FACTA: US IRS Forces 77,000 foreign financial institutions to ‘Share’ Information; End of the US dollar standard?

This is incredible; 77,000 financial institutions have “agreed” to “share” information data with the US IRS supposedly to counter tax evasion and money laundering.

From the AP/CNBC (bold mine)

It will soon get a lot harder to use overseas accounts to hide income and assets from the Internal Revenue Service.

More than 77,000 foreign banks, investment funds and other financial institutions have agreed to share information about U.S. account holders with the IRS as part of a crackdown on offshore tax evasion, the Treasury Department announced Monday.

The list includes 515 Russian financial institutions. Russian banks had to apply directly to the IRS because the U.S. broke off negotiations with the Russian government over an information-sharing agreement because of Russia's actions in Ukraine.

Nearly 70 countries have agreed to share information from their banks as part of a U.S. law that targets Americans hiding assets overseas. Participating countries include the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas.

Starting in March 2015, these financial institutions have agreed to supply the IRS with names, account numbers and balances for accounts controlled by U.S. taxpayers.

Under the law, foreign banks that don't agree to share information with the IRS face steep penalties when doing business in the U.S. The law requires American banks to withhold 30 percent of certain payments to foreign banks that don't participate in the program—a significant price for access to the world's largest economy.

The 2010 law is known as FATCA, which stands for the Foreign Account Tax Compliance Act. It was designed to encourage—some say force—foreign financial institutions to share information about U.S. account holders with the IRS, making it more difficult for Americans to use overseas accounts to evade U.S. taxes.

Well this is hardly about “agreeing” since foreign banks will face “steep penalties” amounting to withholding “30% of certain payments” when doing business with the US. 

Given the US dollar as the de facto global currency standard where much of the global financial transactions revolve around US banks, the US government has been able to compel foreign banks to do its bidding.

This is imperialism enforced or imposed through the sphere of finance.

This also represents how financially desperate the US government have been to do arm serious twisting measures of foreign financial institutions.

And worst, Americans with asset overseas seem to have been presumed by FACTA and the US government as tax evaders or money launderers.

And this may not even be just about finances. This may be a part of the grand scheme of actions by cash strapped governments to end tax competition and to impose a unified global tax.

Nick Giambruno at the International explains:

FATCA’s real purpose is not to collect money, but rather to pave the way for a global FATCA, informally known as GATCA.

You see, complying with FATCA often breaks the privacy laws of other countries. To get around this problem, the US government has been negotiating bilateral agreements with pretty much every country in the world.

However, it’s not practical for each and every country to create their own version of FATCA and accompanying web of bilateral agreements. It would be a very slow and tedious process.

So to address this issue, the central planners at the G20 and OECD devised what they call a new “global standard” of automatic financial information exchange between governments (i.e., GATCA) modeled on the US’s FATCA.

In other words, unaccountable bureaucrats from these supranational institutions are foisting upon the world a FATCA on steroids.

However, GATCA would have never been possible in the first place had the US not cleared the path with FATCA.

The G20 and OECD needed the US—the sole financial superpower (for now at least)—to strong-arm and cram down the throats of the rest of the world this privacy-killing measure. There’s no other entity on the planet with the capability to do so.

The very big stick the US wielded was access to the US financial system and the world’s premier reserve currency. Don’t sign up for FATCA and forget about accessing the US dollar or US financial system, and by extension the vast majority of international trade. It wasn’t long before most of the world fell in line.

Now that FATCA has become a fait accompli, the foundation has been laid for GATCA.

Unfortunately GATCA also will likely become an irreversible reality in the not-so-distant future.

I believe it’s highly probably that the OECD, the G20, and others will sanction or otherwise blackmail countries that don’t comply with GATCA. The pressure will likely be too enormous for the vast majority of countries to bear.

In the end, this means a permanent record of every penny you have ever earned, saved, borrowed, or spent anywhere in the world will be available in an instant to be analyzed and scrutinized, and shared with any number of local and global government agencies, all regardless of any actual or suspected wrongdoing.

But wait, there’s more!

If FATCA wasn’t the end game, don’t expect GATCA to be either.

Let’s peel back the final layer of the onion.

What Comes Next

Did you really think that all these governments would go through all the trouble of creating the architecture to gather all this global financial data with GATCA and then just let it collect dust? Of course not. They’re going to leverage this data as much as they can.

It’s no secret that collectivists the world over have long fantasized about creating a global tax with a planetary taxation authority. Whether it’s the global carbon tax, a worldwide tax on financial transactions, or a UN tax on air and sea travel, all prior attempts at creating a global tax haven’t really worked, as the infrastructure for collecting the data and enforcement wasn’t in place.

