Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

  

Keynesianism is the destruction of the middle class. By printing money and bloating deficits and spending, the size of government in the economy rises faster than the private and productive sectors. The size of the government increases during recessions by increasing expenditure to combat them, and it also increases during economic downturns by hiking taxes and creating inflation, which is a hidden tax—Daniel Lacalle 

In this issue

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting in August? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?  

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position? 

IV. Public Spending Surges to Fourth-Highest Level on Record in May! 

V. Will the Government Introduce a Fiscal Stimulus Package Soon? 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

VIII. Five-Month Debt Servicing Costs Hits Record High! 

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation 

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks 

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

With the BSP priming the public for a policy easing this August, and May public spending reaching a non-December all-time high, could this signify the implementation of a 'Marcosnomics' signature stimulus?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting August?

Businessworld, June 28,2024: THE BANGKO SENTRAL ng Pilipinas (BSP) kept interest rates steady for a sixth straight meeting on Thursday but signaled that a rate cut at its next meeting in August is “somewhat more likely than before,” with up to 50 basis points (bps) in easing likely this year…Mr. Remolona said he expects inflation to further ease in the second semester with the implementation of lower tariffs on rice. 

If an increase in rice tariffs will lower the CPI, why would this require the BSP to cut rates?

Policy rates represent a tool for managing aggregate demand, largely ignoring the impact on balance sheets.

By signaling a cut, is the BSP admitting to a worsening slowdown in demand?

Don’t you see the contradiction? Why would the BSP use a demand management policy to address a supply-side concern? 

For the avoidance of doubt, the results of the BSP’s latest consumer survey corroborate their implicit worries (bold added): The consumer sentiment in the Philippines was more pessimistic for Q2 2024 as the overall confidence index (CI) became more negative at -20.5 percent from -10.9 percent in Q1 2024. The decline in the index is reflective of the increase in the percentage of pessimists, which outweighed the increase in the percentage of optimists. The weaker confidence among consumers was mainly due to their concerns over the: (a) faster increase in the prices of goods and higher household expenses, (b) lower income, (c) fewer available jobs, and (d) the effectiveness of government policies and programs on inflation management, traffic and public transportation, provision of financial assistance, and labor and employment.  For the next quarter (Q3 2024), the CI turned negative at -0.4 percent from 2.7 percent in Q1 2024. However, the consumer sentiment for the next 12 months (May 2024-April 2025) remained optimistic as the CI was little changed at 13.5 percent from 13.4 percent in Q1 2024. (BSP, June 2024) 

So, could this be the genuine reason for the entrenchment of the BSP’s 'dovish' stance? 

It does not stop there. 

It’s not just consumers; businesses have also shared this dour sentiment for 2024. 

This is according to another BSP survey. (bold mine): The business sentiment in the Philippines turned less upbeat in Q2 2024 as the overall confidence index (CI) declined to 32.1 percent from 33.1 percent in Q1 2024. This is reflective of the combined decrease in the percentage of optimists and the increase in the percentage of pessimists. The Q2 2024 business confidence turned less buoyant due mainly to the firms’ concerns over: (a) softer demand for goods and services such as personal care, health and other consumer products, construction supplies, city hotels and restaurants, and manpower services, (b) ongoing international conflicts that may push oil prices higher, (c) slowdown in business activity due to El Niño-induced extreme weather conditions, and (d) persistent inflationary pressures that may weigh down consumer spending. For Q3 2024, the country’s business confidence weakened as the overall CI also fell to 43.7 percent from 48.1 percent in the Q1 2024 survey result. For the next 12 months, business outlook was similarly less upbeat as the overall CI decreased to 56.5 percent from 60.8 percent in the Q1 2024 survey result (BSP, June 2024) 

Even before this survey, has the BSP been aware that revenue growth of listed retail chains had been struggling for some time? 

Besides, why did the BSP not address the escalating tensions between the Philippine government and China over the disputed South China Sea claims? 

An outbreak of violence in the region would not only disrupt global supply chains, but also raise the specter of a wider conflict—a "casus belli"—that could have severe socioeconomic and financial consequences for the Philippines. 

