The Weakness of the Ringgit & the Finance Minister

Why is the ringgit so weak? Is this part of policy strategy?

I read with bewilderment the comment by FMII in Parliament that Malaysia is not in recession - does this mean that the government is in denial?

To argue the recession on technical ground - of contraction in two consecutive quarters (how do you measure that?) - is a great debating point but an insult to intelligence.

Why is the economy not in recession?

1. The government does not know how to measure quarterly GDP. Do you do a year-on-year growth for the quarter to get the change? Or do you do the real thing by first deseasonalising the quarterly GDP and calculate the change against the preceding quarter?

2. Is Malaysia different from the US? If it is, then the technical definition of a recession may not be relevant - a definition created by the US National Bureau of Economic Research. What should be Malaysia's definition of recession? Growth below 3%?

3. Malaysia has already been in recession for too long already. Maybe because Malaysia has been in recession since the end of the Era of the Mega Projects which left a hole in the economic structure and psyche - and our Series of Little Doses of Government Spending is our way of bypassing that psychology but still engaging in the stimulation. If the economy is already in recession, you cannot drop any further - you are already at the bottom.

Why is the ringgit so weak across the board?

1. Interest rate cuts. Because of the cuts in the interest rate which means that savers are going to other currencies to learn higher interest rates. But all interest rates have been cut to near-zero except for Australia and New Zealand.

2. Loss of Investor Confidence. The cuts in the interest rate may be an indication that the economy is really in trouble and the central bank is merely protecting itself from criticism by "pre-ampting" the recession which may be coming. With no hope in listed companies - which are looking for cash from investors to bail them out - investors are fleeing from stocks in the market, selling them and getting out of Malaysia.

3. Anti-Deflation Policy. Maybe the policymakers are trying to counter the possibility of deflation in Malaysia by creating inflationary pressures from a weak currency. If so, this is a very sophisticated policy move.

4. No Support for Ringgit. The authorities have decided not to support the currency in order to preserve their holdings of foreign reserves - as well as to inflate the ringgit value of the foreign reserves which, by definition, are all held in foreign currencies. The authorities have boasted about the strength of the local economy by the amount of foreign reserves that we have. Has this been a tactical error?

What for the stimulus package?

1. If the economy is not in recession, then there is no need for another stimulus package. Or, what was meant is that the economy has not been in recession in the last year - but that it could be in recession in the new year. If this is the case, then there is deliberate attempt at being pedantic. Policymakers are looking at history not the future.

2. We want to know what is the problem with the economy as a starting point for policy. The bloggers seem to know. But the bloggers want to be reassured that the authorities know. We live the Great Age of Globalisation. We are at risk of knowing what is happening around the world, but not the problems in our own little backyard.

3. We should create opportunities for the young generation to venture into business - all members of the young generation and not just a select few. If we cannot interact among ourselves at home, how are we going to be able to interact with the rest of the world. Create opportunities by providing means of interaction and exchange of ideas - with the financiers (microcredit or otherwise) always at the background ready to seize the opportunity to lend. Or, has our system been spoiled for mega projects such that financing the little men and women has become not a business proposition but a tedium?

The Need To Allow Prices To Fall

The wonder of the modern economy is the operation of the market and the price mechanism. This means that prices must rise and fall.

But how is it that everybody seems to be happy with inflation of their assets and policymakers are now worried about deflation that they are willing to stop it?

Prices rise because of an increase in demand - which will then trigger an expansion in capacity and supply - meaning that there will be an increase in equipment and space and a hiring of people to man the shop.

Demand increases because there is optimism in the future - by everybody and they feel that they are cleverest people in the world.

Pessimism arises when some part of the economy hits the wall. If it is just an industrial sector, the rest of the economy can pull along - and some additional spending by the government may help to fill up the lost demand.

But if there is systemic problem, where the foundation of the economy is hit - namely, the banking system - then everybody is adversely affected. There is a collapse of the banks (which the government must step in to support) and a loss in momentum in spending by the private sector (which no amount of spending by the government can fill in).

Everybody becomes an economic refugee.

When people do not know what to do, there is nothing that the government can do except to provide new opportunities.

New opportunities come from deflation. The fall in asset prices give a chance to savers an opportunity to hunt for bargains in assets - and this brings about a change in ownership - which is positive because those who have failed should learn a lesson while those who have been calculative should now step in to rebuild the economy.

The new owners will take the old economy into a new direction.

If savers are not allowed to bargain hunt for assets at home (because of the stop in the deflation process) and if the authorities further make it worse for the savers by cutting interest rates, then the only option left for the savers is to hunt for avenues of investment outside the country - and this results in a decline in the currency - which worsens the cost of doing business and the cost of living.

