Tag: business cycle

Categories
Economics

[1912] Of increased sales in retailing in Q4 2008 and cognitive dissonance

One of the few industries that are truly reflective of the real economy is the retail industry. The reason is that retailing is the industry which will enjoy or suffer the initial wave of any change in the health of consumers’ real wealth.

Today, the Department of Statistics finally made public the performance of the retail industry as well as the distributive trade sector in the fourth quarter of 2008. Despite skepticism expressed far and wide earlier, the retail industry registered an impressive 16.5% year-on-year growth.[1] Distributive trade sector grew by over 10.0% in the same period.[2]

This is surprising given that for the same quarter, the GDP as officially reported by the Department barely grew at 0.1%.

Gross Domestic Product /
Gross National Income
2007p
Q3 2008p
Q4 2008p

Gross Domestic Product (GDP):
Current Prices (RM Million)
641,864
198,653
177,342

Gross Domestic Product (GDP):
Constant 2000 Prices (RM Million)
505,353
136,211
131,261

GDP Growth Rate
Constant 2000 Prices (%)
6.3
4.7
0.1

Gross National Income (GNI):
Current Prices (RM Million)
628,106
192,845
n.a

Per Capita GNI:
Current Prices (RM)
23,115
27,674
n.a

Table reproduced from the Department of Statistics.[3]

This may show how GDP growth as traditionally reported in a single figure is too much of an aggregated figure that masks important trends in the economy.

If accounted for inflation however, the growth in the retail industry as well as in the distributive trade sector might not be all too impressive.

What cannot be ignored is the dramatic dropped between the third and the fourth quarter.

Public domain. Department of Statistics

Only one word can describe the quarter-on-quarter comparison: scary. The number for the first quarter of 2009 ought to be scarier. The same trend is observable for the sales of motor vehicles.[4]

Quarter-on-quarter comparison typically is not a good method to compare figures because it ignores seasonal effect. In this particular case however, the drop is far too big. I admit that I am taking an easy way out by refusing to do proper modeling to account for seasonal effect but by eyeballing it, I doubt removing the seasonal effect would successfully fight the endearing gravity.

Yet, it is hard to imagine how those numbers translate into reality in Kuala Lumpur. Marketplaces and shopping malls are still ridiculously filled with eager consumers, as if those numbers were, well, just meaningless numbers. I for instance regularly visit Midvalley Megamall and my experience there offers me nothing but cognitive dissonance.

A friend shared the same feeling with me last week. He asked how has the deteriorating economic environment affected me. Do I know anybody being adversely affected by it? Do I know anybody who lost his or her job?

I have friends in Singapore and New York who are not so lucky. Then again, those places are Singapore and New York, not Kuala Lumpur. Within Malaysia context, I have yet to feel the slightest brunt of the worsening environment and I do not know anybody personally who has lost his or her job. Answering those questions only strengthen my cognitive dissonance.

My personal outlook is outrageous bright compared to bad news which keeps coming everyday. This especially so when the crisis has serendipitously brought me considerable fortune, thanks to the collapse of the Australian dollar. But I am not prepared to test my luck any farther than I have done at the moment.

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

[1] — The retail trade sub-sector continued to record a growth of 16.5 per cent to attain RM29.3 billion as compared to RM25.2 billion registered a year ago. The sales value for this sub-sector went down by 6.7 per cent as compared to the previous quarter.

Public domain. Department of Statistics

[Survey of Distributive Trades Fourth Quarter 2008. Department of Statistics Malaysia. March 3 2009]

[2] — The sales value of the Distributive Trades sector in the 4th quarter 2008 posted a growth of RM85.8 billion or 10.3 per cent as compared with a year earlier. Quarter-on-quarter, the sales value of this sector decreased 10.5 per cent as compared to RM95.9 billion in the 3rd quarter 2008.

Public domain. Department of Statistics

[Survey of Distributive Trades Fourth Quarter 2008. Department of Statistics Malaysia. March 3 2009]

[3] — [Gross Domestic Product / Gross National Income. Department of Statistics Malaysia. February 27 2009]

[4] — In this quarter, the sales value in the motor vehicles sub-sector registered a positive growth of 8.2 per cent (RM11.1 billion) as compared to the previous year. Compared to the 3rd quarter 2008, the sales value of this sub-sector registered a decline of 8.0 per cent. [Survey of Distributive Trades Fourth Quarter 2008. Department of Statistics Malaysia. March 3 2009]

Categories
Economics Liberty

[1835] Of freedom to err and to learn

Failure is simply part of life. A world without failure is a fanciful dream incapable of withstanding reality. No matter how much failure hurts, it teaches us valuable lessons for future endeavors. Do it enough while learning from it, and a pot of gold awaits the daring at the end of the rainbow.

Success and failure are just the result of competition for the best answers to questions that beset humanity. Who is the fastest runner in the world? Who blew the biggest balloon ever? Who is the smartest kid in the class? Mirror, mirror on the wall, who is the prettiest among them all?

