Keynes vs Monetarism vs Libertarianism

Which comes first, monetarism or libertarianism?

Monetarism is the value judgement that comes out of Milton Friedman, after his study of the long history of US money supply figures, that changes in the money supply has an impact on the real economy.

I don't think Friedman was trying to take a different stance from JM Keynes.

Keynes who was saying, under conditions of a liquidity trap whereby people are holding on to cash even if interest rates were cut down to zero because it is a far better way to preserve capital value and the expansion of the money supply will not help to boost the real economy, the government may need to step in to spend in order to create employment - on the assumption that there is a direct relationship between an increase in the output level and in the employment level.

The concept of the multiplier comes in as an afterthought to this basic Keynes proposition and the multiplier was then taken up as the symbol of the new religion by Keynesians when in fact the concept of the multiplier was invented by Richard Kahn. The multiplier helps Keynes to sell his basic proposition of the need for government spending - the selling point is this: You only have to spend a little, and the economy will take care of itself. The multiplier concept is now an integral component of the Keynesian mental apparatus (not Keynes') as taught in university mathematics courses disguised as economics that the first thing that policy makers with primary education in economics think instantly of whenever they think about policy is the multiplier. This is clearly a mental rut.

Friedman was basically a Keynesian but he was no Keynes. He sought to modify the Keynes proposition by saying that indeed you cannot flood the market with the money supply in a down market in the hope of boosting the real economy because you may get instead inflation - but you can that pre-emptive monetary measures to sustain the real economic growth by controlling inflationary expectations and inflationary forces by restraining the growth of the monetary base and hence the money supply. Hence, the x% rule on monetary growth by the Monetarists.

A technical note was made by Don Patinkin in a big thick book who argued that in a recession when prices fall there will be a real balance effect that will, technically if pushed to the extreme, be able to restore the economy back to full employment on its own without Keynesian interference in the system.

Many other economists also came into the fray to generate the glory days of the bloom of a thousand economic flowery ideas but they were only of two species - only different colours. We shall not enter through this door.

Instead, let's talk about the two species.

The Classical economists, as Keynes labelled them, were in fact excellent thinkers and they had done excellent work, in my view. Classical economists were fundamentalist economists. They thought in real value terms, they thought in the long term. This was necessary at the start of a new thought process. In fact, I would call the Classical economists the Zen masters of economics. What they thought was real in the long run - that's the absolute fundamental - and the Classical economic analysis remains true today in the long run.

But the policy translations of Zen masters are the same everywhere: Do nothing. Let things be what they are suppose to be. Observe the rise and fall. Be at peace even in the midst of apparent chaos. It is chaos because you do not understand it. Once you've understood it, it is nothing.

Perfect Market Competition and the Free Market

Perfect market competition is a theoretical concept invented by Neoclassical economists principally Alfred Marshall to describe the mathematics of economics that he was trying to create. Mathematically, the intersection between two lines is a point which is not a dot. How do you describe the intersection of the supply line and the demand line. For things to be absolutely perfect, you need perfect market competition.

Of course, Joan Robinson and others came in to poo-poo Marshall's mathematical schematics. But the Marshallian scissors were perfect tools for teaching young initiates into the abstract world of economic theory. I think it is the Marshallian scissors that started the teaching of economic theory as an industry in the universities.

But perfect market competition is not the same as Free Market Enterprise.

Free market is an ideology created to counter mercantilism. Free market is an ideology along the line of the French Revolution.

Miltion Friedman, in all his later writings, was a free market enterprise ideologue. This dovetails very nicely into his x% monetary rule. So Monetarism was packaged with Libertarianism as a new industry that runs very profitably as the Chicago School of Economics. The success of the Chicago School has become the scourage of the free world. This is where we are today.

Greenspan violated the x% monetary rule by accelerating US monetary growth to cure what was essentially US loss in global competitiveness. To justify this fundamental monetarist violation, he brought in the Free Market ideology. His current defence of his misrule is that the problem was not the policy makers but the failure of the industry to regulate itself.

The violation of the x% monetary rule simply means the creation of inflationary pressures, inflation and inflationary expectations.

