Money & Wealth

In these days of retail price inflation, depreciation and falling asset prices, this may be a good time to ponder on the question of what is money and what is wealth?

The accumulation of wealth is the primary purpose in life of almost all human beings who are fearful of hunger and depravation tomorrow. It is this fear of the uncertain future that we are compelled, if we can, to save for the rainy day.

It doesn't matter how you save. You mostly start by saving cash under the pillow and deposits in the bank. You save from the surplus of your income after expenditure. If you don't have an income, then you cannot save. Instead, you may have to borrow to buy food - this is where the wisdom of saving for the rainy day comes in. If you spend more than your income, then you also have to borrow. Ideally, you spend within your budget. This is the bare bone economics of income and expenditure.

The key point is that when you have savings in the bank, and you do not need that cash immediately, then you could possibly invest it in earning assets - which basically can be anything that can earn you a return, if you know where to look.

Flat Economy

But spotting earning assets is not an easy task, in normal circumstances, i.e., when the economy is going flat. 

Since everybody has to have somewhere live, then residential property seems to be a good place to start. Instead of renting, you can buy your own house using a mortgage loan. Your house is an earning asset because you can save on rent and at the end of paying for the loan, the house is yours as an asset.

If you already have a house, you can also consider renting out your house and rent somewhere cheaper to stay instead, so that you can provide an income stream for yourself.

If you have lots of money, you can use your money to buy more houses than you can live and rent them out. Usually, under these circumstances, there is an increase in the supply of housing, so you can expect housing supply to exceed demand and therefore the rental would not be good enough to offset your mortgage repayment.

You can venture into stocks and shares. In a flat market, you have to know what you are doing. To buy well-managed companies in sunrise or global markets. In small economies, there are not many companies that can sustain their growth so you have to keep constant watch on company performances.

There are of course other financial assets such as government bonds, insurance products, etc., which are out there to tease out your savings from your bank account.

These are all very basic considerations in a normal but flat economy and market.

Booming Economy

In a booming economy, where the central bank follows a low-cost money policy and print money, you can expect money to be plentiful. This means (a) the banks are looking for good borrowers to lend money to; and (b) there will be asset inflation as borrowed money will be looking for assets to buy up.

It is a no brainer that in an economy when asset inflation exceeds the interest rate, one can borrow (if the bank would lend to you) and buy real estate. Your initial collateral would be your savings in the bank or the value of the house you already have (the bank willing to lend you an amount equivalent to the market value less your existing mortgage). 

What the bank is doing here is a very dangerous thing because it is using inflated value as a collateral to support new loans. Dangerous because (a) it escalates loans and asset value, and (b) everything collapses once the economy stops growing and asset prices stop rising. You will appreciate that (b) is where we are today in the world, and (a) was when every investment gurus were boosting how clever they were in going into heavy debt to buy real estate.

So in a rising economy when real estate and financial asset prices are also rising in what is called asset inflation fueled by increasing expansion in loans by banks (because their executives want to take super year-end bonuses), of course, the rationale thing is to get out of money (by dissaving and borrowing) and get into very clearly earning assets. Because this move is so very clear and obvious and no brainer that even grandmas can be masters, what we get is speculation in real estate and financial assets.

Speculation is based not on real value but expectations of future value. And future value is based on the state of the economy in the future. What happens in the future depends on what happens today. If today is young, tomorrow we grow strong and healthy. If today we are grown and mature, tomorrow we will grow old and slow down. For speculators, however, because they are speculators, the future is always better than today. The future better be better than today - or else, we will be in deep trouble.

Speculation is Not Economic Growth

Speculation is not economic growth. Speculation is on asset prices where economic growth is based on output expansion. Rising asset prices can trigger future output and usually with a delay of a few months or a few years. This goes for real estate, and it goes for agriculture (e.g., musang king). In other words, speculation sets the stage for overproduction in the future.

Why overproduction? In real estate, demand is fueled by bankers who lend money out to borrowers who dream of becoming wealthy without work. 

