What has stimulus packages got to do with the efficiency of resource allocation? Everything, but quite on the reverse.
The idea of an efficient resource allocation comes from the idea of the price mechanism to do the allocation and the idea of competition to ensure its efficiency.
If there is a deliberate attempt to stop the price mechanism from working to allocate resources even in the downturn - to allow those with cash to buy cheap assets at firesell prices - then there will be no resource re-allocation. The resources will still be stuck in the hands of those who have made a complete mess of things but those who have been prudent would not have a chance to exercise a market opportunity.
By right, in a down market, there will be more producers and more workers who are out to compete. At the very least, stimulus packages will be open to the general public so that competition will ensure the best value for money for the packages.
This is the ideal, and the reality is harsh. For one thing, stimulus packages are never big enough to save everybody. But at least those with the least muscles will be left to die.
But the real idea of a stimulus package is form a bottom for the economic downturn so that people can see that there is an end to the decline. It will really stimulus only when the economy is well passed the bottom and could possibly be on the upswing. Then, there will be some kind of a stimulus.
The recession is always a good time to tweak the economic system and repair the faults that have shown up. But there is a danger of overdoing the tweak to the extent that it may make it a bit harder for the system to jump-start itself.
The trick is to let the system be easy when times are hard and for the system to be tough when times are too easy.
Policy thinking today is entirely out of kilter. Policy is easy when times are good - in order to ensure that times are good. Policy becomes non existent when times are bad - when everything is loosened until there is no control.
Zero interest rates - what a ridiculous idea!
I think there should be a bit of disciplining of the economy, by ensuring that investments are done with a decent rate of return and that savers are rewarded for saving their money for a rainy day. Without this discipline in the investment market, we will have gross misallocation of resources to the extent that savers are being punished while abusers of resources are being rewarded with bad ideas.
There is no wonder that we end up with a lot of junk we do not need.
Or are we in the midst of a turning point in civilisation where life as we know it in the balancing of work and play is going to be different. Where work has become play and play has become work. And our accounting of economic value-add may be inadequate for policy to adjust accordingly.
Stimulus packages of any kind are at best a stop-gap measure. Resource allocation is not only temporal with respect to price but inter-temporal with respect to the rate of interest.
Friday, February 27, 2009
Thursday, February 26, 2009
Obama & the End of Prosperity
While Obama may sound good on paper, his words if translated into actions could spell the end of prosperity for the US and possibly the world in the near term.
In his address to Congress on 24 February Tuesday, he talked about cut in Cold-War era weapons programme. If he thinks that the US budget deficit is caused by war and a sharp contraction of the war industrial complex is the answer to the deficit problem, then he had better - and he must - come up with a better economic response to fill in that vacuum.
Not that I suport war or the war machinery. I don't.
But the economics of it is drastic. The war in the Middle East could have been the result of the end of the Cold War where new platforms of destruction need to be identified to keep the war factories going.
There was earlier talk of the Peace Dividend - where the resources leftover from the Cold War could be reallocated to peacetime consumption prosperity. That didn't happen. So, maybe there is the real time to extract the Peace Dividend.
I suspect that the current meltdown in the US is the result of the misallocation of resources, where the war has produced a lot cash in the system which could not be flushed out (with the deployment of the equipment in the Middle East) but led to the asset bubble which finally burst with the death of Sadam Hussein.
There is now a big hole in the US economy, where most of the blame is placed on the poor Chinese peasant workers who slogged all day in sweatshops for peanuts.
Obama and his economics team led by Larry Summers have a big job ahead to fill in that hole with new types of industry and jobs.
Does the US still got the technological or innovative edge?
If not, then I am afraid that Obama administration may, in history, be associated with one of the bleakest economic times in the US, since the 1930s.
In his address to Congress on 24 February Tuesday, he talked about cut in Cold-War era weapons programme. If he thinks that the US budget deficit is caused by war and a sharp contraction of the war industrial complex is the answer to the deficit problem, then he had better - and he must - come up with a better economic response to fill in that vacuum.
Not that I suport war or the war machinery. I don't.
But the economics of it is drastic. The war in the Middle East could have been the result of the end of the Cold War where new platforms of destruction need to be identified to keep the war factories going.
There was earlier talk of the Peace Dividend - where the resources leftover from the Cold War could be reallocated to peacetime consumption prosperity. That didn't happen. So, maybe there is the real time to extract the Peace Dividend.
I suspect that the current meltdown in the US is the result of the misallocation of resources, where the war has produced a lot cash in the system which could not be flushed out (with the deployment of the equipment in the Middle East) but led to the asset bubble which finally burst with the death of Sadam Hussein.
There is now a big hole in the US economy, where most of the blame is placed on the poor Chinese peasant workers who slogged all day in sweatshops for peanuts.
Obama and his economics team led by Larry Summers have a big job ahead to fill in that hole with new types of industry and jobs.
Does the US still got the technological or innovative edge?
If not, then I am afraid that Obama administration may, in history, be associated with one of the bleakest economic times in the US, since the 1930s.
Wednesday, February 25, 2009
Options, Rights & Democracy
What are rights? Rights are options that you are allowed to exercise without any barrier or any cost. Once a price is placed on an option, then your right is taken away because you can only exercise your right at a price. Sometimes, we are just not willing to pay that price.
If you are a citizen of a country, then you have the right to exercise your right, such as your right to exist as a human being, or your right to invest and do business and reap the fruit of your own labour. But if you can only exercise that right on condition, such as invest but you must give away some of your ownership for free or at a discount, then you are given the right to exercise your option at a price.
If you are a legitimate consumer who pays for a service, and if a service is provided supposed at a low price but with many restrictions that are being imposed on hindsight, such as in the case of cable TVs and LCCs, then I would say that you are being had.
In democracy, we exercise freedom of choice. We have the right to choose the way we live. We have the right to suffer our own errors. Let us make our own mistakes, and bugger those of you who would have the audacity to tell us what to do.
But if you restrict us from our right to exercise our options, then there is no deal. We would rather withdraw from a game where the rules are unfair, where the dice is loaded.
The problem with unfairness is that it deprives us of our right to pursue the straight and narrow path. Many of the things in society are borne out of correctness in our behaviour where we respect each other and we help each other.
One that straight backbone is broken, we become crooked. We think the only way to live is to be dishonest, to lie and to mistreat others.
Living a good life is afterall a matter of forming good habits - habits that are sustainable which ordinary folks say living a good life.
All our social mores are justified on the ground that "it is good for you," and that "this is the only way to be."
In times of structural change, the only way to survive is to change habits. We have to form a new way of living. We take ourselves out of our old comfort zone and establish new equilibrium states - new comfort zones.
For us to be entirely free, we pay no price for our options. Let there be competition so that we be rid of marauding sharks who pretend to be dolphins.
If you are a citizen of a country, then you have the right to exercise your right, such as your right to exist as a human being, or your right to invest and do business and reap the fruit of your own labour. But if you can only exercise that right on condition, such as invest but you must give away some of your ownership for free or at a discount, then you are given the right to exercise your option at a price.
If you are a legitimate consumer who pays for a service, and if a service is provided supposed at a low price but with many restrictions that are being imposed on hindsight, such as in the case of cable TVs and LCCs, then I would say that you are being had.
In democracy, we exercise freedom of choice. We have the right to choose the way we live. We have the right to suffer our own errors. Let us make our own mistakes, and bugger those of you who would have the audacity to tell us what to do.
But if you restrict us from our right to exercise our options, then there is no deal. We would rather withdraw from a game where the rules are unfair, where the dice is loaded.
The problem with unfairness is that it deprives us of our right to pursue the straight and narrow path. Many of the things in society are borne out of correctness in our behaviour where we respect each other and we help each other.
One that straight backbone is broken, we become crooked. We think the only way to live is to be dishonest, to lie and to mistreat others.
Living a good life is afterall a matter of forming good habits - habits that are sustainable which ordinary folks say living a good life.
All our social mores are justified on the ground that "it is good for you," and that "this is the only way to be."
In times of structural change, the only way to survive is to change habits. We have to form a new way of living. We take ourselves out of our old comfort zone and establish new equilibrium states - new comfort zones.
For us to be entirely free, we pay no price for our options. Let there be competition so that we be rid of marauding sharks who pretend to be dolphins.
Airlines: How Not To Compete
LCCs claim to compete with full-service airlines with a view to reducing cost for the consumer. This is akin to Proton claiming to compete with Rolls Royce in terms of cost.
1. While the claim is correct with respect to reducing costs, it does not result in reducing the price with respect to cost. While you may pay less, you may actually be getting less value for the money. You may have paid less in terms of money, but you may actually be putting your life at risk. Half the challenge in modern technology is to lengthen life, not shorten it. The LCC business model is a life-shortening one.
2. What is happening in the airlines business is not competition. Competition means that everybody faces the same key parameters (ground service, air service, customer service), where the only way to reduce cost and hence price is greater efficiency in running the business. Then the competition benefits the consumer. Otherwise, the consumer is being shortchanged and there is no outlet for the consumer to air grievances.
3. What is happening is market segmentisation. It would therefore appear that the LCCs are doing the Third Class coaches (and even that with differentiation). The full-service airlines are presumed to be doing the First Class and Second Class passengers. The air world is now neatly divided so that the different classes now don't even go to the same air terminals. They get terminated differently, according to their respective classes. (When the education system fails, you move the classes to real life.)
4. I have no objections to businessmen proposing ideas such as the LCCTs, but I object to politicians agreeing to them - unless of course the normal terminals are congested and more facilities need to be built. But to have built a futuristic airport and not using it is an abuse of resources.
I am in favour of compeition to lower prices for air travel. As there is competition in the full-service airline business, I think there also should be competition among the LCCs. To allow only one LCC is, of course, to promote monopoly.
I would love to see an LCC operating from the normal terminals and providing the full basic service but without frills (i.e. no steak for meal, give sandwich) - but be able to compete with the LCC operating from the LCCT. This would really be a challenge.
At the moment, the LCC business model may not necessarily be working well. Why? The LCCs are rooting for a specific market - the core of which may not be big enough for them to sustain long term - unless they go full service.
The market segment is being enlarged by the cheap thrill seekers - those small towners who have an aircraft taking off from their neighbourhood. This peripheral market will evaporate very quickly - within a year of operating. Evidence - the fewer number of flights per day, the more times flights get rescheduled, the more flights are delayed.
The only way the LCC business model can sustain is to trick new markets, by expansion into new geographical areas. This would not be dissimilar to what the Maddoff brilliance - so bright that we all go blind. But enjoy it while it lasts, so long as the planes are recently bought.
1. While the claim is correct with respect to reducing costs, it does not result in reducing the price with respect to cost. While you may pay less, you may actually be getting less value for the money. You may have paid less in terms of money, but you may actually be putting your life at risk. Half the challenge in modern technology is to lengthen life, not shorten it. The LCC business model is a life-shortening one.
2. What is happening in the airlines business is not competition. Competition means that everybody faces the same key parameters (ground service, air service, customer service), where the only way to reduce cost and hence price is greater efficiency in running the business. Then the competition benefits the consumer. Otherwise, the consumer is being shortchanged and there is no outlet for the consumer to air grievances.
3. What is happening is market segmentisation. It would therefore appear that the LCCs are doing the Third Class coaches (and even that with differentiation). The full-service airlines are presumed to be doing the First Class and Second Class passengers. The air world is now neatly divided so that the different classes now don't even go to the same air terminals. They get terminated differently, according to their respective classes. (When the education system fails, you move the classes to real life.)
4. I have no objections to businessmen proposing ideas such as the LCCTs, but I object to politicians agreeing to them - unless of course the normal terminals are congested and more facilities need to be built. But to have built a futuristic airport and not using it is an abuse of resources.
I am in favour of compeition to lower prices for air travel. As there is competition in the full-service airline business, I think there also should be competition among the LCCs. To allow only one LCC is, of course, to promote monopoly.
I would love to see an LCC operating from the normal terminals and providing the full basic service but without frills (i.e. no steak for meal, give sandwich) - but be able to compete with the LCC operating from the LCCT. This would really be a challenge.
At the moment, the LCC business model may not necessarily be working well. Why? The LCCs are rooting for a specific market - the core of which may not be big enough for them to sustain long term - unless they go full service.