However, that could all change with GATCA, which could provide a platform to make the disturbing dream of a global tax a reality.

Yet what the governments desires and how the public reacts are two different matters.    

There will be serious unintended repercussions on this.  Signs of these has already been surfacing.

While it may be true that initially foreign banks will accommodate the US IRS, these institutions are most likely to shy away from accepting business from US citizens.

Here is an example, from CNN Money (September 2013) [bold mine]

The U.S. Foreign Account Tax Compliance Act, which requires businesses to report all assets held by Americans, aims to recoup the hundreds of billions the U.S. says it loses each year from tax evasion. But it's also leading global banks big and small to dump U.S. customers rather than wrestle with the complicated law.

This absurd ‘imperialist’ regulation will also create barriers for US citizens investing abroad. Another example from SwissInfo.ch (May 2013)

Yet Bartolini admitted he had heard of various problems, such as claims Americans were being pushed out of business deals and prevented from climbing the corporate ladder allegedly due to their US nationality and perceptions about tax reporting and FATCA. If a foreign corporation has a ten per cent ownership by an American, under Fatca the firm is obliged to report that ownership to the US.

Not only that there has been a negative spillover to US-foreign intermarriages. From the same article…

Facta is also causing tensions within mixed couples, say critics. If financial assets are jointly held, FATCA requires the disclosure of the identity of the non-US spouse.

“My Bernese husband is furious,” said Salvisberg, who has to report to the IRS how much money her husband had in his account last year. “He says it’s none of their business what he has in his account. He’s absolutely right but if I don’t report it’s a criminal act.”

And FACTA has prompted a record exodus or renunciation of US citizenship. From Forbes: (February 2014) (bold mine, bold italics original)

America is a great land and lures immigrants worldwide, yet record numbers of U.S. citizens and permanent residents are giving up their citizenship or residency. For all the immigrant arrivals the trickle the other direction is increasing. The number is still small, with the “published” expatriates for the quarter 630 for the last quarter of 2013.

That brings the total number to 2,999 for all of 2013. The previous record high for a year was 1,781 set in 2011. It’s a 221% increase over the 932 who left in 2012. You can call it a shaming or a public record, but the Treasury Department is required to publish a quarterly list of Americans who renounced their U.S. Citizenship or terminated their long-term U.S. residency. The public outing puts Americans on notice who relinquished their rights.

Those seem like tiny numbers, yet the total thus far for 2013 is 2,369. See Number of Taxpayers Who Renounced U.S. Citizenship Skyrockets to All-Time Record High, quoting Andrew Mitchel. Under U.S. tax law, it is not relevant why someone expatriates. Whether the expatriation was motivated by tax avoidance or something else used to matter, but the law was changed in 2004….

The coup de grace is FATCA, which is ramping up now worldwide. It requires an annual Form 8938 to be filed with income tax returns for foreign assets meeting a threshold. And foreign banks are sufficiently worried about keeping the IRS happy that many simply do not want American account holders. Americans abroad can be pariahs shunned by banks for daily banking activities.

If the world will vastly reduce doing business and or hiring of US citizens, as well as, if more and more productive Americans ditch their citizenship, then the demand for the US dollar and US dollar based assets will materially decline. By erecting global financial barriers, FACTA, thus, represents financial protectionism.

The US government hardly recognizes that FACTA extrapolates to a death warrant of the US dollar as the world’s currency reserve.

Don’t worry, be happy; stocks are bound for the heavens!

As Debt Surges, Malaysia’s Shadowy Fund Adds to Systemic Risk

ASEAN’s credit risks has been vastly underestimated. 

In Malaysia, a cross between the nation’s sovereign wealth fund and private investment vehicle sporting an investment grade credit rating can’t even generate enough cash to pay interest rates.

Reuter’s chart link

From Reuters: (bold mine)

Lurking beneath Malaysia's solid investment-grade sovereign rating is a risk posed by a $14 billion investment fund that is not even generating enough cash from operations to cover interest costs.

Regarded as a cross between a sovereign wealth fund and a private investment vehicle, with Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of $11 billion in borrowed money.

The government says it only guarantees around 14 percent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia's debt position from these contingent liabilities that raises concern.

More…

Critics have questioned its investment choices, the size of its debt, $2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.

A $1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give 1MDB more time to launch a $2 billion initial public offering that would reduce debt incurred buying 15 power plants. In a statement published on May 23, 1MDB said the IPO for its power division will take place in the second half of this year.

In 2013, 1MDB, with liabilities of more than $13 billion, generated cash flow of 860 million Malaysian ringgit ($267.75 million) from operations, far below the annual interest outgo of 1.62 billion. It would have made a 1.85 billion ringgit loss, but for a 2.7 billion ringgit revaluation of its property portfolio.

