Wednesday, May 16, 2018

GST and All That - One Last Time

You know I had had my misgivings over the GST all the while. There are of course very good reasons for being apprehensive.
a. GST is a transfer payment, like all taxes. It does not boost the economy, if it is really used to plug the whole in the public budget. But if the government then went on a spending spree, the spending spree will boost economic activities (although not quite if they are mostly foreign in origin). By getting deeper into debt, it violates the original intention of the imposition of the GST of reducing the budget deficit. The argument then went on to talk about a reduction in the debt/GDP ratio which is quite another thing.
b. The GST by itself at 6% does not sound like much, as had been argued by critics here before. But it was argued here that this will lead to an escalation of prices; not purely because of the 6% but because the imposition of the GST is a desperate measure to try to stop a sinking ship. Added by the expectations of higher US interest rates and the reversal of quantitative easing, the outflow of fund which led to further ringgit depreciation exacerbated an already bad situation. The shit hit the fan.
c. Do we zerorise the GST when we want to abolish it? Well, abolishing it means no more GST as an idea, not 0% GST. Sometimes, it's hard to find good English in this part of the world.

When you have an economy that had been focused on the unequal distribution of the petroleum windfall, you know that you are setting up the economy for a long-term reduction in economic efficiency. So much of the policy errors are being disguised by pouring money to gloss over the cracks. Contracts are no more being enforced; they can be renegotiated because of cost overruns and what not. This is paying good money for bad and incompetent work.

It would suggest that by the way we are going to unroll previous policies, which basically is to reexamine and then probably dump bad projects, things are going to slow down while we are trying to do spring cleaning. We need to brace ourselves for a time of quieter activities. The traffic seems to be fairly quiet, for a start.

I am sure most people feel a sigh of relief now that a certain thorn has been removed from our side. After that will be the healing process, of the politics as well of the economy. I am not too sure whether the same old medicines can be used for new diseases. But like the new digital economy we are all immersed in, we should be quite used to disruptive changes. While these are interesting times, let them not be a time of the disruption of the good old peace. God bless us all.

Tuesday, March 27, 2018

Fake News

Yesterday, an anti-fake news bill was tabled in the Malaysian Parliament.

Fake news are now defined as "inaccurate news" which are "any kind of news, information, data and reports published which, in part or whole and in whatever form including write-ups and visual or audio recordings are false.

This presents a very interesting philosophical issue for us to try to resolve - what is truth?

Wise men throughout the last few thousands of years had tried to find out what is the truth and no one has the one and right answer.

Fake news as inaccurate news is a double-edged sword for the legislator.

The government has never been known to be accurate in the information that it presents to the general public, ostensibly to maintain "public calm" in times of unsettling emotions. More realistically, the government is also composed of ordinary people who have the difficult jobs of having to have a complete picture of the national situation as well as having to forecast the future when managing national economic and financial affairs.

Will the government be charged with fake news if its economic forecast for next year turned out not to be precisely on the dot?

The whole exercise of establishing the truth has drawn upon much of the best resources of any nation. This is where the modern institutional triangulation of the legislative, executive and judicial is laid out in order to ensure that what we have is not further from the truth even if it is not the truth.

Truth as conceived by the anti-fake news act is a point of truth and not a range or an idea of truth.

It is very difficult to have a point hit on anything. This is why when surgeons operate on the tumour in the brain, you either leave some of the tumour in in order not to cut away some part of the brain (Type I error in statistics) or you cut away some bit of the good brain in order to not leave any bit of the tumour around (Type II error).

The implementation of the anti-fake news act, if it is passed in parliament, is likely to commit the sins of Type II error, whereby those who are innocent are also charged in the hope that the fear will scare people from writing anything at all, be it accurate or not. This Type II error has been seen in the implementation of the GST when GST amount are imputed for retailers when there is no information to prove things one way or the other.

It is not inaccuracy that the act will the fighting - it will be ignorance that will be punished and at the same time fostered.

Now, for the poor bloggers who are writing opinions of which much of them are sentiment rather than facts. They could be charged for having aroused the wrong sentiment, or should we now say inaccurate sentiment.

In a world where ignorance casts its cloud upon the whole humanity, the chase for accuracy is as good as the reference of the judge of the accuracy.

As an afterthought, accuracy can be accuracy of the truth and of the falsehood. Accuracy does not necessarily equate with truth. A perfect fake painting is an accurate reproduction of the real painting; the only issue is the claim to authenticity.

