We should all try to enjoy this economic winter
And use this rare opportunity to take a little rest
We have had a lovely long summer
Which could not go on forever
Hardworking people so sad not to work
They have no savings and life they cannot afford
Greedy people so sad over their wealth
They keep and keep but nowhere to hide their loot.
Forget winter, we are in the tropics
Fruit trees grow and the rain does fall
The sun shines even if only behind a cloud
There is now time for family and friends.
Monday, March 16, 2009
Sen On Economic Sense
Amartya Sen is probably one of the most brilliant minds in economics today, and he has been quietly humble about it. He finished his PhD thesis at Cambridge in two years and went back to India to teach for a year to sit out the final year to get his PhD. He became a professor at 23. He wrote on social inequality and welfare economics, and earned the Nobel Prize in 1998.
Sen here wrote a perspective on economic issues and economic theory much more eloquently and scholarly and more authoritatively than I ever could have done - although I am delighted to discover in this piece that he has taken a comprehensive overview of the field of economics study with respect to the economic problems of the world today which I have been trying desperately to do in this blog.
Sen has taken a philosophical perspective to economics which is probably very Cambridge - talking about the limitations of mainstream economic theory which ignores the poor and the disdvantaged, including the limitations of Keynes - which I have been trying to do so in my series of the Irrelevance of Keynes.
For students of economics who have left school a bit too early and have not kept up with their reading on the subject, Sen's article is a very good summary of the broader field which all rounded students should acquaint themselves. His article shows very clearly the unacceptable nature of Econ 101 and how it can be dangerous when used as a basis for policy.
Some quotes:
Sen here wrote a perspective on economic issues and economic theory much more eloquently and scholarly and more authoritatively than I ever could have done - although I am delighted to discover in this piece that he has taken a comprehensive overview of the field of economics study with respect to the economic problems of the world today which I have been trying desperately to do in this blog.
Sen has taken a philosophical perspective to economics which is probably very Cambridge - talking about the limitations of mainstream economic theory which ignores the poor and the disdvantaged, including the limitations of Keynes - which I have been trying to do so in my series of the Irrelevance of Keynes.
For students of economics who have left school a bit too early and have not kept up with their reading on the subject, Sen's article is a very good summary of the broader field which all rounded students should acquaint themselves. His article shows very clearly the unacceptable nature of Econ 101 and how it can be dangerous when used as a basis for policy.
Some quotes:
- Ideas about changing the organization of society in the long run are clearly needed, quite apart from strategies for dealing with an immediate crisis.
- How do we assess what is taught and championed among academic economists as a guide to economic policy—including the revival of Keynesian thought in recent months as the crisis has grown fierce?
- The most immediate failure of the market mechanism lies in the things that the market leaves undone.
- Smith viewed markets and capital as doing good work within their own sphere, but first, they required support from other institutions—including public services such as schools—and values other than pure profit seeking, and second, they needed restraint and correction by still other institutions—e.g., well-devised financial regulations and state assistance to the poor—for preventing instability, inequity, and injustice.
- The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments.
- While Keynes was very involved with the question of how to increase aggregate income, he was relatively less engaged in analyzing problems of unequal distribution of wealth and of social welfare.
- There is a critical need for paying special attention to the underdogs of society in planning a response to the current crisis, and in going beyond measures to produce general economic expansion.
- That the market economy can be particularly bad in delivering public goods (such as education and health care) has been discussed by some of the leading economists of our time, including Paul Samuelson and Kenneth Arrow.
- A crisis not only presents an immediate challenge that has to be faced. It also provides an opportunity to address long-term problems when people are willing to reconsider established conventions. This is why the present crisis also makes it important to face the neglected long-term issues like conservation of the environment and national health care, as well as the need for public transport, which has been very badly neglected in the last few decades and is also so far sidelined—as I write this article—even in the initial policies announced by the Obama administration.
Thursday, March 12, 2009
Whither The Global Economy (v2)
The current global financial crisis, and the ensuing global economic crisis, is the result of the inability of the US, as a global economic leader, to respond properly to the structural changes brought onto the global economic scene by the reawakening of the China economy after centuries of slumber.
