Monday, July 28, 2008


I usually try to take a liberal view with regard to many things in life. After all, there are so many ways to live and every individual has the right to live in the best way that he or she sees fit.

I even do try to tolerate incompetence, for who says that only the competent has the right to live. Competence may be an ideal that we all try to achieve throughout our lifetime so that we can do justice to ourselves. With that gift, hopefully we can try to be of service to our family, our friends, our neighbours, our society and our nation - and even the world.

Now, what irks me intensely is when incompetence is proudly paraded as cleverness in public.

I think it is unbecoming for a top policymaker to mouth things like it seems that the economy is "under attack" every 10 years, and such "attacks" to be "coincidental or attempts by unseen hands to sabotage the economy," as if "planned to disrupt the country's efforts to achieve higher growth."

This is the opinion of an incompetent in the field in which he is supposed to be in charge. It is like a medical practitioner who, unable to diagnose the real cause of an illness, assigns it to ghosts and spirits and other invisible forces.

I think such an economic policymaker should just resign. Nobody wants a bomoh for economic policies.

Friday, July 25, 2008

High Prices, Interest Rate & Growth

This is unfortunately a long one.

High Prices

The global economic issue today is the high prices for real goods.

If we know what causes the high prices, then we know how to respond effectively; if not, we may end up doing a lot of things but with no effect on the high prices.

I have introduced the term "real goods" to distinguish it from "fiat money" pieces of paper issued by the central bank that has a value higher than the cost of printing the paper and have it authenticated.

Now, when we think of high prices, are we thinking in terms of "nominal" prices or "real" prices. At first brush, we are all looking at "nominal" prices, which are prices expressed in fiat money terms. E.g., the price of oil has rose from 25 US dollars per barrel in 2003 and 60 in early 2007 to 140 US dollars. The price of rice has tripled since the beginning of the year to 735 US dollars per metric ton. The price of wheat has gone up 180% from a year ago, and soya beans by 82%.

If we think in terms of "real" prices, it is quite obvious that among the "real goods" themselves, the relative prices of goods measured in terms of goods are relatively stable. If all the food and fuel prices doubled, then the relative prices remained unchanged.

If there is a disequilibrium in the commodities market, then that gap will be closed. If the increase in prices is due to higher demand relative to supply, then there is money to be made by increasing the supply. Now, if the higher prices for commodity do not lead to a margin in nominal terms, then there is no increase in demand and therefore any increase in supply will worsen the lot of the farmers. This is why, in today higher food price situation, farmers do not make money.

Where is the most lucratic business in the world today? The stock market and the real estate. Both markets feed on liquidity, and the markets are volatile because the real economies are weak around the world. The liquidity has generated activity which the real returns on those investments cannot justify, either in the stock market (p/e too high) or in the real estate (higher capital value but low rental or even high vacancy rate).

It can therefore be argued that the higher prices are caused by an excessive supply of fiat money printed by the central banks around the world. If this is the case, then the solution to high food and fuel prices is to cut the money supply.

Interest Rate

There is a certain stock of money supply in the market that is doing havoc to prices.

In simple crude terms, the central bank can just withdraw that a certain volume of that stock of money that it has issued. The central bank can ask the banks to place a higher amount of their deposits with the central bank and as a result withdraw it from the system.

In an economy with a fairly well-developed financial system, an increase in the interest rate will increase savings and deposits (which withdraws liquidity from the system) and the higher interest rate also slows down lending (which reduces the creation of liquidity by the banking system). A higher interest rate will also make bonds more attractive with which the central bank can lock up liquidity, if the bonds are long term.

Of course, the argument can be that the high food and fuel prices are not caused fundamentally by the local currency but rather by the excess US dollars. This is why the US Fed must act by raising its interest rates. But there is a consideration. Some of its excessive liquidity has already been destroyed by its banking bankruptcy as a result of the sub-prime problems. Bank collapse is a disastrious way of removing excess liquidity from the system but it gets the job done. The bank collapse in the US has ramifications for its investors which are the cash rich banks in Eurpoe and China. So, there has been a bit liquidity reduction in Europe and China as well.

It will be nice if the US raises its interest rate so that Malaysia can also follow. Then Malaysia does not need a central bank to look after its monetary policy. Malaysia can just copy whatever the US is doing.

The argument for an increase in the interest rate in Malaysia is this: since the higher prices come from imports, then it makes sense for the ringgit to strengthen so that imported inflation is reduced. A rise in the interest rate also has the effect of increasing savings and deposits, and slowing down the creation of money by banks through their lending. The banks in Malaysia should cut down on consumption lending through credit cards, car buying, and the buying of property when there is nobody to stay in them. In the meantime, banks are making excessive profits which the record shows will be followed by a banking disaster as non-performing loans pile up in the instance even of a slight credit slowdown. So the central bank is now riding a tiger.

