Phisix: Escalating Risks from the Region and from Internal Bubbles

Regional Financial Weakness Spreading

Except for Malaysia, ASEAN equities have mostly been losing ground.

This week’s biggest losers were spearheaded by the Philippine Phisix (-3.12%) and surprisingly Korea’s Kospi (-3.15%) along with Singapore’s Straits Times (-1.96%) in apparent sympathy

And what appear as more disconcerting have been signs of renewed weakness in most ASEAN currencies with the exception of Malaysia’s ringgit.

The USD- Indonesian rupiah has broken past the September highs, USD-Thailand baht seems on the verge of a breakout, the USD-Philippine Peso and the USD Singapore dollar have likewise been creeping up.

As a reminder the last time the USD-rupiah set September highs ASEAN stocks endured the second phase of the meltdown after June. So instead of a crash, the current infirmities seem to have evolved towards a more subtle or gradualist decline in the region’s equity markets…again with Malaysia as the outlier.

Malaysia’s Divergence: Leading or Trailing Indicator?

Perhaps part of Malaysia’s exceptional financial performance may have been due to the recent announced reforms as alleged by mainstream media. Given the fresh mandate from the recent elections, Prime Minister Najib Razak has targeted a reduction of the government’s 2014 budget deficit to 3.5% from earlier projections of 4% mainly due to a reduction in subsidy programs. The Malaysian government plans to trim spending on sugar and various fuel subsidies from 18% of government spending to about 15.6% in 2014[1]. This indeed should signify a welcome development.

But a decrease in subsidies should extrapolate to a one shot jump in CPI inflation. However Malaysia’s consumer price inflation has turned the corner since January 2013[2] and been inching up even prior to the elections and to the publicised reforms.

Credit rating agency Moody’s recently raised Malaysia’s credit outlook and foreigners were reported to have flowed back into Malaysia’s bond markets in October[3]

Yet whatever gains in October and whatever present gains in Malaysia’s equity and currency markets have hardly matched the actions in Malaysia’s local bond markets. Yields of Malaysia’s 10 year local currency bonds have spiked to August highs!

The share of holdings of Malaysian bonds has been at 42.8% in the 3^rd quarter down from 46.8% in the 2^nd quarter according to the same report. So which entity has been responsible for the bond liquidations? Have residents been shifting to stocks by selling bonds to non-residents or foreigners, ala in the US, thus rising stocks and appreciating ringgit as Malaysian bonds fall?

As pointed out above, foreigners own a significant share of Malaysian bonds. However in terms of equities, foreign exposure has been comparable with the Philippine Phisix (15-16%) which alternatively means significantly less relative to Indonesia (22%-23%) or Thailand (25%).

Have foreigners seen Malaysia as immune to inflation, currency, credit and contagion risks?

The irony has been that, at the close of November, another credit rating agency the S&P downgraded FOUR Malaysian banks “on concern that rising home prices and household debt are contributing to economic imbalances in the country”[4]

Since January of 2012 Malaysia’s loan to the private sector has ballooned by 21%[5], given that housing prices[6] have retreated in the 2^nd quarter supposedly in part due to newly instituted curbs[7], has all these yield chasing been shifting to stocks?

The bottom line is that the actions in Malaysia’s stock market and currency market appear to have diverged from that of the domestic bond markets as well as financial markets in the region. Will such disparity last? Will Malaysia lead the region out of the languor? Or will Malaysia be the last shoe to drop?

Philippine Bubble Goes Mainstream; the Deposit Bubble

It’s is one thing where columnist/s of popular website/s or conventional media outlet/s make the case for a bubble and it is another thing when bubbles are reportedly casually as part of everyday news. The latter is what I would call as bubbles getting into the mainstream’s radar screen.

Recently in the economic section of the Wall Street Journal Blog, several mainstream economists raised concerns over the exploding money supply in the Philippines which raises the risks of a bubble.

Philippine M3, according to the report, rose 32.5% in October from a year earlier — the fourth straight month it has grown by more than 30%, and a possible warning sign of future asset bubbles[8]

The article points to the Special Deposit Accounts (SDA) as the culprit.

Since 2007, the rise in Philippine M3 has been accelerating faster compared to the previous years. This year M3 has gone nearly vertical[9].

The BSP recently reported that “Domestic claims grew by 11.6 percent in October from 10.9 percent (revised) in September due to the continued increase in claims on the private sector (by 16.2 percent), in line with the sustained growth in bank lending. Meanwhile, net claims on the central government rose slightly by 0.5 percent in October, largely as a result of the increase in credits to the National Government.”[10]

Combined claims on the private sector and claims on other financial corporations account for 78% of domestic claims, which implies that the gist of the jump from M3 comes from mostly credit expansion.

SDAs have been responsible for the recent spike in M3 but hardly have been main force behind sustained M3 growth over the last few years.

Introduced in 2006[11], SDAs have been designed as an instrument to mop up excess domestic liquidity.

Unfortunately, the BSP failed to anticipate the avalanche of deposits that accrued to SDAs, which has resulted to steep financial losses for the domestic central bank.

The BSP initially resorted to rate cuts below policy rates (see right window), but this has hardly dissuaded banks from parking funds in the SDAs (see left window)[12].

The BSP eventually banned “individual investments in SDAs” channelled through Investment Management Accounts (IMA) via the banking system; the deadline of which lapsed a week prior to December 2013. Although the BSP allows individual investments via unified investment trust funds (UITF) or other similar pooled instruments[13]

Nobody seem to be asking why deposits seem to be surging and where such has emanated?

The simple answer is that when the banking system underwrites a loan (issues money out of the thin air), which gets spent by the borrower, the fund flow from such transactions (with the suppliers or providers) or from other consequent transactions mostly ends back in the banking system as deposits.

