Does Government Spending Boost the GDP? PSA’s GDP Data Says No!

Of all tyrannies a tyranny sincerely exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience—C. S. Lewis

Does Government Spending Boost the GDP? PSA’s GDP Data Says No!

The PSA revised the base period of the GDP from 2000 to 2018. This change led to increases in the real GDP numbers in three of the four quarters in 2019 and the annual GDP from 5.9% to 6%. (Figure 1)

Boosting the GDP is so simple, just change the assumptions or the methodology, or tinker with deflator, or manage the inputs, to show what is intended.  As Professor Ronald Coase once wrote, “If you torture the data long enough, it will confess.”

According to media and the establishment, please blame the COVID-19; the Philippine GDP posted a -.2% change in the 1Q, its first contraction since Q4 of 1998!  

Figure 1

Yet, the total infected as of May 12th has only been 11,350 compared to an estimated population of 109 million with a median age of 25.7.

Simply put, total infections account for an infinitesimal .01042% of the population! Importantly, the young demographic should translate to reduced deaths from Covid19! Data from the Department of Health, John Hopkins, and Worldometer exhibit almost similar distribution of mortality concentrated on the elderly. 

So instead of protecting such groups, a one-size-fit-all policy was forced upon the nation, which effectively relegated the economy into suspended animation!

And with the Luzon Enhanced Community Quarantine (ECQ) of the National Capital Region extended until May 15th, albeit (relabeled as Modified) this extrapolates to 77-days since its inception, a day more than the duration of the Wuhan, Hubei lockdown, which commenced on January 23 and lifted on April 8, or a 76-day quarantine! NCR has a 38% share of the GDP (2018).

As a side note, because of the sudden spike in COVID-19 cases, the Wuhan government announced that it would implement universal testing.

That said, won’t a decrease in the standards of living or an increase in poverty make the population more vulnerable not only to COVID-19, but to other health risks?

Back to the GDP.

And here’s a quirk on the data.

If the GDP grew by 6% each in January, February, and in the first half of March, this entails only a 30% drop in the second half that led to 12.05% contraction in March that expunged the two and a half months of GDP growth.  

Yet, the Luzon Enhanced Community Quarantine, which, again, started in mid-March, involved also many provinces and cities outside the region.

With Luzon accounting for nearly 70% of the overall GDP (2018 Regional GDP) as the baseline, the economic shutdown meant that the national economy must have suffered more than the published national accounts statistics.

Regardless of the accuracy of the GDP statistics, that government spending is the elixir to economic development has been the mantra embraced by the consensus even before the COVID-19 induced crisis.

Now, public spending will rescue the economy from the crisis, so they say.

Yet even from the Philippine government’s Philippine Statistics Authority national account data, this would seem like a hollow claim.  

Figure 2

Even before this shutdown, the household consumption data has been under pressure.

The annual GDP elaborates on this diminishing role of household consumption. In contrast, public spending has been revving up. Though both have been intact since 2001, these trends, signifying a shift towards public spending, has accelerated since 2016.

Reinforcing this view is the ratio of the share of household consumption to GDP relative to the share of the government spending to GDP. The reduced role played by household consumption, effectively, dragged the GDP since 2012, but again intensified from 2017 onwards.

Figure 3

The per capita data exhibits a much better angle.

The household consumption topped in Q2 of 2016, then, traded at the lower bound of the range since it hit bottom in Q3 2017.  The GDP per capita data resonated with this entropic motion. But then, the economic shutdown broke that floor in the 1Q. Not so with government spending.

It followed Ernest Hemingway’s two modes to bankruptcy: gradually, then suddenly! 

The household-GDP correlation tells us that the larger the government spends, the lesser disposable income is made available to private-sector households.  

As the great Austrian economist, Ludwig von Mises warned,

The fashionable panacea suggested, lavish public spending, is no less futile. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from commercial banks, it means credit expansion and inflation. Then the prices of all commodities and services must rise, whatever the government does to prevent this outcome.

Or, through the crowding out, household consumption represents the opportunity costs of increased public spending.

From the mainstream viewpoint, the fiscal multiplier is less than one.
 
And there’s more.  

Figure 4

Despite the spending downtrend, households appear to have been escalating the use of credit to bolster their consumption.

Credit usage rocketed by 40.14% and 37.6% in January and February, just before this crisis, but dropped to 22.93% in March, when the ECQ was implemented.

The boom in Consumer credit (ex-real estate) has primarily been from credit card borrowings, which zoomed 57.04%, 50.93%, and 18.98% over the same period.

And ironically, booming consumer credit came in the face of stagnating retail credit, which has been in decline since 2H 2018. Though March’s retail borrowings spiked 6.8%, this looks likely in response to building up cash reserves in expectation of the economic freeze than from the greasing of commercial activities.

Yet, what happens to the consumer’s capacity to spend when credit becomes scarce in the face of shrinking economic opportunities or when money tightens?

This brings us back to the original premise: public spending.

So would the avalanche of public spending to rescue the economy improve the weal of the many? Or will these signify a redistribution in favor of the politically connected elites? And will it create conditions worse or opposite than the intended?

