Pain

The peso plumbed unprecedented depths against the dollar. Although this will cause ordinary Filipinos much pain, there is hardly anything we can do about it.

The peso is not weak. The dollar is strong because of aggressive increases in interest rates imposed by the US Fed. All currencies are retreating before the mighty dollar. Even the US stock market is falling because of the rate increases.

Our resident congressional economist Joey Salceda says the peso could plunge even deeper, perhaps down to P68:$1. The decline in the peso’s exchange value partially offsets the fall in oil prices, preventing us from reaping dividends from lower inflation.

At any rate, oil prices are declining precisely because the market expects global recession. History tells us the only solution to high oil prices is global recession.

It would be folly for the BSP to try and defend the peso as the Japanese central bank is apparently doing. That will produce huge losses and will probably fail anyway.

The US Fed is aggressively raising interest rates to bring down the politically explosive inflation rates. The strategy could push the US economy closer to recession. Inflation is the primary concern of ordinary Americans and this could be a major factor in the midterm elections coming next November.

By aggressively raising interest rates, the US is effectively exporting its inflation to other economies. The British pound, for instance, could soon reach parity with the US dollar. The euro has fallen below parity. The European economies are on the brink of runaway inflation combined with a deep recession in the face of rising energy costs.

With falling currency exchange rates, the rest of the world will see rising costs for their imports. This includes oil, which is priced in US dollars. Those rising costs will push up inflation rates for all other countries.

High inflation in the UK, or the Philippines for that matter, matters little to decision-makers in Washington. Inflation outside the US will not influence the outcomes of their midterm elections.

As in all calamities, the collapse of the world’s currencies will impact the poor more. It will reflect in higher prices for necessities and less employment opportunities. There will be higher poverty and malnutrition in the world’s poorest economies.

Other nations are trying to defend their currencies by keeping pace with the US hike in interest rates. What is happening is something akin to the arms race. As each nation keeps pace with the others in raising interest rates to protect the exchange value of their currencies, this will sap the global economy.

Interest rates raise the cost of money and will invariably result in a drop in investments. Small companies could be forced to bankruptcy by the higher cost of money.

As we saw in previous episodes like this one, the high cost of money will force more vulnerable companies to sell their operations to bigger companies. A wave of mergers and acquisitions will lead to industrial and financial concentration and the rise of oligopolies.

Investment banking institution Goldman Sachs expects US stocks to continue retreating. This means that retirement funds will diminish in value. The retreat in US stocks, in turn, will reflect in declining stock markets across the globe. The world is in for a long and bitter winter.

When inflation hits hard and recession bites deeper, there are political consequences. Voters will find demagogues appealing. We saw in last Sunday’s elections how consumer discontent reflected in a sharp shift in favor of right-wing parties. The next Italian prime minister will be the most right-wing leader since Benito Mussolini.

The simmering discontent over the rising costs of living could produce a wave of support for demagogues promising instant solutions to the myriad problems facing European societies. What happened in Italy could be the beginning of a trend.

In Europe, the trend towards stagflation is driven principally by sharply higher energy costs. The war in Ukraine and the economic sanctions imposed on Russia made Europe vulnerable to natural gas shortages. That will make this coming winter very cold indeed.

The monetary volatility we are seeing is complemented by political volatility.

In Russia, thousands of men of fighting age are fleeing across the border to avoid Putin’s draft. In most Russian cities, demonstrations have broken out protesting against conscription and the war in Ukraine. Slowly, the viability of the Putin regime is being eroded by public disaffection.

In Iran, the death of a 22-year-old woman in the custody of the morality police for improperly donning her hijab sparked a wave of protest in all of Iran’s cities. Unlike previous outbreaks of protest against the medieval political order imposed by the mullahs, this one sees the massive participation of brave women demanding rights. Although the theocracy vows determined action to crush the protests, it is difficult to ascertain the dynamics of Iranian politics at this stage.

The massive increases in interest rates imposed over the past few months have not dented the inflationary tide. Any more increases will likely cripple global economic expansion. Stagnation, in turn, will fuel other social tensions as the pains people are asked to endure multiply.

In sum, all the challenges Filipinos now face, from higher inflation rates and slower growth, are not unique to us. They are happening everywhere else. The world is moving towards a very uncertain episode.

All the challenges engulfing the world will raise the standards of effective political leadership to steer nations through a tough time.