A higher interest rate domestically without a rise in the US interest rate will also draw in excess liquidity, if currency speculators are of the view that the ringgit has strong and continue to strengthen. This will happen, and it will call on the skill and expertise of those in charge to deal with this excess liquidity. But there is no excuse. We see higher interest rates in the UK, the EU, Australia, New Zealand - in inflation-fearing economies.

The central bank talks about waiting to look at: (a) risks to the inflation outlook, whether it is going to increase; (b) the risk at moderation to the growth outlook; and (c) inflationary expectations.

Inflation Risks and Expectations

I think the inflation risks are over in the sense that once you pass the high base as a result of the 40% hike in fuel prices, it is unlikely that you are going to see headline inflation at more than 7.7%. By July 2009, we could see CPI inflation at 1% again - although by then your bowl of noodles could cost 6 ringgit (1% is still an increase no matter how small).

The argument for the recent 40% fuel price hike is to stave off the problem of expectations - the problem of the public thinking that the government will keep on raising fuel prices. The worse could be over for the global oil market, hopefully.


So the problem is really the speed of growth of the economy.

There is fear that the economy is already slowing down and that an increase in the interest rate will slow down the economy further. This may well be the case, but this could be good for the economy in the long run. At present, we have an easy money policy that encourages Tom, Dick and Harry to borrow and spend freely to buy consumer goods just to keep the retail sector afloat - more houses, more cars, more TVs, more fridges, more hifi, more washing machines.

But, structurally, the economy is in shambles. The relative prices are wrong. All the monopolies are asked to become profitable - and they are the GLCs which dominate the stock market index. When monopolies make money, it means that the rest of the economy is held to ransom by their greed to maximise their margins. All the utilities including Astro can raise their rates and send their bills to our house and we can do nothing but pay up, whether we like it or not.

The real private sector is cornered into disadvantage, so that for investments, reliance is made on foreign ones.

In other words, there is no real private sector to suffer the higher interest rates - only the poor consumers who are up to their noses with debts thanks to a low interest rate policy which is completely misleading. Low interest rate loans funded by expected windfall gains in the stock market or the property market is a dangerous economic gain.

Foreign investors are flushed with cash; they do not need loans from local banks.

Only the government needs to borrow, in order to perpetually priming the pump.

I wonder what will the to-be-formed Council of Economic Advisors promulgate.

I propose the following:
1. Raise interest rate so that the ringgit can strengthen and lower imported inflation;
2. Dismantle import duties to lower imported inflation;
3. Cut government spending, to reduce the crowding out;
4. Promote domestic investment, for Bumiputera and non-Bumiputera (if the government does not cut its spending, this will be reduced to arguments about transparency and how contracts are given out);
5. Promote the IT and creative industries as avenues for young graduates;
6. Reduce the role of the government to law and order and the protection of private property ownership (for people to keep the rewards of their own efforts).
7. Not allow the Council of Economic Advisors to be formed. The PM to give up post of Minister of Finance to "the one who would have to provide the intellectual leadership to the Council of Economic Advisors."

Thursday, July 24, 2008

Wisdom vs Ignorance

Let us first talk about ignorance.

In the first place, we all really do not know. Now, the question is: what do we do when we do not know? To pretend that we know when we do not know is foolishness. To acknowledge that we do not know is wisdom. I think Confucious said that.

In the world of economics, do we know what we are doing? We really do not know, except for one thing - that we know hunger and we fear hunger. We become resolved never to be hungry again. I think this is the resolve of ancestors which are then passed down the generations, and the way that hunger issue is resolved is called culture - the established way for the tribe to survive.

In ancient societies, the survival of the tribe is closely associated with the health of the environment. To submit and respect the environment is the means to survival. Human beings are taken to be nothing, to be at the mercy of the environment.

In modern societies where power comes from science and technology, our ability to modify materials is mistaken to be our ability to create and to control the environment. We do not know that our tendency to pursue a fixed method until a crisis forces us to change. (Clever people love to parrot "Crisis means oppportunity.") When a crisis hits, we cannot control the situation and the only thing that we can do is to adapt, given the changed environment or "new paradigm."

The creation of megacities is the modern way of living where the only asset seem to be real estate, not the environment. Value in real estate is defined by the volume of the money supply that the central bank creates. It is no wonder that at a time of inflation, everybody tries to stand their ground in a city environment, comforted when surrounded by concrete.

Agriculture technology has advanced to such a state that it is more dependent on science and technology rather than age old farming traditions. Higher yield requires input from the city folks and the margin that the farmers make will be defined by the disposable income of the people in urban centres. Farmers become slaves to city folks whose access to food is determined by the paper/electronic money issued by the central bank.

If farms could go organic and produce sufficient variety within a rural community, they could technically isolate themselves from the cities. In an environmental crunch, the farming communities will survive and city folks will die.

