Category: Economics

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Economics

[2480] Two graphs for market monetarists in Malaysia

Before this, nominal GDP is hardly a statistics one would look at. Things are starting to change with the rise of market monetarism.

Here is  how the nominal GDP for Malaysia looks like, in comparison to real GDP. As you can see, there is a big gap between potential and actual output in nominal GDP.

A market monetarist will want the loss in potential output in nominal terms be dealt with. If the person had gotten his way, there would not have been a drop in the nominal GDP. Or rather, the nominal trend would have been more constant instead of exhibiting large variation year after year.

The same loss can be seen in terms of growth.

A market monetarist at Bank Negara would have engaged in big expansion of money supply in late 2008 and 2009 to stabilize the nominal GDP. And he would have tightened supply in 2007 and much of 2008.

This raises a question for me. While I do see the virtues of market monetarism, especially when inflation is persistently too low like in the US, would it work in Malaysia?

The reason I am asking is that I am worried about stagflation. We know that the stagflation of the 1970s was terrible but would that be better than what we experienced in 2009?

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[2477] Diamond, consumer choice theory, marginal revolution, Marxian economics and the paradox of value

From those precursors of food production already practiced by hunter-gatherers, it developed stepwise. Not all the necessary techniques were developed within a short time, and not all the wild plants and animals that were eventually domesticated in a given area were domesticated simultaneously. Even in the cases of most rapid independent development of food production from a hunting-gathering lifestyle, it took thousands of years to shift from complete dependence on wild foods to a diet with very few wild foods. In early stages of food production, people simultaneously collected wild foods and raised cultivated ones, and diverse types of collecting activities diminished in importance at different times as reliance on crops increased.

The underlying reason why this transition was piecemeal is that food production systems evolved as a result of the accumulation of many separate decisions about allocation time and effort. Foraging humans, like foraging animals, have only finite time and energy, which they can spend in various ways. We can picture an incipient farmer waking up and asking: Shall I spend today hoeing my garden (predictably yielding a lot of vegetables several months from now), gathering shellfish (predictably yielding a little meat today)? or hunting deer (yielding possibly a lot of meat today, but more likely nothing)? Human and animal foragers are constantly prioritizing and making effort-allocation decisions, even if only unconsciously. The concentrate first on favorite foods, or ones that yield the highest payoff. If these are unavailable, they shift to less and less preferred foods. [Guns, Germs, and Steel. Chapter 6: To Farm or Not to Farm. Page 107. Jared Diamond. 1999]

A lot of words.

Luckily, any economics student who has his or her bases covered will understand this as [latex]\frac{dy}{dx} = \frac{P_x}{P_y}[/latex] in one way or the other. Simple! We can thank the marginal revolution that began in the late 19th century for that. Marginal revolution also solved the paradox of value. Indeed, marginalism is the foundation of modern microeconomics, regardless of your cup of tea.

And oh, did you know that the marginal revolution also made Marxian economics in its original interpretation completely obsolete?

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Economics

[2476] Postponing the European crisis to 2013

I am in the opinion that the expected sovereign debt and banking crises in Europe have been postponed to the end of 2012 or early 2013. There are two reasons why I think so.

The crisis in Europe is essentially two-fold. One is due to government debts. Two is the risk of default by European banks. The two sides are interrelated but it is useful to separate them.

The sovereign debt crisis has been postponed thanks to the establishment and the expansion of the European Financial Stability fund. The EFSF would not be exhausted until the end of 2012 even if all debts repayment or refinancing by the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain) is financed through facility. The potential rating downgrade of sovereign debts of stronger economies, namely Germany and France, may hurt the likelihood of success of on the EFSF front but I will wait until that actually happens.

I am taking this position because by December 2012, total principal and interest payments made by the PIIGS government is projected to be EUR700 billion. That is below the total size of the EFSF.

The following graph shows principal and interest payment obligation of all the PIIGS government cumulatively. Looking at it, without the more permanent European Stability Mechanism which is supposed to kick start in the middle of next year, trouble will come only around February or March 2013.

The banking crisis meanwhile has been postponed until next year thanks to the soft loan facility provided by the European Central Bank. It has been reportedthat banks in Europe will require EUR700 billion next year to pay up their debts. Since the facility offered by the ECB is at the moment limitless (there will be a limit because already the total loans made by the ECB attract considerable question), the problem on this front too has been postponed to 2013.

This of course says nothing of recession and economic recession is another issue altogether.

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Economics

[2475] Issues with the ECB’s soft loan

It was reported that European banks took out EUR489 billion worth of cheap loan from a facility provided by the European Central Bank. The Wall Street Journal revealed these banks will require more than EUR700 billion to meet their obligation next year, with more than EUR200 billion debt maturing in the first quarter of 2012 alone.

