Thursday, April 28, 2016

Governor

The interesting question to ask is who makes a better governor of the central bank - an economist or an accountant.

Self-deprecating economists would joke that since economic theory has nothing to offer now that monetary policy has deteriorated into this mindless expansion of the monetary base either by helicopter money or by quantitative easing, there is really no policy value from an economist. This could indeed be true and it is indeed a serious matter. Look at the present monetary policy stance of the issuer of the international reserve money who is fearful that even a slight notch up for the interest rate is going to send the whole world down into economic chaos. Well, that has not been entirely true. The main cause of the current global economic downturn and slowdown is the political cleaning up in China. As with all spring cleaning, we all have to lift our feet up from the ground and nobody can move.

Of course, the reality is that for a small fry like our nation, we cannot have an independent monetary policy. The only thing to do is to mimic what is happening in the US. This is a no brainer.

Nevertheless, an accountant and a banker may be a better person than an economist to be the governor. The accountant will not spend but will make money by saving up. This will be good to put the government budget in order. The banker will ensure that banks do not go overboard, extend themselves and make themselves vulnerable to insolvency. The accountant banker will ensure that the house will be need and tidy.

Now, I have always argued with the matriarchs in my household that a tidy house is a house not lived in. For a house to be lived in, the occupants will be busy with many ongoing projects at the same time and therefore will have work in progress all over the house. The house will be messy but there is order in chaos. This has always been the condition in which I like to see the economy in. A vibrant economy is a messy economy with everybody busy going about their daily lives and not being bothered by others or others bothering them.

Our economy is not vibrant with the economic growth committee laying out investments and directing what projects will go on. This is central planning.

But for the central bank, it is good to have a nice and tidy central bank. We are lucky.

Tuesday, April 26, 2016

Politics & Business

Politics and business seem to be badly mixed up nowadays, with politicians blatantly doing business and businessmen playing politics. But there is such a thing as real politics and real business.

Real politics is when the government sets about pursuing policies that champion the interests of the nation and the well-being of the general public. The government is the politicians and the civil servants. Politicians are supposed to come and go while the civil servants are supposed to be professional and know their stuff. But when ignorant politicians push policies down to inept civil servants to implement or when they listen to inept advice, we have an economic disaster in the making.

The current episode is bad politics killing off real business. Nowhere have I seen such an eagerness of a government to destroy the underlying foundations of an economy. The government seems to be at war with real business. Giving the benefit of the doubt, policies may be good but the mishandling of their implementation is a sure way to destroy the dynamics of real business.

The GST is a case in point. This is not my favourite topic, but the more I hear the more I am unhappy.

1. The GST is now justified on the ground that we are undertaxed as per the GDP compared to other countries. The blame goes to the black economy and therefore the indirect attempts to capture all transactions in the economy. But for all I care, the GDP number may have been blown up to show that the economy is doing better than it actually is by inflating on the growth of the services sector. And if we realise that the most incentivised sector of the economy is the financial industry with virtually zero tax on any profit made in the stock market, then that is a big chunk of the tax gone. There are no taxes on foreign investments, and the government even gives grant to foreign firms to invest here. So now real business must be properly taxed. At the same time, the government is trying to encourage entreprenuership through start-ups when even existing businesses are struggling to survive in the current environment.

2. The government is very happy to take the GST money from real business even when the invoices are not properly made. But it does not allow claims on the same ground. Is the government a money sucking machine? The government is incompetent to run the GST, being implemented without proper preparation. However the government is going to justify itself, for sure, the GST is a downer on the economy. How the strong will surely survive, I pity the small firms that cannot withstand the burden of having to cope with having to deal with the GST, and administrative as well as the tax cost.

I have applauded the government's policy on restricting foreign workers in the country for several reasons: It is time to move up the value chain. It is time to treat foreign workers here properly by paying them decent wages and offering them decent social services. It is time to take stock of the foreign workers we already have here, rather that importing more. There should be a comprehensive registration of all individuals residing in this country. It is time to ensure that foreign workers are healthy as many are employed in the food and beverage industry.

What happened? Well, real business has real problems registering their workers. End of business and end of story. The civil servants continue to enjoy their take-home pay and go on long training and long leave. (I think the annual leave of civil servants should be cut to 20 days a year and their annual training to not more than 3 days a year.)

