Wednesday, March 30, 2011

International Monetary Troubles

Meeting tomorrow on Thursday 31st March 2011 in Nanjing, when finance ministers and central bankers from the G20 will meet to discuss about all issues except the elephant in the bath tub.

The central problem today with the international monetary system is the balancing of the flow of international trade and the international flow of money. In theory, surplus demand and surplus supplies will adjust so that a balance is always established in the end. Again, this is in theory. In the real world, none of this automatic adjustment exists except possibly in the commodity markets where specific commodities are produced with much competition from substitutes and where supply and demand conditions are fairly easy to predict as they are slow to adjust. Hence, a few traders can corner the commodity markets and hold the poor of the world to ransom, and the only adjustment the poor can make is to starve themselves.

The problem with international monetary imbalance is that, like the poor, deficit countries are under the greatest pressure to adjust only because they run out of credit to spend themselves out of their problems. What do you do when a poor uncle or a poor friend, dying of old age and dwindling income generating capability ask for help - once, twice and we imagine if we allow it, ad infinitum. We answer ashamedly, "I think I have helped you enough" while planning for our next vacation abroad.

One way that an international agency can step in to help the deficit country is to give it some credit when all other conventional lenders refuse to continue to give. The IMF tries to behave like the global central bank with the authority its own currency called the SDR (special drawing right) with funds from the deposits of central banks as "customers". The SDR is constructed like an index number and then its exchange rate determined based on that basket, and translated into the needed currencies like the US dollar for actual transaction purposes. In this way, the IMF steps in to ease the temporary "financial" problems of deficit countries while programmes are put into place the solve the "real" problems.

At the same time, the surplus countries are under no pressure to adjust at all, just like the rich who will only get richer because they have found a strategic advantage to benefit from the rest of the world. That strategic advantage for China may simply be sheer hard and intelligent work for minimal pay, very much reduced consumption and still have surplus to keep. It is simply a question of lifestyle, of a way of life. The poor may not be the destitute but simply those who have sufficient and who overspend. It is still lifestyle and bad habits. Do we then discipline the hardworking and be lenient with the spendthrift. It is not exactly that the US is poor and China is super-rich. Intra-China, there is also an imbalance where the rural poor worked hard for the urban capital-rich for the enjoyment of the deficit US consumers who pay for things with computer digits.

So, what are the adjustments or what are the "real" problems. Is it an exchange rate problem? It was OK before, but now it is not OK. If a people have worked so hard and so long to enjoy a bit of luxury, do you then ask them to adjust their currency so that they will have a work harder and enjoy less. Do you not ask the deficit country people to find new ways of doing things and produce new stuff so that they may have a fighting chance with selling their wares. Or do we allow specialisation of countries where countries like China, Japan and India produces real stuff while European economies produce financial crises.

Or, do we think that surplus countries will translate all their foreign reserves into domestic currency and flush the economy with cash in the real estate and the stock market. Or, do we not think that they will use the US dollar to buy US assets in the US - which the Japanese did in the eighties.

Or, are the issues to be discussed at the G20 really more about strategic issues such as not letting the East conquers the West just like the way the West had previously conquered the East. Is it not really about fearing the huge immigrant population in the US and Europe will forsake those countries and the productive but fluid labour force will float to the most competitive countries in the world and reforce the success.

Against such fundamental issues, we will find that the G20 could just be a meeting to air some issues "of global monetary importance" and then return home to placate the population that something has been done and things will take time to happen. In the meantime, adjustment is a slow cook.

Tuesday, March 29, 2011

Self & Society

Those of us raised on Western philosophy are very clear about the right of the individual, how an individual like ourselves, no matter how basic or poor, is still a countable entity which has the liberty to exist in the best way that we each see fit so long as we personally do not become a nuisance to anybody. This idea of the autonomy of the individual comes from the idea of the existence of the self, where we each like a light bulb can glow quietly unperturbed in the intensity that we have the energy to dispense.

The exertion of the right of the individual self does not in any way automatically leads to the conclusion that the individual is selfish. To be aware of the self is very different from the inclination to always and only look after oneself. Selfishness is that narrowness derived from the unenlightened view that to stay alive is the raison detre for living. Staying alive is nothing but a fallback position when one has nothing else better to do in life. That is why there are individuals who climb rocks and tall buildings and high mountains, and others who dive into the deep dark oceans or float in the deep dark space. There are also others who simply walk into very dangerous places in order to get a job done to save other lives. It is this right of exertion to live or die or suffer in between that defines the character of individuals who under normal circumstances may live lives that others may not even notice. Heroes are born of individual selves who could have been selfish but instead rise above the consideration of the body and dedicate that body to an act that may just for a moment make ordinary life possible for ordinary people.

