How to Respond to Current Global Situation

War is usually a sign that a global economy is doing badly and it needs to create chaos. The current situation is global. All the major economies have been doing badly, and each is waiting for the opportunity to take advantage of the situation - which is to reposition itself strategically in the new world order. Eyes on the US, China and Russia.

The current story started with the Russian invasion of Ukraine. Russia wants to reposition itself better strategically by wanting to open a sea access to the world through the Black Sea. This has caused food and oil prices to rise.

The US attacked Iran by taking out its political leadership. The new Iranian authorities now emerging has to show revenge to save face. They respond by attacking the enemies' military bases in its neighbourhood and inflicting economic pain by blockage sea routes for oil of its enemies. This is causing oil prices to rise further.

Rising global prices for food and other essential goods immediately suck up the purchasing power of everybody. This means people buy less things with the same cash. To return the consumption of the people to the previous level or even to help increase the consumption of the people, the government must give extra cash and run a bigger budget deficit.

It is not correct to raise interest rates to lower aggregate demand to stave off inflation. Higher interest payments by debtors will lower further the consumption of the people and make things worse for them. Higher interest rates will also lower loan demand and investment and creates less jobs. In fact, monetary policy should be loosened to maintain a stable financial environment, while the economy tries to cope with the supply chain problems.

Furthermore, war diverts resources from the ordinary people to the war effort. More people will die unnecessarily either from undue poverty or the war itself.

This war comes at a time when both the government and households are facing deficits to their limits. This was will have to break those barriers further and create now debts and deficits and bring them to historic heights.

Because of the diversion of resources to higher prices and the war, markets for financial assets and real estate will soften. Unsupported by slower loan growth and investment and lower purchasing power, we make see the start of a major downward asset price adjustment.

Brace for tough times ahead and keep cash.

Conundrum

Some gold specialist and investor and adviser suggested that gold and silver are now the things to hold onto for wealth and for the keeping of value, nay, for increasing the value of wealth. 

The argument is that the interest rate is going to go sky high to as much as 20% per annum and more. This means that debtors will default and banks will go bankrupt - which we agree.

The government will also default but it will respond by printing more money which will make money worthless - which is debatable.

In the money-using world that we are living in today, there will always be money which is currency which can be paper or electronics. It doesn't matter the form, but the accounting. Whatever item that is going to play the role of money in the world economy will have to be managed properly for the money to stimulate the economy and keep it going for as long as the economy can. For a fact, gold and silver will not replace the currency as money, be it the US dollar or something else. Somebody go to print enough money for the economy grow smoothly.

Just to close the argument with the gold investor specialist, when the interest rate hits 20% per annum and more, money will flow from gold and silver to the currency because it is giving such a good return. Money has been going to gold and silver because of the near-zero interest rate for the currency, thanks to quantitative easing. The point we are trying to make here is that it is not true that gold and silver will continue to go up in price when the interest rate goes up significantly. Gold and silver prices are likely to crash because of the speculative nature of the buying of precious metals.

An underlying argument of gold is that central banks are now trying to replenish their holdings of gold in their reserves. This is true to BRIC which is trying to create a new international currency to replace the US dollar. The only argument they have is that the proposed new international currency will be backed by gold - going back to the gold standard. The fact that the gold standard was abandoned by the US in 1973 was because it limited the growth of money for sustainable trade especially after the hike in the price of oil at the time. If all the money were to be used to pay for oil, then there would be insufficient supply of money for the rest of the economy to grow. Abandoning the gold standard was correct. So if BRIC wants to go back to the old regime of managing the reserve currency, it is likely to face similar problems regarding the rigidity of the management of the money supply. Let BRIC buy gold and we'll see what they can do with their proposed new international reserve currency.

Apart from BRIC, ordinary holders of gold will sell when there are signs of gold price coming down especially when there is an alternative way to obtain a higher return on their money.

For sure, the interest rate is going to go up. Now that the US has hit again its limit on the federal deficit, this means that there is already a slowing down in the expansion of the money supply when there are no new base money to stimulate loan expansion. The economic dynamic is a very fragile thing. The moment the upward momentum is killed, the downturn happens immediately. This is because the markets are now so transparent and live and market reactions are now extremely rapid. After four decade of quantitative easing and easy money, a long period of downward adjustment is bound to happen and so many events are trying the reversal of the global economic boom. First, covid. Second, Russia invasion of Ukraine. Third, China overproduction and global dumping and the US tariffs. Fourth, the lack of funding for the US federal government. All these have stopped the issue of new loans globally and hence the growth of the money supply.

The only people who have plenty of money or cash are multinationals and private equities. These are not normal businesses as we know them - honest entrepreneurs working with neighbours to produce goods and services for the purpose of taking care of the workers (and owners) and their families by satisfying the needs of customers. The concerns of national governments used to be to stimulate investment and create jobs so that all able-bodied citizens can get a decent job in their neighbourhoods. Now, this is no more. National governments attract multinationals to invest by offering tax holidays and tax concessions and even cash incentives to create jobs for lowly paid foreign workers so that at the end of the day, the rate of growth of the GDP looks good - good enough to argue for another term in the political office. Foreign investors especially private equities are out to make their money back plus an extremely high rate of return within a couple of years or so. They raise selling price and suppress wages and they can do that in an environment of high liquidity. There is no doubt that quantitative easing and easy money has made the lives of ordinary workers miserable with suppressed wages and inflated asset prices especially for real estate.

Of course, we are all sitting on our hands waiting for the downward adjustment to unravel itself, as it is now doing. Quantitative easing and easy money has inflated the ego of China who is now going for world domination. Sure, in the long long term, the China economy with its modern infrastructure will surpass that of the US economy with is aging infrastructure. It is a great mistake to dismiss the need to manage the money supply probably and rely entirely on the superiority of the production function. In a deprived economy, there is a need to increase the output because there is a desperate need for it. Once the need is satisfied, it is often likely that output capacity is overshot because of the lumpiness of industrial investment projects. This is where the trade cycle shows its face. And this is where demand management becomes an art which must be left to the trained professionals.

After four decades of printing money, how is the excess money going to be destroyed? Insolvency. This is where merchant banks or investment banks will be at work. For you and me, you keep gold, I keep cash. In the short term, it is good to have money to spend. 

Days of Reckoning

When times are good, people think they're being clever.

When times are bad, they wondered why.

If they had known, they would not have gone that far.

But it's their cleverness that had brought them to where they are.

It is very sad to realise how people have brought trouble to themselves

We only wish they hadn't. But who are we to tell them so.

The writings on the wall.

1. They had decided on a global liberal economy where labour and capital can move freely.

2. Europe with its fear of stagnation opened up to the free movement of labour.

All that they got is the free movement of Islamic extremists.

