Sunday, November 26, 2023


Meritocracy is a system of operating a society whereby those who put in effort and strive to the best are rewarded for their effort. The purpose of meritocracy is to push the frontier of society towards advancement, to go where we have not gone before. It is with meritocracy that new investments can be made, additional investments made in new areas of technology - and this, by definition, means growth.

Is meritocracy an instrument for achieving a more equal society? Yes, if meritocracy is clearly shown to be implemented without inequality, ie with favouritism towards the less capable, so that there is great incentive for effort and striving to be the best, for the sake of the whole of society. No, if meritocracy does not excite young people to work and be the best in the world - because one can still go ahead in society and be successful in terms of money made and personal prosperity without trying very hard in technology but in finding other ways around meritocracy such as by political action.

A society that does not value meritocracy is doomed to mediocrity because the society is not being run by the best brains but by those who are easily satisfied with whatever they already have. There could be a case for mediocrity, for one can question the benefit of trying very hard and pushing oneself as if against the wall, when the status quo is sufficient. Certainly, we human beings have a higher standard of living today than the kings of yesteryears. 

However, we must remember that where we are now is the result of the people who had lived before us (especially our parents) and those of us in the current generation who happened to be working very hard and are achieving great advancement in technology. Those who are shouting for mediocrity are precisely those who are enjoying the fruits of meritocracy.

By degrading the importance of meritocracy, it becomes easy to steal by its merits by engaging in the corruption of the system. Corrupting means sabotaging, by creating faults in a well-functioning machinery with all kinds of hindrances - for the purposes of stealing benefits from the system that is working very hard, by putting in parts that do not do any work in the system but create obstacles by demanding toll.

Nothing in this world is equal in all aspects. Trying to create complete equality is a foolish idea, an idealism nonetheless. The earth is not flat. Our faces are not flat. But we can try to emulate those whom we admire because we envy what they have, by putting in effort to be like them, by working very hard. 

There are suffering of all kinds in this world. It is noble to try to reduce all suffering; this must be encouraged. But to degrade the entire system by putting incompatible parts in the structure just for the sale of equality is nothing but foolish.

The answer is that we should encourage meritocracy so that we can create an efficient economic system. We should also give opportunity for mediocrity so that it can also strive, by creating an alternative system where the emphasis is not on excellence. No everyone prefer excellence. Many may be content with mediocrity. There is nothing wrong with mediocrity, except probably the idea of it. We all think we are clever. Even thieves and gangsters think they are clever - and indeed they are. But it cleverness of another kind.

It will be sad to live in a society where excellence and meritocracy is not respected - for we then have nothing to strive for.

Friday, November 3, 2023

Economic Conditions: November 2023

 It is a mistake for ringgit interest rate not to close its gap with the global interest rate which is the US dollar interest rate. With the differential of about two percentage points, it is inevitable that local ringgit funds will flow into US dollar funds for very obvious reason - to earn a higher interest rate. If the central bank for the ringgit refuses to act, as a matter of good policy, then inevitably, as more and more the ringgit are converted into the US dollar, there will be a local liquidity crunch in ringgit and the ringgit interest rate of Malaysian banks will have to rise to attract liquidity. While at the same time, there will have been a loss of US dollars which are being held as our international reserves. Maybe the higher global oil price have given the central bank more US dollars which it thinks it can afford to lose on the currency depreciation as a result of bad forex policy.

It is quite interesting to note that the government is always willing to challenge the workings of the macroeconomy at the global level. This has been shown in the past to be detrimental to the local economy.

In the meantime, the lower local interest rate (compared to the global determinant, the US interest rate) and the resultant lower ringgit, along with the higher price of oil (and hence of all operating costs), has led to a massive increase in inflation, namely, a rise in the rate of local prices increases. There is also no way that the government can cap market prices because to do so will result in a shortfall in production and supply as it becomes not profitable for goods to be brought to the market. Supply shortages will accompany price caps. Imports to make up for the loss of local production due to local price caps will inevitable result in imports being substituted for local output which, if this is long term, then the local economy especially of food production will be rendered incapable of competing with its equivalent imports. This is a serious situation for the long term when there is now realisation of the need to increase local food production in order to contain imported inflation. This will require a complete revamp of the local food supply chain to ensure that the whole chain is completely sourced locally. Local food production and its local supply chain should be a major of policy intervention by the government also a source of employment of the local workforce.

The government cannot continue to be a major source of employment for local graduates given that the cost of running the civil service is now very high and eats up the bulk of operating expenditure. Worse still, not a small sum is being used to fund pensions. It is a good idea for the civil service to be put on the local employment provident fund for two reasons. One, to ensure that civil servants also pay for their own retirements just like the private sector. Two, so that civil servants can be fired when they have proven to be not suitable for the jobs they are employed for. The downsizing of the civil service will be a step in the direction to reduce the layers for the corruption of the efficiency of the civil service system. Ministries and departments can be streamlined. 