Opposition leader Anwar Ibrahim was quoted at a news conference in late April warning; "If we continue with this culture of accumulating debts, Najib's 1MDB will fail and become a liability that should be called 1Malaysia's Debt of Billions."

Malaysia’s debt to GDP from tradingeconomics.com

The increasing recourse to accounting magic….

Malaysia's debt-to-GDP ratio stood at 53.8 percent at the end of 2013, central bank data shows, up sharply from 43 percent in 2008 and close to an official debt ceiling of 55 percent, beyond which the government must seek parliamentary approval.

Contingent liabilities, however, stood at 15.9 percent of GDP, up from 9 percent in 2008, bringing total government and government-backed debt to 69.7 percent of the economy, and the off-budget character of 1MDB raises questions.

"It can be viewed as a way to circumvent the 55 percent ceiling on government debt to GDP, while shielding this spending from parliamentary scrutiny," said Prashant Singh, a fund manager at Neuberger Berman in Singapore.

Some important points

-The 1MDB’s investment grade credit ratings essentially departs from the company’s real conditions. Just because the company has been partly owned by the government and whose debt has been partially backed government doesn’t make it 'risk free'. In short, the company doesn’t deserve its investment grade ratings.

This also reveals how credit rating agencies have been mostly remiss or derelict of their fundamental duty: the monitoring credit risks.

-“Investment community assumes it would provide more if needed” means three things: excessive complacency, extreme overconfidence, and the implicit pressure on the Malaysian government to backstop 1MDB’s liabilities. These are signs of Moral Hazard—public taking on more risks in the hope that government will guarantee their actions against potential losses. Creditor’s probably think that the Malaysian government is a perpetual fountain of wealth.

Yet like the Philippines, Malaysia’s government has been draining the much vaunted foreign exchange reserves to defend the currency; the ringgit. This is a sign that there is no such thing as free lunch.

-Because cash generated by 1MDB (860 million ringgit) represents only 53% of interest costs (1.62 billion ringgit), the company resorts to Ponzi Financing dynamics of DEBT IN-DEBT OUT complimented by sale of assets (proposed IPO). This dynamic can only be maintained for as long as interest rates remain low. Yet what is unsustainable won’t last.

-This stirring comment by opposition leader Anwar Ibrahim “culture of accumulating debts” echoes on Malaysia overall debt conditions. Such signifies not only risks for 1MDB or for the government alone but for the entire Malaysian economy as well. Malaysia’s debt stock as % of GDP has even been larger than China! And this has been mostly due to household debt thus the Mr. Ibrahim's association of debt with "culture".

Rising inflation rates and weakening currency which adds to inflation (via import prices) are signs that credit boom days of Malaysia’s bubble economy have reached a maturity phase. Such has been partly reflected on rising 10 year bond yields.

Yet since the Malaysia’s financial system increasingly depends on the rolling over her fast mounting debt, not only will the use of Ponzi financing for both the private sector and for the government deepen or intensify, but accounting skullduggery will most likely serve as another route. The Malaysian government’s debt accounting transfer from official to contingent liabilities in order to dodge the debt ceiling seems like an example.

As Greek historian Herodotus (484-425 BCE) aptly observed in his observation of the Persian empire: (I am quoted this on my latest outlook)

The most disgraceful thing in the world, they think, is to tell a lie; the next worst, to owe a debt: because, among other reasons, the debtor is obliged to tell lies.

But who cares about all these risks which may morph into an ASEAN Black Swan? Don't you see, stocks have been destined to rise forever!

Quote of the Day: Individual Freedom versus Democracy

The democratic process allows people certain freedoms. People do not have freedom to start with. But because people are allowed certain freedoms by the collective process, they think they are free by the individual freedom process of free association. This is not so. That it is not so is evident by the fact that the collective decision-making process takes away freedoms and gives freedoms; and the individual has no say over this except through the voting process. The other road to confusion is historical. The system used to be one of relatively large individual freedom and the scope of collective decision-making was limited constitutionally and by habit, custom and practice. The mythology grew up that the system was one of individual freedom, since voting played so small a role in decisions being made. As time passed and the democratic collectivism became entrenched, people kept right on thinking they had the system of individual freedom, which by then was long gone. And since they possessed a number of what are called personal freedoms still allowed by the collective they thought they still had individual freedom. But they didn’t because the collective had amassed so much power to make laws that any of these freedoms was at the will of the elected representatives, not individual freedoms arising from a system of free association.

