Saturday, June 22, 2024

Key Issues in Economic Collapse

Cause of Economic Collapse:

1.  We are talking about economic collapse, not economic decline. Decline is gradual, collapse is sudden.

2.  Many sources of the collapse can be identified once the economic collapse has occurred. But the economy collapses on its own, when it has reached a certain level of growth such that production exceeds the ability of consumers to absorb even including speculative buys in tangible or financial assets.

3.  The economy collapses when investor and consumer confidence collapses. Investors invest and consumer consumes recklessly when they think that the bull run is going to continue forever. Greed takes over prudence and satisfaction. There only needs to be one incident that wakes everybody up, to break the hypnosis, to break the trance and get the rational mind to take over. In this case, Covid-19 which disrupts the supply chain and the oil price hike on the invasion of Ukraine which sharply contracts real wages and real incomes.

Problems arising from Economic Collapse:

4.  At the international level, the confidence of international debt holders, namely, the surplus countries. The major debt instrument is the US dollar which has been off the gold standard since 1971 as a result of overissuing of the US dollar with respect to the price of gold. Fiat money is important for stimulating growth of the global economy especially during an era of rapid innovation and technical progress. But it also suffers from the problem of overissuing with respect to economic growth resulting in unwanted inflation. The quantitative easing of the last four decades has been good in jump-starting the China economy which reawakens its self-confidence. In the world of friends, this would have been a golden age. The problem is that now China wants to exert its superiority in the world economy. But China sees its wealth to be in the US dollar which destresses it so it wants to get rid of the US dollar in exchange for more tangible assets to hold. It goes to Africa to acquire precious minerals. Monopsony. It buys gold, seen to be most precious of metals. This issue that China has over the holding the US dollar is principally politically driven which is legitimate but which may take a decade or so to adjust. The question then becomes - what is the alternative international reserve currency? The IMF has thought of the SDR which has not worked. It would seem that BRICS wants to issue a new international reserve currency based on their gold holdings - which probably is valued in US dollars. (The dumping of the US dollar to buy gold means that the price of gold will be high in US dollar terms, but this would then not be a good measure of the value of gold.) This raises the question of who is going to manage this new international reserve currency, who determines the ration of its issuance to the "value" of gold. There also needs to be confidence in holding this new reserve currency, which then requires its value to be stable - by some measure. All these issues need time to work out. So, good luck to BRICS in their noble intentions. Of course, Russia is supportive of BRICS because then there will be an alternative banking system not based on the US dollar, so that the US cannot easily sanctions its enemies. There are forces for an alternative reserve currency but there must be basis to build that confidence to hold the wealth of nations in.

5.  A major feature of China's economic growth is that it has to and it has built its productive capacity by major lumpy lots. The capacity to build to build cars, for example, cannot be to increase a few more cars each time, but probably thousands more cars per unit factory expansion. This goes across the board among the industries, from industries to real estate and the wholesale and retail businesses. With the contraction of its domestic consumption, it is naturally that China will have to export its surpluses, probably at a discount in order to clear existing stocks with or without any further new production. Productive overcapacity can always be solved easily through retrenchment of manpower and equipment. It is usually the unsold inventory that produces the headaches. In real estate, unfinished real estate that has already been sold are useless but buyers are stuck with mortgage loans and banks with non-performing loans, accentuated by rising unemployment. In Japan during after the bubble burst, the trick was to book the bad loans in another company and out of the books of the banks so that lending can continue to feed the economy. Debtors were allowed to take decades to try to repay their loans. The Japan dragged along the bottom for decades. For China, the economic collapse may have major implications on social sentiments. Many policy issues for the politicians to tackle.

6.  The dumping of the US dollar bonds increases its discount rate and raises the US interest rate. This add pressure on international inflation as all other currencies depreciate against the US dollar. And domestic prices all increase, on top of higher oil prices and the price increases from supply chain disruption due to diseases and wars.


7.  Malaysia has a small problem of having a new government that attempts to clean up the system. This means destroying the old networks and building new ones. This requires new investments - foreign? At the same time, the civil system has become such a fiscal burden for the federal government, being weighed down by a generous pension system to the extent that it is becoming worthwhile for the government to risk heightening consumer price inflation by removing subsidies starting with diesel. The domestic currency is allowed to weaken not only against the US dollar but also neighbouring currencies. The economic system continues to be stuck in the old mode, with the Approved Permit for imports (of cars) now liberalised to the entire entitled section of the population. In such measures, the local economy shall continue to limp and hopefully forward.

Concluding Remarks

The point is that the entire world is in a mess with a global economic collapse mixed with a desperate attempt to re-orientate the global system to an unknown new one. This is nothing new - after all, all these could be done in the name of revolution. We are now living in interesting times.

