Category: Economics

Categories
Economics

[2333] A story that is likelier better than deposits battle narrative

I had some trouble reading an article on the front page of the business section of The Star dated today. The headline “Battle for deposits” roars to tell the world that Malaysian banks are in the battlefield sword in hand fighting for deposits, especially for current accounts.[1] I find the whole idea somehow unconvincing. I could not quite finger it but there was something definitely missing from the picture. I wanted to roar back and so I gave it a thought. And I think I have got it.

The article reasons that with the overnight policy rate increasing, these deposits offer cheap source of financing for banks. It sounds fine until one asks, why are the owners of funds putting their cash in low yielding accounts? Hmm…

That is a far more interesting issue at hand than the alleged battle for deposits. I will come back to this.

But first, I did some calculation after mining the relevant data from BNM just to satisfy this weird curiosity of mine. Compare the graphics produced by The Star…

…with this longer period time series that I produced using the same data:

As you can see, the rate 11% is rather typical for the past 10 years for deposits in current accounts. Annual growth rate between 2001 and 2010 is close to 13%. So I am wondering if the proof of 11% offered is any proof at all.

Maybe, there is a battle for deposits. Maybe, there is less wealth around and so these banks have to work harder than usual, thus the battle for deposits. Maybe but I am skeptical of it. Even if it is true, like I said, there is a more interesting issue at hand.

Another point that does not run parallel with the deposits war story is the drop in savings deposit growth rate. The average annual growth rate for savings deposits is 8%. If 11% annual growth rate of deposits in current accounts that is really around average paints the picture of a battle, what about 3% rate for savings that is well below average?

I have a more interesting and a likely more consistent story to tell.

I think the whole issue is a symptom of economic recovery. It might be an affirmation of economic recovery.

The continuing growth of deposits in current accounts suggests that there are more transactions going on. The drop in savings deposit suggests that individuals and companies might be using the money or putting it somewhere else with better returns rather than keeping it relatively idle. Companies might have purchased more supplies for sales or invested more, while individuals might have gone spending somewhere. More spending, less saving.

What adds to the plausibility of the story is that in 2008, growth rate of deposits in current accounts slowed. The recent financial crisis began in 2007 while the full realization that we were in trouble only became clear in 2008. That hit confidence and many began to hoard money. That meant harder business environment and less transactions. Since current accounts are typically used for business transactions, deposits in current accounts should not grow too big, or should even shrink. Look at the growth rate in 2008: 6% compared to 23% the year before and 11% the year after.

Here are a few things that may strengthen the story further. One, increasing sales and investment figures for companies. Two, increasing private consumption for individuals. Three, higher velocity of money.

Anybody wants to check that? I am going to bed.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — PETALING JAYA: Banks are engaged in a war for deposits, especially for current accounts, in their drive to build up low-cost deposits as a means of cheaper funding.

“Demand deposits (current account), which were relatively much cheaper than fixed and savings deposits, had been marking a strong year-on-year (y-o-y) growth of about 11% from 2008 to 2010,” RAM Ratings head of financial institution ratings Promod Dass told StarBiz.

”This clearly indicates the drive among banks to build up low-cost deposits for access to cheaper cost of funds. This active strategy of promoting current accounts usually involves corporate clients who utilise the service for their businesses,” he said.

According to Dass, this was in line with the increasing overnight policy rate (OPR) where the average deposit rate had risen since 2009. [Battle for deposits. Sharidan M. Ali. The Star. March 14 2011]

Categories
Economics Society

[2326] Conspicuous consumption in the train

When I first read Veblen’s The Theory of the Leisure Class, I found the idea of conspicuous consumption a bit ridiculous. In the book, he argued that individuals consume for the purpose of signalling his wealth. Wealth as a signal evolved from prehistoric social structure.

During barbarian times, what Veblen called successful exploits — primarily war but later as society became peaceful and orderly, through business — brought the great spoils to the victors. Success brought status and wealth. The society soon used wealth as a signal of success that brought status, while taking the causal relationship for granted. Slowly, it did not matter whether one is successful or not. Only wealth matters. Wealth differentiated individuals into classes.

Wealth is observed through either consumption or leisure. Long story short, through further evolution, the whole society in the end engaged in consumption to signal wealth and status. All that matters in the end are consumption. If one consumes some minimum level of goods or leisure, then one is accorded with some kind of respectability by the wider society.

