Wednesday, January 21, 2015

Economy January 2015

It is early in the new year and we are already making adjustments to our expectations and resolutions.

The first thing to note is that the current developments in the world economy is not a short-term blip and will prove to be a major structural adjustment in the global economy.

We are probably witnessing the end of nearly three decades of expansionary monetary policies by both Japan and US. Standard monetary easing evolved into "quantitative easing" as the central banks ran out of papers to buy from financial institutions instead bought governments papers directly. This was when money flooded the global economy and China boomed, as the US and Japan governments tried to spend their way out of recession.

The US reckoned that its economy has adjusted enough and that early shoots of a recovery can be seen as evidenced by job growth. QE can now taper. This signals to US money all over the world to go back to motherland because US interest rates will be the first to rise. The US dollar strengthens as funds go back to the US after having sold down stock markets in Asia. This is where we are as a fundamental factor.

The second thing is that the discovery of shale oil in the US. This must be seen as a strategic move by the US to regain control of the global economy. This go-ahead on shale oil is to make the US less dependent on oil imports. The lower the cost of fuel also helps to strengthen the economic recovery. The IMF revised US growth to 3.6% in 2015 (from its October forecast of 3.2%).

The third thing is the regime change in China which requires that a major structural change is required for the Chinese economy. The old political power which has gained control of real assets must be eliminated by triggering a consolidation in the property market. The IMF expects China to grow 6.8% in 2015 (from the October forecast of 7.1%) down from 7.4% in 2014 and 7.7% in 2013.

The increase of oil from shale and the slowdown in China, the price of oil has come down to US$55 per barrel, from US$100 before.

It is in this context that the Malaysian government is reviewing its situation.

The adjustment is basically financial. Because of a loss of revenue from oil, and in some part made less painful by the resultant cut in oil subsidy from the oil price drop, government expenditure must be cut accordingly. The government decides to cut operating expenditure while keeping development expenditure unchanged, probably on the thinking that OE is boring spending stuff and DE is major capacity expansion stuff. In truth, massive projects cannot be simply abandoned without wastage, and trouble must be taken till completion. While unnecessary OE should be cut, there should be increase in OE in order to improve the efficiency of the government further, by putting in more machinery to do the work with human cannot or are unable or unwilling to do.

The government budget deficit rises from 3% to 3.2% of GDP. Economic growth is revised down one percentage on the lower end to 4.5% which optimism is kept at 5.5% on the upper end of the forecast range. The deficit increase would more likely be seen from the smaller denominator.

There is no word of the GST which presumably means that the government is pushing ahead with its implementation on 1 April 2015. Without the GST revenue, the government finances could become worse. The GST has come in time to replace oil as a revenue for the government.

Isn't it time for the government to size down? Or rather, to cut down on its massive development projects? This supposedly "counter-cyclical", "stimulative", etc fiscal expansion has been going on for too long. There is a need for the government to expand to increase economic efficiency so that more growth can be squeezed out of existing assets. Capacity expansion should come in when decent efficiency levels are reached. It is not good to cover up inefficiency through side-way expansion. It doesn't create high income for all; it create high income disparity.

The world is undergoing a structural change. At home, we are shuffling things about.

We should create a better ecosystem for entrepreneurship. Not the type of entrepreneurship that go after government projects (a legacy of sustained development expenditure of the government). The key word for entrepreneurship is efficiency and competitiveness. We should operate in moderate sizes. It should not be a world dominated by conglomerates and monopolies. The government should be small and efficient. The private sector should dominate the economy, be big and efficient. People should be busy cracking their brains, rather than playing politics.

In the face of the loss of revenue from oil and gas, are we building our non-oil economy?

Monday, January 19, 2015

The Price of Liberty

It is a bit difficult enough to understand the French, but it is harder to understand French liberty.

Liberty is not just about freedom of expression. Liberty is about freedom from the tyranny of dominate power, but it political, religious or others.

