MANILA, Aug 25 (Reuters) - The Philippine central bank is in firm control of the peso and is confident that the country is not facing a foreign exchange crisis, its governor said on Friday, as the currency hovered around 11-year lows. "We allowed the peso to adjust moderately and gradually but I can assure you the BSP (central bank) is in firm control of the exchange rate," Nestor Espenilla told a business forum. "We remain confident that we are not talking about a freefall situation. Definitely we are not in a foreign exchange crisis."
Huh? Foreign exchange crisis? Didn’t the Philippine peso ever get the memo from the asset bubble religion that NOTHING can ever go wrong??? I repeat with emphasis: NOTHING!
And that “crisis” as a socio-economic lingo signifies a taboo? Why then the utterance of a “crisis”? That would be so politically incorrect!
It seems that the BSP has been reacting to concerns raised by some influential quarters. Otherwise, such “crisis talk” would not surface at all. The BSP’s response to the “free falling peso” has not been the first time or has signified a follow through from the other week.
Well, the USD peso has risen 1.63%, 1.0% and fell .8% over the last three weeks. Or the peso tanked by 1.8% in three weeks. Year-to-date, the USD peso remains up at 2.74%. In a world of falling US dollar, the peso has stuck out like a sore thumb in the Asia region (left).
So concerns over these may have prompted for the BSP’s reaction.
Though I would agree with the BSP for now, I would add to his statement "we are not in a foreign exchange crisis…YET"
Let me give you a hint when the pesos’ fall mutates into a crisis…
From the great Austrian economist Ludwig von Mises* (bold mine)
"If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more andmore, until finally it disappears completely. To be sure, one could conceive of the possibility that the process of monetary depreciation could go on forever. The purchasing power of the monetary unit could become increasingly smaller without ever disappearing entirely. Prices would then rise more and more. "
*Ludwig von Mises 1. Monetary Depreciation p.2-3 I. The Outcome Of Inflation The Causes Of The Economic Crisis, Mises.org
By the way, Venezuela’s hyperinflation evidenced by the crashing bolivar represents a real-time example of this phenomenon.
And as I have repeatedly been pointing out here, the BSP has engaged in aggressive monetization of the National Government’s (NG’s) debt. Such money printing (emergency) operations, which had been reactivated in the 2H 2015, represents inflationary financing. In short, as evidenced by incumbent policies, the peso ispurposely being devalued. (see Chart of the Day: Debt Monetization represents a Policy of Devaluation! July 7, 2017)
Below represents proof that the present BSP actions have been designed.
From a lecture by BSP’s Dr. Dante Canlas in 2012**
[**Dr. Dante Canlas, BSP Sterling Professor of Monetary and Banking Economics, Business Fluctuations and Monetary Policy Rules in the Philippines: Lessons from the 19841985 Contraction April 30, 2012 p 14-17 BSP.org.]
"A prior issue is this: is inflation a monetary phenomenon Friedman had said “inflation is always and everywhere a monetary phenomenon.” With a quantity theory of money in mind, if the central bank increases the money supply from a position of balance, then the real money stock exceeds the demand for it. To restore balance, the general price level must rise, which means inflation rate, defined as the percentage change in the general price level must rise.
And thus…
"Money growth that is inconsistent with a fixed exchange rate or a tightly managed float tends to be unsustainable. A fixed exchange rate collapses in finite time, particularly if money growth, rooted in persistent deficit financing of the government budget is excessive. Likewise, a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation
"If the central bank increases the money supply… rooted in persistent deficit financing", then incumbent policies represents demonstrated or revealed preference. The peso is being devalued.
Pls. understand that speculative attacks on a currency have neither been random events nor have emerged out of a vacuum. ‘Speculative attacks’ signify as symptoms of imbalances extant in the system. Theimbalance of which, as stated by the expert, has been excessive money supply growth. Thus, the BSP practices some theories consistent with the Austrian economics. So when the currency markets smell something wrong, the markets prices the currency to approach its “equilibrium” price level or exchange ratio through arbitrage opportunities.