[Note: these are transactions on the formal economy. As a reminder, only 21 out of 100 households have access to the formal banking sector. Although some of these transactions have spilled over to the informal sector]

As the great dean of the Austrian school of economics Murray N. Rothbard explained[14]

Now what happens when banks print new money (whether as bank notes or bank deposits) and lend it to business? The new money pours forth on the loan market and lowers the loan rate of interest. It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered. Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is. Now, when saved funds increase, businessmen invest in "longer processes of production," i.e., the capital structure is lengthened, especially in the "higher orders" most remote from the consumer. Businessmen take their newly acquired funds and bid up the prices of capital and other producers' goods, and this stimulates a shift of investment from the "lower" (near the consumer) to the "higher" orders of production (furthest from the consumer)—from consumer goods to capital goods industries

In short, the Philippine banking system’s 5.730 peso deposit liabilities (as of September) have been a manifestation of expansionary banking credit.

3^rd quarter’s peso deposit liabilities which accounts for 83.31% of the banking system’s deposit liabilities, also represents 9.45% growth from the second quarter and 22.6% jump from the 1^st quarter. 

The huge jump in deposits nearly squares with the growth of banking loans. In 2013, the average quarterly growth of deposits has been at 15.5% while average monthly growth rate for banking loans has been at 13.4%

The BSP recognized this dilemma way back in 2006 and so has been the reason why the Special Deposit Account came into existence: to “absorb excess liquidity”.

Unfortunately in the face of concerns over M3 growth the BSP chief Amando Tetangco sidesteps on the issue and replied with abstract responses such “trust” on the banking system who are making “very deliberate choices” in issuing loans or that “banks will continue to be discriminating”. Also the BSP chief has so much confidence regulatory responses “The BSP stands ready to deploy appropriate measures as needed to ensure that liquidity conditions to be in line with the BSP’s objective of maintaining price and financial stability”

Yet the BSP chief didn’t even bother to explain why the SDA program went against the “BSP’s objective”

In addition, following a surge in September loans to the banking sector mainly from the "higher" orders of production or capital goods industries which delivered the mainstream’s expectations[15] of “transformational”[16] statistical growth, rate of loan growth in October slumped, based on BSP’s latest data[17].

This looks like a similar pattern in July where the banking system’s loan growth went into a reprieve but eventually bulged at the end of the quarter. It looks as if banking systems loans have been programmed for an unstated reason. But should the rate of growth of banking loans continue slowdown this will be reflected on the statistical economic growth.

BSP’s Inflation Model Sees M3 as Operating in a Black Hole

At around the same period of last year, the BSP also predicted consumer price inflation for 2013 to be at 3.1%[18]. Last week the BSP suddenly upgraded inflation figures to 3.3% in November which coincided with the headlines which blared “Anger rises vs power rate hikes”. As to why the popular uproar over a statistical 3.3% price inflation for November from 2.9% (or a equivalent to 13.8% rise) in October is beyond me. Perhaps is it because people don’t ‘eat’ statistics?

Putting statistics aside, in the real world Liquidified Petroleum Gas (LPG) prices jumped by about 20% which media blamed on foreign dynamics (hardly an accurate account as global energy prices have been either moving down or sideways[19]) and to domestic power plant maintenance shutdown. 

LPG is part of the array of energy and fuel costs that are about to rise.

What media fails to account for is that since the Philippine President declared a “state of calamity” last November[20] in the aftermath of Typhoon Yolanda, where LPG has been covered by “automatic price controls” under Republic Act No. 10623 or the law amending certain provisions of the Price Act (RA 7581) for 15 days[21], price controls always leads to shortages.

With soaring M3, which has been a symptom of excessive banking credit growth that has artificially been boosting demand for the first recipients of banking loans and for the initial beneficiaries of government spending in combination with mandates that induce supply imbalances, e.g. price controls, the Philippine government has put into place key ingredients for greater risks of stagflation regardless of what statistics say.

The BSP attributes[22] the current run-up in domestic CPI to “temporary supply-side factors at play”, although such figures have supposedly been “in line with the BSP’s assessment of a benign inflation environment over the policy horizon” which the means the BSP is in a self-congratulatory mode despite the uptick in CPI: “affirms the appropriateness of the current monetary policy stance”.

The BSP’s M3 data apparently has been vaporized in the BSP’s inflation model.

San Miguel Corporation’s Debt In-Debt Out Accelerates

Publicly listed San Miguel [PSE:SMC] seems as a wonderful example of whether domestic financial institutions have been making “very deliberate choices” in extending loans

Before I proceed first a reminder, as I previously noted[23]

The following doesn’t serve as recommendations. Instead the following has been intended to demonstrate the shifting nature of business models by major firms particularly from organic (retained earnings-low debt) growth to aggressive leveraging or the increasing use of leverage to amplify or squeeze ‘earnings’ or returns, the deepening absorption of increased risks in the assumption of the perpetuity of zero bound rates, and how accrued yield chasing by the industry induced by zero bound rates has pushed up property prices

I have noted how San Miguel’s finances looked vulnerable last September. With the sale of San Miguel’s entire Meralco holdings I expected improvements on SMC’s financial conditions.

SMC was supposed to raise something like Php 100 billion pesos from the Meralco sale. But it seems that this has barely been reflected on her 3^rd quarter financial conditions

Based on the latest SMC investor briefing[24] compared with the 2^nd quarter[25], while cash balance of SMC increased by Php 45.5 billion, interest bearing debt likewise swelled by Php 25.4 billion, albeit less than the gains in cash. The former probably accounts for part of the proceeds of the Meralco sale.

It’s nice to see improvements in SMC’s business conditions. This has been manifested in free cash flows particularly in cash flows from operating activities. For the third quarter, SMC’s cash position has ballooned by 102.6% to Php 36.189 billion from the same period last year at Php 17.867 billion and by 234.74% as against the 2^nd quarter at Php 10.811 billion.

But despite the splendid improvements in operations, unfortunately SMC’s free cash flows have hardly been enough to cover her debt financing, whether interests or principal amortizations.

To the contrary, SMC’s 3^rd quarter[26] short term and long term borrowings which totalled Php 801.602 billion represents a stunning 48.45% jump in borrowing relative to the 2^nd quarter[27] at Php 539.975. Note that in both the 3^rd and 2^nd quarters, the amount that SMC borrowed ended up paying almost what she owed + morsels in terms of dividends and etc…

The 3^rd quarter shuffling of debt has nearly reached the entire 2012[28] operations where SMC raised Php 812.628 billion in short and long term borrowings to pay for nearly a symmetrical debt.

