during inclement weather.

“We would like to take this opportunity to remind them that the responsibility to suspend classes in times of inclement weather when there is (sic) no storm signals belongs now to the local government officials,” Valte said.

She added it is stated in the EO that suspension of morning classes must be announced by 4:30 a.m. so as not to inconvenience students, school staff and parents.

Classes from pre-school to high school levels in Metro Manila were cancelled Tuesday morning due to continuous rains caused by a low pressure area last seen at 40 kilometers west of the capital.

Several parents, however, complained about the late announcement of class suspension as their children were forced to go to school early in the morning despite the flooding.

Local Government Secretary Robredo, in a radio interview, admitted the need to improve the local government units’ announcement of class suspension.

Robredo said mayors, village chiefs, and school principals should coordinate in making the necessary announcement regarding cancellation of classes during heavy rains since they are the ones who see the situation on the ground.

Ok this news is an ex-post observation of the recent flood. Hindsight is 20/20. It’s easy to finger point based on the past.

Yet the problem is tomorrow. The problem is accurately anticipating the weather and its potential impact in both quality and quantity dimensions to affected areas and the social policy response.

The next problem is that families expect schools to make the necessary announcements. Unfortunately schools have NO EXPERTISE in forecasting weather. So it will be judgment call for schools.

The same problem plagues the local government units, hardly any of them have the ADEQUATE knowledge of the impact of nature’s challenges. So it will be judgment call for LGUs.

This leads us back to the national government through the government weather bureau PAG-ASA. Again unfortunately, outside conventional storms, it seems that PAG-ASA hardly can forecast accurately the nitty gritty of the weather changes. So it will be judgment call for the national government through PAG-ASA.

Even in conventional storms, PAG-ASA has hardly been successful in accurately predicting the exactitudes of nature's disturbances.

All these reveal that the fundamental problem is the failure of centralization in weather forecasting. But media's and the political approach has been to finger point.

Two more important things to drive at:

The first is the KNOWLEDGE problem.

The fact is that while there are instruments to help predict the changes in the weather, that knowledge is limited. This means that policy responses will ALWAYS be insufficient, no matter what they do.

The second point is that these has been all about the HOT POTATO problem—everyone seems to toss the responsibility to another party.

Everyone has been HARDWIRED to EXPECT that the government must and shall deliver us from environmental disruptions and disasters.

Yet no matter the horrible track record, we maintain this illusion of infallibility.

People cannot seem to accept that government are composed by people, and like everyone else, has limitations in the possession of knowledge.

In reality, people should NOT depend on government for making these calls.

Everyone should take the responsibility to assess and act upon the tradeoff of allowing you and your family members to go to school or work during inclement weathers.

There are many risks attendant to bad weather e.g. leptospirosis and other diseases, potential accidents (falling trees, open manhole, electrocution among the many). This should be done individually and depending on the circumstances of the environment one operates on.

Government will never know the details of each and everyone of our lives.

Of course there are institutional solutions to these, such as not only the privatization of PAG-ASA but importantly to de-politicize them or subject them to market competition.

People or social institutions, such as schools, can reward or punish private institutions for providing accuracy in weather forecasting through the profit and loss system. Under the government monopoly, sustained mistakes should be expected.

Weather derivatives can also be used as an insurance against tail events or weather based calamities. Institutions can now make their calls based on appropriate assessment of cost and benefits.

There are many REAL things the markets can do that may alleviate the current predicament. But under the current popular mindset, such is a state of vacuum so the problem becomes reiterative or self-reinforcing

Thus the biggest among all the fundamental flaws is the public’s mysticism of government.

As Professor Don Boudreaux wrote,

Too many people, including otherwise very smart people, believe in secular magic. They believe that words written on paper by people, each of whom receive a majority of votes on certain days of the year of adult citizens living in certain geographic areas, and who utter ritualistic pronouncements under marble domes in buildings conventionally called “capitols,” are somehow endowed with greater understanding of society’s complexities and with superhuman capacities to care about the welfare of strangers. These priests preach devotion, dedication, and sacrifice to the One True State (your own government), even while each recognizes that legitimate disputes about the details of the dogma divide various cliques of the secular clergy. When they speak and act in their official roles, they expect – usually correctly – that the laity pay their words special heed as if these words have extraordinary power.

