The US$40 billion spent by China on the Beijing Olympics is small compared to its 2007 nominal GDP of US$3.4 trillion.
Does this mean that China will not suffer the usual post-games growth hangover?
Is the China economy really that invincible?
It will be noted that during the preparation for the Games:
1. Metals and commodity prices rose to their highest levels yet.
2. Visitors to China and Beijing were discouraged so that triple-star Beijing hotels were complaining of only 40% occupancy during the Games.
3. Factories were moved out of Beijing to lower the city pollution.
4. Parallel construction by the private sector to take advantage of the games.
The basic point to note is that, for the two-week event, part of China had been put to work simultaneously to ensure that the project was completed on time. Indeed, it was and how spectacularly.
In economics, we call this "bunching." The problem with bunching is that all sectors are made to work simultaneously to achieve one point. Once that objective is achieved, all the forces suddenly disappear. While US$40 billion was spent directly, there could be more spent indirectly down the line to the basic supplies and infrastructure to ensure that there is no supply bottleneck. The multiplier could be huge (I would say 10x). When you expand capacity, you build whole facilities and they are chunky.
Now, suddenly, there is a vacuum. Only a small vacuum, they say.
There is a plan to plug that small vacuum with a small US$40 billion stimulus package.
Even if this is approved, there is still the demand shortage for the indirect expenditures which had to go in to build the extra facilities in order to ensure that all related projects either directly or indirectly were finished on time at one particular point in time.
The high global prices, although now softening, will already have their impact on global demand, and that impact is negative.
Now, the problem with negative impact is that it cannot be quickly resolved. There are ramnifications which take time to reverse. A person shot but not dead cannot be assumed to be able to get back on his feet immediately once the firing stops; he needs time to recover. So does an economy.
The high global prices will also induce increases in supply which, if already started, will produce excess capacity and lower prices in the next two or three years. These supply capacities will be in areas in addition to those related to the games.
The final factor is that, fromt the economic point of view, the expenditures related to the games are unproductive. They do not create an increase in productive capacity that can be considered as investments for future economic growth. The reverse seems to be the case.
I wish to suggest here that there is a demand vacuum, no matter how small, in the China economy, as well as a potential further increase in excess supply capacity in the world economy which together will create a possible implosion in the global economy in the next 2 to 3 years (2010).
Thursday, August 28, 2008
Wednesday, August 27, 2008
Education: Thinking & Information
If the education ministry takes the view that pieces of information are to be acquired by students from institutions and then applied to their future workplace in order to earn a living, then the education policy is in deep trouble.
Knowledge consists of three major components:
Ability to define issues and problems clearly
Ablility to think objectively, rationally and clearly
Ability to propose simple solutions.
The way of looking at things could be logically or non-logically but not illogically.
The ability to think creatively requires courage.
Information just provides background to the issues.
Students with the ability to think stand at the forefront of knowledge and warriors of modernisation. Their teachers should stand behind the students, not the other round.
Well, it's quite another matter about telling people what to do.
Knowledge consists of three major components:
Ability to define issues and problems clearly
Ablility to think objectively, rationally and clearly
Ability to propose simple solutions.
The way of looking at things could be logically or non-logically but not illogically.
The ability to think creatively requires courage.
Information just provides background to the issues.
Students with the ability to think stand at the forefront of knowledge and warriors of modernisation. Their teachers should stand behind the students, not the other round.
Well, it's quite another matter about telling people what to do.
Monday, August 25, 2008
Poison From the Air
Today I drink the poison from the air
Thick with dark intrigues and evil spells
Mortal beings smile with cunning to spare
Their hearts twisted like devils in hell
Today just after the Beijing Olympics
A show of brilliance or a bag of tricks
The pride of an ancient tribe
Or the envy of an incapacitated lot.
Today the eve of the Permatang Pauh-Wow!