Does this represent another case of an analytical "blackout?" 

In a nutshell, is the BSP concerned about how the gloomy views of consumers and businesses may translate into weaker GDP growth? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?

On the other hand, how would interest rate cuts boost demand, incomes and jobs if household and business balance sheets are already heavily leveraged?

Figure 1

Has the BSP not learned from the Bank of Japan's experience with negative nominal interest rates, where instead of stoking inflation, it exacerbated the curtailment of demand that led to its "lost decades?" (Figure 1, topmost graph)

Further, would the BSP's rate cuts not only magnify economic imbalances and stoke inflationary pressures but also widen inequality between those with access to formal credit and those reliant on shadow banking, such as small and medium enterprises (SMEs)?

Moreover, has the BSP also expressed concerns over the deteriorating conditions in the banking system, where higher interest rates have led to the erosion of accounting profits, potentially worsening financial liquidity conditions and exposing the solvency issues of bank borrowers and the industry? (Figure 1, middle and lower windows)

Will the BSP’s rate cuts not amplify the balance sheet imbalances?

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position?

Along with the above, as previously noted, May's CPI could represent an interim peak. We arrived at this conclusion based on several factors:

Figure 2

1. Slowing month-over-month momentum in the CPI

2. A bullish flattening of the Philippine treasury yield curve, which narrowed further in June (Figure 2, topmost graph)

3. Instead of boosting demand, the elevated leverage in household balance sheets—as revealed by record consumer spending—has fueled an increase in consumer non-performing loans (NPL)

4. Deteriorating job market conditions

5. The recent bounce in imports may be driven by substitution effects due to production slack

6. The rising US dollar-Philippine peso exchange rate, which not only contributes to higher import and financing costs but also puts pressure on local industries to generate more foreign exchange revenues to fill the widening trade gap. (Prudent Investor, June 2024)

The BSP has published its projected CPI for June (3.4%-4.2%)—which seems tilted lower than May (3.7%-4.5%). The next step will be for the consensus "to pin the tail on the donkey" by selecting numbers within the BSP’s range.

If the CPI slows, would it validate our view that the economy has been slowing faster than expected? And would this justify the BSP’s proposed easing this August?

IV. Public Spending Surges to Fourth-Highest Level on Record in May!

We also noted peculiar signs of restraint in government spending in the first four months of 2024.

However, this trend may have reversed in May, as the enlarged deficit emanated from outsized government spending!

Inquirer.net, June 28, 2024: The government reverted to a fiscal deficit in May, after posting a P42.7-billion surplus in April, amid higher public spending fueled by accelerating inflation and a high-interest environment…Government spending in May amounted to P557 billion, accelerating by 22.24 percent mainly driven by allotments to government agencies’ projects and budgetary support to local government units and state-run corporations. For the first five months, disbursement reached P2.3 trillion, up by 17.65 percent…For this year, the government has set a budget deficit ceiling of P1.48 trillion, or equivalent to 5.6 percent of gross domestic product (GDP). It also aims to reduce the deficit-to-GDP ratio to 3.7 percent by 2028.

May's government spending represented the fourth largest on record, according to data from the Bureau of Treasury! (Figure 2, middle chart)

Ironically, this May spending surge was in line with the biggest spending streams that occurred in December over the last three years—when the government typically used the final month to meet or exceed (political) expenditure targets. Yet, it is not even the end of the second semester. (Figure 2, lowest image)

Or, public spending in May was the highest on record (excluding the December expenditures)!

Has the government's frontloading of expenditures last May broken the seasonal December spending cycle? 

That’s right.  The surge in May’s deficit spending may set the template for the coming months through the year-end—we can only expect December spending to surge even more (or hit a fresh milestone)! 

Because of the revenue or collection slowdown, the spending ballooned the fiscal deficit way above 2023’s level. 

V. Will the Government Introduce a Fiscal Stimulus Package Soon?

Figure 3

Remember that government revenues are dependent on economic, financial, and administrative performance, while spending is programmed as part of the Congress—approved budget. 