Back to the great Mises who reinforces the market’s function as an equilibrating mechanism***:
"Whenever such opportunities for profit exist, buyers would appear on the foreign exchange market with a demand for the undervalued money. This demand drives the exchange up until it reaches its “final rate.” Foreign exchange rates rise because the quantity of the [domestic] money has increased and commodity prices have risen. "
***Ludwig von Mises 2. PURCHASING POWER PARITY V. COMMENTS ON THE “BALANCE OF PAYMENTS” DOCTRINE p.26-27 The Causes Of The Economic Crisis, Mises.org
Hence, when the BSP threatens to implicitly intervene through the statement that they are in “firm control of the exchange rate”, they are simply contradicting themselves.
Back to Dr. Canlas, “a managed float based on interventions in the foreign exchange market designed to keep the exchange rate within a narrow band is vulnerable to speculative attacks, resulting in a sharp depreciation”
The more interference in the price setting motion, the greater the fall of the peso!
Interventions have always had time inconsistent effects. Interventions may smooth currency price actions today at the expense of more imbalances tomorrow.
Even more, while debt monetization weakens the peso, actual intervention only attenuates the BSP’s balance sheets thereby reinforcing the peso’s fall overtime.
Strains of the peso have been everywhere…
In 2013, I questioned the sustainability of the “record” narrowing of spreads between US treasury yields and the Philippine yield equivalent, “Per capita GDP of the US represents 11.32x the Philippines, yet bond markets are presupposing that the Philippines will narrow the gap substantially soon (!!)…Yet how will we attain this? Pump up bigger bubbles?” [Phisix: The Convergence Trade in the Eyes of a Prospective Foreign Investor November 11, 2013]
What was once convergence has now transformed to divergence! The yield spread between 10-year bonds of the Philippines and the UST notes have been increasing. Such embodies the broadening differences in relative inflation (uppermost chart). Yes, that would be another bullseye for me!
Additionally, the BSP has increasingly depended on forex derivatives to bolster its Gross International Reserves. FX derivatives have now reached “record” levels. (middle window)
Finally, BSP-NG selling of UST holdings in support of the peso has been apparent even in the US Treasury TIC data (lowest window)
This brings us back to the BSP response to media on the foreign exchange crisis.
“Current Account” or “BoP” has only served as the convenient bogeyman. Imbalances of CA and the BoP signify manifestations of the domestic policies. I will elaborate on this in the future.
As a side note, even as tax revenues outperformed, July’s fiscal deficit has swelled again. The Bureau of Treasury (BoTr) has yet to issue the updated data on the National Government’s outstanding debt. The Bangko Sentral ng Pilipinas will release its depository survey/liquidity survey and bank lending conditions next week. I will discuss this only when the data have all been in place.
Please understand too that BSP deficit financing has not just been the only cause of the plight of the peso.
I have been a USD-Php bull since 2014, or when the BSP exploded its money supply growth at 30%+++ rate for 10 consecutive months. Then, it had entirely been the banking system responsible for the remarkable money supply inflation.
Today, both the BSP and the banking system have been working overtime to expand the money supply. Monetary inflation has been aimed at generating revenues for the NG through direct taxes and through the inflation tax.
In conclusion:
All actions have consequences.
The travails of the peso signify an outcome or a ramification of the FREE LUNCH policies implemented by the government.
The risks of a currency crisis will only magnify IF the BSP continues or even accelerates the prioritization of such invisible transfers to the government and to the elites, through the channels of debt monetization and easy money policies.
In reality, the BSP has not told the public the truth. The government, through the BSP, has willfully embraced policies to devalue the peso.
Asset Bubble Religion and the Propensities to Swindle
And curiously, while the BSP has been alleviating the public’s concern of the foreign exchange crisis, the asset bubble religion has only become more entrenched.
Fanatics have come to believe that asset bubbles come with no costs/no risks and have only benefits. And because they believe that asset bubbles have become a permanent fixture, intensifying intolerance has become a response towards any opposition to such utopian outlook.
They can be analogized to the growing political fragmentation in the US between the extreme (Antifa) left and the extreme nationalists, the “alt right”. Because of the intensifying intolerance due to “you are with us or against us” mentality (false choice), violence has been mounting. Even some unfortunate Filipinos (recently in Canada) have been caught in the crossfire from such increasingly partisan or divisive politics.
Intolerance spawns friction.
One can’t generate “business” unless one belongs to the bullish camp. So they say.