By pursing near-zero interest rates, the authorities are not putting a premium on the future - which means that it is not encouraging investment for the future. They are encouraging consumption - which is what got the economy in trouble in the first place (when the real rate of interest turns negative: inflation higher than the interest rate).

Demand is both consumption and investment - and rebuilding the economy means new investments in new direction - not the support of the old investment projects which have proven not to be commercially viable.

While the old employees get retrenched, the new economy should be built on the fresh graduates with their new ideas while the old ones get retrained. This allows the economy to shed old skin and come out with a new shine.

The adjustment of the economy is important - if the economy is to find its new footing for the future. Otherwise, it will end up dependent on a series of stimulative packages - when what it really needs is a kick in the back.

The price adjustment is an important transformation of the economy. The prices are not allowed to fall, there may be no adjustment in the economy.

The recession in the 1980s killed off the old generation. This one should kill off the current generation - and provide a chance for the new generation to define their own future.

For example, the problems of the construction may not be solvable in a nice way - if we are see better standards in construction with greater reliance on technology rather than using the old manual ones. Developers may have invested in overpriced properties and those without holding power may have to go under so that new, better, bigger and cheaper houses can be build to attract new buyers.

If the car industry cannot innovate, then it should be left to die so that there is greater need to expand the public transport system which is better coordinated with urban and township planning as well as entertainment and cultural centres to attract people to come out at night.

At the moment, we are stuck in the same old thing - in order just to preserve the old wealth.

Stimulus Packages & Efficient Resource Allocation

What has stimulus packages got to do with the efficiency of resource allocation? Everything, but quite on the reverse.

The idea of an efficient resource allocation comes from the idea of the price mechanism to do the allocation and the idea of competition to ensure its efficiency.

If there is a deliberate attempt to stop the price mechanism from working to allocate resources even in the downturn - to allow those with cash to buy cheap assets at firesell prices - then there will be no resource re-allocation. The resources will still be stuck in the hands of those who have made a complete mess of things but those who have been prudent would not have a chance to exercise a market opportunity.

By right, in a down market, there will be more producers and more workers who are out to compete. At the very least, stimulus packages will be open to the general public so that competition will ensure the best value for money for the packages.

This is the ideal, and the reality is harsh. For one thing, stimulus packages are never big enough to save everybody. But at least those with the least muscles will be left to die.

But the real idea of a stimulus package is form a bottom for the economic downturn so that people can see that there is an end to the decline. It will really stimulus only when the economy is well passed the bottom and could possibly be on the upswing. Then, there will be some kind of a stimulus.

The recession is always a good time to tweak the economic system and repair the faults that have shown up. But there is a danger of overdoing the tweak to the extent that it may make it a bit harder for the system to jump-start itself.

The trick is to let the system be easy when times are hard and for the system to be tough when times are too easy.

Policy thinking today is entirely out of kilter. Policy is easy when times are good - in order to ensure that times are good. Policy becomes non existent when times are bad - when everything is loosened until there is no control.

Zero interest rates - what a ridiculous idea!

I think there should be a bit of disciplining of the economy, by ensuring that investments are done with a decent rate of return and that savers are rewarded for saving their money for a rainy day. Without this discipline in the investment market, we will have gross misallocation of resources to the extent that savers are being punished while abusers of resources are being rewarded with bad ideas.

There is no wonder that we end up with a lot of junk we do not need.

Or are we in the midst of a turning point in civilisation where life as we know it in the balancing of work and play is going to be different. Where work has become play and play has become work. And our accounting of economic value-add may be inadequate for policy to adjust accordingly.

Stimulus packages of any kind are at best a stop-gap measure. Resource allocation is not only temporal with respect to price but inter-temporal with respect to the rate of interest.

Obama & the End of Prosperity

While Obama may sound good on paper, his words if translated into actions could spell the end of prosperity for the US and possibly the world in the near term.

In his address to Congress on 24 February Tuesday, he talked about cut in Cold-War era weapons programme. If he thinks that the US budget deficit is caused by war and a sharp contraction of the war industrial complex is the answer to the deficit problem, then he had better - and he must - come up with a better economic response to fill in that vacuum.

Not that I suport war or the war machinery. I don't.

But the economics of it is drastic. The war in the Middle East could have been the result of the end of the Cold War where new platforms of destruction need to be identified to keep the war factories going.

There was earlier talk of the Peace Dividend - where the resources leftover from the Cold War could be reallocated to peacetime consumption prosperity. That didn't happen. So, maybe there is the real time to extract the Peace Dividend.

