During his first inaugural speech in 1933, Franklin D. Roosevelt said: “Let me assert my firm belief that the only thing we have to fear is…fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Those words were meant to sooth and inspire a nation in dire economic times and the worst depression in history.
Many of the issues we fondly identify as “problems”—and the fear that the discussions around those conversations try to create—are too often intellectual exercises and/or in furtherance of political agendas. Roosevelt cited “nameless, unreasoning, unjustified terror.” The actual problem is identifying what is real and what is a childhood monster-in-the-closet to which fear is unjustified.
Government debt is both a genuine concern and “fear itself.” Most people—and the experts have no desire to explain the truth—do not remotely understand sovereign debt.
If you fail to pay your car loan or home mortgage, the lender will repossess or foreclose on your collateral. Loans to governments are not collateralized. Since 1980, Argentina has defaulted on its international debt six times, with Nigeria and Ecuador not far behind with five defaults each. But the Argentine presidential office/mansion is still the “Casa Rosada” and not the “Casa IMF.”
Further, unlike the loans you take out, government debt is never expected to be paid off…ever. The debt is always rolled over as long as the debt service, the interest payments, are paid in full and on time.
Philippine government debt increased substantially during the lockdowns and the wailing about it is deafening. I wonder if the same people that were crying “more ayuda! more ayuda!” are the same ones crying now about the debt?
If I offered to loan you P10 million, payable whenever if at all (your choice) and at 3 percent interest, would that be a good deal? The Philippine government’s total foreign and domestic debt service in 2021 was 2.992 percent of Gross National Income. In 2004 it was 11.1 percent of GNI, and in 2015 it was 3.1 percent. In 2021, the government paid P1.2 trillion in debt repayments including principal. Interest payment (percent of revenue) in 2015 was 13.3 percent, slightly lower than currently.
Personally, I will not borrow (except for credit card zero interest) and I hate government debt. Unfortunately, “The People” also hate paying enough taxes to pay all the bills. Using the excuse that taxes are unfair because there is government waste and corruption is ridiculous. Department stores add 5-10 percent to their prices to cover shoplifting and employee theft. Complain the next time you go to the mall.
There are other issues that are discussed that have only peripheral consequence to the Philippines, the US dollar as the global reserve currency being one.
“A reserve currency is a foreign currency held in significant quantities by central banks as part of their foreign exchange reserves.” That’s it. The USD is not ordained as “God’s Own Money.” It is most widely held because there is more of it than any other and the US can be relied upon not to demonetize. You can buy a beer in Botswana—and every other place else on earth—with a “Benjamin.” The same cannot be said of a “Mao.”
A “trade currency” is what is used to settle international buying and selling and the US dollar is the most widely accepted by a wide margin. Why? China may use the renminbi to buy oil from Saudi Arabia. But what is Saudi going to do with all those yuan? Buy Chinese chopsticks and pork?
The central banks will decide which “reserve currency” they want to hold and if they eventually choose the yuan, so be it. In the meantime and separately, the USD is the trade currency and will be as long as goods and services sellers and buyers find more business use for USD than the CNY. I prefer PHP, of course.
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.