Tuesday, June 4, 2024

Anatomy of Economic Collapse

What we are seeing now is the collapsing of the global economy as a result of the destruction of the global supply chain from policy responses to Covid 19, and the escalation of global prices as a result of Russian responses in oil prices to economic sanctions to its attack on Ukraine. Furthermore, the US Fed decision to raise interest rates cannot be to stifle inflation which is structural in nature and cost push. In consequence, the global economy slows down and domestic unemployment increases.

One way to resolve domestic political issues arising from economic depression is to go for war, as a disruption and a distraction to the voting public. This seems to be a major policy option.

The excuse seems to be to reclaim past glories and, if this the way forward, there will be no end to retracing the relatively long history of this short-lived human civilisation. Global warfare could be a protraction scenario for our world in the foreseeable future.

The major global economic issue is that there is an economic imbalance in international trade whereas China's economic success seems to be measured by its immense economic development in infrastructure, city building and the establishment of its industrial base. This in fact has been the purpose of the long quantitative easing by the US Fed in order to provide the global liquidity for global growth led by IT and the digital economy. There is no doubt that the rise of the Chinese economy is a massive achievement not only for the Chinese but also the world, in terms of global economic development.

But the great economic success of the Chinese is apparently marred by the simple fact that it ended up holding an enormous pile of the US paper money which it is does not seem to be happy about. It could be that the US is trying to entice the Chinese to hold onto its paper currency that the US interest rate is raised.

Instead, the Chinese chooses to divest its foreign reserves into non-US currency holdings. The first alternative asset is gold whose demand and price have soared in the many preceding years. Gold has zero return except as speculation in a rising market. Unless payments can be made in gold, to use gold for payment means the need to sell the gold for other acceptable international currencies, which means that gold price must eventually drop or collapse when there is need to made use of it for international payments.

Hence, the need to create an alternative gold-backed currency, so as to bypass the need to sell gold. To do this, a regional central bank or an alternative global central bank to the IMF is needed. While a new international reserve currency may be created, it may not have a sufficiently large global reach to be popular or readily accepted. Its value needs to be managed. In the limit, if backed by a limit amount of gold, then the supply of that reserve currency is limited and it will limited the growth of the economies supporting that new international currency. And not many countries in the world have the necessary experience to do that well, probably except the incumbents who truly understand the fundamentals of central banking and the integrity that goes with it.

In lieu of a new international reserve currency, regional groupings may agree to trade among themselves their own selected currencies, all except the US dollar.

But this does not mean the US dollar will die. It takes many years to build up confidence and the market systems to trade in the US dollar and the keep it as an international reserve. For one, the issuer of that currency must be able to run the world's largest trade deficit. Which means it must have to capacity to consume a major chunk of global production and get its citizens totally obese and unhealthy. You cannot be the world's greatest producer and the world's greatest consumer. If you are, you will have a  perfect trade balance.

It will be an enormous task for a country with a huge trade surplus to turn around and have a huge trade deficit. It is quite hard to be a global player with yourself as the only player in town.

If the ambition is to be the only global player, then the policy goal must be to conquer the whole world and monopolise (or rather monosopnise) all the resources in the world. You are the only producer and the only consumer. This may seem to be a ridiculous end-game but do not dismiss it, for there are men in the world madder than this.

The global economy is certainly going through a global economic structural change, as China, having experienced forty years of continuous economic growth, thinks it knows how to manage a modern money using economy, as it now tries to dis-engage itself from the US and its corporate influences. Before China can do that, it must first solve its domestic economic problems.

It is a no-brainer to keep printing money, the banks to give out loans indiscriminately, and for developers and businesses to construct brick-and-mortar structures; in other words, to expand only the supply curve or for the whole economy the whole production function. If Keynes were to teach anything in economics, the question is always of demand - whether there is sufficient sustainable demand. For the banks also to lend to buyers of properties and other buildings put the entire burden and liability of the economy on the shoulders of banks, not bankers who are often corrupt and can be dismissed or even executed. When loans cannot be repaid by developers or property buyers on a massive scale, banks are at risk of insolvency. The collapse of banks is the making of economic depression.

If you now want to restrict the printing of your currency by having it backed by a fixed quantity of gold, then you have set yourself up for policy quandary.

The way forward for the world economy is for the price of oil to come down to reasonable levels in a global environment of peace and cooperation. There could be global transformation but only by natural process over the next fifty to a hundred years, not the next five to ten years. There could be a breakup of the global monopoly on the supply of essential components, with multiple players and not just one. The global market may be less integrated but there will be competition and proper choices. The world is big enough for everyone.

In the meantime, we will have to deal with the excesses of the last forty years with implications for the real estate markets and the banks around the world. If these adjustments do not take place, then the countless unemployed and homeless will take matters in their own hands. Peace.