China's reawakening means two major things:
1. Starting the economy from the ground up means rudimentary wages and a hunger to get out of the economic death trap means intense struggle and competitiveness.
2. With a third of the world population becoming less hungry and less impoverished, there must be immense demand on global resources.
In the meantime, the US has become less competitive because of the historical baggage of affluence, despite being innovative industrially. Industries then move to global locations where there is economic efficiency.
As the US economy falters in competitiveness and momentum, the US Federal Reserve sought to save the economy in financial terms (rather than in real terms) by printing money - which it can now do as the largest deficit economy in the world (as Spain and England were in the past centuries).
This resulted in the massive global liquidity that was - and still is - sloshing around in the world.
In the 1990s, the flow of excess liquidity into Asian economies led, in a few short years, to the Asian Financial Crisis.
These global funds (hedge or otherwise) go to national financial markets to get financial returns through the forex and equity markets. Their very behaviour determined the market forces to their advantage. Their entry raised the prices of local financial assets which they then extract a return when local investors followed by speculators joined into the foray.
After Southeast Asia, these global funds went to China and reawakened the dragon. Investments were for exports to the US because the Chinese economy was too small because of the low wages. This was the decade when the US bought real goods from the sweat of the poor peasants and paid them with paper money.
The US Federal Reserve under Greenspan thought it had found the magic fountain of fortune by printing money and getting real goods from abroad.
The excess liquidity in the US from the printing of money caused the US financial and real estate markets to soar - founded on the growth of the global economy led by China.
Every time the US stock market failed, the Fed fed it with more cash. This went on for years. The US stock market went from sober to a state of drunkedness.
The sustained growth of the US stock market then fed the US real estate market. The asset inflation in real estate then gave the US bankers the perfect excuse to do the inexcusable, in the eyes of bankers - funding speculative real estate gains collaterised on inflated real estate.
In computer language, the US asset markets went into a do-loop until it reached its limit of growth and then blew up.
That limit was defined by the real income growth of the people of the US. With the underlying real economy not growing as fast as the asset markets, the limit was when the people had taken loans which they were in a position to pay, now or in the future. That's the sub-prime. This arises thanks to Mr. Greenspan's ingenuity.
Whither the Global Economy
While the US is sorting out its financial crisis, the world should move on. The world economy cannot depend on the US anymore - because it has abused its seignorage as an international reserve currency.
This global financial crisis is really a US financial crisis with global implications.
This means that the global economy will have to limp on one leg for a while, while it finds its new balance - and get used to the gait.
China sees the opportunity for itself to be the next global economic power, and China is seizing it with both hands.
Its massive infrastructure spending - why not for it has now massive foreign reserves to buy foreign imports, if need be, or to expand its own money supply, which it should - is the right way forward.
This is China's opportunity to push its development inward into the hinterland from the coast, and bring development to the villages - mostly along the major river systems.
The expansion of transport - land, air and water - and telecommunications will be the first wave of growth for China.
As the communications system improves for the whole economy, the basic groundwork and infrastructure is now being laid for its next economic cycle - of inward growth and expansion which is being forced upon it by the US financial crisis.
In the meantime, China will continue to source for raw materials worldwide as input for its industrialisation.
With the US and Europe saturated with consumption, China's reawakening may be a godsend to the Third World to rise up from its underdevelopment.
In the next 30 to 50 years, the global economic picture will change from what we are now taking for granted. The New Economies will be China, Asia and Africa.
China's reawakening means two major things:
1. Starting the economy from the ground up means rudimentary wages and a hunger to get out of the economic death trap means intense struggle and competitiveness.
2. With a third of the world population becoming less hungry and less impoverished, there must be immense demand on global resources.
In the meantime, the US has become less competitive because of the historical baggage of affluence, despite being innovative industrially. Industries then move to global locations where there is economic efficiency.
As the US economy falters in competitiveness and momentum, the US Federal Reserve sought to save the economy in financial terms (rather than in real terms) by printing money - which it can now do as the largest deficit economy in the world (as Spain and England were in the past centuries).