We have seen before our own eyes, and experienced an era of the destruction of whole societies by a few individuals for the benefit of the few individuals in the name of progress, rapid economic growth and full employment, as well fairness and equity. We have seen how new inequalities are being created out of policies which explicitly and purportedly tries to redress imbalances and injustices and only to find the ideals slipping through the fingers of those who try to command the earth to stop moving. These selfish individuals, nursing enormous egos, try to use sweet words intersperse with threats to cajole societies to dance to their tunes and in the process redirect the flow of the social efforts into their own pockets finding excuses in the shape of building monuments to themselves. These individuals are asking individual persons to sacrifice their lives so that these leaders can add greatness to their names, at the expense of the faceless toilers. That the powerful can enjoy opulence when the masses starve is the invisible hand that is redirecting scarce resources through the inflationary phenomenon.

At the Fukushima nuclear plant, volunteers were sought and obtained in experienced workers who willingly with eyes wide open go into the inner sanctum and be blessed with the light. By this single charitable act, they have vindicated themselves from all the sins that they have committed in words, thoughts and deeds in the past, and in the process salvaged their souls. They shall suffer and so shall their families, spouse and children, but they shall have pride for the rest of their days. It is in moments like this when we can reflect and realise how we in our little excuses are nothing but petty selfish individuals bent on lying to ourselves and those who will listen to us so that we may maintain our little arrogance deep in our hearts.

Monday, March 28, 2011

The Uselessness of Predictions

Whole industries have sprung up over the centuries for the mere purpose of predicting the future, from the vestal virgins of Delphi and witches of Scotland to star gazers, face/palm/foot readers, statistical manipulators, scientific safeguarders, trend discerners and inspired third-sense charlatans.

When all potential faults and problems are properly identified and resolved, everything goes on so smoothly that it is presumed that that which have been hard at work and keeping everything in tip-top condition are but irritations because of their apparent presumed self-importance which is making the incompetents extremely insecure and jealous.

There is really no reward in forecasting except when one is making plans for one's own life journey. Even then, there are those who argue that there is no need for planning and everything will end up in the best of all possible worlds, so long as we accept whatever comes. For those who have no experiences of good things coming by themselves on their own accord, without effort on one's part, this is an uneasy and possibly traumatic attempt at relaxation. In an organisation or society, the politicians will always short-change the technical people in order to exert control over the experts. Under such repressive conditions, it is likely that the technical upkeep may just be a notch below the necessary as a form of sabotage in retaliation to presumed injustice. Such perverse behaviour may even be observed in children when they underperform in order to hurt their parents. First hand, I tend to try to identify potential problems long before they surface, so that easier milder remedial actions can be applied earlier, but have more often than not been labelled as a person who sees problems where none exist (for the moment). My standard response is this: "I hope I am wrong. If I am not, you are in deep trouble."

But there are things in life that are self-evident who do not need a rocket scientist to predict and which every sensible ordinary person with some common sense will tell you will happen, as a matter of fact: (1) You will die. (2) Human beings will disappear from earth, just as dinosaurs had. (3) You make bombs, bombs kill people. (4) Nuclear plants will blow up.

For natural phenomena such as (1) and (2), there is nothing much that one can do except to accept the inevitable, although most of us will still try to stretch things at the margin just a little more (just like home renovation). You find people popping pills (me included), exercise, and resorting to all kinds of activities of some sort, wasting time in the hope of gaining some, which is nothing but the swapping of young energetic time for a longer weak and frail condition.

Man-made phenomena such as (3) and (4) are simply the foolishness of human beings, of a small group of people harming the whole of mankind just because society at large allow a few foolish people to take control over the majority just because the few claims to have the right or sheer brute force to exert that power.

Will there ever be wisdom at the top, when the foolish thinks that status and position bestow upon them wisdom which they do not possess. The jostling for power and the scrambling for titles are things that foolish people do to feel self important. Even erstwhile perfectly good individuals when they are feeling ordinary and are wise seem to have lost their wits the moment they enter halls of "monumental historical importance." When they do not deserve the position, we will find that they generally will destroy the sacredness of the place through the corruption of its integrity.

