Chinks in the Malaysian economic armour?
We have had nearly thirty "good" years since 1980 spending the "oil" money and pretending to the great. The real chink is that the "oil" money is gone, and populist policy of subsidising food and fuel is being removed - in the midst of probably one of the greatest economic turmoils of the century. So much for timing. This implicates the whole generation of politicians who went along with the merry-go-round.
Financially, we took the hit in the 1997-1998 financial crisis, from which we have not recovered. Indeed, danger looms still in the financial industry which has been quite happy to lend to consumers to buy stocks, cars and houses and a good time. But I think that the downside is limited, given that the industry has been recapitalised. I do not mean that the financial industry will not take a hit again - it is likely to, but not to the magnitude as in 1997-98 or what we see in the US and the rest of the developed world which has been relying on financial services for a living.
Malaysia will also feel a similar effect from the credit crunch. The way the local stock market is mimicking the world markets being that the local economy has no real fundamentals on its own. It has similarly been floating on inflated real estate and the general "consumer'led" recovery of old. With the scare, property prices will deflate to its real value - which could be easily halved in some areas - and this will also remove the excuse for banks to lend without thinking.
Even if interest rates are not raised or credit rules tightened, banks may not be inclined to lend.
Without loan growth, the economy will easily be flat with the tip of its nose down - before it nosedives.
The real chink is in its loss of momentum - from an irrelevant economic structure.
The relevant structure is to refocus the economy on competing in the world market - not the generation of billionaires through mega projects.
Monday, October 27, 2008
Tuesday, October 21, 2008
Rescue, Excuse
You who are so new to the job, how come you are so quickly ill-advised about what to do with the economy?!
I hope you have thrown away the same fellows who had advised the Prime Minister previously to raise fuel prices by 41% and got our prices to double across the board - just because you do not want foreigners to enjoy the fuel subsidy. Look at the mess! Great idea, bad timing!
I really hope it is not the same fellows who had just advised you on using a RM5 billion loan from EPF to support shares in the market. You reckoned that the prices of shares that this investment company is going to buy will rise so much that when you sell them again you can make enough to repay EPF the RM5 billion plus interest. If so, you are rising and falling according to your own will, and not the will of the market!
I think the government should stop fiddling with the stock market. It is the easiest route to hell and you are leading the whole economy onto that fiery path.
Remember this: No easy money, no easy money! You fellas got to do some real work, rather than showing us tricks with smoke and mirrors! Worst, if you do not realise that this is happening.
Real work means translating learning into ideas so that the welfare of the ordinary people could be improved - not helping your rich friends not to become poor when they are burnt in the market.
Put a bit of competition into the tenders so that the margins can be reduced, and the work gets done properly.
Better still, let the markets be free so that good people can have the chance to do proper work to contribute to the economy.
We should let the economy sag a bit first to weed out the waste, and not be too keen to rescue, rescue. It's excuse, excuse!
I hope you have thrown away the same fellows who had advised the Prime Minister previously to raise fuel prices by 41% and got our prices to double across the board - just because you do not want foreigners to enjoy the fuel subsidy. Look at the mess! Great idea, bad timing!
I really hope it is not the same fellows who had just advised you on using a RM5 billion loan from EPF to support shares in the market. You reckoned that the prices of shares that this investment company is going to buy will rise so much that when you sell them again you can make enough to repay EPF the RM5 billion plus interest. If so, you are rising and falling according to your own will, and not the will of the market!
I think the government should stop fiddling with the stock market. It is the easiest route to hell and you are leading the whole economy onto that fiery path.
Remember this: No easy money, no easy money! You fellas got to do some real work, rather than showing us tricks with smoke and mirrors! Worst, if you do not realise that this is happening.
Real work means translating learning into ideas so that the welfare of the ordinary people could be improved - not helping your rich friends not to become poor when they are burnt in the market.
Put a bit of competition into the tenders so that the margins can be reduced, and the work gets done properly.
