Wednesday, October 13, 2010


I was hesitant to write the following article yesterday, considering I was already tackling a prominent Filipino economist, Winnie Monsod. Today, I figured what the heck. It is now Cielito Habito’s turn to be scrutinized.

His column yesterday dealt with a ‘PITIK’ test that gauges a country’s economic situation. ‘PITIK’ stands for Presyo, Trabaho, Kita, or prices, employment and income.

I don’t think any economist could deny that these are significant in the lives of individuals. But Habito goes about it all wrong. The statistics he uses may be accurate but do not indicate the sustainability of the desired thing (say, additional income per capita), or the underlying factors that are actually more important.

The one crucial factor neglected

The single most important thing that is lacking in Habito’s assessment is: monetary stability. Because of such a conspicuous absence of this factor, we can discard his assertion that, based on PITIK, the economy is looking good, hurrah for the new administration!

For my purposes, I will use the PUTANGINA test, that is, Perang Utang Talaga Ng Gobyerno Iwasan NAtin. What I am trying to say in such a forced acronym is that money as dictated by a central bank is actually debt and does not add to wealth in a community and therefore should be avoided. Not that there’s anything we can personally do about central bank shenanigans.

There is nothing more significant to a community’s economic well-being than the money supply. And there is nothing more destructive to a community’s economic well-being than the devaluation of money via inflation, i.e. increase of the money supply. Even under-the-table deals between government officials, even wars (which often have been financed precisely through inflation), do not compare to the significance of what is considered as money among the people. The redistribution made possible by providing the politically privileged with a greater proportion of total monetary units than the rest, affects the community as a whole, in comparison with isolated scams, which are discovered and neutralized before they spread too far.

The insidious process of monetary inflation

The money supply is always increasing, as long as central banks are around, and the real question is how gradual or how fast is the increase. Central banks increase monetary units, that is, the cash balances of ‘private’ banks (which due to the monopoly on banking are more like state cronies as opposed to truly private entities), by exchanging newly printed bills for older government debt. The more existent government debt, as issued by the Treasury, the more new bills can enter the system. The increased rate at which monetary notes increase in supply brings about a drop in the prices of loans, commonly known as the ‘interest rate’.

Don’t taxes fund the payment of debt?

We may be made to believe that it is taxes that fund these borrowing banks that engage in ‘open market transactions’ with the central bank, or that the government is able to pay its debts (however little a fraction of it) through taxes and not by simply printing more money. But the result speaks for itself: how could price indexes keep going up if money supply is stable? Even when accounting for foreign inflows (which themselves are fueled by foreign central banks’ inflation), prices could not all go up.

Prices could only be bid up to a certain degree if the monetary notes for such a purchase are available. If money supply were stable, the price increase in one product would mean a corresponding drop in another product’s price, due to changes in demand or individual preferences.

The C.P.I. is useless

Now let us look at Habito’s overoptimistic view regarding the consumer price index, which shows ‘inflation’ (that is, price inflation, whose basis is always monetary inflation) has been rather low compared to previous periods.

There are actually so many points to be made against his argument. First, prices do not indicate economic health, even though individuals would like to buy products at low prices, just as they would like to earn as much as possible.

Without government interference, prices indicate preferences of actors in the market. If the price of something goes down, it means that demand is low in relation to supply. Even so, prices aren’t fixed. Because low demand for a product would discourage investors in the particular field, supply later drops, and the supply-demand shift will lead to prices being bid up once again.

Given that prices are merely reflective of market decisions, that is, a composite of individual preferences, the rise or fall of the price of a particular product does not bode well, nor ill, of an economy.

Now if some typhoon strikes and wipes away all the rice fields in the country, this will of course be detrimental to the economy. But the increased price of existing rice as would be experienced in such a situation would not be the primary consideration, but that new supply of rice could be produced at all. And despite its millennia-long reputation as staple food in these parts, we must not underestimate consumers’ ability to change preferences, say, to, potatoes, or some other more available crop.