For instance, not only does public spending play a crucial role in shaping economic imbalances that can lead to inflation, but inflation also has a material influence on revenue collection. Revenues depend on the declared transacted price levels.  That is to say, a slowdown in private GDP growth would materially widen the fiscal deficit. (Figure 3, top and middle visuals) 

The government has already proposed a 10% increase in the 2025 budget to Php 6.35 trillion. 

A surge in public spending increases a segment of the private sector’s revenues from Public-Private Partnerships (PPP) and other direct and indirect linkages via the political bureaucracy—which will be used for "consumption." 

Therefore, as we observed in our early June post, 

Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend?  (Prudent Investor, May 2024) 

Are authorities expecting an economic downturn? Are they preparing the public for the launch of a grand stimulus through measures via easing rates, liquidity injections, and deficit spending? 

As we concluded from the same note last May, 

Once again, when the economy slows substantially or recession risks mount, monetary authorities will likely resort to the 2020 pandemic playbook: substantially easing interest rates, infusing record amounts of liquidity, and deepening the imposition of relief measures. Alongside this, political authorities are likely to drive deficits to reach record levels. 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

The increase in the fiscal budget gap for May translates to an impending reversal in the four-month deceleration of public debt issuance. (Figure 3, lowest chart) 

Intriguingly, some quarters have praised this deceleration without fully comprehending the policy "path dependency" of the authorities. 

Subsequent to the April announcement of a Php 2.57 trillion target for 2024, which represents an 8.9% increase from last year's Php 2.07 trillion, the government has already declared that it proposes to raise Php 600 billion in Q3, following the projected Php 585 billion increase in Q2.

As of May, the Bureau of the Treasury (BoTr) has raised Php 1.038 trillion, which amounts to 40% of the projected Php 2.57 trillion financing.

The increase in the May’s fiscal budget gap translates to a coming reversal in the four-month deceleration in public debt issuance.  Intriguingly, some quarters have exalted this deceleration with hardly a comprehension of the policy path dependency of authorities. 

And subsequent to the April announcement of a Php 2.57 trillion target in 2024 or an 8.9% increase from last year’s Php 2.07 trillion, the government has already declared that it proposed to raise Php 630 billion in Q3 following the projected Php 585 billion domestic borrowings in Q2. 

Through May, the BoTr has raised Php 1.038 trillion or 40% of the projected Php 2.57 trillion financing. 

This path dependency on deficit spending would entail increases in systemic leveraging. 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

How is the government deploying our anticipated 'stimulus'?

Figure 4

We anticipated a reversal from the recent slack in LGU allocations, primarily due to the upcoming 2025 Senate and local elections.

The 'proxy war' between the US-NATO alliance and the Russia-China-BRICs alliance is playing out in the domestic political sphere through an intensifying contest between the incumbent and former administrations, where LGUs will play a pivotal role in determining the winners.

The pro-China former President and his two children plan to run for Senate in 2025 against the pro-US incumbent.

Facilitated by the BSP's easing and the banking system's liquidity infusions, the incumbent administration is expected to disproportionately increase budgets for select and favored LGUs that will promote their domestic and geopolitical agendas.

Although LGU allocations increased by 8.54% in May, the 5-month growth surged by 10.6%, reaching a nominal spending of Php 420.3 billion, the second-highest on record. (Figure 4, upper graph)

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! (Figure 4, lower image)

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus."

VIII. Five-Month Debt Servicing Costs Hits Record High!

But there is more.

Figure 5

Notably, interest payments skyrocketed by 47.8% in May alone! (Figure 5, topmost graph)

Over the 5-month period, interest payments soared by 40% to a record high of Php 321.6 billion. As it is, the pie of interest payments rose to 14.24%—its highest level since 2009!

Consequently, 5-month debt servicing (including interest and amortization) surged by 48.5% to an unprecedented Php 1.217 trillion, accounting for 91.78% of the full-year debt servicing in 2023! (Figure 5, middle and lowest windows)

Specifically, amortizations are just 8.22% below the 2023 levels, while interest payments remain 48.8% short of last year’s level.

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation

Adding these together, the BSP’s incentive to ease or cut rates is largely political in nature.

Primarily, it aims to lower financing costs to support the administration’s pre-election geopolitical and GDP "stimulus," while mitigating the rising costs of public debt servicing. 