Instead of monetary restriction to cure the inflation, current policy thinking calls for more "monetary measures" by which is meant physically to increase the quantity of money in the system. It is no ordinary monetary increase; it is senseless monetary expansion. Flood the market.

The basic point in my policy prescription is this: We know we are going to pump in more water in a flooded situation. Instead of just simply pumping water mindlessly, we should be more vigilant and more mindful how and where we are pumping that extra water in. We should pump in water to dry areas, areas that need water, and not areas that are already flooded unless there are people in boats who need extra water to take them over the bumps they are trapped in. We have to be mindful of the collateral damage.

I do mind inflation. Sustained inflation of domestic prices - like sustained depreciation of the external value of the currency - is the quiet robber of the lives of ordinary people who know that their lives are getting harder and harder but do not realise how they are being robbed of the little asset values they spent their whole lives collecting drop by drop.

I do mind zero interest rates because zero interest rates is the most intellectually defunct idea I have ever come across - and countries that practice it are disenfranchising the future of their children. Zero interest rates destroy the role of money in the intertemporal allocation of resources.

But we have totally ignored the most fundamental required action: Building the future.

Monetary Measures

When we talk about economic recovery or growth, we talk about life and living.

We talk about how to live, ways of living and how to be excited about life.

The current talks about policy measures and responses to the economic collapse are like the talks of pharmacists and doctors. You have a headache, take a panadol. You have stomach cancer, remove your stomach.

But the economy to come alive only when the world has a direction.

Where in the world is the future?

Economic planners have to sit down with bankers to figure out which way to go in future. If economic planners know where the future lies.

Or do we leave it to the innovators to come up with new products to excite new customers.

Or do we leave it to the speculators and holders of cash to take advantage of sharp asset price reduction as a basis for the world to engineer for itself somehow a recovery?

An economy grows because there are investors who are brave enough to put their assets on the line to produce goods and services for which there is a demand.

What does the world want?

Certainty, investment, production and consumption - in this order.

Certainty is currently being bought by the holding of cash.

Investment will come in when asset prices are seen to have stopped falling - and only after what potential investors feel have fallen to their proper values and not because some politicians stopped the decline at some inflated prices.

Production will then arise out of those investments.

After investments comes growth in income and hence consumption.

Monetary measures, ha!

Whither the Global Economy Part II

The world awaits with abated breath the recovery of its economy, as nation after nation try to spend their way out of the recession which has emanated from the collapse of the US financial system and the excesses of the China economy.

The first order of business is to look for a bottom.

The bottom is formed when the stimulus is sufficient to overcome the forces of depression.

The forces of depression are:
(a) The end of mortgage lending as the real estate bubble burst.
(b) The end of consumer spending as the real estate bubble burst.
(c) The end of investment in real estate as the real estate bubble burst.
(d) The end of consumer spending as the stock market bubble burst.
(e) The end of investment in businesses as the economy collapses.

If the depressive force is 5% and the stimulus is 2% of GDP, then we should still get an economic contraction of 3%.

If there is no additional stimulus the next year, the economic contraction may continue.

This is why there is a certain urgency to get the banks to start lending again.

In the US, this involves:
(a) Recapitalising the banks. The capital and reserves are insufficient to cover the bad loans. Cash injection is necessary to boost capital to be sufficient to (i) cover the bad loans and (ii) have excess to support additional lending.
(b) Removing bad loans. Usually, the cash injection is underestimated because new bad debts keep coming up in a declining economy as unemployment spreads. The other method is to remove bad debts by having someone with a lot of cash (usually the government through bond issue) to buy and keep the bad debts which are usually real estate where value can be preserved in the long term.

The bottom will form when sufficient amounts of new money are poured into the banking system to take care of the bad debts and to form the new base for new loans.

New Lending Direction

The commercially viability of new loans depends on the new visions that bankers share with businessmen and government leaders.

The global economy needs to know where it wants to go in the future.

In the past, the world has merely been satisfied with producing cheap consumer goods to feed US consumers paid for with US paper money debts.

The world has paid for the senseless consumption with the massive abuse of its own limited global natural resources.