The 3^rd quarter update only means SMC will likely close the year with far larger debt than in 2012.

In the race to close debt gap, SMC’s businesses will need to see an explosion in productivity growth to keep in pace with soaring debt levels, a task that increasingly seems improbable with the rate of debt increases.

San Miguel’s recourse to ‘debt in and debt out’ increasingly exhibits the neo-Keynesian Hyman Minsky’s symptoms of “Ponzi financing”[29] where debt strapped firms borrow to pay interest or sell assets to pay interest (and even dividends). Unfortunately such actions “lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes”. In short for debt holders, “Ponzi finances lowers the margin of safety that it offers the holders of its debts.”

Mr. Minsky’s germane and keen observation appears to have initially been realized as SMC’s equity prices seem as in a downdrift even as debt in- debt out operations continues, and importantly, has been immensely expanding.

[A side note, even if stock markets rally, this won’t be enough to offset the deepening use of debt in-debt out which only magnifies the risks of a credit event. Dramatic fundamental changes are required to neutralize such risks]

The next burden will fall on the creditors.

What concerns me though has been the contagion risk, as I wrote in September (bold original)[30]

While San Miguel looks like a fragile company highly sensitive to changing conditions, what matters for me is the risk of a contagion; particularly the companies, banks and entities whom are creditors to SMC’s 400+ billion loans.

While 400+ billion pesos seems like a drop in a bucket in a system flushed presently with 5.7 trillion pesos of liquidity, the domino effect from a potential SMC credit event may in a snap of finger—the bang moment—turn abundance into scarcity.

From San Miguel’s viewpoint we can note of the escalating systemic risks in the domestic financial system which puts into a tenuous spot claims that banks and financial institutions has made “very deliberate choices”

Behavioral Objections to the Shopping Mall Bubble

This leads us to the second systemic risk: the shopping mall bubble

In January of this year[31], I wrote a controversial article which seems to have upset what seems as an entrenched belief by the consensus. Particularly I pointed to the deepening imbalances between supply side growth along with demand side, the former having been funded by a credit boom.

Basically the objections I receive fall into two categories: sentiment and habit.

Sentiment.

The sentiment based objection has been to equate ‘crowd traffic’ with ‘revenues’. They essentially assume that what they see in malls in terms of throngs of crowd as equivalent to implied spending power.

Such objections essentially fall for psychological errors based on Sensory testing[32], particularly expectations error, the halo effect and logical error.

You see it is easier to make an observation and discern according to crowd traffic from within a mall in general than to add to the mental burden by going out and assess the crowd traffic in other malls and of malls under construction. Even from within the mall it is easier to assume general crowd traffic than to evaluate crowd traffic per store.

Expectations error is where people judge according to their previous or exiting knowledge. The Halo effect is when people judge according to their overall impression. Logical error is the error of association, particularly in the case of shopping malls where crowd equals revenues.

We have already seen how such errors played out when the consensus justified skyrocketing technology stocks with ‘eyeballs’ or where the number of page views or audience traffic was assumed as monetizing websites. The concept of eyeballs, in Wikipedia[33] definition, was popularized during the Dot com boom as an indicator of how much revenue potential a company would have for the future.

Psychologist, Nobel Prize winner and author Daniel Kahneman in his latest book observed of how people have been hardwired to think less[34]

A general “law of least effort” applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.

We know in fait accompli how this turned out, boom morphed into bust. Reality exposed on the bubble outlook and laziness mentality.

Let us give the benefit of the doubt where ‘crowd traffic equals revenue’, if we consider the population growth rate of the Philippines (1.7% 2012) relative to conservatively shopping mall growth rate at 10% per annum, one would realize that the extensive growth in shopping mall supply will eventually reduce crowd traffic in shopping malls.

For instance let us assume that NCR has a population of 15m where 10 malls exists and where crowd traffic are dispersed evenly or 1.5 million per mall (ceteris paribus-all things held constant). Let us further assume that growth in malls double while population remains constant, this means for 20 malls crowd population will diminish to 750k per mall and so forth.

Of course hardly anything is constant. Growing supply relative to demand could mean marginal malls (new or less strategically located malls or malls with fewer regular patrons) will suffer most from diminished crowd traffic than from the established counterparts. Or an overall downsizing of crowd on each mall but on a relative scale could even be an outcome.

Crowd traffic equals revenues while seemingly plausible can hardly stand the rigors of basic math and common sense

Habit

Twenty years ago, how many people in the world has mobile phones? The ITU mobile phone-population data shows how mobile phone subscriptions have closed the gap between population and mobile subscriptions[35] even from 8 years back.

And as testament to this penetration level of mobile phones relative to the Philippine population has reached 100% in 2012 according to reports[36].

The point here is that there is nothing constant but change.

Internet penetration has been spreading throughout the world and through Asia[37]. In the Philippines, internet connection has reportedly reached 36% penetration level[38].

Of course growing internet penetration levels are likely to deepen e-commerce.

In the US there is a new retail trend called as “showrooming” where showrooming is the practice of examining merchandise in a traditional brick and mortar retail store without purchasing it, but then shopping online to find a lower price for the same item[39]. 

In other words, showrooming combines the features of e-commerce with traditional physical retailing but more at the expense of the latter

My daughter is partly a practitioner of showrooming. What she sees in shopping malls she searches in the web, and according to her, when she finds the equivalent, goods are a lot cheaper from the internet. She cited me an example where she bought a bag that was 29% less than the list price at a domestic retail outlet net of shipping costs.

The “cheap” advantage of the web should come as natural. First e-commerce have been covered by lesser taxes. In the Philippines, the E-Commerce Law, R.A. No. 8792, according to Punong Bayan & Araullo[40] lacks specific provisions for the treatment of internet taxation in the Philippines.

Second and most importantly web based commerce requires reduced overhead costs via physical spaces.

This means that if the showrooming trend becomes the next fashion in retailing, retail outlets would likely be redesigned as showrooms that need lesser space for “phasing” or merchandise display and for inventories.

This will reduce demand for large brick and mortar retail spaces thereby putting pressure on real estate and shopping mall supply.

In short, e-commerce may cannibalize on brick and mortar retailing.

This is further proof that there is no such thing as habit especially in the face of technology changes.

