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Month: September 2012
Yet just another day in the year of crisis monetary policy. And of course, yet another acronym to add to the alphabet soup.
The acronym of the day is OMT. That stands for Outright Monetary Transaction. It is a unlimited but sterilized bond buying program aimed at keep yield of sovereign bonds down, with some conditions, without seniority privilege.
The market is responding relatively well to the OMT but I think the OMT is insufficient to address the woes Europe is facing. The European Central Bank cannot do everything but the monetary policy is a potent firepower nonetheless and I think the ECB has not been using it.
From money supply point of view, the word unlimited is misleading because it is a sterilized operation. That means the ECB can purchase an unlimited amount of bonds, injecting unlimited amount money into the system and then withdrawing the same “unlimited” amount of money from somewhere else. So, any purchase of sovereign bonds by the ECB necessarily means someone else will suffer.
The sterilization is done because Europe, or rather Germany, is so much against quantitative easing, apparently still hung up from inflationary pre-World War II experience.
The sterilization aspect is not different from the previous but defunct program called the Securities Markets Program (the SMP).
It appears to me that the only real difference is the no-seniority nature of the OMT. Then again, as Alphaville at the Financial Times quoted a Mr. Nowakowski, a fixed income strategist at Roubini:
The ECB can promise to be pari passu, until a default threatens and it can then pressure Euritania to let it swap into local or international bonds without CACs that receive special treatment, exactly as it did with Greece. They could still argue, though not in good faith, that those bonds are not senior to anyone, they just got lucky again to get such a great offer. The ECB has tremendous leverage on countries whose banking systems depend on it for funding, so it can call the shots. [Joseph Cotterill. Seniority, the SMP and the OMT. Alphaville. September 6 2012]
So, why again is the market rallying?
Economist Nor Zahidi Alias at Malaysian Rating Corporation wrote in The Edge Financial Daily today that there was too much concern for the fiscal deficit. I will accept that (while I am concerned about the deficit, concerns shown by the public is overly excessive, especially about the debt limit) although I do still believe the government revenue should aspire to reduce its deficit in the long run.
But I am writing here not to discuss about the deficit per se, but rather an assertion by him that:
In Malaysia’s case, its budget shortfall widened to 6.7% of GDP in 2009 as the government implemented measures to avert deeper economic contraction. As a result, the economy rebounded strongly by 7.2%, whilst revenue growth accelerated by a double-digit pace by 2011. At the same time, the budget deficit as a percentage of GDP narrowed to 4.8% in 2011 from 5.4% in the preceding year. [Nor Zahidi Alias. Budget shortfall no cause for sleep deficit. The Edge Financial Daily. September 5 2012]
First, a small issue of clarification. The economy grew by 7.2% in 2010. Government grew by 16% in 2011. I think the langauge can be a bit confusing.
Now, to the beef. I am disagreeing with the causality cited here. The author wrote that as a result of government spending in 2009 or really, the stimulus, the economy rebounded strongly in the following year.
In 2010, real government spending in real terms slowed to 2.9% from 4.9% in 2009. The economy did rebound in 2010 but given the trend in government spending, it is really hard to attribute the 2010 rebound to the government. This is especially so when government spending typically formed only 11% of total real GDP.
How about gross fixed capital formation (i.e. investment) of the public sector? It grew by 2.9% in 2009 and 5.0% in 2010. The 5.0% is more or less the typical growth in the immediate years before the recession.
In fact, the first three quarters in 2010, GFCF by the public sector contracted. Only in the last quarter of the year did it grow by 34.7%, which was huge. If GFCF had not grown at all in that quarter, overall real GDP growth would have still grown by about 6% in 2010. If the GFCF had contracted at about the same average magnitude in the earlier three quarters, the economy would have still rebounded. So, clearly, the source of the rebound came from somewhere else, not the stimulus.
One might try the multiplier story but given how late the stimulus came, I doubt it, along with the stimulus, really was relevant.
Truly, private consumption and private GFCF growth recovered before the stimulus really came into force. Private consumption registered year-on-year shot up by the first quarter of 2010 and private GFCF registered its first growth in the last quarter of 2009. Both happened well before the stimulus had a chance to act. If one compares the numbers on quarter-on-quarter basis, one will realize that the recovery came even earlier.
So, I cannot agree with Nor Zahidi’s assertion that the 2010 economy rebounded strongly because of the stimulus. The numbers do not show that.
It is always nice to watch Malaysians from across the spectrum uniting and cheering behind a Malaysian athlete or team in competitive sports at the international level.
That more or less happened when the number one national badminton player Lee Chong Wei was up against Lin Dan of China at the London Olympics. He failed to get Malaysia’s first gold medal but that did not deter the “I’m proud to be a Malaysian” sentiment among Malaysians.
Sports does sometimes give that warm feeling that we all live under the same brilliant, tropical sun. It can emphasize the common bonds that we share as Malaysians. It is that same feeling that has pushed the idea that sports should be supported further to unite Malaysians in times when our society appears so divisive in so many ways.
Yet, call me a skeptic. While there may be various reasons to support the development of sports further, I do not believe unity should be the driving factor in doing so.
I am skeptical of the value of sports as a substantive unifying factor for Malaysians. It is overrated as a unifying tool.
The reason I believe so is because the ability of sports to unite us is at best superficial. It is more or less effective only during the duration of the match. If we are lucky, then the feel-good atmosphere can last several days after, before we direct our attention to the next issue or event of the day.
Sports can make us temporarily forget our real world problems. That respite can be good for our health. We do need a break from time to time but that is all that it really is — a break and nothing more. Once the game is done, each of us will go our own way.
Sports just does not suddenly make us come to realize, “Hey, we are all Malaysians and so let us hug each other, and be best friends ”¦ forever.”
That kind of logic should be left in the essays of young schoolchildren as they develop their writing skills. It makes cute narrative but unfortunately, it is naïve to expect a child’s narrative to dictate the complex real world.
We do not live within school classroom settings. We are not children and unlike most children, we are not forgetful of past wrongdoings and conflicts, for better or for worst. As proof, some of us are still stuck with the May 13 incident which occurred more than 40 years ago.
Malaysia as a whole will likely move on with respect to the issue only once the generations that identified with that incident are gone and replaced by younger generations unburdened by the hangover of yesteryear.
We will go our separate ways because sports solve nothing of importance in the way we live our lives and deal with our differences. As such, old divisions will remain and we will continue to squabble over it.
Meaningful unity can only be achieved through equitable resolution to real problems and differences that we face as a society. The unfortunate thing is that problems are aplenty and it will take a very long time before we can even take a substantive step forward.
We need to have hard, sober, open and long discussions and debates on all of these problems.
We cannot run to sports to forget our problems and expect the temporary respite from our divisions to last. Sports are no refuge from our deep divisions. It is just but a wooden, creaky hut.