Real business is usually small business. I don't think you can nurture young entrepreneurs when the environment is set to kill anyone struggling to make ends meet. The black market exists because not very well educated people are trying to cope in an unfriendly bureaucratic environment. I am not championing the black market. I am calling for a competent and efficient civil service.

I am of course by the racism in real business, when politics is involved in the business world. The government should champion all businesses for the national good. To have government departments championing racism is a bad sign. (I won't comment on religion.)

Politicians play politics, businessmen make money. That the right order of things. It should not be politicians making money and businessmen playing politics.

Monday, April 25, 2016

Macbeth

This being the 400th death anniversary of William Shakespeare, I thought I will write a bit of my relationship with his work which has nothing to do with economics.

For those of us who are now are old enough, there was a time when we had to do Shakespeare for examinations in English Literature. The exam piece changed from year to year, and for us it was Macbeth. It started in Form 4 and the task was to get ready for exams in Form 5.

While we were struggling with the play bit by bit in the first year, we were getting a bit confident by the second year. But exam was still a drag and there were many extra-curricular activities for us to participate and enjoy. One fine day, a few of us decided that the only way to force us to study really intensely on the play was to play it! We decided to tell the Principal of the school that we wanted to put up the play for the school concert that year.

We immediately tried to figure the enormity of the task we had got ourselves into. We had to decide how many people we needed to play the characters. We needed the three witches to do the opening. We needed Macbeth and Macduff to do the main fight. Lady Macbeth had to do her soliloquy. There you all, we needed only six people to get the show going.

Of course, the play being only an item in the school concert, we had a time allocation of half an hour max. We started doing what was (and still is) unthinkable and probably sacrilegious - editing Shakespeare! Well, we made a photocopy of the whole play and started crossing out all the portions that we couldn't do. That was quite a lot. There would be no forest of Birnam moving to Dunsinane Hill. There would be no bedroom scene between Macbeth and Lady Macbeth.

Costuming and the props were no problems. We dressed up in t-shirts draped over with some shawls, and short sarongs. We used tobacco and glue for beard which stunk like hell. We got the woodwork club to make swords for us. We used dustbin cans wrapped around with cloth as shields. The three witches dressed in black enhanced with lighting; the cauldron could be imagined as nobody could see in the darkness.

We used the play to sell the school concert tickets to other schools in town as a short cut way to learn the play for the exams. I think we didn't do that badly. We thought we did quite well because of the excitement of doing it and couldn't think of any other things. We did what we set out to do and did it.

On the following weekend, the local newspaper did a small write-up saying that that it was the first time that Shakespeare was staged with local costumes. We weren't bothered for we were then busily thinking about how to pass the exams and worrying about what we should do next with our lives.

I am happy to report that all the players in the play eventually all flew the nest and left the small town in search of greener pastures. We are planning a class reunion and maybe the small group of us who are still alive and well could reenact the play for old time's sake.

"When shall we three meet again? In thunder, lighting or in rain. When the hurly burly is done. When the battle's lost and won. That will be ere the set of sun. Where the place? Upon the heath. There to meet with Macbeth...Fair is foul and foul is fair. Hover through the fog and filthy air.

Is this a dagger which I see before me? The handle towards my hand. Come, let me clutch thee.

We fail? But screw your courage to the sticking place, and we shall not fail.

Unsex me here, and fill me from the crown to the toe top-full of direst cruelty."

So, it is all about power and power. There is no economics. Whoever takes the throne wins. Ha! Same old story.

Wednesday, April 20, 2016

National Car Project


The idea of the national car project came from the jealousy that foreign car makers could come to this country and assemble their cars and sell them cheap here. Why should we let these foreigners make money here when we could easily monopolise the market. In addition, we could learn and know how to make cars and we could become a super duper nation of science and technology.

This idea came from a bunch of other ideas connected with the desire to industrialise the nation, as per the national plan of raising productivity growth and value add in order to bring about higher incomes. Someone came out with the idea that we should also be manufacturing steel and building a six lane highway for people to drive up and down and therefore creating a demand for cars. All these ideas were implemented and failed.

The reason why car makers go to each market and assemble their cars there is that they are running on grand economies of scale and are trying to reduce the cost of production and making their cars cheaper so that more people can buy. There is a certain fixed cost in creating new platforms which can be repaid by selling many many cars. This basic economics is good enough to kill off any new competitor and makes the car industry the exclusive playground of a determined few in the world. Any body else coming into this game must be a subset or a derivative.

