The Real Truth Behind Puerto Rico's Financial Crisis

Island Facing Economic Destruction

If you want to truly understand what is behind Puerto Rico's financial crisis, look no further than the U.S. Bureau of Labor Statistics "Economy At a Glance" for Puerto Rico. With some statistics dating back to 1976, the graphs and supporting data paint a very clear picture.

Since the peak at 2006-2007, employment numbers have dropped to levels reached 20 years ago.  As I've mentioned in this forum before, what we are witnessing in Puerto Rico is the opposite of economic development; we are experiencing economic destruction.

Prognosis

The implications of this reversal of economic development are three-fold.  First, going forward, all tax collection goals will be more challenging to meet. With a smaller labor force, that means fewer taxes collected.  Unless of course, Puerto Rico implements sweeping tax reforms and switches from the IVU to the IVA.

Second, it is no wonder that there is a mass immigration of Puerto Ricans, there just aren't enough jobs to keep them here.  And while the grey economy still remains strong in Puerto Rico, it appears that even on the fringes of society, there still aren't enough jobs.

Finally, while President Obama just announced the members of the Financial Review Board, it will take years, maybe even a decade for Puerto Rico to establish a floor to the economic destruction.  Meanwhile, the economy is going to get worse, maybe much worse, before any economic development (and the jobs that go with it) can begin.

Conclusion

The scariest thing about Puerto Rico's economic downturn is not knowing how bad it will get before things turn around.  I mean, where is the bottom?  What will these numbers look like after the PROMESA is up and running?  How many more jobs will be lost?  Where will the new jobs come from? What companies? What technologies? What industries?  I wish I knew...

Bonus Math

Employment is at 1,007,496 as of Jul 2016.  In July 1996, employment was at 1,098,169; a difference of roughly 90 thousand jobs.  Let that soak in for a second, yes, there were 90K more jobs twenty years ago!   You would have to go back another year to August of 1995, to compare our current employment numbers.  We've destroyed 21 years of economy growth.

The Magical Mystical Unemployment Rate: Inside Puerto Rico's mysterious drop in unemployment

[Roll up! Roll up for the magical mystery unemployment rate! Step right this way!]

The February unemployment figures came out for Puerto Rico and there was a surprising drop in the numbers; they dropped from 12.4 to 11.6%.  This was possible through a 9K+ net increase in employment.  And while the jump might seem dubious, unemployment has actually been dropping since October of last year.

Roll up, roll up for the mystery unemployment rate 
Roll up, roll up for the mystery unemployment rate 
Roll up (We've got everything you need), roll up for the
  mystery unemployment rate 
Roll up (Satisfaction guaranteed), roll up for the
  mystery unemployment rate

These days, I'm not even sure if unemployment rate is what Puerto Rico economists should focus on.  As I have suggested in the past, the labor force participation rate, is, for me, the most worrisome.

If we look, once again, at the U.S. Bureau of Labor Statistics, Economy At A Glance (Puerto Rico), we see a long steady drop in the labor force.  Starting in 2006, the decreases in the Puerto Rican labor force has dropped down to levels not seen since, 1989.

In total, there has been a drop of about 290 thousand participants in the Puerto Rico labor force since 2006.  Curiously, there has also been a drop of about 272 thousand people employed, during the same time period.  Finally, there has been a total population drop of 257 thousand, roughly the same amount, again, during the same period.

What's the narrative?

A reasonable explanation of these trends could be, as jobs were lost in Puerto Rico, a large majority of the unemployed decided to leave the island. So as the number of total jobs dropped, unemployment skyrocketed, but eventually leveled off, as more and more unemployed went off the grid.  They didn't migrate away, they broke with the Pack, and begin using informal economies to support their well being.

Enter the ever illusive, Puerto Rico informal economy.  The raison d'etat of 8 years worth of complete incompetence in all things IVU or IVA.  As was recently expressed, managing a micro-economy is hard, and few, if any, of our governmental leaders (and their administrations) have been in control of said micro-economy.

The magical mystery unemployment rate is coming to take you away 
Coming to take you away 
The magical mystery unemployment rate is dying to take you away 
Dying to take you away, take you today

Labor force participation rate, total (% of total population ages 15+) (modeled ILO estimate)

Getting back to the labor force rate, here is a graph from the World Bank.  Labor force participation rate is the proportion of the population ages 15 and older that is economically active: all people who supply labor for the production of goods and services during a specified period.  In Puerto Rico, this critical rate went from 48.9% (2005) to 42.6% (2013).  That means that only 4 out of every 10 people in Puerto Rico are working "inside" the traditional BLS type of "employment" model.  Prior to this drop the labor force rate had been climbing since 1990, where the rate was 44.7%.