The global economy must go in the direction of productive investments with the purpose of relieving the misery of the majority of the human and animal population. There should be production and consumption but judiciously. These mean:

(a) There should be full cost accounting for agriculture production, which means eliminating the use of harmful chemicals on the soil.
(b) There should be full cost accounting for industrial production, which means putting in strict regulations on industrial emissions and effluences.

With the proper accounting of the cost of production, less volume but better quality should be produced. This should lead to a slower growth in world population and a better quality of life.

The world economy should slow down in growth, to take time to develop step by step, so that there is proper care in growth.

There is no point in hurrying to our own global demise. The only future the world has is in slowing down its growth so that it can preserve as much of its original natural self as possible. Everything that is man-made is a derivative.

Enjoy This Economic Winter

We should all try to enjoy this economic winter
And use this rare opportunity to take a little rest
We have had a lovely long summer
Which could not go on forever

Hardworking people so sad not to work
They have no savings and life they cannot afford
Greedy people so sad over their wealth
They keep and keep but nowhere to hide their loot.

Forget winter, we are in the tropics
Fruit trees grow and the rain does fall
The sun shines even if only behind a cloud
There is now time for family and friends.

Sen On Economic Sense

Amartya Sen is probably one of the most brilliant minds in economics today, and he has been quietly humble about it. He finished his PhD thesis at Cambridge in two years and went back to India to teach for a year to sit out the final year to get his PhD. He became a professor at 23. He wrote on social inequality and welfare economics, and earned the Nobel Prize in 1998.

Sen here wrote a perspective on economic issues and economic theory much more eloquently and scholarly and more authoritatively than I ever could have done - although I am delighted to discover in this piece that he has taken a comprehensive overview of the field of economics study with respect to the economic problems of the world today which I have been trying desperately to do in this blog.

Sen has taken a philosophical perspective to economics which is probably very Cambridge - talking about the limitations of mainstream economic theory which ignores the poor and the disdvantaged, including the limitations of Keynes - which I have been trying to do so in my series of the Irrelevance of Keynes.

For students of economics who have left school a bit too early and have not kept up with their reading on the subject, Sen's article is a very good summary of the broader field which all rounded students should acquaint themselves. His article shows very clearly the unacceptable nature of Econ 101 and how it can be dangerous when used as a basis for policy.

Some quotes:

• Ideas about changing the organization of society in the long run are clearly needed, quite apart from strategies for dealing with an immediate crisis.
• How do we assess what is taught and championed among academic economists as a guide to economic policy—including the revival of Keynesian thought in recent months as the crisis has grown fierce?
• The most immediate failure of the market mechanism lies in the things that the market leaves undone.
• Smith viewed markets and capital as doing good work within their own sphere, but first, they required support from other institutions—including public services such as schools—and values other than pure profit seeking, and second, they needed restraint and correction by still other institutions—e.g., well-devised financial regulations and state assistance to the poor—for preventing instability, inequity, and injustice.
• The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments.
• While Keynes was very involved with the question of how to increase aggregate income, he was relatively less engaged in analyzing problems of unequal distribution of wealth and of social welfare.
• There is a critical need for paying special attention to the underdogs of society in planning a response to the current crisis, and in going beyond measures to produce general economic expansion.
• That the market economy can be particularly bad in delivering public goods (such as education and health care) has been discussed by some of the leading economists of our time, including Paul Samuelson and Kenneth Arrow.
• A crisis not only presents an immediate challenge that has to be faced. It also provides an opportunity to address long-term problems when people are willing to reconsider established conventions. This is why the present crisis also makes it important to face the neglected long-term issues like conservation of the environment and national health care, as well as the need for public transport, which has been very badly neglected in the last few decades and is also so far sidelined—as I write this article—even in the initial policies announced by the Obama administration.

Whither The Global Economy (v2)

The current global financial crisis, and the ensuing global economic crisis, is the result of the inability of the US, as a global economic leader, to respond properly to the structural changes brought onto the global economic scene by the reawakening of the China economy after centuries of slumber.

China's reawakening means two major things:
1. Starting the economy from the ground up means rudimentary wages and a hunger to get out of the economic death trap means intense struggle and competitiveness.
2. With a third of the world population becoming less hungry and less impoverished, there must be immense demand on global resources.