I suspect that the current meltdown in the US is the result of the misallocation of resources, where the war has produced a lot cash in the system which could not be flushed out (with the deployment of the equipment in the Middle East) but led to the asset bubble which finally burst with the death of Sadam Hussein.

There is now a big hole in the US economy, where most of the blame is placed on the poor Chinese peasant workers who slogged all day in sweatshops for peanuts.

Obama and his economics team led by Larry Summers have a big job ahead to fill in that hole with new types of industry and jobs.

Does the US still got the technological or innovative edge?

If not, then I am afraid that Obama administration may, in history, be associated with one of the bleakest economic times in the US, since the 1930s.

Options, Rights & Democracy

What are rights? Rights are options that you are allowed to exercise without any barrier or any cost. Once a price is placed on an option, then your right is taken away because you can only exercise your right at a price. Sometimes, we are just not willing to pay that price.

If you are a citizen of a country, then you have the right to exercise your right, such as your right to exist as a human being, or your right to invest and do business and reap the fruit of your own labour. But if you can only exercise that right on condition, such as invest but you must give away some of your ownership for free or at a discount, then you are given the right to exercise your option at a price.

If you are a legitimate consumer who pays for a service, and if a service is provided supposed at a low price but with many restrictions that are being imposed on hindsight, such as in the case of cable TVs and LCCs, then I would say that you are being had.

In democracy, we exercise freedom of choice. We have the right to choose the way we live. We have the right to suffer our own errors. Let us make our own mistakes, and bugger those of you who would have the audacity to tell us what to do.

But if you restrict us from our right to exercise our options, then there is no deal. We would rather withdraw from a game where the rules are unfair, where the dice is loaded.

The problem with unfairness is that it deprives us of our right to pursue the straight and narrow path. Many of the things in society are borne out of correctness in our behaviour where we respect each other and we help each other.

One that straight backbone is broken, we become crooked. We think the only way to live is to be dishonest, to lie and to mistreat others.

Living a good life is afterall a matter of forming good habits - habits that are sustainable which ordinary folks say living a good life.

All our social mores are justified on the ground that "it is good for you," and that "this is the only way to be."

In times of structural change, the only way to survive is to change habits. We have to form a new way of living. We take ourselves out of our old comfort zone and establish new equilibrium states - new comfort zones.

For us to be entirely free, we pay no price for our options. Let there be competition so that we be rid of marauding sharks who pretend to be dolphins.

Airlines: How Not To Compete

LCCs claim to compete with full-service airlines with a view to reducing cost for the consumer. This is akin to Proton claiming to compete with Rolls Royce in terms of cost.

1. While the claim is correct with respect to reducing costs, it does not result in reducing the price with respect to cost. While you may pay less, you may actually be getting less value for the money. You may have paid less in terms of money, but you may actually be putting your life at risk. Half the challenge in modern technology is to lengthen life, not shorten it. The LCC business model is a life-shortening one.

2. What is happening in the airlines business is not competition. Competition means that everybody faces the same key parameters (ground service, air service, customer service), where the only way to reduce cost and hence price is greater efficiency in running the business. Then the competition benefits the consumer. Otherwise, the consumer is being shortchanged and there is no outlet for the consumer to air grievances.

3. What is happening is market segmentisation. It would therefore appear that the LCCs are doing the Third Class coaches (and even that with differentiation). The full-service airlines are presumed to be doing the First Class and Second Class passengers. The air world is now neatly divided so that the different classes now don't even go to the same air terminals. They get terminated differently, according to their respective classes. (When the education system fails, you move the classes to real life.)

4. I have no objections to businessmen proposing ideas such as the LCCTs, but I object to politicians agreeing to them - unless of course the normal terminals are congested and more facilities need to be built. But to have built a futuristic airport and not using it is an abuse of resources.

I am in favour of compeition to lower prices for air travel. As there is competition in the full-service airline business, I think there also should be competition among the LCCs. To allow only one LCC is, of course, to promote monopoly.

I would love to see an LCC operating from the normal terminals and providing the full basic service but without frills (i.e. no steak for meal, give sandwich) - but be able to compete with the LCC operating from the LCCT. This would really be a challenge.

At the moment, the LCC business model may not necessarily be working well. Why? The LCCs are rooting for a specific market - the core of which may not be big enough for them to sustain long term - unless they go full service.

The market segment is being enlarged by the cheap thrill seekers - those small towners who have an aircraft taking off from their neighbourhood. This peripheral market will evaporate very quickly - within a year of operating. Evidence - the fewer number of flights per day, the more times flights get rescheduled, the more flights are delayed.