This resulted in the massive global liquidity that was - and still is - sloshing around in the world.
In the 1990s, the flow of excess liquidity into Asian economies led, in a few short years, to the Asian Financial Crisis.
These global funds (hedge or otherwise) go to national financial markets to get financial returns through the forex and equity markets. Their very behaviour determined the market forces to their advantage. Their entry raised the prices of local financial assets which they then extract a return when local investors followed by speculators joined into the foray.
After Southeast Asia, these global funds went to China and reawakened the dragon. Investments were for exports to the US because the Chinese economy was too small because of the low wages. This was the decade when the US bought real goods from the sweat of the poor peasants and paid them with paper money.
The US Federal Reserve under Greenspan thought it had found the magic fountain of fortune by printing money and getting real goods from abroad.
The excess liquidity in the US from the printing of money caused the US financial and real estate markets to soar - founded on the growth of the global economy led by China.
Every time the US stock market failed, the Fed fed it with more cash. This went on for years. The US stock market went from sober to a state of drunkedness.
The sustained growth of the US stock market then fed the US real estate market. The asset inflation in real estate then gave the US bankers the perfect excuse to do the inexcusable, in the eyes of bankers - funding speculative real estate gains collaterised on inflated real estate.
In computer language, the US asset markets went into a do-loop until it reached its limit of growth and then blew up.
That limit was defined by the real income growth of the people of the US. With the underlying real economy not growing as fast as the asset markets, the limit was when the people had taken loans which they were in a position to pay, now or in the future. That's the sub-prime. This arises thanks to Mr. Greenspan's ingenuity.
Whither the Global Economy
While the US is sorting out its financial crisis, the world should move on. The world economy cannot depend on the US anymore - because it has abused its seignorage as an international reserve currency.
This global financial crisis is really a US financial crisis with global implications.
This means that the global economy will have to limp on one leg for a while, while it finds its new balance - and get used to the gait.
China sees the opportunity for itself to be the next global economic power, and China is seizing it with both hands.
Its massive infrastructure spending - why not for it has now massive foreign reserves to buy foreign imports, if need be, or to expand its own money supply, which it should - is the right way forward.
This is China's opportunity to push its development inward into the hinterland from the coast, and bring development to the villages - mostly along the major river systems.
The expansion of transport - land, air and water - and telecommunications will be the first wave of growth for China.
As the communications system improves for the whole economy, the basic groundwork and infrastructure is now being laid for its next economic cycle - of inward growth and expansion which is being forced upon it by the US financial crisis.
In the meantime, China will continue to source for raw materials worldwide as input for its industrialisation.
With the US and Europe saturated with consumption, China's reawakening may be a godsend to the Third World to rise up from its underdevelopment.
In the next 30 to 50 years, the global economic picture will change from what we are now taking for granted. The New Economies will be China, Asia and Africa.
Wednesday, March 11, 2009
The Abuse of the Global Economy II
Now, Greenspan here is singing the same tune as Bernanke and Krugman about the current global crisis - that it is caused by developing countries amassing surpluses after they have become highly competitive in the global economies - and not that the US was printing money to disguise its loss of competitiveness.
Greenspan's argument is ingenius. The US Federal Reserve cannot be faulted in its loose monetary policy which he takes it to mean that the Fed can only the overnight rates - which, as Greenspan pointed out, are short-term rates - and short-term rates do not trigger a speculative run on long-term assets such as real estate. Only long-term rates can.
The only way that long-term rates in the US can be depressed for years is because of the excess surpluses accumulated by the developing economies and which were then reinvested in financial assets in the US. It is the abnormal tendency of developing economies to save that has caused the global crisis which was triggerd by the burst of the real-estate bubble in the US.
Where did the excess surpluses of developing economies come from, Greenspan? He conveniently overlooked his tendency to print money to solve the US economic problems. Instead, he chose to emphasize that it is not the job of the central bank to worry about where the excess money should go - because they will be micromanaging by the authorities.
Instead, he argued that the financial system should be regulated so that excess liquidity will go to productive purposes - and not unproductive purposes such as real estate.