We will never improve on our approach to solve the weather predicament, until we come to realize of the existence of other alternatives…the markets.

Financialization of Commodities: Boon Or Bane?

A Wall Street report recently highlighted on the "financialization of commodities" or the increasing role of commodities being used as investment assets.

They cite a study from Ke Tang at Renmin University in China and Wei Xiong at Princeton University which showed of the growing correlation between prices of commodities with stocks and the US dollar. Mr. Tang and Mr. Xiong writes,

``We find that concurrent with the growth of index investment, commodity prices have become increasingly correlated with the world equity index and US dollar exchange rate, and with oil. In particular, this trend is more pronounced for commodities in the two popular commodity indices, the GSCI 25 and DJ-UBS indices. As a result of the financialization process, the spillover effects of the recent financial crisis contributed to a substantial part of the large increase of commodity price volatility in 2008."

In addition, this has been used by some to cast a bearish light on commodities price trends.

Analyst Simon Hunt is bearish on copper, ``This economic scenario is not conducive to a strong trend growth in world copper consumption let alone to its declining intensity of use, a result of high and volatile copper prices. Moreover, copper’s end users, together with their fabricators, are fully aware that prices have not been driven by real fundamentals, but by the growing intrusion of the financial sector into treating copper, as for other base metals, as an alternative investment." (bold highlight mine)

Well in my view, financialization of commodities isn't a reason to be bearish.

This reflects on the deepening of capital markets in search of higher yield from relative returns, it also signifies the market process of discovering alternative havens or 'store of value' from inflationism and even possibly 'commodity as assets' could also function as sanctuary from numerous regulations.


Besides, commodities plays a minor role (.47%) in the $615 trillion derivatives [from the Bank of International Settlements] market largely dominated by interest rates (73.17%) and followed by foreign exchange (8%) and credit default swaps (5.32%). To consider that even weather plays a role in the derivatives market today as part of the growing sophistication of financial risk management.

Importantly, one mustn't forget that commodities once played the role of money, as Murray Rothbard wrote in Man, Economy and the State,

``Money is a commodity that serves as a general medium of exchange; its exchanges therefore permeate the economic system. Like all commodities, it has a market demand and a market sup­ply, although its special situation lends it many unique features. We saw in chapter 4 that its “price” has no unique expression on the market. Other commodities are all expressible in terms of units of money and therefore have uniquely identifiable prices. The money commodity, however, can be expressed only by an array of all the other commodities, i.e., all the goods and services that money can buy on the market. This array has no uniquely expressible unit, and, as we shall see, changes in the array cannot be measured."

Therefore, in today's environment where inflationism is the dominant path of policymaking, commodities can partly play the role of alternative store of value.

This means that the demand for money which consist of exchange demand (by sellers of all other goods that wish to purchase money) and reservation demand (the demand for money to hold by those who already hold it), would translate to what the mainstream sees as "speculation" or "hoarding".

In short, commodities are not just meant to be consumed (real fundamentals) but also meant to be stored (reservation demand) if the public sees the need for a monetary safehaven.

Moreover, when developments reveal heightened concerns over the accelerating loss of purchasing power in a currency, the role of commodities as money could be reinforced.

As Mr. Ludwig von Mises wrote,

``He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people [p. 427] believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings.

``But if once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse). The mathematical economists are at a loss to comprehend the causal relation between the increase in the quantity of money and what they call "velocity of circulation."

So in my opinion, where commodities serve as insurance against a crack-up boom, financialization of commodities is just one additional way to obtain access to such insurance. Not bad for as long as the counterparty in these contracts produces the 'real goods', when claims are presented.

Lastly, in competition with other asset classes, the financialization of commodities should likewise add to the pricing efficiency of the marketplace.