One economic theory postulates that GDP (Gross Domestic Product) is determined by Money Supply multiplied by Velocity. Velocity, on the other hand, is the number of times a money currency is transacted (used) in the economy for the purchase of goods or services.
As citizens, we must understand why certain government policies affect our well being as individuals.
For example, the higher the GDP, just theoretically, the better one's well being is, since a person's GDP per capita income (or your share in the economy) is arrived at by dividing GDP (peso amount) by the number of population.
During the lockdowns due to the COVID-19 virus, generally, people cannot buy because either they lost income, cannot buy goods (no transport), or supply is not available because the supplier cannot manufacture his goods because of the disruption of the supply chain of his raw materials or his capital has been eroded by losses due to "no business" in the recent past.
In this scenario the movement of money is limited. Velocity is at a standstill affecting the GDP remember?
The famous example would be that of a farmer who has P1,000 and a hardware owner who has P1,000 or a total of P2,000 available currency. Let us assume they are in normal times (devoid of fear and lack of confidence.)
The farmer, thus, buys P1,000 worth of farm supplies and spare parts from the hardware and the hardware owner purchases P1,000 of farm produce from the farmer. That's P2,000 in currency used and two transactions. (In a lockdown situation, both would not be spending any of their available money due to fear, lack of business confidence or the absence of supply or demand as the case may be.)
With his sales proceeds, the farmer is now able to buy P1,000 new raw materials for his farm and fresh medicine while the hardware owner is enabled to purchase P1,000 worth of new food from the supermarket. The total currency used is now P4,000 and velocity will have 4 instead of just 2 original transactions. The cycle will grow exponentially. Let us see how.
Since the supermarket now has additional money, it can now purchase new goods for sale and farm raw material supplies and the botica now has more money to buy their medical supplies for further sale. And so on.
On the other hand, in an effort to rev up the economy, the Philippine government had reduced interest rates to encourage lending and borrowing and "repurchased government securities" to bring back more money into the economy, thus, increasing the money supply. This is their Money Supply route to spur economic growth.
That route becomes inutile if there is no business confidence to invest and clients reluctant to borrow from the increased liquidity. The intent of the government in spending extra of over P200 billion in COVID-related budget both to contain the disease and render wage subsidy loss and loss of consumer spending power was well-intentioned.
However, such an attempt to substitute (G) for loss of C (consumption) was minuscule in the face of an estimated P1.9 trillion loss in jobs and income. Thus the country suffered a horrifying 16.7 percent GDP drop in the second quarter (2020) or a semestral contraction of 9 percent.
If the money supply increase is less than the impact of the loss of velocity GDP will remain depressed, as it did. The Philippines is now infamously known for having the longest lockdown in the world but among the biggest COVID 19 cases in Southeast Asia. Can one, therefore, imagine the impact on the velocity of money when you are inflicted with the longest lockdown in the world, and counting?
Do not, therefore, be shocked to see our GDP go down the pits this 2020. And 2021, as well if we do not reform our ways.
(Even those of you readers who are well off enough to have savings these days can help by just giving money to foundations and the poor. Your donated money will be used by them to buy additional food, essentials, facemasks and alcohol) and start the velocity cycle, remember0?
In the meantime, institutions like ANZ, HSBC, Nomura and Fitch Solutions see PH GDP contraction in the vicinity of 9 percent for the full year 2020. It will be worse if we let the "fear economics" mindset to continue to rule our policy-making from hereon.
In the meantime, let us not forget our original thesis: continuous, needless lockdowns (in any name ending with a CQ) will lessen money velocity and make the economy suffer even more.
The government need not be reminded that whatever the negative results will be because of this will fall inevitably on their laps in the future in terms of additional required stimulus, rehabilitation, and other forms of bail-outs. There are no two ways about it.
It will just increase the magnitude of the problem and prolong the already agonizing procession to the financial Calvary of the Filipino people.
( Bingo Dejaresco, a former banker is a financial consultant, media practitioner, and book author. He is a Life Member and Chair of Broadcast Media of Finex. His views here, however, are personal and do not necessarily reflect those of Finex. [email protected]).