Veblen called it conspicuous consumption and conspicuous leisure. It is conspicuous because individuals consume goods and leisure to — to put it crudely — show off.

As I said, I found the whole concept ridiculous initially. It could not be that we all consume to show off in conscious manner. After awhile however, I started to warm up to Veblen’s idea though there were some reservations, mostly because I accepted that there are individuals who engage in this type of consumption. After all, there is such a thing as a Veblen good. For example, a Ferrari. One of the reservation I had was not all consumptions are principally due to signalling. There are consumptions made out of necessity, even in a rich society. Even so, a majority of consumption of items that might be labelled as luxurious are done simply because individuals enjoy such consumption, not because they want to signal their status in a conscious manner.

That opinion of mine later changed.

While I was in Sydney, a majority of individuals, friends and strangers alike, had iPhone or iPod or anything Apple’s. Even I had one. Apple’s products were ubiquitous. It had become some kind of expected standard of consumption.

I only started to recall Veblen when I was riding a train in Kuala Lumpur. I did not see any Apple product, or at least, a majority did not own it. Consumption as a signal of wealth did function well in describing wealth difference between Malaysian and Australia societies.

As I switched on my iPod in the train, I kept holding it in my hand. I did that because I would like to control the player rather than allow it to randomize the songs for me. At one point, I asked myself, am I showing off in the way Veblen described more than a century ago? More question came to mind: what if whether one is aware that he or she is showing off is relevant? What if all of us are showing off, unconsciously?

Whether or not I was aware of the signalling, or regardless of my intention in consuming, I was effectively signalling my wealth, and arguably, status to others through my iPod.

I first read Veblen about five months ago. The first few months were a struggle that began with me trying to disprove Veblen. From disproving, I later tried to qualify his statements. In the end, Veblen won.

Categories
Economics Politics & government

[2322] Bus operators should go bust

Here is another case of private gains but socialized losses.

The Star reports that some bus operators wanted the government to bail them out. They reasoned that they would go bankrupt. Fares “that they collect can no longer cover costs.”[1]

That is nice, is it not?

When things go awry, get somebody to pay for you. When the going is good, keep the money for yourselves.

Without any doubt, I prefer bankruptcy to bail out. In fact, bankruptcy is likely to be good for these bus operators.

One, if they face competition along the routes that they serve, then some of them will be out of business, which then grants the surviving operators  monopoly power. The fares can be raised after that, subject to other constraints, like train services, cabs or private cars. The government of course should refrain from the temptation of regulating those fares. If they cannot compete with these other means of transportation, then clearly the market does not appreciate the bus service, and thus, no need for this type of bus service.

Two, these bus operators will stop losing money once they are bankrupt. That is the point of bankruptcy, anyway. Coupled with limited liability, bankruptcy can do wonders. Of course, some banks in Malaysia demand individual guarantee, which makes limited liability irrelevant. Still, that is a different issue that requires solution that I cannot think of right now.

Apart from that, the Pan Malaysia Bus Operators Association president Ashfar Ali reasoned that the “government is no longer our proponent, but our competitor.”

This is the only hard point to counter.

I however prefer the government to privatize some of the services instead, like that belonging to Mara, i.e. Transnasional. For others like RapidKL and RapidPenang, I wonder how many of these private bus operators actually compete with RapidKL and RapidPenang?

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — PETALING JAYA: Hit by escalating cost of operations, stage bus operators nationwide have asked the Government to take over their businesses and liabilities.

Pan Malaysia Bus Operators Association president Datuk Ashfar Ali has sent a memorandum to Land Public Transport Commission (LPTC) chairman Tan Sri Syed Hamid Syed Albar proposing that the Government buy over their assets. [It’s bailout or bust, bus firms tell Govt. Teh Eng Hock. The Star. February 21 2011]

Categories
Economics

[2316] Of would goldbugs support a large diverse monetary union?

I took a long hard look at a one-euro coin in my hand while I was on a train to Versailles from Paris. For a huge monetary policy controversy across the Eurozone, the coin does not look so special. It is a small unassuming bimetal. Not too many would take a second look at it. Everybody here in France uses it for mundane purposes. Yet, its link to Eurozone’s policy is there and is no small matter.

I was focusing on the coin to avoid thinking of somebody that I care a lot about. After awhile, I began to retrace the cause of the controversy with Eurozone and the weaknesses of monetary union in general. A question soon popped in my mind. Would some hard currency advocates — goldbugs and others — support a large monetary union?