Thursday, March 8, 2018

Brexit - Revisit

What is happening with Brexit?

Brexit started from the simple idea that there was a need for Britain to control immigration because of the heavy influx and the pressure it was putting on social services. When Britain appealed to the EU to allow it to do so, the EU rejected the idea of a controlled border.

The decision was then to put to the general public through a referendum as it whether Britain should leave the EU (if it so desperately wants to control immigration) or stay. The resumption was that most people would choose to stay and therefore decide once and for all that Britain then would have to accept the uncontrolled immigration with all its costs and the implications on subsequent fiscal decisions such as taxes.

The referendum decided on Brexit which the EU subsequently vehemently opposed by imposing all kinds of restrictions and costs on on the idea that you cannot leave this place alive. Britain must die if it wants to leave the EU.

The EU consists of a bunch of bureaucrats who are not at all directly related to the various constituents of the EU except the home country from which they come from. But the political forces of the EU come from Germany and France, apart from Britain. It looks a bit like a another war where Britain is now defending itself against Germany and France.

The money costs may be a burden for the immediate future but not in the long run. The restrictions especially on trade may have some legitimacy if the common market is the focal point. The common market is important only if its very existence is the underlying force for the economic survival of the EU. In the sense that by the free movement of goods within the EU, EU can develop happily without the rest of the world. It seems strange that while there is a loophole whereby the movement of people from outside the EU can be free once they have gained a foothold in some obscure part of the EU, this cannot be applied to goods. There is a prejudice for the free movement of people from all over the world, but not of goods. It does seem therefore that the EU is really a political entity which is using trade sanctions to punish those who disobey the EU political masters.

Britain's decision to leave the EU is a political decision. It is a war and war has its consequences. Britain has been involved in two major wars in Europe and it has recovered since. So this is not the first time that Britain is facing a situation such as this.

Businesses of course are worried because they are the target of the EU response to Brexit. This applies especially to those who are in the EU because of the EU common market advantage. After Brexit, a new profile of the British economy will emerge which will be shaped according to the new reality of being outside the EU.

But the EU is not the world. The EU bureaucrats have not taken into their calculations that Brexit will only be detrimental to Britain and not the EU. If that is the case, they should let Britain go and concentrate on the joyful development of the EU in future. But the EU will also suffer without Britain because Britain is a major economy in Europe. Within the EU, Britain acts as the financial centre and some manufacturing for Europe while neglecting its agriculture. Outside the EU, Britain may lose some of its financial services; but not all but it will also be able to recover some of its traditional industries.

The future growth engines of the world will be China and Russia. There is much of European and British that the Chinese would wish to consume. Even if India were to become a substantial economic power outside itself, it will also be a major consumer of European goods and services including British. Economic growth of European countries depend on their relationships with countries outside Europe. Europe is a major tourist destination which can be sold by entertaining the tourists.

The EU is merely flexing its political muscles in the negotiation. Whatever the final outcome, it is good for Britain to be out of the EU and be as free as before to be its captivating self.

Tuesday, June 27, 2017

Party & State

My dearest children,

I started off my life by asking the question of what is the best. For if I wanted to do good in the world, if I wanted to do the best for the people, then I have to put them before myself. This is when I started to find a way of how to turn a swamp into a modern and vibrant city.

Of course, our place was not just a swamp like a lump of mud but a lump of mud that is strategically located in the middle of the most important trade route of the world. This is when it is opened to receive that trade as a means for our people to earn a living by working hard to provide a service.

The economic story is well-known. But the politics is a bit more complicated.

I had decided that I should be the philosopher-king as propounded by Plato. If wisdom should befallen the political leader, the society shall benefit from that wisdom. It has been shown that democracy, while the idea is good for being all encompassing and inclusive, is a dilution of perfection and the end result is always mediocrity but of the type that the common people find acceptable. But if we were to pursue economic prosperity through economic efficiency, we must have perfection that is characterized by meritocracy. That perfection and meritocracy must be seen to culminate in at least one place and that one place must be the political leader who is both wise and selfless.

When my eldest son decided to be a politician and ultimately the political leader, I had no choice but to open up the route for him. If he could do the job, why not? But of course, there were criticisms which I did not hear which would suggest that there might be others who were better than him and who, as a result of my son being earmarked for the top post, might have sensibly withdrawn volunteering their talents to the state. How much is this opportunity cost worth no one will ever know. The real cost must lies in the future of this state.