Additionally, it seeks to alleviate liquidity and solvency challenges affecting the banking industry and its clients. 

The banking system operates similarly to a cartel under the BSP's oversight.

Figure 6 

Faced with stepped-up deficit spending, the BSP could likely bankroll this by increasing its direct liquidity operations (net claims on the central government—NCoCG); a strategy previously employed in 2020. (Figure 6, topmost chart) 

In coordination with the BSP, banks are also expected to increase financing of public debt through purchases of government debt (NCoCG). (Figure 6, middle graph) 

The acceleration of the banking system’s historic NCoCG has mirrored the surge in the record-high in public debt. May’s data will be reported by BuTr in the first week of July.

Figure 7

Let's not forget that banks have also been significant borrowers of local savings to bridge gaps from deposit shortfalls, hidden non-performing loans (NPLs), substantial mark-to-market losses, and record Held-to-Maturity (HTM) assets reflected on their balance sheets.

The banking system's bonds and bills payable have been approaching the Q4 2019 zenith. (Figure 7, topmost image)

Essentially, the banking system is in tight competition with the government and non-financials for access to the public's savings. 

Not only does this put a floor on rates, but it also provides an incentive for the BSP to expand liquidity operations to keep the system afloat. Yet, this entrenches inflation, the interconnectedness of leverage, and the potential transmission of risks.

As such, while we expect the rebound in the CPI to have likely climaxed in May—largely due to growing slack in the private sector—a burst of deficit spending should put a floor under it. 

Along with this, the specter of stagflation rises.

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks

It is no coincidence that the rise in the USD to Philippine peso exchange rate has closely correlated with public spending.

Put differently, monetary inflation in support of the “trickle-down” policies that lead to the “twin deficits” emasculates the purchasing power of the peso against the USD and gold. 

So there you have it.  The BSP’s ‘dovish’ stance is largely in consonance with the acceleration of the national government’s intensifying deficit spending. 

While intended as a GDP “stimulus,” these measures also serve other underlying political agendas—facilitating access to cheaper domestic savings for pre-election financing, geopolitical activities, other domestic political objectives, and cushioning banks from worsening balance sheet challenges. 

As the above shows, the Philippine government and the establishment have been so hooked on stimulus in the hope that it will deliver some form of utopia. 

Yet, the more the interventions, the deeper the imbalances, the greater the probability of risks. 

___

References: 

Daniel Lacalle, The U.S. fiscal nightmare. Yellen cannot expect a strong economy with higher spending and taxes, dlacalle.com May 26, 2024 

Bangko Sentral ng Pilipinas, Consumers are Pessimistic in Q2 and Q3 2024, But Optimistic for the Next 12 Months*, June 28, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, Businesses are Less Optimistic in Q2 2024, Q3 2024, and the Next 12 Months*, June 28, 2024, bsp.gov.ph  

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10, 2024  

Prudent Investor, Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness May 12, 2024

 

PSEi 30 Posted its Largest Weekly Plunge of 3.53% in 2024: Why the Incredible Silence on the Influence of the June 17th Ayungin Shoal Incident?

Journalists cannot serve two masters. To the extent that they take on the task of suppressing information or biting their tongue for the sake of some political agenda, they are betraying the trust of the public and corrupting their own profession—Thomas Sowell

PSEi 30 Posted its Largest Weekly Plunge of 3.53% in 2024: Why the Incredible Silence on the Influence of the June 17th Ayungin Shoal Incident?

Why has the June 17th Ayungin Shoal Incident been absent from all media narratives on the stock market? Is censorship making a comeback?

Here is a list of news articles carrying Friday’s selloff at the Philippine Stock Exchange:

Inquirer.net, June 22, 2024: A weaker peso and strong foreign selling pushed the local bourse over its steepest drop of the year so far on Friday, with the benchmark index touching the 6,100 level for the first time in seven months. The Philippine Stock Exchange Index (PSEi) entered an eight-session losing streak on the last trading day of the week, falling by 2.93 percent, or 186.08 points, to close at 6,158.48…Philstocks Financial Inc. research analyst Claire Alviar noted that the market’s negative performance was due to strong net foreign selling, recording a net outflow of P1.34 billion…The local bourse has been falling in recent weeks, mostly due to the Bangko Sentral ng Pilipinas hinting at fewer interest rate cuts this year, which would mirror the move of the US Federal Reserve.