Eyes flash like knives, breathing out fire
The smiles drawn out like swords with words
There will be blood and dying and death tonight
Today these poor people out in the cold
Thought they are getting pieces of gold
Tomorrow they will get from whoever's the government
Lots of inflation and plenty of unemployment
Today I drink the poison from the air
Thick with dark intrigues and evil spells
Mortal beings smile with cunning to spare
Their hearts twisted like devils in hell.
Thick with dark intrigues and evil spells
Mortal beings smile with cunning to spare
Their hearts twisted like devils in hell
Today just after the Beijing Olympics
A show of brilliance or a bag of tricks
The pride of an ancient tribe
Or the envy of an incapacitated lot.
Today the eve of the Permatang Pauh-Wow!
Eyes flash like knives, breathing out fire
The smiles drawn out like swords with words
There will be blood and dying and death tonight
Today these poor people out in the cold
Thought they are getting pieces of gold
Tomorrow they will get from whoever's the government
Lots of inflation and plenty of unemployment
Today I drink the poison from the air
Thick with dark intrigues and evil spells
Mortal beings smile with cunning to spare
Their hearts twisted like devils in hell.
Friday, August 22, 2008
Inflation Dragon
Central banks around the world today are in a dilemma. To worry about high inflation or slow growth?
Most central banks do not want to be blamed for an economic recession, so their strategy is to keep a loose monetary policy by keeping low interest rates low - even in the face of inflation.
The argument of central banks today is that the current hike in commodity prices is a one-off increase this year and this will not happen next year.
If this is the case, then the only thing that is happening this year and not next year is the Beijing Olympics.
But prices around the world has been trending up in the last decade or so, even when there were major financial crises and banking collapses saved by expansionary monetary policy.
Higher prices will induce structural changes in economies - where inefficient industries will die and new ones rise. Structural changes are usually undertaken by technological changes - the improvement of production efficiency to feed the ever growing human demand.
A higher interest rate will also induce an improvment in productive efficiency by weeding out inefficient industries. It is less damaging to the general public to use a higher interest rate rather than a higher inflation rate to induce efficiency. But it will be equally damaging to the general public if it has been attracted by low interest rates and speculative gains in real estate or the stock market and has become overgeared.
Too easy a monetary policy by keeping interest rates low for too long will only build a solid foundation for the promotion of inflation. Now that inflation has set in - look at all the prices around us for food and housing and utilities - it will have to take a massive weapon to slay the inflation dragon. And that massive weapon is an economic recession.
We have seen this in the world with the 1973 oil price hike which was followed by a loose monetary policy which the new Fed chief Volcker in 1979 had to tighten and brought a US recession in the 1980s.
Will China save the day?
Most central banks do not want to be blamed for an economic recession, so their strategy is to keep a loose monetary policy by keeping low interest rates low - even in the face of inflation.
The argument of central banks today is that the current hike in commodity prices is a one-off increase this year and this will not happen next year.
If this is the case, then the only thing that is happening this year and not next year is the Beijing Olympics.
But prices around the world has been trending up in the last decade or so, even when there were major financial crises and banking collapses saved by expansionary monetary policy.
Higher prices will induce structural changes in economies - where inefficient industries will die and new ones rise. Structural changes are usually undertaken by technological changes - the improvement of production efficiency to feed the ever growing human demand.
A higher interest rate will also induce an improvment in productive efficiency by weeding out inefficient industries. It is less damaging to the general public to use a higher interest rate rather than a higher inflation rate to induce efficiency. But it will be equally damaging to the general public if it has been attracted by low interest rates and speculative gains in real estate or the stock market and has become overgeared.
Too easy a monetary policy by keeping interest rates low for too long will only build a solid foundation for the promotion of inflation. Now that inflation has set in - look at all the prices around us for food and housing and utilities - it will have to take a massive weapon to slay the inflation dragon. And that massive weapon is an economic recession.
We have seen this in the world with the 1973 oil price hike which was followed by a loose monetary policy which the new Fed chief Volcker in 1979 had to tighten and brought a US recession in the 1980s.