And Here is The Kicker

So if all of the major economic indicators show declines in the past 8 years, how has the Puerto Rico gross domestic product(GDP) and GDP per capita been able to sustain their continued growth?  How is retail purchasing in Puerto Rico rising?  How?

[Dying to take you away, take you today]

The Elusive Puerto Rican Informal Economy

Funny thing happened to me while I was trolling the economic data for Puerto Rico yesterday.  Surprise, surprise, I found yet another paradox.  According the Puerto Rico Government Development Bank (GDB), Puerto Rico's Economic Activity Index and Retail Sales are growing.   How is this possible?  With lower population and lower employment rates, shouldn't the economic activity be shrinking?  How can there be more money in the economy when there are less people working?

Ask yourself, how could there be more money in an economy, when there is less income?  The only logical conclusion is that there is another source of income.  Now ask yourself, what other sources of income are there that aren't from employment?  Now you might respond, clearly you are overlooking self-employment. Unfortunately, the labor data available for the GDB doesn't support this theory.  On the contrary, self-employment is at it's lowest since 2008.  So if it's not self-employment, then what could be the source of this money?

According to Occam's Razor, the only answer to this riddle is the elusive Puerto Rican informal economy.  Estimated at $17 billion dollars, or 27% if gross domestic product  [of Puerto Rico], the black market is the primary target for both the IVU and the IVA.

When the debate surrounding the IVU caught my attention back in 2006-07, I started watching the growth of a local pulgero, a flea market.  I watched as the IVU became the law of the land, the size of the pulgero grew rapidly.  However, as the years went by and the informal economy continued growing, my local pulgero maxxed out.  Recently, the number of stalls, constructed out of wagons (steel enclosed trailers typically used for goods transport), has roughly stayed the same.  I share my heuristic, to call into question, the origin of the informal economy.

I love the way, the Puerto Rico informal economy has become an accepted fact.  I love it for the irony it represents, for not only does this represent the cash-based economy where goods and services are exchanged outside of law, it also includes drugs and guns trafficking.

It boggles the mind that so many "law-abiding" citizens are complicit with major crime and the syndicates they represent.  Since it is, by definition, off the books, there is no way to estimate the breakdown of the estimated $17 billion.  I wonder though, how much of this economy is drawn from drugs, guns, and prostitution?

Of course, within a kleptocracy like ours, an informal economy is the most nefarious type of corruption.   It slowly leaches into our daily lives, increasingly corrupting more and more of our society.

Much heralded, is the community that protects the gang that helps them to survive, providing "jobs" and income for the community where none existed.  But I wonder....how many of the participants in Puerto Rico's informal economy would openly support murderers, thieves, and extortionists?  Especially, if you factor in that Puerto Rico's population is approximately 95% Christian?

Sadly, I'm left with only the illogic from Star Tek's classic "I Mudd" episode.  "You say that Jesus and The Bible are your strength, but openly allow murder, stealing, and bearing false witness.  But if God was your copilot, you wouldn't take what isn't yours."

The Fable of the Scorpion and the Puerto Rico IVA

Recently the ex-governor of Puerto Rico, Anibal Acevedo Vila made an interesting announcement on his blog, entitled "Refrescando la Memoria."  In his discourse, he suggests that the IVU, which he signed into law in 2006, is one of the reasons that the Puerto Rico economy has not emerged from it's decade old depression.

Yes, let's refresh our memories and see what emerges, but first, I'm reminded of an Aesop Fable, that might help us with our memories:

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too." 

The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of  paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why?" 

Replies the scorpion: "Its my nature..."

The Moral

As some of you political monsters out there might remember, during his political campaign against ex-govenor Pedro Rossello, Acevedo Vila was likened to a scorpion. So let's keep that in mind as I unwind the tatters of history and reveal the moral.

But didn't Acedo Vila, himself, sign the bill into law? Yes, but he remembers thinks a little differently: "Aunque tenía dudas muy fuertes sobre la imposición de un impuesto al consumo, acepté la propuesta del PNP. (While I had strong doubts about the IVU, I agreed to the PNP proposal.)"   So let's deconstruct that statement, because it's a doozy.  So the PDP governor, accepted the IVU proposal from the opposition party, the PNP.  Yeah, that happens here, like, never.

Maybe the blog post is a secret cry for help, because the governor is surely suffering some type of memory robbing affliction. Maybe it's the early stages of senility, because Acevedo Vila must not remember having had the power to veto while governor. Anyway, I digress.

The Informal Economy

When the IVU was implemented it was heralded as the way to increase tax collections from the informal economy (the black market) and those pesky tax evaders.  But like a horrible punch line to a sadistic joke, long story short, it didn't.  As the landscape changed, so did the behavior of the evaders, as well as the merchants and consumers of the black market.