Philstar.net, June 22, 204: The stock market plunged to its lowest level this year as the peso fell to nearly 20-month low against the dollar. The benchmark Philippine Stock Exchange index (PSEi) lost for the eighth consecutive session, plummeting by 2.93 percent or 186.08 points to end at 6,158.48. This was the PSEi’s lowest level in over seven months or since hitting 6,110.88 in Nov. 15, 2023.

Manila Times, June 22, 2024: THE peso and the stock market ended the week on a sour note with both hitting multi-month lows amid a continued lack of positive catalysts. Analysts said that both the currency and financial markets had taken their cues from each other and that sentiment also remained negative amid continued dollar strength and a tech sell-off on Wall Street.

PNA, June 21, 2024: The local stock market ended the last trading day of the week in the negative territory due to net foreign selling, while the peso closed almost flat. The Philippine Stock Exchange index (PSEi) dropped 186.08 points to 6,158.48, while the broader All Shares also fell 65.11 points to 3,375.20. "The local bourse dropped by 186.08 points (2.93%) to 6,158.48 due to strong net foreign selling, recording a net outflow of P1.34 billion. The market’s new level is its lowest this year and marks its 8th straight day of decline. Additionally, the weakness of the peso against the US dollar continued to weigh on sentiment," Philstock Financials, Inc. research associate Claire Alviar said.

The three wise monkeys: "see no evil, hear no evil, speak no evil"

Isn’t it surprising that there’s NO mention of the escalating West Philippine Sea conflict in media coverage of stocks and the peso? 

Does the rising risk of a full-blown conflict hold any implications for the local financial markets?

Could the chaos — including the death, injury, disability, and destruction of private and public property — even lead to a stock market rally?

It’s incredible to observe that after the media passionately highlighted the knife-toting, boat-ramming, and boat-boarding incident by the Chinese Coast Guard at Ayungin Shoal on June 17, Philippine authorities backpedaled from calling it an "armed attack" that could have triggered the Mutual Defense Treaty (MDT) with the US government, potentially escalating into World War 3.

And yet, the astonishing code of silence by the establishment on its economic and financial impact!

However, foreign investors seem to have taken a different page from local media.

Down by 3.53%, the PSEi 30 suffered its largest weekly decline in 2024, with 83% of this week's deficit attributed to Friday's 2.93% plunge.

Figure 1

This selloff was aggravated by a substantial 1.26% pre-closing dump. (figure 1, topmost pane) 

Friday's meltdown saw a significant outflow of foreign funds, with net selling reaching Php 1.34 billion that represented 48.83% of the week's total outflows. (Figure 1, middle graph)

Foreign money has been selling the PSE in the last 12 of the 13 weeks.

Figure 2

Yet this week's selloff affected most of the 10 largest heavyweights, with the top 5 market caps continuing to decline. (Figure 1, lowest graph) (Figure 2, upper window) 

Could this be the law of mean reversion in motion?

The selloff can hardly be attributed to global developments, as the PSEi 30 suffered the largest weekly deficit among Asian-Pacific stocks. (Figure 2, lower diagram)

Could the weak peso be the culprit?

As earlier noted, the peso's frailty is a long-term trend. Why should concerns over a USDPHP breakout suddenly become an immediate threat to foreign investors?

Moreover, why would foreign funds rush for the exit when the region was experiencing a "fear of missing out" (FOMO) mood?   Eleven of the 19 national indices closed higher, with an average return of 0.44%, while four national benchmarks hit fresh record highs.

In addition to imbalances from market concentration plaguing the PSEi 30, sluggish local volume exacerbated its downside volatility due to panic selling.

Figure 3

Despite a significant boost from cross trades by institutional brokers, the five-month trading volume hit a four-year low, further reinforcing its long-term downtrend. (Figure 3, upper graph)

Once again, dwindling trading volumes increase the risk of a market crash.

