With the wise men of the newly formed Special Economic Committee now deliberating on the state of the Malaysian economy and possibly on the future of our economy, I thought I will put in my two rapidly depreciating sen (not only in the international exchange market but also in domestic purchasing power) on what the state of the economy is right now.
1. Managing Expectations. I am amazed at how spoilt most of us can be, especially when we think about our success or failure. We tend to attribute all our successes to ourselves, and all our failures to others. When things turn out badly, we look for scapegoats. I was having a tough time in the last two decades trying to talk youngsters out of their cleverness in thinking they are millionaires just because they dabble in property investments, nay, speculations. Of course, I have to behave humbly in their mighty presence as I am only a poor wage earner. The question is whether the banks will now take legal actions to demand repayments by over-geared loan defaulters, be they in property, shares or credit cards. Everybody in the system seems to be holding together their house of cards. The spanner in the works will be a higher interest rate which will do some of the trick, but a stricter loan control which will really be the killer.
Politicians are always in a dilemma about bad news but sometimes bad news can be good. Good policy markers will always suggest that after a bout of good times, things may be going overboard and it may be good idea to start calming expectations down a bit to tell market players that, well, things can go the other way as well. Usually, politicians will like to postpone the day of reckoning until the problem of ballooning egos sets in. Then, the economy will simply implode.
Economic implosion is a natural phenomenon like a volcano eruption or an earthquake. It will happen, whether you like it or not. The last big one was in 1997 and Malaysia went around in search of Jews to blame. This time round, the shit hasn't quite hit the fan yet but the cracks are already showing and they are sizeable cracks. Even if the depreciating is a global thing, the old drop is a global thing, the high inflation is a global thing, the soft economy is a global thing. Look at China.
But China is running an admirable economic policy. China is slowing down the economy because the economy had run away on a single track to Timbuktu. China was building whole cities where no one lives. China was installing concrete blocks on perfectly good farm lands. China was covered in smog. China was killing itself. China did what was necessary, policy wise.
China fought corruption because it was corruption that led to economic excesses which led to unprecedented richness and arrogance without much sweat or effort. China was fighting a corrupt old regime which had used its political power to convert into economic power through real estate speculation. Without loosing itself from the grip of the old regime in the economy, the new regime cannot have a free hand to run the economy from export oriented to domestic consumption.
The current China regime of course made its own mistake. Just like any economy which runs to the problem of shoring up their GDP growth number, the tendency is always to push the money supply and in the process pump up the assets market, once again. This time, it is the equities market that responded for one complete year before the balloon burst. Boils grow even in an economy when things heat up.
The trick in economic policy is really to keep the temperature of the economy at a lukewarm level so that there is always monetary reward for effort and material discomfort for those who do not put in the effort. It is an economy bad shape when those who work hard are struggling to make ends meet and those who blow hot and cold in the political area with all kinds of nonsense make the most money through hot air.
A credit crunch with a higher interest rate is the necessary bitter medicine for the end of a prolonged party of excesses. Not all the villains will die, and as usual many of the good people will suffer. It may the harsh really that we cannot run away from. I wish things will not have to come to this end, but I think it is a bit too late to wish for only good things.
2. Exports. It is incredible how everybody is now an economic expert with the internet in one's finger tip all the time (or any other subject matter, for that matter, no matter the subject). With the fallen currency, ministers start talking about how this is good for exports like tourism. We are not talking about a currency that is always weak, but a currency that has been weakened. I do not think that tourists go to a destination because it is cheap. Tourists go to places where it is safe and they can have a good time. They have already saved up for the whole year to travel. So do we really wish for the currency to strengthen again and hence lose all the tourists again?
The other fear that we should have over the weak ringgit is that this great country that we have built up with concrete in the cities can all be foreign owned. Wait till the credit crunch ones, and the local speculators have to unload their assets onto the market and since the locals will most be the victims this time, the foreigners will be called in to help save the market value. Or we should let the market prices fall on real estate so that locals on low incomes can afford to buy very decent and prestigious properties.
3. Imports. A weak currency can also be used as a tool to restructure the economy into a higher value added one. The strategy Taiwan used in the 1950s to transform itself from an agriculture to a manufacturing economy was to devalue its currency by half. This made imported machinery expensive and all the graduates started to specialise in machine tooling and they ended up with a very specialised SME sector in manufacturing. Today, Taiwan continues to be innovative, no matter how quirky some of their innovations may be.
Because of the structure of our economy pillared by real estate speculation and massive consumption financed by a high household debt, we have become an economy that is soft in the belly. Our houses are no more built by our own people, our food are no more cooked by ourselves, and we are all busy looking for handouts through the social media and encouraged by some mistaken government policy of helping the poor with upfront cash. Our manufacturing backbone may no longer be there anymore.
4. Concluding Remarks. Whatever the official GDP numbers, I think the economy is in recession. People are already fighting for survival in the streets, either violently through robbery and other crime, or peacefully through demonstrations of their frustrations. It may be a bed of roses, but the people are being pricked by the thorns and are bleeding. Politicians and policymakers are probably the best paid in the nation, and they may be living in a separate strata from the common lot. But the common lot will want improvement which may not forthcoming any time in the coming future. Have we seen the storm, or are we just feeling the calm before the real one comes.
Brace yourselves, hold on to your cash.