Double Dip Or Fallout

It is sad that this has to happen but it has been obvious for a long time - that the structural break of the US economy is now firmly evidenced by the inability of monetary expansion to paper over. We should now expect deflation in the US as it has been in Japan since the early 1990s.

We cannot be thinking about marginal adjustments in the global economy. It is not as if the US economy is still structurally sound and that a sharp depreciation of the US dollar will correct its external imbalance which it doesn't have much relatively. With the rise of China (and India), the US (and Japan) collapses. Germany may hold, but the Euro may break.

The rise of China not only took away manufacturing jobs from the world, but competes with the rest of the world for food and resources. That a billion of Chinese now chooses not to go hungry means food production must rise by 1/6th or a billion people outside China must starve.

Central banks must reduce monetary expansion and direct the new expansion towards food production and away from real estate, stock purchases and credit cards.

Deflation is a needed adjustment after the sustained monetary expansion. This could put more people into productive work to increase output (especially food). This alternative has been viewed negatively as a rise in unemployment which is true in technically unprepared societies.

The Struggle For Power

It is quite interesting to observe how the struggle for power -potentially absolute power - can lead to very desperate acts.

We imagine that the struggle for political power - for Malaysia, and recently for South Sudan (congratulations!) - is made for the purpose of independence - to define one's own destiny - as opposed to be abused as an agent for someone's benefit which therefore all points to a common good that the people of a society can nurture for itself.

The greatness of George Orwell in his Animal Farm is how the objective of the struggle can metamorphosise from high level to more degraded levels. In South Sudan, we are hearing worries over tribal warfare and potentially huge economic survival issues at all levels. In Malaysia, we have descended from an inspired greater commonwealth to one of sectarianism. We have not done ourselves justice.

We thought we started with a fairly good institutional structure of checks and balances, but with a very big loophole in the shape of the Internal Security Act which allows the authorities to detain people without trial for 60 days plus 2 years - which unfortunately has been abused to kill dissent. As a result, the inherited institutional structure devolved into a lopsided one with the power accumulated in the hands of the very top. The question now becomes: How can this concentrated power be opposed or even disposed?

It is interesting to note that with the concentration of political power comes the concentration of economic power. "I say this is mine" and it is his or hers. This phenomenon is being justified as the building up of the war chests of political parties, which invariably is the war chest of the political party of the incumbent government and, by extension, of the few individuals who control everything. With that sense of power, it is extremely difficult to dream of fair play and a more balanced approach to how things can turn out in the future for our country and our people. Thoughts are likely to be focused on "how I can siphon the money out without being caught." (Those caught would be considered stupid and ostracized in order not to damage the whole branch.)

When things come to an extreme, how do we proceed as a country? We can continue to let the system squeeze the juice out of the economy and the strength of the people, inviting inflation to redistribute wealth from the very poor to the very rich through "rapid growth of the money supply and loans at low interest rates." This has been going on. "It is not our fault - it is imported global inflation, crop failures in other parts of the world." The nation stares and justifies as a bystander to this global drama.

There are those who figure that they may be able to provide a change - a breath of fresh air, so to speak. The great beauty of democracy is that everybody has a chance to try their hands at governing the nation. How can one claim to know more than another, except through long years of dictatorship which the modern world is trying to do away with. The answer is really to limit the term of tenure so that ideas do get rotated. Do not believe in dictators however benevolent they are making themselves to be - the world can always be a better place without them.

With flexibility and adaptability and room for change and hopefully improvement, the nation and society can evolve and adjust into an animal that is the product of no one person's mind but that of the facets of many people's views - rightly or wrongly. This is where the storytelling comes in for the nation. This is where the wise men and women and sages and prophets come in to guide the people towards redemption. Lest, we are all caught in the quagmire of our own conceit.

There is no mystery to why private investments here have tanked. It spells how much confidence we have in ourselves. We have abused ourselves, our own people, we have spit at each other. We do this because we still have the luxury of past wealth which is slowly being eroded by mismanagement. We are being arrogant.

The path out of this darkness is the light of trust and cooperation, of exerting our selves and making efforts to serve our neighbours by providing them with goods and services in return for what they can provide for what we need. Whether we should persist in what we are doing depends on the vote of society in the exercise of their right to decide what they want to want and do not want. It is the freedom of choice. It is the demonstration of revealed preference.

Malaysians' Right To (MRT) Speak

The 9 July 2011 Bersih rally is significant. It shows clearly that the ordinary Malaysian citizen is now reduced to nothing but an ant for the authorities who is supposed to look after us to step on.

It is the fundamental right of a Malaysian citizen to raise his or her concern over any aspect of the nation. Not to do so is to fail in one's duty to serve the country. Does the government of the day think that after being elected into power it has the absolute power to do whatever it likes until the next election? Isn't there any recourse in the interim?