To sustain this model, there must be people who are willing to rent at the prices they ask for. Over time, with everybody buying real estate for themselves to stay because developers keep building new units, there will come a time there will be units which nobody want to rent. Because also bad location, not near rail transport, etc. Demand fall can also be triggered by fall of nominal income (salary cut) or fall in real income (petrol price increase).

Economic Growth is Productivity Gains

For the economy to sustain its growth on its own, the assets invested in must be able to generate a higher output in the future and price is sustained by increase in wages through productivity gains. This usually happens through technological advancement as well as managerial or workplace efficiency improvement.

Politics Sabotaging Economy

When the economy is doing well, is doing very well, this create economic power because businessmen now have money or rather assets (buildings or factories?) and access to banks. This challenges the power of politicians. When challenged, politicians have a tendency to flex their muscles by a stroke of the pen. With such threats of the political masters looming, businessmen and investors become nervous and fearful of the future, an uncertain future, they become petrified. The first thing they do is to stop investment. This means no new money into the economy. Second, they leave the country. This means they close shop and retrenched the workers.

Political Restructuring through Economic Consolidation

Political masters are willing to sabotage the economy when they realise the economy is heading in a direction that is not in favour to their political future. Either you die, or I die. So, you die first.

This is quite a dangerous game. First, the economy will go into a depression not only because investment slows down but there is disinvestment, i.e., less investment than before. Massive number of workers become unemployed. They become hungry and turn to the streets. There is social unrest to get the political masters to help them. But they can't help. So they want a change in government. Even if the government is changed, the economic situation would not change. Unless, investor confidence is restored. Which brings the economic structure back to square one, which is unfavourable to the political regime. So there must be a regime change.

Money & Wealth

Now, we know money is wealth, but wealth is not necessary money. The beauty of money is that it is liquid. In times of trouble, you can take money with you. (Those who feel less secure take gold bars.) You cannot carry your many condos with you. The value of your condos may have plunged, and no rental. You still owe the banks lots of money in mortgage loans.

In these troubled times, health is wealth. Peace and harmony is wealth. Peace of mind is wealth.

Money is a means to an easier life. Wealth is a burden for those who are old and have no strength to carry on.

There is no clear case for debt to be wealth. Debt is unearned wealth.

Even when you have physical assets and financial assets without debt, you cannot use them unless you have sold them and converted them to money. Cash allows you to buy food.

The way forward to life is to live a simple life, with basic needs. You will be happy.

Why ride on the backs of those who must struggle to pay rent so that you can have passive income? If you have not bought units which you cannot use, housing could be a lot cheaper and they could have been able to afford to buy their own little house.

In the end, all that is considered wealth is just a pile of bricks and steel beams.

Key Issues in Economic Collapse

Cause of Economic Collapse:

1.  We are talking about economic collapse, not economic decline. Decline is gradual, collapse is sudden.

2.  Many sources of the collapse can be identified once the economic collapse has occurred. But the economy collapses on its own, when it has reached a certain level of growth such that production exceeds the ability of consumers to absorb even including speculative buys in tangible or financial assets.

3.  The economy collapses when investor and consumer confidence collapses. Investors invest and consumer consumes recklessly when they think that the bull run is going to continue forever. Greed takes over prudence and satisfaction. There only needs to be one incident that wakes everybody up, to break the hypnosis, to break the trance and get the rational mind to take over. In this case, Covid-19 which disrupts the supply chain and the oil price hike on the invasion of Ukraine which sharply contracts real wages and real incomes.

Problems arising from Economic Collapse:

4.  At the international level, the confidence of international debt holders, namely, the surplus countries. The major debt instrument is the US dollar which has been off the gold standard since 1971 as a result of overissuing of the US dollar with respect to the price of gold. Fiat money is important for stimulating growth of the global economy especially during an era of rapid innovation and technical progress. But it also suffers from the problem of overissuing with respect to economic growth resulting in unwanted inflation. The quantitative easing of the last four decades has been good in jump-starting the China economy which reawakens its self-confidence. In the world of friends, this would have been a golden age. The problem is that now China wants to exert its superiority in the world economy. But China sees its wealth to be in the US dollar which destresses it so it wants to get rid of the US dollar in exchange for more tangible assets to hold. It goes to Africa to acquire precious minerals. Monopsony. It buys gold, seen to be most precious of metals. This issue that China has over the holding the US dollar is principally politically driven which is legitimate but which may take a decade or so to adjust. The question then becomes - what is the alternative international reserve currency? The IMF has thought of the SDR which has not worked. It would seem that BRICS wants to issue a new international reserve currency based on their gold holdings - which probably is valued in US dollars. (The dumping of the US dollar to buy gold means that the price of gold will be high in US dollar terms, but this would then not be a good measure of the value of gold.) This raises the question of who is going to manage this new international reserve currency, who determines the ration of its issuance to the "value" of gold. There also needs to be confidence in holding this new reserve currency, which then requires its value to be stable - by some measure. All these issues need time to work out. So, good luck to BRICS in their noble intentions. Of course, Russia is supportive of BRICS because then there will be an alternative banking system not based on the US dollar, so that the US cannot easily sanctions its enemies. There are forces for an alternative reserve currency but there must be basis to build that confidence to hold the wealth of nations in.

5.  A major feature of China's economic growth is that it has to and it has built its productive capacity by major lumpy lots. The capacity to build to build cars, for example, cannot be to increase a few more cars each time, but probably thousands more cars per unit factory expansion. This goes across the board among the industries, from industries to real estate and the wholesale and retail businesses. With the contraction of its domestic consumption, it is naturally that China will have to export its surpluses, probably at a discount in order to clear existing stocks with or without any further new production. Productive overcapacity can always be solved easily through retrenchment of manpower and equipment. It is usually the unsold inventory that produces the headaches. In real estate, unfinished real estate that has already been sold are useless but buyers are stuck with mortgage loans and banks with non-performing loans, accentuated by rising unemployment. In Japan during after the bubble burst, the trick was to book the bad loans in another company and out of the books of the banks so that lending can continue to feed the economy. Debtors were allowed to take decades to try to repay their loans. The Japan dragged along the bottom for decades. For China, the economic collapse may have major implications on social sentiments. Many policy issues for the politicians to tackle.

6.  The dumping of the US dollar bonds increases its discount rate and raises the US interest rate. This add pressure on international inflation as all other currencies depreciate against the US dollar. And domestic prices all increase, on top of higher oil prices and the price increases from supply chain disruption due to diseases and wars.

Malaysia

7.  Malaysia has a small problem of having a new government that attempts to clean up the system. This means destroying the old networks and building new ones. This requires new investments - foreign? At the same time, the civil system has become such a fiscal burden for the federal government, being weighed down by a generous pension system to the extent that it is becoming worthwhile for the government to risk heightening consumer price inflation by removing subsidies starting with diesel. The domestic currency is allowed to weaken not only against the US dollar but also neighbouring currencies. The economic system continues to be stuck in the old mode, with the Approved Permit for imports (of cars) now liberalised to the entire entitled section of the population. In such measures, the local economy shall continue to limp and hopefully forward.

Concluding Remarks

The point is that the entire world is in a mess with a global economic collapse mixed with a desperate attempt to re-orientate the global system to an unknown new one. This is nothing new - after all, all these could be done in the name of revolution. We are now living in interesting times.

Anatomy of Economic Collapse

What we are seeing now is the collapsing of the global economy as a result of the destruction of the global supply chain from policy responses to Covid 19, and the escalation of global prices as a result of Russian responses in oil prices to economic sanctions to its attack on Ukraine. Furthermore, the US Fed decision to raise interest rates cannot be to stifle inflation which is structural in nature and cost push. In consequence, the global economy slows down and domestic unemployment increases.

One way to resolve domestic political issues arising from economic depression is to go for war, as a disruption and a distraction to the voting public. This seems to be a major policy option.

The excuse seems to be to reclaim past glories and, if this the way forward, there will be no end to retracing the relatively long history of this short-lived human civilisation. Global warfare could be a protraction scenario for our world in the foreseeable future.