3. Capital is free to flow. The US Fed print money and the money went to China to make use of the cheap labour, They lost the capital and the intellectual property.

4. China, feeling rich and capable, use their surplus reserves to buy minerals in Africa.

5. It is inevitable that China will rise and the US will fall. China has newer infrastructure and the US infrastructure is decades old.

6. While the global transition is going to be a gradual process from the US to China, the usual impatience of Marxists to allow historical transition to take its course is ignored and a forced transition is tried. China says it should be the dominant economies and the US economy is in descend.

7. The US while in descent is not without economic and political power and China in ascent is with no economic nor political power. Impatience kills.

8. The US in decline will not decline without a fight. The US still has enough power to kill China.

9. The US dollar is still the reserve currency. Whoever think they can device a good alternative is utterly lack of education on the history of money.

10 While China may strive to live without the US and may possibly succeed, this does not mean that the US is without dominance in the world economy.

11. With the tariff war, the world economy is doomed to recession and high unemployment.

12. China currently suffers from delusion of grandeur, while the US is struggling to stay above water.

13. China for the moment cannot live without the US.

14. The US economy will dominate for the next 5-10 years.

15. The China economy is still in the infant. It has not treated its workers well.

16. It is easy to print money - in the US and China. After printing money, how do you retrieve money from the system?

17. The only way money dies is for banks to go bankrupt.

18. When banks do not lend, the economy goes into recession.

19. Economic growth is borne out of confidence.

20 When there is no confidence in politics and economics, recession looms. 

Tariff War

A tariff is imposed because the deficit economy is caught in a downward spiral because the surplus economy fails to adjust properly.

The theory is that the surplus economy, as a result of the increase in foreign exchange, will have a strengthening currency which leads to a loss of export competitiveness which then gives the deficit economy a chance to compete and recover its external trade position. 

This does not usually happen in the now of China and in the past of Japan where their respective currencies are being held down deliberately either by maintaining low domestic interest rates or by managed foreign exchange policy.

It is a long-held belief that an external trade surplus is indicative of good economic health. 

Of course, it is better to have a trade surplus than a trade deficit. 

But it is not good to always maintain a trade surplus which means than other economy or the rest of the world has to run a trade deficit forever which it clearly cannot. 

(If the trade surplus economy is small, then the problem is not that serious, as in the case of Singapore.) 

By maintaining a sustained trade surplus, it means that the domestic industries are deliberately keeping down the cost of production especially wages and the benefits to workers while profits are ploughed into machinery to keep increasing productivity.

A social and political policy question arises: What is the benefit of a sustainable trade surplus when the working population does the enjoy much of the fruit of the surplus? Are people meant to work the machinery and hence work like machines as well?

Of course, the trade surplus has also the effect of flooding the domestic economy with liquidity. The local banks choose to direct their new loans at real estate which seems to the practice all round the world in the last few decades. The problem with real estate is that it is also a good collateral for banks for their loans, so as real estate prices increase, asset inflation escalates new loans to real estate again, thus accelerating asset inflation.

The banks think they have good collateral so when the asset price bubble bursts, as it is happening now, the banks will end up owning the real estate themselves. In asset deflation, the banks will be loaded with bad loans enough to send them into insolvency due to lack of reserve provisions as the directors have pocketed the profits (which had encouraged them to be reckless in their lending).

Now, what should the surplus economy do when faced with tariff imposition by the deficit economy? A non-economist will think that it is war, call it economic war, and retaliate. Even at war, one probably does retaliate but possible try to defend. 

To retaliate means that: since you are hurting my industries, I too will do the same to hurt your industries. 

To defend means that: since you are hurting my industries, I will do my best to ensure that my industries are not hurt too much. How can you do that?

One is to provide subsidies to the hurt industries. This may not be a good move because you will be accused of further distorting fairness of trade.

Two is to negotiate to see which aspects of the trade is deemed to be unfair. It has usually got to be concerned with the (allegedly) suppressed exchange rate, the too low cost of production such as excessively low wages, poor worker welfare and all those things dealing with labour which the deficit economy has been doing to improve human welfare in society. To undertake a negotiated worker welfare programme for the labour force may be a good first step.

Of course, what has happened with the surplus economy is that it has tried to spend its surplus in third world countries to try to secure raw materials for future growth. This diversion of the trade surplus could probably have also weakened the force of adjustment for the benefit the deficit economy. This is like a three-body problem which means that there is no possible stable working equilibrium to be established between the surplus economy and deficit economy (which the conventional theory espouses) because there is a third party economy involved to which the equilibrating energy is diverted. With no equilibrium in sight, it is natural that the deficit economy wants to put a stop to its deficit run and start rebuilding its economy with a new paradigm. The same goes for the surplus economy which will now have to find its new working model without the prevailing deficit economy.

If the now surplus economy now wants to circulate around its own orbit, it will have to find another economy with a big deficit to fund its desired surplus. This is unlikely to happen firstly because of the deficit size to be replaced but because it will then have to accept a new currency for its foreign currency reserves. At the moment, there is no such single currency that could be deemed acceptable.

There has been an apparent drive to sell the US dollar for gold which can be kept as reserves. When you keep gold in your vaults, gold does nothing as it sits there collecting dust. In the end, you may try to issue your currency as a receipt to an actual amount of physical gold. It would be much better than bitcoin which is an artificial digital construct on an arbitrary basis.

The problem with a currency on the gold standard is that if you allow the gold to be redeemed, you may end up with no physical gold and lots of paper money.

There is no way in a money-using economy that you can do away with money as a unit of final settlement. It is the ability of the fractional banking system that allows money to be created through the expansion of loans, and when the new loans are properly vetted and used, that money creation helps to expand the real economy. It is a fact that the expansion of the US money supply helps to raise the China economy as new US loans were spent on investing and building factories in China and in the process built up the foreign reserves of China.

For China now to discard the US dollar as its foreign reserves by divesting into monopsony and gold, is an attempt now to play the economic game with the US. It is therefore logical that the US should stop this bilateral economic understanding and enforce a structural break even just for the sake of trying to reduce the deficit problem. Like everybody when we try to reduce our debt, we consume less output thereby causing a recession.

A tariff war ends up in recession. This is a fact. 

Tariffs

 A country imposes a tariff to increase the cost of imports of similar goods which are being produced at home due to higher local costs such as higher wages, higher rentals, and higher quality such as tighter QC. Tariff gives the local industry a chance to survive or grow.

The country on whose exports tariffs have been imposed may want to retaliate by imposing tariffs on imports from the first tariff-imposing country. It is not likely that it will be on the same products but probably products which are competing locally or even not.

