Economic ‘coma’

A “coma” is defined as “a state of deep unconsciousness in which a person cannot be awakened; fails to respond normally to stimuli, and does not initiate voluntary actions for a prolonged or indefinite period, caused especially by severe injury or illness.”

The economy is in a coma. Simply speaking, when a person is in such a state, there are only two priorities: getting oxygen into the blood and making sure the blood circulates to all parts of the body. A functioning human heart keeps the blood moving, but the key is a mechanical ventilator first widely used in the 1950s with the invention of the Bird Universal Medical Respirator.

For an economy, money is the blood or more accurately the oxygen in the blood. There is not much that can be if a human heart stops functioning to pump the blood. Likewise, there is not much that can be done for an economy if transactions are not taking place as in the current lockdown situation.

However, the greatest problem that the global—as well as domestic —financial systems face right now is a lack or potential lack of liquidity in that there is no “oxygen” in the “blood” for financial transactions that are taking place.

Currently with India ordering its billion-plus population to stay inside for three weeks, a third of the world population is under lockdown. The US is looking at the potential of 30 percent of its work force being unemployed. Globally, the same situation prevails: the only functioning business is the government.

In truth, governments are like “poor” people that live hand to mouth expecting tax money to come in every day to pay for ordinary
government expenses. While income taxes are important, it is the crucial sales or value-added tax that keeps governments in business. With private businesses shut down, the flow of VAT stops. Yet, expenses for government workers go on.

In theory—bad theory—all the government has to do is print extra cash and the problem is solved. But contrary to all the “money printing” experts, that is not how it happens unless you are Venezuela or Zimbabwe. Even in the age of fiat currencies, governments must account for the cash.

Both Denmark and Norway are conducting an auction of US dollars through their central banks to raise local currency. The domestic banks will buy their central bank’s US dollars in exchange for local currency. Then the CBs will provide that cash to the national governments.

The Bangko Sentral ng Pilipinas has lowered the amount of money that private banks must hold in reserve to give extra cash for lending to the private sector. The big policy move is that the BSP will be lending P300 billion to the national government. The Bureau of the Treasury (BTr) will issue debt securities—whether short-term Treasury bills or longer-term Treasury bonds—which the BSP will then buy.

The funds that the BTr receive from this transaction will fund the government’s public health spending. Once the debt securities mature, the government will repay the central bank the amount it borrowed, with interest. This is not “money printing” any more than you are taking a cash advance or using your credit card to pay emergency bills. The national government will pay back the loans upon maturity. If necessary, the process will happen again if the government is short on money. Be safe.

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