The facility is designed to avert or reduce liquidity crunch in Europe. These are two-fold. One, so that the bank have enough money to not default. Two, so that these banks do not cut loans to individuals and businesses.

Given the near panic that prevails in today environment that is ever looking for the big bazooka solution, it is understandable that the facility provides comfort and reduces the likelihood of bank runs.

But the interest rate of 1% is so low that there is an opportunity for some banks that have a better position than others to profit at the expense of the ECB. Some could probably borrow and reinvest in higher yielding assets like government finance to get essentially free pure profits. The Journal indeed did mention that the French President Nicholas Sarkozy has suggested this to kill two birds in one stone: the banks get their refinancing and the money flows into government coffer through the sales of sovereign debts to further postpone the sovereign debt crisis farther into the future.

Discounting banks which actually need the facility to refinance themselves in time when massive amount of debts are maturing, would the presence of the better-positioned banks compete with those who truly need the funds?

I would imagine some kind of controls is present in the ECB but in time of near-panic like this, I expect the controls to be weak. The tighter the controls, the longer it will take to disburse the money and that is not good. There is no time decide who really needs it. Just give it out and worry about it later.

The tightness of the loans would depend on the size of the facility. I tried to look for it but I have not found it. I would think it should be more than EUR700 billion so that the facility would be too big for the whole of 2012 requirement.

So, I would guess some banks would make pure profit. So, the presence of controls would not answer the crowding out concern.

Also, even if some of the banks actually needed the loan, what exactly prevents the banks from hoarding it like what happened in the United States with money from Troubled Asset Relief Program. Lending cost to businesses and consumers were high but the banks had access to cheap fund. The banks were saved

So, really, the facility is saving the banks. Liquidity issued faced by individuals and businesses will not be solved by the loan facility from the ECB.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s – an extremely helpful Q&A by FT Alphaville.

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Economics

[2471] Decoupling, finally?

The 2008-2009 financial crisis laid to rest the idea that Asia is isolated from the troubles in the US and Europe. The idea was that the fundamentals in Asia were strong enough to support growth. Proponents of decoupling were silenced and embarrassed but the celebration on the other side did not last long. There was a recession at hand and the debate swiftly switched to how best to address the recession.

The dead is walking.

It is 2011 and the idea of decoupling is reemerging again. It has been criticized, just it has been criticized before but statistics in the past few quarters and months have been surprising. The final GDP growth for Malaysia is very likely to be healthy despite all the skepticism and bad news from abroad. The industrial production index figures came out strong for October, beating forecasts by a long shot; it beat even the highest forecast among those polled by Bloomberg. Exports meanwhile has been amazing despite Europe tumbling up and down on a roller coaster ride. The only thing that is not as great as these things is the leading indicator, which by the way, is not negative. After all that has been said and done, it is likely Malaysia will grow at least 5% for the whole year of 2011.

Contrasting these numbers and those in Europe, there appears to be a strong case for decoupling.

Decoupling does make sense, since domestic demand is strong. Just observe the GDP growth figures. It is really hard to say there is a threat of a recession by looking at the GDP numbers so far. Still, the trade exposure is still high, and it is also really hard to say Malaysia will escape whatever really bad happening in Europe unscathed. I will not stick my neck out just yet, unlike the author of Economics Malaysia who writes that Malaysian exposure to European woe is not as big as a brouhaha some has made it out to be.[1]

Standard Chartered thinks 2012 will be a two-speed world, implicitly supporting the decoupling idea in its report. Financial Times’ Beyond BRIC sarcastically, maybe, writes, “just don’t call it decoupling” while reviewing the two-speed world report.[2]

As for myself, I think I prefer to be on the safer side. I subscribed strongly to the decoupling idea because I looked at the so-called real economy and concluded, Malaysia would go through the global crisis rather smoothly. I was wrong. There was a shallow recession. So, I will sit out and watch as an observer than a proponent this time around, for now.

Still, if the European crisis materializes, if the worst materializes, it will be worse than that experienced in 2008 and 2009.

Add that to the fact that the Chinese economy is slowing down (slowing down is relative because the growth rate is still high), I at least am expecting 2012 to be a rougher ride than 2011. But it does not take a genius to say that; I dare say it is the general feeling within the profession.

The more important thing is that we will see whether the decoupling hypothesis will survive 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Malaysia’s European Sensitivity. Economics Malaysia. December 12 2011]

[2] — [Standard Chartered sees a resilient Asia, Mideast and Africa in 2012. Standard Chartered. December 12 2011]