Is Malaysia still a democratic country, or is it now a dictatorship, or is it now a police state?

What happens to civil liberties? Or, don't the authorities do not understand any of these things anymore?

The recent event has shown that while the government of the day may put on a smiling face, it may not desist from using crude methods to prevent dissent. This is dangerous.

Of all the transformations that the government is trying to institute to get the economy into high income, I fear that the current transformation of civil society from a once proud society to dirt is probably the most potent and alas! the most dreadful.

Unpleasant it may be to the government of the day, it should have the good of society at heart to let the people demonstrate the seriousness of their call for a clean election, no matter how clean the government or the election commission may insist that it is. Truth will prevail. The recent event in Thailand how that truth will eventually re-assert itself, no matter how much it may be supposed.

I do not think that the government of the day is doing itself a service with its recent actions, with collusion from an authority which should have been more competent and professional in handling such a difficult situation. It is only when a situation becomes intricate that professionals are called in. We do not seem to have any.

Cry, my beloved country!

Six Strategic Reform Initiatives (SRIs)

This latest set of initiatives is to wrap up the New Economic Model, with focus on trying to solve the problems of running a proper government machinery and correct the abuses of the past (or rather, the present). But somehow it lacks the Oomph! for the private sector - which I suppose the EPPs are suppose to be doing.

SRI 1: Public Finance: Increasing Revenue, Reducing Cost
+RM13 billion (contractionary on economy)
Improving tax administration
Rationalising corporate tax incentives
Transparent procurement
Control expenditure
Accrual accounting
Implement GST

SRI 2: Government's Role in Business
Since the government has a funding problem, the government will divest its stable of companies and will only be involved in business in strategic and "GNI-positive" areas:
Regional corridor developments
Procurement of defence technology, etc
Investment in "large growth capital, catalytic or new technology"
Biotechnology, renewable energy, public transport systems, etc

SRI 3: Human Capital Development for High-Income Economy
Minimum wage to be instituted
Talent Corporation to draw up a plan
Unemployment insurance to be introduced
To study labour market
Gender issues
SMEs workforce requirements

SRI 4: Public Service Delivery: Lean, Efficient, Facilitative Government
Remove overlapping processes
Standardise functions
Clear governance structure
Real-time performance monitoring
Real-time feedback rating mechanism
Greater public involvement in high level policy review
"Strategic human resources practices"
Open recruitment within civil service and public-private sectors
Enhancing "cross-moblility" by introducing "mobility characteristics" in new superannuation schemes and enhancing current pension scheme (meaning that civil servants can quit or be sacked halfway through their career and still get pension?)

SRI 5: International Standards and Liberalisation: Improving Malaysia's Competitiveness
Liberalisation of the services sector: healthcare, education, business services (professional businesses)
Standards
Competition law - to promote "competition, private investment and market dynamism" and safeguard against "anti-competition practices and abuse of market power"

SRI 6: Narrowing Disparities (Bumiputera SMEs): Capacity Building Boost
Develop Bumiputera SMEs
Promote wealth creation
Uplift low-income Malaysian households
TERAJU to "lead, coordinate, drive Bumiputera economic participation and to strengthen the Bumiputera development agenda"
High-Performance Bumiputera SME programme
Develop next generation of world-class Bumiputera entrepreneurs
To be able to compete in "open market without heavy reliance on Government contracts"

The Beatles In Mono

I am resisted acquiring the set since its release in 2009, arguing the stereo set is good enough and it is not that inexpensive. After all, it was just another ploy by the marketing guys to extract more hard earned money from the average consumer. But, last week, in a moment of fiduciary irresponsibility (the kids are still studying), I relented and bought it. Printed in Japan.

The mono sound jumps out. The mono sound is clear and tight, with a punch which creates excitement in the music that engages every sense of one's being. The boys are having fun, and I am having fun. That's entertainment.

The old CDs for the first four albums are also mono but unremastered. There is a loss of clarity. The new remastered stereo albums are a significant improvement over the unremastered in terms of definition, but the remastered mono stands out on clarity, tightness and punch. Ringo has never sung so well before, with his drumming a significant contributor to the songs and not a mere last minute addendum.

The brilliancy of the mono over the stereo is therefore the definition as well as the tightness of sound which ensues as one. Stereo, the new technology of the late sixties and early seventies, is an attempt at polarisation with a view to creating a greater "soundstage" at home (as if in a concert hall) - and this could be the manufacturers' way of doubling their sales by selling two speakers at one go rather than one by one. This could be related to increasing affluence where houses and homes get bigger and there is more space in the living room for the income earner to relax and enjoy after a hard day's work in the office.