If the rural areas are denuded and rebuilt with concrete, then the society is being extermination by the greed of a few people whom they have tricked into voting to be the guardians of society. Greed breeds ignorance.

Wisdom is to see what is at hand and enjoy it, even if it is nothing. Knowledge, learning and philosophy at the end of the day boil down to the acknowledgement that we are nothing, here just for a moment to enjoy that moment of bodily 3D existence.

Economic wisdom is to have food for the stomach two or three times a day, leisure to procreate or, if not, then recreate or just create. Creativity is nothing but a shameless way of using up one's spare time, which is plentiful when one is not caught up accumulating savings in monetary terms to pay for a car that will crumble within a few years.

We abandon activity or even economic activity when we have lost energy due to sickness or old age, when we could see we have no future. Many of us are now living our live energetically because we have a future - that is the least that we can console ourselves when, in reality, we have none. It's a question of perspective - where we are in our life cycle. Ask all the old folks in the homes.

Youth is filled with energy of life and youth breeds ignorance.
Wisdom resides among the old folks.

Right vs Wrong

What is the "right" thing to do is also subjective, and not an absolute.

What is "right" is also usually related to the idea of what is "good."
At the end of it all, what is "right" and what is "good" are related to the instinct for human survival, either as individuals or societies, or any sub-group.

The most narrow will take a very small group and champion its cause.
The more open will cast a larger net and embrace more kinds of people and groups .
The most liberal will be those who see people as one category, or better people and animals and nature as one, or the solar system as one, or the whole universe as one.

Those who are most liberal will de-emphasize their own individuality and focus on the commonalities with other kinds and other species.

In economic policy, we have been pushing too much economic growth based on growth of capital through investment, at the expense of the well-being of workers or the environment. We think capital holds the future, more so than the environment. That is narrow thinking.

The broad economic thinking is to embrace the environment as part of the economic process.

When human beings do not fear death or the existence of its own species, then there should be a case to limit the growth of the human race on this earth at some point, before its natural limit.

Monday, July 21, 2008

Good vs Evil

I suppose what we are being exposed to in the mass media has a lot to do with trying to influence us, the public, of our opinion on things.

While "truth" deals with the reality of things (and hence a bit more objective in the sense that there is a certain "reality" out there which we should try to discern even if it is also greatly influenced by our perception and "colours" of things), in a sense "good" has got more to do with the nature of the effect of our action or thought on ourselves and those in our immediate surroundings and elsewhere.

It may sound circular, but "good" is when our actions have positive effect on ourselves and society - positive in the sense that we feel encouraged to be happy and pleased with ourselves.

The issue of "good vs evil" is really a subjective thing, based on our likes and dislikes and hence depends on what we value most dearly. It is an opinion, a view of things in life. There is no one way about it.

In the light of the events that we read about one man's battle against the system for what he views to be "just," it does appear to be quixotic in battling against windmills and armies when in fact he may just be getting his knickers twisted.

I am for the freedom of individual expression, but I am sick and tired of being bombarded by one's man views and opinions continously for so long that I suspect that it may just be a propaganda of sorts. I would hate to think that one man's paranoia has been subconsciously seeped into my psyche and that of my friends and those around me.

Rhetoric may get only so far - and for some, very far! - but surely there must be a limit to hot air.

What is happening is an injustice to our nation and to ordinary men, women and children. Let us get on with our lives.

And I hope there is some policy maker out there who is worried about whether to raise the OPR from 3.5% to say 5% so that the ringgit may rise from RM3.30 to RM2.50 so that imported inflation may be reduced, though this may be bad timing as the global engine from China looks to be tottering.

However, it may be better to have just the recession without the inflation rather than stagflation. With higher interest rates, the high property prices may then fall just like what has happened to the stock market, inevitably.

When the economy has come down to its own reality, hopefully the whole nation can come back to our senses that the most important thing in life is a good education and from there we all work hard and sweat to try to contribute by our ideas to society and the world we live in. With a bit more wisdom from education, we would need less material things to be happy in this short life that we have, and leave the world in its own natural equilibrim or ecology.

Politics and politicians then become irrelevant and hopefully looks increasingly harmful. This will be a nice world to live in.

Friday, July 18, 2008

Truth vs Falsehood

We live in an age of information but no truth!

We are being bombarded with all kinds of information everyday - telling us what to do, what to think. I do not like this.

I wish people would sit down and do some research - find out things for themselves and share what they have discovered with others.

Instead, this is a world of plagarisms and hearsays and hypotheses.

It is so easy to say something and hope that our views will catch fire. We gain fame and popularity and hopefully make some money out of it, and hopefully live a life of luxury as we see in the examples of the successful ones.

By the truth, or rather, the reality of it all is that life is so boring that it can be peaceful.