The end result is that prices of goods and services will rise in both countries on all things with tariffs imposed. There are other consequences. Tariffs are usually imposed with times are tough for local industries. This means higher prices with probably slowly growing demand. These tariffs suck up purchasing power from the local economy into government coffers and this comes in handy as governments are suffering huge deficits around the world. The net impact is smaller quantities consumed and hence production cut. 

Economic recession is inevitable, even if tariffs were originally imposed to restructure global economic balance. 

Economic restructuring usually means some industries will die and new ones come up.

The current global economic problem is something that is waiting to happen and we were not so sure how that was going to happen. This round of tariff imposition among trading countries is surprising but anything could have happened to trigger a global adjustment. For sure, this also means that the US is unlikely to print more money and so we should see a sharp drop in global liquidity and a massive contraction around the world, hitting real estates and banks.

What is happening is something we have been expecting - a massive adjustment in the global economy. A slowdown and recession will take place in the next few years, and it will be sad to see the economic adjustment and deterioration descending into military warfare.

The Value of Living

There is nothing like to feel alive, being able to enjoy life and be happy. This money cannot buy.

Money can of course prevent poverty but poverty is not starvation and not suffering in the strictly absolute sense.

All of us live in relative poverty when compared to all the rich people, in terms of money. Rich people live in relative poverty when compared to ordinary people who can love and trust and be honest in equal measure without fear of the person closest to you stabbing you even when you are guarded.

Of course, all assets are relative in value, relative to money and relative to each other.

Now, the values of all types of assets are going to be measured by which way the economy is going to adjust. 

The biggest fear is that interest rates will rise to curb inflation. It is a bit too late to curb inflation. The world economy is already highly inflated. Prices are already very high, so say too high. Prices must adjust ie to fall in order for the economy to adjust back to equilibrium. Why adjust back? Because the global economy has stopped growing, China has stopped growing. So prices must adjust downwards in the coming future.

Interest rates are not going up because all policy makers and politicians are interested. Their wealth will evaporated as whenever there is an economic depression. We do not need a cut in the money supply for proper adjustment to take place. We just need the growth of the money supply namely the growth of debt creation to slow down. Then deceleration forces will bring about the needed economic correction. Those with their hands full of assets will be devastated.

The cryptocurrency investor has a major reckoning to make. Even cryptocurrency unit is now worth more than an ordinary person's lifetime income. More many of these units are out there waiting to cash out? If all the cryptocurrency units where to be sold, there don't think there is enough volume of the money supply to support that value under the supply curve of cryptocurrency. Even if that happens, the cryptocurrency investor will now hold all the money supply in the world and surely the interest rate on money will rise. They would want interest rates to be high then they can gain from holding cash. There is a convoluted thinking in cryptocurrency. We will let the cryptocurrency investors figure that one out. Similarly, the case with gold investors. The only real gold investors are those accumulating gold to support a new international reserve money. They will not ever sell their gold holdings, as would be the case for cryptocurrency investors who want to be wealthy in that digital unit.

The food for thought here is the nature of value of assets as we await how policymakers decide to solve their debt repayment problem. Unless, they all print money till all hell breaks loose, which it seems to be. Then, we should be gladness just to be alive. Enjoyment of life is an added bonus. How cool the night is tonight. Nice!

The Nature of Risk

Nobody invest with a view to risk. Everybody invest in the belief that they will make money for sure. If they are not sure, they would not have invested.

But there are risks in investments. And people do lose money in investments.

So what happens?

People believe that prices rise and fall for all assets over time. Even those who are absolutely convinced that property values will keep rising in city centres because the population keeps rising and there is limited space in city centres.

But city centres do shift. There are many inner city decays and inner city slums and poverty.

People keep building new assets, designs keep improving as well as the way of life.

Nothing is static. Things in life keeps changing.

It is not true that if you just sit on your assets and do nothing, the prices of your assets will keep rising.

There is this fantasy that one can just accumulate more and more assets and become richer and richer.

All that happens in the end is that there will be companies that grow and grow with assets, and there are people running the companies and they are not owners of the companies. There are these non-human legal entities that just keep accumulating, apparently under the same name, but inside the companies, the corporate ownerships have changed many times, and the founders and their descendants have long sold off their grandfathers' assets and blown off their wealth.

It is true that as the world gets older and more and more people are building more and more assets, more and more assets will come into existence and they will all crowd around certain areas for critical mass. These assets will be owned by people and companies of all shapes and sizes. Or they could all be left in ruins, like all ancient cities and civilisations.

The real question is where do we as individuals come into the picture?

Do we want to become like individuals who spend all their lives accumulating gold and carrying sacks of gold on their backs?

Or are we masters of ourselves and living this world and, at the same, making sure that we have just sufficient means to be able to enjoy this short life that we have. No more, no less. If not, only slightly more but no less.

In which case, we should be spending our younger days working hard and saving, so that we have the means to enjoy our lives when we are not physically or mentally capable of exerting ourselves in the struggles of living.

The risk of accumulating assets is that we have forgotten the primary purpose of accumulating them and have forgotten to live and enjoy our lives.

Some would ask with vastly accumulated assets, we can have all the riches to live our lives the way we want. It is very hard to be rich and humble. It is also very hard to be rich and know the value of living. When very rich, we also know our cleverness and become arrogant and try to reshape the world around us to our own whims and fancies.

It is very easy to fall into the trap and think that what we believe is reality.

The truth is that we are all nothing and we will all die and there is nothing about us to be arrogant about.

We should be spending our remaining days enjoying the quietness and solitude of time spent with ourselves and loved ones, saying all the things we want to be able to say to each other face to face one simple word at a time.

All the assets are like the roof over our heads and rooms to keep us safe and warm. We can use money to buy things and comfort, but we can only discover for ourselves the true happiness of quiet contentment, that we alone are quite sufficient for us alone.

Asset values rise and fall with the madness of people as they react in fear to the uncertainty of the future which is always uncertain and hence always at risk.

The Value Of Gold

The value of gold can hold only when everybody wants to buy gold and keep and does not want to sell.

The only people in the world who keep gold forever are those from ancient civilisations which must have known, from history, that gold is something that has lasting value.

The only institutions in the world which keep gold forever are the central banks when gold is the only money and money is gold. This was true in the past when first it was the silver standard (Spain and the Incas) and then evolved into the gold standard. During the silver standard, silver was dug out in Peru and after trading was buried in the soil in China by corrupt officials. The gold standard was used by the British and abandoned by the Americans. 

The reason was that the standard restricts trade as there was a shortage of the money supply. When money becomes fiat, there is no shortage of the money supply and the only problem becomes an oversupply. The answer to the problem of the money supply is a rule on the restriction of the money supply which no government today seems to be willing to adhere to. The alternative answer is a return to the gold standard whereby the supply of money is constrained by the output in digging gold out of the ground.