In the meantime, the US has become less competitive because of the historical baggage of affluence, despite being innovative industrially. Industries then move to global locations where there is economic efficiency.

As the US economy falters in competitiveness and momentum, the US Federal Reserve sought to save the economy in financial terms (rather than in real terms) by printing money - which it can now do as the largest deficit economy in the world (as Spain and England were in the past centuries).

This resulted in the massive global liquidity that was - and still is - sloshing around in the world.

In the 1990s, the flow of excess liquidity into Asian economies led, in a few short years, to the Asian Financial Crisis.

These global funds (hedge or otherwise) go to national financial markets to get financial returns through the forex and equity markets. Their very behaviour determined the market forces to their advantage. Their entry raised the prices of local financial assets which they then extract a return when local investors followed by speculators joined into the foray.

After Southeast Asia, these global funds went to China and reawakened the dragon. Investments were for exports to the US because the Chinese economy was too small because of the low wages. This was the decade when the US bought real goods from the sweat of the poor peasants and paid them with paper money.

The US Federal Reserve under Greenspan thought it had found the magic fountain of fortune by printing money and getting real goods from abroad.

The excess liquidity in the US from the printing of money caused the US financial and real estate markets to soar - founded on the growth of the global economy led by China.

Every time the US stock market failed, the Fed fed it with more cash. This went on for years. The US stock market went from sober to a state of drunkedness.

The sustained growth of the US stock market then fed the US real estate market. The asset inflation in real estate then gave the US bankers the perfect excuse to do the inexcusable, in the eyes of bankers - funding speculative real estate gains collaterised on inflated real estate.

In computer language, the US asset markets went into a do-loop until it reached its limit of growth and then blew up.

That limit was defined by the real income growth of the people of the US. With the underlying real economy not growing as fast as the asset markets, the limit was when the people had taken loans which they were in a position to pay, now or in the future. That's the sub-prime. This arises thanks to Mr. Greenspan's ingenuity.

Whither the Global Economy

While the US is sorting out its financial crisis, the world should move on. The world economy cannot depend on the US anymore - because it has abused its seignorage as an international reserve currency.

This global financial crisis is really a US financial crisis with global implications.

This means that the global economy will have to limp on one leg for a while, while it finds its new balance - and get used to the gait.

China sees the opportunity for itself to be the next global economic power, and China is seizing it with both hands.

Its massive infrastructure spending - why not for it has now massive foreign reserves to buy foreign imports, if need be, or to expand its own money supply, which it should - is the right way forward.

This is China's opportunity to push its development inward into the hinterland from the coast, and bring development to the villages - mostly along the major river systems.

The expansion of transport - land, air and water - and telecommunications will be the first wave of growth for China.

As the communications system improves for the whole economy, the basic groundwork and infrastructure is now being laid for its next economic cycle - of inward growth and expansion which is being forced upon it by the US financial crisis.

In the meantime, China will continue to source for raw materials worldwide as input for its industrialisation.

With the US and Europe saturated with consumption, China's reawakening may be a godsend to the Third World to rise up from its underdevelopment.

In the next 30 to 50 years, the global economic picture will change from what we are now taking for granted. The New Economies will be China, Asia and Africa.

The Abuse of the Global Economy II

Now, Greenspan here is singing the same tune as Bernanke and Krugman about the current global crisis - that it is caused by developing countries amassing surpluses after they have become highly competitive in the global economies - and not that the US was printing money to disguise its loss of competitiveness.

Greenspan's argument is ingenius. The US Federal Reserve cannot be faulted in its loose monetary policy which he takes it to mean that the Fed can only the overnight rates - which, as Greenspan pointed out, are short-term rates - and short-term rates do not trigger a speculative run on long-term assets such as real estate. Only long-term rates can.

The only way that long-term rates in the US can be depressed for years is because of the excess surpluses accumulated by the developing economies and which were then reinvested in financial assets in the US. It is the abnormal tendency of developing economies to save that has caused the global crisis which was triggerd by the burst of the real-estate bubble in the US.

