Author: Hafiz Noor Shams

For more about me, please read this.

Categories
Economics

[2562] A time for fiscal expansion at no cost, a challenge to minarchism

This economic crisis is a challenge to advocates of small government, especially for those who establish their argument based on finance. Even those who ground their position on something more profound like libertarians are being challenged simply out of the practicality of the situation.

The situation is that the cost of borrowing for several governments with debt considered as flight-to-safety grade like the US Treasuries and the German Bunds are very low now. For some, it is more or less zero.

Risk-averse investors really have nowhere to go and the supply for such fixed-income assets is limited. Demand for such assets will continue to outstrip supply in this situation of widespread economic crisis and yields will likely continue to suffer from downward pressure as individuals, firms, central banks and foreign governments bid the prices of these bonds up.

Cases of negative yields in real terms are aplenty. More profoundly, there have been cases of negative yields even in nominal terms. The Danish and the Swiss bonds are two examples where purchasers pay the government to borrow money from the purchasers. This does not happen too often. The market is saying, just take my money and keep it safe; we will pay you to do that.

In such cases, it is probably optimal for governments to borrow so much money and it does not matter if they actually do not need the money. Just borrow and store it somewhere. And if the relevant government has plan that has been delayed due to funding requirement, then this is the time to do it. With zero yields, financing is free. With negative yields, governments get paid to finance the project.

So, the relevant countries, this trend can be used to massively boost government spending and indeed, this can be a Keynesian case for fiscal expansion. There is no cost to it, at least, in the near future. This suspends the crowding out effect that is embedded in mainstream macroeconomic theories.

With the current situation, advocates of small government have to rely on long-run structural argument. The unfortunate thing with long-run argument is that it is describing a situation so far into the future, that it is hard to capture the imagination of enough persons. To most people, what is real is what they see.

And yields on various governments are zero. And judging from the look of it, increased government spending is unlikely to push yields up by a significant margin.

Categories
Economics

[2561] What inflation?

Kapil Sethi has a really odd piece yesterday in The Malaysian Insider yesterday. It started pretty alright by discussing crime but the strangeness began when he tried touch the realm of economics:

At a deeper level though, this desperation points to a changing politico-economic environment that is forcing such radical shifts in behaviour. When there is a perception that well-connected people are getting obscenely rich and are spending their wealth conspicuously and extravagantly while everybody else is feeling the pressure of stagnating incomes, greater indebtedness and inflation, feelings of anger and desperation seem only natural [Crime and the economic divide. Kapil Sethi. The Malaysian Insider. June 19 2012]

In short, he tried to link crime rate with fiscal profligacy.

I do not intend to discuss the strangeness of his article because it messes up my mind. Suffice to say, I disagree with what he wrote about the link. All I want to highlight further is this paragraph of his:

Increasing inflation, higher interest rates and consequent high default on outstanding loans given stagnating incomes could be an outcome of profligate government spending rife with ”leakages” already seen in other economies, notably Greece.

Unfortunately for him, here is how Greek inflation looks like over the past 10 years or so.

I do not see anything special about the inflation rate, save those in 2008 and 2009 which were due to something else entirely (commodity prices boom and the subsequent recession and so-called recovery).

Increasing inflation? If you flip the chart upside down, then yes, maybe for the past two years.

Categories
Economics

[2560] Scary quote of the day

…consider the grim fact that even â‚¬100 billion may not be enough to put Spain’s banks back on their feet, as they could easily face losses of perhaps three times that amount: Real-estate loans amount to â‚¬298 billion, construction credit to â‚¬98 billion, mortgages to â‚¬656 billion and other loans for families and firms to â‚¬683 billion. Assuming a 50% loss in real-estate and construction loans, a 5% loss in mortgages and 10% loss in other credits to the national private sector, brings us quickly to the worrying figure of â‚¬300 billion in losses. And don’t forget the banks’ additional exposure of â‚¬78 billion to Portugal and â‚¬10 billion to Greece and Ireland, which could add losses of between â‚¬40 billion or more to our calculation.

Spanish banks currently report total equity of â‚¬377 billion, so losses on this scale would leave them with just â‚¬50 billion to â‚¬70 billion remaining in equity. To bring them back to reasonably levels of capital would then require €150 billion to â‚¬170 billion—well above the â‚¬100 billion line of credit… [‘Bail-in’ Spain’s banks, not bailout. Juan Ramón Rallo. Wall Street Journal. June 18 2012]

No wonder yields on Spanish sovereign debt are going up, regardless of Greece.