The economic structure of the global economy is now quickly being re-engineered as the major global powers fight for dominance and a shift in the global economic axis. As a result, the global interest rate cycle is being reversed. The global economy has been slowing down ever since the advent of Covid, and the two structural changes in the global economy will ensure that the slowdown will continue. Higher interest rates and higher food prices will be the main features of the current global economy. For this small local economy to pretend that it can insulate itself from the tsunami of global macroeconomic adjustments is a foolhardy stance to take. 

It will still be painful, but there may be pain in fewer areas if the government allow the ringgit interest rate to track the US dollar interest rate and solves half the local economic problem in (a) local liquidity tightness, (b) threat to the international reserves, (c) higher imported prices. The other half of the problem still remains: (a) difficulty borrowers are facing with repayment as a result of lower income and now higher interest payments. The economic slowdown and the resultant weakness in the stock market is also causing problems to the property sector. Of course, the banks are also now being challenged through their loan portfolio to the property sector. The adjustments in the property and banking sectors are inevitable, and a higher local interest rate will aggravate the problem but it is not the cause of the problem in the first place. It is just a question of time for the macroeconomic adjustment to take place locally. The economy also seems to have a mind of its own as to how it will react to external signals and internal conditions.

Global superpowers have decided to make a change. The local economy must take precautions to mitigate as much as possible the coming consequences. Times will be tough.

Take care and all the best.

Wednesday, July 26, 2023

The Mess In the World

It is obvious that the world is in a mess.

I thought I would set down my thinking of how we got here.

For decades, it was obvious that the relentless pumping of money into the world economic system would one day lead to massive inflation - in the minds of old-fashioned economists.

The main counter-arguments was that extra liquidity was needed to fuel the new economy that was the digital boom. This was indeed correct, and for decades the world economy could grow rapidly with little or no inflation. At the same time, technological advances and economies of scale drove down prices of electronic goods.

While relentless investments in the digital economy was driving advances in that part of the world, the liquidity that had resulted in those investments had got bankers excited and they worked in cahoots with real estate developers, leading to the real estate boom around the world. There was obvious massive asset inflation in the real estate sector and everybody was happy because they felt richer and richer.

The key question I have been having in my mind for those decades is this: under what circumstances would the economy explode? There must be a point where asset prices cannot go up very much further. The point must be when householders cannot afford to buy houses based on their prevailing incomes. Commercial properties can still be driven by corporate profits, so long as the real economy is doing well. So I was waiting for real wages to fall, meaning that prices are rising faster than wages - that this probably would have to go on for quite a while, several years or decades. It is quite funny that when the money illusion sets in, the illusion could be sustained for a long time. Households are able to get extra credit from their banks based on the real estate inflation - the difference between the current house prices and their respective current loan outstanding. Inflation feeding on itself.

When it looks like economic theory is not doing its job in curtailing or moderating the runaway economy, the impact of the excessive printing of money comes out in the politics of the beneficiary economies - China and Russia. The liberals might have thought that the printing of money might liberate the world of totalitarian states. But the accumulation of wealth by totalitarian states has made them confident, an increased belief in themselves and their superiority. China began to defy the orthodoxy of western democracy. Russia wanted to reclaim its lost empire glory.

The world economy that was working almost working like a well-oiled engine was beginning to splutter.

Not going into the question of how did the covid come about, the issue of interest to us is that the advent of covid and the political reaction to the public health concern was to disrupt the global supply chain, whereby factories everywhere were asked to shut down. With the total shutdown of supply, it is not surprising that there should be inflation due to a sub-optimal operation of the global supply chain. Cost of operations shot up and so the prices at the retail stores.

But the most significant cause of the current inflation problem is the escalation in the price of oil, and that higher cost is pushed through the entire supply chain. As the cost of oil takes up a substantial portion of the household budget, the quantity that can be consumed on the non-oil budget must surely be sharply reduced. This is where the present cry by the public is.

It does not help that the war affects the supply of grains and other foodstuff.

The central bank of the reserve money, ie, the US Federal Reserve, then decided to raise the interest rate from near zero to now more than 5% pa. This cannot be a proper response to the cost-push inflation. But its immediate impact is to worsen the budgets of households directly. In the rest of the economy, firms who are all indebted with massive loans have to find cash to service them, at a time when cost-push inflation and the disruption from covid is causing problems for businesses. 