It is clear that Greenspan is mentally stuck in his own little spin - and this could be the real reason for the global economy to be in crisis today.
I continue to maintain that the current global crisis was caused by the sustained printing of money by Greenspan for decades in order to disguise the fundamental problems of the US economy as it began to lose its competitiveness with the rise of China. The US is suffering from the same problem as faced by Japan in the 1980s. Let's hope that the US will not take as long as Japan to recover (as Japan still hasn't).
Greenspan's argument is ingenius. The US Federal Reserve cannot be faulted in its loose monetary policy which he takes it to mean that the Fed can only the overnight rates - which, as Greenspan pointed out, are short-term rates - and short-term rates do not trigger a speculative run on long-term assets such as real estate. Only long-term rates can.
The only way that long-term rates in the US can be depressed for years is because of the excess surpluses accumulated by the developing economies and which were then reinvested in financial assets in the US. It is the abnormal tendency of developing economies to save that has caused the global crisis which was triggerd by the burst of the real-estate bubble in the US.
Where did the excess surpluses of developing economies come from, Greenspan? He conveniently overlooked his tendency to print money to solve the US economic problems. Instead, he chose to emphasize that it is not the job of the central bank to worry about where the excess money should go - because they will be micromanaging by the authorities.
Instead, he argued that the financial system should be regulated so that excess liquidity will go to productive purposes - and not unproductive purposes such as real estate.
It is clear that Greenspan is mentally stuck in his own little spin - and this could be the real reason for the global economy to be in crisis today.
I continue to maintain that the current global crisis was caused by the sustained printing of money by Greenspan for decades in order to disguise the fundamental problems of the US economy as it began to lose its competitiveness with the rise of China. The US is suffering from the same problem as faced by Japan in the 1980s. Let's hope that the US will not take as long as Japan to recover (as Japan still hasn't).
Malaysia's RM60 billion Stimulus Package
RM60 billion over two years means 4% per annum to a RM740 billion economy in current prices.
This is substantial. Assuming no leakage, no multiplier, no inflation, economic growth in 2009 post-stimulus of -1% to +1% means the pre-stimulus scenario could be -5% to -3%.
Nature of the stimulation over two years:
1. Construction of infrastructure and housing (RM5 billion)
2. Private investment fund (RM1.6 billion)
3. Capital for SMEs (RM20 billion)
4. Microcredit (RM0.3 billion)
5. Savings Bonds (RM5 billion)
6. Tax exemption
I see the immediate impact to be the RM5 billion for infrastructure and low-cost housing, in as far as I can itemise them.
There is substantial attempt to recapitalise the private sector (RM21.6 billion) - which is good for the medium term - the building of capacity.
The microcredit looks a small sum but it may have wide coverage on the lower ground.
The savings bonds are an anomaly in a stimulus package - this is an attempt at correcting the flaw in the monetary policy. It is far better to ensure reasonable deposit rates while cutting the mark-up by banks.
[On reflection, the RM5 billion savings bonds could be to finance the RM5 billion construction projects. This could mean that RM10 billion of the RM60 billion is neutralised. This brings the net impact to 3.4% of GDP a year.]
The cost and benefit of tax exemption may at best be estimated variously, and treated [corrected from "tested"] as a residual factor. With help to house buyers and those retrenched.
I observe with great encourage the help given to the unemployed, especially first-timers, through more studies and retraining.
I am sure that there are many things I have left out from the whole package. The above are specifics I can observe at present.
This is a fairly modest budget while a lot of help given to promoting investments for the next few years. Would be useful to get an economic vision and direction.
This is substantial. Assuming no leakage, no multiplier, no inflation, economic growth in 2009 post-stimulus of -1% to +1% means the pre-stimulus scenario could be -5% to -3%.
Nature of the stimulation over two years:
1. Construction of infrastructure and housing (RM5 billion)
2. Private investment fund (RM1.6 billion)
3. Capital for SMEs (RM20 billion)
4. Microcredit (RM0.3 billion)
5. Savings Bonds (RM5 billion)
6. Tax exemption
I see the immediate impact to be the RM5 billion for infrastructure and low-cost housing, in as far as I can itemise them.