The problem of having a son succeeding his father in politics is that the son is under pressure to do better than his father, and this better must be seen as a much harder line instead of a veering away from the old path and taking the country onto a more enlightened path as it was then on a much firmer footing. If the son were to presume to take a similar premise as the father had taken, then the whole future is staked upon a single platform which may or may not be as relevant now as it had been in the past. The likelihood of making an error in future projection is very real, the further time moves away from the origin. But this is now for the government to decide.

In my case, for my own legacy, I had already made it very clear - that I did not wish to be glorify in any grandiose scale, for to do so will distract the attention of the people from what they have to do for themselves in the future if they have to keep looking backward into the past. It was for this reason that I had decided that any physical monument that had come to represent me should be removed so as to prevent any idol worshiping.

However, I was aware that there could be considerations by the party that its history should be preserved as part of the national history. That is very well and good when you imagine that the party is the best representation of the interest of the people and the nation in the future as it had in the past. But it may not be so. New parties may rise up and take over our party as the people demand their new aspirations to be met and which may be best served by new representations which they may create in the future. The party may not even be as important in the future as it had been in the past, unless the ideology of the party evolves with the times.

I know now that the quarrel among my children is a quarrel between the party and the citizens. I would say, son, let the citizens win.

Your loving father, etc.

Thursday, June 15, 2017

End of Civilisation

Clever economists cook up fantastic ideas about accelerating economic growth through competition. Adam Smith conjectured that public interest can be served by the pursuit of personal interest. Now we know Adam Smith had got it wrong.

Competition is now extended to the global level. First, we have nations conquering other nations to ensure their own prosperity. Second, we have companies conquering the world to ensure their own corporate profitability. Third, we have politicians hand in glove with global companies conquering their own nations in pursuit of their own personal gains. Clever politicians are now global companies in their own right.

The second layer of competition is people competing with companies. Marx said people should rise in arms to take over companies, because in the end there are no profits and all gains go to labour because there will be more capital than people. Now we know Marx had got it wrong.

While there is indeed much more capital than needed thanks to decades of money printing, it seems that human beings have been much more productive. This is a perfect situation for capitalists as they now can pay zero wages for people to work, as they take back the wages through inflation. Thanks to the help of politicians who now control economic policies as they raise taxes in order to pay for the services of firms. There is a great pretense in paying wages. The new phenomenon is the working poor; those who work can still be poverty stricken. In the past, the poor can pick from the land; now they have to pick rubbish from the streets.

There is the great sickening concept of the aging population is no good because they cannot feed themselves. This is utter rubbish. The fact is that the population has not been properly paid and what they have been paid is not sufficient to live on over their entire life. What happens to the profits that they have helped to make? Companies get richer and they have no where to invest. So they start buying countries from politicians. Corporatisation of the world? Big Brother is coming.

The aging population is good. It reduces the population in the world and conserves scarce resources so that they are sustainable in the long run. That you need a faster rate of population growth and lower wages in the future to take care of the old folks is a pathetic idea. Some financial consultants have got their calculations all wrong.

And now, people competing with people. There is no more gentlemanly fights or womanly fights. No more boxing; it is now kick boxing and mixed martial arts. There are no more rules. You can do anything to bring your opponents down. You have the right to be abusive and disruptive.

The clever people is no more a person who knows many things and be honourable and polite. The clever people is now a person who does not have to know a lot, but that the little that he knows is good enough for him or her to abuse others and remove any threat perceived. There is no more at improving knowledge; there is everything to do with acts of destruction.

So now we have politicians calling people whom they do not like all kinds of ugly names. The ones who are abusive and foul mouthed win. Those who can lie and cheat win. People who can be abusive of fellow citizens are national heroes. Those who can insult their customers in a language their customers cannot understand is a great sign of disrespect; they are a product of the political environment in which they are brought up.

Is this the end of civilisation where people have forgotten to be civil? Has the respect for each other gone? Are we in the middle of a war of one group of people against another group where is only goal is to destroy the other? Is there no hope for people to live in peace and harmony and work hard to raise their families? Is it our way of life to steal from others and destroy them so that we can live off the fruits of their hard work? Are we in the midst of a fight to death for scarce resources as we encourage faster population growth in order to fight an aging world? Is the human race going to choke in death in their own toxin as we have seen in some countries? Is the world messing up its own back garden?