The market segment is being enlarged by the cheap thrill seekers - those small towners who have an aircraft taking off from their neighbourhood. This peripheral market will evaporate very quickly - within a year of operating. Evidence - the fewer number of flights per day, the more times flights get rescheduled, the more flights are delayed.
The only way the LCC business model can sustain is to trick new markets, by expansion into new geographical areas. This would not be dissimilar to what the Maddoff brilliance - so bright that we all go blind. But enjoy it while it lasts, so long as the planes are recently bought.
Tuesday, February 24, 2009
LCCs: A Study in Tyranny
What is low cost? It is not value for money. It is not competitiveness - better value for money. It is what it says it is - low cost.
Low cost of production. You get exactly what you deserve. Because of the low cost, many of the facilities that the public has taken for granted are not provided.
So, if you go low cost, it means that you have decided that you can do without a lot of things.
What are these? All these things come under the heading of No Options. You have absolutely no options. (In political terms, you have no right.) You do exactly what the small print says.
1. Price. You make a forward contract and this is the price. The future price is lower than the spot price because the seller wants to lock in a certain amount of capture which should be sufficient to cover the cost of that operation. The spot prices are there to make a profit. If the forward contracts are not sufficient, then launch another so-called promotion. If still insufficient, consolidate operations. So, no way is the seller going to refund your money back. Hence, there is no need to invest in any communications with customers - whatever they want, the answer is "No, didn't you read the contract?"
2. Date. Any change of date is to be discouraged because of the costs involved. They need to rent a place and hire the people and pay the communications bill. To discourage any change of mind, impose a charge for the change as much as making a new contract so that, price wise, it makes no sense for the buyer in making any changes.
3. Ground Infrastructure. If possible, there will be no infrastructure. If possible, they would ask you to wait in an abandoned lot, but unfortunately the size of the carrier does not allow that to happen. Som you are given a basic shed to wait in, for which you pay a nominal sum. This is low cost. You get what you pay for. If possible, you will be ask to climb up the carrier in a rope. But that may discourage too many customers. If possible, they would want you to luge your stuff with you subject to a limit because they do not want to spend too much time or money doing things for you. Whatever they do, they want to make sure that they get something extra out of you. For example seating.
4a. Free Seating. Seating seems to be a big thing in the worldview of ordinary human beings. As if a sign of great egalitarianism, there is free seating. You queue up to be certified to board but because of the super long free space that exists between the door of the holding hall and the door of the carrier, this passage is a study in free competition. You will see that the experienced and the young and the strong will move rapidly forward. Understandably, there used to be a handicap given to those of 55 and above, families with young children. But such welfare provisions have been toughened. Now, only those 65 and above, and only those who pay for the option to board first.
4b. No Free Seating. From great egalitarianism, comes totalitarianism. No Free Seating. These buggers are very clever. They observe customer behaviour, and change their rules and their pricing. All the favourite places on the carrier have been noted and now come under a charge if you want to seat there. If the carrier is half empty (not surprising, given their recent trickery), you will see that all the favourite seats are left empty. (It is not dissimilar to the abandoning of a first-class futuristic travel station for a shed.) Everybody else is preassigned by the computer to a seat not of their choice, and true to their evil intention, you have to pay to change your seat.
Nonetheless, there are a few things I wish to commend travelling low cost:
1. Alertness. LCCs train you to be alert. You have to be alert to book early. For that, you have to be alert about your whole year calender.You have to be alert to queue up. You have to be alert to know where to sit (now no more, taken over by computer).
2. Patience. LCCs train you to be patience. Because of the tightness of their schedules, there is really no time to service the carrier except when you are sitting onboard. It is servicing as and when trouble arises - no pre-emptive. (I suppose travelling on LCCs is like playing Russian roulette.) But if you are not onboard, you have to wait in the shed because they really make the carriers work very hard and there is a know-on effect. If the trouble starts early in the day, the last one of the day could be delayed for hours. You have to be patient - bring a book and some drinks.
3. Exercise. If your doctor tells you that you have to strengthen your legs by walking and to strengthen your heart by climbing up and down stairs and that you should have fresh air (rather than breathing recycled air in massive concrete blocks), well travel LCCs. It fulfills all your doctor's recommendations.
4. Food. This is the one thing good if it is short haul. You do not get stale food smells trapped in the carrier. You do not get to over-eat, i.e., eating the stuff you do not need. Even for long haul, I can imagine it to be good if you enjoy sleeping and not wanting to be disturbed.
Conclusion. LCCs are a subject for a study in tyranny for any student of democracy. It is a tyranny of no free options, that a human being has no right unless he or she pays for it. You are controlled by a system that is monitoring you all the time and making you pay for your favourites so that to enjoy life you must have money.
Maybe it should properly be a study of expectations, if tyranny is perceived as the removal of expected rights. So, LCCs may afterall be a great way to travel if you are a keen student of politics.
Low cost of production. You get exactly what you deserve. Because of the low cost, many of the facilities that the public has taken for granted are not provided.
So, if you go low cost, it means that you have decided that you can do without a lot of things.
What are these? All these things come under the heading of No Options. You have absolutely no options. (In political terms, you have no right.) You do exactly what the small print says.
1. Price. You make a forward contract and this is the price. The future price is lower than the spot price because the seller wants to lock in a certain amount of capture which should be sufficient to cover the cost of that operation. The spot prices are there to make a profit. If the forward contracts are not sufficient, then launch another so-called promotion. If still insufficient, consolidate operations. So, no way is the seller going to refund your money back. Hence, there is no need to invest in any communications with customers - whatever they want, the answer is "No, didn't you read the contract?"
2. Date. Any change of date is to be discouraged because of the costs involved. They need to rent a place and hire the people and pay the communications bill. To discourage any change of mind, impose a charge for the change as much as making a new contract so that, price wise, it makes no sense for the buyer in making any changes.
3. Ground Infrastructure. If possible, there will be no infrastructure. If possible, they would ask you to wait in an abandoned lot, but unfortunately the size of the carrier does not allow that to happen. Som you are given a basic shed to wait in, for which you pay a nominal sum. This is low cost. You get what you pay for. If possible, you will be ask to climb up the carrier in a rope. But that may discourage too many customers. If possible, they would want you to luge your stuff with you subject to a limit because they do not want to spend too much time or money doing things for you. Whatever they do, they want to make sure that they get something extra out of you. For example seating.
4a. Free Seating. Seating seems to be a big thing in the worldview of ordinary human beings. As if a sign of great egalitarianism, there is free seating. You queue up to be certified to board but because of the super long free space that exists between the door of the holding hall and the door of the carrier, this passage is a study in free competition. You will see that the experienced and the young and the strong will move rapidly forward. Understandably, there used to be a handicap given to those of 55 and above, families with young children. But such welfare provisions have been toughened. Now, only those 65 and above, and only those who pay for the option to board first.
4b. No Free Seating. From great egalitarianism, comes totalitarianism. No Free Seating. These buggers are very clever. They observe customer behaviour, and change their rules and their pricing. All the favourite places on the carrier have been noted and now come under a charge if you want to seat there. If the carrier is half empty (not surprising, given their recent trickery), you will see that all the favourite seats are left empty. (It is not dissimilar to the abandoning of a first-class futuristic travel station for a shed.) Everybody else is preassigned by the computer to a seat not of their choice, and true to their evil intention, you have to pay to change your seat.
Nonetheless, there are a few things I wish to commend travelling low cost:
1. Alertness. LCCs train you to be alert. You have to be alert to book early. For that, you have to be alert about your whole year calender.You have to be alert to queue up. You have to be alert to know where to sit (now no more, taken over by computer).
2. Patience. LCCs train you to be patience. Because of the tightness of their schedules, there is really no time to service the carrier except when you are sitting onboard. It is servicing as and when trouble arises - no pre-emptive. (I suppose travelling on LCCs is like playing Russian roulette.) But if you are not onboard, you have to wait in the shed because they really make the carriers work very hard and there is a know-on effect. If the trouble starts early in the day, the last one of the day could be delayed for hours. You have to be patient - bring a book and some drinks.
3. Exercise. If your doctor tells you that you have to strengthen your legs by walking and to strengthen your heart by climbing up and down stairs and that you should have fresh air (rather than breathing recycled air in massive concrete blocks), well travel LCCs. It fulfills all your doctor's recommendations.
4. Food. This is the one thing good if it is short haul. You do not get stale food smells trapped in the carrier. You do not get to over-eat, i.e., eating the stuff you do not need. Even for long haul, I can imagine it to be good if you enjoy sleeping and not wanting to be disturbed.
Conclusion. LCCs are a subject for a study in tyranny for any student of democracy. It is a tyranny of no free options, that a human being has no right unless he or she pays for it. You are controlled by a system that is monitoring you all the time and making you pay for your favourites so that to enjoy life you must have money.
Maybe it should properly be a study of expectations, if tyranny is perceived as the removal of expected rights. So, LCCs may afterall be a great way to travel if you are a keen student of politics.
Saturday, February 21, 2009
Stimulating the Common Man
At a time when the big businesses, both local and global, are hit by their own big-headed expansion plans, the government should not sacrifice ordinary men and women for these ones by asking them to go into debt and spend. Instead, the government should find ways to help the little men and women to whether through these hard times while the big ones collapses.
At the very centre of the operation to save the national economy is the Federal Budget. I believe the Federal Budget should be looked at differently in order for us to be able to get ourselves out of this quandry.
Structure of the Federal Budget
The Federal Budget is structured in such a way that Federal Revenue is used first to fund Federal Operating Expenditure, with leftover to fund Federal Development Expenditure. If the Development Fund is insufficient, it is deemed alright to fund Federal Development Expenditure by issuing debt because development expenditure should be on development projects which are expected to earn a return in the future and earn the government future revenue.
Human Capital as Infrastructure
We are caught up by the idea that infrastructure is all brick and mortar - roads and school buildings - that we tend to favour the construction sector at the expense of all the other sectors, which are many.
1. Maintenance. Maintenance is regarded as an operating expense. This means that once an allocation is made in the Development Budget to build an infrastructure, the matter is usually left at that, with no attendant allocations made for the necessary and essential maintenance expenses. In economics, maintenance is considered as replacement investment, to mend the wear and tear. I suggest that the cost of all Development Projects should include replacement investment for maintenance.
2. Human Capital. When the Budget allocates funds for education projects, allocation should also be made for new teachers, trainers and lecturers. Human capital does not reside in buildings but in people and we must take care of the human repository of our national human and intellectual capital. The bodies and training and output of the education sector should be considered as capital expenditure, not operating.
3. Law and Order and Security. Law and order and security of the nation is important for its peace and harmony. There may be a preponderance of the Budget on the hardware, but equal emphasis should be made on the personnel. By not having enough bodies and sufficiently trained policemen and soldiers, we open our society to fear from internal and external sources. We should have proper guard of our coastline as well.
4. Cultural Capital. With the corporate world is suffering from the aftermath of a wild party, and as the economy rests, we now have the time and space to rebuild our cultural capital which we have unfortunately left unattended for too long. The Federal Budget should allocate funds to all the Local Authorities throughout the nation for them to organise culture-related economic activities which are likely to be centred on the arts. Let a thousand cultures bloom.
5. Hawking and Small Businesses. By far one of the most effective ways for individuals to counter the effects of the global economic slowdown is for them to have the opportunity to use a little capital but a lot of ingenuity and hard work and sweat to peddle things which they are in a position to produce. I therefore suggest that the Local Authorities should go all out to help individuals to set up stalls by preparing neat spaces for them to trade.
6. Lessening the Burden of the Ordinary People. The Federal Budget should allocate sufficient funds to the Local Authorities so that these LAs are not tempted to raise fees and charges during a recession just because they themselves are having a hard time with their finances. By passing their financial problems down to the general public, the authorities which are part of the government are acting as bullies instead of civil servants to the people. The ridiculously exorbitant fines imposed on small traffic offences, for example, is a disgrace to the government.
What is Operating, What is Development
As Keynes would argue, by the time you have sorted out your conceptual problem, society would have suffered untold miseries by the loss of jobs and incomes. It is far more important to act according to one's common sense and compassion to alleviate suffering rather than to be intellectually correct. There is a mental block in the way we are responding to the current global crisis and my suggestions are to show how some of the inadequacies may be overcome.