The only way the LCC business model can sustain is to trick new markets, by expansion into new geographical areas. This would not be dissimilar to what the Maddoff brilliance - so bright that we all go blind. But enjoy it while it lasts, so long as the planes are recently bought.

LCCs: A Study in Tyranny

What is low cost? It is not value for money. It is not competitiveness - better value for money. It is what it says it is - low cost.

Low cost of production. You get exactly what you deserve. Because of the low cost, many of the facilities that the public has taken for granted are not provided.

So, if you go low cost, it means that you have decided that you can do without a lot of things.

What are these? All these things come under the heading of No Options. You have absolutely no options. (In political terms, you have no right.) You do exactly what the small print says.

1. Price. You make a forward contract and this is the price. The future price is lower than the spot price because the seller wants to lock in a certain amount of capture which should be sufficient to cover the cost of that operation. The spot prices are there to make a profit. If the forward contracts are not sufficient, then launch another so-called promotion. If still insufficient, consolidate operations. So, no way is the seller going to refund your money back. Hence, there is no need to invest in any communications with customers - whatever they want, the answer is "No, didn't you read the contract?"

2. Date. Any change of date is to be discouraged because of the costs involved. They need to rent a place and hire the people and pay the communications bill. To discourage any change of mind, impose a charge for the change as much as making a new contract so that, price wise, it makes no sense for the buyer in making any changes.

3. Ground Infrastructure. If possible, there will be no infrastructure. If possible, they would ask you to wait in an abandoned lot, but unfortunately the size of the carrier does not allow that to happen. Som you are given a basic shed to wait in, for which you pay a nominal sum. This is low cost. You get what you pay for. If possible, you will be ask to climb up the carrier in a rope. But that may discourage too many customers. If possible, they would want you to luge your stuff with you subject to a limit because they do not want to spend too much time or money doing things for you. Whatever they do, they want to make sure that they get something extra out of you. For example seating.

4a. Free Seating. Seating seems to be a big thing in the worldview of ordinary human beings. As if a sign of great egalitarianism, there is free seating. You queue up to be certified to board but because of the super long free space that exists between the door of the holding hall and the door of the carrier, this passage is a study in free competition. You will see that the experienced and the young and the strong will move rapidly forward. Understandably, there used to be a handicap given to those of 55 and above, families with young children. But such welfare provisions have been toughened. Now, only those 65 and above, and only those who pay for the option to board first.

4b. No Free Seating. From great egalitarianism, comes totalitarianism. No Free Seating. These buggers are very clever. They observe customer behaviour, and change their rules and their pricing. All the favourite places on the carrier have been noted and now come under a charge if you want to seat there. If the carrier is half empty (not surprising, given their recent trickery), you will see that all the favourite seats are left empty. (It is not dissimilar to the abandoning of a first-class futuristic travel station for a shed.) Everybody else is preassigned by the computer to a seat not of their choice, and true to their evil intention, you have to pay to change your seat.

Nonetheless, there are a few things I wish to commend travelling low cost:

1. Alertness. LCCs train you to be alert. You have to be alert to book early. For that, you have to be alert about your whole year calender.You have to be alert to queue up. You have to be alert to know where to sit (now no more, taken over by computer).

2. Patience. LCCs train you to be patience. Because of the tightness of their schedules, there is really no time to service the carrier except when you are sitting onboard. It is servicing as and when trouble arises - no pre-emptive. (I suppose travelling on LCCs is like playing Russian roulette.) But if you are not onboard, you have to wait in the shed because they really make the carriers work very hard and there is a know-on effect. If the trouble starts early in the day, the last one of the day could be delayed for hours. You have to be patient - bring a book and some drinks.

3. Exercise. If your doctor tells you that you have to strengthen your legs by walking and to strengthen your heart by climbing up and down stairs and that you should have fresh air (rather than breathing recycled air in massive concrete blocks), well travel LCCs. It fulfills all your doctor's recommendations.

4. Food. This is the one thing good if it is short haul. You do not get stale food smells trapped in the carrier. You do not get to over-eat, i.e., eating the stuff you do not need. Even for long haul, I can imagine it to be good if you enjoy sleeping and not wanting to be disturbed.

Conclusion. LCCs are a subject for a study in tyranny for any student of democracy. It is a tyranny of no free options, that a human being has no right unless he or she pays for it. You are controlled by a system that is monitoring you all the time and making you pay for your favourites so that to enjoy life you must have money.

Maybe it should properly be a study of expectations, if tyranny is perceived as the removal of expected rights. So, LCCs may afterall be a great way to travel if you are a keen student of politics.