Monday, April 17, 2017

Inflationary Forces

I think we have to be clear how we think of inflationary forces in this country.

We know that GST would cause a one-off increase in the price level with the introduction of the 6% on 1 April 2015.

We know that the piling up of sin taxes on alcoholic drinks and cigarettes would also only cause a one-off price increase - each time the sin taxes are raised.

We know that even the drastic depreciation of the ringgit of 20% against the US dollar would also be a one-off effect on the price level.

The academic argument on inflation is that a one-off increase in the price level is not considered inflation because inflation is the continuous increase in the price level from one period of time to the next.

On this score, the GST is free of guilt because the 6% is only one-off from the base of zero GST. At all subsequent times, the GST remains at 6% and hence the price for the same product will remain unchanged at the heightened level. Unless of course the GST is raised above 6%, then another round of one-off price increase occurs.

In the case of the sin taxes, these have in the past few years been heavily victimised because the policy makers want to raise tax revenue in the guise of self-righteousness.

The sharp depreciation of the ringgit of course is again another one-off ever since the depreciation started at about the same time as the imposition of the GST. There was gradual depreciation on a sustained basis until it hit the current level which the general public feels that the situation is completely out of control. This was when the coffee shops started raising prices by 20% to 30%. We can consider this also as another one-off impact.

In terms of analytical rigour, if we were to separate out each of these factors, the conclusion is that none of these by them is a major cause of inflation.

But the obvious answer is that there is the cumulative effect of all these little impacts. A single mosquito bite doesn't quite bother, but a hundred bites would anyone insane.

All these analytic rigour is good for the student who is trying to understand the basic mechanics of inflation. Mind you, the ability to distinguish between a one-off price increase as not inflation and the sustained increase in prices is an important one to learn in class.

After having understood the lesson, in the real world, the challenge is how to think about policies which will affect the price stability of the nation. This after all is the mandate of the central bank, a responsibility entrusted to it by the government. The world has invented the central bank in order to control the minister of finance from spending recklessly for political/populist reasons. The central bank's main tool is tight control of the money supply.

In this country, the central bank has no control over the money supply. We do not have foreign exchange control because we embrace free trade and the free flow of capital. Quantitative easing by the US Fed encouraged money to flow into the stock market here raising stock prices which subsequently fell upon profit taking. The currency rose and fell as a result of the collective inflow and outflow. We lose foreign reserves through our stock market.

The last time the central bank tried to sterilise the domestic money supply from the capital flows resulted in incompetent forex dealers at the central bank losing the pants for the nation.

The increased capital inflows and the increased monetary base encouraged banks to lend out money to the general public to punt shares, speculate on real estate and generally going on a spending spree with their numerous credit cards. The bank executives got big bonuses for creating debt recklessly.

Chief among the borrowers is the government who has learned the joy of spending to solve all political and economic problems, including an incompetent civil service which does nothing but line their pockets with giving out concessions, perks and pensions at the top of their respective scale. Nothing productive came out in the economy except huge public sector debt, raised through bonds which need to be redeemed eventually. Which they did and caused the sharp currency depreciation as foreign bondholders sold out and leave.

They left because the central bank was afraid of the impact of selling forward on the currency and foreign bondholders were left with nowhere to hedge their currency risks on their miserly discount rate on the bonds.

The attempt to control the public sector debt and the political need to spend on mega projects compelled the government "to make very difficult decision" by imposing the GST on the economy. This is a major single act of the transfer of funds from the people to the government which at once make the government rich and the people poor. There is no doubt about this - inflationary or not.

When the ordinary people talk about "inflation" they are really talking about the fall in their standard of living - times are bad, taxes go up, prices go up, margin level down, business poor, hard to earn a living.

The imposition of the GST seems to be a vindictive act to kill off the informal sector which has been the lifeline for many of the poorer sections of society which has been ostracised because they are not of true blue blood of the soil. The GST will force this group further underground, no doubt with the godsend from cyberspace.

The sin taxes and all the other taxes which the government now seems to be trigger happy in imposing will slowly but surely and persistently ensure an underlying bubbling of the inflationary forces in this nation.

