BSP 4Q 2018 Consumer Expectations Survey: The Largest Collapse Since 2007!

"...[A] fool cannot be protected from his folly. If you attempt to do so, you will not only arouse his animosity but also you will be attempting to deprive him of whatever benefit he is capable of deriving from experience. Never attempt to teach a pig to sing; it wastes your time and annoys the pig." -- Robert A. Heinlein, American Writer

In this issue

BSP 4Q 2018 Consumer Expectations Survey: The Largest Collapse Since 2007!

-BSP Survey: The Largest Collapse in Consumer Expectation Since 2007! The Economic Linkage

-The BSP’s Consumer Survey from the Perspective of the CPI, Credit Flows and Domestic Liquidity

-If Consumer Spending Falls, What Happens to the Bubble Industries? BSP’s Business Sentiment Survey Also Skids

BSP 4Q 2018 Consumer Expectations Survey: The Largest Collapse Since 2007!

BSP Survey: The Largest Collapse in Consumer Expectation Since 2007! The Economic Linkage

The Bangko Sentral ng Pilipinas issued a very interesting Consumer Expectations Survey for the 4Q 2018 and 1Q 2019:  (bold mine)

Consumer outlook continued to weaken for Q4 2018, as the overall confidence index (CI) declined to -22.5 percent from -7.1 percent in Q3 2018. In particular, the current quarter CI registered the lowest reading back in Q4 2014 and posted the largest drop by 15.4 percentage points since the nationwide survey started in Q1 2007. The negative index indicates that the pessimists outnumbered the optimists for Q4 2018. The CI is computed as the percentage of households that answered in the affirmative less the percentage of households that answered in the negative with respect to their views on a given indicator. A positive CI indicates a favorable view, except for the inflation rate, the peso-borrowing rate, unemployment and change in prices, where a positive CI indicates the opposite. The overall consumer CI measures the average direction of change in three indicators - overall condition of the economy, household finances, and household income.

From -7.1% to -22.5% or “the largest drop…since the nationwide survey started in Q1 2007”? That was a thundering crash!

Respondents attributed their bearish outlook during the current quarter to the following: (a) higher prices of commodities, (b) low salary/income, (c) increase in household expenses, (d) no increase in income, and (e)upsurge in the number of unemployed persons. Respondents also noted the occurrence of typhoon and other calamities in Q3 2018 as reasons behind their weaker sentiment for the current quarter.

So consumer confidence had been afflicted by the inflation, lack of jobs and inadequate income… 

The less favorable consumer sentiment was carried to the subsequent reference periods as the next 3 months CI reverted to negative territory at -0.8 percent (from 3.8 percent in the previous quarter) while the next 12 months CI, although remaining positive, declined to 10.7 percent from 13 percent a quarter ago. Similar to the current quarter, the consumer outlook was less buoyant for the next quarter and the year ahead due to expectations of: (a) higher prices of goods, (b) low salary or income, (c) rise in expenditures, (d) no increase in income, and (e) high unemployment rate.

So the morose Q4 outlook percolated into the future (1Q 2019 and 3Q 2019).

I am no fan of surveys since they reveal not of the individual’s actual actions, but of expectations that may shift at the moment when individuals act.

Moreover, in the psychological prism, surveys usually incorporate social desirability bias or where respondents express sentiment designed to be “viewed favorably by others”.

In the economic context, consumer surveys are supposed to exhibit the Keynesian “animal spirits” or the confidence level that drives people’s actions (consumption savings or investments). If you wake up feeling good, you may go on a spending binge! And if a large number of people do so, the GDP grows! Or the opposite.

Surveys also form part of the rational expectations theory whereby, according to Investopedia.com, “people make choices based on their rational outlook, available information and past experiences.”

The general idea of these theories has been predicated on measuring and nudging of people’s animal spirits or market expectations towards the right direction. It assumes that actions of authorities can only be beneficial at most and neutral at least.

Moving on the survey, here are the reasons why it caught my attention:  (figure 1, upper window)

1. The plunge in consumer sentiment represented an existing trend

2. The current data exhibit an acceleration of the decay or that the downtrend has been worsening.

3. Other economic data seems to support the BSP’s survey

Let’s dive into them.

Figure 1

While economics is supposed to be value-free, it would be hard to detach political events with economic data.

