Wednesday, January 13, 2010

Economic Relativity: Stocks & Exchange Rates

So much for the stock market to play the role of risk-taking in order to create a market for the trading of stocks in according to the expectations by investors of their future earnings. The stock market takes risks which ordinary men and women including entrepreneurs with their high sense of business would not even touch with a ten-foot pole. This is, in essence, the idea behind the establishment of the stock market in each country around the world - to help boost actual investments by real investors in order to provide an orderly basis for growth in an economy.

Now, the Malaysian stock market called Bursa Malaysia has its chief executive officer expressing dismay by the low 12% participation by the young 20-29 age group in Malaysia in "investing" in the stock market. He calls for a better business model by the stock market to attract the young.

As a parent, I am appalled by such irresponsible thinking on the part of the manager of a major market in the Malaysian economy. I would not advise my young children to think of investing in the stock market as the way forward in their career in living.

The current dismal state of the Malaysian economy is due to the overwhelming success of the stock market in enticing the best talents and the most precious of our resources into something of a zero-sum game akin to the casino. We have lost the woods for the trees. We have turned the means to investment into the only avenue for investment.

The thinking of the stock market does not jive with that of an economist. In the stock market, inflation of asset value is seen as an investment opportunity, whereas an economist will try to avoid introducing inflationary pressures into the system so that there will not be a huge wedge between monetary values and real values.

Unfortunately, today, expansionary monetary policy is seen not to be inflationary because the increase in monetary values is considered to be stable without much escalation. In economics, a constant rate of increase in monetary values is inflation and an increase in the inflation rate is an escalation of monetary values - both of which are only possible by a constant expansion of the money supply, most often inititated by external flow and later justified by the steady and rapid expansion of loans by banks.

The only fear in this twisted thinking is deflation, the decline in monetary values, because of the difficulty of stopping the price decline - as would be the case of inflation. It is therefore conventional wisdom in economics that we do not try to stroke inflation because we have to suffer deflation later.

But after having encouraged inflation (which we all are quite happy about it, especially those with physical assets), policy makers and politicians now do not allow deflation to occur. There is no downward adjustment to correct for any overshooting of prices in a market run-up in stocks or real estate.

(There is probably universal agreement on such a tacit no-deflation zone because everybody has inflated, the the deflation-ridden economy will be the worst-hit re Japan for the last twenty years.)

Be that as it may, we must recognised that monetary values around the world are all inflated, thanks to the easy money policy - easy because it makes life easy for politicians and those who have made it and do not wish to lose what they have easily gotten.

In economics, we know that the only other relative value that has to adjust downwards to be in some some eqivalence with real values (read: productivity growth and newly invested industries) is the exchange rate.

The policy issue around the world today is the correct adjustments and realignment of the exchange rates which are reflective of the underlying economic fundamentals, in an enviroment when everybody has to adjust downwards.

This policy decision boils down to choosing a scapegoat - the one currency that must appreciate when everybody must depreciate or be seen to have depreciated, in a world of economic relativity.


walla said...

hishamh said...

Yes, I thought Yusli's statements were a little crazy myself. I can think of more than a couple of reasons why there is low participation by the young in the stock market - not least of which, as any financial planner knows, that the young have far less disposable savings to invest.

Another reason why I think it's crazy is that I thought it was stated SC policy to increase participation of institutional funds, not retail.

I see the corporatisation of Bursa as a mistake - what I see here is the profit incentive overriding social and economic imperatives, not to mention common sense.