In Malaysia, the attempt by Bank Negara to slow the rise of the local interest rates in relation to the global interest rates has the effect of sending the ringgit into depreciation as local funds leave to enjoy better returns abroad. This is the price to pay for trying to prevent the inevitable adjustment to the real estate sector, for trying to ease the problem of their major borrowers who are mainly the real estate borrowers, and for trying to ensure that banks themselves should loans begin to become non-performing on a massive scale.

Is it possible for the Malaysian policy makers to avert the macroeconomic adjustments that are inevitable in the economy without too much pain? This is the time for the local central bank must act boldly in accordance with basic economic policy principles. It is just a question of when.

Friday, March 8, 2019

Not Inflation, Not Deflation

The key focus for monetary policy is always price stability. In technical terms, it is called zero inflation, zero deflation.

Make sure that prices do not change, so that people can concentrate on increasing volume to satisfy rising population in an efficient manner meaning with less use of scarce resources at each increase in scale.

In stockbroking, I was shocked that the master market players were saying to clients that there was going to be inflation and it would be good for the market. Shock for proper economists; money for stockbrokers. Technically, this means negative interest rates: inflation rate higher than interest rates. The main goal of running quantitative easing is to create negative interest rates so that savers are punished and speculators borrowing cheap money think they are making money. In real estate, every idiot bought four properties: one for the wife and one each for the three children. They thought are set for life; no need to work and only collect rent.

The famous Japanese asset bubble burst in 1992 which meant it underwent deflation for more than two decades - that was how far assets had inflated and how long it took for asset prices to come down to be affordable for ordinary people. In the meantime, the economy underwent a recession which means more unemployment and lower wages until they created a category of workers called the working poor. In recent years, there has been some price increases due to increased government tax on consumption (which makes life harder for people with fixed incomes) and the attraction of tourists as well as foreign property ownership.

In Malaysia in January 2019, the consumer price index fell by 0.5% from December 2018 and 0.7% from a year ago when compared with January 2018. This was the first time in recent history and the media was calling this deflation. Sorry, no, this was just a decline in the CPI for the month.

Technically, deflation is a persistent decline in prices over a period of time, not a flash in the pan. So we do not know yet whether we are in a deflation period. We have just to see.

It is only logical that after several decades of inflation, ie persistent price increases culminating in the escalation in prices in recent years caused by outflow of cash which led to a sharp declining in the ringgit and now the refusal for ringgit interest rates to rise accordance to the rise in US interest rates, that we can only expect deflation to follow in the coming years and even decades. We may not like it but I think it is inevitable. Think of all the smart guys with there three extra properties for their children's future education now facing tenancy problems and loan repayments especially as interest rates on their loans start to climb.

It is one thing to not to wish for bad things to happen, but it is a different thing to ignore the inevitable. It is much better to be prepared. Well, I suppose many of us just love the cosy warm sand around our heads even if our arses are still sticking out.

Thursday, February 21, 2019

EPF & Housing Mortgages

It will be one of the greatest errors of social policy if the current proposal by housing developers for individuals to use their EPF to fund the mortgage repayments of their houses.

1. If demand for housing is poor and houses are not affordable to the ordinary person in the street, the logical thing to happen is for houses prices to fall and developers to lose money. We cannot afford to ask ordinary people to pay good money to overpriced properties so that profits from real estate projects can be sustained.

2. To release the bulk of the EPF to real estate will maintain property prices higher than warranted by the market, ie the incomes of the people. By not doing so, property prices will be lower and at a level that ordinary people can afford without having to raid the bulk of their EPF.

3. If EPF is used to fund housing mortgages, when there is a crash in the property market which it surely will, then ordinary people will be the victim of real estate speculation perpetuated by real estate developers.

4. I take the view that the real estate market, not only in Malaysia but around the major cities of the world - now happening in London, Brexit not withstanding - will take a major crash - put conservatively at at least 40% down. The situation is akin to the Japan asset bubble which has taken more than 30 years to recover.

5. I think the current EPF policy on housing should stay as it is. The EPF policy is probably one of the best conceptualised schemes in the world for the ordinary person. The only problem now is that wages have been too low and inflation due to the mismanagement of the economy since 1980 has a most devastating impact on the cost of living and the standard of living of the wage earning population.

6. Why is the government bolstering the profits of corporations and not taking a more social oriented stance on relative prices in Malaysia? Time to end politicking for profits for the elite.

Thursday, November 22, 2018

World Today November 2018

There are few trends going on around the world which I think are interesting.

1. Malaysian Economics
The Malaysian politicians seem to have stopped having any interest in the growth of the economy. Their prime concern has been on witch-hunt - which is a crucial enough job for cleaning up the house after the mess of a five decade prolonged party of hubris. Who is to blame? It doesn't matter, economically, for the impact is also being paid for by the ordinary people through high prices and a weakened currency as well as a slowdown in growth of economic activities. The bankers have also had a good time in playing the real estate market. It is now interesting to see how they are going to unravel the piles of tall bricks sitting in vacancy. They say developers have deep pockets, but then no one can live forever.