Has it been a coincidence that consumer sentiment peaked upon the advent of the incumbent regime in 3Q 2016, cascaded from then, and collapsed in 2018?

Has it been a fluke that the Philippine Statistics Authority’s (PSA) per capita on Household Final Consumption also reached its zenith in Q2 of 2016, turned south and has registered quicker declines in 2018? (figure 1, lower window)

Has record deficits and the big government bubble been “crowding out” the consumers?

Has funding and resources been diverted away from consumer goods and consumer goods related investments towards the government to spur the depletion of the consumer’s purchasing power?

What are excise taxes and expanded VAT? Are these not consumption taxes? Isn’t it that “when you tax something you getless of it (law of demand applied to taxes)?

So have the present policies been designed to redistribute wealth from the consumers to the government?

Ironically, the PSA tells us that the employment rate is at the near-record high of 5.0% in October. However, the BSP survey reported otherwise.  Aside from price inflation, the principal reasons for consumer gloom were joblessness and inadequate income. The SWS’s 3Q jobless report also contradicts this claim.

I can only surmise that the PSA calculates their employment data based on the Philipps Curve. The Philipps Curve states of the inverse relationship between inflation and unemployment such that “with economic growth comes inflation, which in turn should lead to more jobs and less unemployment” (Investopedia.com)

Of course, the stagflation era of the 70s debunked the Philipps Curve. But it remains popular because of the political redistribution embedded in it.

It is for this likely reason the BSP’s survey clashes with the PSA. People could be saying differently from that of what the PSA’s models say.

And it has not just been per capita household spending, per capita GDP also partly reflects on such dynamics.

The pinnacle of the per capita GDP was in 2013. It has been downhill since. Though it rebounded in 2015, per capita GDP culminated its recent cycle with the onset of the current leadership. Since then, the decay in household spending gnawed at the per capita GDP.

So if consumers were pessimistic how would it affect their spending patterns?

Again from the BSP (bold mine)

The spending outlook index of households on basic goods and services declined to 42.3 percent for Q1 2019 (from 45.7 percent in the previous quarter’s survey results). This suggests that while more respondents continue to expect higher spending on basic goods and services, the number that said so decreased compared to a quarter ago, indicating that growth in consumer spending could slow down in the near term. Fewer respondents expected increased spending on food, non-alcoholic and alcoholic beverages, clothing and footwear, house rent and furnishing, water, electricity, fuel, communication, and restaurants and cafes.

How about the big-ticket items?

The percentage of households that considered the current quarter as a favorable time to buy big-ticket items declined to 24.5 percent from 26.4 percent recorded a quarter ago. The less sanguine outlook on buying conditions was evident across the three big-ticket items and is attributable to: (a) the shift of respondents’ spending priority on food and other basic needs (from big-ticket items), (b) high prices, and (c) low/insufficient income.  Meanwhile, the percentage of those who intend to buy big-ticket items slightly decreased but remained broadly steady due largely to the steady buying intentions for real estate and weaker buying intentions for motor vehicles and consumer durables.

There will be less spending on groceries, department stores, appliances, cars and anything else but real estate!

If the BSP should reflect on actual actions, in the hope of increases in future spending, consumers are going to pare down consumption to gamble on real estate!

Such would signify a blatant misperception premised from expectations of generating “something out of nothing” at its finest!

The BSP’s Consumer Survey from the Perspective of the CPI, Credit Flows and Domestic Liquidity

Figure 2

If the surge in CPI backed by the temporal stimulus from cuts in income taxes boosted sales revenues of the retail industry in the three quarters of 2018, the plunge in November’s CPI to 6.0% from October’s 6.7% should likely deliver the opposite scenario. (figure 2 upper window)

Aggregate sales of listed Puregold, Robinsons Retail, SSI Group, Metro Retail, and Philippine Seven rose 13.15% in Q3 from 12.29% a quarter ago. (figure 2 middle window)

Paradoxically, because of mandated fare increases in public transportation and the likely lagging effects of food prices of food retailers, the CORE CPI surged to 5.1% in November from 4.93% a month ago. 

Restaurant CPI increased to 3.16% in November from 3.07% while Transport CPI jumped 8.91% from 8.75%. The latter was mainly from mandated fare hikes on fares of public utility transports.  A rollback on the latter would contribute to more decline in the CPI.