It is a curse, according to the Chinese, that one should live in interesting times and be sentenced to unhappiness where one's erstwhile inert emotions would be aroused and abused.

I should stop reading the press for a few more days.

Wednesday, July 9, 2008

Diversity vs Monoculture

We should prefer cultural diversity over monoculture.

When we over-generalise and over-simplify, we tend to become bloody-minded and impatient. We want to say "The situation is like this; why don't we just do it this way. Simple!"

But the fact is that while we are all like fundamentally as human beings, we are also all unalike in our tastes, preferences and values.

If we are all equally enlightened in the same way, yes, we can say all agree to live life in the same way - like all our religious teachers.

But we are not. We are each wired up differently, because of our hormones, genes, upbringing, culture and the things we read and see. We also want to be different, and try very hard to be different. This is ego, but ego is what is keeping ordinary men and women and even children alive from day to day, as they search for their own uniqueness and niche in life, which gives them meaning.

Given such diversity, it will be a shame to set one set of values as the overarching set of values and impose that on everyone.

The First Emperor of China might have got the right approach in dealing with diversity - invent a commonality for the eyes, but leave everything else as they are but evolving around that commonly accepted value.

We should in fact encourage creativity and evolution for a diverse culture to blend into something new and unique. By fossiling one set of values and imposing it on everybody, we run the risk of making ourselves irrelevant to the modern world.

Tuesday, July 8, 2008

Of Bloggers and Buggers

What a terrible crime it is
To be fighting to get at the truth
When facts which surely do exist
Are covered up by festering wounds
There is something one should do
Blog, or be buggered

"I want proof," cries the accused in tears
When he knows none is easily available
For he has covered up his tracks for years
And hopes his friends are dependable
There is something one should do
Blog, or be buggered

When incompetence makes a mockery of things
When ignorance exudes an unperturbed calm
When mastery involves pulling invisible strings
When survival means doing each other harm
There is something one should do
Blog, or be buggered

Like a clever thief, the culprit screams from the side
Pretending that he is not at fault
Like a god, he still wants to rule other people's lives
While his own is grinding to a halt
There is something one should do
Blog, or be buggered

Two buggers slogging it out in full public view
Each bidding the other a dramatic adieu
How did things deteriorate to this level
How can things go on like this
There is something one should do
Blog, or be buggered

Monday, July 7, 2008

Risk of Overadjustment

While we must allow the market to adjust, there is the risk of overadjustment in the market as a result of policy interventions.

Property sales in Kuwait fell 36% year-on-year in May, the second consecutive month of decline, as banks were asked to increase the credit credentials of borrowers.

When the price increases, the adjustment is that demand will fall so that demand adjusts to existing supply. The higher price may trigger new supply.

Or, in this case, if the price increase is due to speculation in the global commodity markets, then the decline in demand will create an excess supply which will undermine the speculative assumption.

Either of these adjustments will be nullified if income is increased to maintain the prevailing demand, which will then strengthen the speculative assimption.

If the price increase is due to the depreciation of the US dollar, then the solution is to increase the US interest rate in order to strengthen the currency.

If the local currency is tied to the US dollar which is depreciating, then the solution is to increase the local interest rate to strengthen the local currency, regardless of the US interest rate.

In the Kuwaiti case, the prescription is a credit crunch which is always a nasty pill, as it will unwind instantly the speculative process in the real estate. This applies for all countries that are tied to the US dollar.

Instead of a credit crunch, an increase in the interest rate will give a longer period of adjustment for the private sector.

But, then, there has never been an ordinary exit out of a house on fire.

Sunday, July 6, 2008

Forsaking Market Adjustment

We really should get politicians out of the market place. They are making a terrible mess out of the whole thing.

The market is like the jungle - it is neutral. Ignorance is not an excuse; you pay for it.

The market rewards those who succeed and punishes those who fail.

The saving of the failures during the 1997 market adjustment and the unprepared during this bout of inflation is setting a trend which no government can sustain.

There is a reason for the market to go for selection - so that it can strengthen the core of the economy. Without core strength, the whole market is crumbling and so will be the political system.

We must rebuild our economic foundations.

Wednesday, July 2, 2008

Economy In Jeopardy

As the political game turns ugly, investors will become increasingly nervously. While they may continue to stay on, they may not be putting new money into their investments. Less jobs will be created in the coming months.

A large part of the unemployment in Malaysia has been disguised by "self-employed" people engaging themselves in speculation in real estate and the stock market. With confidence lost in the coming months, the speculative bubble will burst across the markets. The banks will be hard hit, and so will be the people - furthermore, having to face sharply higher costs of living.

Hungry people could be persuaded to do vicious things.

And all the economic leaders in the government and public agencies will be shown to be insubstantive in ideas, after their current stance of "wait and see as everything so far is still so good."