To understand the actual system we live by, we cannot start with the set of our observed freedoms and then infer the system’s type. We can’t do this because under both systems, there may be a substantial amount of freedom left in individual hands. Instead, we have to inquire as to the origins of what freedoms we have, that is, the kind of legal system we have, who has the ultimate decision rights, who decides on the freedoms and whether or not we have freedom of association. Freedom of association distinguishes the system of individual freedom from a collective system like democracy or any comparable system of state. If freedoms are decided by individuals, that is not the same as their being decided by voting, which is a collective process. In addition, voting is by citizens many of whom are involuntarily bound into a state, so that the process itself, not only its outcomes, is collective and forcible.

This is from retired finance and economic professor Michael S. Rozeff at the LewRockwell.com

Pentagon’s climate warnings in 2003 turns out to be a bogus

The seemingly unusual heat in the Philippine capital, which has already claimed some lives, has prompted the government to issue warnings on the increasing risks of heat stroke.

And I’ve seen post hoc based comments associating high temperatures to “global warming”. This is a sign of how the public has been hardwired or brainwashed to view temperature changes as "global warming".

Unfortunately, the public doesn't realize it that the dogma of man made global warming continues to take a beating. 

The Washington Times points to a study commissioned by the Pentagon over a decade ago, which warned of the potential havoc that the world was faced from global warming. The prediction turned out to be blatantly inaccurate.

Here is the intro (ht Gary North)

Yet the 2003 report, “An Abrupt Climate Change Scenario and Its Implications for United States National Security,” is credited with kick-starting the movement that, to this day and perhaps with more vigor than ever, links climate change to national security.

The report also became gospel to climate change doomsayers, who predicted pervasive and more intense hurricanes, tornadoes, floods and droughts.

The release of this report is what likely sparked the ‘modern era’ of security interest in climate affairs,” said Jeff Kueter, president of the George C. Marshall Institute, a nonprofit that examines scientific issues that affect public policy.

“It was widely publicized and very much a tool of the political battles over climate raging at the time,” said Mr. Kueter, who sees as “tenuous” a link between U.S. security and climate change.

Prediction versus reality

Under the section “Warming up to 2010,” here are some of the report’s key scenarios, compared with what has transpired:

• By 2005, “more severe storms and typhoons bring about higher storm surges and floods.”

Today: The most recent U.N. Intergovernmental Panel on Climate Change report said it has “low confidence” of an increase in hurricanes or tornadoes. The U.S. is likely experiencing fewer tornadoes compared with 50 years ago, according to data from the National Oceanic and Atmospheric Administration. This year’s tornado season was historically low.

The U.N. report said: “No robust trends in annual numbers of tropical storms, hurricanes and major hurricane counts have been identified over the past 100 years in the North Atlantic basin.”

In December, Roger Pielke, a scientist who has conducted extensive analysis of storm history, told a Senate panel: “There exists exceedingly little scientific support for claims found in the media and political debate that hurricanes, tornadoes, floods and droughts have increased in frequency or intensity on climate timescales either in the United States or globally.”

The U.S. has not experienced a major hurricane in nearly 10 years.

• Global temperatures will increase by 0.5 degrees Fahrenheit per decade and, in some areas, 0.5 degrees per year.

Today: Scientists skeptical of man-made climate change say satellite data show there has been no increase in 17 years. The Environmental Protection Agency, a strong climate change advocate, puts the decade increase at 0.3 degrees.

• There will be more floods, making coastal cities such as The Hague “unlivable” by 2007.

Today: The Hague is still livable.

The United Nations said this year: “There continues to be a lack of evidence and thus low confidence regarding the sign of trend in the magnitude and/or frequency of floods on a global scale.”

• “Floating ice in the northern polar seas is mostly gone during the summer by 2010.”

Today: Arctic sea ice remains. Warming in the polar region has reduced the ice extent, from 2.8 million square miles at its yearly summer minimum in 1979, when satellite measuring began, to 2.1 million square miles in 2013, according to the National Snow and Ice Data Center.

• Sacramento River levees will fail, creating “an inland sea” in California that “disrupts the aqueduct system transporting water.”

Today: There are no inland seas in California.

Oh Professor North also provides as a link where 31,487 scientists from all over the US signed a petition (via PetitionProject.org) stating that…

“There is NO convincing scientific evidence that human release of carbon dioxide, methane or other greenhouse gases is causing or will, in the foreseeable future, cause catastrophic heating of the Earth’s atmosphere and disruption of the Earth’s climate.”

The religion of climate change has been about promoting environmental scare stories to justify funding from the government, aimed at providing “scientific basis” for the political social engineer’s vision of expanding control over society...Or more economic and political repression in the name of environmentalism.

At the end of the day, these scare stories—backing populist politics—turn out to be a myth.

