The end of cheap and easy money


On May 22, this year, Chairman Ben S. Bernanke of the US Federal Reserve Board triggered what looks like a meltdown in stock markets around the world, including the Philippines (where stocks declined by 17 percent from their May 15,2013 high), and the depreciation of the peso by 5.6 percent, from P41 to more than P43.32 per dollar.

Bernanke testified before the US Congress Joint Committee on the US economic outlook. His testimony is a classic in obfuscation and gobbledygook. He sounded neither here nor there, neither pro or con, neither in and out, of Quantitative Easing, the program whereby the equivalent of America’s central bank buys up to $85 billion a month of IOUs of the Federal government (the so-called long-term Treasury securities) and private companies (the so-called agency mortgage-backed securities) at almost no cost to the latter. It’s the equivalent of printing money, without any counterpart in production of goods and services.

Yet, markets around the world, hedge funds managers and foreign stock market investors read Bernanke’s testimony as a sign America will ease up on its easy money policy. In other words, no more near zero interest rates. The end of cheap and easy money is here.

In his testimony, Bernanke talked about the benefits of cheap and easy money.

“Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment. Importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee’s two percent longer-run objective,” the Federal Reserve Board chief explained.

However, Bernanke was worried about the long-term impact of cheap money. He said:

“For example, even as low interest rates have helped create jobs and supported the prices of homes and other assets, savers who rely on interest income from savings accounts or government bonds are receiving very low returns. Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability.

“For example, investors or portfolio managers dissatisfied with low returns may ‘reach for yield’ by taking on more credit risk, duration risk, or leverage. The Federal Reserve is working to address financial stability concerns through increased monitoring, a more systemic approach to supervising financial firms, and the ongoing implementation of reforms to make the financial system more resilient.”

This is the portion of the Bernanke statement that spooked markets. The FSB is tired of having zero or low interest rates. Like all good things, it must come to an end. When? Bernanke did not say so. But it looks like the end will begin before the end of this year. He said simply:

“Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.”

“Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve—consistent with its congressional mandate—to provide policy accommodation as needed to foster maximum employment and price stability. Of course, we will do so with due regard for the efficacy and costs of our policy actions and in a way that is responsive to the evolution of the economic outlook.”

Translation, Quantitative Easing will stop soon. The effect is higher interest rates in the US— good for investors and savers.

Bad for the Philippines and other emerging economies. The US, after all, is the best place to put your money. It is very stable. It has never been invaded (except in Hawaii).

The US is a safer heaven for capital than say the Philippines where the government doesn’t seem to know what to do, with foreign investors, in particular. So foreign capital, especially money inside portfolio, is leaving Manila. The hedge fund managers are packing up, leaving locals and their girl friends, with the proverbial empty bag.

The moral of this story? Self-reliance. The Philippines has plenty of money. It does not need credit rating upgrades to be able to borrow cheap. We don’t need to give away precious tax incentives to attract investors.

The best investors are Filipinos themselves. Our tycoons and taipans (who own 90 percent of the economy) and our OFWs, which number ten million and make more money than our exporters and remit more money than foreign capitalists.


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  1. kaya naman ang gobyerno ginagatasan lagi ang mga OFW, panay ang taas ng required fees at membership fees at kung anu-ano ang fees,

    tapos meron pang mga uniformadong holdaper sa airport, magtatanong ng marami hahanaan ng kung anong papel, yun palang kulay ng pera ang hanap

    bat ganun? anyare?

  2. Voice from the Wilderness on

    Yes, indeed the country does not really need this credit upgrades because it has a sound macro-economic fundamentals which this present inept presidency has not taken full advantage of by sleeping on the job. But this credit upgrades was lobbied by the present docile administration to prop up the popularity of this inept president even if he is doing nothing.