A typical weakness of a large monetary union is its inflexible interest rate as set by its central bank.

A large area with diverse parts that economically grow or shrink differently. That demands different monetary policies and specifically, different interest rates to be pursued by different parts of the union. A monetary union prevents these different parts from pursuing individual rate however. There is only one rate by definition.

The politics between members of the union will inevitably decide the union’s single rate. Each representative at the table will promote the interest of the member who they represent.

The more diverse the members of the union, the harder it will be to achieve a consensus. It is hard because the rate cannot accommodate everybody easily, if ever.

The debilitating politics of a diverse monetary union discourages the rate from becoming flexible. It would be hard to change the interest rate at any one time, unless there is to be some kind of systemic shock that would make everybody to agree to some magnitude of rate change on top of individual needs, and unless the composition of the decision-making body is skewed to side that makes the body unrepresentative.

Through this, the central bank effectively loses control of the rate. This, I think, is a close equivalent of having a hard currency because the central bank loses its power to print money arbitrarily.

Given this, I think many advocates of hard currency will likely like the creation of a large and diverse monetary union. Or at least, they would prefer this to a normal fiat currency regime.

Categories
Economics

[2294] Of favoring the fat over the fit

The prime minister has said it so many times. His administration wants to turn Malaysia into a high-income country.  One of several initiatives that the administration believes can help in that direction is the introduction of minimum wage through the establishment of the National Wage Council. In promoting its supposedly market-friendly and market-driven policy, the federal government embarks on central planning without even flinching at the contradiction. For others, they will do more than flinch because as with any effort at central planning, there are side effects. One of them is the creation of an uncompetitive market.

In the free market, some firms have more market power than others do. That is inevitable due to various factors that are only too natural. Some are just larger than others are and they may have better access to resources and may be able make use of it more efficiently than others do, thus allowing them to sustain their prominence in the market.

That, however, does not prevent smaller firms from competing against their larger counterparts in the same industry successfully. There is enough flexibility in the free market to enable smaller firms to succeed. That flexibility creates free competition and that competition in the free market exacts punishment on mistakes made by anybody, even by larger firms. It gives others the opportunity to rise up.

This competitive force may no longer be true if the wage council dictates wages. The focus here is not the minimum wage itself but rather, the mechanism at which the council dictates the wage.

Consider the possible composition of the wage council. For it to be truly representative, it has to have all stakeholders in the labor market represented. This includes firms of all size and industries. There will be representatives from the labor unions and the government as well.

Consider now the interest of each side given an industry. The government wants to turn Malaysia into a high-income nation and believes the introduction of minimum wage can help. The labor unions want higher wage for its members and are strong advocates of minimum wage. The larger firms do not like competition and can afford higher wages. Finally, the smaller firms do not like competition as well but unlike the larger ones, they cannot afford to pay the kind of wages that the larger firms usually can.

One can see that at least one aspect of interest of the government, the labor unions and large firms coincides and then competes directly against the interest of small firms. Given this setup with the wage council, smaller firms are likely to lose out.

What begins as a problem of low wages or wage stagnation — what has been the rationale for the proposed formation of the wage council and the introduction of minimum wage in Malaysia — that is partly caused by unequal bargaining power between employers and employees is transformed into something else. It turns one problem into another.

While it attenuates the difference between employers and employees, the council amplifies the bargaining power differential between firms. The incentive mechanism of the free market is tweaked, or rather mangled, to give more leeway to larger firms to make mistake and less for smaller ones.

To put the implication more starkly, the wage council encourages the creation as well as the continuance of monopolies in the market. It creates an uncompetitive market, on top of the inflexibility created by the minimum wage policy.

What makes this all the more unpalatable to those who actually believe in market-driven policy is that many pre-existing monopolies in Malaysia are government-linked companies while the smaller companies are likely to be privately held. And when the monopolies are not government-owned, many of these monopolies came to being not because they were competitive, but because of past government policies of lemon socialism that privatized profits but socialized losses.

The concern for lemon socialism and privately-owned monopolies aside, the dynamic of the wage council is stacked against privately-held companies in favor of larger as well as government-linked companies. The role of the state in the market increases with the establishment of the wage council.

This is an example of Najib administration’s supposedly market-driven policy.

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 December 28 2010.