At the very centre of the operation to save the national economy is the Federal Budget. I believe the Federal Budget should be looked at differently in order for us to be able to get ourselves out of this quandry.
Structure of the Federal Budget
The Federal Budget is structured in such a way that Federal Revenue is used first to fund Federal Operating Expenditure, with leftover to fund Federal Development Expenditure. If the Development Fund is insufficient, it is deemed alright to fund Federal Development Expenditure by issuing debt because development expenditure should be on development projects which are expected to earn a return in the future and earn the government future revenue.
Human Capital as Infrastructure
We are caught up by the idea that infrastructure is all brick and mortar - roads and school buildings - that we tend to favour the construction sector at the expense of all the other sectors, which are many.
1. Maintenance. Maintenance is regarded as an operating expense. This means that once an allocation is made in the Development Budget to build an infrastructure, the matter is usually left at that, with no attendant allocations made for the necessary and essential maintenance expenses. In economics, maintenance is considered as replacement investment, to mend the wear and tear. I suggest that the cost of all Development Projects should include replacement investment for maintenance.
2. Human Capital. When the Budget allocates funds for education projects, allocation should also be made for new teachers, trainers and lecturers. Human capital does not reside in buildings but in people and we must take care of the human repository of our national human and intellectual capital. The bodies and training and output of the education sector should be considered as capital expenditure, not operating.
3. Law and Order and Security. Law and order and security of the nation is important for its peace and harmony. There may be a preponderance of the Budget on the hardware, but equal emphasis should be made on the personnel. By not having enough bodies and sufficiently trained policemen and soldiers, we open our society to fear from internal and external sources. We should have proper guard of our coastline as well.
4. Cultural Capital. With the corporate world is suffering from the aftermath of a wild party, and as the economy rests, we now have the time and space to rebuild our cultural capital which we have unfortunately left unattended for too long. The Federal Budget should allocate funds to all the Local Authorities throughout the nation for them to organise culture-related economic activities which are likely to be centred on the arts. Let a thousand cultures bloom.
5. Hawking and Small Businesses. By far one of the most effective ways for individuals to counter the effects of the global economic slowdown is for them to have the opportunity to use a little capital but a lot of ingenuity and hard work and sweat to peddle things which they are in a position to produce. I therefore suggest that the Local Authorities should go all out to help individuals to set up stalls by preparing neat spaces for them to trade.
6. Lessening the Burden of the Ordinary People. The Federal Budget should allocate sufficient funds to the Local Authorities so that these LAs are not tempted to raise fees and charges during a recession just because they themselves are having a hard time with their finances. By passing their financial problems down to the general public, the authorities which are part of the government are acting as bullies instead of civil servants to the people. The ridiculously exorbitant fines imposed on small traffic offences, for example, is a disgrace to the government.
What is Operating, What is Development
As Keynes would argue, by the time you have sorted out your conceptual problem, society would have suffered untold miseries by the loss of jobs and incomes. It is far more important to act according to one's common sense and compassion to alleviate suffering rather than to be intellectually correct. There is a mental block in the way we are responding to the current global crisis and my suggestions are to show how some of the inadequacies may be overcome.
Friday, February 20, 2009
The Middle Class - The Great Leveller
The Middle Class is the great leveller of income and wealth. (See "Burgeoning Bourgeoisie" Special Report by The Economist Friday 20th February 2009 here. )
The Middle Class is created through trade and commerce, fully educated about the world and is of the world. By the sweat of its brows, the Middle Class pushes forward from nothing but the shirt on his back to save and acquire basic assets such as a house and a car and education for his children. In this way, the assets of one generation is passed on to the next, through careful handling of money and finance, prudence and frugality, honesty and hard work.
The Middle Class is where the Coolie Class aspires to. The Coolie Class is disadvantaged by the lack of choice of occupation and is restricted to specific dead-end employment. The Coolie Class can only make ends meet, and sickness is a potential ticket to poverty. Without a house or a car, the Coolie Class can still strive to save and gather all the pennies and send their children to school and beat them until they pass all their exams.
The privileged by way of history evolved to become the Political Class which is an economic class by itself for it has the potential to amass fortunes through the abuse of political power (as a rat which falls into the rice bag). Politics is not seen as a duty to govern for the sake of the nation but to take advantage of for economic gains. Such members of the Political Class have no qualms about wrecking the whole social and economic structure just so as to hold on to power for as long as society allows them to do so.
Some members of the Middle Class may try to join the Political Class with the purpose keeping politicians honest. By their very motivation, they are not part of the Elite. The Middle Class in politics brings with them the Middle Class ethics of hard work, honesty, and be of service to all and sundry, only to be floored by mercenaries of the Elite. (But some of the members of the Middle Class could be traitors - especially those who have been professionally trained to disregard the pain they inflict on others in the belief that they are doing good.)
But my point is that it is the Middle Class thinking that is the reason for many of us calmouring for education to be key investment that the government must make for the society and the country during such a trying time. With education, young people can contribute to building the society that they have inherited (although some may wish to disinherit themselves by trying to destroy it). With education, the unemployed can only travel the world in search of a proper occupation. This is for those of the Middle Class who have been taught to depend on themselves, to fend for themselves, to pull themselves up by their own bootstraps. With education, those who have been transported on a conveyor belt on a magic mystery tour will find themselves dumped when the conveyor stops; the consolation is that at least they have been endowed with the elements of a basis for finding where their bootstraps are.
It is not strange that the Middle Class is versatile and mobile. Because they have sweated for the little assets they own, they are always on the lookout for a safe place to deposit their little fortunes. This is where the political climate comes in. There is where the social infrastructure comes in. This is where the Political Class plays a crucial part in determining the investment climate of the country. If the Political Class cannot see beyond their fat tummies, then the economy will face a hallowing of the Middle Class and be left with the Coolie Class to deal with. (Do not therefore be dismayed if the Political Class try to romance the Coolie Class by harping on the good old days when the sultans ruled absolutely over the masses.)
We should all be Middle Class and be the same as everybody else.
The Middle Class is created through trade and commerce, fully educated about the world and is of the world. By the sweat of its brows, the Middle Class pushes forward from nothing but the shirt on his back to save and acquire basic assets such as a house and a car and education for his children. In this way, the assets of one generation is passed on to the next, through careful handling of money and finance, prudence and frugality, honesty and hard work.
The Middle Class is where the Coolie Class aspires to. The Coolie Class is disadvantaged by the lack of choice of occupation and is restricted to specific dead-end employment. The Coolie Class can only make ends meet, and sickness is a potential ticket to poverty. Without a house or a car, the Coolie Class can still strive to save and gather all the pennies and send their children to school and beat them until they pass all their exams.
The privileged by way of history evolved to become the Political Class which is an economic class by itself for it has the potential to amass fortunes through the abuse of political power (as a rat which falls into the rice bag). Politics is not seen as a duty to govern for the sake of the nation but to take advantage of for economic gains. Such members of the Political Class have no qualms about wrecking the whole social and economic structure just so as to hold on to power for as long as society allows them to do so.
Some members of the Middle Class may try to join the Political Class with the purpose keeping politicians honest. By their very motivation, they are not part of the Elite. The Middle Class in politics brings with them the Middle Class ethics of hard work, honesty, and be of service to all and sundry, only to be floored by mercenaries of the Elite. (But some of the members of the Middle Class could be traitors - especially those who have been professionally trained to disregard the pain they inflict on others in the belief that they are doing good.)
But my point is that it is the Middle Class thinking that is the reason for many of us calmouring for education to be key investment that the government must make for the society and the country during such a trying time. With education, young people can contribute to building the society that they have inherited (although some may wish to disinherit themselves by trying to destroy it). With education, the unemployed can only travel the world in search of a proper occupation. This is for those of the Middle Class who have been taught to depend on themselves, to fend for themselves, to pull themselves up by their own bootstraps. With education, those who have been transported on a conveyor belt on a magic mystery tour will find themselves dumped when the conveyor stops; the consolation is that at least they have been endowed with the elements of a basis for finding where their bootstraps are.
It is not strange that the Middle Class is versatile and mobile. Because they have sweated for the little assets they own, they are always on the lookout for a safe place to deposit their little fortunes. This is where the political climate comes in. There is where the social infrastructure comes in. This is where the Political Class plays a crucial part in determining the investment climate of the country. If the Political Class cannot see beyond their fat tummies, then the economy will face a hallowing of the Middle Class and be left with the Coolie Class to deal with. (Do not therefore be dismayed if the Political Class try to romance the Coolie Class by harping on the good old days when the sultans ruled absolutely over the masses.)
We should all be Middle Class and be the same as everybody else.
Consumption & Service Tax
There is an anomaly in the thinking on taxation in relation to the economic activities of production and consumption.
It used to be fashionable to think that production is the better thing to happen in the economy and therefore the income tax was seen to be undesirable because it supposedly discourages production. Hence, the service tax was invented with the objective of discouraging consumption so that more resources would be released for production, by the government from the service tax collected and the public by the amount of consumption discouraged.
Now, it is fashionable to think that consumption is the better thing to do for the melting economy because there is fallout in demand.
If the policy objective is to increase consumption, then the service tax should be reduced or abolished.
It used to be fashionable to think that production is the better thing to happen in the economy and therefore the income tax was seen to be undesirable because it supposedly discourages production. Hence, the service tax was invented with the objective of discouraging consumption so that more resources would be released for production, by the government from the service tax collected and the public by the amount of consumption discouraged.
Now, it is fashionable to think that consumption is the better thing to do for the melting economy because there is fallout in demand.
If the policy objective is to increase consumption, then the service tax should be reduced or abolished.
Thursday, February 19, 2009
Maintaining Confidence
How does one maintain confidence in the face of disaster?
If there is a tsunami, or a massive outback bush fire, or a financial meltdown or an incapacitation of the economy or a massive heart attack, the correct posture should not be one of as if it is not a serious matter.
The correct posture should be to find out exactly what is wrong - to get as much data and information as possible, analyse them and then try to come up with a logical conclusion and a course of action.
Not only should more data and information be analysed out for the authorities, but those data and information should be made public so that public has an idea of the situation and respond accordingly in their own way.
I wonder whether what happened to Pompeii was because of the policy on managing confidence so that the public did not panic and lived as if today would be like yesterday.
If there is a tsunami, or a massive outback bush fire, or a financial meltdown or an incapacitation of the economy or a massive heart attack, the correct posture should not be one of as if it is not a serious matter.
The correct posture should be to find out exactly what is wrong - to get as much data and information as possible, analyse them and then try to come up with a logical conclusion and a course of action.
Not only should more data and information be analysed out for the authorities, but those data and information should be made public so that public has an idea of the situation and respond accordingly in their own way.
I wonder whether what happened to Pompeii was because of the policy on managing confidence so that the public did not panic and lived as if today would be like yesterday.
Monday, February 16, 2009
Confidence & Optimism: Policy
There is a difference between confidence and optimism. Confidence is usually quiet, but your enemies will call you arrogant. Optimism is confidence with enthusiasm, with a tendence to act because the future is expected to be better than today.
For an individual, confidence comes from inner strength - moral values, spiritual enlightenment. Individual optimism comes from the feeling of one's ability to perform well in the coming environment.
For the nation, confidence and optimism is the result of policy. The people feel confident when they know they have a right to belong in the country regardless of the circumstances. The people feel optimistic when they can what they like in the country, within the bounds of the usual individual limitations traded off in any civilised society.
Confidence and optimism becomes an issue in a country when the citizens are differentiated. Like any differentiated product in a market economy, there is a competition for a higher value, based on certain characteristics which the promoters may wish to highlight. When intrinsically homogeneous products, like washing power, are differentiated, the only method of differentiation is branding. This is where promotion and advertising. The differentiation are purely in the minds of those who would benefit from the branding, and they are the politicians. The ordinary men and women which, in this example, are the homogoneous washing power, can only feel bewildered by the sharp differentiation they may been made to realise among themselves that they may even begin to believe in that differentiation in due course. This is treading on dangerous ground.
Sensible governments, as we have seen in the civilised world, have placed great emphasis on the commonness of people. It is this commonness of people that gives rise to the commonwealth of man, a concept I am dismayed that even our more eminent political leaders may have failed to understand. It is the working together of the common people among ourselves that we all share a common future, and depending on what we do and how we do them, a better common future.