Though oversold from Friday’s plunge, which could see a bounce this week, the latest breakdown of the PSEi 30 makes it vulnerable to testing recent lows (5,960 October 27, 2023 and 5,740 September 30, 2022). (Figure 3, lowest chart)

Lastly, media narratives typically focus on either post hoc or availability bias when attributing recently concluded events, but why the blackout on the June 17th Ayungin Shoal incident?

Bottom line: Are authorities assuming that shielding the public from the escalating risk of war will somehow keep the economy and financial markets afloat?

Is censorship making a comeback?

Why US Elections Highlights a Decisive Turning Point in the Era of Inflationism

Cross published from my Prudent Investor Newsletter blog

Inflationism’s Major Roles: Bubble Blowing, Increased Social Conflicts and Heightened Risks of War

Breakthrough history can be seen on how global central bank’s full adaption of inflationism has spawned not only asset bubbles but likewise have been inciting increasing societal strains

The IMF declares record debt household, corporate and global debt to the tune of $152 trillion or 225% of the global economy.

This has been supported by record explosion of central bank’s balance sheets (Yardeni.com November 4), as well as record streak of interest rates cuts which now exceeds 666, as of August, notes the Bank of America, since 2008 (Business InsiderAugust 6). And central banks have moved out of Zero Interest Rates Policy (ZIRP) to deploy negative interest rates (NIRP).NIRP has been implemented by several countries led by Japan, Scandinavian and EU economies. The effect of which has been to spawn unprecedented negative yielding government bonds which has soared to $12-13 trillion (Bloomberg October 3) or about a third of total outstanding bonds (quartz July 2016)!

And because NIRP creates leakages through increased holdings of cash, many have called for an outright ban on the use of cash or eliminate high denomination notes.

Because record debt means borrowed money has to go or used somewhere, such has led to global asset bubbles.

Because part of the easing policies by central banks included bond purchases, negative yielding bonds means bond prices have soared to record highs! And bond prices have been accompanied by record pileup in bond ETFs! From the Financial Times (October 10, 2016): “Investors have piled more than $100bn into bond exchange traded funds so far this year, taking the global total to its highest ever level as fixed income investors adapt to a changing financial ecosystem”.

The IMF’s gauge of housing prices has almost reached 2008 highs! And this again has been backed by ballooning housing debt!

 

Record debt has also fueled stock market bubbles.

And because of the imbalances in relative levels of interest rates created arbitrage opportunities, along with BREXIT, US stock and bond markets rocketed to new records last July. From the Financial Times (July 11): A fundamental relationship between bonds and equities has broken down as the pressure for returns intensifies in an ever-expanding world of negative interest rates. An insatiable thirst for income has driven both US bond yields and equity prices — two areas that traditionally move in opposite directions — into record territory.

This occurred even when the index of global stocks (FAW) failed to correspond with the US which runs in contrast to 2014 and 2015.

Such curious developments have transpired even when the global economy as measured by World Bank’s GDP has been trending significantly lower since 2010!

The unequal distribution of economic gains has sown seeds to social conflicts.

Inflationism’s Role in the Destruction of Social Fiber

And because borrowed money hasn’t only been inflating bubbles which have apparently become dissonant with global economic performance, these have also been used to finance public expenditures, such as the welfare and the warfare state.

Based on OECD’s measure for member countries, social spending as % of GDP soared to 2009 record highs in 2016!

In other words, as economic conditions slowed, more people have become dependent on government’s largesse to sustain them. And with insufficient revenues, such government bounties have been funded by expansive debt.

And because of bigger funding requirements, governments intrusions on the economy has vastly increased—as evidenced by surges in regulations or mandates and by taxes (indirect and direct).

The intensifying politicization of domestic economies across the world, in the face of immensely burgeoning of dependency on the government, has prompted for a deepening polarization of society.

This comes as global bubbles amplify redistribution process favoring the financial and speculator class.

Don’t forget bubbles have varying effects on the populace. For instance, property bubbles impact society unevenly. Property bubbles subsidizes property speculators, but harms businesses through reduced profits via higher operating costs through increased rents and or higher property costs for acquisitions especially funded by debt or via reduced cash flows. It also impacts households through reduced affordability for potential or would be buyers homeowners, as well as, diminish the disposable incomes for renters.