Monarchy and the dynastic power of a few families over societies is the first form of attack, by which we are all familiar with the term "anti-establishment". It is the mere disdain for authority that tells us to behave while they can misbehave. Or that they can tell us to do thing so that they can benefit.

Religion in the past, and sadly at present as well in some cases, had been the dominant power in societies that the call was, and still is, for the separation of religion from politics. To most extent, this separation of power between religion and politics has been accomplished in most modern and enlightened societies. Politicians go about doing their normal business of fighting either for businesses (good for jobs!) or workers (improve welfare!), while religious leaders go about preaching the good life in wealth (if possible) or if not, then in health.

But the pursuit of liberty had not been bloodless in the past. Heads had rolled, and blood had been spilled. One ideology takes over another ideology, both seemingly good for everybody (can't be, right?). Everybody tries to cling onto his or her power. Nobody wants to let go of their "strategic" position in the world.

The wisdom of Adam Smith (a member of the Scottish Enlightenment who ignited the French Revolution) is the liberty of everyone to pursuit his or her economic objective through competition, and doing away with monopoly and collusion and the concentration of economic power and wealth in the hands of a few. His book is called "The Wealth of Nation" and this wealth is to come from the economies of scale and market economies through competition.

In other words, economic wealth is to be created by the dissolution of the controlling power of politics and religion on societies so that ordinary people with no titles or social status but only the wherewithal and business-mindedness for material survival can have an opportunity to provide for themselves and their families.

It is necessary that economic prosperity for all can be derived by a government and the religious council to let the people live as they see fit, with the government ensuring fairness and security and opportunity for all, and the religious council administering to the faithful if they so wish to keep their faith.

It is not without reason that religious leader Thomas Carlyle called Adam Smith's economics as "the dismal science" as he saw Smith to promote material well-being rather than spiritual salvation. This sentiment probably still echoes today as people get tired of the "good" life and sought the "more meaningful" life.

We may be seeing the completion of a cycle, as religion now comes back to take over politics and economics.

As with all powers, there are splits internally as well, as each faction vies for power and the spoils.

The religious war today is therefore at two levels: one to take over the world, the other to fight one's own brother for the throne.

The pursuit of liberty may be priceless, but one should not imagine it to be painless.

Tuesday, January 13, 2015

Extremism Or Militancy?

Are we now fighting extremism or militancy? I rather think that we are worried about militancy rather than extremism.

There are extremists and they can be passive too. There are moderates and they can militant too.

But extremists cover both ends of the spectrum - the ultra right and the ultra left. This is exactly what happened recently in Paris - the militant reaction of the ultra right to the militancy of the ultra left.

All perfectionists are also extremists - they strive to the best of the best, at all costs, often regardless of their own lives. When we teach our children to the best, we are teaching them miltancy - and we think it is for good, and often it is. But the greatest geniuses of the world of the physical science created for the human race the weapons of mass destruction as well as the weapons of destruction by remote control - starting with the bow and arrow, the blowpipe and the gun.

At home, we have the call to "arms" of the moderates and hence the rise of the militancy of the moderates. Moderates are now bombarding the media with their messages of moderation, and presumably to the destruction of extremism of all kinds.

The great distinguishing factor in all human lives and activities is ethics - the knowledge of right and wrong. In  the progression of the genes of the human race, right is the preservation of the human race and the wrong is the destruction of the human race.

But in war, there has been wars against mother nature - the control and subjugation of the natural elements - so that human beings are at peace to procreate, multiply and live long lives. All animals are considered wild and need to be tame. We are friends with domesticated animals and enemies with the wild.

The greatest battle is always people against people. So long as the ego comes in and distinction is pronounced, the battle begins. All those who are not with us are against us. We fight against the enemies. In battles, one side is enemy of the other side.

The fight among human communities are often, if not always, economic warfare. The survival of the fittest. Those who are lacking in brawn must use their wits and supplemented with weapons and tricks. This is militancy, pure and simple.