One of the greatest failures of the Malaysian economy - and society - is the segregation of the various business communities such that each has short-changed themselves by their failure to open up and trade with each other. This works against the law of economics, and the consequences can only be a degradation in efficiency and competitiveness against the rest of the world.
Strangely, thought not unexpectedly, within such a divided economy, it seems acceptable to bring barbarians within our midst while we refuse to co-operate to work among ourselves. We make a big deal out of the promotion of foreign direct investments, while we are happy to strangle our own home-grown investors through all kinds of economic restrictions.
The result of this misguided policy on investment - the preference of foreign to local - has brought our economy to a hugely mis-structured economy where our graduates are deemed useless. FDIs want to hire cheap and half-thinking individuals so that wages can be kept low. The elite pump primed themselves with construction projects wish hires only illiterate or semi-illiterate. There is no adequate home-grown investment which can only grow through productivity gains and innovation. We are not stuck as a middle-income economy for no reason.
While the deterioration of our education system is a phenomenon to lament - which only the agents of the deterioration can only sing their own phrases - it is not an entirely hopeless situation. Our people, as a result of our diversity, are well-educated in the world outside; where the formal education system may be a near-failure, the world outside the local universities is the school of hard knocks. Some of our chosen geniuses have been knocked down really hard.
The only thing that we all need to learn, including our children, is to have an openness of the mind, so that we can see things as they are for ourselves, rather than believing in what other people may tell us. Learning to think is the only education we need, regardless of the fields of study we or our children may choose to undertake. The ability to think and to acquire knowledge of reality is the very basis for innovation of a better world for all of us.
What is the best form of investment in the current economic crisis? When there are not enough jobs, invest in the education of the people - the first-time job seekers, the retrenched and those how currently clinging onto their jobs. The economy has collapsed because it has gone off-tangent. How to redirect the economy? I won't leave it to the politicians; the politicans should leave it to the people - by providing the preconditions for investment, our own investment.
For an individual, confidence comes from inner strength - moral values, spiritual enlightenment. Individual optimism comes from the feeling of one's ability to perform well in the coming environment.
For the nation, confidence and optimism is the result of policy. The people feel confident when they know they have a right to belong in the country regardless of the circumstances. The people feel optimistic when they can what they like in the country, within the bounds of the usual individual limitations traded off in any civilised society.
Confidence and optimism becomes an issue in a country when the citizens are differentiated. Like any differentiated product in a market economy, there is a competition for a higher value, based on certain characteristics which the promoters may wish to highlight. When intrinsically homogeneous products, like washing power, are differentiated, the only method of differentiation is branding. This is where promotion and advertising. The differentiation are purely in the minds of those who would benefit from the branding, and they are the politicians. The ordinary men and women which, in this example, are the homogoneous washing power, can only feel bewildered by the sharp differentiation they may been made to realise among themselves that they may even begin to believe in that differentiation in due course. This is treading on dangerous ground.
Sensible governments, as we have seen in the civilised world, have placed great emphasis on the commonness of people. It is this commonness of people that gives rise to the commonwealth of man, a concept I am dismayed that even our more eminent political leaders may have failed to understand. It is the working together of the common people among ourselves that we all share a common future, and depending on what we do and how we do them, a better common future.
One of the greatest failures of the Malaysian economy - and society - is the segregation of the various business communities such that each has short-changed themselves by their failure to open up and trade with each other. This works against the law of economics, and the consequences can only be a degradation in efficiency and competitiveness against the rest of the world.
Strangely, thought not unexpectedly, within such a divided economy, it seems acceptable to bring barbarians within our midst while we refuse to co-operate to work among ourselves. We make a big deal out of the promotion of foreign direct investments, while we are happy to strangle our own home-grown investors through all kinds of economic restrictions.
The result of this misguided policy on investment - the preference of foreign to local - has brought our economy to a hugely mis-structured economy where our graduates are deemed useless. FDIs want to hire cheap and half-thinking individuals so that wages can be kept low. The elite pump primed themselves with construction projects wish hires only illiterate or semi-illiterate. There is no adequate home-grown investment which can only grow through productivity gains and innovation. We are not stuck as a middle-income economy for no reason.
While the deterioration of our education system is a phenomenon to lament - which only the agents of the deterioration can only sing their own phrases - it is not an entirely hopeless situation. Our people, as a result of our diversity, are well-educated in the world outside; where the formal education system may be a near-failure, the world outside the local universities is the school of hard knocks. Some of our chosen geniuses have been knocked down really hard.
The only thing that we all need to learn, including our children, is to have an openness of the mind, so that we can see things as they are for ourselves, rather than believing in what other people may tell us. Learning to think is the only education we need, regardless of the fields of study we or our children may choose to undertake. The ability to think and to acquire knowledge of reality is the very basis for innovation of a better world for all of us.
What is the best form of investment in the current economic crisis? When there are not enough jobs, invest in the education of the people - the first-time job seekers, the retrenched and those how currently clinging onto their jobs. The economy has collapsed because it has gone off-tangent. How to redirect the economy? I won't leave it to the politicians; the politicans should leave it to the people - by providing the preconditions for investment, our own investment.
Thursday, February 12, 2009
Design Fault in the Modern Economy
Trained economists take a long time to understand the real meaning of "aggregate demand" which the man in the street seems to be able grasp within a second. Why? Because there is a design fault in the modern economy which is predicated on constant investment not consumption.
Consumption
When the man in the street hears the word "demand," he thinks like a businessman. Demand means people come and buy things from you.
If people do not come and buy, there is no demand, and this is bad for business. You must go and get people to buy.
If the problem persists, you can threaten to sack your workers (for you to save costs, rather than for you to bring out the profits you have made all the while to hold up the operation).
You can appeal to the government to cut interest rates, cutting taxes, and cutting contributions to retirement funds - so that people will have more money to spend (which is good for your revenue) and your interest payments will be lower (if you have the cash).
You hope that the ordinary consumers will get more into debt (if the banks are willing to lend in a declining economy) so that you can get your business out of debt.
How long do you think this reliance on the increasing indebtedness to the consumers can go on?
If their current spending level cannot save you in the first place, it is unlikely that their future spending will be any better - given that they may lose their jobs, their share investment has fallen in value, their real estate value has declined and there is less social pressure to buy things to keep up with their neighbours.
It is more likely that prudence and the general fear over the uncertain future will keep them from increasing their spending in the coming weeks and months.
The consumption policy to economic recovery is doomed to failure.
Investment
The secret to keeping the modern economy alive is government spending and investment. Why?
There is a design fault in the modern economy. In the old traditional rural economy, people produce things that they need. Whatever amount of rice they have produced, they share amoung themselves and are content.
In a modern economy, we produce things that we ourselves do NOT need. We produce things we think our people will buy, whether they need it or not.
So the share of the output which would have belonged to us as profit in the traditional economy has now become unsold stock. So we need somebody else to buy the stock so that we can translate that into profit in monetary terms.
The need for this monetary translation of stock to become profit is the design fault of the modern economy.
The only demand that can arise to give this monetary translation of the profit-stock is either government spending on projects or new investments by the private sector.
With investment, the economy uses the excess of the output, over and above current consumption needs, to increase its future output. It is this productivity growth in production by the current generation that will produce the means of employment for the next generation.
It is the abstinence of the current generation in its current consumption that provides the basis for the future expansion of the economy. This abstinence is called savings and innovation is required to convert savings into investment.
The decline in current investment is the result of wrongful production of output by the last generation. Such wrongful unproductive output are things like funny financial instruments (which give unprecedented rewards to their inventors) and real estate (especially those that are involved in luxury rather than necessities) and consumption goods.
Why the production of only consumption goods wrong? (a) Because there is no effort made to invest in future production. (b) Because the workers are never paid sufficiently for them to have the income to spend until businesses can make money, unless the workers get into debt. This is the worst policy option.
The second worse policy option is for the government to spend. But this is necessary and that is the basis of expansionary fiscal policy.
The best policy is for investment to be forthcoming. How? Confidence and optimism.
Consumption
When the man in the street hears the word "demand," he thinks like a businessman. Demand means people come and buy things from you.
If people do not come and buy, there is no demand, and this is bad for business. You must go and get people to buy.
If the problem persists, you can threaten to sack your workers (for you to save costs, rather than for you to bring out the profits you have made all the while to hold up the operation).
You can appeal to the government to cut interest rates, cutting taxes, and cutting contributions to retirement funds - so that people will have more money to spend (which is good for your revenue) and your interest payments will be lower (if you have the cash).
You hope that the ordinary consumers will get more into debt (if the banks are willing to lend in a declining economy) so that you can get your business out of debt.
How long do you think this reliance on the increasing indebtedness to the consumers can go on?
If their current spending level cannot save you in the first place, it is unlikely that their future spending will be any better - given that they may lose their jobs, their share investment has fallen in value, their real estate value has declined and there is less social pressure to buy things to keep up with their neighbours.
It is more likely that prudence and the general fear over the uncertain future will keep them from increasing their spending in the coming weeks and months.
The consumption policy to economic recovery is doomed to failure.
Investment
The secret to keeping the modern economy alive is government spending and investment. Why?
There is a design fault in the modern economy. In the old traditional rural economy, people produce things that they need. Whatever amount of rice they have produced, they share amoung themselves and are content.
In a modern economy, we produce things that we ourselves do NOT need. We produce things we think our people will buy, whether they need it or not.
So the share of the output which would have belonged to us as profit in the traditional economy has now become unsold stock. So we need somebody else to buy the stock so that we can translate that into profit in monetary terms.
The need for this monetary translation of stock to become profit is the design fault of the modern economy.
The only demand that can arise to give this monetary translation of the profit-stock is either government spending on projects or new investments by the private sector.
With investment, the economy uses the excess of the output, over and above current consumption needs, to increase its future output. It is this productivity growth in production by the current generation that will produce the means of employment for the next generation.
It is the abstinence of the current generation in its current consumption that provides the basis for the future expansion of the economy. This abstinence is called savings and innovation is required to convert savings into investment.
The decline in current investment is the result of wrongful production of output by the last generation. Such wrongful unproductive output are things like funny financial instruments (which give unprecedented rewards to their inventors) and real estate (especially those that are involved in luxury rather than necessities) and consumption goods.
Why the production of only consumption goods wrong? (a) Because there is no effort made to invest in future production. (b) Because the workers are never paid sufficiently for them to have the income to spend until businesses can make money, unless the workers get into debt. This is the worst policy option.
The second worse policy option is for the government to spend. But this is necessary and that is the basis of expansionary fiscal policy.
The best policy is for investment to be forthcoming. How? Confidence and optimism.
Wednesday, February 11, 2009
Protection: Where To Hide
How does one protect oneself in modern life?
The modern life is often seen to be perilous and most of us feel inclined towards a need for protection.
Insurance used to be most acceptable form of protection from unforeseen financial circumstances. Unforeseen bodily impairment leading to the explusion from the economic mainstream is a fear that people could be tempted to impart regular sums of money on the promise of a token sum on the eventuality. Death is pretty foreseeable although not precisely, so an insurance for death is very much a intertemporal savings arrangement for the middle class. (For the poor, it is more a case of overcoming the fear of having not enough money for proper burial). From this basic ideas, all kinds of fear are promoted by the insurance industry, such as education for the children, illnesses, old age, and I think somebody has come up with the insurance for unemployment (which is a brillant idea, the one all of us really need, if the returns are sufficient).
Education is often seen to be a universal insurer in the belief that a certified 3-4 years spent in an institution of higher learning is sufficient ground for keeping a toe in the doorway when times are hard. For any business needs a talent to take one of out a quagmire. This usually applies to the case of a business with no active owners and a hired hand is expected to bring in the profits, usually with a share to the manager, but at the expense of the workforce who will be often shakened and stirred, and spit out when times are bad. For an owner-operator, the entrepreneur of course sees himself as the master strategist and any hired hand is but an underling to do his bidding.
In the civil service, the ministers are the masters and all bureaucrats are but servants not to the people but to the ministers. For the top civil servants to be able to counter any unreasonable requests of the ministers, they really must be men of integrity (and that integrity must come from their knowledge and their wisdom); failing which, the civil servants are nothing but peons. It is an insurance for both the ministers and the civil servants when they collude to fool the people - but then the truth will always prevail even if belatedly. How do we protect ourselves from bad government? Bad government comes from the lack of wisdom. Strong leadership can lead to bad things, and good leadership without power is a lame duck. I rather a good system in place first and then staff it with the right kind of people.