Quote of the Day: The fastest road to bankruptcy in foreign exchange was an economics degree

Thirty years ago economists believed that “purchasing power parity” determined the “long term” currency rate between countries. And economists who became traders kept blowing up by selling the “expensive” currency and buying the “cheap” one. And, if anything, the opposite held: Currencies that were expensive kept getting more expensive. So it became known that the fastest road to bankruptcy in foreign exchange was an economics degree. More analytically, saying “the long term” without attaching a period to it (six months, six years, six hundred years, etc.) is meaningless. The duration is more relevant than the idea that currencies “converge.”

This from Nassim Nicolas Taleb, who along with Mark Spitznagel discuss "inequality, free markets and crashes" at the NationalReview.com

ECB’s Coming QE: ABCP, Interest Rate Cut or Negative Deposit Rates?

The latest melt-UP phase (record run) in mostly developed economy stocks has mostly been prompted by the the European Central Bank’s recent signaling of fresh easing measures which may be announced this June 5.

Here is another sign of financial schadenfreude: the ECB’s Mario Draghi’s induced dilemma for the euro (the euro has been plunging since late April) has extrapolated to a booming Stoxx 50 and the US S&P.

David Stockman at his Contra Corner website explains the possibility of the revival of asset-backed commercial paper (ABCP) as the focal point of ECB’s easing this week. (bold original)

You can smell this one coming a mile away:

The European Central Bank and Bank of England on Friday outlined options to reinvigorate the market for bundled bank loans, which was “tarnished” by the global financial crisis, saying a better-functioning market for asset-backed securities can help boost lending to the private sector, particularly small businesses.

Yes, the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP)—-the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again—- thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year. 

What they are really up to, however, is money-printing and snookering the German sound money camp. That is, the ECB is getting set to launch QE in financial drag by purchasing or discounting ABCP while loudly proclaiming that it’s not “monetizing” any stinking sovereign debt!…

So in clearing the way to “monetization” of ABCP, the ECB is simply heading down the path of Bernanke/Yellen style quantitative easing though a transparent gimmick that may or may not bamboozle the Germans. But it most certainly will succeed in snookering the financial press as the post below from the ever gullible Brian Blackstone of the WSJ clearly conveys.

But here’s the thing. The ABCP market is not a place where hard-pressed business borrowers or consumer’s can find a new source of credit outside the banking system. Instead, it is a financial engineering arena in which banks will have a chance to mint phony overnight profits through an accounting expedient known as “gain-on-sale”. 

What that means is that when credit card receivables or small business loans are “bundled” by their commercial bank issuers and sold into an off-balance conduit which issues ABCP against these “assets”, the life-time profits of these loans can be booked instantly. Indeed, modern technology allows the credit card swipe to be booked as a profit nearly the same nanosecond as it happens, and accounting convention allows the profits from a 7-year car loan issued at 110% of the vehicle’s value to be recorded virtually at the time it rolls off the dealer lot.

Aside from the ABCP, many have been speculating too that the ECB may engage in either interest rate cuts or even adapting a Negative Deposit Rate. At any rate, it’s all about promoting bank credit expansion.

Some charts that has prompted the ECB’s likely actions:

Bank lending remains in doldrums

Eurozone’s disinflation amidst skyrocketing debt levels

The decline in loans has been manifest in money supply growth (left). Unfortunately lower interest rates hasn’t translated to credit expansion

But despite the lackluster bank lending growth, Europe’s leverage loans and corporate debt department continues to sizzle, which has been an important influence to sky bound stock markets.

This comes as Stoxx 600 earnings continue to be dismal.

So again, who says stock markets are about the economy and earnings?

Bottom line:  the du jour central bank policies today, has been to solve existing DEBT problem by promoting even more DEBT.  This is like solving alcoholism by prescribing even MORE intake of alcohol!

Current policies that promote more debt build-up, which have been meant to buy time, will translate to even greater systemic risk that is bound for implosion. 

Of course, the main beneficiaries here are no less than the governments (see huge debt levels above) via interest rates (financial repression) subsidies, the Wall Streets of major economies via inflated balance sheets that keeps their debt burdened banking system afloat and the political economic elites whom are further enriched by inflated asset markets that comes at the expense of society.

Aldous Huxley once warned that “That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.” Central banking policies simply highlight on this.

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

“The most disgraceful thing in the world, they think, is to tell a lie; the next worst, to owe a debt: because, among other reasons, the debtor is obliged to tell lies.”—Herodotus: On The Customs of the Persians

In this issue:

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

-Differentiating Primary from Secondary Cause

-The Link between Typhoon Yolanda and Economic Growth? Coconuts!

-Fishing for Truth

-Construction Slump Amidst a Bank Lending Boom??? Yikes!