There is substantial attempt to recapitalise the private sector (RM21.6 billion) - which is good for the medium term - the building of capacity.
The microcredit looks a small sum but it may have wide coverage on the lower ground.
The savings bonds are an anomaly in a stimulus package - this is an attempt at correcting the flaw in the monetary policy. It is far better to ensure reasonable deposit rates while cutting the mark-up by banks.
[On reflection, the RM5 billion savings bonds could be to finance the RM5 billion construction projects. This could mean that RM10 billion of the RM60 billion is neutralised. This brings the net impact to 3.4% of GDP a year.]
The cost and benefit of tax exemption may at best be estimated variously, and treated [corrected from "tested"] as a residual factor. With help to house buyers and those retrenched.
I observe with great encourage the help given to the unemployed, especially first-timers, through more studies and retraining.
I am sure that there are many things I have left out from the whole package. The above are specifics I can observe at present.
This is a fairly modest budget while a lot of help given to promoting investments for the next few years. Would be useful to get an economic vision and direction.
Wednesday, March 4, 2009
The Abuse of the Global Economy
Krugman here (and The Star today) quoted Bernanke that the problem of the world started when Asia had its financial crisis in 1997 and started to accumulate foreign reserves - and those foreign reserves were then exported back to the US to create the subprime problem and the current financial crisis.
I disagree.
The cause of the current financial crisis is the problem of the US monetary policy - more specifically the problem of Greenspan's relentless printing of money to exploit seignorage to benefit the administrations he served as well as the American people.
The indiscipline of the US monetary policy - where every stock market decline was followed immediately by the cutting of interest rates to pump in the liquidity to prop up financial asset prices - spilled over into the speculation of real estate - to the glee of all speculators, i.e., the man in the street (who now laments) and the bankers (who now are quite happy to live on their accumulated fat bonuses).
That Asia worked hard during those times and saved cannot be the problem. If Asians did not work hard, we might have seen worse inflation around the world. Let it be remembered that the low-cost products from Asia helped to lessen the inflationary pressures on the ordinary people while the small but rich part of the world population indulged in shameless luxury.
The reason for the asset inflation in the US is that the American people have lost their competitive edge and they cannot compete. The money printed by Greenspan was used to buy local financial assets and real estate as well as imports from the rest of the world.
The abuse of the US dollar of its status as an international currency is the reason for the current financial crisis. The morale of the story is that printing money does not solve economic crisis.
Abusing Keynes will not work either.
Working hard to make products that the world needs and which will improve the wellbeing of the people of the world (as well as the planet) is the road ahead for this global economy.
I disagree.
The cause of the current financial crisis is the problem of the US monetary policy - more specifically the problem of Greenspan's relentless printing of money to exploit seignorage to benefit the administrations he served as well as the American people.
The indiscipline of the US monetary policy - where every stock market decline was followed immediately by the cutting of interest rates to pump in the liquidity to prop up financial asset prices - spilled over into the speculation of real estate - to the glee of all speculators, i.e., the man in the street (who now laments) and the bankers (who now are quite happy to live on their accumulated fat bonuses).
That Asia worked hard during those times and saved cannot be the problem. If Asians did not work hard, we might have seen worse inflation around the world. Let it be remembered that the low-cost products from Asia helped to lessen the inflationary pressures on the ordinary people while the small but rich part of the world population indulged in shameless luxury.
The reason for the asset inflation in the US is that the American people have lost their competitive edge and they cannot compete. The money printed by Greenspan was used to buy local financial assets and real estate as well as imports from the rest of the world.
The abuse of the US dollar of its status as an international currency is the reason for the current financial crisis. The morale of the story is that printing money does not solve economic crisis.
Abusing Keynes will not work either.
Working hard to make products that the world needs and which will improve the wellbeing of the people of the world (as well as the planet) is the road ahead for this global economy.
Liquidity, Interest Rate, Lending & Investment
Central banks around the world choose to take the risk of pressing the interest rate pedal to the floor in the hope of sending more liquidity into the system so that the economy can move faster, hopefully forward.