Unlike our fable, in this version, Acevedo Vila isn't the scorpion, he's the frog. And the willing participants of the black market and those wily tax evaders are the scorpion.  For you see, as ugly as it sounds, if there is one thing tax evaders excel at, it is bending the rule of law to their favor.

What's My Point?

If one of the motivations for the new tax law is to capture taxes from the informal economy and tax evaders, then the VAT (IVA) is doomed already.  For just as certain as the sun rises in the east and sets in the west, the moment the VAT becomes law, people will find a way to beat the new system. It is just our nature, we can't help ourselves, even if we tried.  Therefore, all of the tax revenue projections are based on a flawed assumption.

Excessive Gun Fire Rings In New Year




Analysis

As difficult as this video is to watch, it merely punctuates an extremely violent end to a historically bloody 2011. With four injuries from stray bullets, one confirmed death, and another victim in critical condition, thousands of hours promoting no "balas perdidas" on New Year's Eve. All for nothing!

It's been decades since I felt comfortably on New Year's Eve. While the illegal fireworks make it sound like a war zone, we now have a personal account of the horror of living with gangs controlling our streets. While she hides it well, you can see the terror in her eyes. Worse, her brother knows the sounds of different gun reports; he can identify the type of  weapons being fired.


Hope

Where does hope exist in this situation. If this happened to just one brave family, how many others passed the last night of 2011 hiding on the floor of their houses? No amount of money can fix this problem. It's been building slowing for decades, and is quickly reaching a boiling point. How much longer will the citizens of Puerto Rico stand by and accept bribes, participate in corruption, and remain oblivious of the collapse of our society?

Warning

While it hasn't reached your house, or mine, it will. I did hear and found a spent blank shell in the street, so I know someone was walking around shooting blanks from a pistol. How much longer until he buys real bullets? Take your precautions! Take them now. Don't wait to become the next victim.

Puerto Rico's Banking System On The Brink & The Fake Rich

Banco Popular's Shares Got Crushed: What You Need to Know

What: Shares of Banco Popular of Puerto Rico (BPOP) fell as much as 11.4% on above-average trading volume. [Banco Popular's stock hit $1.02, but closed at $1.11, down 8.61%]

So what: Fellow Puerto Rican bank Doral Financial got a NYSE delisting notice on Friday, and Popular is likely to get one from the Nasdaq pretty soon unless share prices bounce back. Moreover, analysts at Barclays highlighted these two as severely undercapitalized and in need of a white-knight buyout.

Now what: The stock is exploring all-time lows, just below the levels set by the 2008-2009 banking crisis, and hasn't paid a dividend since 2009. You'd have to be a very brave soul with a dramatic turnaround plan in mind before buying Puerto Rico's big banks today. The smartest investors prefer American banks right now.

From AOL Money & Finance

Analysis

Contrary to any economists or politicians, Puerto Rico's economy is NOT growing. It's still contracting. It's tough to see it. Between the media and the politicians, we are shown shiny distractions which seem positive. They're right, it is great that are bonds are doing better, but we're not being shown the crumbling foundation of our economy.

If Doral Financial or Banco Popular are delisted, to quote Ross Perot, "There will be a huge sucking sound," as billions or dollars of value disappear. If you are a stock holder in Doral Bank (DRL), and they are delisted, your investment is now worth $0. That is, unless you own preferred stock. ;-)

If any of these financial tragedies were to occur, it might even go by quite un-noticed, locally. There is still a lot of money in the Puerto Rican marketplace, many analysts attribute that to Puerto Rico becoming a narco-state. According to El Nuevo Dia:

Hace unos tres años, Estudios Técnicos, la firma que preside Villamil, estimó que la economía informal en la Isla oscilaba entre $12,000 millones y $14,000 millones al año. De esa cifra, unos $5,000 millones podrían estar vinculados al narcotráfico.

¡Ojala, que no! But if DRL or BPOP disappears, we would be cash rich, but significantly poorer. As the wealth created from 1950 - 2001 disappears, we have become the "fake rich."

This tragedy would hit hardest mutial-fund owners of the stock and the local 1%. Of course, if DRL does gets gobbled up, there would be a trickle down effect; as it would lead to bank closings and layoffs. That's the last thing we need, more "fake rich" looking for easy money. Goodbye, formal revenue! Hello, informal economy!

One final thought. If you listen to the 4th estate or government [same?], for any plans to mitigate the collapse of our banking system, all you will hear is "¡Coqui!"

Saving Puerto Rico will require us to eliminate the 1% and our government [same?] as providers of solutions. We're on our own! No one can help us, if we can't help ourselves.