A wonderful example: In the US, while economic conditions (meager jobs and wage growth) have been cited as main reason why more young adults are living with their parents –for the first time in 130 years (NPR, Pew Research May 24, 2016)—asset inflation or property bubbles may have likely been an important contributor to such dynamic. This has been happening as homeownership has slumped to the lowest level in more than 50 years (Bloomberg July 28) while rental markets skyrocketed (CNBC June 16). [As a side note, perhaps as signs of hissing bubbles, some major rental markets in August have started to drop. Wolf Street, September 2]

Also in the past [How Inflationism Spurred Singapore’s Labor Protectionism September 24, 2013] I have shown how Singapore’s property bubbles have sparked an outcry by residents against foreigners. This has led the government to impose labor protectionism or added restrictions on foreign hiring in the hope to reduce demand for housing.

So for the politically dependent class and for many other aggrieved segments of society, the unevenness of (the unseen politically, or to be more specific, mainly central bank induced) economic distribution has been seen as “inequality” brought about by “market forces”, hence, the aggravation of partisan politics predicated on immediate gratification or short-termism as evidence by the accession of a mélange of anti-immigration, nationalism, protectionism and anti-globalization forces, as well as, growing secession movements.

Scotland’s failed independence referendum in 2014 served as a precursor to the successful Brexit (UK’s withdrawal from the EU) referendum in 2016. The arguments for Brexit centered on immigration controls, rejection of EU bureaucrats and interests of the establishment, as well as reduced intervention on UK’s economy (Marketwatch June 23). PM Theresa May chastised the Bank of England for sowing inequality early October (Business Insider October 5). Unfortunately, Brexit hit a wall when UK’s Supreme Court ruled that invoking Article 50 required a vote by the Parliamentary. The government has appealed to reverse on this ruling. (Bloomberg November 4, 2016)

Italy’s government has been slated to hold a supposedly crucial referendum on “constitutional reform” in December 4. The referendum could represent a litmus test on the likelihood of Italy’s exit from the EU. And Italy has been experiencing a deluge of money outflows, partly due to the banking system’s problem, and perhaps partly, through increased risks of an “Italexit” (Bloomberg, October 17)

Inflationism’s Role in Global Conflict

And since the world operates in sheer complexity, years of central bank inflationism has also spillover to promote global conflict through the financing of the warfare state.

While global military spending expanded materially from 1991-2010, it has been static over the past few years. However, even while the aggregate numbers have been stable since 2011-2015, the distribution of global military spending has vastly differed. The biggest growth in the arms race in 2006-2015, according to the Stockholm International Peace Research Institute (SIPRI, April 2016) have been the UAE 136%, China 132%, Saudi Arabia 97%, Russia 91%, India 43%Brazil 38% and South Korea 37%.

Though expenditures fell 3.9% over the same period, US military spending accounted for 44% of the $1.35 trillion spent by the top 15 or 35% of the total world arms spending at US $1.676 trillion. US military spending accounted for 16% of 2015 budget (Heritage Foundation) and is bound to rise to $617 billion in 2017 according to USgovernmentspending.com

In short, relative growth comparisons would seem inadequate simply because of the scale of spending involved. All other nations have come from small reference numbers.

Yet, the US doesn’t spend all that humongous amount of money for nothing. Hence they have been meddling everywhere.

Former US president Dwight Eisenhower was right, in his 1961 speech he warned against the expansive influence through the domestic political and geopolitical clout of the military industrial complex: “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist”.

Today, the military industrial complex combined with the neoconservative’s embrace of the Wolfowitz Doctrine (Wikipedia) “suppress potential threats from other nations and prevent any other nation from rising to superpower status” has led to manifold US intrusions in overseas affairs and “encirclement strategies” against perceived competitors for superpower status.

Hence, this has prompted governments like China and Russia to respond with an arms race.

