Tuesday, May 10, 2011

Economic Readjustment

Those of you who have been following my thoughts here would know that I am quite happy with the recent developments in the economy, i.e., that at least there are some countries such as Malaysia which are beginning to take a stand against the American nonsense (after Japan) of printing money at zero interest rates and holding the world to ransom at gunpoint.

I hope this will lead to a structural break in the global mentality. With higher interest rates, some currencies should strengthen which is a good thing. There should be a way to reflect the weekness of the US dollar. That Malaysia is amon the few countries that go this route is commendabble.

Higher interest rates and a stronger currency may help to restrain some the inflationary pressures coming from the global commodity markets. Malaysia may suffer a bit for commodity producers and the foreign investors who are here to reap the benefits of low wages as a result of the weak ringgit. But these are labour intensive low productivity activities which we could be less dependent on. We should expect some difficulties for these activities. We should expect some difficulties for speculators of properties as well as the stock market. These difficulties are nothing but the needed adjustments for higher interest rates to reduce prices as a result of some difficulties for businesses. Without these difficulties, businesses would continue to live in a dream world of more profits from little efforts and lots of inflation.

These difficulties will be good for making businesses search for higher productivity economic activities. Hopefully, a stronger ringgit will make less unattractive ringgit wages. This may help to reduce the current brain drain and, if possible, to reverse it.

But my great consolation is that with higher interest rates, now or expected, there will be enough fear among speculators. We are now seeing a reaction by speculators in the oil and commodity markets, who think that they may need to reverse their long positions. There is crack here, and the prices of oil and commodities are seeing some selling and a lowering of commodity prices.

This last bit of development, to my mind, is absolutely crucial. The higher global interest rates may mean a weakening of global demand and thus leading to a weakening of commodities prices. If downward adjustment of commodity prices is what the world needs right now. There is a need for the world to insulate itself from America in terms of monetary policy. With lower prices or lower price increases, there is a chance to stablise world politics. When this stability is established, there may be a chance for investments and real economic growth.


hishamh said...

I wish what you're saying is true. But the sell-off in commodities the past couple of weeks has been mainly due to tightening margin requirements rather than higher interest rates. Still too early to tell if there's been a fundamental change in investor sentiment.

etheorist said...

Good to hear from you again, hishamh.

The tightening could of course reflect a change in the view of the future. The expected change in view is inevitable. The timing debatable.

walla said...

Fiscal policies to prod capital intensity are fine but what about ideas and innovation?

That's brainware, something we are losing, not that it has been welltuned in the first place. Neither Talentcorp nor Mida has moved. How many have come back even with the fifteen percent tax bracket; don't people research these days they will still be taking a minimum sixty percent ppp paycut even with that incentive? And Mida, corporatized quo vadis?

And there's only so much one can do with commodities. The local-trained biotechnologist is just doing IT for a garments factory overseas. So much mismatch around because opportunities are not available.

The most important thing for the future of this country is not a percentage point here or there in the vain hope that the market will respond to realign itself more productively or creatively. It has to be how and where every enterprise can create new value and markets.

We don't have the right brainware because our ecosystem to develop it or incubate it is moribund. And, not to belabor the point, by ecosystem i don't mean just education. Even when that itself has no hope of ever improving because it is run by people locked by personal interest in some jurassic mindsets.

Ideas and innovation and ecosystem on top, and align everything including the politics below.

We will slide to a sinking plateau. And you know it.

etheorist said...


Too much money chasing too few ideas.

Or, is it that there is so much money (or perceived wealth in overblown asset prices) that nobody feel inclined to invest. Just collect rent.

I am looking for a correction in asset prices. If not, then, I pity the poor fixed-income people who must now eat dirt as a result of inflation.