Because of the foolishness of individuals, we can only allow each individual a short period of time of time to display their foolish the moment they step into power.

Wednesday, March 23, 2011

Zen & The Japanese

How do the simple teachings of the correct method of realigning one's psyche to the cosmos by a foreign teacher in a foreign land can so readily be accepted by the xenophobic Japanese who then made them distinctively their own? Is it because those teachings fit exactly into the Japanese shared experience of Earth and how Mother Nature can both be giving and neutral.

Zen is the end-result of the teachings of a 6th century master who went to China to correct the way for practicising Buddhism. There was much doggedness and flippancy, and the way out was flexibility and focus. That flexibility which juxtaposes prolonged silent sitting with controlled focused movement and the later gives rise to the famous Shaolin monks. The focus is made in all conscious efforts, whether it be sitting or moving, and the first trick is to understand and accept what comes without acting further to aggravate the situation, and the final trick is to understand that it is all in the mind and nothing else which could in modern science be simply called "neutral".

The big name in Chan is Huineng who was a butcher who left his poor old mother to the care of neighbours in order to work in the kitchen of the temple. Huineng demonstrated his understanding with a few lines on the wall scribbled in the middle of the night, whose handwriting the master recognised who then gave him the authority to be the next master and told to leave the temple immediately that very night so that the competitor could not kill him. From Huineng arose several schools of Chan, and it was the Linzi school which probably had had the biggest influence on the Japanese, who enunciated it as "Zen". I highlighted Linzi because it is the school which beats its disciples with a stick during meditation if the master finds the disciples to be drifting.

The Japanese make a big deal out of Zen because they are perfectionist. If they really want to be "truly unperturbed" they must make a real effort in a equal and opposite response to what must have been a terrible environment for them - the warlords, the serfdom, the fightings and wars, and servitude in addition to natural calamities such as volcanoes, earthquakes and tsunamis.

The extreme nature of Japanese stoic-ness could be a Malaysian perspective, as we tend to be soft and forgiving, not only to others but particularly to ourselves and our communities. Everything seems to be an excuse for a good giggle.

In Zen, the final lesson is this: In the face of even the most unpleasant external environment, the only response is not to respond. "Be a stone", as an ex-Japan resident used to tell me. Keep still, do not react, do not retaliate - not only in body, but also in mind and spirit and soul.

I think it was only with the deepest inability to contain his emotion when the Governor of Fukushima, Yuhei Sato, said on national television on 16th March 2011, "The worry and anger of the people of Fukushima has been pushed to the limit." This is very unZen-like, but how poignant.

Wednesday, March 16, 2011

The Liquidity Trap & How To Fund Spending

Economic theory has advanced so much that the Keynesian-Monetarist dichotomy is blurred. Economists today can think freely about fiscal policy (with monetary implications) and monetary policy (with fiscal implications) interchangebly. In the end, spending and pumping money into the system are quite the same however you dice it. The illumination from Keynes has been to be able to accept deficit-spending as a way forward. The unfortunate thing is that Keynesian policy has reached its limits apparently, because of limits placed on government deficits by buyers of government debt. The Japanese answer to this debt limit is to bypass private debt purchasers and just ask the central bank to print.

But what I really want to discuss in this blog is Keynes' famous concept of the Liquidity Trap. This is economic psychology. The economic assumption has been that when people have money, they will either spend the money on food or buy a guitar or save it and invest it in bonds or equities or buy a house. Somehow, by putting more money into the system, people will spend or invest and somehow generate economic activity. Under normal circumstances, monetary policy works. By lowering the interest rate, people borrow more and spend and get the economy going. In the process, money is created.

The Liquidity Trap kicks in when people suddenly become fearful of the uncertain future, and they start holding onto cash. This happens they expect prices to fall - no point buying now when things can get cheaper later and get a bargain. The Liquidity Trap comes in when deflation is expected to happen or is already happening. It's like catching a falling knife. When there is a Liquidity Trap, lowering interest rates do not work to stimulate the economy and this is when governments have to spend and arrest the decline in prices.

For years, governments have been arguing for stimulus packages in order to kick start a depressed economy and get inflation going. This is jolly well and good. Now, the problem is when stimulus packages are no longer virgin policies and they have been used and abused for decades. Prices run off and people are happy making tons of money without too much hard labour except speculating on shares and properties in the comforts of a cozy office.