Excessive Corporate Debt and Stagflation as Pricks to the Shopping Mall Bubble

Let us proceed to systemic risks

Can you identify what is wrong with the two graphics above?

There are essentially three variables here: namely sales (black bar), Finance or Debt (blue bar) and Earnings before taxes interest depreciation and amortization or EBITDA (orange bar).

I don’t even need to argue of an industry wide shopping mall bubble to reveal of the growing risks shown above.

Essentially these two companies have been borrowing far faster than the rate of growth of sales and EBITDA. The rapidly ascending derivative ratio which represents the leverage in terms of debt/ebitda has been evidence of this. The red rectangle represents projection for 2014 and 2015.

Even if we assume that the law of economics will be suspended, where both companies will see a sustained rise in sales and ebidta in perpetuity, at the rate of the borrowing binge, debt levels will eventually become a self-imposed burden that will impact on earnings and profitability, expansion of projects, put a kibosh on management flexibility and lastly increase credit risks.

This also means that eventually the companies may resort to SMC’s model of debt in and debt out.

If we factor in the demand-supply imbalance then like many highly leveraged firms they will become even more vulnerable to changes in interest rates (domestic and or foreign), foreign currency (for companies with foreign debt), inflation and competition.

Before I forget the above companies are SM Primeholdings[41] [PSE: SMPH], the largest mall operator in the Philippines and Filinvest Land[42] [PSE: FLI], one of the largest horizontal developers who also operate a mall: Filinvest Festival Mall in Alabang.

SMPH’s long term debt has ballooned by about 39% from Php 49.647 billion at the close of 2012 to Php 69.066 billion at the 3^rd quarter’s close[43].

SMPH’s debt issuance has doubled through the third quarter of this year from the end of 2012

If the competition driven imbalance will reveal of what I expect then things will always move in the margins or from periphery to core.

As I wrote in April[44]

For shopping malls, the “periphery to the core” would start from the mall areas with the least traffic and from marginal malls or arcades.

Surpluses amidst a boom which implies high rents, high cost of operations such as wages, electricity and other inputs prices, would place pressure on profits of retail tenants competing for consumers with limited purchasing capacity.

Periphery to the core would mean initially fast turnover from retail tenants on stalls of lesser traffic areas and of marginal malls. Then the length of vacancy extends and the number of vacancy spreads.

Leveraged malls and arcades thus will suffer from the same vicious cycle of cash flow problems and eventual insolvencies that will impair creditors and will spread to many sectors of the economy.

Additionally as I noted above the populist outrage over rising energy and fuel costs represents a threat to the highly touted Filipino consumer.

Rising prices of basic goods will extrapolate to a redistribution of consumer spending. This means that given that fuel light and transportation costs have been key factors in the household budget[45], add to this rising rents, and eventually food prices, a diversion of spending to basic goods means lesser disposable income and consequently demand.

Moreover, such factors will also impact retail outlets as rising input prices put a squeeze in profits which will be further aggravated by diminishing purchasing power of consumers.

Of course, not only the above, rising inflation expectations will translate to higher interest rates. If this should occur then the convergence trade will likely be exposed and unravel, thereby putting extra burden on highly leveraged companies or firms, as well as, increasing credit risks of the property related industries.

So rising CPI will likely have a trifecta impact on the shopping mall bubble via reduced consumer demand, squeezed earnings for retailers which should spillover to mall operators and to creditors, and that higher interest rates that are likely to increase credit risks of such industries.

All told, aside from excessive corporate debt and competition, stagflation could likely be another potential prick to the shopping mall bubble.

Again any slowing of demand will not only impact the retail and shopping mall industry but likewise all other property sector related businesses. 

In the 1997 vacancy rates in Thailand hit 15% that sparked a regional crisis[46]. The Philippines then even had only 1%. This is not to suggest of a parameter threshold for a crisis, everything will depend on the prevailing conditions and the degree of confidence of creditors.

Nonetheless this is to say that the massive scaling up of debt on major industry players signifies in and on itself the escalating degree of risks, especially in the face of the global bond vigilantes.

Simply said, the prospects of reward look hardly appealing to override the growing scale of risks.

---

[1] Wall Street Journal Real Times Economic Blog Investors Welcome Malaysia Reform Budget October 28, 2013

[2] Tradingeconomics.com MALAYSIA INFLATION RATE

[3] Wall Street Journal Real Times Economic Blog Chastened by Sell-off, Malaysia Gets its Government Books in Order December 4, 2013

[

4] Bloomberg.com S&P Cuts Outlook on Malaysia Banks on Household Debt Concern November 27, 2013

[5] Tradingeconomics.com MALAYSIA LOANS TO PRIVATE SECTOR

[6] Tradingeconomics.com MALAYSIA HOUSE PRICE INDEX

[7] Wall Street Journal Real Times Economic Blog Investors Shift Focus as Malaysia Property Curbs Hurt November 25, 2013

[8] Wall Street Journal Real Times Economic Blog As Money Supply Surges, Some Warn of Bubble Risk in Philippines December 5, 2013

[9] Tradingeconomics.com PHILIPPINES MONEY SUPPLY M3

[10] Bangko Sentral ng Pilipinas Domestic Liquidity Continues to Expand in October December 5, 2013

[11] Bangko Sentral ng Pilipinas BSP Maintains Key Policy Rates, Adopts Tiering Scheme on Banks’ Placements November 2 2006

[12] International Monetary Fund STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION April 2013

[13] Inquirer.net SDA funds stream out as BSP deadline lapses November 29, 2013

[14] Murray N. Rothbard 1 The Positive Theory of the Cycle Part I Business Cycle Theory America’s Great Depression Mises Institute

[15] See Philippine statistical ‘bubble’ economy grows as expected November 28, 2013

[16] See More Media Spin on the Philippine Statistical Bubble Economy December 5, 2013

[17] Bangko Sentral ng Pilipinas Bank Lending Continues to Grow in October November 29, 2013

[18] ABS-CBN News BSP cuts inflation estimates for 2012, 2013, 2014 December 13, 2012

[19] See Philippine Politics: Low Inflation? LPG Prices Skyrockets December 3, 2013