As I have been saying here, the yield curve of Philippine Treasuries has predicted the CPI slowdown.

The cynicism expressed by consumers in the BSP survey appears also backed by financial flows.

The growth of M1 (currency in circulation and peso demand deposits) dived to 8.92% in November, a January 2013 low from 11.4% a month ago.  (figure 2, lower window)

When cash in circulation has been materially slowing, how will cash-based transactions be financed? 

The growth in the banking system’s consumer credit has also been slowing meaningfully, growth in credit card loans eased to 21.6% in November from 22.19% a month ago. Bank credit growth for auto purchases dived to 14.23% in November from 21.91% last month. That’s a 768 basis points plunge!

The growth in salary loans climaxed in the 3Q of 2016. In November, salary loans (-.86%) registered its four straight monthly contractions! (lower window)

A considerable deterioration in consumer spending has been evident in both cash and credit conditions.

Figure 3

If income and job growth have been in a slack and if consumers have been taking up less credit, could consumers be drawing from savings?

That could be possible. Peso deposit liabilities growth fell anew in October to 9.49% from 10.38% in September, the lowest rate since December 2015. (figure 3 upper window)

The drop in peso deposit liabilities continues to dovetail with domestic liquidity conditions. 

What continues to plague the banking system’s liquidity vacuum? The banking system’s industry credit portfolio continues to grow at a furious pace (+18.71% in October, 07.36% in September). (figure 3, middle window) Why has such growth not been converted into money supply growth? Because of surging closet NPLs?

Meanwhile, the growth in foreign currency deposits increased by 6.74% in October from 5.61% in September. (figure 3 upper window)

The decline in the banking system’s cash and due banks eased last October to -9.32% from -11.86% in September. The growth of cash and due banks to deposits ratio improved slightly to 19.69% in October from 19.36% in September. The growth of liquid assets to deposit ratio also rose marginally to 46% from 45.66% over the same period. (figure 3, lower window)

That said, consumer sentiment plus CPI plus credit flows and domestic liquidity conditions points to a substantial downturn in consumer spending activities.  

All of these, of course, have been predicated on the accuracy of the government’s statistics.

If Consumer Spending Falls, What Happens to the Bubble Industries? BSP’s Business Sentiment Survey Also Skids

Nominal (N) GDP can be expected to meaningfully slow. The retail sector should bear the brunt of the slowdown in gross revenues.

Improvements in margins will not be a guarantee, considering the steepness in the increase in street inflation. Retailers may have restocked at higher prices. If retail prices remain sticky, this would exacerbate the shortfall in demand.

Repercussions from the slowdown in the retail industry should hurt both the banking and the real estate industry, despite the survey’s assertion that consumers will continue buying them.

Figure 4

With the “race to build supply” industries anchored on the trajectory of a perpetual robust growth, what happens if the consumers begin to increase demand for cash or liquidity?

And considering that the industry has been one of the principal absorbers of credit, what happens when demand slows?

Previously bank credit to the trade sector grew even as the consumer portfolio slowed, that divergence appears to have been resolved. Divergence became convergence.

Bank lending to the trade sector slowed to 19.91% in November from 22.71% a month back. (figure 4 upper window)

Even more, if consumers pullback, what happens to the growing imbalance between the discrepancy in the trade GDP/real GDP which continued to grow while consumer GDP/real GDP continues to fall? Will excess supply re-emerge and transform into losses that diffuse into credit issues for the banking system? How about bad loans of consumers? (figure 4 middle window)

Finally, it’s not just consumers that have turned glum. Business sentiment, according to the BSP’s Business Survey, has also become bleak. (figure 4 lower window)

From the BSP: (bold mine)

Business outlook on the economy turned less optimistic for Q4 2018, with the overall confidence index (CI) declining to 27.2 percent from 30.1 percent in Q3 2018, the lowest level since Q1 2010. This means that the number of optimists declined, but continued to be greater than the number of pessimists during the quarter. The confidence index is computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respect to their views on a given indicator.