The one obvious thing - to the eyes of a trained practicing economist - is this: when is the major adjustment going to take place in real estate. Real estate prices have gone off beyond the reach of the ordinary people. Either wages have to go up or prices have to come down - in order for the market to equilibrate. For the moment, the market is waiting for the equilibrating forces to come from overseas thanks to the cheapened currency.

The thing about inflation (or rather, a one-off major increase in prices) and depreciation of the curreny is that they really do decrease the standard of living of the ordinary people by increasing the costs of living and the only way that they can cope is to reduce their consumption. We are now very discerning in the things we spend money on - and only on the essentials which may also be verging on the inferior quality.

I am looking at you - the banks with your huge debt portfolio all skewed towards real estate and personal finance. You cannot lend much more because your customers have lost their credit-worthiness. Now you are only dealing with big tycoons - does that mean money laundering?

Looking ahead, the world is now entering an upcycle on interest rates - meaning that there is only one way for the interest rate to go - which up.

This is a big nervous decision for the US Fed because they have been so used to solving problems by printing money (QE) for the last three decades that for them to end that trend will just reverse everything that happened. That's why Yellen is walking on a tightrope. To fight inflation, interest rates must go up.

The good times are over. Youngsters who have had a good life putting stocks and flipping real estate may have to learn to do real jobs. The other fantasy world is cyberspace which is real in itself being of the digital economy age but probably only a handful will succeed. The rest will just have to put their noses to the grind, work at a job and wishing and hoping that properties will become affordable so that they can start their new families and get on with life.

Yes, economic theories and models are great. They help us to think clearly. But policy is an entirely different ball game altogether - a combination of every model that you can hold in your head at any one time.

Thursday, March 30, 2017

Brexit - Leaving EU

The United Kingdom triggers off its break from the European Union on the 29th March 2017, with two years to negotiate by 2019.

The original intention for the UK to break off is to be able to control its own borders. Rapid immigration has put pressure on its public sector especially in housing, healthcare and welfare services. It is inevitable that with common borders, workers from poor countries flow to rich countries in search of jobs and a better life.

The UK is forced to take this extreme measure of breaking off between the EU does not allow member states to limit the number of immigrants, a direction that was pursued by David Cameron. The EU said, "No, you take the whole package and cannot pick and choose." This forced the referendum and the population voted to get out.

Those in the cities mostly voted to stay in while those outside the cities mostly voted to leave. Scotland and Northern Ireland voted remain, while England and Wales voted leave. As democracy is in the end reduced to a simple major rule, the leave wins which then leads to the triggering of Article 50 of the Lisbon treaty yesterday.

The beauty of the EU is that it provides a common market for the goods and services of the EU member states. It may be envisaged that a mixture of rich and poor countries can provide all the necessary ingredients of a balanced and self-contained economy. As it turns out, capital does not easily flow to poor countries, but the people of poor countries easily flow to rich countries.

But why should the Europeans be so angry with the UK for trying to leave the EU, by being very difficult in the negotiation? After all, there is freedom and democracy in Europe and countries should be able to freely join or leave the club.

Maybe the EU is not a club, but like a religious grouping where once you joined you cannot leave with threats of tribulations.

The EU is a political grouping that is disguised as an economic club. While the immediate benefits are economic in nature, the ultimate purpose is to create a political entity that is a federation of member state that answers to a big brother in Brussels. The EU is an attempt by Europe to regain its former glory as a unified empire, in an apparent counter-force to Russia and China, and probably the US. Many say that EU has resulted in decades of peace in Europe.

If the EU were to break, then individual nation states may see themselves as vulnerable to attacks by their bigger neighbours, the biggest one being Russia. The EU can be seen as a continued ideological fight for democracy against the totalitarian state of Russia. In attempting to do, unfortunately, Brussels may have to act in a totalitarian manner with respect to their individual states.

Each European state may therefore have to choose to suffer in the hands of either friendly dictators or fearful enemies.

In trying to punishing the UK for leaving the EU, Brussels may be shooting its own foot. By destroying the UK economy, the EU may be destroying a potential ally in times of war should Russia decides to act. Putin is watching. Strategically, the EU should help and ensure that the UK be sound and strong so that they can collaborate politically if need be in future.

After WWI, Europe punished Germany by insisting on war reparations causing hardships to people and which led to the rise of Hitler and WWII. After WWII, the US supported Germany and Japan, the losers in the war, as economic giants so that they can be strong allies in times of war or to deter another war.

These are lessons that Germany should learn, when dealing with the UK.