The way out of all these troubles is adaptation and resourcefulness, which is often achieved by co-operation. The challenge is to do the greatest good for the greatest number. Failure to adapt and be resourceful means death to oneself, and the only way to survive in such a situation is to kill the other side for the means to survival or to steal.

The only great path to walk in this world is ethics and morality, which means helping each other to find happiness in this world. Moral values play an important role in all decent communities. Good morals and good values are being promoted by all enlightened communities. Those who promote good morals are usually those who do not worry about material well-being. They learn to adapt and be resourceful.

What is usually considered "bad" is the systematic attempt at the destruction of communities whose way of life is not similar to ours.

The ultimate right is individual right which is at a higher level than communal right. The ultimate statement on individual right is by John Stuart Mill: Every individual has the right to live his or her life in the best way that he or she sees fit, so long as he or she does not prevent others from doing the same.

It is understanding and wisdom, not just tolerance. It is not outright militancy, or physical or verbal coercion. It is simply live and let live. What is so hard about this?

Monday, January 5, 2015

Downward Price Rigidity

When input prices go up, like the not so distant fuel price increases, wholesale and retail prices usually go up, often quite disproportionately, namely, more than justifiable. However, when input prices go down, like recent fuel price cut, wholesale and retail prices do not come down at all. Why?

This is a common phenomenon known to economists as "downward price rigidity". It applies also to property prices, share prices and other prices as well.

Producers and suppliers are always testing the market to see how much the market can bear in terms of prices. This is when they can extract a surplus - which they will justify not in terms of the cost of production or normal profit but over and above those, in terms of the higher cost of living in general, the higher rental or prices they have to pay to own a property, etc.

The coffee shop owner is not going to cut his price for a cup of coffee if at the same price, the number of customers is the same. The customers may grumble but they will still pay for that cup of coffee, even if the strengthen of the coffee has already been weakened. The only coffee shop owner who will offer a lower price is the one who is not getting enough customers and is therefore quite happy to try to attract new customers will a lower price for a cup of coffee.

It is simply a case of the strength of the demand against the strength of the supply. Conceivably, it may be argued that, now that the price of petrol has been cut, the demand for coffee for in fact rise because consumers now have "spare cash" saved from the petrol to splurge on coffee.

In the case of property, as the banks now cut back on mortgage loans together with higher interest rates, we would naturally expect property prices to fall, now that there is an apparent decline in demand for property. But no current holder of property will sell at a price lower than the last transacted price unless he is desperate - in the sense of being threatened by the bank with bankruptcy or that the bank is in fact undertaking forced selling to recover their principal plus interest back. There is competition for banks to force sell if banks perceive the property market to be weak as a whole. But there is time to see a decline in property prices because the banks will take years from the start of the issue of the letter of demand for loan repayment to the borrowers to the time when the banks gets a judgement from the court to declare bankruptcy on the borrowers.

Furthermore, if there is a perceived decline in the property market in general, then property developers will also stop launching new projects. This will reduce the oversupply of new properties. But there will also be an oversupply in the existing property market, especially when speculators have already entered the market to bet on the further increase in property prices. Even if there are no new projects launched, there will also be new projects already launched and under construction and there will also be a string of new supplies coming into the market. It is likely that property prices will fall, but the pace will depend on institutional factors, like bank actions, court actions, government interventions, ability of owners to hold their properties.

The share market and the property market are quite similar in the sense that they are the playgrounds of the same group of people who speculate to make money. The ups and downs of the share prices are well know and they can adjust very fast. They can crash and pick up within a day or two. This is when the share market is fairly stable and there are no structural changes. However, the current situation is that with the end of the Quantitative Easing in the US after three long decades, there is now a major structural shift - that US interest rates will rise because the economy at long last is recovering. Hence, all US capital around the world will return to motherland. This flow back to the US equities market means an outflow of funds from overseas equities markets including Asia. The Asian stock markets crash. As local currencies are being converted to the US dollar for repatriation, local currencies weaken and the US dollar strengthens.