The major global economic issue is that there is an economic imbalance in international trade whereas China's economic success seems to be measured by its immense economic development in infrastructure, city building and the establishment of its industrial base. This in fact has been the purpose of the long quantitative easing by the US Fed in order to provide the global liquidity for global growth led by IT and the digital economy. There is no doubt that the rise of the Chinese economy is a massive achievement not only for the Chinese but also the world, in terms of global economic development.

But the great economic success of the Chinese is apparently marred by the simple fact that it ended up holding an enormous pile of the US paper money which it is does not seem to be happy about. It could be that the US is trying to entice the Chinese to hold onto its paper currency that the US interest rate is raised.

Instead, the Chinese chooses to divest its foreign reserves into non-US currency holdings. The first alternative asset is gold whose demand and price have soared in the many preceding years. Gold has zero return except as speculation in a rising market. Unless payments can be made in gold, to use gold for payment means the need to sell the gold for other acceptable international currencies, which means that gold price must eventually drop or collapse when there is need to made use of it for international payments.

Hence, the need to create an alternative gold-backed currency, so as to bypass the need to sell gold. To do this, a regional central bank or an alternative global central bank to the IMF is needed. While a new international reserve currency may be created, it may not have a sufficiently large global reach to be popular or readily accepted. Its value needs to be managed. In the limit, if backed by a limit amount of gold, then the supply of that reserve currency is limited and it will limited the growth of the economies supporting that new international currency. And not many countries in the world have the necessary experience to do that well, probably except the incumbents who truly understand the fundamentals of central banking and the integrity that goes with it.

In lieu of a new international reserve currency, regional groupings may agree to trade among themselves their own selected currencies, all except the US dollar.

But this does not mean the US dollar will die. It takes many years to build up confidence and the market systems to trade in the US dollar and the keep it as an international reserve. For one, the issuer of that currency must be able to run the world's largest trade deficit. Which means it must have to capacity to consume a major chunk of global production and get its citizens totally obese and unhealthy. You cannot be the world's greatest producer and the world's greatest consumer. If you are, you will have a  perfect trade balance.

It will be an enormous task for a country with a huge trade surplus to turn around and have a huge trade deficit. It is quite hard to be a global player with yourself as the only player in town.

If the ambition is to be the only global player, then the policy goal must be to conquer the whole world and monopolise (or rather monosopnise) all the resources in the world. You are the only producer and the only consumer. This may seem to be a ridiculous end-game but do not dismiss it, for there are men in the world madder than this.

The global economy is certainly going through a global economic structural change, as China, having experienced forty years of continuous economic growth, thinks it knows how to manage a modern money using economy, as it now tries to dis-engage itself from the US and its corporate influences. Before China can do that, it must first solve its domestic economic problems.

It is a no-brainer to keep printing money, the banks to give out loans indiscriminately, and for developers and businesses to construct brick-and-mortar structures; in other words, to expand only the supply curve or for the whole economy the whole production function. If Keynes were to teach anything in economics, the question is always of demand - whether there is sufficient sustainable demand. For the banks also to lend to buyers of properties and other buildings put the entire burden and liability of the economy on the shoulders of banks, not bankers who are often corrupt and can be dismissed or even executed. When loans cannot be repaid by developers or property buyers on a massive scale, banks are at risk of insolvency. The collapse of banks is the making of economic depression.

If you now want to restrict the printing of your currency by having it backed by a fixed quantity of gold, then you have set yourself up for policy quandary.

The way forward for the world economy is for the price of oil to come down to reasonable levels in a global environment of peace and cooperation. There could be global transformation but only by natural process over the next fifty to a hundred years, not the next five to ten years. There could be a breakup of the global monopoly on the supply of essential components, with multiple players and not just one. The global market may be less integrated but there will be competition and proper choices. The world is big enough for everyone.

In the meantime, we will have to deal with the excesses of the last forty years with implications for the real estate markets and the banks around the world. If these adjustments do not take place, then the countless unemployed and homeless will take matters in their own hands. Peace.

Meritocracy

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.

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.

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.

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.