[20] Philstar.com State of national calamity declared November 12, 2013

[21] Inquirer.net Anger rises vs power rate hikes December 6, 2013

[22] Bangko Sentral ng Pilipinas November Inflation Rises to 3.3 Percent December 5, 2013

[23] See Phisix: Moody’s Sees Bubbles as Structural Shift to Higher Growth October 7, 2013

[24] PSE.com.ph SMC’s Investors’ Briefing November 11, 2013

[25] PSE.com.ph SMC’s 2013 First Semester Results Investors’ Briefing August 12, 2013

[26] PSE.com.ph SMC SEC form 17-Q as of September 30, 2013 November 14, 2013

[27] PSE.com.ph SMC SEC form 17-Q as of June 30, 2013 August 14, 2013

[28] PSE.com.ph SMC SEC form 17-A Annual Report June 4, 2013

[29] Hyman P. Minsky The Financial Instability Hypothesis* Levy Economics Institute May 1992

[30] See Why San Miguel Corporation Looks Vulnerable September 23, 2013

[31] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[32] SensorySociety.org Psychological Errors in Sensory testing and Ways to Reduce Them

[33] Wikipedia.org Eyeballs (term)

[34] Daniel Kahneman Thinking, Fast and Slow (p.35)

[35] ITU.int 6.8 billion mobile-cellular subscriptions ITU Facts and Figures 2013

[36] GMA Network PHL mobile penetration to hit 100 percent in 2012, telco claims July 7, 2013

[37] Ecommercemilo.com The Ultimate Guide to E-commerce Statistics in Southeast Asia & Malaysia Slideshare.net

[38] Inquirer.net NSCB says PH Internet penetration rate at 36% October 18, 2013

[39] Wikipedia.org Showrooming

[40] Punongbayan & Araullo Internet taxation in the Philippines

[41] 4-traders.com SM Prime holdings

[42] 4-traders.com Filinvest Land

[43] PSE.com.ph SMPH SEC form 17-Q as of September 30, 2013

[44] see Phisix 7,000: Why Asia’s Rising Star is a Symptom of Mania April 29, 2013

[45] Hyun H Son Has Inflation Hurt the Poor? Regional Analysis in the Philippines ADB

[46] Marcus Noland The Philippines in the Asian Financial Crisis: How the Sick Man Avoided Pneumonia University of California 2000

Even Santa Claus has lost his freedom

Politics has seeped even into the Santa Claus’ territory.

From Reuters (picture and quote):

A U.S. military website showing Santa Claus delivering his presents while guarded by warplanes has some children's advocates worried.

In a twist to its tradition of tracking an animated version of Santa Claus' sleigh and reindeer as he flies around the globe on December 24, the military is adding the animated fighter plane escort to give a realistic feel to the popular feature, said a spokesman for the North American Aerospace Defense Command.

"We wanted to let folks know that, hey, this is a NORAD video, and we're the military and this is our mission," said the spokesman, Navy Captain Jeff Davis.

The Aha moment:

A video on the NORAD website shows military personnel seemingly preparing for a test flight by Santa, who has the call sign "Big Red One."

"We all know that Santa travels faster than starlight," an officer says in the video, "but this is nothing that our technologies can't handle."

In the eyes of the US government, Santa Claus' actions needs to be regulated. Even Santa Claus has lost his freedom! 

Goes to show how politics has been corrupting on people’s morals.

Best Tribute to Nelson Mandela comes from Rush Hour’s Detective James Carter

There has been no shortage in the outpouring of homage to the departed politician Nelson Mandela (1918-2013)

Philippine media jumps into the bandwagon

Here is collection of Mandela quotes from MSN

Ironically the New York Times in June 1990 reported that the CIA played an important role in Mr. Mandela’s arrest (hat tip Zero Hedge).

Not everyone has been pleased by Mr. Mandela though.

Austrian economist Peter Klein says Mr Mandela misread the “apartheid” problem as one of "capitalism"

Unfortunately, the leaders of the anti-Apartheid movement, Mandela included, viewed Apartheid as a “capitalist” system, turning to Marxism-Leninism as the only viable economic (and political) alternative. When the African National Congress came to power in 1994, it dismantled Apartheid’s system of racial separation, opening up land ownership and labor-market opportunities for all South Africans, but continued to embrace the socialist economic principles that underlie the Apartheid model. As Murray Rothbard pointed out, economic freedom is a better path to racial reconciliation: “Free-market capitalism is a marvelous antidote for racism. In a free market, employers who refuse to hire productive black workers are hurting their own profits and the competitive position of their own company. It is only when the state steps in that the government can socialize the costs of racism and establish an apartheid system.”

William Jasper at the New American alleges that Mr. Mandela was a "commie" and “not a saint”. (hat tip Bob Wenzel)

What is it about Nelson Mandela the man that justifies this global adoration? To be sure, his mien contributes; he is tall, dignified, and statesman-like in appearance, gracious in public speech, and grandfatherly in tone. He does not exude the radical, self-promotional hucksterism of, say, Al Sharpton, Zimbabwe’s Robert Mugabe, or the ANC’s current head, Jacob Zuma. And, yes, he served many years in prison, but not merely for opposing injustice and racism, as his legions of hagiographers would have us believe. He was a leader of the African National Congress (ANC), an organization designated a terrorist group by the U.S. State Department and many governments and intelligence agencies. He was also a co-founder of the ANC’s Umkhonto we Sizwe (Spear of the Nation), a militant terrorist group within a terrorist group. He was tried and convicted for his terrorist and subversive activities within those organizations (more on which in a moment).

Countless thousands of genuine prisoners of conscience, who have never done anything more “criminal” than praying, or speaking out against tyranny, are languishing in prisons all across the planet without so much as a peep of protest from the legions of Mandela worshipers and his chorus of media promoters. How many of those praising Mandela as the world’s moral compass have ever heard of Ignatius Cardinal Kung, the Roman Catholic Bishop of Shanghai, who was imprisoned in Communist China for 33 years, most of it overlapping the same period in which Mandela was in prison? Cardinal Kung’s heroic incarceration was in many ways more severe than that faced by Mandela, but no media love-fest awaited him when he was released in 1988. Ditto for Dr. Oscar Elias Biscet, a black Cuban physician who was released from Fidel Castro’s prison system in 2011 after brutal captivity for the “crime” of criticizing the island’s communist regime. But did Nelson Mandela chastise his comrades in Beijing and Havana when he visited there, or did he bring up the plight of the countless political and religious prisoners in their gulags? If so, there is no public record of it, though there is plenty on record of him praising those oppressive regimes.