Where did the excess surpluses of developing economies come from, Greenspan? He conveniently overlooked his tendency to print money to solve the US economic problems. Instead, he chose to emphasize that it is not the job of the central bank to worry about where the excess money should go - because they will be micromanaging by the authorities.

Instead, he argued that the financial system should be regulated so that excess liquidity will go to productive purposes - and not unproductive purposes such as real estate.

It is clear that Greenspan is mentally stuck in his own little spin - and this could be the real reason for the global economy to be in crisis today.

I continue to maintain that the current global crisis was caused by the sustained printing of money by Greenspan for decades in order to disguise the fundamental problems of the US economy as it began to lose its competitiveness with the rise of China. The US is suffering from the same problem as faced by Japan in the 1980s. Let's hope that the US will not take as long as Japan to recover (as Japan still hasn't).

Malaysia's RM60 billion Stimulus Package

RM60 billion over two years means 4% per annum to a RM740 billion economy in current prices.

This is substantial. Assuming no leakage, no multiplier, no inflation, economic growth in 2009 post-stimulus of -1% to +1% means the pre-stimulus scenario could be -5% to -3%.

Nature of the stimulation over two years:
1. Construction of infrastructure and housing (RM5 billion)
2. Private investment fund (RM1.6 billion)
3. Capital for SMEs (RM20 billion)
4. Microcredit (RM0.3 billion)
5. Savings Bonds (RM5 billion)
6. Tax exemption

I see the immediate impact to be the RM5 billion for infrastructure and low-cost housing, in as far as I can itemise them.

There is substantial attempt to recapitalise the private sector (RM21.6 billion) - which is good for the medium term - the building of capacity.

The microcredit looks a small sum but it may have wide coverage on the lower ground.

The savings bonds are an anomaly in a stimulus package - this is an attempt at correcting the flaw in the monetary policy. It is far better to ensure reasonable deposit rates while cutting the mark-up by banks.

[On reflection, the RM5 billion savings bonds could be to finance the RM5 billion construction projects. This could mean that RM10 billion of the RM60 billion is neutralised. This brings the net impact to 3.4% of GDP a year.]

The cost and benefit of tax exemption may at best be estimated variously, and treated [corrected from "tested"] as a residual factor. With help to house buyers and those retrenched.

I observe with great encourage the help given to the unemployed, especially first-timers, through more studies and retraining.

I am sure that there are many things I have left out from the whole package. The above are specifics I can observe at present.

This is a fairly modest budget while a lot of help given to promoting investments for the next few years. Would be useful to get an economic vision and direction.

The Abuse of the Global Economy

Krugman here (and The Star today) quoted Bernanke that the problem of the world started when Asia had its financial crisis in 1997 and started to accumulate foreign reserves - and those foreign reserves were then exported back to the US to create the subprime problem and the current financial crisis.

I disagree.

The cause of the current financial crisis is the problem of the US monetary policy - more specifically the problem of Greenspan's relentless printing of money to exploit seignorage to benefit the administrations he served as well as the American people.

The indiscipline of the US monetary policy - where every stock market decline was followed immediately by the cutting of interest rates to pump in the liquidity to prop up financial asset prices - spilled over into the speculation of real estate - to the glee of all speculators, i.e., the man in the street (who now laments) and the bankers (who now are quite happy to live on their accumulated fat bonuses).

That Asia worked hard during those times and saved cannot be the problem. If Asians did not work hard, we might have seen worse inflation around the world. Let it be remembered that the low-cost products from Asia helped to lessen the inflationary pressures on the ordinary people while the small but rich part of the world population indulged in shameless luxury.

The reason for the asset inflation in the US is that the American people have lost their competitive edge and they cannot compete. The money printed by Greenspan was used to buy local financial assets and real estate as well as imports from the rest of the world.

The abuse of the US dollar of its status as an international currency is the reason for the current financial crisis. The morale of the story is that printing money does not solve economic crisis.

Abusing Keynes will not work either.

Working hard to make products that the world needs and which will improve the wellbeing of the people of the world (as well as the planet) is the road ahead for this global economy.

Liquidity, Interest Rate, Lending & Investment

Central banks around the world choose to take the risk of pressing the interest rate pedal to the floor in the hope of sending more liquidity into the system so that the economy can move faster, hopefully forward.