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

Sorry but I have to play again the role of the unpopular spoiler.

I am not supposed to write this weekend but recent developments have been compelling enough for me to deliver a shorter than usual outlook.

Differentiating Primary from Secondary Cause

In the realization of what seems as widespread misinformation that has been unquestioningly accepted and imbued by the public as ‘fact’, such requires some counterbalancing.

Let me state my position clearly. I do NOT deny that Typhoon (Haiyan) Yolanda has contributed to the economic decline.

However my position is that the embedded imputation that the deadly and costly storm accounts for as the main source of the unexpected slowdown in the statistical economy or “The relatively slow growth is expected given the magnitude of destruction by typhoon “Yolanda” to agriculture as proposed by Philippine officials has been patently misguided.

Secondary causes or aggravating factors are not the same as the primary driver.

Of course, officials can be slippery enough to deny such association as shown by this newspaper narrative “while provinces directly affected by Yolanda accounted for a relatively small part of the economy, the damage in those areas disrupted supply chains nationwide, dragging down the entire country” 

The following table is from the National Statistical Coordination Board (NSCB) is a reconstruction of the 1^st quarter GDP intended to reveal the relationship between two important factors: the share contribution and the growth rates of each sector, subsector and the GDP-GNI. Since my concern is of the risks from the supply side, I will focus on the statistical data based on the industrial origin of the GDP methodology. All data in this discussion will be based on 2000 constant prices.

The last column represents the growth data as shown in media: 5.7% GDP growth, .9% growth in Agriculture, 5.5% expansion in industry and the 6.8% outperformance of the service sector which lifted the statistical data.

The prior column shows the difference in the context of the distributional share of sectoral performance of the economic pie. The reason I’d like to exhibit the distribution is to examine whether alleged growth has been inclusive or exclusive. Put differently, to know whether growth has been broad based or concentrated.

The blue colored numbers represent the significant gainers, while the red numbers have been the decliners whereas the black numbers are industries that posted marginal changes.

Let me further clarify that a loss in the share means either that the sector suffered losses or other sectors have outweighed the growth performance of the given industry.

We will have to revert back to the table once in a while.

The faithful crowd will likely construe the following as needless caviling. But remember movements in the stock markets have been anchored in the entrenched conviction that the stock market performance equals economic growth. Even more important is the deeply held misperception that the Philippine economy has reached an immutable and irreversible new paradigm.

So a balanced perspective has to be presented to guide the mature audience why the boom should not only be questioned or doubted, but also to show that such has been founded on an unsustainable model that has been destined to crumble.

The Link between Typhoon Yolanda and Economic Growth? Coconuts!

Mainstream media associates the following figures as related to the claim of “disrupted supply chains nationwide”; “Slowdowns were noted in several key sectors. For instance, agricultural output growth slowed to 0.9 percent in the first quarter from 3.2 percent in the same period last year. The manufacturing industry also suffered, growing by just 6.8 percent from last year’s 9.5 percent. In construction, growth slowed to 0.9 percent from 31.1 percent in 2013, dragged down mainly by the private sector.”

Yet media and domestic officials hardly even exerted any effort to explain HOW this supposed association or supply chain links ever occurred. The connection had simply just been presumed or rationalized.

Let us take on Agriculture first.

Agriculture has been reported to have slowed by .9%. Looking at the table, as a share to the overall economy the industry has declined from 11.15% to 10.64% for year on year even when this sector posted a positive growth. The implication is that growth in the other industries outshined agriculture that resulted to its loss of share.

Meanwhile, fishing represents the only subsector of the agricultural industry. Fishing accounts for 16.63% of the agricultural pie in the 1^st quarter data down from 17.3% during the first quarter of 2013.

The reason for this quarter’s share reduction has been because y-o-y fishing economic activity has posted a substantial loss of 3% that virtually chipped away the 1.7% gain of the land based agriculture industry.

Aside from geothermal industries and the “two of the country’s top dollar earners: the Philippine Phosphate Fertilizer Corporation (PHILPHOS) and the Philippine Associated Smelting and Refinery Corporation (PASAR)” according to the NSCB Eastern Visayas Region branch, Region 8 “is rich in natural resources, including vast agricultural lands with fertile soil, abundant water and wet climate.  Among its major crops are palay, coconut, banana, camote, corn, abaca and sugarcane.  It is the country’s second largest producer of coconut and abaca among the 17 regions.  It is also rich in freshwater fish and other marine resources.” (bold mine)

Let us see how Typhoon Yolanda’s impact on Region 8’s major produce affected the national growth during 1^st quarter by looking at the national performance.