In search for the best, somebody must lose. Somebody must be in second place, or last. Not all can take the No. 1 position.

How do we cross the ocean? How do we get to the moon? How do we conquer the final frontier? Failures greeted us along the way before we successfully answered the questions. Remember the tragedy of the Apollo 1 and the Space Shuttle Challenger. Their failure led us to learn more about ourselves, our capabilities and our mistakes. It is because we learned that they did not die in vain.

The glorious discovery of scientific methods which played no small part in aiding the relentless progress of humanity itself stands firm as a witness to the importance of failure: observe, hypothesize, predict and test.

If the prediction is successful in verifying the hypothesis in the first try, then congratulations. If no, then hypothesize sensibly anew. Each time we hypothesize and fail, we are one step closer to the answer for we now know yet one more path we should not take, cutting down the odds in our favor. It is simply so because failure eliminates the wrong paths.

We learn from failure by marking the false doors and knocking tirelessly on unopened ones. The whole process, to generalize it crudely, is an exercise in trial and error. Needless to say, repeated trial and error involves failures and successes.

Evolution, for one, is the great trial and error game. Since time immemorial, nature has constantly tried countless combinations to find the building block of life and reach where the whole earthly living world finds itself today. It is through evolution that nature finds the perfect fit for all. It systematically tries everything in its mind and systematically purges failed combinations in favor of the successful results from many trials.

Evolution is a competition of designs, as Eric Beinhocker writes in ”The Origin of Wealth” as he tries to promote complexity in economics to challenge the neoclassical models. Evolution is a contest to look for the best design and eliminate the failed ones. The inherent Darwinism is harsh but trust the evolutionary processes to produce greatness by exercising the liberty to err and the liberty to learn.

The parallel is seen in the free market system. Through the creation of free competition enabled by the free market system, various ideas compete against each other to satisfy our needs, our demands and our questions. The best ideas and decisions will be rewarded while the worst will be punished, as judged by participants of the market. In other words, the free market mechanism simply adheres to the concept that failures eliminate the wrong paths. The free market is evolution.

This is exactly what we have witnessed for the longest time. An economic downturn occurs for a reason and each time it happens it is because of the mistakes which we commit. The irrational exuberance of the 1990s, for instance, saw massive investment into businesses with weak models. When these models failed as the market finally turned around to revolt against our acts of foolishness, so too those who invested in it. We then adjust our expectation to a more reasonable level.

The current economic crisis is characterized by failure to see the mistakes in time. Mistakes of encouraging home ownership with disregard to creditworthiness; mistakes of loose monetary policies to solve the previous economic downturn; mistakes from leveraging too highly while failing to manage risk; mistake of bad regulations. When the mistakes converged as the fruits ripened too much to turn sugar to poison, the time for punishment at long last arrived.

There is no doubt failure is painful but we are only likely to learn something when it is painful. The fear of pain will encourage us to not to repeat the same mistake. We know fire is hot only after we have burned ourselves.

While we learn, we must remember that we are only humans and we are not perfect. Some will learn and some will forget. Some will learn to adapt and others will fail to do so. For those who failed, the system will keep reminding them why they failed.

What we are witnessing at the moment is the free market taking its course to correct the paths we have mistakenly taken. The system now demands that we learn from our mistakes. For those who have learned something from the past, they will not be affected as badly as those who commit the same mistakes again out of ignorance or arrogance.

Regardless of that, failure is part of the free market system because failure is one of the manifestations of free will. Mahatma Gandhi once said that freedom is not worth having if it does not connote freedom to err. Without failure, the free market cannot function on paper or in practice.

Without failure, the best cannot be found. Without failure, there is an implicit assumption of the equality of results where everybody lives as miserably as the other in a dull monotony: at its center is the equality of poverty. We have seen how such systems failed to incorporate the very basic economic lesson — that individuals respond to incentive. We have seen how that has failed and how the human spirit revolted against it. That failure too is merely a function of evolution embraced by the free market philosophy.

While keeping this in mind, one should be mindful of missing the woods for the trees.

The series of failure across the Pacific and its subsequent ripples spreading globally are not a failure of free market capitalism. It is not a failure of liberty. On the contrary, the series of failure is an automatic reaction against our mistakes. The system is responding because we respond to events around us and that alone shows that the idea of economic liberty with its carrot and stick model works.

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

A version of this article was first published in The Malaysian Insider.

Categories
Economics Humor

[1818] Of tautology of the day

Prediction is hard, especially about the future. [Slippery slope. Free Exchange. October 28 2008]

Shall we predict the past?