In the past, banks used to be responsible especially after having gone through the recession of the thirties and the inflation of the seventies. Banks were prudent and had their internal checks and balances. Most banks were owned by private individuals, with a personal stake in its fortune. By the eighties, many banks went from European/UK type to US type banking where the CEOs were and are just employees out to make a quick buck from their bonuses calculated on loan disbursed but not necessarily repaid. An untrained banker can become very rich by blindly giving out loans and targeting high loan growth. The only thing you need is a collateral and collaterals can be created everyday if you are giving out loans for properties.

When the game of rapid loan growth funding property purchases hit its limit when there are no more housebuyers, the mortgage market gets into trouble. Because deposits of the public is at stake, government stepped in to save banks and this can be done if the property market is not allowed to adjust downwards. Property prices are kept up and loans kept on the books but there is no extra cash to lend to other users like businesses. The banking system gets caught in a quagmire.

Governments print money to save banks from collapsing. There is no threat of inflation. In this case, there is a threat of deflation from property prices. It is this threat of asset deflation that is being used as a justification by central banks around the world to print more money in an effort to the save the economy.

With property asset prices being kept up, rental prices continue to be high. Housing prices remain unchanged; they may even rise as more money is being pumped into the system and banks try to show a profit with more loan growth. Those who do not own their homes still have to rent and pay high rentals. Businesses pay for high rentals of their shoplots. For the ordinary people, food prices continue to be high as the global commodity markets go crazy on biofuels and natural disasters as well as on sustained growth in China and India.

The unfortunate case of Japan today given the earthquake should give Malaysians a stark lesson in economic efficiency. It is really not a clever argument to say that economic efficiency is not important. The natural disaster requires that scarce resources of the Japan government has now got to be re-deployed into replacing what is lost rather than build more on what already exists. All additional resources will be used to recreate new towns and new villages and new facilities. But for the Japanese, all will not be lost. They will rebuilt a new system which will be far more superior from what they had lost. What they have now lost in structure will now be replaced with greater efficiency. Japan will recover, and it is the efficiency and determination of its people that they have my greatest respect as economic creatures.

Tuesday, March 15, 2011

Japan Earthquake & Tsunami: Does It All Matter Anymore?

To watch the unfolding of an on-going tragedy in the warmth of one's home is one of the most uncomfortable senses of being that I have ever experienced, so far. The tragedy that is hitting Japan today is a sad moment.

Christchurch and the other earthquake incidents were one-off. There was the quake, and a few tremors. Or, there was the tsunami, and all was gone. But to watch the earthquake and then the tsunami and then the unsteadiness of the nuclear plants and to see crowds of people with nowhere to go, hungry, cold and lost, and then to see the plain devastation of an entire village and town where thousands used to live and are there no more, that scene in my mind is the most heart wretching.

I watched the unfolding drama with my Japanese friend and his wife. They had the nervous laughter, unable to show their sadness in front of their guests, and forever trying to play the perfect host and hostess. Their two boys and a girl are in Tokyo and in the initial hours they could not keep contact. Finally, they found one son walking home seven kilometres, the daughter squeezing in among friends in fear, and the youngest son could only responded: "What, OK!" They have a fallout with their youngest son and my friend concluded that the one consolation of this disaster is that he and his wife could at the very least have some form of communication with their son.

I said to my youngest sister who I discovered has already passed forty when we were watching the tragedy on TV that this is a tragedy only because of the insignificance of the lives of human beings. The earth is nothing but a ball of fire and the other layer has cooled to form a crust which is in a constant state of flux, like the skull. The movement is constant, but in human terms, this is what the engineers called a once in a hundred year event. Well, if a moment for the earth is a hundred years for humans, then our individual lives do not last more than one moment each, in global terms, and probably far less than in cosmic terms. We are like insects that are born in the morning and die by night fall. And what do we do in this shortness of time. We fight, we lie, we cheat, we become generally unhappy with ourselves and everybody else. How silly are we all!

So, there is no big deal to this former prime minister of our who has again distinguished himself by writing a book of lies to justify his wrongdoings, and calling everybody else names. I have find it extremely unpleasant for supposed educated young and old men and women to degrade themselves as intellectual by extreme forms of arguments when good manners should have prevailed. Instead of focusing on the subject matter, they would focus on character assassination and calling people names. Sticking labels on people is one the easiest and lowest forms of human communication and I can see now where our young people are getting their bad manners from. Economists, unfortunately, have become extremely ill-mannered ever since Keynes published The General Theory. He argued that in order to get his argument across and to break through a tough convention, he had to be rude - in his words, to "convict" his opponent. Since then, economists have acquired very bad manners in their talking and writing. I have learned this little thing from my Malay colleagues when I was working in a major bank. The executive director told me: "You might be clever, but you must make people accept you first." I am eternally gratefully to this person, who unfortunately had fallen into disgrace due to his lack of good judgement in his work. If you want to know why economists do not agree, it is because they are rude, no matter how brainy they may imagine themselves to be.