In everyday life, we all live dangerously. Harm and death await us at every corner. We go about our daily chores like bubbles jumping up and down until we pop and disappear. There is no certainty, and out of this constant fear about the unknown future, we try to manage our immediate environment. In everyday society, this is called politics - the politics of fear, war, and control. Mobilising the power of the mob is the basis of political power. We need a strong leadership that is good, and restrained. A strong leadership that incite the use of violence to control and weld power is the way of the gangster. When gangsterism arises in politics, the countervailing force must be the exercise of the power of law and order by the government. It is the fear of strangers that people choose to congregate in villages and towns and nations. When society does not understand its own people and consider each other strange, we have the ingredients for civil war.
It is modern wisdom that a life is worth the same as all lives. To think of dispensing of someone's life so that one can live is the thinking of a selfish person. To think of dispensing of one's own life so that others may live is usually considered a hero by those who benefited from such actions. Both are incorrect for their extremism.
At the end of the day, the only way to protect oneself from unhappiness is not to fear death but also not to love death. We should use our brains to express ourselves and solve problems which must surely be technical in nature. To charge every issue with emotion is dangerous in an era of mass communication and miscommunication. The only way to protect all of us is through clear thinking and reconciliation, no matter how painful emotionally.
The modern life is often seen to be perilous and most of us feel inclined towards a need for protection.
Insurance used to be most acceptable form of protection from unforeseen financial circumstances. Unforeseen bodily impairment leading to the explusion from the economic mainstream is a fear that people could be tempted to impart regular sums of money on the promise of a token sum on the eventuality. Death is pretty foreseeable although not precisely, so an insurance for death is very much a intertemporal savings arrangement for the middle class. (For the poor, it is more a case of overcoming the fear of having not enough money for proper burial). From this basic ideas, all kinds of fear are promoted by the insurance industry, such as education for the children, illnesses, old age, and I think somebody has come up with the insurance for unemployment (which is a brillant idea, the one all of us really need, if the returns are sufficient).
Education is often seen to be a universal insurer in the belief that a certified 3-4 years spent in an institution of higher learning is sufficient ground for keeping a toe in the doorway when times are hard. For any business needs a talent to take one of out a quagmire. This usually applies to the case of a business with no active owners and a hired hand is expected to bring in the profits, usually with a share to the manager, but at the expense of the workforce who will be often shakened and stirred, and spit out when times are bad. For an owner-operator, the entrepreneur of course sees himself as the master strategist and any hired hand is but an underling to do his bidding.
In the civil service, the ministers are the masters and all bureaucrats are but servants not to the people but to the ministers. For the top civil servants to be able to counter any unreasonable requests of the ministers, they really must be men of integrity (and that integrity must come from their knowledge and their wisdom); failing which, the civil servants are nothing but peons. It is an insurance for both the ministers and the civil servants when they collude to fool the people - but then the truth will always prevail even if belatedly. How do we protect ourselves from bad government? Bad government comes from the lack of wisdom. Strong leadership can lead to bad things, and good leadership without power is a lame duck. I rather a good system in place first and then staff it with the right kind of people.
In everyday life, we all live dangerously. Harm and death await us at every corner. We go about our daily chores like bubbles jumping up and down until we pop and disappear. There is no certainty, and out of this constant fear about the unknown future, we try to manage our immediate environment. In everyday society, this is called politics - the politics of fear, war, and control. Mobilising the power of the mob is the basis of political power. We need a strong leadership that is good, and restrained. A strong leadership that incite the use of violence to control and weld power is the way of the gangster. When gangsterism arises in politics, the countervailing force must be the exercise of the power of law and order by the government. It is the fear of strangers that people choose to congregate in villages and towns and nations. When society does not understand its own people and consider each other strange, we have the ingredients for civil war.
It is modern wisdom that a life is worth the same as all lives. To think of dispensing of someone's life so that one can live is the thinking of a selfish person. To think of dispensing of one's own life so that others may live is usually considered a hero by those who benefited from such actions. Both are incorrect for their extremism.
At the end of the day, the only way to protect oneself from unhappiness is not to fear death but also not to love death. We should use our brains to express ourselves and solve problems which must surely be technical in nature. To charge every issue with emotion is dangerous in an era of mass communication and miscommunication. The only way to protect all of us is through clear thinking and reconciliation, no matter how painful emotionally.
Tuesday, February 10, 2009
Economic Horoscope
Will there be structural adjustments in the economy?
The current global economic crisis is caused by the US means that structural adjustment is badly needed in the US. What does this mean?
1. The US has printed too much money to solve its economic problems which has resulted not in an increase in output but in an increase in prices. The deflation only reduces the money stock and prices to their appropriate levels, and reveals the actual amount of production that is going on in the economy. Hence, the surge in unemployment.
2. The problem of low production in the US has been disguised by the surge in the imports of cheap Chinese products paid for by the printing of the US dollar. At the same time, the export of paper money has allowed the US to overconsume its fair share of the world's production as evidenced by the high level of indebted at the personal and government levels.
3. The solution to the US economic problem is to increase the production of goods, which may have been hampered by high nominal wages caused by the printing of money. US wages may have to fall in order to be able to compete with the wages in China. In other words, the US has to with content with a lower standard of living, even if the US recovers.
There are also structural problems in the Chinese economy, the mirror economy to the US.
1. The Chinese had pursued an economic strategy that was used by the Japanese before and shown to be a failure - mercantilism. The tenet of mercantilism is to export and accumulate foreign reserves - a process that is not self-sustaining. If China wants to export, it must also consume imports. This it has done but not in a bilateral way. China exports to the US but imports from Europe. The closure is for Europe to buy from the US which it tries not to. The problem in the global nexus may be the European Community which has a strong anti-trade sentiment with the US.
2. China first absorbed foreign direct investment from the US to set up plants to export back to the US. With China's open door policy in place for nearly three decades, that FDI had been fully repaid. The Chinese export boom has therefore funded the domestic asset inflation, in shares and property - the boom that was exported by the US printing of money. The collapse of the US economy therefore causes a collapse of the share and property prices in China.
3. The solution is for China to allow old export-oriented companies to collapse, and out of that rubble for new enterprises to come up that cater to the new export markets and new domestic markets. For this to happen, China has to improve on its labour laws, the present ones exploits rural workers. Labour laws on minimum wages and proper contracts for employees mean that there will be increasing recognition of labour as a valuable input to production which therefore warrants a higher wage rate. But China's relative lack of innovation especially in quality may have been overlooked by its low prices, as well as disguised by successes in other areas of the economy, particularly tourism. China should refocus on food production. The only major things China needs to import are raw materials for manufacturing.
The EC may be rather insulated from the global crisis, as a result of its clever politics.
1. The EC as an economic bloc may be working much better than expected. The greater mobility within the EC has created an in-house boom which has fueled its economic optimism. While Europe is also affected by the US financial meltdown, its real economy is intact and so long as the banks continue to lend, the EC will grow but at a very low rate. The EC has protected itself with its stringent import rules, which they probably could have learned from the Japanese. But the Asian penchant for European luxuries especially the new rich Asian class is a boom to the Europeans. Structurally, Europe is in good shape.
What about Malaysia?
1. The Malaysian economy has long suffered from a series of bad policies disguised as successes by the use of heritage petrol money to the extent that the petrol reserve may not be there anymore when we really need it.
2. The Malaysian economy has been destroyed by the nationalisation of economic opportunities and the dispensing of the licence to economic opportunities to the elite has created an economic structure that is lopsided and unstable - in the sense that there has been so much extraction of economic rent at all levels that the underlying support industries are weakened. With economic opportunities coming from patronage, businesses are clear that this is not sustainable and therefore has been bailing out of the economy under the cover the outward investments. Even ostensibly government-linked companies (GLCs) whose mandate is to spearhead the structural change in the economy has joined in the Outward Bound movement, abandoning the more difficult job at home (while they continue monopolistic dominance). The attempt by the government to ensure the profitability of natural monopolies in Malaysia will also spell the doom for local business as all rates of basic infrastructure facilities will be raised to uncompetitive levels. The problem runs in the real sector as well as the banking sector.
3. The way out for Malaysia is to rebuild its entire socio-economic-political profile. Fairness and integrity are key issues that affect confidence, not only in the political system but also in the decision to invest long term in this country by ordinary people - which means it will affect their decision to put their roots, pour in their savings and work to improve the society. Without confidence, there will be no genuine investments - investments in one's homeland - and the weakness of the economy will be shown by the secular decline in the standard of living as the cost of living soars and the currency plunges in value. There is a need for an entire remake of the economy which no stimulus packages no matter how will solve.
Monetary Policy In General. Greenspan has done the world a great disservice by preaching the blessings of keeping monetary policy loose. Now, the world has taken monetary policy off the leash - because monetary expansion was not reined in earlier to keep inflation in check. The inflationary pressures are still there. But unemployment rises, there is a political need to act as if to create jobs. Pouring more liquidity into the system will not allow price adjustment but will keep asset prices high while jobs may not be created.
My conclusion is that this is a good time for economies to take time to formulate policies to restructure their economies by removing distortions and by improving the market mechanism. No more politics.
The current global economic crisis is caused by the US means that structural adjustment is badly needed in the US. What does this mean?
1. The US has printed too much money to solve its economic problems which has resulted not in an increase in output but in an increase in prices. The deflation only reduces the money stock and prices to their appropriate levels, and reveals the actual amount of production that is going on in the economy. Hence, the surge in unemployment.
2. The problem of low production in the US has been disguised by the surge in the imports of cheap Chinese products paid for by the printing of the US dollar. At the same time, the export of paper money has allowed the US to overconsume its fair share of the world's production as evidenced by the high level of indebted at the personal and government levels.
3. The solution to the US economic problem is to increase the production of goods, which may have been hampered by high nominal wages caused by the printing of money. US wages may have to fall in order to be able to compete with the wages in China. In other words, the US has to with content with a lower standard of living, even if the US recovers.
There are also structural problems in the Chinese economy, the mirror economy to the US.
1. The Chinese had pursued an economic strategy that was used by the Japanese before and shown to be a failure - mercantilism. The tenet of mercantilism is to export and accumulate foreign reserves - a process that is not self-sustaining. If China wants to export, it must also consume imports. This it has done but not in a bilateral way. China exports to the US but imports from Europe. The closure is for Europe to buy from the US which it tries not to. The problem in the global nexus may be the European Community which has a strong anti-trade sentiment with the US.
2. China first absorbed foreign direct investment from the US to set up plants to export back to the US. With China's open door policy in place for nearly three decades, that FDI had been fully repaid. The Chinese export boom has therefore funded the domestic asset inflation, in shares and property - the boom that was exported by the US printing of money. The collapse of the US economy therefore causes a collapse of the share and property prices in China.
3. The solution is for China to allow old export-oriented companies to collapse, and out of that rubble for new enterprises to come up that cater to the new export markets and new domestic markets. For this to happen, China has to improve on its labour laws, the present ones exploits rural workers. Labour laws on minimum wages and proper contracts for employees mean that there will be increasing recognition of labour as a valuable input to production which therefore warrants a higher wage rate. But China's relative lack of innovation especially in quality may have been overlooked by its low prices, as well as disguised by successes in other areas of the economy, particularly tourism. China should refocus on food production. The only major things China needs to import are raw materials for manufacturing.
The EC may be rather insulated from the global crisis, as a result of its clever politics.
1. The EC as an economic bloc may be working much better than expected. The greater mobility within the EC has created an in-house boom which has fueled its economic optimism. While Europe is also affected by the US financial meltdown, its real economy is intact and so long as the banks continue to lend, the EC will grow but at a very low rate. The EC has protected itself with its stringent import rules, which they probably could have learned from the Japanese. But the Asian penchant for European luxuries especially the new rich Asian class is a boom to the Europeans. Structurally, Europe is in good shape.
What about Malaysia?
1. The Malaysian economy has long suffered from a series of bad policies disguised as successes by the use of heritage petrol money to the extent that the petrol reserve may not be there anymore when we really need it.
