Wednesday, June 17, 2009

Economy 101 Malaysia: Common Sense

The head of one of the think tanks in Malaysia recently said that Malaysian financial journalists should not be faulted for failing to warn against the global financial tsunami.

What utter rubbish! Fine, they may be forgiven for burying their heads in the sand in 2007. But, they did not even get it right in the first quarter of 2008. In the last quarter of 2008, they were still singing praises about the Malaysian economy and that 2009 would register a robust growth.

Maybe the head of this think tank was making excuses for himself and deflecting any criticisms to that of financial journalists. How pathetic can one get?

And now, the Governor of Bank Negara has lately conceded that she underestimated the severity of the impact of the global financial tsunami on Malaysia.

Put it bluntly, such journalists are employed to sell good news so as to lure greedy and stupid investors to gamble in the stock market after the big boys and insiders have made their moves and are waiting to cash out.

Gamblers are driven by herd instincts. They care not about fundamentals. That is why I never hesitated to call them suckers. And they are suckers through and through.Every country has been following the FED in stimulating the economy and pumping vast amounts of monies into the economy. These experts called it “quantitative easing” instead of the simple term, creating money out of thin air – printing money electronically.

For a technical explanation, I reproduce here an extract from Wikipedia:

The term quantitative easing describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero. Normally, a central bank stimulates the economy indirectly by lowering interest rates but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

In practical terms, the central bank purchases financial assets, including treasuries and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing). This process is called open market operations. The creation of this new money is supposed to seed the increase in the overall money supply through deposit multiplication by encouraging lending by these institutions and reducing the cost of borrowing, thereby stimulating the economy. However, there is a risk that banks will still refuse to lend despite the increase in their deposits, and in a worst case scenario, possibly lead to hyperinflation.

Quantitative easing is sometimes described as 'printing money', although the central bank actually creates it electronically by increasing the credit in its own bank account.

Examples of economies where this policy has been used include Japan during the early 2000s, and the US and UK during the global financial crisis of 2008–2009.

But seriously, how many Joe Six-packs reading the above extract can fully appreciate the implications and consequences of such policies of central banks the world over?

In my previous articles and in my book, The Shadow Money-Lenders I have given detail explanations, but I still receive e-mails requesting for further explanations.

In this article, I am adopting a different approach. I want you to think about certain issues and problems and see whether applying common sense will assist you in arriving at the logical conclusions.

Here we go:

Economic Stimulus
1. Right now, at this moment in time, is your government stimulating for growth or merely stimulating for consumption?

2. If it is the latter, does it make sense? The so-called experts say that “credit is the lifeblood of the economy”.

3. “Credit” to the banker means “loans” to you. “Loans” to the borrowers means “debts”. So why do you want to be in debt, just so as to consume?

4. You have a fixed income. Most people do. You are already committed to several debts – car loans, housing loans, financing for your children’s education. You have also your usual household expenses. So why do you want to borrow to consume on things or products that you do not really need or are necessary in your present state of finances?

5. Who gains by this excessive consumption?

6. Which is more critical, production or consumption?

7. Which, in the final analysis, ensures stability in the economy, employment and efficient allocation of resources and investments?

8. When exports are down and the economy has contracted, what are the implications?

Should we tighten our belts or consume and consume?

9. When exports are down, national revenue is down. Likewise, when your income is down, what do you normally do?

10. Which sectors of the economy will be stimulated and has the most benefit to the economy when we continue consuming, spending and borrowing?

Check out from the retail outlets, hypermarkets etc. and ascertain where are the majority of products produced? If they are mainly imported items, who benefits?

Too Big To Fail or Too Big To Sustain

11. When a bank through mismanagement fails, why should we use tax-payers monies to bail them out? Why are banks being treated differently?

12. If deposits are guaranteed by the government, why can’t the bank be liquidated, the old management sacked so that new investors and management can come in and revive the bank? After all, bank licenses are in great demand and few are granted. The new investors will re-capitalise the bank and revive it. Why the need for tax-payers’ monies to re-capitalise the bank?

13. When was the last time you heard a banker sent to jail for CBT? Corrupt bankers plunder in the billions and destroy economies. They get away time after time. Snatch thief is sent to prison and even whipped for stealing a few hundred ringgit.

14. Government linked companies use tax-payers monies to operate as opposed to private companies. In the case of the latter, when they fail, the investors bear the loss. Should we have tighter regulations and laws governing the management of government-linked companies over and above the laws governing private companies?

15. CEOs and board members are invariably political appointments. Should we allow this practice to continue?

Should the government inflate the stock market?

16. You have a bubble when you inflate, as in a balloon. When an asset is inflated, the price is artificially high. Thus, if a share price is inflated to RM10 when its actual value is RM1, why would anyone take the risk of buying such a share when sooner or later it will collapse?

17. Does it make sense for a government to use tax-payers’ monies to prop up the stock market when its values are artificially inflated?

18. Is this not misallocation of scarce resources?

19. Markets go up, markets go down and gamblers indulge in such activities with their eyes wide-open. So why should any government use tax-payers’ monies to sustain a market so as to prevent gamblers from suffering losses?

20. When a bubble has burst, what is the use of trying to reflate a burst bubble? In any event, physically can anyone reflate a burst balloon? When an asset’s actual value is RM1, does it make sense to maintain post-crisis, the artificial value of RM10 prior to the bursting of the bubble?

I want you to evaluate the RM67 billion stimulus in the light of the above questions. Then ask yourself whether the policies make sense.

Finally, ask the RM67 billion question.
How did we fund this stimulus?
Where is the source for these funds?

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