Bitcoin ostensibly comes in to replace gold as a standard for the money supply where the supply of bitcoin is dependent on some computer algorithm and the amount of precious electricity required to run the program. But this is no different from a money standard based on the number of kangaroos in the world, or any other exotic or esoteric output. Furthermore, who gives the authority to bitcoin for bitcoin to be the world standard for money - nobody. But this does not detract people from buying paintings of dead people as the supply would certainly be restricted to the existing available.

Same as for bitcoin, there is nothing to prevent gold being accumulated and used in some cases for the payment of bilateral transactions, if both parties so do agree, just as in any other barter trading arrangement.

The point to make is that the price of gold is very high now because first there are people want to buy and keep gold and are buying and keeping gold. Second, there is an enormous of fiat money that has been printed and because of the oversupply of the money supply, people are selling the fiat money for real and tangible assets like gold, silver, minerals, oil, etc. Not sure how real and tangible bitcoin is.

A more interesting question is: Will the price of gold ever reverse? If the people who are keeping gold do not need money and are keeping the gold forever, then no.

Under what conditions will the price of gold reverse? When the opportunity cost of holding money is too high. I.e., when the interest rate is high, say, 5% or 8% p.a., on fiat money. When the return of investment is high, such as in stocks and shares. This may be in certain stocks, as the global economy is adjusting the current technology which seems to be threatening every human job. This last point is interesting.

If computers and machines are doing all the work producing output, who will be consuming that output. If humans are out of a job and have no money, then humans cannot consume that output. The machine produced output will go bankrupt and have to stop.

What do humans do then? Humans go back to the farm and live a simple life eating durian.

There seems to be a way out for policymakers today. Forget about the super-rich investors in technology which are producing output that no humans can afford. Focus on the agriculture sector whereby owner-farmers can grow enough simple food to feed their families. There is plenty for farm-based industries to grow, using the use of super-machines.

Accumulate gold by all means. Most likely this is your savings, your surplus capital. You have more money than you will ever need. Trading in gold and other assets is just a game you play to while away your time alone.

For those who want to live, it may be more useful to engage in more physical and down-to-earth activities which have direct benefit to your physical and mental health, making you tired and hungry, so that rest and eating are joys in your life. The value of gold is just a theoretical consideration done at leisure in quiet solitude.

The Illusionary Nature of Value

When markets collapse, we hear of the loss of billions in value. 

Just like during good times when markets rise, people feel good because they feel they are extremely rich.

The funny thing is this - that the value of any class of assets is measured by the last market traded price of probably one unit of that asset class.

It is by simple extrapolation of that last market price to the entire asset class that has not been sold that value is measured - what they call market capitalisation.

Market capitalisation is a theoretical concept that has no representation in real life. You cannot eat market capitalisation. You can only eat the last assets that you have sold for cash that you can use the cash to consume. The assets that you hold of which you imagine to be worth so very much because of the price that is currently going on in the market is a fool's paradise. 

Of course, it is better to have assets in your hands than no assets at all - because at least at the end of the day, when need be, you have something to sell for cash.

My point is to discourage people from imagining how wild rich they are when in fact they are holding onto to something durable or tangible which carries some value in the future (before of their durability), of which we have no clue what it will be when we need to sell the asset.

It is for this reason that people with extra money need to work hard and pay attention to markets so that they can ensure that the assets that they are holding hold the value that they desire.

There is no guarantee to the value of their assets - because the value is dependent on market conditions.

This is the great disaster story about saving for retirement by entire populations. But that is another story.

Financial Market & The Economy

The financial market collapse has nothing to do with the economy.

The financial market collapses because there are no more greater fools coming after them.

Everybody is looking for a way out of the financial market without losing money.

They are all stuck with financial assets with prices so high that they are ridiculous. Everybody knows that but who is to blink first.

So there is no one to blink first. Everybody is looking for a common excuse to dump the market.

That excuse is the economy.

Everybody knows that the economy has been gone for several years now, ever since covid, ever since the Russia invasion of Ukraine, ever since the CCP cracks down on its own private sector and scare foreign investors.

Everybody knows that the economic problem will be covered up by a major war where sentiments are brewing now and threaten to blow up anytime soon.

The global economy is in trouble because all economies have reached the limits of their government debt financing and the limits of zero interest money supply expansion.

The impact of relentless money printing in the last decades, apart from stimulating the China economy, has been to create a real estate bubble as evidenced by ordinary working people being unable to afford basic housing in the home land. Real estate in capital cities around the world has been fed by corrupt money inevitable from excessive money printing.

The adjustment in the real economy that needs to be seen is in the real estate sector. This has been long in coming because banks are trying very hard to stall the adjustment. Banks are inundated with actual and potential bad loans in real estate for which they are probably inadequately covered by their provisions. The collapse of the real estate in major cities and the collapse of major banks are the next major things to look out for.

This reaction in the financial market is probably major -we do not know how much the adjustment will be this time. Stocks and all kinds of financial assets include cryptocurrencies have been way over inflated. The extent of the adjustment will depend on the amount of spare cash that investors still have to buy up the fallen financial assets. If there is little money floating around, then financial asset prices will be depressed. This may spend problems for banks if they have been funding financial assets all the while.

The real estate adjustment depends on the state of the economy. The real estate sector needs rental to support their mortgage repayments. If business prospects are bad, then rentals will be low and insufficient. Real estate prices will have to fall. Probably by a sharp margin as well.

Bankers have a lot to worry about.

Finally, the saviour of the human race will be the IT sector, the electronics, the digital and everything that has to do with electrical and electronics. The feeding frenzy before has been a new frontier of technology which has brought about a new way of living. Everybody now interfaces with an electronic device.

But technology is now so well developed and embedded in consumer goods such that there is no necessity by the average person to constantly change the rice cooker, the TV, the laptop, the handphone. We are quite happen with what we already have now, thank you. So ends consumer demand for electronic goods.

The last frontier seems to the electric vehicle. Well, for now, no.

I think the human race has developed technology so rapidly in the last three to four decades that it has exhausted the possibility for further enticement of the human greed and curiosity. We are quite happy with what we already have. Our children are quite happy with what we have given them. There is no need to make more babies.

The one last adjustment that is needed is to align the cost of real estate with the purchasing power of the average person. With the end of indiscriminate money printing, there is no more corrupt floating about. The price of real estate in prime locations will have to adjust downwards. How much depends the quality of new jobs being created and the salaries they pay.

The economy is taking a path of its own to adjust. It has very little to do with the current financial market adjustment. The chicken have come home to roost.

Global Markets: Correction, Reversal or Normalisation?

When the Bank of Japan raised its costs of funds from zero to 0.25%, stocks tumbled and the currency strengthened. What is happening?

This is not just about Japan with its thirty years of zero interest rates but also the differential in interest rates among currencies.