Better still, let the markets be free so that good people can have the chance to do proper work to contribute to the economy.
We should let the economy sag a bit first to weed out the waste, and not be too keen to rescue, rescue. It's excuse, excuse!
Monday, October 20, 2008
Credit Cards and Sub-Prime
Nothing to worry over credit card over-spending.
The bad loans are already factored into the interest rate - that's why you pay 10-12% pa on credit card as opposed to 5-6% pa on normal loans.
Credit cards are small loans, and it is cheaper to write them off than litigate for recovery.
I have not seen credit card debts doing much damage to banking institutions - although individuals are known to get into trouble.
But it is always a sign when banks are keen to give out credit cards that the end is nigh for the economy - they are really going for the sub-prime customers.
The bad loans are already factored into the interest rate - that's why you pay 10-12% pa on credit card as opposed to 5-6% pa on normal loans.
Credit cards are small loans, and it is cheaper to write them off than litigate for recovery.
I have not seen credit card debts doing much damage to banking institutions - although individuals are known to get into trouble.
But it is always a sign when banks are keen to give out credit cards that the end is nigh for the economy - they are really going for the sub-prime customers.
Sunday, October 19, 2008
In For the Long Haul
We could be going for the long haul.
The current US financial crisis could simply mean the end of the US economic dominance in the world.
The Japanese meltdown lasted nearly two decades and still counting.
For turn around, the world awaits China - and India and Russia.
Export-oriented China firms may fail in the next 2-3 years. New domestically-oriented firms need to rise. They may wait to suss out the situation to build new factories and seek bargains of old factories. This may take 2-3 years. For the result to show, if any, we may have to wait 3-5 years.
In the meantime, China has to rethink its economic policy.
We could be in for the long haul.
The current US financial crisis could simply mean the end of the US economic dominance in the world.
The Japanese meltdown lasted nearly two decades and still counting.
For turn around, the world awaits China - and India and Russia.
Export-oriented China firms may fail in the next 2-3 years. New domestically-oriented firms need to rise. They may wait to suss out the situation to build new factories and seek bargains of old factories. This may take 2-3 years. For the result to show, if any, we may have to wait 3-5 years.
In the meantime, China has to rethink its economic policy.
We could be in for the long haul.
Wednesday, October 15, 2008
Flying Blind
Banks and financial insitutions in the US and Europe and even Japan are badly affected by overlending and loan non-performance resulting in the inability of banks to repay deposits in full and the loss of paper wealth in financial markets.
This could potentially undermine public confidence in the banking and financial system. When confidence is lost, everybody wants to keep hard cash under their beds. This threatens the economic system. So, the policymakers argued that the banking and financial system should be saved.
Saving the banking and financial system does not mean that everything is OK.
In the first place, the banking and financial system collapses because of the sharply deteriorating economic system. So the rescue package only tries to stop the financial collapse.
With no additional investment, the economic system should continue to deteriorate at the same rate as before. Hence, the fear of a global economic recession.
Bear in mind that US and Europe are in trouble because of a major structural change in the global economy - the rise of China. It is this inability to compete with China that the US under Greenspan sought to pour liquidity into the economy in order to shore it up. Exactly like Japan in 1985 - and Japan has since not recovered. Do not be surprised if the US economic deterioration should last for some time, say 15 years.
Whether the world will fall into a recession depends on China's ability to restructure from an export-oriented policy to domestic consumption.
This turnaround in economic policy requires a different set of working parameters:
(a) Instead of cheap labour, now better-pay packages are required so that consumption is sufficient to yield positive returns to investments; and
(b) The old export-oriented companies may go bust or go abroad, while a new set of industries producing for the domestic market has to arise. And these do not necessarily mean robustness in the stock market nor real estate.
We must be careful that we do not listen only to speculators for answers to real economic problems.
The narrow focus of policy on financial market as a performance indicator is one of the causes of the current global financial mess.
