Monday, February 1, 2016

Negative Interest Rate and All That

In line with Abe's goal of creating inflation that the Bank of Japan is now resorting to introducing the negative interest rate for its customers - namely commercial banks - for keeping their deposits. As of January 29, the central bank will charge 0.1% p.a. on the new deposits of commercial banks kept with the central bank. Luckily, the negative interest rate does not apply to ordinary customers at financial institutions.

The idea is to discourage commercial banks from being prudent and to encourage them to lend to ordinary people so that they will spend more money and increased the demand for goods and hence raise prices in general. But this is a foolhardy task.

Japan has been suffering from deflation for a quarter of a century since the burst of the asset bubble in 1991 after the introduction of the newfangled technique of quantitative easing in 1986. The QE was introduced to reverse the sharp appreciation of the yen forced on Japan by the US in the Plaza Accord. The US economy was weak and it accused Japan of undervaluing its yen.During the asset bubble, the stock market and the real estate market rose to unprecedented heights with banks giving out housing loans that required three generations to pay. The bubble burst when the central bank feels that speculation in the markets had gone mad and there was a need to stop that. The markets collapsed when credit tightened and interest rates rose.

The fact that the Japanese economy has slowed and deflation has continued for so long point to the problems at the banks. With such huge non-performing loans affecting millions of people, the government just cannot push for foreclosures to solve the problem. It would put the entire banking system and the population into bankruptcy. At the same time, the high yen had forced Japanese multinationals to go abroad to places such as Malaysia and thus leaving a vacuum in the SME sector consisting mainly of family-owed companies. Japan hasn't so far recovered from this structural shift.

It is natural that nominal wages have not risen in the midst of weak labour demand, and therefore there is no scope for real estate prices to recover. Instead, real estate prices are looking for the correct level of nominal wages, and if this could not be found at home, then they will have to wait for stronger foreign buyers. Japan has no opened its doors to foreign tourists and it won't be long before these tourists fall in love with the lovely Japanese manicured townships and buy them up, especially those from China.

Lessons for Us

For us here at home, we must recognise a structural problem when we see one, instead of thinking that we are still dealing with a temporary marginal demand adjustment problem.

The impending rise of global interest rate, although the idea is somewhat challenged by Japan's interest rate, and the shift of global money flows in light to that expectation is a structural shift which we have not see before. This is coupled with the adjustment of the oil price back down to normal which should put an end to the grandiose schemes by the government in using demand management to support an income that is not sustainable.

The government here should really cut down on its expenditure so that it does not have to support the huge foreign worker population. The increase in the foreign worker levy is a right move. But the government must cut down on the operations of the government. Senior government servants are paid exorbitant salaries (perks included) for prestige but not talent. They should be given titles that befit their subservient status, rather than as honoured guests in all kind of functions.

I really won't really worry about public transport. With the recession, there will be less cars on the roads. The public transportation in any case does not serve those who drive fancy cars. I think real estate developers should be asked to contribute to the building of the public transport to or near their properties.

Encouraging enterpreneurs is always a good idea. But how it is being done will determine its success. Entreprenuership should not be seen as a special activity that is carried out by a select group. It should be encouraged as a way of life. This calls for a change in mindset starting with policy that is open to all citizens and there are no privileges to selected groups. The system encourages the society as a whole so that everybody has equal opportunities. Those who are clearly handicapped should be helped but should in no way be allowed to obstruct the general progress of the whole society. This policy is also translated down to the banking system which should be liberated to allow for smaller boutique banks that cater to special groups rather than lumping every banking and financial functions under big lumberous megastructures.

To compete in the world ahead, the government should assume itself ignorant and therefore playin the supporting role to the private sector which must take the entire risk of their endeavours. In no way should the government guarantee the financial profitability of projects that bear great benefits to a few at the expense of many. The government should not guarantee private profit. The market rewards those who succeed and punishes those who fail. The government must not penalise those who succeed and rewards those who fail.

We at home should gear us for a few years of deflation and a slow growth. The 3% cut in the employee's EPF contribution is the clearest demonstration of the poverty of policy thinking at this critical juncture of our national economic life. Begone your naive Keynesianism. We are now in post-Keynesianism. Our budget deficit has ballooned to enormous size. The government is now trying to take more money from the people to patch up the budgetary holes. Our people are over-geared and facing unemployment. We are now in post-monetarism. Easy monetary policy has gone kaput. We are drowning in liquidity. Let us try the see things a bit clearly.


walla said...