The US Fed raised the interest rate on its Fed funds from zero by a quarter of a percentage point in March 2022, to 4.50% by the end of 2022 to 5.50% today. This major increases were to stamp inflation which unfortunately did not quite work because higher prices came from supply side disruption to the supply chain during covid and subsequently the oil price increases as a result of the Russian attack on Ukraine.

The US rate increases have created problems for many countries which fear the impact of significantly higher local interest rates on their domestic borrowers who are mostly heavily invested in real estate as well as the stock market. As a result, most of these currencies suffered depreciation as savers opted for higher rates in the US dollar. This happens to the yen and the ringgit as well.

In Japan, its main problem had been deflation as a result of the asset bubble which burst in 1991 and real estate had deflated and had been unable to recover since. Borrowers were caught with multi-generational loans and these basically prevented any youngsters from borrowing anew to fund new activities while in the meantime diligent housewives continued to save. Japan pursued a zero interest rate since 1990 to try to persuade housewives to spend and reflate the economy. Perversely, the government was trying all means to create inflation in the economy but to no avail for a long time, until recently.

Tourism is now its tool for reviving the Japan economy which after covid has gained tremendous interest such as there is now an aversion to too much tourism. In the meantime, online trading of ordinary Japanese goods has also increased. While all these economic activities are good for creating jobs and profits in Japan, the currency continues to weaken despite the inflow of tourist money. They discovered that Japanese online trading has been too dependent on foreign logistical and payment systems which they have to pay significant fees on. Of course, underlying the Japanese financial story is the borrowing of zero interest yen from Japanese banks and investing those funds abroad, not only to earn higher interest rates or better profits from expanding markets (see the many new Japanese stores open in major cities in Southeast Asia), but also to benefit from the weakening yen.

In an apparent act of desperation to prevent the yen from a depreciating trend, the BOJ raised its interest rate from 0.1% to 0.25% on 31st July, 2024. This is an act against all global interest rate policies which is to lower interest rates as economies around the world as beginning to falter on account of political interference in private investor decisions which therefore entails a significant realignment of global investor strategies among global companies. (The horse the world has bet on has become unreliable.)

It is to be noted that, as of today, what the slight but contrarian interest rate increase by Japan has caused the yen to rise as (some) funds have been sold and repatriated back to yen. The currencies of some other countries have also strengthened, including the ringgit, in an apparent mimic to the yen.

Many commentators are arguing that this is because of the loss of zero interest rate on the yen, but it is only a 0.15 percentage point increase which is small. 

The significance of the (slight) increase in the Japanese interest rate is signal to where the global markets are. That the global markets have been too high for too long and there is now going to be a major adjustment. When this major adjustment happens, don't be the last one holding the baby. So the correct market behaviour is to sell first, and buy back later when prices have fallen enough. This is we see in the global markets today.

Which of course means that the market recovery can be equally quick but probably not to previous highs.

The markets have already known that the global economy is in trouble and they are playing US interest rates coming down. This game is still being played.

The reason for small currencies such as the ringgit to appreciate lately is because forex traders have also been playing on the depreciating trend of the currencies. They could be shorting the currencies and now they have to pull back and cover their positions. In doing so, the currencies strengthened more than necessary. Eventually, everything will fall back to fundamentals.

The economies in the world are in bad shape. Loans are drying up, regardless of whether cheap or expensive. This reduces liquidity. The money supply can be reduced by the decline in the velocity of circulation as less transactions are being made. Cash sits stale in the bank. If you have gold, there is no return and if the price of gold has dropped, then you have lost money. Of course, if you had bought gold earlier, just like every other assets, you are rich asset-wise. To spend you need cash.

The global markets are currently undergoing a quick correction, but they will before long continue as before. Interest-rate disparity among currencies are still there. Economies will continue to crumble. The prospects of war shines a light for economic recovery but what a lousy way to live and prosper (for some).

Cryptocurrency: Is It Money?

The only thing in cryptocurrency that is money is that it has currency in its name. 

Otherwise, it is just a computer generated digital product, just like any other digital products which are ephemeral i.e. can disappear when there is no electricity.

To be fair, cryptocurrency can be considered an asset because it carries a value. This value is determined by supply and demand. In this case, the supply is made limited by creating a process that requires a lot of energy to create. The demand is determined by marketing to the ignorant who have lots of cash but do not know where to put that cash.

The value of cryptocurrency like all other assets will rise when there is continued demand from surplus cash and its value will fall when there is a cash deficit which creates a need to sell the cryptocurrency for cash.

Cash is king because cash is the only real money. Money is any asset which is accepted, by convention or by law, to be the means of final settlement of debt by everybody in society.

The current argument that cash has lost and is losing its value because the government is printing lots of money. This is true.

But the situation will change when the government stops printing money. This is why, because of fiat money, there is a law which restricts the amount of money that the government can print, i.e., borrow.

It is not true that the government can simply print any amount that it likes. Money is a liability which is created on the back of assets, to be fair, paper assets such as government bonds. Once the government bonds are reduced, the amount of money in the system will be reduced as well. In the same way, once banks reduce their loans, there will be less money out there.

In reality, the main concern is not the reduction of the money supply but the reduction in the increase in the money supply. This is because we are talkin about acceleration or deceleration of the economy and hence the increase or decrease in the money supply.

A sustained increase in the money supply (through loan growth or increase in government debt) will generally accelerate growth of economic output along with increases in prices.

Output growth is generally driven by persistent inflation which everybody likes because they think they are making money in cash terms. A simple householder sitting in his little house generally feels wealthy when property prices go through the roof, thinking that it applies to his house but it is imaginary because he likes his house and he has only one house. Property speculators have been laughing till their teeth all fell off.

We have seen speculation bringing about an overproduction. Sky-high property prices have brought about an excessive number of property units. Every property speculator imagines that there are tenants for their many properties. There is indeed a high demand for housing but many people do not have enough money to rent a house. They make do with living in room, some shared even.

When there is a slowdown in the expansion of the money supply, there will be less extra cash to go around. 

The problem with speculation is that speculation does not slow down. Speculation either gets very frenzied or it simply fizzles out. The bubble simple bursts and speculation could not be found.

It is unfair for me to pick on cryptocurrency but it is a good example. There is now a popping of all the speculative bubbles on all assets, including sad to say the speculation in the value of degrees and diplomas.

Everything will simply boil down to confidence. Confidence is important - to be positive of the future is unknown. Especially when we are now in the period of panic and fear as the future doesn't look too good.

When asset prices come crashing down, and you know what are good assets, and you have cash, you should be sitting tight and getting ready to pick up some good assets at good prices.

The time is not now as it is still too early, because we can see the beginning of a major collapse.

Every up and down is an opportunity for investment. It depends on where you are positioned.

