June 21st, 2022
House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) has warned that the country’s economic recovery could be undermined by a “massive disinflationary effort” in the United States to curb the rise in prices of goods and to bring its liquidity levels to its pre-pandemic trajectory.
“We have to watch out. The United States will, at some point, have to undertake larger disinflationary efforts than the 75 basis points in policy rate hikes that it conducted last week. It appears that the US will have to undertake measures similar to what it undertook in the early 80s under Fed Chair Paul Volcker, which brought prices back to more normal levels, but also hit the global economy hard,” Salceda warned.
“I think it is the biggest forward risk to the Philippine economy. And we need coordinated fiscal, and monetary policies, as well as efforts in both the financial and the real sectors of the economy, to mount a strong defense.”
“I am particularly concerned about two things: One, US May inflation rates were the highest since 1981, at the height of Volcker-era policies to combat inflation. Second, the US has added USD 6.3 trillion in liquidity since January 2020. In other words, about a third of all liquidity circulating in the US economy was created just during the pandemic.”
“That is the fastest money ever grew in US history. And it is causing massive demand spikes without the corresponding growth in productive capacity, raw material, or technology and innovation. Of course, it was bound to cause price hikes.”
“For mature economies like the US, the bedrock of the economy is price stability. So, they will be forced, at some point, to kill that new money, to siphon it off of circulation.”
Salceda recalled that due to Volcker-era policies in the US in the 1980s, US economic growth was negative, causing the slowest Philippine growth in ten years, at just 3.4% in 1981, presaging the eventual economic difficulties of the mid-1980s.
“It’s going to cause a global storm, because you will probably need to kill around 20% of all financial assets in the US economy. That is the largest definancialization the global economy will experience, in nominal terms, ever,” Salceda warns. “And that kind of money murder will certainly affect at least some assets in the country, and will also make borrowing harder for our private sector, which has around USD 43 billion in external debt.”
“My point is, this is going to be a global storm. Our house is very strong due to comprehensive fiscal reforms and investment and trade liberalization reforms. Q1 growth levels prove that. But an economic supertyphoon like this will still hit us. And that will have implications on growth, investment, borrowing costs for the economy. No matter how strong the house is, or how clean the living room is, or how good the cooks are. We will still be flooded outside,” Salceda added.
Fortify the house
“We can still fortify the house better, and we can still make sure we have food for everyone when the storm hits.”
“Agriculture is the most important sector in this regard. It will help ensure that at least, when the crisis hits, everyone has something to eat. It will also help keep prices down while we are still in this inflation stage, and it is a potential economic growth buffer once the disinflation stage begins,” Salceda added.
Salceda recalled that “during GMA’s anticipatory economic stimulus on January 2008, prior to the Global Financial Crisis, agriculture was atop the priorities funded. That helped us avoid negative growth when the rest of the world economy was shrinking.”
“Agriculture will once again save us. But we have to act in the early days of the administration, including us in Congress. Having spent most of my pre-political career in the capital markets as an analyst, my view of this is that trouble is coming sooner rather than later.”