Palay grew by 3.3%, coconut suffered a setback of a considerable 6%, banana gained 1.8%, camote and abaca (perhaps under other crops fell by .8%), corn advanced 1.5% and also sugarcane which jumped by 6.1%.

If there has been any major impact on agriculture, it has mainly been conspicuous in the coconut sector. This is understandable given that Region 8 has been “the country’s second largest producer of coconut”.

Yet with national agricultural data suggesting that losses from the Typhoon have been neutralized for MOST of the crops, then this leaves the fishing industry as the possible other link.

Now let us put into context whether the decline in the agricultural industry has been an aberration. If there is one then this would reveal the extent of the damage from the typhoon.

Typhoon Haiyan slammed the Philippines on November 3-11, 2013, that’s about halfway the fourth quarter period.

Yet agriculture ironically posted gains of 2.3% despite the steep decline in the fishing industry at -4.4% at the last quarter of 2013. So from day zero of the storm’s impact going into the end of the quarter from the impact, the last quarter 2013’s growth rate still posted a positive .9% (blue rectangle). Apparently, the 1^st quarter performance seems like carryover of the last quarter performance. So this hardly looks like a deviation.

Notice too that agricultural-fishing industry has been very volatile. 

Even BEFORE to the storm, specifically during the second and third quarter of 2013, the main agricultural sector posted marginal loss (-.9%) and a very much slower (+.3%) than the 1^st quarter 2014 gains (1.7%). This has also been reflected on the gross value added -.2 and .3, respectively as against +.9%. 

The crowd may blame it on Typhoon “Bopha” Pablo that struck in November 25-December 9, 2012, which Wikipedia.org considers as the most destructive. But this wouldn’t square with robust 3.2% annualized gains during the first quarter of 2013.

So the post Typhoon Yolanda performance has even been STRONGER than the two quarters of output preceding the advent of the calamity.

In short, except for the coconuts, most of the attributions to Typhoon Yolanda as the main source of slowdown in the agricultural sector looks more like a post hoc ergo propter hoc fallacy.

Fishing for Truth

Let us proceed to fishing.

Based on the data from Philippine Fisheries Development Authority, commercial fishing volume of fish unloading in the first quarter on major fish ports* has shown an 8% growth in terms of metric tons (left pane). Note there has been no major port from Region 8.

Metro Manila’s Navotas Fish Port Complex (NFPC), which posted a decline of 5%, has been toe to toe with General Santos Fish Port Complex (GSFPC) whose growth offset the loss in Navotas, as the leader for the largest drop off point for commercial fishing.

This is in contrast to processed products which posted a sharp a decline. The reduction of output in Zamboanga can be traced to the three month fish ban on sardines and red herring.

*Navotas Fish Port Complex (NFPC), Sual Fish Port, Lucena Fish Port Complex (LFPC), Camaligan Fish Port, Iloilo Fish Port Complex (IFPC), Davao Fish Port Complex (DFPC), Zamboanga Fish Port Complex (ZFPC) and General Santos Fish Port Complex (GSFPC)

There are two other categories in fishing; this is the field of municipal fisheries and aquaculture. The latter seems the most likely candidate for Region 8’s potential given the description of “rich in freshwater fish”. Unfortunately I don’t have access to the other data to determine the depth of link between Region’s 8 contributions to the national economy in the context of these areas.

But such data would not be necessary. The region’s GDP would be enough.

If we look at Region’s GDP based on NSCB data, in 2011, the fishing sector contributed to only 4% of the region’s output. Region 8’s fishing output represented about 4.6% of the national fishing industry (see page 9 of the link) for the same period. So it would be difficult to explain how 4.6% will have a material spillover effect on the 95.4%.

If the far larger agricultural sector, where Region 8’s share of the national has been at 5.67% based on 2011 data, has been outweighed by the national performance, then the same dynamics should apply to the much smaller fishing industry. Therefore the decline in the fishing industry must have been less likely from Region 8 but from elsewhere.

Meanwhile, the manufacturing sector accounts for the largest share of the region’s economy at 26.8% in 2011. From the national level, the sector’s contribution has been a puny 3%! So I am also at a loss to see or comprehend how 3% would have “disrupted supply chains nationwide”.

The same holds true with construction industry where in 2011, the sector generated 5.3% of the region’s output. In the context of the national level, the region’s construction activity only accounted for 2.63% level in 2011. So to assume that 2.63% would have a significant supply chain drag on the national level would seem quite perplexing for me.

I hope officials can enlighten us on this supposed causal chain of flows. But I suspect that they won’t.

I am even more confused to see how construction has not taken off in the region despite the reported whopping 34 billion peso worth of donations which accounts for 22% of the 2011 regional GDP. 

What happened to all those contributions?