Read the rest here

I liked Detective James Carter’s (played by Chris Tucker in Rush Hour 2) tribute to Mr. Mandela best.

JGB Watch: Takatoshi Ito Advice to Japan’s Pension Fund: Sell JGB’s Now

Interesting twist of events. 

The chairman of the advisory group to Japan’s Government Pension Investment Fund (GPIF), the world largest retirement pool of retirement savings, advocates that the pension fund substantially reduce their holdings of Japanese Government Bonds (JGB) holdings by selling now.

From the Bloomberg (bold mine) 

The world’s biggest retirement fund needs to cut local debt holdings now because Japan’s government will follow an advisory panel’s recommendation that the wealth manager seek higher returns, the panel’s head said. Bonds fell.

The 124 trillion yen ($1.22 trillion) Government Pension Investment Fund should pare domestic debt immediately to 52 percent of assets, its lower limit, in part by selling to the Bank of Japan, said Takatoshi Ito, chairman of the advisory group. The investments comprised 58 percent of the fund’s holdings as of Sept. 30.

“GPIF needs to start reducing bonds as soon as possible,” Ito said in an interview in Tokyo today. “Now is the right time to sell, while the BOJ is buying.”

The comments show a rift between Ito, an academic handpicked by Prime Minister Shinzo Abe to help overhaul Japan’s state-backed pension plans, and Takahiro Mitani, president of GPIF since 2010. The central bank, which is buying more than 7 trillion yen of bonds a month, will fail in its goal of spurring 2 percent inflation and the risk of owning so much domestic debt was overstated by Ito’s panel, Mitani said this week.

And here is the kicker: (bold mine)

Mitani said in a Dec. 4 interview with Bloomberg News that inflation is less of a risk to GPIF than many people, including Ito, assume, because the fund is a long-term investor and can hold bonds until redemption. Consumer-price increases will probably stay between 0.1 percent and 1 percent, missing the BOJ’s 2 percent target, he said.

Mitani “doesn’t seem to understand that it’s about mark-to-market valuation,” Ito said today.

If GPIF doesn’t start reducing its holdings before inflation takes root in Japan, the fund will exacerbate a slump in bond prices by needing to sell as demand from other investors wanes, Ito said.

“If inflation reaches 2 percent, and yields rise to 3 percent, and then they start trying to sell domestic bonds, we’ll see disaster in the markets,” he said.

10 year JGBs appear to have reacted dramatically to the above comments with a sharp spike in yields.

Meanwhile the yen fell hard (above is the USD-Yen)…

…as Japan’s equity benchmark the Nikkei 225 “celebrated” the yen’s fall ending the session higher by .81%

Even people close to Japan's powers-that-be acknowledge that JGBs signify a ticking time bomb.This also reveals how vulnerable the global financial system is.

More Media Spin on the Philippine Statistical Bubble Economy

Perhaps in an attempt to recoup lost glory from recent political setbacks from the Pork barrel scam and Typhoon Yolanda debacle, the Philippine government’s PR campaign machinery may be working overtime.

Here is an example of a media spin romanticizing the supposed accomplishments from this government, from Bloomberg

Aquino has achieved this transformation by pruning a record $7 billion budget deficit in 2010 to $2.3 billion in the first nine months of 2013, declaring war on rampant corruption, announcing plans to more than double state spending on public works to $19 billion -- or about 5 percent of GDP -- by 2016, and exploiting Filipinos’ English-language skills to promote industries as diverse as casinos and call centers.

Reference points always matter in framing explanations.

The incumbent Philippine President assumed office in June of 2010, which means this administration has been half responsible for the spike in the government budget- GDP ratio during the same year (red arrow). 

So the article implies, first balloon the deficit, then reduce them and then call them “transformation”. Duh.

Second government spending is part of the calculation of GDP so we have a circular logic at work. A boost in government spending bloats GDP (or the denominator) which diminishes the impact of the budget (numerator) thus a lower budget-gdp ratio. 

Based on the above reasoning all this government has to do is keep throwing money at the Philippine economy for the “transformation” to continue.

And throwing money comes with no cost, no risks of higher future taxes, no risks of increase in debt, and no risks of inflation. There exists an endless pool of money to tap. Free lunch lives!

A far better measure would be to look at the Philippine government budget in nominal peso currency terms

Here is the so-called “transformation” of the administration (data based from National Statistical Coordination Board).

We have nominal deficits above pre-2010 levels as of 2012. This has emerged as the rate of government spending far outpaces tax revenue collection. And to consider, we are supposedly in boom days.

Look at the first chart. Government spending has constantly been rising since 1996 whereas tax revenues has been volatile. So what happens when the statistical economy slows? 

Here is a guess: the so-called “transformation” would mean an explosion of budget deficit. Remember the uptrend in government spending has been constant and even accelerating, whereas tax revenues have been gyrating.

So the current administration needs to keep pumping the debt driven statistical bubble in order to look good.

As a reminder, the above data are from the government which hardly anyone tries to vet.

And of course those deficits has been revealed in the country’s rapidly expanding debt levels based in nominal peso terms. Since 2010 total (foreign and local) debt has grown by over 15%. Data above are from NSCB and the Bureau of Treasury

So while the debt to gdp ratio may seem as moderate, largely due to the puffed up denominator from credit bubble in the property and allied industries and from government spending, seen in the context of debt in nominal terms (not as a ratio) debt levels have been expanding rapidly.

The government has been shifting the debt profile from external to internally generated debt.

So what happens if the statistical economy slows? Here is another guess, as budget deficit explodes so will the debt levels.

As for call centers, here is what the British Philippine Outsourcing says “BPO has been one of the fastest growing sectors in the Philippines in the past 7 years”

2013 minus 2010 equals 3 years. The administration is 3 years old, BPO’s have rapidly been advancing for the last 7 years. Thus attributing the triumph of BPOs to the administration's “exploiting Filipinos’ English-language skills to promote industries as diverse as casinos and call centers” represents a rather hyperbolic claim.

