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.

Saturday, January 23, 2016

The People Protest Again (TPPA)

I am writing here as per request.

I initially had no interest in these things because (a) the economy is already in deep trouble and what difference would this TPPA make even if it is for the worse; and (b) would anybody in government bother to rethink carefully if they know how to protect the national interest instead of the interest of the party. (But seriously, the party is over and now we have to clean up the mess.)

I think I may have something to add.

TPPA stands for the "Trans-Pacific Partnership Agreement."

Trans-pacific is a very USA terminology for when they look over the Pacific Ocean, they are looking at the whole of Area. (When they look over the Alantic Ocean, they are looking at Europe.) So the TPPA is a very American intiative. The US wants it, not us in Asia.

It is obvious that China is not included in the TPPA negotiations. For one, China wouldn't be so stupid to be tied by the US. Two, the US is obviously tying up with its "allies" in Asia in order to counter China which has surged to scary heights economically. The US is in decline economically and is in sore need of a strategic move to at least play defensive against China.

1. If I were the US, what I want from the TPPA is for all partner-nations to operate subservient to US companies with the US government setting the rules of the game. In other words, the US government will play judge and jury in any business disputes which US companies would surely raise if they were to lose their investments because of country risks.

In the TPPA, there would be no country risk for US companies and if there is, the country must pay. Country in the end means the people in terms of inflation, currency depreciation, high interest rates and high unemployment, as the errant country must pay a huge sum in US dollars and its government must run a budget deficit to do so.

2. US companies are holding many copyrights and they wish to ensure that they can extract rent out of these copyrights. Areas to attack are music, films, medicine as well as technology. Since modern technology is being used not only to save labour but also for entertainment, it is therefore likely that entertainment for the masses will an expensive hobby.

3. It is obvious that US service companies want to capture a chunk of the professional services industry in Asia. They have already done so under WTO, and it is likely that under TPPA, they will deepen it with legal implications.

4. I agree that worker conditions must improve so that every working person earns a living wage. There should be provisions for housing, medicare and schooling for their children if we want to host workers in this country. This is how a country grows, by taking care of the people who work. Only when we have this baseline drawn properly can this country move up the value chain and be a high-income economy.

My final point is that, if Malaysia really wants to sign the TPPA with the USA, then the government should also pursue such a liberal and liberating policy in our own domestic economic policy where there are no quotas and restrictions for the selected few in our own society. If we are glad to appease ourselves with foreigners, then we must also be prepared to treat all our citizens as equal.

Wednesday, January 13, 2016

Malaysia Economy 2016

I am surprised that the prime minister has to spend time to revise his budget as the price of oil plunges further.

If the economics department of the government were to have been staffed professionally in the first place - rather than employing part-time MBAs and jack-of-all-trade consultants to disguise the emptiness - somebody would have (a) done a risk analysis on the oil scenario that would swing either way around the USD 50 a barrel at the time of the budget, and (b) foreseen the rise of US interest rates two or three years ago and the impact on the stock market, the real estate market and the ringgit and local interest rates.

The paucity of strategic policy thinking and the lack of understanding of how the real economy of the country works is shown up clearly by the mishandling of the GST, a topic which this blog has covered at length and with great passion arguing against it.

The GST cannot be the saviour of the national budget. The use of the GST, without the abolishment of the personal income tax, is an abuse of the theoretical argument for indirect consumption taxes. That the GST can be saviour of the national budget must mean that the income and welfare of the general public must deteriorate by the same amount of the revenue raised by the GST.

The current call by the government for all enforcement agencies to raise their tax revenues from customs, inland revenue, fines and other miscellaneous sources including increased dividends from listed companies, must be seen as a desperate act to "make the numbers look good for the rating agencies" and the ordinary people must suffer. But for what?

That the government can continue spending recklessly? The civil service has been drained of professionalism but that lack of professionalism is costly, not only in terms of lack of work done and the end to employ consultants to do their jobs, but also the need to spend most to send them for courses in reward of their incompetence (pay, and no need to work), the tendency to organise PR activities to sell the image of the government rather doing the actual delivery, and the tendency to triviality (re dress codes to be eligible for government services).

The biggest white elephant will be the public transport system now being built in KL with money collected from all states. By the time it is done, the economy will be in the deepest recession. It is not stimulating the economy, nor will it solve the urban traffic problem. With the recession, there will be much diminished traffic on the road.

What needs to be done for the economy is a complete overhaul of the current system. There is too much concentration of economic power in the hands of a few organisations who therefore act as monopolies. They extract fees but do not improve their delivery. TM's Unifi is a sham. All the utilities can raise their rates and nobody can complain. The call for improved dividend payouts by listed monopolies can only mean increased fees across the board and a general deterioration in the purchasing power of the ordinary people.