Construction Slump Amidst a Bank Lending Boom??? Yikes!

Both media and officials have sparsely treated the unforeseen plunge in the construction industry which obviously has been meant to downplay the message.

The construction activity on the national level has shriveled to a still positive but miniscule .9% growth. The public’s sector’s substantial 22.3% gains have barely lifted the industry from an evolving slump! This is because of the astonishing 6% dive by private sector spending which provided the heft of construction activities at 77% share in April. 

Yet with buzzing of the construction activities going on here in the metropolis, how can this be?

Has government construction spending been ‘crowding out’ private sector spending or has government been using resources at the expense of the private sector?

Viewed from annualized q-o-q changes from 2012, each time private sector grew, the public sector contracted and vice versa (left pane).

Such are signs of the tradeoff between the competing use of resources by the private and the public sector.

Nonetheless, what seems troubling is that the deterioration of private sector spending seems to have been mirrored in the in the decline in the gross value added in the construction industry, which apparently peaked in Q4 2012. This reveals an ongoing loss of productivity coming in the face of a supposed boom.

Even more baffling has been the still blistering pace of bank lending growth to the construction and real estate sectors.

The drop in construction activities has been rationalized as government tightening.

Media quotes Philippine officials as saying that “prudential measures implemented by the Bangko Sentral ng Pilipinas (BSP) aimed at keeping banks’ exposure to the sensitive real estate sector could have constrained lending to property companies”

Perhaps they are right.

Bank lending to the construction industry fell from an average of 51.82% [FIFTY ONE PERCENT] in the 1^st quarter of 2013 to an average of 46.64 [FORTY SIX PERCENT] in the first quarter of 2014 (right window)! Despite the 5% drop, FORTY SIX percent would still be about SEVEN times the economic growth rate of the 1^st quarter! Some constrain huh?

And this juggernaut in bank credit expansion to both the real estate sector and construction industry has still been apparent based on the latest April BSP lending data.

Bank lending to the real estate industry still hovers at 20% (20.18% in April; see left pane) while construction loans have fallen to 40.53% (FORTY Percent).

This comes even AFTER the April 4^th implementation of the first series of the twin One Percent increases in the banking system’s reserve requirements.

As a side note: I told you so (!), reserve requirements under the modern central banking system will barely constrain bank lending. General loans even climbed to 18.8% in April (y-o-y) from 18.07% last March. The BSP and the government will not tolerate the end of the subsidies to the government from financial repression policies. They have been incredibly HOOKED to it.

This validates my view of the bluff pulled by the BSP which has been embraced by the clueless and gullible public.

Well folks, that’s how the government defines “macro prudential” or “keeping banks’ exposure to the sensitive real estate sector” constrained.

But don’t worry, the public or the crowd so agrees with them.

Yet despite the FOURTY SIX percent bank issued loans to the construction industry and TWENTY percent loans to REAL ESTATE companies, PRIVATE sector construction output FELL SIX percent???

Huge loans producing negative growth, why? What’s been going on??!!

Not only has bank lending been roaring as output have been in a sharp decline in the construction industry, money supply as of April continues to stagnate(!), as shown by the chart above, thereby galvanizing my suspicions of a fast expanding use of debt in-debt out.

No systemic risk eh?

Let me tell you that the recent downturn in the construction industry may represent the initial signs of fissure from stagnating money supply growth. If these events persist, as stated last week, then this will mark the process reversing this illusory boom where the new paradigm will be faced with gravity from planet earth.

Going back to the GDP table, it has been notable that the drop in the share of the construction sector has more been covered by the gains of the real estate sector. Notice too that the share of the bubble sectors (excluding the hotel) have gained from 38.27% to 38.38% as the share of agriculture, electricity, and others have shrunk.

This again translates to a growing concentration of risks.

Watch it though, the trade (wholesale and retail) sector seem to be showing signs of fracture! While y-o-y growth posted 5.5%, the share of trade has contracted along with the construction industry.

Hmmmm…

At the end of the day, massaging of data would hardly bring about the relevance or connection between the partialities of Typhoon Yolanda—bank ending “macro prudential measures” rationalization against the slowing economic growth.

Oh, the Phisix fell 2.4% this week for its first official correction.

Eyes on money supply growth now!

Expect euphoria to segue into a deep acrimonious denial phase. This means that IF the statistical economic slowdown persists, then finger pointing will become the du jour talking point. There will clarion calls by the public for the government to do more and more interventions that will only deepen the predicament.

Let me end with a quote from English enlightenment writer François Marie Arouet or more popularly known by his nom de plume “Voltaire” (1694-1778)

"Prejudices are what fools use for reason."

Enjoy the weekend!