Question: Will even zero interest rate increase liquidity or lending?

I am not too sure about the purpose of zero interest rate. At zero interest rate, you still have to repay the loan that you have borrowed. If your business or your income stream is not steady, you may even have problems repaying the banks.

The advantage of a zero interest rate is that (a) you do not have to pay the interest component which lightens your repayment burden, if you have an income stream in the first place. If not, then (b) you refinance your loan. I suspect this is what is happening, with banks now marketing as hard as your vitamins salesmen. With refinancing, banks can pull customers away from other banks and build up their loan book - but if the loan book consists mostly of bad loans (i.e., if the economy does not recover fast), then these banks are likely to face the problem of bad loans before long. I suspect inexperienced banks will now be the most aggressive.

If the zero interest rate is encouraging banks to refinance bad customers (because of too much liquidity in the system), then where is the lending to good borrowers.

What are good borrowers?

Good borrowers are businesses who have a track record in dealing with banks and have shown, in their transaction history, a good habit of repayment on time - which means that they have given priority to loan repayment over their other commitments. It is these customers with an intimate relationship with banks that are considered to be good, and hence are "likely" to get the support of the banks during hard times like this - "likely" only if the banks have a good memory. If the banks are run by young people who behave like market analysts, then they would not understand "relationship banking" and kill even their best customers by their pursuit of numbers.

So far in our story, we have not seen banks lending for investment yet. Banks generally do not know business. They know customers - they know the characteristics of types of customers in different activities - and they manage their risks according to those characteristics.

The people who invest are people who know business. They are on the ground looking at the developments in every nook and corner. They know what is cheap and expensive. They know what is a bargain. They know future value. In other words, they see opportunities.

Those who are the first to seize opportunities are those with cash. With zero interest rate, they are being forced to invest their cash in projects to get some decent returns. This is why prices must be allowed to fall so that valuations can come down to more "realistic" levels - realistic in the sense that investors in opaque situations are enticed to take risks in investments because of the price. If not, then bad investors are being rescued to continue to plague the efficiency of the economy.

The Weakness of the Ringgit & the Finance Minister

Why is the ringgit so weak? Is this part of policy strategy?

I read with bewilderment the comment by FMII in Parliament that Malaysia is not in recession - does this mean that the government is in denial?

To argue the recession on technical ground - of contraction in two consecutive quarters (how do you measure that?) - is a great debating point but an insult to intelligence.

Why is the economy not in recession?

1. The government does not know how to measure quarterly GDP. Do you do a year-on-year growth for the quarter to get the change? Or do you do the real thing by first deseasonalising the quarterly GDP and calculate the change against the preceding quarter?

2. Is Malaysia different from the US? If it is, then the technical definition of a recession may not be relevant - a definition created by the US National Bureau of Economic Research. What should be Malaysia's definition of recession? Growth below 3%?

3. Malaysia has already been in recession for too long already. Maybe because Malaysia has been in recession since the end of the Era of the Mega Projects which left a hole in the economic structure and psyche - and our Series of Little Doses of Government Spending is our way of bypassing that psychology but still engaging in the stimulation. If the economy is already in recession, you cannot drop any further - you are already at the bottom.

Why is the ringgit so weak across the board?

1. Interest rate cuts. Because of the cuts in the interest rate which means that savers are going to other currencies to learn higher interest rates. But all interest rates have been cut to near-zero except for Australia and New Zealand.

2. Loss of Investor Confidence. The cuts in the interest rate may be an indication that the economy is really in trouble and the central bank is merely protecting itself from criticism by "pre-ampting" the recession which may be coming. With no hope in listed companies - which are looking for cash from investors to bail them out - investors are fleeing from stocks in the market, selling them and getting out of Malaysia.

3. Anti-Deflation Policy. Maybe the policymakers are trying to counter the possibility of deflation in Malaysia by creating inflationary pressures from a weak currency. If so, this is a very sophisticated policy move.