Despite the expected uptick in demand during the Christmas season, business outlook was less buoyant for the current quarter due to (a) higher inflation driven by rising raw material costs and global oil prices,  (b) weakening peso, (c) higher interest rates (i.e., borrowing costs), (d) decrease in volume of sales and orders, and (e) lack of supply of raw materials. The sentiment of businesses in the Philippines mirrored the less buoyant business outlook in the U.S., U.K., Australia, France, Hong Kong, South Korea and Thailand. However, business sentiments in Canada, Brazil, Hungary, and the Netherlands were more upbeat.

Respondents expected the less bullish business conditions to continue for the quarter ahead (Q1 2019) as the index remained positive, but lower at 29.4 percent from 42.6 percent in the previous quarter. This is the lowest next quarter reading since Q3 2009. Respondents attributed their weaker outlook for Q1 2019 to the usual slowdown in consumer demand after the holiday season. Moreover, sentiment of firms was tempered by expectations of a peso depreciation, which increases the costs of imports, as well as higher inflation and interest rates.

Aside from price instability and interest rates, ah, a “decrease in volume of sales and orders”. So deficiencies in demand have emerged!

Will the dour consumers drag the less sullen sentiment of businesses? Or will business sentiment pull up the consumers?

We certainly live in interesting times.

October Fiscal Deficit Shoots to a New Record! Deficit-to-GDP ratio Swells in Good Times, What Happens on Bad Times?

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard—Alan Greenspan

In this issue

October Fiscal Deficit Shoots to a New Record! Deficit-to-GDP ratio Swells in Good Times, What Happens on Bad Times?

-Record Fiscal Deficit Equals Greater Government Control of the Economy and Rising Risks of a Fiscal Crisis

-How Does One Analyze Financially the Transition to a Neo-Socialist State? Credit Allocation Determined by Politics

-The Carrying Costs of Spend, Spend and Spend Elixir: Accelerating Credit and Sovereign Risk and Peso Devaluation

-The Contortion of Keynesian Economics: Bulging Deficit-to-GDP Ratio in Good Times; With Emergency Policies in Place, What’s Left When The Tide Runs Out?

October Fiscal Deficit Shoots to a New Record! Deficit-to-GDP ratio Swells in Good Times, What Happens on Bad Times?

Record Fiscal Deficit Equals Greater Government Control of the Economy and Rising Risk of a Fiscal Crisis

Figure 1

With 10-months through 2018, the National Government’s (NG) fiscal deficit zoomed to Php 483.1 billion as public spending outpaced collections immensely. The 10-month deficit has raced 25% above last year’s annual rate with two months to go! (figure 1 upper window)

Though revenues recovered to jump by 20.33% year-on-year from September’s 1.13%, public expenditure growth sizzled at 35.16% in October from 26% a month ago. As such, October deficit more than doubled (174%) at Php 59.87 billion from 2017’s Php 21.8 billion.

The Bureau of Internal Revenue (BIR) collection growth bounced 15.61% in October from the -7.68% it registered in September. It was, however, revenues from the Bureau of Customs (+30.38%) and Non-Tax Revenues (+31.97%) that provided the main boost for the total revenue growth in October. BIR, BoC and Non-tax revenues had a revenue share of 66.78%, 22.67% and 9.93% of the total.

Following its peak in late 2017, tax revenue growth has been decelerating in line with the slowdown in the growth of total bank loans. The bounce in tax revenues in October appears to have echoed the rebound in the bank loans (+18.36%) in the same month from 17.42% in September and 18.83% in August.

Figure 2

In the 10 months, 2018’s total collection growth of 17.53% was the second highest since 2011’s 17.88%. However, despite a broader tax base and substantial increases in excise taxes, BIR collection growth of 11.6% trailed marginally 2016’s 11.69%, and lagged widely 2014’s 18.84%, 2013’s 20.36%, 2012’s 11.99% and 2011’s 14.29%. 

Again, much of the growth in total revenues have been from collections by the BoC from the record imports that has brought about unprecedented trade deficits, and from non-tax revenues. And record imports have been much about public and private sector spending related to build, build and build. To this end, the government’s aggressive deficit spending produced a twin deficit: trade and fiscal deficit.

It is for this reason that TRAIN 2.0, from the perspective of the NG, must be onboarded.