Will China save the day?
Tuesday, August 19, 2008
Global Economic Game Part 2
So, what is the current global economic game?
The world is sloshing with US dollars which has led to the rise of China and the sub-prime crisis. Both are separate issues. China arose from excess funds being invested in China as well as the ability of Chinese goods to compete. The sub-prime crisis came from excess funds being lent to low-grade borrowers, especially consumers who are caught up by the asset bubble and consumption.
The sub-prime crisis will affect China growth insofar as it will affect the demand for Chinese goods. Even if the Chinese goods are the most competitively-priced, the overall demand will be affected by the growth of economies including the US.
The real critical factor is the global inflation.
The global inflation reflects the situation that global demand thanks to China has gone up one notch vis-a-vis supply. It is an illusion that global prices can be reduced by increasing global supply, because to do that it will have to push prices even higher as additional investment is needed for expansion.
But current higher global prices will reduce real demand, given nominal income. There is a real threat that higher global prices will result in slower growth.
The Greenspan-type policy trick is to keep expanding the money supply so that nominal income will rise to feed the inflation in the hope of maintaining output growth.
The question now is whether the Greenspan trick has come back to roost - that there is now so much inflation with so much excess cash that we are in what Keynes call a "liquidity trap."
The way out is for China to use the excess global liquidity and move the China economy one notch up in value-added. This will mop up the excess liquidity by paying China workers more, justified on better education and higher productivity growth. In order words, China will have to consume the output it produces. This will be genuine improvement of the lot of China society.
Europe will revive with China, as the more affluent China people will go for luxurious Europeon products. European inflation will be relentless, interest rates will rise and threaten a recession in other parts of the economy as the production of European luxurious products could be bound up by inelastic family-oriented production.
Economies like Malaysia will continue to do well in the commodity sector. This will disguise inefficiency in other parts of the economy. The central bank will continue to drive out cash with low interest rate in order to "contain" inflationary pressures. Politicians will intensify their fight for public funds which are diminishing as a result of the decline of the non-commodity sectors. The asset bubble is burst. Stock prices cannot hold up with weak fundamentals. Property prices cannot hold up with high vacancy rate, although speculators will try to stay optimistic on the argument that construction costs are now higher. In the end, even property prices must face the reality of demand and such trivial matters are rentals. This analysis can be extended into prime properties and sub-prime properties. But the point being made here is that the economy has been running away with asset inflation, and that self-defeating internal domestic game could be over. The real game is outside in the global economy.
At the end of the day, fundamentals of the economy will prevail, depending on how long the inflation mongers can keep up with their act of easy money policies. (Economic historians can remember that central banks were first established to curb the tendency of power manaics of overspending.)
Fundamentals: Produce things that will improve productivity growth which in turn will pay more to the people who work.
The world is sloshing with US dollars which has led to the rise of China and the sub-prime crisis. Both are separate issues. China arose from excess funds being invested in China as well as the ability of Chinese goods to compete. The sub-prime crisis came from excess funds being lent to low-grade borrowers, especially consumers who are caught up by the asset bubble and consumption.
The sub-prime crisis will affect China growth insofar as it will affect the demand for Chinese goods. Even if the Chinese goods are the most competitively-priced, the overall demand will be affected by the growth of economies including the US.
The real critical factor is the global inflation.
The global inflation reflects the situation that global demand thanks to China has gone up one notch vis-a-vis supply. It is an illusion that global prices can be reduced by increasing global supply, because to do that it will have to push prices even higher as additional investment is needed for expansion.
But current higher global prices will reduce real demand, given nominal income. There is a real threat that higher global prices will result in slower growth.
The Greenspan-type policy trick is to keep expanding the money supply so that nominal income will rise to feed the inflation in the hope of maintaining output growth.
The question now is whether the Greenspan trick has come back to roost - that there is now so much inflation with so much excess cash that we are in what Keynes call a "liquidity trap."