So the national car project basically learns to assembly a car that is also designed and manufactured elsewhere. Whatever we had tried to do to make the car project a national project is to try to increase its local contents which can at best be marginal because the basic cost is the fixed cost. If localisation means deterioration in quality as a result of inexperienced in controlling quality. If the purpose of the national car project is a social project of creating jobs for locals, then there could be the reluctance to invest in automation especially if the machinery is made overseas. In other words, we have basically set ourselves up to lose right from the very start. We are going to clone an existing product from a competitor and reduce its quality and try to sell it at a lower price. Obviously, the market we are trying to target is the lower income groups.

However, it was discovered that the localisation did not reduce the cost of producing the car and in fact increased its cost. The key reason is the loss of any advantage of economies of scale because there wasn't any. There are then the issues of quality of parts and assembly which all added to a major PR negative. In any case, the solution to this was to impose import duties on imported cars and this has to be done by a colossal amount in order to be able to price the national car more competitively.

With now a higher priced car than an imported one without duties, the only way to sell the car is to literally give it away through easy car financing schemes. One could (and still can) drive a brand new car away with a small downpayment and abandon the car when one cannot repay. This is our car version of the infamous sub-prime lending. Nonetheless, what this means is that we have been pouring the national cars on our road system everyday at the rate at which they can push off the assembly line in a day.

We now have a recipe for national road traffic congestion disaster. Before long, all roads are clogged up and new roads have to be built for these cars to drive on. In the past, we could limit credit for hire purchase as part of monetary policy; today, we have no hire purchase policy except schemes that relentlessly push more and more cars on the roads. With the national car project, we have abandoned any planning for the public transport system with public housing and sustaining townships. We just have cars and cars on the roads. (The current afterthought on the MRT is an attempt to solve some problems of the past, not planning for the future.)

With poorly made cars being put on urban roads and country roads, when these cars go on the expressway, they become potential flying coffins. I am not entirely surprised that we are now number one in the world for fatal car accidents.

I am convinced that the national car project must be scrapped so that no more good and scarce money should be thrown to support it. The national car project of course is supporting a community of vendors and car sales people and even lucrative car mechanics, but it is not as if we are closing down the car industry which we apparently nearly have by our bad policy. It is time we correct the car industry policy, by killing the national car project and reviving the national car industry. Those from the national car project can still be redeployed within the local car industry, when the national car project is sold to the private sector. It is an economic efficiency issue.

Let us reduce the adverse impact of cars on our environment by reducing the number of poorly made cars on our scarce roads. Let us put good public transport systems in our major urban centres. Let us do proper town planning. Not just the Klang Valley. We can even remove the import duties on cars and control the number of cars on the roads by other means. It is time that we all learn to think about the policies on these issues.

Monday, April 18, 2016

Banking - Hidden and Regional

I read with great interest the changing of hands of stakes in the banking sector. Could this be the final re-emergence of the quiet one when old age, the Panama Papers or the end of an era is finally making the day of reckoning coming close at hand? Even President Raul Castro has to declare that the old guards must now really call in a day and let the young ones chart their own future. There is no greater curse in the world than a few arrogant fools think that they are the only ones who should rule the world and make the world go the way they want it to go. In the end, God is great and all men and women must die.

This post should be short and is at best conjectural. I cannot help myself in trying to put down my feelings on this issue.

Back in the old days when the world collapsed on us as a result of our own economic mismanagement when politicians controlled the finance of the nation and influenced banking decisions, the political decision was to consolidate the entire banking system into ten large banking groups ostensibly to better ensure the ability of banks to withstand major defaults and errors in lending (the banks would call them systemic failure which I think is a silly idea). At one stroke, all the small regional banks were wiped out and growth of the nation consequently was concentrated in Kuala Lumpur and Putrajaya which thereafter raised the need to solve city congestion problem, the need to build the MRT and the need to impose GST to fund it and other mega projects of the government.

We are now stuck with this PM/FM composite post of national inflation and currency depreciation where the central bank has lost control of the monetary policy and has nothing left but its own sense of authority and dignity. The counterplay between the treasury and the central bank has been lost and the central bank gives up on its independence on the conventional wisdom that the real central bank is the US Fed.

As men and women grow old and they will die even if they do not want to, there is a need for closure and the unraveling of the great matrix of cross-holdings just in case one suddenly dies and the great fortunes lie in the hands of non-family members and the great scam becomes an exercise in futility and foolishness. It is a good time to wrap up for one's progeny.