2. End of QE
Of course, the Malaysian economy has not been so clever as Malaysian politicians and policymakers who like to be imagine themselves to be. we are all being influenced by the mother of all policy, the US monetary policy. I am happy that at long last, the US Fed has decided to raise interest rates and slow down the growth of the money supply. We are now beginning to see the impact of this monetary tightening. Bitcoin crashed. Tech stocks plunged. Banks are beginning to see problems. The problem of monetary tightening is that it is impossible to do a soft landing. When the crack appears, the crash will follow. The US Fed has the tough job of having to raise interest rates which ensuring that there is sufficient liquidity to keep ordinary businesses going.

3. US-China Trade War
The problem of the world economy is that China, having expanded aggressively in the past, is now left with massive production over-capacity which it must sell. Because of their massive over-capacity, their cost of production is likely to be the lowest anywhere in the world, to which Trump is accusing them of dumping. For the US to produce its own basic industrial inputs now is not viable. So the US-China trade war will leave everyone very unhappy and possibly a global recession.

4. China Economy
The China economy is in a very bad state of health, with overspending by the GLCs and imprudent lending by its financial institutions, all funding over-capacity in industrial production and real estate. As we have seen elsewhere in Asia before, it is often that public institutions will suffer while gains will be made by private individuals. This is where the fight against corruption in China is so intense. It is a matter of national security as well as political vendetta. Punishing individuals is one thing. The crucial thing is to focus on the flow of money and see whether any new money is going into new economic activities. If not, recession.

5. Mass Migration
As with the massive flows of money around the world, there are also massive flows of people around the world, people looking for a better way of life. This was what the great Washington Consensus was out to do, to liberalise the world. It was a good idea, a good thing. In practice, however, when the great rush of people into a country is not officially recognised and followed by a massive programme of social housing and creating of jobs as well as of taxing new incomes, then the system will not be sustainable. There will be massive budget debts for social development which must some how be paid. It's an irony if the immigration does not boost GDP growth and raise government revenue. These massive migrations cannot in no way be unconnected to the previous massive increase in the supply of money in the world, which leads to greater economic disparity, greater flow of money into military weapons, and the maintenance of regimes by force because there is good money to be made.

6. Brexit
Theresa May comes out as such a tough cookie. Brexit becomes more complicated than as I have earlier imagined. It was supposed to be a simple case of immigration control. It spiralled out to be a total departure from the customs union, which may be so wise. Then, to checkmate the immigration control, the Europeans brings up in the border issues with Northern Ireland and Granada. If Brexit is seen as an economic issue, it may not have been that wise to bring it up in the first place. But if Brexit is seen as a fight for political independence, then it should be worth every penny of it.

It is good to be alive. But it is not wise to be influenced by the collapse of the total whole picture into a few stories in a blog or a website. Like chilli, you have to take a small dose of the real stuff at a time. Sorry for this summary of world events.

Saturday, November 3, 2018

Malaysian Budget 2019

Let me give a brief analysis.

1. The Malaysian Budget 2019 is contractionary on the economy because the government will take more from the general public than to pump money into it as it undertakes to reduce the federal deficit from 3.7% in 2018 to 3.4% in 2019, 3% by 2020 and 2.8% in 2021.

2. With the economy expected to grow slightly from 4.8% in 2018 to 4.9% in 2019. This means that the private sector has to do a lot of the heavy lifting of the economy. If the government continues to politicise its policies by behaving as if it is still doing election campaigning rather than managing investor confidence, it is unlikely that the private sector will invest in amounts that will overcome the fiscal consolidation. The world economy is slowing down and there are attacks on palm oil. The only consolation in the horizon is the oil price.

3. The budget is an eye-opener for those who had hoped for a miracle to happen to their lives in the last general elections. The sore truth is that life for ordinary people are going to be hard hit by the attempt by the government, any administration, to try to raise its revenue. It is a rotten state of affairs in Malaysia that the government thinks that it is the great determinant of our prosperity. No, it is no, any administration. The government has been good in taking from the general public to line the pockets of the elite. This is not changed.

4. Times are going to be hard for a long time as the US is determined to reverse the Quantitative Easing of the money supply raising interest rates. Malaysian monetary policy will continue to be "accommodative" (the central bank has no new word for its monetary policy since its opened its doors) which means keeping local interest rates unchanged which in turn means the ringgit will continue to tank, just purely on interest rate differentials. Investor confidence has not been fully discounted yet.