The closure of the formal economy to half the population to a third of the citizenry does not only mean a multiplier effect on the contraction of the potential of the local economy but a general mental blockage about trading with the rest of the world. Unless, of course, the objective is to exclude the local non-inclusive while sharing the largesse with the politically-inconsequential non-locals.

It is this paranoid and distorted thinking on nationhood and the deliberate repression of a selected section of the society that is destablishing the social fabric and the economic engine. The lack of incentive to invest in one's own country and the need to squirrel away ill-gotten gains in some foreign hideouts merely means that the local currency can only be weak.

It can be observed that after every boom in the economy, the currency will appreciate during the boom but deteriorate after the boom. This happened in every decades since 1982. It cannot be attributed to one regime but the entire economic system that has been set up to provide economic gains to a particular racial and political group.

The nation has come to logical end of the economic system that was hoisted in 1970. The 1970s saw the transformation from a professional civil service to a race-based system and the reclamation of so-called national assets from foreigners. The 1980s saw the failures of the autarky and the beginnings of dealing with foreigners who were erstwhile enemies. The 1990s saw the transformation of the economy from agriculture to manufacturing and the wholesale building of infrastructure for industries, funded by short-term foreign capital in collaboration with local political powers and the eventual collapse of the currency. The 2000s was spent covering up the damages with oil money. The current decade attempts to use the money that is not there to bolster the economy with big public projects. There is simply no encouragement of local citizens to invest in value-added businesses by a revamped banking system that is not focused entirely on the stock market and the real estate market.

Are the local government system and the local banking system geared towards promoting private investments not only in the old industries (plantations, real estate) but new industries and services which the modern world wants? The way the local immigration policy is conducted, we are painfully exchanging high-calibre citizens for disease-born illiterate workers from the bottom of other countries.

Politicians and senior civil servants should cut down drastically on their overseas travelling and should instead spend more time thinking through on the nature of local issues and how they may be resolved in our own way, rather than plugging standard solutions from consultants. It is only when we learn to solve our own problems that we can begin as a nation to be able to stand on our feet and bring happiness to our own people.

Saturday, October 24, 2015

Malaysian Budget 2016: Comments

Budget 2016 is about the government's budget, not about the economy although it has implications for the rest of the economy.

To be fair, the strategic thrusts for the economy where already spelt out the 11MP announced earlier.

In straightening out the books of the government, the government did the following:

1. Increasing personal income tax for those earming RM600,000 a year or more by 1 and 2 percentage points. Move in the right direction.
2. There should be an increase in the corporate income tax as well, especially for big multinationals. They must contribute more to the economy.
3. I am dismayed that the government gloated at the massive amount of money they have raised and will raise from the GST. This is taxing everybody for the benefit of government revenue to pay civil servants who do a bad job in running the country and economy.
4. I am concerned that the extra GST money may have come from the reluctance of the government to refund businesses. If the government can go around to every shop and demanding GST payments and fines, the government is not thinking of fairness in implementing the GST but in collection extra revenue, by hook or by crook.
5. The minimum pay for civil servants at RM1,200 per month is a good move, being socially just though the economics is another matter althogether.
6. The move to ramp up the average speed of the internet to 20mps is a good move.

Having said that, a good budget is one that inspires investors. This budget does not do that.

Thursday, October 22, 2015

Economic Transformation: Right Way, Wrong Way

We are being told that transformation is the way for our nation to get out of the middle-income trap and progress. I am afraid that transformation is just a nice word. Yes, we need transformation but not of the kind you are taking about. The current transformation is bogging down the whole nation.

1. Reducing the budget deficit to a manageable size is good. But going for a balanced budget is not so clever.

2. Reducing the budget deficit by reducing mega projects is good, but reducing the budget deficit by taxing the general public more is no good as it bogs down the private sector.

3. Reducing the budget deficit is good but increasing the cost of living and doing business by the removal of subsidies and imposition of more taxes is no good because it burdens the general public and the private sector.

4. Enhancing rural development is a good transformation for the rural areas, but it will not enhance economic growth and transformation.

5. Putting in a public transportation system is good although belated but it is good only for KL and not the rest of the nation and it by itself will not transform the economy. It only solves a perennial problem in hindsight but forward looking into the future.

6. Assisting low income households is good for low income households which exist because of deterioration in productivity growth, increase in the cost of living, and bad economic planning which is unable to create good paying jobs. It is not going to transform the economy into fast growing.

My apologies for yet another negative post. This is my long winded way of saying that we need better policies than the ones we are having if we want this nation to have a good economic future. Our policy makers have no good ideas. We are only doing the management of the economy by treating symptoms we can see, but not inspiring our young people and old businessmen to fight in the frontier of the technological war in the international market.

Alternative?