If you are in cryptocurrency or in gold, I won't know how you can buy up bargains in other assets.

Anyway, just to give you my thoughts on cryptocurrency and where it stands today in the sea of assets and economic adjustments.

Money & Wealth

In these days of retail price inflation, depreciation and falling asset prices, this may be a good time to ponder on the question of what is money and what is wealth?

The accumulation of wealth is the primary purpose in life of almost all human beings who are fearful of hunger and depravation tomorrow. It is this fear of the uncertain future that we are compelled, if we can, to save for the rainy day.

It doesn't matter how you save. You mostly start by saving cash under the pillow and deposits in the bank. You save from the surplus of your income after expenditure. If you don't have an income, then you cannot save. Instead, you may have to borrow to buy food - this is where the wisdom of saving for the rainy day comes in. If you spend more than your income, then you also have to borrow. Ideally, you spend within your budget. This is the bare bone economics of income and expenditure.

The key point is that when you have savings in the bank, and you do not need that cash immediately, then you could possibly invest it in earning assets - which basically can be anything that can earn you a return, if you know where to look.

Flat Economy

But spotting earning assets is not an easy task, in normal circumstances, i.e., when the economy is going flat. 

Since everybody has to have somewhere live, then residential property seems to be a good place to start. Instead of renting, you can buy your own house using a mortgage loan. Your house is an earning asset because you can save on rent and at the end of paying for the loan, the house is yours as an asset.

If you already have a house, you can also consider renting out your house and rent somewhere cheaper to stay instead, so that you can provide an income stream for yourself.

If you have lots of money, you can use your money to buy more houses than you can live and rent them out. Usually, under these circumstances, there is an increase in the supply of housing, so you can expect housing supply to exceed demand and therefore the rental would not be good enough to offset your mortgage repayment.

You can venture into stocks and shares. In a flat market, you have to know what you are doing. To buy well-managed companies in sunrise or global markets. In small economies, there are not many companies that can sustain their growth so you have to keep constant watch on company performances.

There are of course other financial assets such as government bonds, insurance products, etc., which are out there to tease out your savings from your bank account.

These are all very basic considerations in a normal but flat economy and market.

Booming Economy

In a booming economy, where the central bank follows a low-cost money policy and print money, you can expect money to be plentiful. This means (a) the banks are looking for good borrowers to lend money to; and (b) there will be asset inflation as borrowed money will be looking for assets to buy up.

It is a no brainer that in an economy when asset inflation exceeds the interest rate, one can borrow (if the bank would lend to you) and buy real estate. Your initial collateral would be your savings in the bank or the value of the house you already have (the bank willing to lend you an amount equivalent to the market value less your existing mortgage). 

What the bank is doing here is a very dangerous thing because it is using inflated value as a collateral to support new loans. Dangerous because (a) it escalates loans and asset value, and (b) everything collapses once the economy stops growing and asset prices stop rising. You will appreciate that (b) is where we are today in the world, and (a) was when every investment gurus were boosting how clever they were in going into heavy debt to buy real estate.

So in a rising economy when real estate and financial asset prices are also rising in what is called asset inflation fueled by increasing expansion in loans by banks (because their executives want to take super year-end bonuses), of course, the rationale thing is to get out of money (by dissaving and borrowing) and get into very clearly earning assets. Because this move is so very clear and obvious and no brainer that even grandmas can be masters, what we get is speculation in real estate and financial assets.

Speculation is based not on real value but expectations of future value. And future value is based on the state of the economy in the future. What happens in the future depends on what happens today. If today is young, tomorrow we grow strong and healthy. If today we are grown and mature, tomorrow we will grow old and slow down. For speculators, however, because they are speculators, the future is always better than today. The future better be better than today - or else, we will be in deep trouble.

Speculation is Not Economic Growth

Speculation is not economic growth. Speculation is on asset prices where economic growth is based on output expansion. Rising asset prices can trigger future output and usually with a delay of a few months or a few years. This goes for real estate, and it goes for agriculture (e.g., musang king). In other words, speculation sets the stage for overproduction in the future.

Why overproduction? In real estate, demand is fueled by bankers who lend money out to borrowers who dream of becoming wealthy without work. 

To sustain this model, there must be people who are willing to rent at the prices they ask for. Over time, with everybody buying real estate for themselves to stay because developers keep building new units, there will come a time there will be units which nobody want to rent. Because also bad location, not near rail transport, etc. Demand fall can also be triggered by fall of nominal income (salary cut) or fall in real income (petrol price increase).

Economic Growth is Productivity Gains

For the economy to sustain its growth on its own, the assets invested in must be able to generate a higher output in the future and price is sustained by increase in wages through productivity gains. This usually happens through technological advancement as well as managerial or workplace efficiency improvement.

Politics Sabotaging Economy

When the economy is doing well, is doing very well, this create economic power because businessmen now have money or rather assets (buildings or factories?) and access to banks. This challenges the power of politicians. When challenged, politicians have a tendency to flex their muscles by a stroke of the pen. With such threats of the political masters looming, businessmen and investors become nervous and fearful of the future, an uncertain future, they become petrified. The first thing they do is to stop investment. This means no new money into the economy. Second, they leave the country. This means they close shop and retrenched the workers.

Political Restructuring through Economic Consolidation

Political masters are willing to sabotage the economy when they realise the economy is heading in a direction that is not in favour to their political future. Either you die, or I die. So, you die first.

This is quite a dangerous game. First, the economy will go into a depression not only because investment slows down but there is disinvestment, i.e., less investment than before. Massive number of workers become unemployed. They become hungry and turn to the streets. There is social unrest to get the political masters to help them. But they can't help. So they want a change in government. Even if the government is changed, the economic situation would not change. Unless, investor confidence is restored. Which brings the economic structure back to square one, which is unfavourable to the political regime. So there must be a regime change.

Money & Wealth

Now, we know money is wealth, but wealth is not necessary money. The beauty of money is that it is liquid. In times of trouble, you can take money with you. (Those who feel less secure take gold bars.) You cannot carry your many condos with you. The value of your condos may have plunged, and no rental. You still owe the banks lots of money in mortgage loans.

In these troubled times, health is wealth. Peace and harmony is wealth. Peace of mind is wealth.

Money is a means to an easier life. Wealth is a burden for those who are old and have no strength to carry on.

There is no clear case for debt to be wealth. Debt is unearned wealth.

Even when you have physical assets and financial assets without debt, you cannot use them unless you have sold them and converted them to money. Cash allows you to buy food.

The way forward to life is to live a simple life, with basic needs. You will be happy.

Why ride on the backs of those who must struggle to pay rent so that you can have passive income? If you have not bought units which you cannot use, housing could be a lot cheaper and they could have been able to afford to buy their own little house.

