Written by John Mangun
Outside the Box
Three events occurred in the last two weeks that will have profound and lasting impact on the world and the Philippines. And it is unlikely you are aware of any of them.
It would be unkind to say that much of the local media live in a fantasy world of issues like “global people power” and a belief that the United States is still the Philippines’ “Uncle Sam.” It would be unkind but it is probably true.
China and Japan went to war two weeks ago. Japan lost. A Chinese fishing trawler was impounded by the Japanese Coast Guard for fishing in the disputed island area in the East China Sea between Taiwan and Okinawa—known as the Diaoyu by China and in Japanese as the Senkakuo. China demanded the ship be released. Japan refused. China stopped its exports of strategic metals (China now produces approximately 97 percent of the world’s rare-earth oxides) that Japan must have for its industry. The next day Japan released the Chinese fishing vessel.
China has made clear that the resources of the ocean area extending through the South China Sea are hers and any country may dispute this fact at its own peril. The “Greater East Asia Co-Prosperity Sphere” concept created by Japan in the 1930s has ended. China now owns Asia, including resources in the Spratly Islands.
The US and Israel went to war against Iran in June. Iran lost. The most sophisticated computer virus ever created, called Stuxnet, was unleashed on Iran, crippling its nuclear plants and processing facilities. Stuxnet has the ability to take over the industrial control system of a power plant, factory, or any other facility using a widely used, standard Siemens computer control system. Stuxnet can then open and close valves, over-ride and shut down critical safety systems, and make any vital control system do what it wants. Iran has publicly admitted that over 30,000 of its industrial computers are infected. Iran’s Bushehr nuclear plant was scheduled to go online in August but was delayed “due to hot weather.”
Some interesting speculation about Stuxnet includes this: Was China involved in Stuxnet development or is China the next potential target?
The third event ushers in a new age for the financial world. A little background first.
There are two major schools of thought about the results of the failed $2-trillion stimulus and $15-trillion debt policy of the US government. One is that this will lead to a period of deflation and economic stagnation similar to what Japan has experienced in the last two decades.
By definition, deflation is a decrease in the general price level of goods and services because credit availability and the money supply are dramatically reduced. It amounts to an increase in the real value of money, allowing one to buy more goods with the same amount of money. The value of paper currency increases in purchasing power, but economic activity is stagnant. In light of the huge budget deficit and government debt, increased-value paper money would go to pay debt. Economic activity would resume when that debt is paid down.
The second alternative is a period of potentially hyper-inflation where the money supply is wildly increased to pay off debt, the currency is greatly devalued, and debt is paid back with near-worthless currency (in terms of purchasing power).
The US Federal Reserve through its policymaking Fed Open Market Committee (FOMC) last week confirmed the second option as stated policy.
From Larry Kudlow at CNBC: “Fed head Ben Bernanke and the FOMC dropped a new policy bomb at their meeting this week. Now they say inflation is too low. That’s the real problem. And the solution? Punch up the money supply and punch down the dollar.”
From another commentator at jsmineset.com: “If the Fed wanted to give the dollar the kiss of death with yesterday’s FOMC release, they certainly managed to accomplish their task. As it has done so, it has resulted in once again another huge inflow of funny money into the commodity sector in an exact replay of what was occurring in early 2008.”
The effects of the Fed deciding to inflate the money supply are predictable. The “funny money” will flow into hard assets: global stock markets, commodities, and currencies other than the US dollar. We saw the start last week with the dollar dropping against virtually all currencies, another explosion on the Philippines stock market with issues like PNB up 30 percent, and commodities including oil, silver and gold moving one way, up.
The Federal Reserve will now even more actively fund US government borrowing by buying US debt, which other countries and institutions are avoiding. Proof? Foreign central banks have been net sellers of US government debt in the last two weeks in the amount of $50 billion. The Fed will buy this debt with newly printed currency because that is what the Fed does, print and control the amount of money in circulation.
The Bangko Sentral ng Pilipinas (BSP) is already looking at controlling capital inflow to keep the peso from appreciating too fast. But we will see an appreciating peso. We must see the peso appreciate as the dollar falls or imported goods such as oil will skyrocket.
This is the scenario that has been on the books for a year, since the failed stimulus produced very little US economic activity. This Fed-induced inflation will play out as surely as dawn follows darkness over the next nine to 12 months.
Gold will reach $1,600 per ounce. The Philippine stock market will not trade on corporate fundamentals as much as one of many shelters from dollar devaluation. All commodity prices will rise creating even more attractiveness to the Philippine mining sector. The peso will breach the 40 level in spite of BSP intervention.
If President Aquino’s recent trip to the United States is any indication, the government is dangerously behind the curve of adjusting to world events. No longer can the Philippines display a Third World, near-beggar mentality. This is a time to seize opportunities with a forceful economic policy that emphasizes natural resources, delinking from the US dollar and economy, and developing a clearly stated and very aggressive policy to create the Philippines as a profitable financial and investment destination.
It is the dawn of a new age and yesterday’s ideas and policies will create failure.
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Tuesday, 28 September 2010
Written by John Mangun