In the case of Malaysia,
(a) Yes, the local banking system should not be unsettled by the global financial crisis. Most banks are not allowed by the central bank to be overexposed to global markets. This is because the central bank has all the foreign exposure. If there should be concern, it should be over the central bank.
(b) Well, the local economy has continued to suffer from the 1997-98 financial crisis. Only that government spending had helped shore up the economy, with help from an easy money policy. The attempt to bring about productive change to the economic structure through regional development has not been well received - by people who are addicted to easy money from mega projects. There is a limit to how much one can keep the economy afloat by printing money, if the economy remain unproductive.
(c) The only way to live in a time of uncertainty is to reduce the uncertainty through better and more information feedback. Worse if information is being withheld from the public. Information is needed to anticipate change and prepare for it rather than be caught by surprises. At the moment, we are all flying blind.
This could potentially undermine public confidence in the banking and financial system. When confidence is lost, everybody wants to keep hard cash under their beds. This threatens the economic system. So, the policymakers argued that the banking and financial system should be saved.
Saving the banking and financial system does not mean that everything is OK.
In the first place, the banking and financial system collapses because of the sharply deteriorating economic system. So the rescue package only tries to stop the financial collapse.
With no additional investment, the economic system should continue to deteriorate at the same rate as before. Hence, the fear of a global economic recession.
Bear in mind that US and Europe are in trouble because of a major structural change in the global economy - the rise of China. It is this inability to compete with China that the US under Greenspan sought to pour liquidity into the economy in order to shore it up. Exactly like Japan in 1985 - and Japan has since not recovered. Do not be surprised if the US economic deterioration should last for some time, say 15 years.
Whether the world will fall into a recession depends on China's ability to restructure from an export-oriented policy to domestic consumption.
This turnaround in economic policy requires a different set of working parameters:
(a) Instead of cheap labour, now better-pay packages are required so that consumption is sufficient to yield positive returns to investments; and
(b) The old export-oriented companies may go bust or go abroad, while a new set of industries producing for the domestic market has to arise. And these do not necessarily mean robustness in the stock market nor real estate.
We must be careful that we do not listen only to speculators for answers to real economic problems.
The narrow focus of policy on financial market as a performance indicator is one of the causes of the current global financial mess.
In the case of Malaysia,
(a) Yes, the local banking system should not be unsettled by the global financial crisis. Most banks are not allowed by the central bank to be overexposed to global markets. This is because the central bank has all the foreign exposure. If there should be concern, it should be over the central bank.
(b) Well, the local economy has continued to suffer from the 1997-98 financial crisis. Only that government spending had helped shore up the economy, with help from an easy money policy. The attempt to bring about productive change to the economic structure through regional development has not been well received - by people who are addicted to easy money from mega projects. There is a limit to how much one can keep the economy afloat by printing money, if the economy remain unproductive.
(c) The only way to live in a time of uncertainty is to reduce the uncertainty through better and more information feedback. Worse if information is being withheld from the public. Information is needed to anticipate change and prepare for it rather than be caught by surprises. At the moment, we are all flying blind.
Wednesday, October 8, 2008
Removing Excess Liquidity
Excessive liquidity is removed by the collapse of banks.
So what is this big hoohah about bankrupt financial institutions and the attempt by the government to save them?
When there is too much money in the economy, this money got pushed into assets which do not have any conceivable return. This is fine if the assets are bought with cash or past savings. But, if the assets are bought with borrowed money, then it creates a potential problem for loan repayment. It is just a matter of time that the loan repayment problem will appear in the form of non-performing loans in the books of banks.
The only way that banks can hide the problem of NPL is to keep the ratio of NPL to total loans down. As NPL rises, total loans must rise faster. That is banks are forced to gear up and escalate their lending. Banks keep lending until there are no more borrowers to lend to. Then, the NPL ratio surges.