So far, the adjustments in the local stock market is without too much interventions. There is no panic even if the outflow is not small. There is no attempt at capital controls as happened in the late 1990s. Portfolio investors are allowed to freely sell in the local market and repatriate their funds. The only big worry now seems to be money laundering where illegal money go through the stock markets and are now being "repatriated" as the outflow of foreign indirect investments. This is where the central bank comes in to ask everybody to prove the source of the foreign remittances.

But there is always tendency to hinder market price adjustments especially when politics enter the economic picture. Politicians are quite happy to use public funds to support falling asset prices when the declining prices are destroying their financial positions. This is why downward price adjustments usually involve regime change, as is happening in China which is trying to get rid of the corruption that is embedded in the current system by previous regime. In the home front, there is a subtle attempt at engineering change of the system but that change is being made by creating a new one over the old while the old system is monopolising all major sectors of the economy. There is no more private sector.

The current attempt at teasing more cash from the general public through the GST (coming 1st April) is not a strategy for reducing local prices. But the sharp decline in the world price for crude oil is a major game changer. It is both a product of the US shale gas and the overall economic adjustment in China. If we are not looking at our economic prospects from the point of view of the world strategic situation, we are certainly not going to feel very smart staring straight into the depth of a coffee cup.

Wednesday, November 26, 2014

Race & The Nation

A nation is made of many races, in any country. There is no country in the world that is absolutely homogenous. The homogeneity is usually borne out of symbiotic association.

The Chinese are a race of many different dialects, who have graduated from calling each dialect a race and consider all dialects to be Chinese, although one really cannot understand what the other is saying. If left to themselves, the Chinese would have fought among themselves over their dialects. And they did.

I am sure that this aggregation of convenience occurs among the other races in Malaysia, although I will not delve into them.

Except to mention that in Sarawak, it will do the indigenous people much good if they are willing to subsume their individual language under a larger agenda. But the way things are, given the education system, it will be that Malay will dominate as the national language and everyone else has to speak plus English. There is much to be said however about the preservation of ethnic cultures of all language/dialect groups in the nation, if only to remember the roots of where we all come from.

But looking ahead in forging the identity of the nation, it will do well that the Nation has an identity that is a composite of as many of the key and good elements of all of us.

We have already seen the successful amalgamation of religion with race, whether the key identity of the race is religion. But even then, with the religion, not all races are the same. In other races, we see of religions being practiced within a race. This integration of various elements in a race occurs naturally according to the fancy of each individual of each race and therefore cannot be stopped. To do so will be to ostracize an individual as an outsider and not be a member of the inner fold.

A political party therefore is no different from a club whereby membership requires a fee and there are benefits to be derived from being a member. How the nation has been and is being divided is that the holders of positions in the club stand to be elevated so that command by the club over the whole of society can be maintained, with the club imposing its values on everybody.

The club is as good as what it can deliver to its members. If the club fails to deliver to its members, its members will leave.

Other clubs will also rise looking for members, peddling probably the same old stuff of the old club but with a twist - that new members have a chance to be part of the core team. The community therefore splinters into different groups.

But what is the catch for everybody? It is nothing but money and wealth. It is telling that one old guard could declare since we have not managed to make everybody a millionaire, at least we have made a few people billionaire, including himself and his friend, of course. It is all about money.

It is of course true that everybody is in it for the money. You and I and everybody else, because this is the construct of our present society - that we need money to survive. But money for wealth sake is an entirely different kettle of fish - it is about greed and jealousy and domination.

So it is therefore no mystery why politics is couched in racial terms as a means to obtaining the monopoly on wealth. It is about the distribution of wealth. Wealth distributed through projects and it is not surprising that public projects are big projects financed by debt, and this debt is to be reduced by extracting as much as possible from the general public in terms of taxes and reduction in subsidies.

The distribution of wealth in this country is therefore a direct result of the government policy to redistribute wealth directly, at the expense of growth. This policy is leading the nation downhill. When an elite can be made rich and the rest should pay for it. Those who are poor will be given handouts in order to keep them quiet.

