Thursday, 22 March 2012

What should government do about oil prices?

Business Mirror

AMERICAN philosopher Thomas Paine is a founding father of the US. He wrote a series of pamphlets entitled Common Sense, advocating the colonies to break from British rule. His writings were so influential that some of the first US leaders believe independence would not have occurred without him.
Paine was a radical. His book, The Age of Reason, was a scornful attack on religion. When Paine died, no Christian church would receive his body for burial. He wrote Agrarian Justice, which introduced the concept of a guaranteed minimum income. Paine opposed capital punishment. After he participated in the French revolution, he was called a “missionary of world revolution.”

It would seem that Paine would fit perfectly with today’s Occupy movement as well as with those groups in the Philippines identified as progressive, pro-poor and leftist.

Except for one thing.

Paine wrote, “That government is best which governs least.” At the core of his political writings was the belief that government was the source of problems, not the provider of solutions.

What should the government do about oil prices?

Usually when you hire someone to do a job, you check his/her past performance.

One thing government should do successfully is run the international airports. From “Safety and management concerns led the US aviation watchdog to downgrade the Civil Aviation Authority of the Philippines in 2007 and limit US-bound flights from the Philippines. In 2010 the European Union also blacklisted Philippine carriers.” The current DOTC secretary responds that the government will assess the situation and address the deficiencies. What has the government been doing since 2007?

A Catholic bishop says the government should “show concern on the poor people, regulate the oil industry,” regulate being the code for price controls. How about if the government “regulates” donations to the Church, requiring the Church prove that 80 percent of those donations go for services to the poor?

A party-list group says the government should impose price controls. But then they say the blame for high oil prices rests with evil speculators in the global oil markets. By their logic, the speculators, who apparently control oil prices, should have been thanked in 2011 when prices dropped 30 percent from $113 to $80. Just plain dumb.

One solution offered is to decrease or eliminate the value-added tax on oil products. Yes, pump prices will drop immediately. But how does that do anything if crude-oil prices continue rising?

I guarantee you within six months, the government will figure out a way to make up the P50-billion value-added tax (VAT) shortfall—maybe with increases to the tariffs on oil products, with a net economic benefit to the public of zero.

Perhaps drilling for our oil in the Philippines would be a good idea. No, that doesn’t work for these people either. Opening up new areas for oil exploration to the global companies that have the money and expertise to do the job is considered “rape and plunder.” Their solution is for the government to pay for and develop the resources. Good idea. Let’s double the VAT to raise the money to do it.

Government price controls are always offered as the solution. However, in order to make that work, what really needs to be done is nationalize the oil companies which some are calling for. In fact, that is one of the progressive leftists’ solutions.

The problem is that these people can never show one example of where government ownership has ever worked to the benefit of the public. Look how successful the government-owned National Power Corp. has been in keeping electricity prices low.

Every comment from someone who says, “I am pro-business, but the government should…” scares me because it really means, “I don’t trust business but I do trust the government.”

Quantum International Group Inc. plans to invest more than $2.6 billion in five power plants that can produce as much as 13,000 megawatts (MW) of electricity, almost doubling the Philippines generation capacity. The company says it could sell power for 25 percent less than Napocor within five years and 50 percent less within seven years. They generate the power from safely burning garbage and industrial and hazardous wastes. Quantum is building plants in Brunei, Malaysia, Bangladesh and South Africa.

I can hardly wait to see if the government can avoid doing something to kill this project. I look forward to the pro-poor groups proving their concern for something other than their pro-government ideology.

So what should the government do about oil prices? Nothing.

What the government will do, based on current suggestions, will not provide a true solution, will actually make things worse over time, and will stop the free market from finding genuine solutions.

E-mail to and Twitter @mangunonmarkets. PSE stock-market information and technical-analysis tools provided by Inc.

Tuesday, 20 March 2012

Good economies mean more debt crises

Business Mirror

YOU have heard the old saying that banks will only lend to you when you don’t need the money. In a sense, that makes for a good lending practice.

Yet people and institutions lend to governments who both desperately need the money and are very far in debt. The US government literally spends nearly $2 billion each day that it does not have and much of it must be borrowed. The current outstanding US government debt is $15 trillion, which is greater than the total annual economic output of the country.

The global debt crisis has put many large and important economies on the brink of disaster. Yet these same economies have been able to borrow money at historically low interest rates. The central banks have lowered rates to push more money into the economies, hoping they would begin to grow. However, that has not happened.

Further, the central banks have followed this policy to control the one damaging thing that can most easily and most quickly kill an economy: fear.

The reason interest rates are low is that people are scared about their money. When there is strong economic fear, money goes into safe government debt. The demand for this debt is big so the governments can borrow at low rates.

Fear is what has driven trillions of dollars lending to governments. When there is fear, people want the supposed safety of lending to a government that can always repay the debt even with newly printed money.

What, other than fear, would make it financially prudent to lend money to a virtually bankrupt borrower at a near-zero interest rate?

But here’s the catch.

The world is being told that these damaged economies are going to come back soon at full steam ahead. If that is true, then here is what will happen.

If the economies in the West do start to pick up, then that means people will have more money to spend, create jobs, and then economies will grow. But when confidence comes back and the fear goes away, the flight to safe government debt disappears.

If you are not afraid to invest in your business expansion, which will make you a 10-percent, maybe 15-percent net profit, why would you loan money to the government at 1 percent for five years? If the economies start growing and lending to government at these very low rates fails, rates will go higher.

Over the next 10 years, the 30 largest global economies will need to refinance $36 trillion of their debt. Where is the money going to come from? Now here is where it gets dangerous.

The interest payment on that $36 trillion takes a large portion of these governments’ revenues. An interest-rate increase will cause a dozen Greek defaults and we are right back where we started.

Therefore, the contradiction is this. These governments must borrow more money to pay the debts they already have. They cannot afford to pay higher interest rates above current levels. If the economies improve, no one will loan at these cheap rates. The financial system goes back down.

From Bloomberg: “Treasury 10-year notes declined [meaning rates go up] the most in eight months after the Federal Reserve drove investors into riskier assets and reduced speculation of further debt purchases by increasing its assessment of the US economy.”

Here in the Philippines, there are so many interesting short-term topics to think about—from the President’s love life to the Chief Justice’s real estate.

Even on the economic front, we cannot seem to look beyond the next quarter or past the latest economic-growth estimate. The stock market moves forward and last week’s action is forgotten while thinking about tomorrow’s trading but rarely about next year.

The Philippines has been fortunate to escape any significant damaging effects from this ongoing crisis. The predictions of planes loaded with overseas workers coming home and remittances drying up have not happened. The outsourcing industry is still experiencing large growth.

Philippine economic growth in 2011 was dismal, but cheer up. Credit Suisse just upped its forecast for 2012 to 3.5 percent from 3 percent. Of course, that’s lower than in 2011 and is barely enough to move even slightly forward, but hey, it could be worse.

The Philippines is not worried and is being short-sighted.

The greater economic problems lie just around the corner.

On a personal note, I look forward to seeing all of you who will attend my seminar this Saturday. However, we are fully booked as I want to keep it small for better two-way communication. I might have another in April. Please e-mail me at if you are interested.

E-mail to and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by Inc.