No quick relief for RP woes

The nation eagerly awaits the first State of the Nation Address of the country’s first President with a Ph.D in Economics. That Gloria Macapagal-Arroyo got her Ph.D by studying and working for it rather than the honoris causa route, gives her the academic credentials to talk about the condition of our tattered economy and what to do about it.

The only problem is, it is not certain if it is the professional economist who will take center stage this afternoon, or the professional politician. I am not ready to hold my breath, hoping to see the economist. Given the way she has acted (or not acted) these past six months, I am worried that the politician in her will prevail.

The only message I want to hear from her today is simply, we have serious problems and there is no quick relief for any of them. The last thing I want to hear from her is the long worn out statement about how great our country’s fundamentals are and the reality reported by media is a distortion or that current horrible conditions are short term.

I just received by e-mail, a copy of the Assessment of the Current Economic Environment prepared by Dr. Robert Keleher, chief macro economist of the Joint Economic Committee of the US Congress. The US Embassy should send a copy to the country’s number one economist in Malacañang, the DOF Secretary and the Governor of the Bangko Sentral. It makes very interesting reading, as it analyzes what exactly is going on.

Briefly, the paper discusses two views: one that says the negative developments are cyclical in nature and the pain will be short term. "Much of the impact of this slowdown manifested itself in the form of a conventional short-term inventory cycle concentrated in manufacturing with involuntary inventory accumulation spawning production cut-backs until inventories were again in line with sales projections."

The paper cited the view of some economists that "additionally, over-investment is largely concentrated in information-computer-technology equipment, which has rapid depreciation rates, helping to shorten the investment slowdown. According to this view, then, the economy should turn around and return to more robust growth in relatively short order."

However, the paper acknowledges that "another, diverse set of analysts have drawn attention to an alternative set of longer-term, structural factors affecting the slowdown-recovery. These factors portend a larger, more drawn-out, and significant slowdown period followed by a significantly weaker, more sluggish recovery, resulting in a "U-shaped" slowdown-recovery."

Interestingly, these analysts point out this is "the first significant slowdown of the information age as well as the globalization era and it is not associated with significant inflation and therefore may be similar to business cycles prior to World War I." (I wonder, isn’t that the era of the Great Depression?)

The globalization that helped bring about the rapid worldwide economic boom is also bringing about rapid slowdown worldwide. "Where some analysts expect a US slowdown to be offset or counter-balanced by expansions overseas, globalization may dictate that slowdowns are more synchronized." (I guess that means, worldwide.)

This is also one slowdown that requires "necessary balance sheet adjustments associated with accumulated debt burdens." As such, and this is important, "these adjustments suggest the slowdown-recovery may last longer and may be deeper than inflation-driven recessions." And because this slowdown-recovery is characterized by excess or mal-investment, low savings, asset bubbles, and high levels of debt and structural balance sheet dislocations, it will take extended periods to remedy.

How did all these happen? The paper suggests a scenario Asians are familiar with: "This increased credit supply encourages borrowing and spending, and in turn increased earnings, as well as increases in capital investment and capacity. As profits and earnings advance, the stock market advances. Increases in perceived wealth encourage more spending, borrowing and debt accumulation. Indeed, rapidly rising equity prices tempt business to expand capacity too quickly and can encourage a credit binge, rapid investment, and excess capacity."

The paper continues: "This process is often associated with asset price bubbles (e.g., sharp increases in the prices of equity, real estate, or collectibles), over-investment, excess capital accumulation, and rapid debt accumulation. Eventually, the over-investment and excess capacity creates earnings shortfalls; the over-investment puts downward pressure on returns to capital.

"Indeed, earnings can decline sharply, causing equity prices to decline and investment spending to fall off, sometimes rapidly. Businesses’ efforts to sustain profitability often result in lower output (to reduce inventories), reduced spending, and layoffs. These efforts, in turn, encourage further slowdown. The equity bubble often bursts. As equity value and net worth decline, households may be burdened by residual elevated debt levels and consequent balance sheet dislocations.

"As a result, spending declines, as households and business attempt to work off these significant debt burdens. These imbalances are structural in nature and may take an extended period of time to be worked off." Perhaps, debt relief for countries like us will help shorten recovery time. But I doubt if our BSP and DOF officials, who made their careers in foreign banks, have the guts to even suggest that.

In other words, the paper suggests that relief will not be quick for the United States. That means, neither will there be a chance that relief will be quick for us in the Philippines. If anything else is said in the SONA today, we all know it just isn’t so.

Golf

On the lighter side, here’s something sent by a reader who identified himself only as Manuel.

A fellow is getting ready to tee-off on the first hole when a second fellow approaches and asks if he can join him. The first says that he usually plays alone but agrees to let the second guy join him. Both are even after the first couple of holes. The second guy says, "Say, we’re about evenly matched, how about we play for five bucks a hole?"

The first fellow says that he usually plays alone and doesn’t like to bet but agrees to the terms. Well, the second guy wins the rest of the holes and as they’re walking off of the eighteenth hole, and while counting his $80.00, he confesses that he’s the pro at a neighboring course and likes to pick on suckers.

The first fellow reveals that he’s the Parish Priest at the local Catholic Church to which the second fellow gets all flustered and apologetic and offers to give the Priest back his money. The Priest says, "No, no. You won fair and square and I was foolish to bet with you. You keep your winnings."

The pro says, "Well, is there anything I can do to make it up to you?"

The Priest says, "Well, you could come to Mass on Sunday and make a donation. Then, if you bring your mother and father by after Mass, I’ll marry them for you."

(Boo Chanco’s e-mail address is [email protected])