The key to economic prosperity is always through economic growth. Through savings and investments and hard work to make a success out of their ventures. It will be a combined effort of skills as well as acumen in business to know the business terrain and to compete. This is what makes a nation tough. But a government that looks jealously at the successful businessmen and say I must have a share of your success without your losses is a recipe for national failure.

Where is the entry point for young people into the economy when the government creates companies that dominate the economy. The structure of the economy is fixed by the politics. The rest, if they want to succeed, must go underground to create an alternative economy.

The obsession of wealth distribution over economic growth leads to the result that is to be expected. That wealth will be distributed and growth will decline.

It is a perverse strategy that to try to keep the economic growth up, the government brings in a foreign third force - foreign direct investments, after having stifled local direct investment. The success of local direct investment will be seen in the form of local physical assets and hence a display of wealth which jars the eyes of politicians. Foreign direct investments merely take their profits out, leaving behind a skeleton physical structure which they are always willing to let go. And the building of infrastructure for foreign direct investment is paid for by the general public in the form of taxes and reduction in subsidies.

With everybody now quite comfortable with handouts, small businesses suffer a shortage of manpower and the only solution seems to be to import foreign workers. There are now many foreign workers, which is leading to a second wave of immigration (issue of citizenship yet again). I should think this second wave is good for the nation, in terms of economic growth. Whether it is good for racial politics or not is something that is left to be seen. We really have to think seriously about our nation.

Monday, November 24, 2014

Friendship & Entrepreneurship

In this digital information age where information is a commodity and social networking is the new frontier for friendship, the question I have is this: Is it possible for this new form of friendship to be a major force in the new economy that we are trying to invent for this brave new digital world of ours?

The first thing about this digital world is that we can be instantly and constantly connected at all times - if we want to. Most of us imagine that this constant contact is the best thing that can happen to the modern person or to all modern persons. I can call you at any time and you can call me at any time. What can we possibly say to each other if we are constantly talking to each other, and not dedicating ourselves to doing something else so that we can report new stuff to each other. It is as if gossip can in itself generate new ideas (possibly) or information (possibly not).

Constant contact can generate new information only when we are simultaneously trawling the net which therefore means that we are then susceptible to be baited on the net, because we belief the net to be the best source of information.

I would not imagine any clever person using the net to deposit new ideas (not necessarily innovative ones) which no one has ever thought of before (except probably this blogger who, by definition, means he is not so clever after all). It is therefore foolhardy to therefore be on the net all at times in the hope that somehow, somewhere a gem will float out from the screen like a genie out of the bottle which then asks: What do you want me to do for you?

It is therefore likely that what you will get from the net is what economists call "arbitrage" - the opportunity to bridge values or prices in different places because of time difference or local knowledge gap. So the person who gets the information first will have the advantage of acting with "insider" information, so to speak. (Like what David Ricardo did using pigeons to bridge the information gap on stocks between UK and Europe.) But then if you are getting information from the net, so would everyone else on the net as well, and therefore you would have that first advantage. You have serious flaw in your networking and information system.

The way to play this information-as-commodity game is to take at least a first order differential on the basic information, if not a second order differential. You have to process the basic information. Processing requires theoretical knowledge, some hypothesis or theory, or an insight into how the reality actually works.

This is why we all have to go to school to learn the old ways of thinking, to learn how to think differently from the old ways and from others present, and to take leaps in our thinking and vision. We have to learn to stand on the edge and learn to have the courage to take a deep breath and dive into the unknown, oblivious of what the crowd at the back are saying how stupid you may be.

Courage is borne out of conviction and conviction comes from knowing what you know, and knowing what everyone else does know. Conviction is a lonely journey inside oneself which culminates in an act of determination and persistence. Conviction is the product of hard work and deep thought. It doesn't come from chitchatting.