With mining gone, we have only three pillars left: agriculture, manufacturing and services. Of these, most of our services are just trade supports for agriculture and manufacturing.

One may consider financial services to be a trade support since it takes money from depositors and trades it for a fee to borrowers.

These days financiers are downsizing and retrenching not just counter staff but also their marketeers. Yet they have high liquidity. It can only mean they can't find enough borrowers.

One would think because the ringgit has weakened against the dollar, our goods whether from agriculture or manufacturing would be more competitively priced in the world markets in dollar terms so that expansion will be more which means loans from banks to fund expansion should be more.

But since that is not so happening, it means people are not investing. Maybe it's because world demand for our goods is not building up to expectations.

Skipping the reasons for weakening investments which have been amply articulated, what does this mean?

For manufacturing, it could mean our goods are not competitive despite price advantage. We don't automate enough because we don't have enough people who will fund, or can design, operate and maintain automation systems. Besides, many of the self-starting entrepreneurs have little technology know-how when they start fresh from mundane jobs or school. We depend on foreign labor for low-value manufacturing because they are scalable cost centers whilst automation systems call for massive, dicey and upfront outlays which will have to be reflected in price spikes at a time when we least can afford to do so. Our mass-produced goods are also not very sophisticated or they depend too much on semi-assembled inputs.

For agriculture, it means our produce are not coming out in optimal yields or competing alternatives have hit yield payloads or it's the weather. But i can tell you it's the workers, especially for oil palm. The quality of the foreign workers has dropped but their demands have increased so there is a lot of pressure on bottom-lines especially when produce prices and yields have dropped in parallel while fertilizer and chemical costs have gone up off-tandem from fuel price on account of the weakened currency.

walla said...

Given that both agriculture and manufacturing form the national bulwark of employment which provide the disposable income to bolster the economy and nurse back the services sector especially financial services which have a fulcrum role in business expansion and upgrading, it is therefore hard to understand why both have to be saddled at this inopportune time with a higher levy on foreign workers that by standard practice has always been absorbed by the employer and in this case will have to be absorbed even more simply because the workers' o. Ergo, an entrenched and myopic education system destroys all hopes of domestic progress against the benchmarks of competitive world advances. So after two massive mistakes in the two economic staples of this nation, we are now left with the tatters of political spin trying to revive a services sector already dead-born in the morass of GSTed depression. How, now?

Some will say if not now, when? If we don't kick our locals to employ locals over foreigners, when can we do so such that forex losses from their earnings repatriation can be stemmed to safeguard our currency? Well, for the agriculture sector, the answer is simple. Which local will willingly offer to be employed in the plantation sector where, for oil palm, one needs to work from dawn to dusk in order to make less than two grand a month, eleven variables provided? Locals need six tugs to prune each frond from a tree which may have thirty fronds to be pruned in a year in which he will be paid a ringgit or two a tree a year. The foreign worker needs two tugs because he has resigned to it as his living. The same local would rather go pick cockles from the shore and sell them to make three hundred a weekend morning at the local market so that he collects a thousand two for four mornings work.

Yet in our hunky dory make-believe economic world as it progresses to Vision 2020, NEITHER is going to make one iota of a difference to the re-survival of this nation. And we already knew that long ago, didn't we?

It remains to ask one question vis-a-vis the levy. Why destroy the country for rm2.5 Billion when it has already been destroyed for rm48.0 Billion? No guesses for any answer.

walla said...

o ..because the workers' wage repatriations have been weakened by the ringgit falling.

..economic planners have botched it historically on two counts..agriculture which needs wise long-term investment was focus-ditched for manufacturing which however is not about incentives but trained brainpower...


walla said...


the foreign worker pays in full to private outlets for his own charges education; his employer pays for full fee for his healthcare and medicals as well as for the passport, permit and other charges like insurance; the foreign worker pays for any fuel he uses on his bike, and the full fare for any public transport; so where has he been subsidized? Cooking gas? the gas cylinder costs a sizable fraction of his monthly pay.

The only ones utilizing subsidies meant for citizens are the ones given citizenship behind the backs of the citizens.

Maybe that's the reason as a confessional.