The stereo tries to create an artificiality of sound through their separation to create an illusion of space. Some instrumental sounds are placed on the left and some on the right, with yet the key ones such as main vocal and drums would be placed in the centre to provide a centrality to the sound right in front of the listener - on the assumption that the listener sits comfortably in the centre in a large armchair. To enhance the illusion - and the ideal - some hifi freaks even suggest drawing the curtains and listening in the dark in order to create space.

The attempt to separate sound goes even further into the quadraphonic (4.0) and the 5.1 for the home theatre (with centre and subwoofer) all now is the rage as people imagine that sound could be given more space through separation and alienation.

Cohesion in sound and the creating of sound can take a more destructive path when the idolised Beatles each could not stand each other anymore (probably because increasing wealth has created increasing intolerance for others' idiosyncrasy) that they are quite happy to each go their own separate ways - and pursue their "solo" careers which, in my mind, though fairly successful were not as brilliant as the Beatles as a group. Each had their own peculiarity which were accentuated to the extent of being a bore, whereas the Beatles as a group was a much more considered attempt at creating good and enjoyable songs for the enjoyment of the public, by paring down on the outrageous and keeping things to the centre of an infinite variations.

The Beatles in mono, therefore, is a brilliant act and piece of work which combines the best of the group and of what is good in sound technology. Listening to The Beatles in mono is an enlightening experience, which shows how the simple and sharing and working together can be good and beautiful. Much better than the dominant of a member over the group or the pursuit of their solo careers.

The Beatles in mono could be a lesson for Malaysia, on how keeping the nation together is such a critically important thing.

The Middle East Turmoil & High Oil Prices

I was struck by this simple juxtaposition: As the people in the Middle East become unhappy because of the difficulties of earning a good living and high cost of living, Iran, with the help of Venezuela, Iraq, Algeria, Angola and Libya, fought against the Saudi's efforts to increase output by 1.5 m bpd and soft the price of oil in Vienna on June 9. Apparently, the opposition comes from those without the capacity to pump more and are thus unlikely to benefit from the scheme. Saudi has the capacity and it can unilaterally do it and gain extra revenue, while helping to bring down the price of oil.

This is quite interesting. That governments do see a difference in the budget and the welfare of the people. The Middle East is in a position to try to lower the price of oil and in effect reduce some inflationary pressures from high commodity prices and hence the cost of living. If their region is in turmoil as people take to the streets, lessening retail prices may help to cool those pressures on the ground.

But this is not going to happen. Governments need a good budget to spend and they do not appear to be spending in a way that will directly benefit the people. The people can suffer and it is none of the business of the governments - so long as the governments can be elected or re-elected into power through strong party membership that takes care only of party members. The people can take to the streets and the governments are quite happy to shoot their own people - just to stay in power.

All this is interesting only if my assumptions are correct. Some may argue that the general uproar in the Middle East is a product of technology and that people are taking to the streets because they now know that can congregate in the streets at the same time. I would not confuse the means with the ends.

There could be another argument that says that people are simply fed up with the same old people in governments and they want new faces with fresh ideas, and they are making these protests with great distress to the physical body as well as the mental anguish and hence no amount of cheap prices will help to quell that unrest. This must be really tough then.

The upshot of all these is that the problem in the Middle East is something that the Middle East itself can solve, by itself. Whether it will or not depends on how cohesive the Middle East communities are among themselves, or they are simply bitter enemies among themselves to the bitter end. If they are enemies, then they are ripe for manipulation from outside the region, and there is great incentive for causing unrest especially when the control of resources is concerned.

There is a lack of intellectual leadership in solving the Middle East problem. If the Middle East is uniquely different from the West, it should strive to exert its own uniqueness and identity. If not, then, the Middle East is no different from anywhere in the world, where sectarianism seems to rule the day with the inability to see the sameness in all human beings to the chief cause of trouble. There could even be animosity among brothers. If this is the case, the problem is pure greed and the scramble for power. We just need one or two evil men (and women).

World: To Adjust or Not To Adjust

The current debate on the world economic condition gives a glimpse of why economics is a very difficult subject to master. There are all the theories, which are fine in themselves because of their own internal logical consistency of varying degree of inclusiveness of factors. The main difficulty is in the diagnosis of the problem, which is subjective and based on experience and judgment. The signs are all there. The difference could be as in the judgments of Dr Watson and Sherlock Holmes (however fictional).

We are all agreed that the world (the US) has gone through a serious bout of asset inflation and the bubble has burst. The adjustment has taken place, not in asset prices but in banks whose solvency has been supported by explicit government intervention. The judgment now is that the worst is over and the world can go on with business as usual.

(a) This supporters of this policy are congratulating themselves that they have done an excellent in preventing an all-out fallout and an inevitable recession which could lead to a depression.

