[2819] Minutes to the MPC a trade-off between transparency and frank discussion

Bank Negara Malaysia does not publish the minutes to its Monetary Policy Committee meetings, unlike the Federal Reserve in the United States. This keeps the rationale behind rate-setting decisions murky to outsiders sometimes.

A few economists in the past several years have bugged the governor on the matter. Acquaintance Jason Fong from RAM Ratings yesterday asked Zeti whether BNM would release its MPC minutes. She provided the same answer she gave last year — I think, also asked by Jason — that maybe in the future, the central bank would allow certain PhD students to go through the minutes for their thesis. The short answer is, disappointingly, no.

The demand for transparency goes by back to professional economists’ attempt at understanding various decisions taken by the MPC. Detailed minutes would reveal who thought what, and explain the MPC statements clearly. A more transparent process would ultimately helps in projecting the Overnight Policy Rate or other aspects of monetary policy.

But yesterday, I suppose since it was her last big briefing with all the economists in town, she felt a bit generous and volunteered a longer answer. It is a good response I think, highlighting the trade-off between transparency and frank discussion.

She reasoned having published minutes could keep participants from discussing various issues freely during the meeting. Some may even be encouraged to state something just to be on record without sharing what he or she really thinks. The end result could be one where not all views will be shared and not all views are actually honest, leaving the final decisions incapable of aggregating views of the committee members accurately.  Zeti said MPC decisions are currently reached through consensus, which means, I guess, no voting.

I understand her point. I would also add having secretive element into the process protects meeting participants from political backlash, much in the spirit of Chatham House Rule, where privacy is the key to robust and frank discussions.

While I do not disagree with the governor, I can think an instance where her point could be weak.

The MPC can get away with that reasoning because there is a lot of trust in the competency and the motive of the committee members. If the next governor is one who does not inspire confidence, I think the importance of transparency will outweigh the importance of having frank and robust discussions.

These days, after all, the trust deficit is not merely a mere gap anymore. It is a gaping hole.

While Zeti is respected in the industry and everywhere else, the next governor — as well as the Finance Minister (the office which effectively appoints the governor) who is also the Prime Minister of multiple conflicts of interest —presents us all with a big question mark.


[2696] Good news is bad news and bad news is good news

This is truly a bonked up world. Sometimes it is as if humanity as a whole does not really know what it really wants. No, what it wants, what the market wants, is to have its cake and eat it too. Ever since quantitative easing became orthodox monetary policy, signals have been mixed up that it confuses the whole market.

Take QE for instance and its effects in Asia. Experts were worried that the expansive monetary policy in the US and more so in Japan these days were fueling asset inflation in across emerging Asia and elsewhere. There is also effectively a manipulation of exchange rates even if it is unintended and done indirectly (do not call it competitive devaluation!), which helps the export sectors of economies which are committed to QE. Those who see their currency appreciating by too much blame QE.

But now that the Federal Reserve Chairman Ben Bernanke said will end when the economy recovers, the equity markets of the whole world are tanking.

From 10,000 feet high, the ridiculousness comes in the form that good news is bad news and bad news is good news. The exact reason for the end of QE is a recovered economy. Judging by the equity and bond markets’ response to Bernanke, it seems that those markets are afraid that the market is recovering.

This highlights how QE has truly detached from the real economy.

As a digression, that does not mean that the QE is not working. It merely means that QE has caused these markets to be divorced from the so-called Main St. The real economy in these QE countries with its high unemployment rate and stuff clearly does not go in tandem with equity market. In the same line, I am the accusation that “Abenomics” has failed only because the Nikkei has jumped off the cliff as missing the point about the function of QE. The QE remains an expansive monetary policy aimed at improving output and not pushing the stock market up, however the function of the stock market as a leading indicator. The fact that the stock market and all of those investment papers are not part of the GDP calculation only stresses the actual intention of QE.

Looking closer, the detachment is understandable I suppose. It is a world of cheap money where the transmission of monetary policy is imperfect. Not all of those money get to the real economy, however it lowers long-term borrowing costs.

Anyway, in non-QE countries, oh, boy! It is almost like a boom. Domestic demand is strong, the stock market goes crazy (relatively because, when the KLCI is compared to regional bourses, all one can say is meh) and yields are so low that it makes sense for the government like Malaysia to expand its borrowing.

But now with the speculation of a tapering and Bernanke’s statement of the end of QE, the same those who complained about asset inflation are panicking, begging, Ben, please, don’t send the ‘copher back home. Stock market is down, yields on government bonds are up and the ringgit got spooked.

And yes, who can forget the craziness of the Treasuries are an insurance to its own downgrade? The magic of reserve currency!

Oh well. Just another day in this crazy world of ours.

At least gold is going down and I am extremely delighted of that. And that is not crazy.

Enough ranting. I have work to do.


[2685] Austrian alert!

