Wednesday, February 9, 2011

Change: Breaking Point , Turning Point

Obama brought the word "change" to current circulation. meaning "revolution". He could have been inspired by the parking vending machine which says "change is possible". How does change occur?

In general, people do not like change because change implies uncertainty. As I understand it, the whole economic apparatus that people have erected around ourselves is to reduce uncertainty and to create stability of some sort. So long as the existing apparatus is still workable, people will maintain it until there is a critical mass of sufferers of the system who then demanded that change be made of the apparatus or system or paradigm.

We can see very clearly that political change will be brought about by the masses of ordinary people when their quiet suffering and despair could no longer be tolerated, when what they see around them is unbearable daily difficulties in the face of opulence - which indicates to them somehow that it is a systematic problem, not a natural problem. Nature can of course make things worse, but in a stable system natural calamities by themselves do not call for structural breaks as they create uncertainty; if they have faith, they want the system to help them, as is the case now in Australia with politicians shedding tears for ordinary people who are suffering from the natural disasters. It is when the prevailing system is seen to have lost its integrity which means that the integrity of the system has been corrupted that ordinary people rise to demand the obvious - that the system be improved or, better still, changed. "Improvement" to a corrupted system doesn't usually bode well because it usually implies that the "second tier" will simply "move in" to take over the "first tier" as well as to take care of the "first tier" which has somewhat "gracefully" made way for the "second tier" to come up to the podium. As we know from the computer, once the system has been corrupted by viruses, and if the corruption is severe (which must be in the cases that we are talking about), then we need to reinstall a new system. Those impoverished may install the same old system which is not the wisest thing to do because it has been shown to be easily corruptible. A completely new system is required to be installed, as in the old system with new safeguards or a new system with a completely different platform or paradigm altogether so that the viruses as we know them to do be cannot penetrate. In the realm of politics, the opposition to the incumbent government is usually of the same mould except that it is the opposite. The real challenge for change is to come up with something that is completely different from the incumbent and the opposite, and in the comfort zone of human horizon, the third force is usually a synthesis of the first two (acknowledgment to Hegelian dialectics). I prefer the George Bernard Shaw vision: People see things as they are and ask Why?; I dream of things that are not and ask Why not? In this way, we truly move forward and beyond the ordinary, meaning beyond what we are used to.

As in politics, economic change can also be traumatic. In the world of economic theory that many of us grew up in, the economic change is very much Victorian - small little marginal changes (mathematically called perturbations) which do not really upset the system at all, merely to test the robustness of the system. What happens when the system is not robust? The system breaks down, and a new system has to be reconstructed from the old model or constructed completely new from scratch. That is in the world of economic theory. In the world of economic reality, what happens?

In the world of economic reality, when the economic system shows any sign of struggle such as the rattling of some parts, the political masters, being control freaks, instinctively try to and usually do takeover the economic system completely. This is usually done by a process called Emergency Rule when the system is deemed to be at the very breaking down and the Master must now be "hands on" to smooth things over. As when a non-doctor tries to cure a (severe) headache with blind prescription of panadol, likewise in economic policy, the non-economist blindly prescribes monetary expansion as the cure for all economic headaches. Central bankers in trying to please their political masters consciously try not to trigger off any economic adjustments in order the central bankers not be blamed for any consequent crisis that will be created later on. When this happens, it is a sure sign of weak leadership or technical ignorance in both the political and the economic policy arenas. As in medicine, if an illness is not cured immediately at the root (preventive medicine) while merely plastering over the obvious symptoms, we have been taught that the illness is going to become very bad and can even become life threatening. In economic policy, we know that when the root economic problems are not properly resolved, economic adjustments will be forced onto the system and explode. The 1990 Japanese Asset Bubble, the 1997 Asian Financial Crisis, the 2010 US Financial Crisis. With political repercussions. These are all adjustments of the socio-politico-economic systems that politicians have been trying to lord over around the world in the last two decades or so.

At the very least, the US economy is now undergoing some drastic adjustments - collapse of property prices and the US dollar as well as some banks commercial and investment. In this way, I believe that the US economy will manage its find its own feet after a few years and give the Chinese a good fighting in the global economy. Malaysia, in looking east and following Japan, is still caught in an asset bubble, and banks with a huge loan book to households, can only stay solvent so long as loan growth is high enough to cover up the subprime problem which must be festering. The problem with monetary policy is that you really cannot stage manage a "soft landing". You are flying at 30,000 feet and suddenly you let go of the fuel pedal; what happens. Brakes become irrelevant. Such events are studied as chaos theory or catastrophe theory. It starts with a smooth ride with a little change, and the next thing that hits is breaking point or if lucking a turning point.

With the present being an accident of the past, the Malaysian economy is now saddled with some fairly difficult problems. Now truly Malaysian, the purpose in life is to be very very rich, and for that you do not need an education. Education in fact can become a hindrance to material wealth for you really do have to go to garbage dump and shift through while the government keeps bringing in truckloads of banknotes to dump. The scavengers now employ bodyguards to mark out territories in the name of politics and justice, and the only fellows who work are those poorly paid to do the manual work. The end result of the activities must be handled to the masters of monopolies who compete among themselves to see who is the cleverest. What else get done in the economy? Houses, roads, cars.

The current government in Malaysia is in a most unenviable situation. The party is over, the cash is spent, now we are living on borrowed money. But everybody is well trained to be mercenary. Grab and run. How do you change this mindset.

In the macroeconomic front, there are a few variable to grapple with. While the ringgit will try not to fall with the US dollar - and hence heading from 3.00 to 2.70 and 2.50 - it is not that particularly strong either as can be seen from its Singapore dollar rate of 2.30 although this is an improvement from 2.40-45. A real show of strength for the ringgit is when it can go to 2.00, 1.80 and 1.50 to the Singapore dollar. I would be happy to see sterling at 4 ringgit from the current 5.

Of course, now the financial markets are in turmoil in Malaysia. Will there be an election rally. Will interest rates be raised to curb inflation. These are rumours used by currency speculators from offshore financial centres to shore up the currency and equity markets for a while. Buy on rumours, sell on news. All these will be over by May, June. The central bank can be concerned with the reserve requirement to reduce the credit multiplier from capital inflows, and banks will be incredibly silly to lend long term using short term funds as we had seen in 1997.

In the meantime, let us try to build our economic foundation of a solid education system, a court of justice, an economic system where those who work hard will get the fruit of their labour. Let us bring proper pricing back to the local system. Let us continue to teach our children that they have a bright future in Malaysia if they work very hard. This will be real change.

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