Monday, June 30, 2008

Democracy in Practice

Democracy is a nice ideal, but hard to achieve in reality.

Since full consensus is impossible in reality, the rule of a simple majority is but a symbolic token of the high ideal of democracy.

Even so, a fair simple majority is so hard to get. Zimbabwe today is a case in point, where so much human suffering is engineered just for one man to dominate the politics. Examples abound in other countries.

Domination comes when a man stays too long, and has the time to control the system.

That is wisdom in limiting the top positions to one term or two terms.

We only have to suffer their greatness or incompetence for a short time; the great ones so that they do not become arrogant and destroy the society, and the bad ones so that they stink and destroy the whole society.

Don't trust people, build a good system.

How about the argument that in a small society, there are not enough talents to go round. My answer is: when there is opportunity, talents will come forward.

The term may be too short for the leader to accomplish anything. That's the idea: Not to give the person time to do anything. The people should have the opportunity to do something for themselves; and the system should do the work.

Sunday, June 29, 2008

The Role of the Opposition

The role of the opposition is not to oppose but to create an economic programme, as a clear alternative to the prevailing one.

Where is the dichotomy. Racial groups or economic groups.

In the past, race was an issue because race was taken to be synonymous with economics. This was strongly argued to be the case, and championed. The champions got the trophy, and are now being challenged.

Today, the cause is justice. Social justice or economic justice.

The political battle is to pitch the poor against the rich.

This sounds like a good strategy, because there are more poor people than rich people. This is an advantage in a one-man or woman-one vote system. There is fairness the rich do not have two votes each (although there could economic transactions on the side).

The powerful becomes rich and becomes an elite.

It is a simple battle for the opposition: get rid of rich group A, by getting rid of the power of group A.

Group B enters.

If the system remains unchanged, the same routine continues until the loot is gone.

So long growth and prosperity is based upon development using government (or public) money, there will be abuse.

The current quarrel over the size of development, without which there is supposed to be no prosperity, is to be caught in the matrix, within the same paradigm.

For the opposition to propose something really different, they must propose a system of the economy which relies not on government infrastructure spending, not on foreign direct investment, but on local investments by local innovators employing local talents for exports.

I ain't see nothing yet.

Wednesday, June 25, 2008

The Price Mechanism or Ghost

Many people have in the past lauded the price mechanism for being the correct road to prosperity. China benefited tremendously from FDIs flows ostensibly to tap its large virgin domestic market, but ended up exporting cheap products, as the children of poor peasants flooded to the coast to earn few dollars by sweating in crowded factories, with sufficient wages to buy a handphone and go home once a year. China's persistent double-digit growth sets the stage for the global markets to fly, fast forwarded by the hedge funds, with hands full of useless US dollars to throw them away. Metal and commodity prices soar.

High commodity prices are in fact a global battle for scarce resources. Either more of the precious environment is destroyed or the poor starve. It is right for the government to put cash into the hands of the poor so that they do not go so hungry.

But the panic at the petrol kiosks is not about the price hike, but no petrol from strikes by petrol stations. People will pay for necessities, in order to get on with their daily lives, but they must consume less elsewhere.

The loss of welfare by people in countries such as Malaysia despite its good economic growth year after year is the poor quality of that economic growth which has failed to increase the income all round in real terms. FDIs create jobs but the wages are much smaller than their total revenue. Mega projects engender huge leakages in capital outflows through import of machinery and "payment for consultancy services." Asset inflation keeps people pre-occupied. Higher property prices allow them to borrow more and "invest more" in property as well as stocks. A rise in the interest rate will hurt many of these people. That the current inflation is imported rather than demand pushed, as per the conventional wisdom of officials espoused in the media, confirms the poor quality of our economic growth as we did not share in that general prosperity which have led to the increase in demand for commodities worldwide. Worse, the currency is happily kept undervalued to accentuate the export earnings of commodity exporters while the rest of the country suffer higher imported prices.

The price mechanism in the market economy works even in this case; the ordinary men and women and children must tighten their belts because of higher prices so that the commodities will be consumed by people wtih money in other countries. Moonlighting with new hawker licenses may not help. Now wonder the people are angry and the government is worried. The ghost of past misdeeds, indeed.

Tuesday, June 24, 2008

The Role of the Central Bank

What is the role of the central bank, anywhere in the world?

