Categories
Economics

[2554] Is the real interest rate too high?

Those whom keep a close eye on monetary policy will realize that the real interest rate at the moment is positive. My data suggests it is above 1% mark right now given how the Overnight Policy Rate is at 3% and inflation is hovering around 2% with core inflation being slightly lower than headline inflation.

Despite an abstraction and not directly observed like the everyday nominal interest rate, it is the real interest rate that is crucial in determining decision between consumption and saving/investment in most cases. This is not to say the nominal interest rate is not an abstraction. It still is but real interest rate is not immediately understood or observed by laypersons as nominal interest rate.

The reason I am bringing up the issue about real interest rate is that I think there is a worry of a slowdown in the domestic economy, especially with European and Chinese economies showing signs of stress. And I am always not keen of shoring up the economy with fiscal policy in the traditional way as long as monetary policy can do the jobs well. I also think that monetary policy has done an excellent job in the past few years amid serious unprecedented crisis despite Keynesian’s liquidity trap theory, which appears to be irrelevant: as market monetarists have successfully argued, the fixation on interest rate is overrated in zero-interest rate situation. Market monetarists, the successor to the monetarism of the 1970s, of course, argue more about monetary policy but let us leave that aside for now because I know they would not like my fixation with interest rate here.

With more than 1% real interest rate, this creates the incentive to save more than to spend in the economy. Or to invest less. The bottom line is that it has a negative impact on economic growth.

One also has to remember that the OPR is the base rate. There are other rates based on the OPR and they are priced higher. This means the relevant real interest rate are higher than 1% for consumers and businesses.

Furthermore, in the free (or rather, maybe, just efficient?) market, I would assume the optimal real interest rate is 0%. This suggests that even under free market environment, the real interest rate is too high.

There are other considerations in the settings of the rate. One big consideration is the management of inflation. But with demand-pull inflation coming down and with downside risk as far as growth is concerned, I think there is room to make the real interest rate more accommodative to economic growth without scaring the hawks away.

Categories
Economics

[2553] The lesson of Europe for Southeast Asia

Indonesian President Susilo Bambang Yudhoyono warned of the danger of a common currency in an interview with the Wall Street Journal. It is a reminder that needs not a resounding. The horror of Europe is enough to make one thinks twice of a currency union. The talks of Greek exit can potential become the end of the European dream.

The European crisis is a challenge to me partly because I am supportive of a currency union for Southeast Asia. Sometimes in the past, I contended to be associated with the term Aseanist.

More importantly, I am supportive of a currency union because of my free trade tendency: a union boosts trade because it reduces trade barrier significantly.

To be fair to myself, I support a union across similar economies and not wholly across the diverse Southeast Asia economies from the financially sophisticated Singapore to the tiny backwater East Timor.

Really, the lesson of Europe is not that monetary union does not work. The lesson is that monetary union works best for similar economies: the economic cycles mostly coincide, the structures are about the same, the culture of societies in it are not so different, etc.

I think I have made the case for a currency union for Malaysia, Singapore and Brunei for a start. In fact, Singapore and Brunei are already on a currency board, which effectively means de facto currency union. Malaysia is the natural extension of the Brunei-Singapore union because of its proximity and the massive interlinking between the three economies.

Then, there is perhaps historical hangover on my part, given how the original Malaysian proposal was a 15-state federation, with both Brunei and Singapore in it. Indeed, prior to 1973, all three currencies were interchangeable freely. Even before that between 1953 and 1967, all three countries used the same currency.

One issue with the Malaysia-Singapore-Brunei currency union is that the Singaporean economy tends to be more volatile than Malaysia. Nevertheless, I think in many ways, the direction of both economies are more or less the same. In that sense, the challenge of a monetary authority is to be more flexible and responsive to a more dynamic economy.

Categories
Gaming

[2552] I see you, when I see you

Categories
Politics & government

[2551] Class is something DAP supporters can learn from Tunku

I am disappointed at the treatment which Tunku Aziz received with respect to his comment about the Bersih’s sit-in. It is quite clear the DAP-led Penang state government ended Tunku’s senatorship to punish him for criticizing the sit-in.

While I disagree with Tunku’s position and I do support the sit-in, the path taken by the state government is utterly disproportionate to the issue at hand. It reveals immaturity of those in power in handling disagreement over what I see as a minor issue. Worse, it suggests some kind of intolerance towards differences of opinion.

Some differences may require severe punishment. The case of Hasan Ali in PAS is a perfect example where there were severe differences that translated into actual actions that caused real unrest and consternation among the populace. Hasan Ali appeared determined to weaken the state government.

In the case of Tunku however, this is really the first real public disagreement. Furthermore, the disagreement is over something that cannot be turned into action. What could the Tunku do as a senator? To be sure, nothing as nearly as severe as what Hasan Ali did. And Tunku has no intention to bring down the state government or break the unity of Pakatan Rakyat coalition.

Another disappointment is the naivety on the part of the state government. It is pure foolishness to peg Tunku’s senatorship to his take on the sit-in. The result of the pegging has now raised questions about DAP’s commitment to free speech. That opens DAP to attack unnecessarily, especially when the general election is just around the corner. Now that Tunku has decided to quit the party, the DAP finds itself in a deeper hole dug by the party itself.

Among these disappointments, there is an insulting opinion floating around accusing Tunku as an UMNO mole.

What is this? Prior to this, the man was praised as the hallmark of integrity. Now, the man has none?

The DAP-led state government is a mistake. DAP supporters and sympathizers need to realize that. Step out for awhile and see the larger picture.

Instead of that they are leveling an outrageous accusation against a gentleman that is Tunku.

What is this? How is this filth any different from the slime UMNO is employing?

Have a bit of class. Now, class is something they can learn from Tunku.

Categories
Economics

[2550] Labor shortage in the palm oil industry

I do not typically post news articles these days, but I think this news article is particularly relevant on one issue that I raised earlier.

MALAYSIA is losing billions of ringgit in palm oil exports because there is not enough foreign workers to harvest fruit bunches in the oil palm fields.

The Malaysian Palm Oil Board (MPOB) estimates that the industry need to hire another 40,000 foreign workers to harvest the riped fruit bunches in order to achieve the 19.3 million tonnes of oil output target.

[…]

“The trees are fruiting, but there’s acute shortage of harvesters and this is affecting the country’s palm oil export earnings,” he told reporters on the sidelines of MPOB seminar titled “Labour – Key Driver For Continued Sustainability of the Oil Palm Industry” held here yesterday.

“If the government approves of another 40,000 foreign workers, we can reduce wastage and surpass the 19.3 million tonne output target easily,” Lee said.

It is estimated that millions of tonnes of fruit bunches rot in the fields because planters are not able to hire enough foreign workers to harvest them. [Labour shortage hits palm oil export earnings. New Straits Times. May 15 2012]

This is the difference between debating from market knowledge with context and theorizing by reading one line in a news article.