Question: Will even zero interest rate increase liquidity or lending?
I am not too sure about the purpose of zero interest rate. At zero interest rate, you still have to repay the loan that you have borrowed. If your business or your income stream is not steady, you may even have problems repaying the banks.
The advantage of a zero interest rate is that (a) you do not have to pay the interest component which lightens your repayment burden, if you have an income stream in the first place. If not, then (b) you refinance your loan. I suspect this is what is happening, with banks now marketing as hard as your vitamins salesmen. With refinancing, banks can pull customers away from other banks and build up their loan book - but if the loan book consists mostly of bad loans (i.e., if the economy does not recover fast), then these banks are likely to face the problem of bad loans before long. I suspect inexperienced banks will now be the most aggressive.
If the zero interest rate is encouraging banks to refinance bad customers (because of too much liquidity in the system), then where is the lending to good borrowers.
What are good borrowers?
Good borrowers are businesses who have a track record in dealing with banks and have shown, in their transaction history, a good habit of repayment on time - which means that they have given priority to loan repayment over their other commitments. It is these customers with an intimate relationship with banks that are considered to be good, and hence are "likely" to get the support of the banks during hard times like this - "likely" only if the banks have a good memory. If the banks are run by young people who behave like market analysts, then they would not understand "relationship banking" and kill even their best customers by their pursuit of numbers.
So far in our story, we have not seen banks lending for investment yet. Banks generally do not know business. They know customers - they know the characteristics of types of customers in different activities - and they manage their risks according to those characteristics.
The people who invest are people who know business. They are on the ground looking at the developments in every nook and corner. They know what is cheap and expensive. They know what is a bargain. They know future value. In other words, they see opportunities.
Those who are the first to seize opportunities are those with cash. With zero interest rate, they are being forced to invest their cash in projects to get some decent returns. This is why prices must be allowed to fall so that valuations can come down to more "realistic" levels - realistic in the sense that investors in opaque situations are enticed to take risks in investments because of the price. If not, then bad investors are being rescued to continue to plague the efficiency of the economy.
Question: Will even zero interest rate increase liquidity or lending?
I am not too sure about the purpose of zero interest rate. At zero interest rate, you still have to repay the loan that you have borrowed. If your business or your income stream is not steady, you may even have problems repaying the banks.
The advantage of a zero interest rate is that (a) you do not have to pay the interest component which lightens your repayment burden, if you have an income stream in the first place. If not, then (b) you refinance your loan. I suspect this is what is happening, with banks now marketing as hard as your vitamins salesmen. With refinancing, banks can pull customers away from other banks and build up their loan book - but if the loan book consists mostly of bad loans (i.e., if the economy does not recover fast), then these banks are likely to face the problem of bad loans before long. I suspect inexperienced banks will now be the most aggressive.
If the zero interest rate is encouraging banks to refinance bad customers (because of too much liquidity in the system), then where is the lending to good borrowers.
What are good borrowers?
Good borrowers are businesses who have a track record in dealing with banks and have shown, in their transaction history, a good habit of repayment on time - which means that they have given priority to loan repayment over their other commitments. It is these customers with an intimate relationship with banks that are considered to be good, and hence are "likely" to get the support of the banks during hard times like this - "likely" only if the banks have a good memory. If the banks are run by young people who behave like market analysts, then they would not understand "relationship banking" and kill even their best customers by their pursuit of numbers.
So far in our story, we have not seen banks lending for investment yet. Banks generally do not know business. They know customers - they know the characteristics of types of customers in different activities - and they manage their risks according to those characteristics.
The people who invest are people who know business. They are on the ground looking at the developments in every nook and corner. They know what is cheap and expensive. They know what is a bargain. They know future value. In other words, they see opportunities.
Those who are the first to seize opportunities are those with cash. With zero interest rate, they are being forced to invest their cash in projects to get some decent returns. This is why prices must be allowed to fall so that valuations can come down to more "realistic" levels - realistic in the sense that investors in opaque situations are enticed to take risks in investments because of the price. If not, then bad investors are being rescued to continue to plague the efficiency of the economy.
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