As for casinos while I see the industry as a necessary part of leisure, for many patrons, casino can be a vice. As for how vices can signify a boon to long term productivity to an economy signifies another bizarre allegation.

Besides the domestic casino industry appear to be part of the bubble propagation.

Oh by the way, “transformation” seems as another (this time is different) byword, catchphrase or slogan that gives me goose bumps.

English novelist and author Eric Arthur Blair popularly known for his pen name George Orwell warned us on the perversion of thoughts in “Politics and the English Language”

But if thought corrupts language, language can also corrupt thought.

Bitcoin prices almost equal to Gold

Bitcoin closed at 1,236 yesterday

Gold closed at 1,242.5

The gold bitcoin spread has narrowed to amazingly only USD $6.5 from more that $1k just a few months back

While this may look like a bitcoin to gold rotation, this has not been clear.

There has been an ongoing fascinating impassioned debate (especially in the Austrian school of economics) on bitcoin as money and as investment. 

For me since bitcoin is a product of the spontaneous market process and of the information age, whose present role appears to be as an "alternative currency", the markets will ultimately determine bitcoin’s viability and potential role as medium of exchange, in spite of intervention from various governments. Perhaps even a gold-bitcoin tie up could emerge.

As I have been saying the information age will deliver decentralized products, and services (even new financial services such as payment and settlement methods) that will immensely alter the way we do things. This is part of the manifold revolutionary innovations brought about by rapid advances in technology which will be met intuitively by resistance to change. 

Incidentally, Bitcoin seems to have the first mover advantage of the dramatically growing world of cryptocurrencies. It remains unclear how bitcoin will fare against competition over the long run.

But even if I had a bitcoin wallet today, I wouldn’t be buying bitcoin at current prices. Looks like the easy money policy yield chasing induced wild speculation has spread to bitcoin.

Video: Hunger Games' Catching Fire: Is Katniss a Modern-Day Spartacus?

My daughter wanted to watch Hunger Games: Catching Fire, so my wife and I accompanied her. I haven't seen the first episode The Hunger Games in its entirety (I saw only the last segment on cable TV) but headed to the movie with a general idea of the plot. Nonetheless, I came out quite impressed by the second series.  Reason? The movie seem like an allegorical portrayal of real world politics; freedom versus despotic political power

Learn liberty has a video explaining the popular appeal of Hunger Games and related movies: (hat tip Cafe Hayek)

Literature and legend often reflect their culture. Some themes, like that of rulers imposing coercive power, or of individuals rising up against tyrants, are as relevant today as they were in antiquity. Suzanne Collins drew on Greek mythology's story of the Minotaur and on the legend of Spartacus in ancient Rome as she created the Hunger Games series. Her hero, like the heroes in these stories, does not seek her own power or profit but is standing up against a violent and tyrannical government. "People everywhere yearn for the freedom to pursue their own goals and dreams," says Prof. Amy Sturgis. Even though the themes are ancient, stories like the Hunger Games resonate with readers because the anxieties and fears they portray are real and relevant. "These stories aren't just entertainment," Sturgis says. "They are reflections of who and what we are." Do the themes in these stories resonate with you? Why?

Video: This Time is Different 1999 edition: Magical environment for the stock market

The following video interview conducted during the peak of the dotcom bubble or in December 1999 (chart of the Nasdaq below from bigcharts.com), is a classic example of how mainstream ‘experts’ anticipate markets so badly and how the mania mentality (this time is different) operates at the climax of a bubble. 

A reminder of the “this time is different” mindset from Harvard’s Carmen Reinhart and Kenneth Rogoff in their discourse of the 250+ crisis since 1800: (bold mine)

The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes

The four deadliest words of investing comes in different variations such as “permanently high plateau”, “As long as the music is playing, you’ve got to get up and dance,” and more…

In the video this has been embodied by “Magical environment for the stock market”

Learning from history, it gives me a creep when I hear personalities publicly declare phrases that resembles the above such as: “Rising Star of Asia”, “We have the kind of economy that every country dreams of” and etc…

(hat tip Zero Hedge)

The Pope and Populist Politics

Pope Francis plays populist politics by supposedly taking on an economic stand.

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” Francis wrote in the papal statement. “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacra­lized workings of the prevailing economic system.

Harvard’s Greg Mankiw’s reaction (hat tip Mark Perry)

First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.

Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the "soak-the-rich" theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

Third, as far as I know, the pope did not address the tax-exempt status of the church.  I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down.

Wall Street’s Mary O’Grady on Venezuela as example of the Pope’s model.

Heavy state intervention was supposed to produce justice for the poor in the breadbasket of South America. We all know how that turned out.

No Christian can doubt the love expressed in the pope's message, which aims to shepherd the flock away from materialism. But the charge that grinding poverty in the world is the outgrowth of "the absolute autonomy of the marketplace" ignores reality. To be sure, even prosperous economies regulate markets. But those that have a lighter touch do better. Human history clearly demonstrates that when men and women, employing their free will and God-given talents, are able to innovate, produce, accumulate capital and trade even the weakest and most vulnerable are better off.

Instead the pope trusts the state, "charged with vigilance for the common good." Why is it then that the world's most desperate poor are concentrated in places where the state has gained an outsize role in the economy specifically on just such grounds?

…

Venezuelans need a moral authority that defends their rights to run a business, make a living, own property and preserve the purchasing power of what they earn. In short, they need a champion for a rule of law that will limit the power of the state over their person. Mother Church ought to be that voice. In siding with Mr. Maduro, however inadvertently, she harms her cause in the region.

New York Stern Professor Mario Rizzo on the Pope’s omission of the scientific dimensions of social policies.

If we move beyond Jesus’ exhortations to individuals about their moral behavior to papal exhortations about government policies to achieve the goal of eliminating or reducing avoidable human suffering, a scientific dimension is added. Policies have consequences, often unintended. The social interaction of people is more than the acts of people taken individually.  There are complexities in these cases subject to scientific analysis.