I was glad to read the suggestion by HRH The Sultan of Johor that Johor must have its own bank to be called the Bank of Johor to fund the development of the state and the funding requirements of its people. I agree. There is a need to revive the presence of regional banks which cater to the financial needs of their respective regions. The CEOs of the big banking groups in Malaysia which are headquartered in KL and Singapore and other major cities would not appreciate the needs of regional centres and their need to grow as the world grows bigger. After the centralisation of banks, I think it is right that the banking policy should be to diversify the ownership of banks and give rise to new regional banks to be established.

One tiny step for the PM/FM to move the nation forward in the right direction.

Monday, April 4, 2016

Macroeconomic Adjustments: Capital vs Labour

It is clear that the world is undergoing a major deflation, after years of priming the pump to inflate the global economy beyond its ability to absorb, given the current level of technology that we have.

We now have a monstrosity in our hands, the trillions of dollars that are now sloshing around the global financial markets looking for a safe home to hide. These short-term capital flights looking for high returns are the product of money printing by irresponsible central banks around the world led by the US Fed which now has a moral dilemma of how to stop printing the cash and not be blamed for the ensuing deflation. The implosion of the global economy is a natural consequences of years of excessive liquidity which has left stock prices high (and refusing to crash), real estate prices way beyond the reach of ordinary working people (and still refusing to crash), banks with loans heavily loaded on stock and shares and real estate lendings (and still refusing to crash).

The ensuing deflation and depression are the natural outcomes of decades of money printing which central bankers should have seen in the first place, but instead had argued with breathtaking profundity of how they are saving the world economy and triggering off the ICT revolution when no one is asked to do real work.

So the policy wisdom is now how to prevent deflation and depression so that we do not trigger off a third world war (which probably is already happening with madmen with cash getting hold of weapons of mass destruction now for real). It is still this thinking of a loose monetary policy that is taking hold of the minds of so-called wise central bankers who did nothing but to subject the real economy to the vagaries of global tidal waves.

For sure the argument is not a credit squeeze which would basically lock everybody out of the banking system, but for a series of bold steps to raise interest rates especially deposit rates to encourage savers, curb consumption and challenge the capitalists to come up with ideas and schemes with a decent rate of return.

The capitalists probably now have so much real estate that is going to last them many lifetimes. But of course there is excess capacity in real estate with building left unoccupied because those who need housing do not have access to shelter.

It is an unthinking capitalist who imagines that the only way the world is going to grow and prosper is to have an evergrowing population that is going to do all the hardwork to obtain decent returns for the capital of capitalists. We know this to be the mere extraction of surplus value of labour. There is no reason why just having money or property is going to make not having to labour in their lives.

There were two world wars where significant portions of the world population were killed. But the aftermath were economic boom because everybody who were left alive were galvanised as a society to work to survive and live.

It is disheartening to read in modern day Japan that young people are being taken advantage of by companies which forced people to work inhumanly long hours with wages that no human beings can live on and when workers are forced to take their own lives as the only way out of their predicament.

Japan has failed as a national economy because the government and the corporate sector collude to steal resources from the people by printing money, currency depreciation, inducing inflation, underpaying wages and with the government and the people going into debt which eventually must be paid by the younger generations. In the meantime, the Japan companies go global to seek better returns overseas and leave the kids at home to fend for themselves by working their butts off for some food in their stomachs and nowhere to go.

It is quite alarming that youth unemployment has grown to 25% and 50% for most economies, advanced or not. There seems to be a real disconnect in the globalised economy where a handful of people can earn more than several nations can in a year and that so-called wealth is not sufficiently spread around by bankers. Bankers are doing an appalling job allocating financial resources, preferring to build cities of ever-growing densities ostensibly to create better economies of scale and "fuel efficiency" centred around casino-type activities.

Governments who measure the libido of their economies by the index of their respective stock market are probably the most corrupt, for these politicians are probably managing their personal fortunes in the markets with projects they are pushing. Everybody are in it to suck the life juices of the ordinary people through all kinds of asset play.

There really is a need for bankers and the financial market to sit down quietly and analyse the economy and decide on the directions of their loans and nuture the current generation of young people who are dying for a toe-hold into the unreal world of the economic matrix.