The US government’s interference in the Middle East affairs, in particular Syria and in Eastern Europe (Ukraine) has brought her face to face with nuclear power Russia. The US appears to be fighting a proxy war for Israel, since the Syrian leadership has been an ally of Iran and Syria supported Palestine resistance against Israel. The US government has been further involved in Libya, Yemen and, Iraq where the US seems also fighting a proxy war for Saudi Arabia [New York Times March 13, 2016].

This shows how world is faced by real risks of a nuclear confrontation between nuclear powers.

A week ago, the CNN (October 28) reported that a US and Russian war plane, “flew dangerously close to each other while flying over Syria earlier this month”.

Any possible real encounter could translate to “one thing leads to another”.

Add into this combustible cauldron are South China Sea territorial disputes, and rogue North Korea. And another potential flashpoint should include the Kashmir region (India versus Pakistan versus China) [James Hardy Asia Pacific editor of the IHS Janes Defence weekly The National Interest October 17, 2014].

Such debt financed massive arms race increases the risks of a world at war—especially once the global economy falters or a financial crisis emerge. Governments are likely to look for external bogeymen to blame their internal woes.

And wars in the Middle East have led to massive refugee flows into Europe as well. And such massive refugee flows has led to a refugee crisis that has fueled the growing anti-migration/nationalist sentiment.

In other words, trickle down central bank policies based on war on interest rates have spawned multiple social problems not limited to the economic and financial sphere.

US Elections: Political Turmoil as Post-Election Legacy?

This leads us to next week’s crucial US presidential elections.

Despite being the most unfavorable candidates today, the two major candidates appear to be products of Fed sponsored inflationism

Intense partisan politics has reduced the present election into a sham. With both proposing to solve current dilemma by focusing on short term solutions through increasing interventionism and expansive the government, there seems hardly a distinction between them. Nevertheless, the election has been projected as representing a competition between the establishment and the anti-establishment—a theme which resonates with the geopolitical milieu.

Regardless of the winner next week, the vitriol from the election campaign will likely be a legacy.

For one, investigations over the scandals that have wracked the administration’s bet will unlikely diminish.

Question is why has the FBI suddenly U-turned to reopen its investigation on the email scandals that has plagued the administration’s bet at culmination of the campaign period? Has there been a fracturing in the relationship among the establishment interests or the unelected “deep state”, for them to have abandoned the administration’s bet?

Has part of the establishment or the unelected deep state been worried that further investigations post-elections would expose them and cause prospective indictments? Will the sustained investigations, most likely to be conducted by the lower house if controlled by the rival but incumbent (Republican) party, lead to an impeachment, if the administration’s presidential bet wins?

If so, how will the administration’s bet respond to them, will she divert the public’s attention by forcing an armed confrontation with Russia and or China?

Moreover, given the unfathomable wedge that has driven many of the populace towards the populist rival, would a perceive winning by administration’s bet be calmly accepted?

Electoral violence looms especially if ballot rigging will be perceived as the cause of the underdog candidate’s loss (The Guardian November 5). Will there be civil unrest if the populist bet loses?

And what happens if the underdog anti-establishment bet wins? Will the winner eventually end up like the fate of John F. Kennedy?

Additionally, will the election of the populist leader actually lead to imposition of protectionist trade and migrant walls?

And again, regardless of next week’s winner, the imbalances from inflationism will eventually take its toll…perhaps sooner than later.

Just how will next week’s winner respond to this? Will there be more bailouts? And how will the public perceive of the leadership during the coming downturn? Will the present divide lead to a smoldering of umbrage and indignation? Will there be civil unrest?

Yet it has been pretty much a fascination to see how recent performance in the stock markets has been attributed by media to the perception of the odds of winning by the contenders for the US presidency.

When markets go up, it has been said that administration’s bet has the perceived edge. And when the markets go down this has been imputed to growing chances by the underdog. So far, the US and global markets appear to be teetering at the precipice (see FAW above).

In the case of Brexit, polls were mostly skewed towards establishment interests (Bremain) only to see an opposite outcome. At present, polls and establishment media has largely been projecting a win by administration’s protégé.  Will next week be a reprise of Brexit which may cause revulsion in the financial markets? Or will next week send a massive short covering? 

As said above, persistent inflationism has only spawned societal disharmony and the risks of discord

Even in the US, decisive history is in the making.