As Predicted, The Global Recession has Arrived, Will Depression Be Next?

A permanent lowering of the interest rate can only be the outcome of increased capital formation, never the result of any technical banking measures. Attempts to achieve a long-term lowering of interest rates by expanding the circulation credit of the banks ineluctably result in a temporary boom that leads to a crisis and to a depression—Ludwig von Mises

In this issue

As Predicted, The Global Recession has Arrived, Will Depression Be Next?

-The Wile E. Coyete Moment: From China to the World

-We Live in Interesting Times! Negative Oil Prices and Worst US Job Losses Since the Great Depression

-The Unseen Consequences from the Uncharted Global Fiscal and Monetary Bailout! Depression Ahead?

-The Bernanke Doctrine in Motion!

As Predicted, The Global Recession has Arrived, Will Depression Be Next?

The Wile E. Coyete Moment: From China to the World

When about 760 million or 50% of China’s population had been immobilized and placed under home quarantine by their government in response to the COVID-19 epidemic, I predicted that this would spur a global recession.

Back then*, I called this China’s Wile E. Coyote moment.

*Batten Down the Hatches! Global Recession Ahead: The New Coronavirus Pushes China’s Economy to a Freefall! February 16, 2020.

Figure 1

In the fulfillment of this watershed moment, last mid-April, China’s first-quarter GDP reported a 6.8% contraction, its first in a few decades!

And considering that the lockdown, which began on the 23rd January in Wuhan, Hubei which spread to over 80 cities in nearly 20 provinces and municipalities that lasted mostly through March, many analysts have come to dispute the reported GDP’s accuracy. The Wuhan lockdown was lifted on April 8th.

Nevertheless, the record economic contraction has prompted the Chinese government to rethink about setting up GDP targets for 2020. According to a report from the Bloomberg/Economic Times, “China’s leaders are considering the option of not setting a numerical target for economic growth this year given the uncertainty caused by the global coronavirus pandemic, according to people familiar with the matter.” Is this a facing saving measure for an embattled ruling class, the CCP?

In the meantime, the rapid transmission of COVID-19 across the globe has eventually prompted the World Health Organization (WHO) to admit on March 11 that this was a pandemic, more than a month after declaring a public health emergency on January 30. Given the speed of transmission, why did it take so long for them to consider?

The pandemic character has been so obvious that even this layman** can distinguish!

**The Coronavirus Pandemic: Who is Panicking? More From the Year of the Rat: Will History Rhyme? February 2, 2020

To “flatten the curve” by social or physical distancing, many countries embraced the authoritarian approach of epidemic containment by forcibly shutting down significant segments of or the entire country, although at varying degrees.

By early April, about 3.9 billion people or half of the world’s population were under home quarantine (house arrests?)!

Figure 2

Hence, the Wile E. Coyote moment wasn’t limited to China; it became a worldwide phenomenon!

As such, in the 1Q, the Eurozone’s GDP shrank 3.8%, its fastest rate on record, while the US GDP reported a 4.8% decrease, its steepest contraction since 2008!

Bloomberg estimates that the Global GDP in April plunged by 4.8%!

But there is more behind the headline numbers.

We Live in Interesting Times! Negative Oil Prices and Worst US Job Losses Since the Great Depression

Things that could not seem to happen—have actually been happening!

And here are just a few of them.

 

Figure 3

With a sharp decline in demand, which came in the face of a dearth of storage space, oil price futures fell to negative in the third week of April! Depressed prices put in peril debt-ridden oil companies and oil-producing nations with untenable welfare systems.

In the US, a record 20.5 million people have lost their jobs last April, sending the unemployment rate to 14.7%, the highest since the Great Depression! Yet, there were 33.5 million people who have filed for unemployment or jobless claims in the last seven weeks!

Minneapolis Federal Reserve Bank President Neel Kashkari in a CNBC interview recently said that though the reported unemployment rate could be as high as 17% — a brutal number, no doubt — but he says the true number may be as high as 24%. “It’s devastating.”

April’s job losses have virtually erased job gains of the last two decades! That’s Nassim Taleb’s Turkey Principle in action!

The US private sector employment-to-population, a measure of the number of people employed against the total working-age population (Investopedia), crashed to a harrowing 51.3% last April, the worst since, again, the Great Depression!

The highest unemployment rate during the Great Depression was 24.99% in 1933, according to the Balance.

Again, that’s only a piecemeal of the overall picture.

And because the great Wile E. Coyote moment has only scratched the surface, governments around the world backed by their respective central banks launched a series of unprecedented measures to bailout both their financial systems and the economies.

The Unseen Consequences from the Uncharted Global Fiscal and Monetary Bailout! Depression Ahead?

Figure 4

Governments around the world have collectively unleashed at least USD 8 trillion worth of subsidies to cushion the impact from the economic shutdown caused by both COVID-19 and the political response to contain its spread. Bank of America’s Michael Hartnett estimates that fiscal spending support has reached $16.4 trillion, about 19% of the 2019’s USD 86 trillion Global GDP!

With depressed economies, spending at this scale translates to massive fiscal deficits, which will require extraordinary amounts of borrowings and or support from the central banks.