If the gearing of banks has been increased by the reselling of mortages, then the other financial institutions buying the mortgage papers are at risk, no matter how big the potential rate of return may be. One fine day, the mortgage papers will be worth nothing when borrowers cannot repay their mortgages.
The rise in NPL means that banks must use more of their capital to cover their NPL. This cannot happen because the banks are fully geared. Since they have to throw all their capital into the NPL hole, there is no more extra cash for them to lend to new customers. If this happens to one bank, the other banks can help. If this happens to most of the banks, then there is a shortage of liquidity in the system. There is a seizure in the credit line in the whole financial system.
The natural thing to happen is for the banks to go bankrupt - which could mean 10 cents to each dollar of deposit can be repaid. Ordinary depositors pay for the sins of the banks and the borrowers.
So the central banks have to come in to rescue the banks. The mortgages are fine, because they are real estate; if the price of real estate has collapse because of the credit crunch, it is just a matter of time (18 years in Japan and still counting) for the real estate to recover. The central banks can come in to buy these mortgages and keep them. With those mortgages, the central banks can inject more capital into the banks.
But financial institutions which have bought the mortgage papers (not the mortgages) have only useless pieces of paper left. These mortgage papers are sometimes called mortgage-backed bonds, and bonds generally have a limited life, say, one year, three years, five years. These bonds become worthless because the banks issuing these mortgage bonds have gone bust. These are financial institutions that are caught with their pants down. They simply collapse, having exhausted all the reserves they have built up over the years, some, over 100 years. For these financial institutions, they will still have other assets which they can sell to other financial institutions.
It is therefore important in a monetary economy to control the money supply tightly to ensure that there is sufficient liquidity to finance businessess and other real economic activities. It is highly irresponsible for the central bank to keep printing money and maintaining a high pace of expansion of the money supply in the hope of keeping a dying economy alive. This is like pushing a string - the real economy will continue to die while tycoons are created in the financial and real estate sectors. When the uneducated rich begins to laugh at the educated poor, you know the world is upside down and ready for punishment for the greedy.
It is the responsibility of the central bank to keep a disciplined growth in the money supply so that ordinary people do not suffer - by putting their hard-earned savings as bank deposits at risk, by making them poor by engineering the escalation of property prices which put house ownership out of their reach, and generally allowing an insidous creeping up of prices in general. Inflation means ordinary people must tighten their belts so that the rich can consume more.
So what is this big hoohah about bankrupt financial institutions and the attempt by the government to save them?
When there is too much money in the economy, this money got pushed into assets which do not have any conceivable return. This is fine if the assets are bought with cash or past savings. But, if the assets are bought with borrowed money, then it creates a potential problem for loan repayment. It is just a matter of time that the loan repayment problem will appear in the form of non-performing loans in the books of banks.
The only way that banks can hide the problem of NPL is to keep the ratio of NPL to total loans down. As NPL rises, total loans must rise faster. That is banks are forced to gear up and escalate their lending. Banks keep lending until there are no more borrowers to lend to. Then, the NPL ratio surges.
If the gearing of banks has been increased by the reselling of mortages, then the other financial institutions buying the mortgage papers are at risk, no matter how big the potential rate of return may be. One fine day, the mortgage papers will be worth nothing when borrowers cannot repay their mortgages.
The rise in NPL means that banks must use more of their capital to cover their NPL. This cannot happen because the banks are fully geared. Since they have to throw all their capital into the NPL hole, there is no more extra cash for them to lend to new customers. If this happens to one bank, the other banks can help. If this happens to most of the banks, then there is a shortage of liquidity in the system. There is a seizure in the credit line in the whole financial system.
The natural thing to happen is for the banks to go bankrupt - which could mean 10 cents to each dollar of deposit can be repaid. Ordinary depositors pay for the sins of the banks and the borrowers.
So the central banks have to come in to rescue the banks. The mortgages are fine, because they are real estate; if the price of real estate has collapse because of the credit crunch, it is just a matter of time (18 years in Japan and still counting) for the real estate to recover. The central banks can come in to buy these mortgages and keep them. With those mortgages, the central banks can inject more capital into the banks.