2. The Malaysian economy has been destroyed by the nationalisation of economic opportunities and the dispensing of the licence to economic opportunities to the elite has created an economic structure that is lopsided and unstable - in the sense that there has been so much extraction of economic rent at all levels that the underlying support industries are weakened. With economic opportunities coming from patronage, businesses are clear that this is not sustainable and therefore has been bailing out of the economy under the cover the outward investments. Even ostensibly government-linked companies (GLCs) whose mandate is to spearhead the structural change in the economy has joined in the Outward Bound movement, abandoning the more difficult job at home (while they continue monopolistic dominance). The attempt by the government to ensure the profitability of natural monopolies in Malaysia will also spell the doom for local business as all rates of basic infrastructure facilities will be raised to uncompetitive levels. The problem runs in the real sector as well as the banking sector.
3. The way out for Malaysia is to rebuild its entire socio-economic-political profile. Fairness and integrity are key issues that affect confidence, not only in the political system but also in the decision to invest long term in this country by ordinary people - which means it will affect their decision to put their roots, pour in their savings and work to improve the society. Without confidence, there will be no genuine investments - investments in one's homeland - and the weakness of the economy will be shown by the secular decline in the standard of living as the cost of living soars and the currency plunges in value. There is a need for an entire remake of the economy which no stimulus packages no matter how will solve.
Monetary Policy In General. Greenspan has done the world a great disservice by preaching the blessings of keeping monetary policy loose. Now, the world has taken monetary policy off the leash - because monetary expansion was not reined in earlier to keep inflation in check. The inflationary pressures are still there. But unemployment rises, there is a political need to act as if to create jobs. Pouring more liquidity into the system will not allow price adjustment but will keep asset prices high while jobs may not be created.
My conclusion is that this is a good time for economies to take time to formulate policies to restructure their economies by removing distortions and by improving the market mechanism. No more politics.
Monday, February 9, 2009
Banks & Profitability
In the excesses of the current economic era, the greatest culprits are the banks. Executives pay themselves huge salaries and bonuses while they take entire economies plus all their customers to the cleaners. I agree that their pay should be cut down to size and that their bonuses should be used as part of the insurance money for depositors.
Banks are a monopoly in the flow of the financial resources of the country, very much like the Russian gas pipelines for Europe. Banks can dictate which no ordinary citizen can protest, with the unwitting connivance of the central bank, if the central bank is not wise enough. If central banks are not careful enough, they can agree to give the mandate to banks to add-on all sorts of charges for the customers, not unlike the bills of some private hospitals that can charge you an arm and a leg for a cold.
I do not know the source of the wisdom of the central bank that allow banks to impose high administrative charges onto the costs of funds to arrive at the Base Lending Rate which even banks, despite their marauding tendency, are even ashamed to impose on their customers such that the Average Lending Rate (6.08% pa in 2008) is lower than the BLR (6.70% pa in 2008).
An ALR lower than the BLR must be an embrassment for the managers of a banking system. In theory, the BLR is the best rate that a bank gives to its best customers. The BLR should be like selling almost at cost but with a small margin to cover costs. Customers with excellent credit ratings should be given the BLR. For the average loan rates of banks to fall below the BLR means that the BLR is grossly mispriced and has failed to provide the price reference for the loans market. Maybe the currently pricing of the BLR is in tune with the people's preference for a discount, whether buying decisions are made on the basis of the discount rate regardless of the extent of the initial over-pricing. The mispricing of the BLR is a way to confuse the market.
Technically, in a down economy, the policy concern is to put cash in the hands of savers and lower the cost of borrowing. In a properly structured banking system, this means to lower the cost of funds as that the cost of borrowing can be cut, as the mark-up is already basic and small. In a situation like ours where the mark-up is high, it is possible to maintain the deposit rates while lowering the mark-up so that the lending rate can be lowered.
The average interest rate for fixed deposits was 3.29% pa in 2008 and the savings deposit rate was 1.42% pa. The BLR of 6.70% pa in 2008 was a mark-up of 3.40% over the average fixed deposit rates and 5.28% pa over the savings deposit rate. The ALR of 6.08% pa in 2008 was a mark-up of 2.79% over the average FD rate and 4.66% over the SD rate.
I think the banks, with the approval of the central bank, have done a disservice to the small depositors. The argument may be that small savings depositors are a cost to the banks in terms of the infrastructure, but banks do impose charges for services even to small depositors using the ATM. If the central bank can provide bonds at 5% to senior citizens over 55, a more effective way is to cut the margins of banks. One way is to cut the fat salaries and bonuses of senior executives. There used to be a shortages of senior executives as the number of banks expand. But the consolidation of the banking system into an oligopoly of the chosen few must mean that there is no such shortage.
One reason for a hugh mark-up is to provide the cover for bad loans. In other words, get the good customers to subside the bad customers. This is the sure way to ruin an economy - by lending money for unproductive uses and taxing the productive borrowers. Such an argument may be a cover for the incompetence of bankers, that they do not anymore know how to lend prudently and in a way that is healthy for the economy. This complete loss of perspective has a cost that depositors pay with their poor interest rates and borrowers pay with their higher than necessary loan rates.
Or, is this mispricing of our financial resources a product of bad economic thinking right at the top where it is possible for political leaders to direct bankers to fund privatised projects which may have doubtful economic viability. Has the elite in this way rob the country of its wealth by ruining its whole sense of trust and truth, so that only the dishonest can have a future in this system?
Banks are a monopoly in the flow of the financial resources of the country, very much like the Russian gas pipelines for Europe. Banks can dictate which no ordinary citizen can protest, with the unwitting connivance of the central bank, if the central bank is not wise enough. If central banks are not careful enough, they can agree to give the mandate to banks to add-on all sorts of charges for the customers, not unlike the bills of some private hospitals that can charge you an arm and a leg for a cold.
I do not know the source of the wisdom of the central bank that allow banks to impose high administrative charges onto the costs of funds to arrive at the Base Lending Rate which even banks, despite their marauding tendency, are even ashamed to impose on their customers such that the Average Lending Rate (6.08% pa in 2008) is lower than the BLR (6.70% pa in 2008).
An ALR lower than the BLR must be an embrassment for the managers of a banking system. In theory, the BLR is the best rate that a bank gives to its best customers. The BLR should be like selling almost at cost but with a small margin to cover costs. Customers with excellent credit ratings should be given the BLR. For the average loan rates of banks to fall below the BLR means that the BLR is grossly mispriced and has failed to provide the price reference for the loans market. Maybe the currently pricing of the BLR is in tune with the people's preference for a discount, whether buying decisions are made on the basis of the discount rate regardless of the extent of the initial over-pricing. The mispricing of the BLR is a way to confuse the market.
Technically, in a down economy, the policy concern is to put cash in the hands of savers and lower the cost of borrowing. In a properly structured banking system, this means to lower the cost of funds as that the cost of borrowing can be cut, as the mark-up is already basic and small. In a situation like ours where the mark-up is high, it is possible to maintain the deposit rates while lowering the mark-up so that the lending rate can be lowered.
The average interest rate for fixed deposits was 3.29% pa in 2008 and the savings deposit rate was 1.42% pa. The BLR of 6.70% pa in 2008 was a mark-up of 3.40% over the average fixed deposit rates and 5.28% pa over the savings deposit rate. The ALR of 6.08% pa in 2008 was a mark-up of 2.79% over the average FD rate and 4.66% over the SD rate.
I think the banks, with the approval of the central bank, have done a disservice to the small depositors. The argument may be that small savings depositors are a cost to the banks in terms of the infrastructure, but banks do impose charges for services even to small depositors using the ATM. If the central bank can provide bonds at 5% to senior citizens over 55, a more effective way is to cut the margins of banks. One way is to cut the fat salaries and bonuses of senior executives. There used to be a shortages of senior executives as the number of banks expand. But the consolidation of the banking system into an oligopoly of the chosen few must mean that there is no such shortage.
One reason for a hugh mark-up is to provide the cover for bad loans. In other words, get the good customers to subside the bad customers. This is the sure way to ruin an economy - by lending money for unproductive uses and taxing the productive borrowers. Such an argument may be a cover for the incompetence of bankers, that they do not anymore know how to lend prudently and in a way that is healthy for the economy. This complete loss of perspective has a cost that depositors pay with their poor interest rates and borrowers pay with their higher than necessary loan rates.
Or, is this mispricing of our financial resources a product of bad economic thinking right at the top where it is possible for political leaders to direct bankers to fund privatised projects which may have doubtful economic viability. Has the elite in this way rob the country of its wealth by ruining its whole sense of trust and truth, so that only the dishonest can have a future in this system?
Thursday, February 5, 2009
Growth with Investment & Small Consumption
It is possible to grow the economy with just investment and nominal amounts of consumption. In fact, this is how a modern urban society is created.
It is not necessary to focus too much on current consumption in order that the economy must grow. The focus on current consumption is necessarily only when the economy is structured to concentrate on the production of consumer goods. This was the Japanese economic model and, in the last decade or so, the Chinese economic model.
But in order that the economy is able to sustain its growth for a longer time, there is a need to focus on investment. Investment is that part of the current resource that you have which you have decided not to simply consume away (because you have simple needs) and instead used to improve future production (because you feel you will be unable to produce for yourself in the future or because you will have more dependents to take care of).
You could develop your current resources to the gathering of know-how, exploring the environment or just experimenting to find new ways - to produce things for which you think there will be a demand in future, things that people will need.
By focusing on saving current resources from current consumption and investing those savings on projects that will bear fruit in future, we create a society where people are hard at work on their little projects with great curiosity of how to come up with new ideas and putting those ideas into practice. There will be excitement about developing a better world for our children.
If instead we are focusing our current resources on current consumption - which may be necessary in cases where there is constant starvation because of high population growth or poor production technology - then society will be caught in a poverty trap. (Poverty in the modern sense of the word, as in this sense, probably all of history is caught in poverty.)
But we have become enlightened with new possibilities because of our ability to think out of the religious box and into the scientific box. Now, we may have to jump out of the scientific box into new boxes which are now becoming favourites such as the environmentally-friendly box. Whatever it may be, there is a lot of investing for all of us to do and it is better we spend time dreaming and doing rather than eating and grow fat and sick.
It is not necessary to focus too much on current consumption in order that the economy must grow. The focus on current consumption is necessarily only when the economy is structured to concentrate on the production of consumer goods. This was the Japanese economic model and, in the last decade or so, the Chinese economic model.
But in order that the economy is able to sustain its growth for a longer time, there is a need to focus on investment. Investment is that part of the current resource that you have which you have decided not to simply consume away (because you have simple needs) and instead used to improve future production (because you feel you will be unable to produce for yourself in the future or because you will have more dependents to take care of).
You could develop your current resources to the gathering of know-how, exploring the environment or just experimenting to find new ways - to produce things for which you think there will be a demand in future, things that people will need.
By focusing on saving current resources from current consumption and investing those savings on projects that will bear fruit in future, we create a society where people are hard at work on their little projects with great curiosity of how to come up with new ideas and putting those ideas into practice. There will be excitement about developing a better world for our children.
If instead we are focusing our current resources on current consumption - which may be necessary in cases where there is constant starvation because of high population growth or poor production technology - then society will be caught in a poverty trap. (Poverty in the modern sense of the word, as in this sense, probably all of history is caught in poverty.)
But we have become enlightened with new possibilities because of our ability to think out of the religious box and into the scientific box. Now, we may have to jump out of the scientific box into new boxes which are now becoming favourites such as the environmentally-friendly box. Whatever it may be, there is a lot of investing for all of us to do and it is better we spend time dreaming and doing rather than eating and grow fat and sick.
Wednesday, February 4, 2009
No, Not Household Demand - Private Investments!
I don't think that getting the consumers to spend is the answer to the current economic woes - not even in Malaysia.
You get consumers to spend because your diagnosis of the current problem is that it is the result of a temporary drop in the buying spree of the people. Maybe interest rates are on the high side so you drop them. Maybe taxes are on the high side so you cut them. Maybe banks have no money to lend so you inject liquidity into the system by cutting the SRR (Statutory Reserve Requirement). But the current problem is caused by none of the above.