In the end, all that is considered wealth is just a pile of bricks and steel beams.

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.

Malaysia

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.

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.

Meritocracy

Meritocracy is a system of operating a society whereby those who put in effort and strive to the best are rewarded for their effort. The purpose of meritocracy is to push the frontier of society towards advancement, to go where we have not gone before. It is with meritocracy that new investments can be made, additional investments made in new areas of technology - and this, by definition, means growth.

Is meritocracy an instrument for achieving a more equal society? Yes, if meritocracy is clearly shown to be implemented without inequality, ie with favouritism towards the less capable, so that there is great incentive for effort and striving to be the best, for the sake of the whole of society. No, if meritocracy does not excite young people to work and be the best in the world - because one can still go ahead in society and be successful in terms of money made and personal prosperity without trying very hard in technology but in finding other ways around meritocracy such as by political action.

A society that does not value meritocracy is doomed to mediocrity because the society is not being run by the best brains but by those who are easily satisfied with whatever they already have. There could be a case for mediocrity, for one can question the benefit of trying very hard and pushing oneself as if against the wall, when the status quo is sufficient. Certainly, we human beings have a higher standard of living today than the kings of yesteryears. 

However, we must remember that where we are now is the result of the people who had lived before us (especially our parents) and those of us in the current generation who happened to be working very hard and are achieving great advancement in technology. Those who are shouting for mediocrity are precisely those who are enjoying the fruits of meritocracy.

By degrading the importance of meritocracy, it becomes easy to steal by its merits by engaging in the corruption of the system. Corrupting means sabotaging, by creating faults in a well-functioning machinery with all kinds of hindrances - for the purposes of stealing benefits from the system that is working very hard, by putting in parts that do not do any work in the system but create obstacles by demanding toll.

Nothing in this world is equal in all aspects. Trying to create complete equality is a foolish idea, an idealism nonetheless. The earth is not flat. Our faces are not flat. But we can try to emulate those whom we admire because we envy what they have, by putting in effort to be like them, by working very hard. 

There are suffering of all kinds in this world. It is noble to try to reduce all suffering; this must be encouraged. But to degrade the entire system by putting incompatible parts in the structure just for the sale of equality is nothing but foolish.

The answer is that we should encourage meritocracy so that we can create an efficient economic system. We should also give opportunity for mediocrity so that it can also strive, by creating an alternative system where the emphasis is not on excellence. No everyone prefer excellence. Many may be content with mediocrity. There is nothing wrong with mediocrity, except probably the idea of it. We all think we are clever. Even thieves and gangsters think they are clever - and indeed they are. But it cleverness of another kind.

It will be sad to live in a society where excellence and meritocracy is not respected - for we then have nothing to strive for.

Economic Conditions: November 2023

 It is a mistake for ringgit interest rate not to close its gap with the global interest rate which is the US dollar interest rate. With the differential of about two percentage points, it is inevitable that local ringgit funds will flow into US dollar funds for very obvious reason - to earn a higher interest rate. If the central bank for the ringgit refuses to act, as a matter of good policy, then inevitably, as more and more the ringgit are converted into the US dollar, there will be a local liquidity crunch in ringgit and the ringgit interest rate of Malaysian banks will have to rise to attract liquidity. While at the same time, there will have been a loss of US dollars which are being held as our international reserves. Maybe the higher global oil price have given the central bank more US dollars which it thinks it can afford to lose on the currency depreciation as a result of bad forex policy.

It is quite interesting to note that the government is always willing to challenge the workings of the macroeconomy at the global level. This has been shown in the past to be detrimental to the local economy.

In the meantime, the lower local interest rate (compared to the global determinant, the US interest rate) and the resultant lower ringgit, along with the higher price of oil (and hence of all operating costs), has led to a massive increase in inflation, namely, a rise in the rate of local prices increases. There is also no way that the government can cap market prices because to do so will result in a shortfall in production and supply as it becomes not profitable for goods to be brought to the market. Supply shortages will accompany price caps. Imports to make up for the loss of local production due to local price caps will inevitable result in imports being substituted for local output which, if this is long term, then the local economy especially of food production will be rendered incapable of competing with its equivalent imports. This is a serious situation for the long term when there is now realisation of the need to increase local food production in order to contain imported inflation. This will require a complete revamp of the local food supply chain to ensure that the whole chain is completely sourced locally. Local food production and its local supply chain should be a major of policy intervention by the government also a source of employment of the local workforce.

The government cannot continue to be a major source of employment for local graduates given that the cost of running the civil service is now very high and eats up the bulk of operating expenditure. Worse still, not a small sum is being used to fund pensions. It is a good idea for the civil service to be put on the local employment provident fund for two reasons. One, to ensure that civil servants also pay for their own retirements just like the private sector. Two, so that civil servants can be fired when they have proven to be not suitable for the jobs they are employed for. The downsizing of the civil service will be a step in the direction to reduce the layers for the corruption of the efficiency of the civil service system. Ministries and departments can be streamlined. 

The economic structure of the global economy is now quickly being re-engineered as the major global powers fight for dominance and a shift in the global economic axis. As a result, the global interest rate cycle is being reversed. The global economy has been slowing down ever since the advent of Covid, and the two structural changes in the global economy will ensure that the slowdown will continue. Higher interest rates and higher food prices will be the main features of the current global economy. For this small local economy to pretend that it can insulate itself from the tsunami of global macroeconomic adjustments is a foolhardy stance to take. 

It will still be painful, but there may be pain in fewer areas if the government allow the ringgit interest rate to track the US dollar interest rate and solves half the local economic problem in (a) local liquidity tightness, (b) threat to the international reserves, (c) higher imported prices. The other half of the problem still remains: (a) difficulty borrowers are facing with repayment as a result of lower income and now higher interest payments. The economic slowdown and the resultant weakness in the stock market is also causing problems to the property sector. Of course, the banks are also now being challenged through their loan portfolio to the property sector. The adjustments in the property and banking sectors are inevitable, and a higher local interest rate will aggravate the problem but it is not the cause of the problem in the first place. It is just a question of time for the macroeconomic adjustment to take place locally. The economy also seems to have a mind of its own as to how it will react to external signals and internal conditions.

Global superpowers have decided to make a change. The local economy must take precautions to mitigate as much as possible the coming consequences. Times will be tough.

Take care and all the best.

The Mess In the World

It is obvious that the world is in a mess.

I thought I would set down my thinking of how we got here.

For decades, it was obvious that the relentless pumping of money into the world economic system would one day lead to massive inflation - in the minds of old-fashioned economists.

The main counter-arguments was that extra liquidity was needed to fuel the new economy that was the digital boom. This was indeed correct, and for decades the world economy could grow rapidly with little or no inflation. At the same time, technological advances and economies of scale drove down prices of electronic goods.