The ultimate normative goals of action can be based on a religious insight or commitment. (I prefer to say on ethics.) But the means chosen to attain those goals are in large part a scientific question. Thus the proximate goals of action are largely in the domain of science. (An exception is where the means are considered intrinsically evil.)

The point is that policies are means to ends. They are not decrees about how the world should be. They can succeed or fail to achieve the desired moral ends. They can have consequences more undesirable than the problems they purport to solve. It is hard to see what the Church can authoritatively add to these discussions.  Issues like income redistribution, globalization and financial speculation, however, are either above or below the papal pay grade. As Jeremy Bentham said about the state, the job is basically to “be quiet.”

Obviously, for a Church wanting to be relevant in its growth areas in poor, less developed countries, this might not be enough. And yet there is more it can say about the state’s use of coercion, of its violation of the basic principles of just conduct in the creation of crony “capitalist” economies, of its secrecy and lack of accountability, of the use of torture, of trafficking in slaves, and war. The Church has to its credit tackled many of these. It will be seen, I suggest, that in most of these areas governments or others are violating the fundamental principles of individual just conduct: lying, cheating, stealing, physically harming innocent individuals, failing to aid others in distress (as opposed to failing to coerce people to aid others in distress), and even the use of force where turning the other cheek would be appropriate.

But where social policy is concerned, fundamentally scientific issues are crucially involved and the Church has no greater teaching authority than the rest of us. To confuse matters by combining superficial scientific analysis with strictly moral teaching does neither the Church nor the world much good.

Uttering feel good noble sounding populist political rhetoric with hardly a good understanding of the real social consequences from proposed repressive policies will do little to help society. For me, the Pope's major gaffe has been the failure to understand that the state is run by human beings who shares the same vulnerabilities as the rest.

As the great dean of the Austrian school of economics Murray Rothbard admonished:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Philippine Politics: Low Inflation? LPG Prices Skyrockets

I was stunned to discover that local LPG prices has risen steeply—by over 20%. So I checked on the web to verify, and found this.

From the Inquirer:

Retail prices of liquefied petroleum gas (LPG) grew to as much as P14.30 per kilogram starting on Monday, amid long lines at distribution hubs in Batangas. Tight supply would also lead to price hikes for gasoline and diesel.

More on the coming oil and energy price hikes. From the Philstar.com (bold mine)

Oil prices, meanwhile, are expected to go up again this week as local petroleum players track movements in the global crude market.

The price of diesel is expected to increase by P1.10 per liter while gasoline prices are projected to climb by 30 to 50 centavos per liter, marking the first adjustment for the month of December and the third price hike in three weeks.

Electricity rates are also expected to increase this month and in January 2014 because of the Malampaya shutdown.

“Malampaya is currently on shutdown because it needs maintenance,” Petilla explained.

Manila Electric Co. (Meralco) is expected to announce today the power rates for the month of December.

Electricity rates for the month of November went up by P1.24 per kilowatt-hour (kwh) on the back of maintenance shutdown of the Malampaya Deep Water Gas-to-Power project, which supplies natural gas to three power plants in Luzon. The maintenance shutdown started from Nov. 11 and will run up to Dec. 10.

Petilla said that during the shutdown, Malampaya plants would run on diesel, which is the “most expensive.”

It’s a wonder how the BSP can come up with a CPI of 2.9% to 3.6% when prices of basic goods appear to be running berserk.

Next oil and energy prices are hardly tracking movements in the global energy markets.

US WTIC crude has been in a decline.

Europe’s Brent crude has been drifting sideways albeit a recent uptick.

US Natural gas also reveals a sideways movement. However recent developments exhibit a bounce.

US gasoline has also been in a decline, again with a near term rally.

Again hardly any of the above exhibits the dynamic where domestic energy price inflation are supposed to be reflecting on global developments. 

Instead, “maintenance shutdown” on power generators have been local developments.

Moreover, the article explains partly the supply side aspects without delving deeper into demand-supply relationship.

Be reminded that while fuel, energy and transportation costs may be secondary to food and rental in terms of price sensitivity to domestic consumers (chart from ADB’s Hyun H. Son), we should expect that the former variables to have a spillover effect on food prices. 

I have already previously noted of how the Philippine property bubble has been raising rental prices that will eventually impact “consumer affordability, disposable income and consequently demand.”

So domestic consumers appear to be facing price pressures on these three fronts. The next will be on wages.

The real reason we are seeing incipient signs of the renaissance of the inflation monster has been due to the BSP’s policies. M3 growth has been exploding over the last one year and a half.

We can sum up the above as:

One, this has been a domestic dynamic

Two, domestic consumers are highly price sensitive to food, rental and energy costs.

Three, rising input costs will eventually impede profitability and reduce commercial activities

Four, thanks to the BSP’s policies, exploding M3 means those with access to the banking system have been benefiting more than those without access. Increased demand funded by credit has led to higher CPI.

Rising CPI means growing inequality as the poor will suffer from higher prices of basic goods. 

Fifth, higher CPI is a manifestation of the loss of purchasing power of the peso

Finally, sustained increases in CPI will postulate to greater risks of stagflation that implodes the bubble economy and markets.

As I wrote in 2011 

 

Consumer price inflation which is politically unpalatable especially for the Philippine setting, where the Philippines is shown as the most sensitive to food inflation in Asia (see chart from businessinsider.com), would eventually compel government to drastically tighten.

When this happens depends on the level or degree of rate of increases in consumer price inflation which will likewise be reflected in the interest rates.

But before that happens, expect the private sector to bear the brunt as the principal scapegoat for alleged economic 'greed', when the main culprit is no other than political greed.

And this will be met by a gamut of price controls which only exacerbates the situation.

Like in the 70s, negative real rate regime eventually leads to stagflation.

As the great Austrian economist Ludwig von Mises warned

The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be. 

Quotation of the Day: Which is more dangerous, inequalities of wealth or concentrations of power?

Those who want to "spread the wealth" almost invariably seek to concentrate the power. It happens too often, and in too many different countries around the world, to be a coincidence. Which is more dangerous, inequalities of wealth or concentrations of power?

This is from American economist, philosopher and author Thomas Sowell in his "Random Thoughts" article at the Townhall.com.