But financial institutions which have bought the mortgage papers (not the mortgages) have only useless pieces of paper left. These mortgage papers are sometimes called mortgage-backed bonds, and bonds generally have a limited life, say, one year, three years, five years. These bonds become worthless because the banks issuing these mortgage bonds have gone bust. These are financial institutions that are caught with their pants down. They simply collapse, having exhausted all the reserves they have built up over the years, some, over 100 years. For these financial institutions, they will still have other assets which they can sell to other financial institutions.
It is therefore important in a monetary economy to control the money supply tightly to ensure that there is sufficient liquidity to finance businessess and other real economic activities. It is highly irresponsible for the central bank to keep printing money and maintaining a high pace of expansion of the money supply in the hope of keeping a dying economy alive. This is like pushing a string - the real economy will continue to die while tycoons are created in the financial and real estate sectors. When the uneducated rich begins to laugh at the educated poor, you know the world is upside down and ready for punishment for the greedy.
It is the responsibility of the central bank to keep a disciplined growth in the money supply so that ordinary people do not suffer - by putting their hard-earned savings as bank deposits at risk, by making them poor by engineering the escalation of property prices which put house ownership out of their reach, and generally allowing an insidous creeping up of prices in general. Inflation means ordinary people must tighten their belts so that the rich can consume more.
Tuesday, October 7, 2008
Financial Markets & The Real Economy
[Just returned from a long break.]
It is very easy to be caught up by the ups and downs of the financial markets. Financial markets are nothing more than the trading of useless papers. The reason why many people are caught up by the financial markets is that it is so easy to make money there, as well as losing it - as many would have discovered by now.
The financial markets float up and down depending on liquidity and sentiment. At the moment, both have dried up.
Now, the real world is where people go to school to be educated, to make goods and services which improve the welfare of people. This is the real world where people do sweat, and develop a daily routine which is passed down from generation to generation long enough for that routine to be accepted as culture.
It is now the accepted doctrine that the market economy is the most efficient, in that a greater variety of goods and services can be produced, distributed and enjoyed by more people. At the end of the day, the market economy exchanges the goods and services provided by diligent people.
It is also accepted, in the market economy doctrine, that the rarest of the commodities or items of restricted supply, holds the best value over time because of relative scarcity.
The US Federal Reserve has forgotten this restricted supply rule and has flooded the US and the world with so much US dollars that the way to make money is the inflation of assets - where the paper money shows its increasing worthlessness. For the banks to survive, they just have to lend more and more - to perpetuate the lie - until no more borrowers can be found.
It is time to refocus on the real economy, while the financial markets choke in their own vomit.
It is very easy to be caught up by the ups and downs of the financial markets. Financial markets are nothing more than the trading of useless papers. The reason why many people are caught up by the financial markets is that it is so easy to make money there, as well as losing it - as many would have discovered by now.
The financial markets float up and down depending on liquidity and sentiment. At the moment, both have dried up.
Now, the real world is where people go to school to be educated, to make goods and services which improve the welfare of people. This is the real world where people do sweat, and develop a daily routine which is passed down from generation to generation long enough for that routine to be accepted as culture.
It is now the accepted doctrine that the market economy is the most efficient, in that a greater variety of goods and services can be produced, distributed and enjoyed by more people. At the end of the day, the market economy exchanges the goods and services provided by diligent people.
It is also accepted, in the market economy doctrine, that the rarest of the commodities or items of restricted supply, holds the best value over time because of relative scarcity.
The US Federal Reserve has forgotten this restricted supply rule and has flooded the US and the world with so much US dollars that the way to make money is the inflation of assets - where the paper money shows its increasing worthlessness. For the banks to survive, they just have to lend more and more - to perpetuate the lie - until no more borrowers can be found.
It is time to refocus on the real economy, while the financial markets choke in their own vomit.
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