Categories
Economics Politics & government

[2559] Election now leads to less populism

We live in a time of widespread economic crisis.

Europe is in recession. For some European countries like Greece, it is effectively the Great Depression all over again. Economic recovery in the US is slow, with the labor market in May registering horrible statistics to suggest that the US recovery may be flagging.

On the other side of the Pacific Ocean, the Chinese economy is slowing down. Meanwhile, Asian production and trade are growing very slowly as well, if not contracting altogether like in Taiwan and South Korea.

The latest export statistics reveal that Malaysian April exports contracted for the second consecutive months as Europe and others demanded less goods and services. Europe will likely continue to demand less in the near future as its governments, firms and households rebalance their finance towards more saving and less spending on average. The rebalancing is needed and overdue. As always, there is cost to the exercise. The cost will be significant even to those halfway around the world.

These external developments are important to Malaysia because the country has one of the highest trade exposure in the world. The openness and generally liberal trade attitude has allowed Malaysia to enjoy significant secular economic progress so far. But the same factor also makes Malaysia sensitive to the global business cycle.

The awful trade data has not been translated fully into the domestic economy. The domestic labor market, for instance, is holding up pretty well and close to full employment. The resilience of the domestic economy is encouraging but if trade growth continues to be dismal, sooner or later things will change for the worse.

So, there is crisis abroad and Malaysia may very well feel the heat soon enough.

The country needs to be ready for the possible headwind. Politically, it is hard to see how Malaysia is ready given that the general election is just over the horizon, somewhere.

That means policymakers and politicians are politicking.

While this behavior is only to be expected, there is a fear that the government’s collective eyes are off the economic ball. Both sides of the divide — more importantly, the government of the day — are making populist promises and policies to outdo each other and win votes. That may hurt the country’s ability to address possible economic troubles when the time arrives.

While the election is a must to preserve and to enhance our democracy, there is a cost to it. That cost is populism. We have to bear the cost but we do not need to exacerbate it.

How does populism exacerbate cost?

The cost will be higher the longer the politicking opportunity persists. That is so because the longer the politicking period, the higher the likelihood of populist policy will emerge.

That in turn may cause us as a society to meet potential economic trouble with a rifle loaded insufficiently. The point is especially relevant because the federal Budget is expected to be tabled in September. A ”people’s budget” will not be ideal if Malaysia wants to weather the gloomy days successfully.

So, this is a case to hold the general election as soon as possible. A resolution is needed as soon as possible. It is only by having an election as soon as possible that there can be less opportunity for politicking to lessen the probability of economic populism winning the day and ruining the future.

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 Malaysian Insider on June 11 2012.

Categories
Economics

[2558] Introducing unemployment benefits in Malaysia may be good

There was a piece of news recently that the government plans to introduce unemployment benefits in Malaysia. By default, as a libertarian, this should be a repulsive idea to me. But really, I can be supportive of the benefits on at least one condition.

I like rule-based policy and I mostly dislike discretionary one, especially when it comes to fiscal policy. I distrust the government in managing its finance because the government, especially one that is especially susceptible to populist demand, may easily spend with much disregard to public finance. This is especially so in times of recession. I in fact distrust the government in even committing to a complete counter-cyclical spending. The typical reaction to a typical recession by those in government is a Keynesian one: spend. In good times, the necessary austerity is not taken.

I dislike stimulus program not only because of ideological reason but also because of practicality. Stimulus spending is slow and open to abuse if one wants to make it effective and quick. It is open to abuse because, after all, it is a large discretionary spending. Besides, its multiplier effect is not really that clear and because it is slow, government demand may crowd out private demand especially during recovery period.

An unemployment benefit system is like a fiscal stimulus except that it is an automatic stabilizer. That means it is fast, direct and it is more transparent than a discretionary orthodox fiscal stimulus. It is based on rules.

The presence of an automatic stabilizer may reduce the temptation to engage in a massive fiscal stimulus like what happened in 2008 and 2009 in Malaysia and indeed all around the world during the now-dead Keynesian resurgence.

True, it does cost money and it does increase the size of government. But I have a suspicion that an automatic stabilizer like the unemployment benefits, if properly designed to help the unemployed rather than take away the incentive to work, can be cheaper than a fiscal stimulus. It can prevent a worse evil.

There is an added benefit to having an unemployment benefit mechanism in place: better and timely data to gauge the labor market. In the US, labor data through initial claims is produced weekly and lagged by only a week. Professional economists in Malaysia will appreciate this. Right now, only the heaven knows, economic reporting in Malaysia is lagging behind advanced countries by a long shot. Economic data is not really forthcoming.