Time to be serious

The peso will depreciate as the dollar goes higher. However, less than 20 percent of our debt is in dollars. Further, we are actually “making money” because since early March the peso has appreciated against the yen by 15 percent. Finally, the Philippine economy is growing and while high, we will weather the oil price inflation storm although the government must do much more to mitigate the economic suffering, particularly of the poorest.

We have a global economic situation and the potential consequences cannot be ignored or underestimated. I have been through every “Black Monday (through Friday)” in the past 50 years, including the first oil shock in 1973. This time it is different.

“Of course, it is different. There is a war going on in Europe. Don’t you read the newspaper? And it’s Putin’s fault!”

But there was another war in Europe when an estimated 150,000 combatants and civilians were killed and 2.2 million people became refugees. This was between April 1992 and December 1995 in the former Yugoslavia.

Interestingly, the US economy grew at an average of 4 percent and inflation averaged under 3 percent back then. But it is different because while Ukraine has the most arable land area in Europe and holds the second largest iron ore reserves in the world, it is also at the absolute European bottom in terms of gross domestic product (GDP) per capita.

Ukraine’s GDP per capita is $3,116; the Philippines’s is $3,270. Everyone wants a piece of Ukraine.

However, this is only part of the global economic crisis and is not even the most important. In January 2021, US annual inflation was a favorable 1.4 percent. By the time Putin invaded Ukraine, US inflation was 7.9 percent. What happened?

Energy and oil may be what keeps the world economy functioning, but money is the “lifeblood” and currency exchange rates and interest rates may be the “heart” and “lungs.” The exchange rates determine the money flows between nations, and interest rates strongly determine the value of currencies.

All the Internet-educated financial experts like to talk and talk and talk about sovereign debt. A nation’s debt, like your own personal debt, means little or nothing as regards the total amount. The only question is if you can pay the monthly amortization. Japan’s government debt is 2.7 times its total economic output. So what? I would be willing to bet that your home mortgage—if any—might be at least 2.7 times your annual income.

However, if a nation must pay its debt in US dollars and its currency is now worth 70 percent less in US dollars (like Turkey), it is screwed. The current dollar strength is much more worrying than the amount of debt for nations like Egypt, Pakistan, and Argentina. Even India is potentially in trouble as its external debt is 50 percent dollar-denominated and the rupee is down 4.5 percent year-to-date. That makes their debt payments—or monthly amortization—4.5 percent higher. Pakistan is a basket case as its currency has lost 14 percent against the dollar.

Combine “devalued” currencies with higher interest rates and you have a perfect storm for sovereign debt default.

The Japanese yen is at the lowest exchange rate since 1998 as government policy drives the decline. Now we come to the next point.

Did you ever cook spaghetti sauce? A little red wine vinegar adds great f lavor. But too much makes the sauce taste sour and it needs a spoonful of sugar. But maybe a spoonful is too much, and you need to add a little more vinegar. Oops, too much vinegar. Where’s the sugar.

The Fed refused to raise interest rates last year as inflation was going higher for fear it would “crash” the stock market and slow the economy. By the time you read this the Federal Reserve will have raised rates by a relatively huge amount to make up for lost time. Too much vinegar; then too much sugar.

Japan wants to keep rates low because their economy is dead in the water (GDP Annual Growth Rate 0.2 percent), but they know that low rates will depreciate the yen as it has been doing. Japan does not want to get caught in the vinegar/sugar sequence. This cycle makes terrible spaghetti sauce and an even worse economy.

Why is the dollar appreciating? Because even if the “cooks” in the US are incompetent, there is the hope that the “land of milk and honey” might be a better place to park money than someplace else.

The peso will depreciate as the dollar goes higher. However, less

than 20 percent of our debt is in dollars. Further, we are actually “making money” because since early March the peso has appreciated against the yen by 15 percent. Finally, the Philippine economy is growing and while high, we will weather the oil price inflation storm although the government must do much more to mitigate the economic suffering, particularly of the poorest.