And as a result, in 2020, 107 rate cuts have been imposed by about 78 central banks as of May 8th.

And to ensure liquidity, global central banks have engaged in balance sheet expansion by financing their respective governments through asset purchases.

Since surging fiscal deficits signify a global phenomenon, debts and central bank assets have exploded.

Despite the Trump government’s unleashing an accrued $2.4 trillion of spending support for the main street, backed by about $ 2.41 trillion of asset purchases by the US Federal Reserve, which has been faster than the Great Recession or the Financial Crisis (GFC) of 2007 to 2008, the yield of US 2-year Treasury note dropped to a RECORD low, while Fed Fund rate futures turned NEGATIVE before bouncing above zero late last week! The Fed’s balance sheet has soared to a milestone USD 6.712 trillion and has been expected to rocket to $10 trillion by early next year!

The details of the USD 2.4 trillion spending stimulus and the various support programs bankrolled by the US Federal Government can be found here and here.

And rumors of the second phase of support from the Federal Government have been afloat due to the recent job numbers.

Yet the carrying costs of the subsidies from the Great Recession or Financial Crisis of 2007-2008 has been immense. It lowered the trajectory of the rate of economic growth, increased dependency towards leveraging or debt for financing, redirected financial activities from the economy towards debt financed asset speculation, thereby, fueling asset market bubbles, nurtured the rise of zombie firms and industries, which siphoned resources that contributed to maladjustments that decreased economic productivity, promoted the widening of inequality, and entrenched economic structural imbalances, where central bank emergency policies became the norm that ultimately increased systemic global financial and economic fragility. 

Thus, COVID-19 fundamentally exposed such embedded vulnerabilities!

And here is the thing, the US signified the epicenter of the Great Recession or Financial Crisis of 2007 to 2008 (GFC) that spread to the world.  Hence, using domestic policies and international cooperation, much of the world was able to erect defenses against the contamination.

But this time is different.

In 2020, the IMF expects about 170 nations or 90% of its 189 members to register negative per capita income growth! Over 100 countries have approached the IMF for emergency financing. Though the IMF brags that it has USD 1 trillion in lending capacity, the irony is, some of the sources of financing may be from countries that are presently in need of it!

While access to bridge financing for countries undergoing economic stress had been made available from bilateral or multilateral sources during the GFC, that’s unlikely the case today.

Moreover, today's bailouts will be like funding deadbeats, where a financial blackhole exists to continually drain resources. For instance, Argentina received a rescue package from the worth $57 billion in 2018, the biggest loan from the IMF ever. Today, or less than two years from the rescue, Argentina is on the brink of its ninth default!

Furthermore, while it took over 10-years to expose the embedded costs from bailout policies of the GFC, the imbalances built from the present simultaneous fiscal and monetary support will extrapolate to the acceleration of capital consumption.

Besides, the economic shutdown has seriously impaired the availability of capital and capital goods in the global economy!

Yet to surface and be accounted for are the second-, third- and nth order from the current ambit of socio-economic and political events, which means, the current crisis is at its incipient phase!

A prolonged recession could morph into a Depression!

The Bernanke Doctrine in Motion!

Figure 5

And imbalances?

Since the GFC, US Federal Reserve policies have greatly influenced the direction of the US stock market. In a single month, the Fed’s USD 2.4 trillion asset expansion has encapsulated such rescues!

The financial markets have been 'totally' detached from the economy, the Mainstreet, or from “fundamentals”.

Mr. Ben Bernanke penned the below, even as a professor in 2000, or before to his entry to the US central bank. He would eventually assume the highest post as Fed Reserve Chairman from 2006 to 2014:

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Central bank policies today continue to hallmark the Bernanke Doctrine and throw gasoline to the fire!

And because of this, millions of people have been hurt, and more are to suffer. This policy-induced pain represents its consequence, a somber reality of the business cycle.

A Note to My Family: Prepare for Depression

The damage from the political response against COVID is one for the books. 

Because of the global economic shutdown, which erodes capital, savings, and incomes, there won’t be any V-shape recovery. 

Furthermore, the political response to provide relief (actually indemnity insurance) translates to RECORD fiscal deficits worldwide. This milestone extends to the Philippines, which should compound the process of the corrosion of capital and savings, as well as, exacerbating the misallocation of resources. 

Moreover, central bank easing, which intends to keep rates low and avoid defaults will boomerang. This will not only put pressure on the banking industry’s equity and liquidity, but it will amplify the risks of credit impairments that lead to defaults (here and around the world). 

With smaller access to savings, fiscal rescues will become dependent on money printing that will magnify risks of inflation, and currency collapses as banks confront the likelihood of defaults. 

More than 100 countries have now approached the IMF for rescues! 

The epicenter of the Great Financial Crisis in 2007-2008 was in the US, which spread worldwide. 

This time, there are multiple epicenters occurring simultaneously. 

 This crisis, which actually started subtly last year, and reinforced by the COVID-19, will have a devastating impact on the world that could last for several years.

(sent via Viber on April 23, redacted for spelling and grammar)