But here is something less tautologous by Myron Scholes (via):

Economic theory suggests that financial innovation must lead to failures. And, in particular, since successful innovations are hard to predict, the infrastructure necessary to support innovation needs to lag the innovations themselves, which increases the probability that controls will be insufficient at times to prevent breakdowns in governance mechanisms. Failures, however, do not lead to the conclusion that re-regulation will succeed in stemming future failures. Or that society will be better off with fewer freedoms. Although governments are able to regulate organisational forms, they are unable to regulate the services provided by competing entities, many yet to be born. Organisational forms change with financial innovations. Although functions of finance remain static and are similar in Africa, Asia, Europe and the United States, their provision is dynamic as entities attempt to profit by providing services at lower cost and greater benefit than competing alternatives.

Categories
Economics

[1814] Of different treatment for different circumstances

It is true that the world is more integrated than ever. Major developments on the other side of the world may affect the local environment. Being one of the top trading nations in the world with an export-driven economy, it is undeniable that a reduced consumption in the economies of our major trading partners — specifically the United States — will adversely affect our export sector and ultimately the Malaysian economy.

As the economic crisis unravels and insidiously spreads globally, it is crucial to keep in mind that the local economic environment is different from that of the US. A problem faced by the US economy may not be the same as that faced by the Malaysian economy.

The integration of the world economy is within the grasp of many Malaysians. It is amazing how many Malaysians are attuned to the economic turmoil in the US. This is a cause for celebration because this demonstrates the existence of the free flow of information. That in many ways is crucial in creating a liberal society with empowered individuals.

The idea of connectedness is enhanced by the fact that many households have access to CNN, CNBC and Bloomberg, among others, which keep them informed with the latest nightmares-turned-real on Wall Street and its counterparts across the world.

But something is horribly wrong with the picture. The centric-ness of perception bugs me.

It has been joked that the world according to a typical American begins with Hawaii and California in the west and ends with the West Coast with a whole lot of red states in the middle. To the north are people who end their sentences with “eh” for some unclear reason while to the south, always there are huddled masses yearning to breathe free trying to break into the US. Anything else beyond the US borders is irrelevant, except for some obscure countries like Iraq, Afghanistan, and that one country where French fries supposedly come from and Europe. The perception is that the average American worldview is US-centric.

This is an unkind gross generalization of Americans but to a large extent, it describes the coverage of CNN, CNBC and Bloomberg. These news channels report — especially CNBC and Bloomberg given the fact that these are financial channels — news from the US perspective. It is more likely to give greater coverage over the US economy instead of the local economy. And it does not help when the coverage is biased towards that of the stock markets rather than the real economy.

While many Malaysians are exposed to events outside of our borders, one has to be cautious in taking the US economy as a complete parallel of the Malaysia economy. Yet, here in Kuala Lumpur under the incessant rain, I find Malaysians unreasonably subscribing to US-centrism.

I therefore wonder whether it is possible that some are merely absorbing US-centric commentaries word for word without critically considering their relevance to the local economy? Being informed is great but what use is it when one merely memorizes the lines without comprehending the implication or non-implication in this age of information overload?

This is not another “decoupling theory” which suggests that a particular economy could be isolated from global events. Whenever the US sneezes, the world catches a cold and that world includes Malaysia since the country is not an autarky by any stretch of the imagination. Instead, this only stresses the different issues which Malaysia and the US are facing. Malaysia needs to run a set of policies different from that seen in the US and other countries in crisis.

Despite the importance of the US to the Malaysian economy, the two economies are different. For example, first of all, the main cause haunting the US economy is the deflating of the housing bubble. For Malaysia, there is no housing bubble; even if there was one, it has not deflated it. Secondly, sub-prime lending along with the associated securities are practically non-existent in Malaysia. Even if there was one, that would be dependent on the housing bubble. The closest shave Malaysia saw was probably the one involving AIG. After considering the level of debt, foreign reserve, laws and regulation as well as other important indicators, the difference between the two economies is as clear as daylight.

There may be more close shaves later and if one does hit us, it is likely that the crisis would be exogenous in nature — meaning originating from outside of our borders — instead of endogenous or caused from within. In all likelihood, if a crisis does hit us — knock on wood — it is likely that Malaysia will defend the local economy from exogenous waves rather than protecting the local economy from itself.

The impacts will be different from that seen in the US and the solutions will be different from those employed in the US. Therefore, any effort to stimulate the Malaysian economy will require policies tailor-made to local circumstances rather than cut-and-paste ones.

That requires the relevant authority to keep close tabs on various indicators of the local real economy. These indicators at the moment suggest that issues plaguing the US economy are different from what Malaysia is facing, though the issues are connected in one way or another.

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

A version of this article was first published in The Malaysian Insider.

Categories
Economics

[1809] Of Anna Schwartz talks

Federal Reserve Chairman Ben Bernanke has called the 888-page “Monetary History” “the leading and most persuasive explanation of the worst economic disaster in American history.” Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

To understand why, one first has to understand the nature of the current “credit market disturbance,” as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.” [Bernanke Is Fighting the Last War. Brian M. Carney. The Wall Street Journal. October 18 2008]