Monday, February 1, 2016

Negative Interest Rate and All That

In line with Abe's goal of creating inflation that the Bank of Japan is now resorting to introducing the negative interest rate for its customers - namely commercial banks - for keeping their deposits. As of January 29, the central bank will charge 0.1% p.a. on the new deposits of commercial banks kept with the central bank. Luckily, the negative interest rate does not apply to ordinary customers at financial institutions.

The idea is to discourage commercial banks from being prudent and to encourage them to lend to ordinary people so that they will spend more money and increased the demand for goods and hence raise prices in general. But this is a foolhardy task.

Japan has been suffering from deflation for a quarter of a century since the burst of the asset bubble in 1991 after the introduction of the newfangled technique of quantitative easing in 1986. The QE was introduced to reverse the sharp appreciation of the yen forced on Japan by the US in the Plaza Accord. The US economy was weak and it accused Japan of undervaluing its yen.During the asset bubble, the stock market and the real estate market rose to unprecedented heights with banks giving out housing loans that required three generations to pay. The bubble burst when the central bank feels that speculation in the markets had gone mad and there was a need to stop that. The markets collapsed when credit tightened and interest rates rose.

The fact that the Japanese economy has slowed and deflation has continued for so long point to the problems at the banks. With such huge non-performing loans affecting millions of people, the government just cannot push for foreclosures to solve the problem. It would put the entire banking system and the population into bankruptcy. At the same time, the high yen had forced Japanese multinationals to go abroad to places such as Malaysia and thus leaving a vacuum in the SME sector consisting mainly of family-owed companies. Japan hasn't so far recovered from this structural shift.

It is natural that nominal wages have not risen in the midst of weak labour demand, and therefore there is no scope for real estate prices to recover. Instead, real estate prices are looking for the correct level of nominal wages, and if this could not be found at home, then they will have to wait for stronger foreign buyers. Japan has no opened its doors to foreign tourists and it won't be long before these tourists fall in love with the lovely Japanese manicured townships and buy them up, especially those from China.

Lessons for Us

For us here at home, we must recognise a structural problem when we see one, instead of thinking that we are still dealing with a temporary marginal demand adjustment problem.

The impending rise of global interest rate, although the idea is somewhat challenged by Japan's interest rate, and the shift of global money flows in light to that expectation is a structural shift which we have not see before. This is coupled with the adjustment of the oil price back down to normal which should put an end to the grandiose schemes by the government in using demand management to support an income that is not sustainable.

The government here should really cut down on its expenditure so that it does not have to support the huge foreign worker population. The increase in the foreign worker levy is a right move. But the government must cut down on the operations of the government. Senior government servants are paid exorbitant salaries (perks included) for prestige but not talent. They should be given titles that befit their subservient status, rather than as honoured guests in all kind of functions.

I really won't really worry about public transport. With the recession, there will be less cars on the roads. The public transportation in any case does not serve those who drive fancy cars. I think real estate developers should be asked to contribute to the building of the public transport to or near their properties.

Encouraging enterpreneurs is always a good idea. But how it is being done will determine its success. Entreprenuership should not be seen as a special activity that is carried out by a select group. It should be encouraged as a way of life. This calls for a change in mindset starting with policy that is open to all citizens and there are no privileges to selected groups. The system encourages the society as a whole so that everybody has equal opportunities. Those who are clearly handicapped should be helped but should in no way be allowed to obstruct the general progress of the whole society. This policy is also translated down to the banking system which should be liberated to allow for smaller boutique banks that cater to special groups rather than lumping every banking and financial functions under big lumberous megastructures.

To compete in the world ahead, the government should assume itself ignorant and therefore playin the supporting role to the private sector which must take the entire risk of their endeavours. In no way should the government guarantee the financial profitability of projects that bear great benefits to a few at the expense of many. The government should not guarantee private profit. The market rewards those who succeed and punishes those who fail. The government must not penalise those who succeed and rewards those who fail.

We at home should gear us for a few years of deflation and a slow growth. The 3% cut in the employee's EPF contribution is the clearest demonstration of the poverty of policy thinking at this critical juncture of our national economic life. Begone your naive Keynesianism. We are now in post-Keynesianism. Our budget deficit has ballooned to enormous size. The government is now trying to take more money from the people to patch up the budgetary holes. Our people are over-geared and facing unemployment. We are now in post-monetarism. Easy monetary policy has gone kaput. We are drowning in liquidity. Let us try the see things a bit clearly.