(b) Banks have since recovered apparently and are now back on track to be as good as they had been.

The main argument against this affirmative solution is that there has been no adjustment or that the adjustment is insufficient for real change to take place. Those who had made mistakes in the market (mainly speculators) have not been punished by the market - which the market is supposed to do in order to ensure vigilance and discipline. The same people or type of people are still in charge and playing the game. There is no lesson learnt from the recent problem. The problem will repeat itself because the policy makers are looking for solutions in market behaviours that have brought the economy into problem in the first place.

Real adjustment means structural adjustment where the structure of the market and economy will have to change. There have to be new rules and policies and new ways of doing things. Those who have lost in the market must exit and those who have been disciplined and have capital will have the opportunities to buy foreclosure assets at realistic prices so that a new foundation could be built. In this adjustment, employees will be laid off and they have to readjust also through retraining to learn new and more appropriate skills.

This adjustment is necessary in order that the new world order will be able to come to an organisational structure which will be able to provide sufficient jobs for new entrants into the economy. Whilst in the long run, it may be an observable factor that the demography defines the pace of the economic growth. But, at present, the world is undergoing a truly significant change.

In the west, the baby boomers are now in the sixties and retiring. Being baby boomers, they are the largest representation in the demography. Smaller groups (non-boomers) will have to work the extra hour or so to support the boomers in their retirement. While pensions may be defined in nominal terms, that the inability of the new cohort to produce sufficient for themselves and the retirees mean that (a) there is inflation (if pension payments are appropriate) or (b) there is unemployment among the new cohort (if the aggregate demand is low as the retired boomers reduced their consumption).

In the east, China's increased production of consumer goods has reduced per unit cost as well as increased the global participation in industrial production by workers by a significant amount - which reduces wages (first nominal and then real). This has caused the withdrawal of employment by higher-paid workers in the west. Added to this global work pool is India, in the higher value-added sector of ICT. This sharp increase in the global volume of workers means that the west (particularly the US) has resorted to solving its problem by printing money - which we had seen and still seeing. (Whether they are translating the excess liquidity into rapid loan growth now or not is moot; they had.)

Maintaining an easy money policy is politically advantageous to do. It is like giving morphine. Fiscal policy has run its limits, constrained by common sense about government debt.

I think it was Franco Modigliani who asked the question a long ago in a published paper: Should be foresake stablisation policy, when discussing the relative merits of fiscal and monetary counter-cyclical policies. This question is now moot. We are not talking about stablisation policy. The world has changed. The structure of the world economy has changed. We are now dealing with structural change.

Is it then correct that the US should counter the comparative advantage of China's labour force with a low interest rate for its industries so that its industrial workers can compete - or that has the US actually foresaken its agriculture and manufacturing industries and now focuses on the services sector in order to compete. In the services sector, adjustments could be massive and rapid with a high casualty rate, such as venture capital, stock market, financial instruments, and all kinds of financial products. (It is no surprise that massive financial crimes occur in the US, and elsewhere.) It is also no surprise that WTO pushes for the opening in the east for the services sector.

In globalisation, the problem with using the services sector for growth is that it does not necessarily has to use local workers. Local workers may not be skilled enough or they do not have local knowledge. The services sector, in order to expand, especially for financial services, it has to tap the best brains in the countries they operate. While US firms may grow, US employment may not rise commensurately in that sector. This is the same issue for all MNCs. (It is therefore questionable for Malaysian employment that Malaysian GLCs go abroad and brought back nothing.)

These services MNCs do not need zero interest rate to flourish. They need a policy where credit is easy to get. The banks with their billions of unlent excess reserves would be most happen to fund grandiose schemes by US firms that span the globe.

By not allowing local asset values to adjust downwards, there is no scope for local businesses to flourish as old local businesses could be weighed down by high debt and a long repayment period which chew up revenue and discourage recapitalisation. Those with cash has no chance to buy assets at fair value, and they end up holding financial assets. In a world where excessive wealth is looking for a safe place to park in the financial market, there is always the problem of overvalued of financial assets, as real asset value are kept up by the inability of the market to adjust downward as governments around the world stablised their respective economies with artificial means.

Adjustments of course means hardship and unemployment; but this does not mean they do not exist today when unadjusted. For fear of a flash of pain, one may have to suffer long and quiet.

As economic adjustments are increasingly politicised, it is not surprising that unemployed youth are trying the oust the old and crumbled who are holding to their asset values through long established networks in the only means available to them. Greedy people are trying to hold on to brick and mortar or pieces of paper which enough paper wealth to last them a few generations, at the expense of the new generations of the rest of society. Future values and investments are concepts that need a rethink. In the end, other young people, provided they can get a job, will have to work for the descendants of these old rich.