The way out is for China to use the excess global liquidity and move the China economy one notch up in value-added. This will mop up the excess liquidity by paying China workers more, justified on better education and higher productivity growth. In order words, China will have to consume the output it produces. This will be genuine improvement of the lot of China society.
Europe will revive with China, as the more affluent China people will go for luxurious Europeon products. European inflation will be relentless, interest rates will rise and threaten a recession in other parts of the economy as the production of European luxurious products could be bound up by inelastic family-oriented production.
Economies like Malaysia will continue to do well in the commodity sector. This will disguise inefficiency in other parts of the economy. The central bank will continue to drive out cash with low interest rate in order to "contain" inflationary pressures. Politicians will intensify their fight for public funds which are diminishing as a result of the decline of the non-commodity sectors. The asset bubble is burst. Stock prices cannot hold up with weak fundamentals. Property prices cannot hold up with high vacancy rate, although speculators will try to stay optimistic on the argument that construction costs are now higher. In the end, even property prices must face the reality of demand and such trivial matters are rentals. This analysis can be extended into prime properties and sub-prime properties. But the point being made here is that the economy has been running away with asset inflation, and that self-defeating internal domestic game could be over. The real game is outside in the global economy.
At the end of the day, fundamentals of the economy will prevail, depending on how long the inflation mongers can keep up with their act of easy money policies. (Economic historians can remember that central banks were first established to curb the tendency of power manaics of overspending.)
Fundamentals: Produce things that will improve productivity growth which in turn will pay more to the people who work.
Tuesday, August 12, 2008
Global Economic Game
The missing link in the economy is a confident private sector that is not wholly reliant on government spending but can play the global economic game.
The success of the FDIs has sidetracked the national economic policy into infrastructure construction only for the purpose of clearing road congestion brought on by wrong monetary policy that stimulates consumer spending in buying houses and cars. (Too many housing estates in poorly developed areas.)
Monetary policy nurtures asset inflation by its low interest rate policy. (Banks no where to lend except increasing the supply of their collateral assets. Real estate prices are rising from speculation while rental is low due to poor demand. No wonder foreign buyers are called in to support housing developers' profitability.)
The local economy is unable to lock into the global value chain and the global supply chain. (This is why when the global commodity prices rise, the locals are not protected by higher income which should have come naturally from higher GDP growth.)
Except for the plantation sector which is a legacy of the past. (Now oil palm estates better than housing estates.)
It's a long road to redemption. Technical knowledge. Market knowledge. Innovation. Risk-taking. Market creation. Art of selling. Reward. (This is real hard work that requires a lifetime of dedication.)
By dichotomising real reward from real effort, the economy has lost its internal mechanism for saving and investment. (Those who work do not get, those who get do not work.)
The only game in town seems to politicking and speculation. (Win the politics and get the contracts.)
Get down to the brass tacks.
The success of the FDIs has sidetracked the national economic policy into infrastructure construction only for the purpose of clearing road congestion brought on by wrong monetary policy that stimulates consumer spending in buying houses and cars. (Too many housing estates in poorly developed areas.)
Monetary policy nurtures asset inflation by its low interest rate policy. (Banks no where to lend except increasing the supply of their collateral assets. Real estate prices are rising from speculation while rental is low due to poor demand. No wonder foreign buyers are called in to support housing developers' profitability.)
The local economy is unable to lock into the global value chain and the global supply chain. (This is why when the global commodity prices rise, the locals are not protected by higher income which should have come naturally from higher GDP growth.)
Except for the plantation sector which is a legacy of the past. (Now oil palm estates better than housing estates.)
It's a long road to redemption. Technical knowledge. Market knowledge. Innovation. Risk-taking. Market creation. Art of selling. Reward. (This is real hard work that requires a lifetime of dedication.)
By dichotomising real reward from real effort, the economy has lost its internal mechanism for saving and investment. (Those who work do not get, those who get do not work.)
