Portrait of the politician as economist

Two congressmen, in analyzing global economics against the increasingly complex calculus of domestic currency valuations, declared that the recent devaluation of the peso was the fault of the President. After much thought, they concluded that at the core of the devaluation were cuss words.

As if on cue, the latent counterpunching rhetoric might, indeed, have been incendiary, as it had immediately been reignited by the taunt from stalwarts of the last administration. Rodrigo R. Duterte drew from the hip and countered that the peso was being forced down by the Americans.

Some people hot-wire their tongues prior to cranking their brains.

The first critic was a political-science graduate who had risen in the party hierarchy clambering up its virtual bouldering wall and eventually establishing himself as a party senior perched above the smoldering rest. Like an experienced indoor wall climber, he knew his way through the maze of holds, grips and jugs that would lift him above the rest. That he knew how to manage political realities and the different and diverse power plays and partisan games was undeniable.

In the last presidential elections, atop a virtual rocky crest, he stood front and center, perpetually on the attack versus anyone who challenged his anointed bet.

The second was a veteran, almost an icon in Philippine politics, and like the first, he also was cut from the same mold as other traditional politicians were. Like the previous politician, he also knew how political games are played, himself a master gamesman, perhaps simply longer in the tooth, with incisors sharpened and strengthened from political battles won and lost.

Unlike the first politician, the second was a member of the bar. Like political-science majors as the first politician, such focused educational background afforded him a pedigree trumping other lawmakers less qualified. The first, however, was not facing accusations of plunder in connection with the notorious pork-barrel patronage system that traditional politicians are known for and wield like royal scepters and cattle prods.

Throughout the careers of both, neither had been known to be economists. As for Duterte, the same labels are pinned. The label best suited was politician. Such shared DNA explains their recent economic analysis of currency values and its multilateral bases.

Currency values are more a function of the following factors, which these politicians should have studied before opening their mouths.

A currency is always benchmarked against another; hence, comparative economies and diverse policy rates necessarily enter the valuation. In the last two months, currency investors increased their bets on the US dollar. Where capital has feet and can travel beyond national borders in a global economy, moving to where it can earn more, affects currency valuations.

Ever since August of 2015, the US Federal Reserve (The Fed) has been mulling over increasing interest rates depending on the US jobs data. Now, on the eve of 2016’s final quarter, that likelihood becomes very real. A spike in the US rates would attract capital stateside where funds might earn there more than they would here.

Such capital flight has little to do with Duterte’s rhetoric as dark and seemingly ominous his lexicon might sound. Politicians should really throw away their political beanies and instead don thinking caps. The promise of higher values for the dollar when the Fed raises rates is enough to attract prodigal capital back to the US economy where, because of their current election spending, gross domestic US productivity now hovers above three-year averages. Given better returns, deliberately swapping investments from pesos to dollars and shipping these across the Pacific is self-fulfilling and effectively catalyzes the widening disparity between both currencies’ values.

As the heightened demand for prospectively more profitable dollars pushes the dollar higher against the peso, note the criticality and the quantitative impact of its economics.

While money supply and the amount in circulation measured as M1, M2 and M3 are important determinants, currency values are as subject to quantitative and measurable supply-and-demand forces as they are to notional expectations of unquantifiable prospects and crystal-ball forecasts.

Note the following.

The Bangko Sentral ng Pilipinas (BSP) policy rate fell from 4 percent to 3 percent, and the BSP reverse repurchase facility remains at 3.0 percent, while rates for overnight lending and deposit facilities are 3.5 percent and 2.5 percent, respectively. These reveal that current money supply remains not only high but is expected to expand. High liquidity tends to reduce peso values, especially where key interest rates remain low, thus, forcing funds to circulate rather than sleep within vaults.

To politicians who insist that the recent peso devaluation was a function of invectives now would be an appropriate time to remember: “It’s the economy, stupid!”