Prices should be dropping!

Second, it is unfortunate that any increase in the consumer price index occurs at all. If money supply were stable, and with the increased output of producers, the prices of goods would actually fall to reflect both an increase in efficiency and profit among producers, as well as increased availability of all sorts of goods.
But in an inflationary environment such as our present situation, the monetary unit’s purchasing power, that is, the exchangeability of each unit, constantly goes down.


Let us for the moment skip employment and jump right to the third indicator, income. Just as prices merely reflect preferences and in themselves are not good or bad, neither do incomes as such tell the whole story. Nominal incomes are not as important as that which takes into account (monetary) inflation, that is, each unit’s purchasing power. And limitations as to incomes do not point to a ‘market’ failure as much as they point to the inherent scarcity of resources that we have to deal with as long as we live in this finite, physical world.

But Habito doesn’t even really bother with determining income. He simply assumes that the increase in gross domestic product (which when adjusted for the consumer price index still does not consider monetary inflation) indicates that incomes by which workers are hired to produce stuff, are increasing. He also figures that increased foreign investments, where foreigners perceive the Philippines as a better place to do business than the depressed West, are a sign that things are looking up!

Relatively better off than the West

We can expect a significant shift of investments from US and Europe to Asia, that will boost employment opportunities and output in the country. But does a relative increase in output growth in comparison with the West make for an actual increase in wealth compared to other periods of growth in the past? Perhaps. If we are to believe Habito, more projects are being set up in the Philippines, which means more jobs.

But inflation never stops showing its ugly head. Just as we have seen the stock market reach record highs over the past month as a result of the international trend of inflation, an economic recovery seems to have taken place as seen in bustling projects. The unemployment rate has gone down, prices are not rising as fast, incomes are higher. The delicate question now is, is all of this sustainable?

It’s not gonna last

Just as the Philippine stock market could not go up forever, nor even maintain its present level (although we could expect Asian stock indexes to do better than their Western counterparts), the employment situation, being propped up by inflation, will have to go down as well.

The business cycle at work

Monetary inflation could only boost the number of projects and people employed, by taking from other sectors that are just as essential for a sustainable economy. An increase in monetary notes does not make for an increase in production. This is because prices are bid up, wherein the corresponding increase in output could not match such price increases, which merely reflect preferences for the actual supply of goods.

Whenever inflation is used as a means to prop up lagging sectors, this could only take from other sectors, which in turn will seek propping up as well through borrowing at low rates. It’s a vicious cycle that ends up in a depletion of savings and capital, where less people than before could be employed. By the time loan rates are raised so as to more accurately reflect individual preferences, resources are already running low and a depression must set in.

Simplistic mainstream arguments

All of this is ignored by Habito, who is probably ignorant of the not-exactly mainstream theory behind it. The mainstream economist’s approach to things is far too simplistic. If job numbers are high, this automatically means that an employment program is a success, without considering - except with token comments - the long-term sustainability of such a program.

Now there is nothing more indicative of a prosperous community, than employment, which would imply productivity, and abundant consumption. But not employment per se. The credit situation of the banking sector is always a consideration. It is in recognizing the role of inflation and sound money that we could tell if the employment level is where it is supposed to be, and is in accordance with individual preferences.


While Habito names important aspects of the economy, his analysis is all wrong, wherein he finds optimistic signs in that which is irrelevant, all the while completely ignoring the more fundamental aspects, in particular money supply (or PUTANGINA), in such an analysis.

We’re not saying the Philippines is headed for trouble, at least not in the next six months. Come to think of it, the Philippines’ economic situation has been troubling for too long now. But knowing the relevance of monetary factors, we do not find comfort in the ‘prosperity’ that surrounds us, much less attribute it to the brilliance of the three-month old administration.

1 comment:

Nonoy Oplas said...

P___ tangna, hanep sa acronym! You're doing well, Paul. Keep it on! Kick the asses of statist economists!