1. To keep the GST, you must abolish personal income tax but keep corporate income tax.

2. To impose tax on stock market transactions because it is no more transfer payments but a money making industry on its own.

3. To increase the levy on foreign workers who are using the public transport system and other public services for free.

4. The government to divest itself out of business areas and introduce more competition to create more business opportunities in services and to reduce the cost of living. Why do I have to pay more for my internet connection while access to the line has deteriorated.

5. The banks to start recovery action on default loans especially on commercial and residential properties in order to bring the market price of properties to affordable levels instead of waiting for another boost of liquidity to inflate asset prices.

6. To get banks to allocate at least 40% of their loans on commerce and businesses, excluding property purchases.

7. To bring savings interest rate to 5% pa, and limit the mark-up by banks to 4% pa, so that the maximum loan interest rate is 9% pa for businesses.

8. To limit the loans for buying cars.

9. Not to protect the plantation businesses by pursuing a low currency policy, since subsidies have been removed for the general public and the pursuit is higher productivity growth.

10. To make English the national language of business so as to empower more young people to have the world as their oyster.

Wednesday, October 21, 2015

Is Govt Ineptitude Killing the Economy?

I wish to contend that government ineptitude is killing the economy.

The quality of the government has deteriorated so much that it is detrimental to all and sundry who are unfortunate enough to those who are part of the economy, not just who has to deal with the government.

1. It is morally wrong for the government to raise its revenue through additional taxes and fines. What is worse that with its latest objective of raising raising money for the government, government ministries and departments and their officers are now behaving like gangsters terrorising ordinary people with threats. Small businesses now would rather close down their businesses altogether rather than having to deal with this new crop of government officers who are inept and who try to show result through psychological and pecuniary coercion. Small businesses are forced to react in a manner that these officers imagined the real business world to be, accusing businesses of being greedy and dishonest. It takes a thief to imagine that everyone is crooked. Small businesses have to lower prices because the price of petrol has fallen regardless of the mighty fall of the local currency and the imposition of the GST which is now kicking up the honest nest of business tax reporting where businesses are being fined for every conceivable accounting crime, helped no doubt by the accounting firms which concocted such schemes in the first place before. Yes, the government will get its bucket of blood but the economy will die in the end.

2. The distribution of wealth in this country is deteriorating in this country because the political class has colluded with big businesses to maximise their profits by underpaying sub-contractors and contract workers. We are now back square one. This economy is not about the welfare of the ordinary people any more. This economy is not about training local citizens with good skills and paying them decent salaries on which they and their families can live on. This economy is now about making big money by not working but by creating fantastic ideas on which to make use of other people's savings as capital and other people's efforts as labour. The big banks colluded with this politics and big businesses to create extraordinary profits for bankers and for which the future generations will have to pay for the bad loans that are surely on the way to hit all of us as the economy deteriorates. Those with no access to big bank loans and depending on their meagre wages and salaries who have whatever little they have squeezed further by the GST, the hike in tolls and the imported inflation. The worst part of this skewed distribution of wealth is that the loot has been squirrelled away in overseas assets to avoid taxes and is the main cause of the persistent depreciation of the value of the ringgit. In return, we import cheap unskilled labour to generate more profits for the capital employed in property development and mega infrastructure projects. The spending addiction of the government helps to distort the distribution of wealth and destroy the future potential of the economy.

3. The key to the growth of the economy is always investments and investment opportunities always arise from new territories that emerge from the mixing of two or more spheres of seemingly incongruous nature. This nation should not be reduced to a mono-culture, and not be seen to allow such tendency even to have a toe-hold. It is unfortunate that top politicians have allowed themselves to play with the fire of racism if only to again momentary political mileage but at a tremendous cost to society cohesion and the future of the economy. This nation needs the confidence of its people to sink the future of their children here. This nation needs to exploit the tremendous opportunities that exist from having probably one of the richest cultural mixture in the world by allowing that diversity to bloom in its full splendour. For a start, we should introduce bilingualism in all our public communications - the national language and English. We should have Malay and English in all our official letters and public signs. Even the Japan that Malaysia has followed in the past into mono-culture is now anglicising its street signs. Malaysia seems to have lost our common sense, not being able to respond to the market logically but being enslaved by an ideology that is bringing us back to the Stone Age. This nation needs to shake out of its spell of doom.

4. I think I have written enough to give an inkling of how I feel about the state of the nation. There are many more things to write but they will just be more words. To cut the whole thing short, I will make this simple policy recommendation. I disagree that the GST should be reduced from 6% to 5% or 3%. I strongly believe that the GST should be abolished although and the person who sold this idea to the PM should be sacked. This one simple act will do much good in bringing back some hope for this economy. It will also demonstrate that the PM has some sense and guts to do the right thing.