So, what about the economy? I have refrained from making any comments on the economy because I have already said what I have wanted to say about it. The global economy stands in ruin because of the reckless pumping of fiat money by the irresponsible Fed of the US. That extra money is being used to keep its economy by the propagation of war around the world. The mountain of extra printed money flooded rapidly through the financial centres around the world making arrogant stockbrokers and bankers. They lend recklessly to speculators on real estate and financial assets. The pumping of more money to prevent these asset markets from correction and downward adjustment is now being lauded as the saviour of the global economy because economists do not have any new ideas to solve this economic disaster. Any correction of the asset markets would be a political and human disaster. The global economy now swims afloat a sea of greenbacks trying to find dry land. If the stock markets are recovering, do not believe that the global economy is recovering; it is bad money looking for good avenues to surface. In the meantime, China suffers from its own success and the world suffers from the scarce resources that China has the money to buy.

We know from history that the great wars are started by massive inflation especially with respect to food so that whoever or whatever promises to put on the tables of hungry fathers and mothers and brothers and sisters, there is a revolution waiting to happen. China is not like the Middle East or the rest of the world, because China is communist and communists are supposed to live and die for the rakyat. China may yet find a narrow path out of the world of contending factions.

Tuesday, March 1, 2011

Inflation & System Change: No?

Regimes in the Middle East change because people are fed up with the same old politicians with their same old ideas of stability and making themselves rich while the rest of the people cannot find jobs or are in jobs with steady but low pay while food prices have skyrocketed.

Of course, the chief cause of very high food prices is the natural disasters and crop failures. There is a shortfall in the supply of food and prices rise to ration the supply to those who have the purchasing power to access the food. In other words, the supply of food in the world is now distributed more among the rich and away from the poor. (The poor even with their pooled resources would have have a limited access while the rest falls on the tables of the well-to-do.)

Does it help to restrain demand growth? If slower demand growth will create less jobs or less to higher unemployment, then the poor with continue to suffer. So long as there is a shorter of food supply, the rich will bid up the prices until they get the quantity they need. By slowing demand growth, if the slowdown is marginal, its impact will be much more severe on the poor (who have no cushion) than on the rich (who do not have a cushion problem).

The only way that prices can really adjust downwards is through a severe depression whereby not only the poor will be jobless with no cash but the so-called rich will be in trouble with their cashflows and their investments. Banks will also be in trouble again. This is a shock scenario which is unwarranted. The problem is a shortage in food supply and the solution is to replant the acres lost to the floods or weather. Time is the cure.

How ironic then that it is the weather and the floods that bring about the downfall of old regimes, as if it is the straw that broke the camel's back. It is as if the almighty has decided that the old regimes have stayed too long and decided to give the poor masses a helping hand. Would there be a new regime or an old regime in a new bag.

But didn't sustained rapid growth in the money supply of the reserve currency awakened the sleeping dragon which had slept for half a century, and decided that it will not go hungry any more. Surely China is big enough to absorb all the money that Greenspan could print at high speed for a decade or so - and China grew just as fast and as long. Along the way, short-term money flowed through all the financial markets around the world, awaking stockbrokers and the real estate markets, and everybody suddenly became rich and corrupt without much effort. No, of course, the growth of asset prices are consistent with so much percentage point growth per annum, while wages among manufacturers remained low thanks to the newcomers from China. Global wages threatened to adjust downward to Chinese levels - at least this was what MNCs threatened their workers outside China while Chinese workers apparently gladly suffered in silence of their newfound economic opportunities.

So much water had flowed under the bridge. The global economic depression that promised to surface didn't happen as Bernanke cleverly staved off the threat with extra cash. All nominal values stayed about the same, except for some unfortunate real estate but temporary. The world is saved from a horrible adjustment which had been sorely needed to readjust global and local economic power. Everything stayed the same more or less, except for the food prices, housing rentals, transport charges - all the things that a poor man and his family needs everyday.