The pivotal problem is the bursting of the asset bubble in the US. The bubble burst because banks have been lending money for people to spend until they cannot justify lending to them anymore - as evidenced by the high loandefault rate. People had been spending based on borrowings out of the inflated prices of real estate and stocks. With the bubble burst, people become indebted and hence cannot spend anymore. Banks become insolvent as their lending philosophy is found to be unsound. There was a lack of prudent. Companies close down because the buying stops. The rescue in the US is first to prevent the banks from collapsing - which would otherwise jeopardise the entire economic system. The second step is for banks to start lending again - and certainly it will not be by way of consumer spending. The banks have learnt their lessons. But the government can put some money in pockets through tax cuts - or better still direct handouts or unemployment benefits. But the proper rescue must come from a recovery of investment by businesses so that they will need to rehire.
In Malaysia, the problem is that commodity prices have dropped and this makes the harvesting of our commodities economically not viable. The problem is the cost of growing and the inefficiency of the technology we use. The agriculture suffers from lack of technological innovation. The low commodity prices will have to make them move up the technology curve. If not, then agriculture in Malaysia is a sunset industry.
Our industrial sector has hollowed out. Not only foreigners but even our local flagships which are supposed to champion the Malaysian economy by spearheading the industries have also moved out to foreign pastures - in the hope of earning easy money like they have been nurtured at home in their formative years. The only industries left are those that feed onto the higher operations in China for exports to the US. These small companies are the ones that are being hit and they are the ones that will be closing after the festivities. Tax cuts won't help if you are bankrupt. You cannot get households to consume half-made hard disks.
The services sector is such a shame. You have the unemployed who become self-employed because there is money to be made in speculation - in shares and in property. This was the biggest game in town and everybody has been quite happy to do little for big gains. The global meltdown destroyed this game - for the moment - so these speculators can rely on their past earnings, if they have not lost all in the crash already. But most will tighten their belts because they are now asset rich but cash poor. So, there is nothing that one can do for this groups except to join in their prayers that the market will rise again.
Of all the above factors, the biggest issue is the sudden fall in aggregate investment in this country despite having a high savings rate. The sole cause of poor investment is a loss of confidence in the ability of the government to govern properly by ensuring that those who invest can take all their earnings. The government can tax, like other governments, to provide the safety net for the old and incapacitated - but not to enrich the elite or themselves. So long as the government continues to build projects that lead nowhere, no private sector person will invest in a business that they cannot win either way. The job of the government today is indeed to stimulate the economy. Government deficit spending is helpful, but it is important for the government to re-establish private sector confidence in this economy as the place where fortunes can be made by those who choose to work hard. This is why there is constant flux in the election results - because the people cannot seem to be able to find politicians whom they can have confidence in in looking after their (the people's) basic welfare.
Where, then, can the people find confidence? Religion is a good fallback - with everybody answering for themselves. There is no surprise of the resurgence of religion-centred parties. Abstract concepts such as justice is amorphous, for it begs the question: Justice for who?
At the end of the day, we may just need people who are technically trained and who know how to build systems. It is the system of institutions where each is given the power to move forward while another is given the power to counter-balance, so that the whole system will somehow trudge along dispassionately dispensing justice and injustice to those who are caught by the perfection and inadequacy of the system. When something goes wrong, fix the system. This removes the invisible hands of the elite including the politicians from the system which is a good thing.
When the rules are properly set, we can expect a good game to be played by all participants and can even be enjoyed by those on the wayside including tourists. Only that we need good umpires.
In Malaysia, somebody has run off with the ball insofar as the wealth of this country is concerned. We have failed to redistribute wealth; somebody has managed to hijack it.
You get consumers to spend because your diagnosis of the current problem is that it is the result of a temporary drop in the buying spree of the people. Maybe interest rates are on the high side so you drop them. Maybe taxes are on the high side so you cut them. Maybe banks have no money to lend so you inject liquidity into the system by cutting the SRR (Statutory Reserve Requirement). But the current problem is caused by none of the above.
The pivotal problem is the bursting of the asset bubble in the US. The bubble burst because banks have been lending money for people to spend until they cannot justify lending to them anymore - as evidenced by the high loandefault rate. People had been spending based on borrowings out of the inflated prices of real estate and stocks. With the bubble burst, people become indebted and hence cannot spend anymore. Banks become insolvent as their lending philosophy is found to be unsound. There was a lack of prudent. Companies close down because the buying stops. The rescue in the US is first to prevent the banks from collapsing - which would otherwise jeopardise the entire economic system. The second step is for banks to start lending again - and certainly it will not be by way of consumer spending. The banks have learnt their lessons. But the government can put some money in pockets through tax cuts - or better still direct handouts or unemployment benefits. But the proper rescue must come from a recovery of investment by businesses so that they will need to rehire.
In Malaysia, the problem is that commodity prices have dropped and this makes the harvesting of our commodities economically not viable. The problem is the cost of growing and the inefficiency of the technology we use. The agriculture suffers from lack of technological innovation. The low commodity prices will have to make them move up the technology curve. If not, then agriculture in Malaysia is a sunset industry.
Our industrial sector has hollowed out. Not only foreigners but even our local flagships which are supposed to champion the Malaysian economy by spearheading the industries have also moved out to foreign pastures - in the hope of earning easy money like they have been nurtured at home in their formative years. The only industries left are those that feed onto the higher operations in China for exports to the US. These small companies are the ones that are being hit and they are the ones that will be closing after the festivities. Tax cuts won't help if you are bankrupt. You cannot get households to consume half-made hard disks.
The services sector is such a shame. You have the unemployed who become self-employed because there is money to be made in speculation - in shares and in property. This was the biggest game in town and everybody has been quite happy to do little for big gains. The global meltdown destroyed this game - for the moment - so these speculators can rely on their past earnings, if they have not lost all in the crash already. But most will tighten their belts because they are now asset rich but cash poor. So, there is nothing that one can do for this groups except to join in their prayers that the market will rise again.
Of all the above factors, the biggest issue is the sudden fall in aggregate investment in this country despite having a high savings rate. The sole cause of poor investment is a loss of confidence in the ability of the government to govern properly by ensuring that those who invest can take all their earnings. The government can tax, like other governments, to provide the safety net for the old and incapacitated - but not to enrich the elite or themselves. So long as the government continues to build projects that lead nowhere, no private sector person will invest in a business that they cannot win either way. The job of the government today is indeed to stimulate the economy. Government deficit spending is helpful, but it is important for the government to re-establish private sector confidence in this economy as the place where fortunes can be made by those who choose to work hard. This is why there is constant flux in the election results - because the people cannot seem to be able to find politicians whom they can have confidence in in looking after their (the people's) basic welfare.
Where, then, can the people find confidence? Religion is a good fallback - with everybody answering for themselves. There is no surprise of the resurgence of religion-centred parties. Abstract concepts such as justice is amorphous, for it begs the question: Justice for who?
At the end of the day, we may just need people who are technically trained and who know how to build systems. It is the system of institutions where each is given the power to move forward while another is given the power to counter-balance, so that the whole system will somehow trudge along dispassionately dispensing justice and injustice to those who are caught by the perfection and inadequacy of the system. When something goes wrong, fix the system. This removes the invisible hands of the elite including the politicians from the system which is a good thing.
When the rules are properly set, we can expect a good game to be played by all participants and can even be enjoyed by those on the wayside including tourists. Only that we need good umpires.
In Malaysia, somebody has run off with the ball insofar as the wealth of this country is concerned. We have failed to redistribute wealth; somebody has managed to hijack it.
Money, Politics & Business
While we teach our children to respect money and be frugal, what do the grown-ups do?
Grown-ups become ostentatious in their spending as they grab whatever that comes along, feeling justified that they can do whatever they want with their money regardless of others. In the lonely world of theirs, they feel that they need for money to be happy; and, if they do not need the money, they justified it by saying that making money is their way of life which defines the very essence of their existence.
But why do we teach our children to respect money and be frugal. Frugality is not stinginess. Frugality is about not wasting your resources, now throwing about whatever seems to you to be in abundance at the moment. Frugality is about the consciousness of the importance of money in the way we live. Money has an economic role and it must stay that way. To have sufficient money so that we do not have to worry about money matters is the point; to have plenty of money and let money define us is stupidity. We should rise above money issues and focus on the real stuffs of life.
In the economy, money has a role to play and the regulation of money and the task of making sure that money does not misbehave is the job of the central bank. There is a certain failure in this job by central banks around the world. The destruction of money started with the de-regulation of money on the assumption that money will take care of itself. Money is now a drug that has gotten out of control.
In the real world, politicians and businessmen have colluded to share the same mistress called money. Polticians are in power to stay in power and will say and do anything to remain so, even after their expiry dates. Businessmen in power will say and do anything to stay in economic power, but the market will bring them out after their expiry dates even if they refuse to step down. We have our own experience when politicians think they can do economics and run the economy like a political system until their plans fall asunder when the market decides not to play that game anymore - then the politicians blame the market players. It is as if the banker of a card game says that he controls the cards and everybody must play to lose so that the banker can win. Such arrogance comes from tenure, so there must be an enforced expiry date for top politicians - the shorter it should be further up the political power structure.
There is also a need to divorce politicians from money because both are power tools and to have one person or a group of persons controlling all the levels of power is a danger for both the economic and political systems.
Politicians have controlled the economy by nationalising all economic opportunities which they will then dispense at their own discretion. This is why there is so much concern in this country over the issue of tenders, licensing and quotas. We have to build systems of operations for the economy that can be decentralised so that the man and woman in the street can have access to basic economic opportunities by dealing with their local officials, rather than having the big politicians making deals with or becoming big businesses themselves and then retailing their deals down to the ground. The politico-economic system the defines the distribution of wealth nationwide.
The economic system becomes inefficient and not competitive when those with the best business acumen do not have the chance to play direct while the incompetents block the view for everyone. This is why many people have opted not to play this game and have gone on to different playing fields.
The world economic failure is the result of money taking a centre stage in the political and economic game. The obsession with money has everybody mesmised into a standstill. "Now that we have money, what do we do?" There is a poverty of ideas and innovation. The reason the world economy is standing still because banks and businesses do not know what to invest in anymore. The current technology has gone to the level that it has failed to serve mankind anymore (is this why we are all edging towards self-destruction?) If so, then a slower GDP growth is the answer rather than stimulus packages to save the world. Slow down, relax and be happy.
Even in a money-using world where money is everywhere and in everything, the trick is really to think out of the money and into the real world where money becomes a slave and not a master. In this money-not-important world, the reality for happiness is family relationships (and not the office), friendship with people we have met (and not fighting with rivals), our sense of how we are going to actualise ourselves (and not waiting for a bigger position), and quietly preparing ourselves for our own demise (and not trying to monuments to remind others of us).
All the reality in the world can be reduced to just a few simple thoughts in our own minds. We only have to make sure those are our own thoughts, and not something we have memorised and not properly understood. We have to synchronise our thoughts with our hearts. You will find that you can live without money in your mind.
Grown-ups become ostentatious in their spending as they grab whatever that comes along, feeling justified that they can do whatever they want with their money regardless of others. In the lonely world of theirs, they feel that they need for money to be happy; and, if they do not need the money, they justified it by saying that making money is their way of life which defines the very essence of their existence.
But why do we teach our children to respect money and be frugal. Frugality is not stinginess. Frugality is about not wasting your resources, now throwing about whatever seems to you to be in abundance at the moment. Frugality is about the consciousness of the importance of money in the way we live. Money has an economic role and it must stay that way. To have sufficient money so that we do not have to worry about money matters is the point; to have plenty of money and let money define us is stupidity. We should rise above money issues and focus on the real stuffs of life.
In the economy, money has a role to play and the regulation of money and the task of making sure that money does not misbehave is the job of the central bank. There is a certain failure in this job by central banks around the world. The destruction of money started with the de-regulation of money on the assumption that money will take care of itself. Money is now a drug that has gotten out of control.
In the real world, politicians and businessmen have colluded to share the same mistress called money. Polticians are in power to stay in power and will say and do anything to remain so, even after their expiry dates. Businessmen in power will say and do anything to stay in economic power, but the market will bring them out after their expiry dates even if they refuse to step down. We have our own experience when politicians think they can do economics and run the economy like a political system until their plans fall asunder when the market decides not to play that game anymore - then the politicians blame the market players. It is as if the banker of a card game says that he controls the cards and everybody must play to lose so that the banker can win. Such arrogance comes from tenure, so there must be an enforced expiry date for top politicians - the shorter it should be further up the political power structure.