The only game in town seems to politicking and speculation. (Win the politics and get the contracts.)
Get down to the brass tacks.
Monday, August 11, 2008
Hard Rain
We started out nicely as a commodity-export economy. We were not happy because of the "vagaries" of commodity exporting, namely, that when the US economy faltered our commodity prices crashed and we had no support. So we said we wanted to industrialise.
To industrialise, we tried to build an industrial complex with steel plants for car making.
When this failed, we called in the foreign investors who did a good job in creating jobs and exporting. But our inadequate infrastructure gave us the excuse to build "mega projects" financed by the clever concept of "privatisation" which really was to tap into the stock market. We were trying to finance long-term projects with short-term speculative foreign funds.
To pretend that it knows its job, the central bank followed the US and kept interest rates low and financed consumers who went on a spending spree giving the basis for buying that nobody lives and shopping in mega malls, all very happy with the asset bubble.
The real global demand to add value and compete as in China has now led to high commodity prices. What are we doing in the face of higher prices? No higher productivity. No innovation. No capturing of global markets. Just give us more money to tie things over.
Hard rain is going to fall.
To industrialise, we tried to build an industrial complex with steel plants for car making.
When this failed, we called in the foreign investors who did a good job in creating jobs and exporting. But our inadequate infrastructure gave us the excuse to build "mega projects" financed by the clever concept of "privatisation" which really was to tap into the stock market. We were trying to finance long-term projects with short-term speculative foreign funds.
To pretend that it knows its job, the central bank followed the US and kept interest rates low and financed consumers who went on a spending spree giving the basis for buying that nobody lives and shopping in mega malls, all very happy with the asset bubble.
The real global demand to add value and compete as in China has now led to high commodity prices. What are we doing in the face of higher prices? No higher productivity. No innovation. No capturing of global markets. Just give us more money to tie things over.
Hard rain is going to fall.
Friday, August 8, 2008
Economic Council
A council of 40 non-economists but politicians and businessmen is not an Economic Council but a Business Council.
An economic council should consist of people who understand economic history, how the world has come to its present predicament and what should be done to influence the course of the world economic direction in the next decades - hopefully in favour of the economy that they are supposed to be championing.
Instead, we are getting a bunch of short-termers who would look for "immediate solutions" to solve "urgent problems" in the name of "the people" at the expense of the long term. Where we are today is the result of the solution of a similar bunch when they solved their problems then at the expense of the people today.
That is, the people of today has to pay for that solution in terms of an undervalued currency, a low interest currency, an inefficient private sector, an inefficient public sector, a disfunctional economy, a disfunctional executive, a disfunctional judiciary, a generation of beggars of oil money, a generation of people who believe that it is possible to be rich by not studying and working and benefiting from knowledge of how the world operates.
"Okay, let's all sit down and talk. Not too many arguments. Can we now come to a decision fast. Okay, this is the consensus. The council has decided. Let's get on with it, lah!"
Something happened. Then, nothing happens.
I think the system hangs!
An economic council should consist of people who understand economic history, how the world has come to its present predicament and what should be done to influence the course of the world economic direction in the next decades - hopefully in favour of the economy that they are supposed to be championing.
Instead, we are getting a bunch of short-termers who would look for "immediate solutions" to solve "urgent problems" in the name of "the people" at the expense of the long term. Where we are today is the result of the solution of a similar bunch when they solved their problems then at the expense of the people today.
That is, the people of today has to pay for that solution in terms of an undervalued currency, a low interest currency, an inefficient private sector, an inefficient public sector, a disfunctional economy, a disfunctional executive, a disfunctional judiciary, a generation of beggars of oil money, a generation of people who believe that it is possible to be rich by not studying and working and benefiting from knowledge of how the world operates.
"Okay, let's all sit down and talk. Not too many arguments. Can we now come to a decision fast. Okay, this is the consensus. The council has decided. Let's get on with it, lah!"
Something happened. Then, nothing happens.
I think the system hangs!
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