NG collections would have to be kept at a targeted level to sustain the projected rate of fiscal deficit. Otherwise, a shortfall in total collections would unexpectedly widen the fiscal gap thereby requiring a disproportionate amount of funding.

And the risk of a fiscal crisis increases in the event of an unanticipated blowout in the spending-revenue gap.  “Fiscal crisis” is a term coined by James O'Connor who denoted of a “structural gap” between public revenues and expenditures that leads to an economic, social and political crisis (encyclopedia.com).

Though studies like the IMF observed the emergence of such crises based on plummeting growth and unemployment and or a surge in inflation; from my perspective, the financing the gap should be more of a concern.  Access to local savings through the banking system, domestic and international capital markets will play crucial roles in the bridge financing of the accretion of such deficits. 

The 10-month data tells us that the escalation in public spending rather than a shortfall of revenues has engendered such a historic deficit.

As such, the aggressive pace of public spending has resulted in the government’s direct share of the estimated 10-month GDP to surge to 20.18%, the highest ever since 1986. Such figures exclude indirect expenditures or private sector spending on public projects (such as Public-Private Partnerships or PPPs).

Such frenzied rate of public spending ventilated through unmatched deficits reveals of the structural shift in the growth model of the Philippine political economy.

The Philippines has rapidly been moving away from a market economy and has transitioned to a socialist (state) economy, patterned after China. The neo-Maoist model.

And since government spending means competition for resources and funding, the bigger the share of the government, the lesser resources and funds are made available to the private sector. And with a lesser output from the diversion of funding and resource consumption to the government, street prices can be expected to rise, as it has.

How Does One Analyze Financially the Transition to a Neo-Socialist State? Credit Allocation Determined by Politics

How does one model or analyze such a transition? The shift towards political directed economic activities would render financial ratios, like PE, Price to Sales, ROIC and etc., obsolete!

For instance, instead of business viability, the principal determinant of credit quality would be about political connections. 

Politically instituted monopolies would emerge as a result of business barriers and the political picking of winners and losers.

Legislative bills purportedly aimed to “open” the economic backdrop to a business-friendly environment would be all a sham for as long as the government continues to shanghai the economy’s resources and finances.

Moreover, sustained intrusion through various political channels such as regulations, mandates, licenses, prohibitions, taxation and more, cements the control of the economic sphere by politicians, bureaucrats and special interest groups.  

It’s like the alleged deregulation of the Telecom industry in 1995 (RA 7925) which ended up with an oligopolistic structure, primarily because of operational interventions. Yes, on the surface, the government deregulated the industry, but the stranglehold of the industry increased resulting in the elimination of competitors by operational interventions.

And the same politically determined operational obstacles have been used to displace alleged competition to usher in the entry of China Telecoms as the third player last month. Fitch Solutions wrote: “The selection of China Telecom, which follows the almost immediate disqualification of the two other bidders, hints at the government’s bias towards Chinese involvement in the telecoms sector, and is a clear sign of Duterte’s warming posture towards China.”  It was more than a bias, it was a setup. [See Has the Choice for the Third Telco Player Been Rigged? Will a National Social Credit System be the Next Telecom Agenda? (November 11, 2018)]

As the web of political control expands over the economic sphere, the distribution of economic opportunities would become more politicized at the expense of the marketplace.

Even the allocation of banking loans has become slanted towards industries favored or controlled by the NG.

Figure 3

Bank loans to the politically favored or controlled sectors grew robustly as these were the principal contributors to the improvement in bank lending in October, namely construction (39.08% in October, 37.04% in September), public administration and defense (28.19% and 27.52%), education (25.95% and 23.86%) and financial intermediation (32.01% and 31.01%). Only loan growth to the transport industry fell 17.73% and 22.03%.

Of course, there will always be a tradeoff. The opportunity costs of rewarding political sectors come at the expense of the consumers. Bank loan growth to the retail sector slipped to +19.91% in October from 22.71% in September and have now caught up with the sharp downturn in consumer loans +14.61% in October and 18.19% a month ago.

If the growth of cash in circulation (m1) collapsed in October (+8.92% from +11.4% a month ago) and where credit card spending slowed (+21.6% and +22.2%), how did consumers finance their spending? Salary loans continued to contract for four straight months!

The consumer economy paid the price of redistributing benefits to the political and politically affiliated sectors.