While relentless investments in the digital economy was driving advances in that part of the world, the liquidity that had resulted in those investments had got bankers excited and they worked in cahoots with real estate developers, leading to the real estate boom around the world. There was obvious massive asset inflation in the real estate sector and everybody was happy because they felt richer and richer.

The key question I have been having in my mind for those decades is this: under what circumstances would the economy explode? There must be a point where asset prices cannot go up very much further. The point must be when householders cannot afford to buy houses based on their prevailing incomes. Commercial properties can still be driven by corporate profits, so long as the real economy is doing well. So I was waiting for real wages to fall, meaning that prices are rising faster than wages - that this probably would have to go on for quite a while, several years or decades. It is quite funny that when the money illusion sets in, the illusion could be sustained for a long time. Households are able to get extra credit from their banks based on the real estate inflation - the difference between the current house prices and their respective current loan outstanding. Inflation feeding on itself.

When it looks like economic theory is not doing its job in curtailing or moderating the runaway economy, the impact of the excessive printing of money comes out in the politics of the beneficiary economies - China and Russia. The liberals might have thought that the printing of money might liberate the world of totalitarian states. But the accumulation of wealth by totalitarian states has made them confident, an increased belief in themselves and their superiority. China began to defy the orthodoxy of western democracy. Russia wanted to reclaim its lost empire glory.

The world economy that was working almost working like a well-oiled engine was beginning to splutter.

Not going into the question of how did the covid come about, the issue of interest to us is that the advent of covid and the political reaction to the public health concern was to disrupt the global supply chain, whereby factories everywhere were asked to shut down. With the total shutdown of supply, it is not surprising that there should be inflation due to a sub-optimal operation of the global supply chain. Cost of operations shot up and so the prices at the retail stores.

But the most significant cause of the current inflation problem is the escalation in the price of oil, and that higher cost is pushed through the entire supply chain. As the cost of oil takes up a substantial portion of the household budget, the quantity that can be consumed on the non-oil budget must surely be sharply reduced. This is where the present cry by the public is.

It does not help that the war affects the supply of grains and other foodstuff.

The central bank of the reserve money, ie, the US Federal Reserve, then decided to raise the interest rate from near zero to now more than 5% pa. This cannot be a proper response to the cost-push inflation. But its immediate impact is to worsen the budgets of households directly. In the rest of the economy, firms who are all indebted with massive loans have to find cash to service them, at a time when cost-push inflation and the disruption from covid is causing problems for businesses. 

In Malaysia, the attempt by Bank Negara to slow the rise of the local interest rates in relation to the global interest rates has the effect of sending the ringgit into depreciation as local funds leave to enjoy better returns abroad. This is the price to pay for trying to prevent the inevitable adjustment to the real estate sector, for trying to ease the problem of their major borrowers who are mainly the real estate borrowers, and for trying to ensure that banks themselves should loans begin to become non-performing on a massive scale.

Is it possible for the Malaysian policy makers to avert the macroeconomic adjustments that are inevitable in the economy without too much pain? This is the time for the local central bank must act boldly in accordance with basic economic policy principles. It is just a question of when.

Not Inflation, Not Deflation

The key focus for monetary policy is always price stability. In technical terms, it is called zero inflation, zero deflation.

Make sure that prices do not change, so that people can concentrate on increasing volume to satisfy rising population in an efficient manner meaning with less use of scarce resources at each increase in scale.

In stockbroking, I was shocked that the master market players were saying to clients that there was going to be inflation and it would be good for the market. Shock for proper economists; money for stockbrokers. Technically, this means negative interest rates: inflation rate higher than interest rates. The main goal of running quantitative easing is to create negative interest rates so that savers are punished and speculators borrowing cheap money think they are making money. In real estate, every idiot bought four properties: one for the wife and one each for the three children. They thought are set for life; no need to work and only collect rent.

The famous Japanese asset bubble burst in 1992 which meant it underwent deflation for more than two decades - that was how far assets had inflated and how long it took for asset prices to come down to be affordable for ordinary people. In the meantime, the economy underwent a recession which means more unemployment and lower wages until they created a category of workers called the working poor. In recent years, there has been some price increases due to increased government tax on consumption (which makes life harder for people with fixed incomes) and the attraction of tourists as well as foreign property ownership.

In Malaysia in January 2019, the consumer price index fell by 0.5% from December 2018 and 0.7% from a year ago when compared with January 2018. This was the first time in recent history and the media was calling this deflation. Sorry, no, this was just a decline in the CPI for the month.

Technically, deflation is a persistent decline in prices over a period of time, not a flash in the pan. So we do not know yet whether we are in a deflation period. We have just to see.

It is only logical that after several decades of inflation, ie persistent price increases culminating in the escalation in prices in recent years caused by outflow of cash which led to a sharp declining in the ringgit and now the refusal for ringgit interest rates to rise accordance to the rise in US interest rates, that we can only expect deflation to follow in the coming years and even decades. We may not like it but I think it is inevitable. Think of all the smart guys with there three extra properties for their children's future education now facing tenancy problems and loan repayments especially as interest rates on their loans start to climb.

It is one thing to not to wish for bad things to happen, but it is a different thing to ignore the inevitable. It is much better to be prepared. Well, I suppose many of us just love the cosy warm sand around our heads even if our arses are still sticking out.

EPF & Housing Mortgages

It will be one of the greatest errors of social policy if the current proposal by housing developers for individuals to use their EPF to fund the mortgage repayments of their houses.

1. If demand for housing is poor and houses are not affordable to the ordinary person in the street, the logical thing to happen is for houses prices to fall and developers to lose money. We cannot afford to ask ordinary people to pay good money to overpriced properties so that profits from real estate projects can be sustained.

2. To release the bulk of the EPF to real estate will maintain property prices higher than warranted by the market, ie the incomes of the people. By not doing so, property prices will be lower and at a level that ordinary people can afford without having to raid the bulk of their EPF.

3. If EPF is used to fund housing mortgages, when there is a crash in the property market which it surely will, then ordinary people will be the victim of real estate speculation perpetuated by real estate developers.

4. I take the view that the real estate market, not only in Malaysia but around the major cities of the world - now happening in London, Brexit not withstanding - will take a major crash - put conservatively at at least 40% down. The situation is akin to the Japan asset bubble which has taken more than 30 years to recover.

5. I think the current EPF policy on housing should stay as it is. The EPF policy is probably one of the best conceptualised schemes in the world for the ordinary person. The only problem now is that wages have been too low and inflation due to the mismanagement of the economy since 1980 has a most devastating impact on the cost of living and the standard of living of the wage earning population.

6. Why is the government bolstering the profits of corporations and not taking a more social oriented stance on relative prices in Malaysia? Time to end politicking for profits for the elite.