4. No Support for Ringgit. The authorities have decided not to support the currency in order to preserve their holdings of foreign reserves - as well as to inflate the ringgit value of the foreign reserves which, by definition, are all held in foreign currencies. The authorities have boasted about the strength of the local economy by the amount of foreign reserves that we have. Has this been a tactical error?

What for the stimulus package?

1. If the economy is not in recession, then there is no need for another stimulus package. Or, what was meant is that the economy has not been in recession in the last year - but that it could be in recession in the new year. If this is the case, then there is deliberate attempt at being pedantic. Policymakers are looking at history not the future.

2. We want to know what is the problem with the economy as a starting point for policy. The bloggers seem to know. But the bloggers want to be reassured that the authorities know. We live the Great Age of Globalisation. We are at risk of knowing what is happening around the world, but not the problems in our own little backyard.

3. We should create opportunities for the young generation to venture into business - all members of the young generation and not just a select few. If we cannot interact among ourselves at home, how are we going to be able to interact with the rest of the world. Create opportunities by providing means of interaction and exchange of ideas - with the financiers (microcredit or otherwise) always at the background ready to seize the opportunity to lend. Or, has our system been spoiled for mega projects such that financing the little men and women has become not a business proposition but a tedium?

The Need To Allow Prices To Fall

The wonder of the modern economy is the operation of the market and the price mechanism. This means that prices must rise and fall.

But how is it that everybody seems to be happy with inflation of their assets and policymakers are now worried about deflation that they are willing to stop it?

Prices rise because of an increase in demand - which will then trigger an expansion in capacity and supply - meaning that there will be an increase in equipment and space and a hiring of people to man the shop.

Demand increases because there is optimism in the future - by everybody and they feel that they are cleverest people in the world.

Pessimism arises when some part of the economy hits the wall. If it is just an industrial sector, the rest of the economy can pull along - and some additional spending by the government may help to fill up the lost demand.

But if there is systemic problem, where the foundation of the economy is hit - namely, the banking system - then everybody is adversely affected. There is a collapse of the banks (which the government must step in to support) and a loss in momentum in spending by the private sector (which no amount of spending by the government can fill in).

Everybody becomes an economic refugee.

When people do not know what to do, there is nothing that the government can do except to provide new opportunities.

New opportunities come from deflation. The fall in asset prices give a chance to savers an opportunity to hunt for bargains in assets - and this brings about a change in ownership - which is positive because those who have failed should learn a lesson while those who have been calculative should now step in to rebuild the economy.

The new owners will take the old economy into a new direction.

If savers are not allowed to bargain hunt for assets at home (because of the stop in the deflation process) and if the authorities further make it worse for the savers by cutting interest rates, then the only option left for the savers is to hunt for avenues of investment outside the country - and this results in a decline in the currency - which worsens the cost of doing business and the cost of living.

By pursing near-zero interest rates, the authorities are not putting a premium on the future - which means that it is not encouraging investment for the future. They are encouraging consumption - which is what got the economy in trouble in the first place (when the real rate of interest turns negative: inflation higher than the interest rate).

Demand is both consumption and investment - and rebuilding the economy means new investments in new direction - not the support of the old investment projects which have proven not to be commercially viable.

While the old employees get retrenched, the new economy should be built on the fresh graduates with their new ideas while the old ones get retrained. This allows the economy to shed old skin and come out with a new shine.

The adjustment of the economy is important - if the economy is to find its new footing for the future. Otherwise, it will end up dependent on a series of stimulative packages - when what it really needs is a kick in the back.

The price adjustment is an important transformation of the economy. The prices are not allowed to fall, there may be no adjustment in the economy.

The recession in the 1980s killed off the old generation. This one should kill off the current generation - and provide a chance for the new generation to define their own future.

For example, the problems of the construction may not be solvable in a nice way - if we are see better standards in construction with greater reliance on technology rather than using the old manual ones. Developers may have invested in overpriced properties and those without holding power may have to go under so that new, better, bigger and cheaper houses can be build to attract new buyers.

If the car industry cannot innovate, then it should be left to die so that there is greater need to expand the public transport system which is better coordinated with urban and township planning as well as entertainment and cultural centres to attract people to come out at night.

At the moment, we are stuck in the same old thing - in order just to preserve the old wealth.