So what should happen to the frenetic race-to-build supply for the consumers?

The Carrying Costs of Spend, Spend and Spend Elixir: Accelerating Credit and Sovereign Risk and Peso Devaluation

However, there is no such thing as a free lunch.

The political spending elixirs that should serve as the nation's economic deliverance requires funding.  

Thus, spend, spend and spend has been supported by a mixture of debt and the BSP’s monetization.

Figure 4

An update of the public debt data has yet to be published by the Bureau of Treasury.

Nevertheless, debt servicing of public debt swelled to Php 649.72 billion running at a rate to reach possibly the record high of Php 854.374 billion in 2006. The share of debt servicing to revenues jumped from a record low of 19.83% in the year 2017 to 27.55% in the 10-months of 2018.

With the burgeoning amount of debt supported by increasing interest rates, debt servicing can be expected to keep moving in pace with the record growth of deficits. One of the carrying cost to the economic deliverance from spend, spend and spend elixir would be the deepening leveraging of the taxpayer’s balance sheet and its attendant risks.

For as long as there will be access to credit or someone’s savings or income (via tax), the spending panacea can go on.

Naturally, the NG can’t use an all debt financing because it would siphon away liquidity in the private sector. If the private sector, the principal source of funding gets drained, from where will they get funding? That’s the reason why central banks exist.

To leave some crumbs to the private sector, the BSP assumes the other role of providing finance to the intensifying public sector spending.

From the BSP’s October domestic liquidity report: “Net claims on the central government grew by 11.3 percent in October, broadly steady from 11.4 percent (revised) in the previous month.”

The BSP allotted Php 17.09 billion in October for a 10-month aggregate of Php 207 billion or about 47.25% of the total deficit during the said period, the second largest amount of monetization by the BSP since 2015. The BSP launched its version of Quantitative Easing in 2015.

So the other carrying cost to the economic deliverance from spend, spend and spend elixir would be to inflate the system at which comes at the sacrifice of the peso, or the citizen’s purchasing power

The Contortion of Keynesian Economics: Bulging Deficit-to-GDP Ratio in Good Times; With Emergency Policies in Place, What’s Left When The Tide Runs Out?

The 10-month record deficit of Php 483.1 billion is just Php 40.5 billion shy from the NG's target of Php 523.6 billion

Christmas spending such as the published Php 25k bonus to government employees and other yearend earmarks can easily push such deficit beyond the official annual target.

Revenue conditions will play a critical role. If collections underperform in the face of programmed increases in expenditures, deficits will be pushed further away from the target. That said, how the NG finances this will be projected into the interest rates, the CPI, debt levels, the economy, and earnings.

So far, in the thrust to finance the record NG deficit and to clamp down on the CPI, the BSP has been tightening liquidity in the system directed at the private sector. The sharp fall of M3 and consumer credit demonstrates such transfer as shown above.

While tax collections have held ground in October, the effect of such tightening may lag.

In the last twenty years, deficit-to-NGDP ratios of over 3% occurred during downturns in revenues as an outcome of economic slowdown.

And public expenditures were ramped up in only times of economic stress, such as the Economic Resiliency Plan (ERP) in 2009, put in place as a stabilizing force against the Great Recession. Part of the ERP was the transitory Php 330 billion fiscal stimulus (4.1% of GDP)

A gradual withdrawal of fiscal stimulus segued as the economy gained momentum.

As I have been saying here, this time is different.

Fiscal stimulus used against adverse external influences has become the principal development model used to attain economic growth. The former, known as Keynesian economics, has been reinvented.

At the end of 2018, fiscal deficit should breach past 3% of GDP target even with the headline GDP hovering at 6% and above. (chart shows 1986-2017 only). Again, traditionally, 3% deficit to NGDP ratio coincided with falling real GDP. Not today.

The Philippine economy has been surviving on emergency measures via monetary stimulus (record QE, record low interest rates) and unprecedented fiscal stimulus.

Diminishing returns from these measures have become apparent even when no downturn or crisis has yet transpired. The peso has fallen, market rates, as well as, policy rates have increased and debt continues to mount.

Remember this? (FSCC’s FSR 2017)

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise.

What policy tools would be left for our policymakers to use, should a genuine shock (whether of internal or external origin) occur?