Wednesday, February 4, 2009

No, Not Household Demand - Private Investments!

I don't think that getting the consumers to spend is the answer to the current economic woes - not even in Malaysia.

You get consumers to spend because your diagnosis of the current problem is that it is the result of a temporary drop in the buying spree of the people. Maybe interest rates are on the high side so you drop them. Maybe taxes are on the high side so you cut them. Maybe banks have no money to lend so you inject liquidity into the system by cutting the SRR (Statutory Reserve Requirement). But the current problem is caused by none of the above.

The pivotal problem is the bursting of the asset bubble in the US. The bubble burst because banks have been lending money for people to spend until they cannot justify lending to them anymore - as evidenced by the high loandefault rate. People had been spending based on borrowings out of the inflated prices of real estate and stocks. With the bubble burst, people become indebted and hence cannot spend anymore. Banks become insolvent as their lending philosophy is found to be unsound. There was a lack of prudent. Companies close down because the buying stops. The rescue in the US is first to prevent the banks from collapsing - which would otherwise jeopardise the entire economic system. The second step is for banks to start lending again - and certainly it will not be by way of consumer spending. The banks have learnt their lessons. But the government can put some money in pockets through tax cuts - or better still direct handouts or unemployment benefits. But the proper rescue must come from a recovery of investment by businesses so that they will need to rehire.

In Malaysia, the problem is that commodity prices have dropped and this makes the harvesting of our commodities economically not viable. The problem is the cost of growing and the inefficiency of the technology we use. The agriculture suffers from lack of technological innovation. The low commodity prices will have to make them move up the technology curve. If not, then agriculture in Malaysia is a sunset industry.

Our industrial sector has hollowed out. Not only foreigners but even our local flagships which are supposed to champion the Malaysian economy by spearheading the industries have also moved out to foreign pastures - in the hope of earning easy money like they have been nurtured at home in their formative years. The only industries left are those that feed onto the higher operations in China for exports to the US. These small companies are the ones that are being hit and they are the ones that will be closing after the festivities. Tax cuts won't help if you are bankrupt. You cannot get households to consume half-made hard disks.

The services sector is such a shame. You have the unemployed who become self-employed because there is money to be made in speculation - in shares and in property. This was the biggest game in town and everybody has been quite happy to do little for big gains. The global meltdown destroyed this game - for the moment - so these speculators can rely on their past earnings, if they have not lost all in the crash already. But most will tighten their belts because they are now asset rich but cash poor. So, there is nothing that one can do for this groups except to join in their prayers that the market will rise again.

Of all the above factors, the biggest issue is the sudden fall in aggregate investment in this country despite having a high savings rate. The sole cause of poor investment is a loss of confidence in the ability of the government to govern properly by ensuring that those who invest can take all their earnings. The government can tax, like other governments, to provide the safety net for the old and incapacitated - but not to enrich the elite or themselves. So long as the government continues to build projects that lead nowhere, no private sector person will invest in a business that they cannot win either way. The job of the government today is indeed to stimulate the economy. Government deficit spending is helpful, but it is important for the government to re-establish private sector confidence in this economy as the place where fortunes can be made by those who choose to work hard. This is why there is constant flux in the election results - because the people cannot seem to be able to find politicians whom they can have confidence in in looking after their (the people's) basic welfare.

Where, then, can the people find confidence? Religion is a good fallback - with everybody answering for themselves. There is no surprise of the resurgence of religion-centred parties. Abstract concepts such as justice is amorphous, for it begs the question: Justice for who?

At the end of the day, we may just need people who are technically trained and who know how to build systems. It is the system of institutions where each is given the power to move forward while another is given the power to counter-balance, so that the whole system will somehow trudge along dispassionately dispensing justice and injustice to those who are caught by the perfection and inadequacy of the system. When something goes wrong, fix the system. This removes the invisible hands of the elite including the politicians from the system which is a good thing.

When the rules are properly set, we can expect a good game to be played by all participants and can even be enjoyed by those on the wayside including tourists. Only that we need good umpires.
In Malaysia, somebody has run off with the ball insofar as the wealth of this country is concerned. We have failed to redistribute wealth; somebody has managed to hijack it.


de minimis said...


The points you make in this post are good. I have taken the liberty to qualify the Malaysian Insider op-ed piece displayed at my blog by referring to this post of yours. This will provide a more balanced perspective.

etheorist said...

de minimis

You're always welcome.