Wednesday, October 7, 2015

Malaysia: State of Economy

1. The economy is undergoing one of the sharpest adjustments in recent world economic history, after having gone through the glory times of the US quantitative easing of money printing. The rise and collapse of the asset markets - stocks and properties - is what we are seeing as the current business cycle. During the downturn, the sellout in the stock market and the subsequent outflow of funds depresses the local currency. How far down the adjustments will go is left to be seen.

2. As we have seen in Japan, if the adjustments are small and managed, then the adjustments will take a long time. In Japan, three decades and counting. Property prices have gone up to levels which the average young person in the job market could not even dream of owning a simple housing. This will create an entirely new generation of youngsters who have to cope with a high cost of living. At the same time, the property developers continue to milk their land bank by developing real estate based on inflated expectations. They can do so because they are already cash rich in their projects in the last three decades. Rents will remain high or properties vacant, and the only available market is the foreign market. In the world today, there is a class of the super rich who have the privilege of buying prime properties in any major city in the world. In the world today, there is also a class of the super poor who cannot afford to subsist even when they work very hard everyday. Those who cannot work are of course suffering the greatest miseries of human life especially in cities.

3. But do we dare to do major adjustments and how can we do it? The only balancing act is between the cost of living and wages. Ordinary people find it hard to live even when they are working hard. It means that wages are insufficient and therefore should be raised by an amount which is deemed sufficient, maybe 40%. If this happens, employers will say they cannot afford that as business is now bad. The other adjustment is to say that, given the current wages, the cost of living should come down. The cost of living is not just food, but importantly transport and housing. In the modern world, the cost of telecommunications and utilities now feature prominently.

4. The greatest spanner in the works today is the current great currency depreciation of 20%. This raises the prices of all imported stuff. This squeezes the livelihood of ordinary people into a pulp. As a result, overall demand for imported stuff drops. This squeezes even further the ability to own properties. This means that for those who are already invested in a property or properties, they may already be defaulting if they cannot find good tenants.

5. The greatest dilemma for banks today is how to deal with the aftermath of their reckless lending frenzy. The bad consumer debts and the non-performing loans in shares and real estate. Do they forgive these bad debts and move on? Who pays for the debts ultimately? The answer is simple - savers and depositors.

6. In such a depressed economic environment, the role of the government is to revive investor confidence. This good and generic statement is often mistaken to mean that we must sell our country cheap to foreigners. The most important thing for the government to do is to revive the investor confidence of Malaysians. This is of prime importance. It is really unbecoming of irresponsible politicians, just for the sake of rhetoric and showing courage, to deride businesses of all kinds in all occasions. We have the ministry of domestic food prices accuse businesses of profiteering by not reducing food prices when the price of petroleum drops a sen. We have the customs now going around witch hunting legitimate businesses for that gangster money called GST to the point, as I have heard, of outright harassment simply because every business in town is assumed to have always been evading customs duties and taxes and now GST. The response of many old businesses is to close down shop because it is simply too bothersome. The customs people are new in this game of the GST collection and in order to show results they use fear. In a word, the imposition of the GST will worse the business climate of this country and we should see a great economic slowdown and a rise in poverty as the government gleefully go about solving its deficit problem. Really, the best way to cut government deficit is to stop spending money you don't have on silly projects proposed by half-past-six management consultants.

7. I believe the political issues are mere political issues and should be isolated from economic issues. If there is any connection, I would say that the economics have a greater influence on the politics than the politics have on economics. Of course, in this country of ours, the politics have driven the economics for so long that it is assumed to be the only and correct for human beings to live. I believe we have been living under a dark cloud and that dark cloud will be passing even if reluctantly. That doesn't mean that the current shenanigans are acceptable. They are not, and they are silly. But in the end, it is going to be the economics that is going to influence people how they are going to vote.

8. How do we put the economy back together again? Confidence in ourselves. Start working with each other for the greater good. Politicians should stop making social comments and start straightening their policies and implement projects and programme. Give more money to the department of statistics so that they can get a more accurate picture of the social and economic profile of the country and the states. DOS has been so grossly underfunded and findings are approximated from sparse surveys and we get an unchanging picture of a blurred reality. Make the utilities more competitive through watchdogs and remove their monopolistic elements. Hopefully, basic facilities can be affordable and efficient and hence improve the overall competitiveness of the living and economic environment. Keep finance a separate and independent function. Charge finance with the role of ensuring the financial health of the nation. Remind the central bank of its role of preserving the value of the currency in a proactive manner. (Eg. ban inflows of short-term capital for the stock market.) Stop spending on silly projects - the LRT is the recent one, totally underplanned and hastily put together. Stop imposing silly policies - the GST is the recent one, totally uncalled for, with stupid arguments.

I better stop here.