The first central bank in the world is the Bank of England, originally created in 1694 to finance war for the king. The US Federal Reserve was established to prevent another depression similar to the one in the 1930s as a result of unbridled monetary expansion which led to the stock market crash of 1929 - although Mr. Alan Greenspan would have read the other interpretation that the depression was caused by too tight a monetary policy when the market crashed. The German Bundesbank, in the aftermath of the 1920s hyperinflation after WWI, vowed to fight inflation all the way. (New Zealand today requires the central bank to target inflation at the 1-3% range over the medium term.)

Milton Friedman said about monetary policy, "You cannot push a string, but you can pull it."

Monetary policy cannot stimulate economic growth - only innovation and investment can, by keeping monetary growth just enough to finance investment. Keeping the interest rate low is to say that the central bank is willing to finance investments with poor returns.

An easy monetary policy stimulates inflation - domestically by keeping demand unusually high. It also encourages speculation in the stock market and the real estate market with a negative real interest rate where the nominal interest rate is lower than asset inflation so that it pays to borrow money from banks and speculate.

Externally, an easy monetary policy with a low interest rate encourages "external inflation" by allowing the currency to depreciate so that imported inflation is higher.

While the government spends through deficit spending, the role of the central bank must be to control the money supply so that inflation does not become a major problem. The Minister of Finance is not the Governor of the Central Bank, and must not be allowed to do the other's job.

The role of the central bank must be to contain inflation (including asset inflation) in order to protect the underlying long-term growth potential of the economy.

It is sad in Malaysia today that investment has given way to speculation, seriously undermining technical knowledge and innovation, as a result of a loose monetary policy on a sustained basis.

Monday, June 23, 2008

World Food Crisis

What world food crisis?

There has been an increase in food prices, but there is no shortage of food supply.

If the increase in food prices is due to cost factors such as oil and raw materials, then the price of food will not come down through an increase in production - unless the food producers are happy to make losses through oversupply.

World food prices rise in US dollar terms because the US dollar has depreciated. It's a US dollar problem. The solution is for the US to raise its interest rate to strengthen the dollar or risk the beginning of the end of the US dollar as an international reserve currency.

Thursday, June 19, 2008

Khazanah Defends Big Pay

Khazanah defended its big payout by the millions (RM0.5 million to RM9.4 million) per annum to each of the top executives of the GLCs (government-linked companies), arguing that "such talent was worth not only in Malaysia but overseas." These payouts were mostly bonuses tied to performance.

These GLCs are monopolies and near-monopolies at home which could simply raise the prices they charge to consumers to achieve their preconceived profits, and they did. For such simple corporate strategies, these top executives could be over-paid.

Wednesday, June 18, 2008

People vs System

I really do not trust people. They have too much ego. When they are down, they are humble and nice. When they are up, they become arrogant and abusive.

I rather prefer a system-based approach to government.

The job of the elected chief personnel is to work hard to put in place a system that will ensure the greatest fairness to the general public, efficient without wasting people's time and effort, and transparent enough not to cast a shadow on its reliability. The system should be like the ATM.

When the system has been put in place, the elected personnel should voluntarily go.

There is nothing to huff and puff about one's own cleverness. There had been many clever people before us, and there will be many clever people after us.

I would rather that politicians do not focus on themselves. They should work for a system that will be beneficial to the whole population.

Cutting the Budget Deficit

There is so much talk about cutting the budget deficit. I really do hope that people know what they are talking about.

When the government goes into a deficit, it means that it is spending more than the revenue it collects from taxes, and income from investments - but mostly from tax revenue.

If the government goes into a balanced budget, it means that the government is not expansionary on the economy. The government is not stimulating the economy, money-wise. This means that the economy will be the same size as before, unless the private sector is bullish about the economy and invest.

If the economy is not fully developed, there is a need for the government to go into debt and spend beyond its tax revenue. This is before the government thinks it has a development plan that will help the economy in the longer run. It is legitimate for the government to go into a deficit.

If the government's role is unduly curtailed, then great reliance must really be placed on the ingenuity of the private sector. It has better lived up to its reputation.

Otherwise, running the budget deficit to zero is fashionable, but foolhardy.