In domestic stocks, transactional payoffs have been made primarily on the upside. Additionally, shorts are hardly used. Therefore, the current system built on an upside bias make this assumption partly true. But that certainly does not apply now.
Well, the Phisix has been locked in at 8,000 for the past 2-3 weeks, yet where has the business been????
Daily trade volume has shriveled at a stunningly rapid rate – faster than its previous predecessors in 2015 and 2016! (upper chart) But for the antecedents, volume shrinkage matched prices: The PSEi had been in downtrends! This time it is different.
The average volume last week was at Php 5.7 billion. In 2017, there had been only three occasions where volume was equal or lower than this: March 3 (Phisix 7,247.12), February 3 (7,226.7) and January 20 (7,232.66). 2016 ended with Php 4.35 billion (6,840.64).
In other words, volume has not matched prices at present levels.
So despite sinking volume, why has the Phisix remained at 8,000? One simple and obvious answer: Corrections have NOT been permitted (see lower window).
Price fixing has become institutionalized! “Volume PRECEDES prices” a chart technician would say. But such would be a truism in the condition that markets have been allowed to work.
The prevailing mindset has been that markets are out there for convenience (sensory and egotistical gratification, hedonism, social status among many others) and not for allocation purposes. So the deformation of markets has become the order of the day. In short, stock markets have been perceived as free money ATMs.
Price fixing has already signified symptoms from such asset bubble zealotry. Such depravity, of course, also means many uncovered malfeasances elsewhere.
As historian Charles P Kindleberger****, “The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And for the signal for panic is often the revelation of some swindle, theft, embezzlement and fraud.”
In the US, one of the biggest banks was recently fined for the opening of many spurious accounts. The same bank was likewise accused of making unauthorized changes to customer’s mortgages or even without the customer’s knowledge. Lately, the same bank had recently been exposed for charging unneeded auto insurance to people who took out car loans.
In Canada, early this year many employees went on air to whistleblow on their employers for hard selling to their clients.
From the CBC News (March 15, 2017): “Employees from all five of Canada's big banks have flooded Go Public with stories of how they feel pressured to upsell, trick and even lie to customers to meet unrealistic sales targets and keep their jobs. The deluge is fuelling multiple calls for a parliamentary inquiry, even as the banks claim they're acting in customers' best interests.”
Stunning.
And I’m quite certain that these activities have not been limited to these countries
The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.
For redistribution to take hold, the policy of rewarding debtors at the expense of savers affects people’s outlook. These policies fundamentally change people’s incentives, and consequently, actions. And such incremental change in incentives involves the narrowing people’s time orientation (Austrian economics lingo: high time preference). When priorities have been skewed, many become vulnerable to the employment of unethical or unscrupulous means or instruments to attain their short-term agenda or interests or objectives. Or differently put, when greed becomes a priority, the propensities to speculate morphs into the propensities to swindle.
At the end of the day, greed’s nemesis will be its undoing.
Back to Mr. Kindleberger: (p.82)
“What matters to us is the revelation of the swindle, fraud, or defalcation. This makes known to the world that things have not been as they should have been, that it is time to stop and see how they truly are. The making known of malfeasance, whether by the arrest or surrender of the miscreant,or by one of those other forms of confession, flight or suicide, is important as a signal that the euphoria has been overdone. The stage of overtrading may well come to an end. The curtain rises on revulsion, and perhaps discredit
Why do volumes decline in bear markets? Answer: Because losses become the dominant force. Losses thereby spread to affect the balance sheets of speculators and investors.
Plainly stated, fear or revulsion takes on the driver’s seat.
Since the opposite side of greed is fear, while greed overwhelms today, eventually it will be fear’s turn.
Fanatics have been worshipping the Phisix at 8,000. But when priced from the USD that 8,000 level shrinks. Said differently, the inflation adjusted Phisix won’t be at 8,000. It would much much much lower.
Mass Delusions.
To be clear, I am not saying that the 2015 record won’t be broken. Given the intense price fixing process, whether it does or doesn’t shouldn’t be a concern. What matters will be the peso as an outlet for present policies. The Phisix hasn’t only been outclassed by the falling peso, in the context of record breakthroughs. The plight of the peso will also serve as a critical obstacle to the Phisix.That’s unless the Philippines will suffer from a hyperinflation – which is unlikely.