There is also a need to divorce politicians from money because both are power tools and to have one person or a group of persons controlling all the levels of power is a danger for both the economic and political systems.
Politicians have controlled the economy by nationalising all economic opportunities which they will then dispense at their own discretion. This is why there is so much concern in this country over the issue of tenders, licensing and quotas. We have to build systems of operations for the economy that can be decentralised so that the man and woman in the street can have access to basic economic opportunities by dealing with their local officials, rather than having the big politicians making deals with or becoming big businesses themselves and then retailing their deals down to the ground. The politico-economic system the defines the distribution of wealth nationwide.
The economic system becomes inefficient and not competitive when those with the best business acumen do not have the chance to play direct while the incompetents block the view for everyone. This is why many people have opted not to play this game and have gone on to different playing fields.
The world economic failure is the result of money taking a centre stage in the political and economic game. The obsession with money has everybody mesmised into a standstill. "Now that we have money, what do we do?" There is a poverty of ideas and innovation. The reason the world economy is standing still because banks and businesses do not know what to invest in anymore. The current technology has gone to the level that it has failed to serve mankind anymore (is this why we are all edging towards self-destruction?) If so, then a slower GDP growth is the answer rather than stimulus packages to save the world. Slow down, relax and be happy.
Even in a money-using world where money is everywhere and in everything, the trick is really to think out of the money and into the real world where money becomes a slave and not a master. In this money-not-important world, the reality for happiness is family relationships (and not the office), friendship with people we have met (and not fighting with rivals), our sense of how we are going to actualise ourselves (and not waiting for a bigger position), and quietly preparing ourselves for our own demise (and not trying to monuments to remind others of us).
All the reality in the world can be reduced to just a few simple thoughts in our own minds. We only have to make sure those are our own thoughts, and not something we have memorised and not properly understood. We have to synchronise our thoughts with our hearts. You will find that you can live without money in your mind.
Tuesday, February 3, 2009
Having An Intimate Relationship With Money
[This is being inspired by Sakmongkol's posts on the relative economic success of different cultural traits.]
Having a proper and intimate relationship with money is probably the most important thing that a modern person needs to master in order to be considered successful in the concrete jungle that we now live.
Those who fail to have a healthy monetary relationship are doomed to fall by the wayside of the economic mainstream - if they have no ancestral land to fall back on and they are landless, they become the disenfranchised, the homeless in their own land.
To put the whole thing in another way, success or failure in modern life is now centred upon one's management of money and wealth. This is what (almost) all of us are engaged every moment of our waking days (including some moments in our nightmares when we have to think about kids' education).
Money is a concept invented by human beings to placate their fears about the unknown future and the unforeseen circumstances that will incapacitate them and render them economic incompetents. So human beings sought out things in nature as well as things they invented themselves to embrace and hold on to. And the funny thing is that, as more people are seen to be hugging the same types of things, the more other people want to embrace whatever so many people are embracing.
In other words, value is created by demand.
And as a result, Say's Law follows: Supply creates its own demand. Hence, we have central banks creating money by lending to the government (to finance war and public monuments for national pride), banks and property developers creating physical assets to be paid for by the man in the street with his future income (if any), banks and businesses creating financial assets by selling shares of equity ownership, and banks and other financial institutions creating other financial assets by repackaging financial assets with value-enhancer such as insurance.
If the unschooled person is lost in this asset jungle, then this is why education is the key to success in the modern world - in order to be able to play this economic game of life.
But if the educated person is lost in this asset jungle, he or she can still survive by working hard (if he or she can find a job) and save (in order to buy car, house, tv, and a home entertainment system).
So, how do we have a proper and intimate relationship with money (and wealth):
Education. Why is education important? The modern society is an artificial construct of the education people. Therefore, education is important in order, first, to be at par with the thinking of the modern society (even if we do not understand the workings). Second, education is needed to support the modern soceity. In traditional times, it was religious knowledge, followed by science and technology for the purpose of saving labour. Now, it is science and technology but for entertainment. Third, education is needed in order to able to understand the workings of the modern society and how do the successes and the failures come about and how the defects of the modern society can be fixed. This latter function of education is much more specialised and harder, as evidenced by the difficulties that the current fixers of the world economy have. Qualification: Education refers to the broadest range of training and knowledge, not just that which is propagated by universities.
Work and Economic Opportunity. To be able to participate in the economic mainstream is important. To be excluded from the modern society for whatever reason and to disallow people to try to earn a living and feed their family is the greatest form of cruelty. People want to work. People must work.
Save. The Chinese dictum on saving is this: If you earn a dollar and spend ninety-nine cents, you are good; if you earn a dollar and spend a dollar and one cent, you are doomed. None of that rubbish that is being propagated by the illiterate policymakers who encourage ordinary people to spend until they are bankrupt so that some inefficient firms will stay alive - swapping personal indebtedness for corporate solvency.
Invest. This is the scourage of the modern society. People do not know where to invest, because people do not know what is wealth any more. Central banks around the world have printed so much money that the traditional money that we know it now has no more value. People now don't want money. People want value. Does the modern society have no more value?
Value. If you were to ask me, I would any time put my money in the proper education of my children so that they can learn and be trained in values that do not die, such as honesty, trustworthiness, truthfulness, integrity, grit, perseverance, self-reliance, self-realisation, clarity of thought, courage, bravery, firmness without aggression, gentleness without cowardice, generosity, kindness, understanding, sympathy, compassion, helpfulness, resourcefulness, service. Only after when I am comfortable that my children have some proper values would I then venture to think of helping them out on the real estate, something which I feel they should do on their own. I have seen too many adult spoilt brats. This country is being spoilt by them.
It is true. Money is quite a useless thing, without which we cannot survive in the modern society that we have constructed. Hence, most people try to opt out of the modern society and live in the kampung, in order to avoid the use of money. But then they run into timber companies. Money is quite a useless thing, as it is something that we must have and not use. Isn't this the meaning of treasure? Most people follow such pristine routines that they fail to live.
The problem with most obvious political solution to the economic problem of the electorate that they are trying to entice is that they try to hook the electorate to their political camp with economic drugs.
The problem with money is that it is easily printed. To print money thoughtlessly is akin to the mind of the thief who thinks that the cleverest way to make money is to steal. It is one of the greatest paradox of modern life - that the shortest route for the individual is not necessarily the best route for society as a whole. To take the short cut for oneself could have been done at the expense of our neighbours who have to toil so that we can live comfortably (and pontificate).
Conclusion: To have a proper relationship with money, don't be greedy; live.
Having a proper and intimate relationship with money is probably the most important thing that a modern person needs to master in order to be considered successful in the concrete jungle that we now live.
Those who fail to have a healthy monetary relationship are doomed to fall by the wayside of the economic mainstream - if they have no ancestral land to fall back on and they are landless, they become the disenfranchised, the homeless in their own land.
To put the whole thing in another way, success or failure in modern life is now centred upon one's management of money and wealth. This is what (almost) all of us are engaged every moment of our waking days (including some moments in our nightmares when we have to think about kids' education).
Money is a concept invented by human beings to placate their fears about the unknown future and the unforeseen circumstances that will incapacitate them and render them economic incompetents. So human beings sought out things in nature as well as things they invented themselves to embrace and hold on to. And the funny thing is that, as more people are seen to be hugging the same types of things, the more other people want to embrace whatever so many people are embracing.
In other words, value is created by demand.
And as a result, Say's Law follows: Supply creates its own demand. Hence, we have central banks creating money by lending to the government (to finance war and public monuments for national pride), banks and property developers creating physical assets to be paid for by the man in the street with his future income (if any), banks and businesses creating financial assets by selling shares of equity ownership, and banks and other financial institutions creating other financial assets by repackaging financial assets with value-enhancer such as insurance.
If the unschooled person is lost in this asset jungle, then this is why education is the key to success in the modern world - in order to be able to play this economic game of life.
But if the educated person is lost in this asset jungle, he or she can still survive by working hard (if he or she can find a job) and save (in order to buy car, house, tv, and a home entertainment system).
So, how do we have a proper and intimate relationship with money (and wealth):
Education. Why is education important? The modern society is an artificial construct of the education people. Therefore, education is important in order, first, to be at par with the thinking of the modern society (even if we do not understand the workings). Second, education is needed to support the modern soceity. In traditional times, it was religious knowledge, followed by science and technology for the purpose of saving labour. Now, it is science and technology but for entertainment. Third, education is needed in order to able to understand the workings of the modern society and how do the successes and the failures come about and how the defects of the modern society can be fixed. This latter function of education is much more specialised and harder, as evidenced by the difficulties that the current fixers of the world economy have. Qualification: Education refers to the broadest range of training and knowledge, not just that which is propagated by universities.
Work and Economic Opportunity. To be able to participate in the economic mainstream is important. To be excluded from the modern society for whatever reason and to disallow people to try to earn a living and feed their family is the greatest form of cruelty. People want to work. People must work.
Save. The Chinese dictum on saving is this: If you earn a dollar and spend ninety-nine cents, you are good; if you earn a dollar and spend a dollar and one cent, you are doomed. None of that rubbish that is being propagated by the illiterate policymakers who encourage ordinary people to spend until they are bankrupt so that some inefficient firms will stay alive - swapping personal indebtedness for corporate solvency.
Invest. This is the scourage of the modern society. People do not know where to invest, because people do not know what is wealth any more. Central banks around the world have printed so much money that the traditional money that we know it now has no more value. People now don't want money. People want value. Does the modern society have no more value?
Value. If you were to ask me, I would any time put my money in the proper education of my children so that they can learn and be trained in values that do not die, such as honesty, trustworthiness, truthfulness, integrity, grit, perseverance, self-reliance, self-realisation, clarity of thought, courage, bravery, firmness without aggression, gentleness without cowardice, generosity, kindness, understanding, sympathy, compassion, helpfulness, resourcefulness, service. Only after when I am comfortable that my children have some proper values would I then venture to think of helping them out on the real estate, something which I feel they should do on their own. I have seen too many adult spoilt brats. This country is being spoilt by them.
It is true. Money is quite a useless thing, without which we cannot survive in the modern society that we have constructed. Hence, most people try to opt out of the modern society and live in the kampung, in order to avoid the use of money. But then they run into timber companies. Money is quite a useless thing, as it is something that we must have and not use. Isn't this the meaning of treasure? Most people follow such pristine routines that they fail to live.
The problem with most obvious political solution to the economic problem of the electorate that they are trying to entice is that they try to hook the electorate to their political camp with economic drugs.
The problem with money is that it is easily printed. To print money thoughtlessly is akin to the mind of the thief who thinks that the cleverest way to make money is to steal. It is one of the greatest paradox of modern life - that the shortest route for the individual is not necessarily the best route for society as a whole. To take the short cut for oneself could have been done at the expense of our neighbours who have to toil so that we can live comfortably (and pontificate).
Conclusion: To have a proper relationship with money, don't be greedy; live.
Monday, February 2, 2009
Billboards & The Art Of Self-Deception
Certain countries have a tendency to elect political leaders who seem to suffer from bouts of insecurity as if they fear the ordinary people have forgotten what they look like.
As a result, these leaders put up billboards - at the expense of the taxpayers - to remind them how important they have become and hence worthy of veneration.
It is, therefore, an embarassment for many of us to have to put up with the false smiles of these little individuals beaming down from the billboards, normally hiding behind their immediate bosses - who apparent are quite agreeable to such nonsense.
These political leaders have forgotten that the game is not about them - but it is about the jobs they have been entrusted to do.
As a consolation, it is good that we do not get many statues. But we do have lots and lots of photographs, though.
Maybe, we should be a bit more forgiving - afterall, don't billboards peddle junk, anyway?
As a result, these leaders put up billboards - at the expense of the taxpayers - to remind them how important they have become and hence worthy of veneration.
It is, therefore, an embarassment for many of us to have to put up with the false smiles of these little individuals beaming down from the billboards, normally hiding behind their immediate bosses - who apparent are quite agreeable to such nonsense.
These political leaders have forgotten that the game is not about them - but it is about the jobs they have been entrusted to do.
As a consolation, it is good that we do not get many statues. But we do have lots and lots of photographs, though.
Maybe, we should be a bit more forgiving - afterall, don't billboards peddle junk, anyway?
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