Managing imbalances and rising indebtedness under a low interest rate environment

Very low interest rates have now prevailed for a number of years and appear to be likely to continue for the foreseeable future. Given the duration of the easing period, a key question is whether monetary policy can still be considered as being counter-cyclical or has there been a stuctural change in the monetary environment. It also gives rise to the potential unintended consequences of the prolonged low interest rate environment in terms of the mis-pricing of risks, overleveraging and rising household indebtedness, disintermediation of savings away from the banking system, excessive speculation, and the formation of asset price bubbles. Such developments could create financial and macroeconomic vulnerabilities that could harm the long term growth potential of the economy.

Papers on this topic could touch on potential policy issues arising from the prolonged period of low interest rates, and explore possible measures to address financial imbalances. Studies on the effectiveness of alternative monetary tools and instruments in managing risks of imbalances are also welcomed. [Bank Negara Malaysia’s Conference on “Monetary Policy in the New Normal”. Bank Negara Malaysia. Accessed May 8 2013]


[2674] It is Scott Sumner Day, again

How do you write Scott Sumner Day in Japanese? Haruhiko Kuroda Day?

The BOJ said it changed the target for money-market operations from the overnight call rate to the monetary base — cash in circulation and the money that financial institutions have on deposit at the central bank. It predicts the measure will grow to 270 trillion yen by the end of 2014. [Toru Fujioka. Masahiro Hidaka. BOJ Doubles Bond Purchases in First Kuroda Easing Salvo. Bloomberg. April 4 2013]

The last Scott Sumner Day fell in September 2012, the day the Federal Reserve announced QE-infinity.

It is not exactly nominal GDP level targeting, but the shift from rate to level is a big one.

I still do not quite fully understand it but I am sure the commentary over the internet will help.


[2660] A currency war that is not so bad

A currency war is inevitable in the era of quantitative easing (QE). While the long-standing assertion by major central banks that the exchange rate is not a policy tool is pretty much true, there is a well-understood link between monetary policy and the strength of a currency. It is no mystery that the market expects a currency to depreciate each time the monetary authority in control of the particular currency decides to expand its policy.

So, just because the exchange rate is not a policy tool does not mean these central banks are not involved in a currency war. The truth is that it only makes their participation in such so-called war indirect. These central banks have been accused of weakening their currencies through the back door even as they maintain a free-floating exchange rate mechanism.

The need for QE is not being disputed here. The world is stuck in an extraordinary situation where any typical monetary policy is simply inadequate. Rates are so low that it cannot be lowered anymore. QE easily circumvents that problem.

The need for weaker currency for certain countries is also not being disputed here. Time is so bad in the developed world that, almost everybody there wants to export their way out to prosperity.

Currency depreciation does increase the competitiveness of a country by making its exports cheaper to the rest of the world. The issue is that nobody can have a weak currency all at the same time. A currency is always valued against the rest. Someone out there will always suffer from a stronger currency. It is a race to the bottom so to speak.

Under normal situation, the tit-for-tat policy can be disastrous. Economists have a special name for that: beggar-thy-neighbor  Add in concerns for hot money inflow and asset inflation, emerging economies are ill at ease with ever looser monetary policy in advanced economies.

But then again, are the QE and the implicit currency war that follows really that bad in this time of extraordinary circumstances?

The world’s economy requires some kind of rebalancing. Notwithstanding the debate on fiscal austerity in Europe, there is a need for the developed world to spend less and save more, and they may need to export more and import less.

This is the very opposite of what is mostly required by many emerging countries, which do save too much and continue to be export-dependent. The dependency maybe untenable in the near future since most exports go to the very economies that are struggling to grow in the first place. There is just not much room for exports to grow anyway.

For Malaysia, there has been some kind of rebalancing. While the national economy continues to rely heavily on exports, domestic demand has played an increasingly bigger role in moving the economy forward.

Despite uncertainty in the global economy, Malaysia has grown at a rate that is largely surprising in the past few quarters. The fourth quarter national GDP numbers will be released soon and the figures will likely show an uninspiring export growth in contrast to a relatively strong domestic demand growth.

Strong domestic demand translates into strong import figures. In fact, the contrast between global demand of Malaysian goods and services and domestic demand has been spectacular. Malaysian exports for 2012 did not grow more than 1% from the year before while imports grew by nearly 6% in the same period. It is really a wonder that Malaysia maintains a trade surplus still.

Before anything, it is good to know that at least 20% of imported goods and services in 2012 originated directly from countries which unambiguously run a QE programme. Three of those countries are the United States, Japan and the United Kingdom.

These two facts, the first being strong import growth and the second being a large chunk of it is coming from the big three advanced economies engaging in QE, highlight at least one benefit of the currency war: the continuing depreciation of those currencies has kept Malaysian imports cheaper than it would have been otherwise.

This is especially relevant since Malaysia is embarking on massive investments which include the construction of mass rapid transit lines. These efforts require considerable imports of goods the domestic industries are incapable of supplying.

Furthermore, the federal government does have a role in financing these projects in one way or another. It is very possible that the growth of government expenditure has been limited by a stronger ringgit, which has allowed for cheaper imports. That also means it limits the size of fiscal deficit of the federal government, which has come under intense public scrutiny in recent times.

So from this perspective, the supposedly currency war between the big economies is not that bad. While some measures against hot money and asset inflation may be called for, this is a show Malaysia should sit back and enjoy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Sun on February 14 2013.