But new ideas can come from chitchatting - with different minded people. You are comfortable only with your own kind, then you might as well talk to yourself; you are a comfort junkie. But if you want new ideas, talk to people with different ways of looking at things. These different people make you uncomfortable, because it is hard to listen to different ideas without wanting to shout them out first. But once you are comfortable with different ideas, you can't bear to listen to copycats (people who copy ideas learned from the net). You hear music from different notes.

I am apprehensive when I hear people say they want to be entrepreneurial but are unable to accept different views or see things in different ways. The problem is often comprehension. A statement can have multiple meanings in normal language, unless you have couched the whole statement in legalese which has covered all angles and tied up all loose ends. A common sentence is often ambiguous or imprecise - it requires a "you know, I know" kind of nod to affirm that we are on the same page and on the same line. Otherwise, it is easy to quarrel, if we are looking for acceptance. I would rather use this ambiguity as a source of inspiration for new ideas.

So, for this little piece, I merely want to make the point that by playing with your mobile the whole day every day until forever, you are not likely to become an entrepreneur. An entrepreneur makes and sells things. You on the mobile is a consumer.

Monday, November 17, 2014

Modern Guillotine

Now, we have a state in our great Nation that proposes to chop off offenders' limbs for crimes which are now considered minor by modern standard, such as stealing. I do not like people stealing from me, and I certainly do not like to see their hands chopped off for that either. For all I care, I could have also been inadvertently stealing from others, such as ideas, and I certainly do not like either to have my head chopped off.

Total elimination has always been the simplest method for solving problems by people with little ideas and no compassion. The cruelest punishments are devised by people with the more devious minds, those who cannot imagine why others can resort to desperate acts. It is unfortunate to have to live in a society where desperate acts are common, for it must mean life is very hard for many. It is the duty of the leader of the state or the nation to think of ways and means to lighten the burden of people who cannot help themselves except to do things that they know society despises them for.

I don't think it is ever possible for society to be homogeneous for long. Imagine a society that stays the same forever, doing the same thing day in and day in, year by year, decade by decade, century by century. Japan may immediately spring to mind. But Japan is last of the feudal states of the world, and look at what desperate acts it had chosen to undertake in the name of survival, not just of its neighbours but also of its own people. In the end, everything boils down to the preservation of an old institution which has refused to change in the face of change. Everything else must adjust to it.

Ancient philosophers had taught us that it is possible to build a society of civil people where stealing does not exist, not because people are not hungry but because people are honest. They may not have to beg, but people will give. In this world of economic exchange, the market is a devise constructed whereby it is encourage that people should exchange things which they have too much for what they want, even if among perfect strangers. But this thesis presumes that outside the market, people do exchange because of their kindness and their friendliness and their attempt to be nice to each other. In olden days, this friendly giving is called charity; now, it is called corruption.

In this world of polarity, we think in terms of black and white. This is how the world has been mostly explained, so far that my books tell me. Positive or negative, yes or no, male or female. One is unity; it is also stagnation. Two is the minimal that is required to exchange motion, dynamics, and hence the rest of the world with its myriad manifestations. I am more inclined to think in terms of spectrum and distribution, whereby everything exists, in all its infinite realities, but it varying quantities. Amidst this natural spectrum, we are not likely to see black overwhelming white, or light overwhelming dark. The world is as it is without domination; thereby without elimination or annihilation of others who are different from you.

It is of course for self development and self improvement that one chooses to cultivate oneself in a certain direction. While I think think of the good stuff that one can try to cultivate for oneself, I can also imagine situations where individuals simply mutilate themselves to look different. I have nothing to say to them except to have fun. To each his own. But be restrained, very restrained in doing it to others.

This great Nation has seen the modern guillotines operating in many spheres of our daily lives. You cannot be involved in this economic sector and hence cut off because you are of the wrong race or religion. You are cut off from government funding because you are of the wrong r&r. You are not allowed promotion because you are of the wrong r&r. You cannot think these thoughts because they are seditious, even though you are peaceful. It is therefore not a great surprise that we should come to this frame of mind, to think it is even now in this day and age quite all right to chop off someone's limbs, as a matter of rule. Is this law?