Managing Trade Surpluses and Foreign Reserves

Are trade surpluses and foreign reserves necessarily a good thing?

Some governments would think so. A huge trade surplus from exporting more than we import is taken as "making money" by accumulating reserves in foreign-denominated assets. In such a "favourable" situation, the tendency is to maintain the same exchange rate and "let the good times roll."

But a trade surplus situation occurs when the exchange rate is too low, which makes exports "cheap" to foreigners and imports "expensive" to locals. The exchange rate should be allowed to "appreciate" in order to reduce the rate of accumulation of foreign reserves.

What, after all, are foreign reserves? They are nothing more than just investments overseas, either in bank deposits, government bonds, other financial assets, real estate or businesses.

By "reducing the foreign reserves," the spoils from trade could be used to reinvest in the local economy and build its foundation for future growth. Accumulating foreign reserves merely create jobs abroad.

Tuesday, June 17, 2008

The Role of the Government

What is the role of the government?

The role of the government is to govern the nation to ensure peace and prosperity of the nation.

For peace, the government must ensure the liberty of each and every individual so that each person can live in the best way he or she sees fit without injury to others.

For prosperity, the government must ensure that economic conditions are conducive for the creation of economic opportunities by the people themselves, and that there is equal access to economic opportunities by each individual. When the government dictates the economy, it must bear the brunt of economic failure.

The role of the government is not to rebuild and sustain a particular political party. A political party must serve the nation, not the nation the party.

Should hunger be the only legitimate reason for demanding national change?

Monday, June 16, 2008

Government Should Cut Sin Taxes

The government in its coming budget should cut sin taxes - particularly for cigarettes and alcohol - now that it has decided to cut subsidies.

The government should not impose its judgement on the lifestyle of people and force diehard consumers to go for inferior versions and spoil their health, since the sin taxes are imposed in the first time to save these people from ill health.

Let the people die happily with their little pleasures, rather than compel them to join political marches just so that they can get a few more dollars of rebate to burn and spoil the environment.

Sunday, June 15, 2008

The US Dollar and Commodity Prices

If the US and the G8 could get the US dollar to rise, could the speculative process be reversed and commodity futures traders close their short positions in commodities and go long on the US dollar.

In simple English, the global prices of commodities including fossil fuel could fall if the US dollar could be engineered to rise.

Tuesday, June 10, 2008

Horsemen in the Distance

First came China
Then came the West
All grew faster
And chewed up the rest.

US paid by printing money
China paid by its sweat
We all rejoiced
Now promptly got wet.

The US dollar sinks
And local prices rise
This does not make sense
Except when the ringgit tanks.

The ringgit stands firm
And sinks with the dollar
They say it's good policy
Trade surplus does us honour.

Use other people's fortunes
Rob windfall gainers
We shall all look good
When we play Robin Hood.

Set a minimum wage
To contain all the rage
Raise income higher
To fan the inflation fire.

What shall we do
What shall we do
We are all goody two shoes
But the shit hits the fan again.

Stay clear, you incompetent lot
Laissez faire will do the job
Leave us alone, leave us alone
Take your filthy hands from the pot.

Cut import tariffs
Ban import quotas
You'll see prices fall
In no time at all.

Legitimise smuggling
Remove import taxes
Businesses and trading
Will soon pick up their paces.

Now finally the good times are over
Fiscal policy cannot expand anymore
Monetary policy remains uptight
Inflation this round is not its fight.

Who grows the money supply
Who keep interest rates low
Who floods the system with liquidity
Speculation in property and equity.

Raise interest rate
Stop asset inflation
Prices will adjust down
The start of a solution.

People will then save
Better firms will thrive
Quality goods will be made
Wages will then rise.

Monday, June 9, 2008

Oil Price Hike to RM2.70

The 40% oil price hike means a spiralling impact on the general price level. Since there are multiple layers in economic activities, the final price level will be a multiple of this fundamental hike.

Real purchasing power will fall and with it the real aggregate demand. Companies at the margin trying to make ends meet will now have to close shop. Unemployment will rise. To suvive, companies will have to go for the export market. China has the misfortune to be in the midst of a major natural disaster. But local firms may help to supplement supplies in China to make up for any break in their supply chain.

In the meantime, the man and woman in the street will have to suffer from the general price increase, and in some cases, loss of jobs.