Categories
Economics

[2565] Do not judge Barclays too hastily

There were two big news over the past two days in the financial world. One was the EU Summit which yet again calmed the market for only the gypsies (Gypsies, get it? GIPSI? Maybe not) know how long. Another was the official fallout of Barclays’ rigging of LIBOR.

The rigging of LIBOR has been an on-going case but this is the first time it exploded in the open. Barclays is unlikely to be the only one guilty here. Everybody is likely to have some kind of involvement in rigging the LIBOR. It appears even the regulators in the UK are in it.

There are several issues with the LIBOR fiasco but the one I find most interesting is the understatement of cost of funds. This was the initial concern when the Wall Street Journal first reported of it in 2008. Banks were suspected of understating their cost of funds during the then credit crunch, hence falsely presenting themselves to the market as relatively healthier than they actually were.

While the wilful misreporting is regrettable, I cannot help but wonder would it be better at that time to report the truth? Would reporting the truthful higher rates have helped everybody in the market, especially in an environment where Blackrock and Lehman Brothers just went under? I could easily imaging contributing to further loss of confidence would not be the wisest thing to do then.

The underreporting of LIBOR might have provided some needed liquidity to the banks than truthful reporting otherwise would. That would relieve some stress off the banking system. In that way, the underreporting was the better way of doing things. It is not only better for the banks, it is good for the so-called main street. What the crisis of the past few years have shown, a sound banking system is terribly important to the short-run stability of the whole economy. That is sad, but it remains a fact.

Because of how lower rates might have helped with liquidity in the market, however unreflective it were to reality of the banks’ situation, I am a little sympathetic of banks found guilty of committing that.

The same sympathy however cannot be extended to the rate setters whom collaborated with the traders, granting those traders with the unfair advantage of inside information. Those are just, plainly wrong.

Categories
Economics

[2564] Anti-dumping duty on wire rods has little to do with predatory pricing, more to do with protectionism

It appears that protectionist sentiment within the steel industry just will not just die down. Earlier last year, Megasteel unsuccessfully lobbied for a levy on steel imports. That was shot down because users of steel protested. Megasteel, being the sole domestic producer of flat steel (used mainly for vehicles and major appliances), in its eagerness to protect itself from competition, wanted not only protectionism for domestic flat steel, but lobbied for across the board protectionism. That stepped on a lot of toes and it was good that the protest stopped the protectionist petition dead in its tracks.

In the news today however, the government is considering anti-dumping duty on foreign-produced steel wire rods. Wire rod is considered long steel product and most Malaysian steel manufacturers produce long steel. Contrast the fact about long steel with flat steel, which is only produced by Megasteel: one can immediately understand why the anti-dumping proposal may be more popular than Megasteel’s earlier protectionist proposal. The anti-dumping duty will benefit a lot more manufacturers (if not most in the industry) than Megasteel’s earlier proposal.

According to The Star, the government is mulling anti-dumping duty after an unnamed domestic manufacturer filed a complaint about how foreign steel manufacturers are dumping wire rods in Malaysia.

First, for laypersons’ benefits, what is dumping?

The typical definition of dumping is when a foreign manufacturer priced its products aboard at a price cheaper than the price its sell at its home country. The logic behind this is that foreign firm is flooding the market on purpose to kill off domestic competitor so that it will be a monopoly later. It is predatory pricing. The real concern is predatory pricing and the prices differential is just a proxy to that concern.

The problem is that not all of such pricing is predatory but regulators rely solely on the proxy to decide while disregarding the main concern, which is again, predatory pricing. This is flawed way of looking at the case.

It is all too possible for foreign firms to price their goods at home more expensive than aboard without engaging in predatory pricing.

One reason can be that a foreign firm has monopoly power over its home market while its export market is exposed to fierce competition.

Now, add another factor, which is likely the case for Malaysia since Malaysia steel manufacturers do not have the scale required to make it efficient: foreign steel manufacturers from large economies like China has the economies of scale to be efficient. In a world of pure free market with initial position as it is in the real world, Malaysian manufacturers would not be able to compete with the foreign manufacturers’ price.

Given both factors, efficient but monopolistic foreign firm can engage in such price discrimination across economies. So, a firm pricing its good in its export market lower than its home market is not embarking on predatory pricing at all. Rather, it is only responding to market reality. Under this scenario, anti-dumping measure by any government is highly inappropriate and in fact, protectionist.

The reality is the anti-dumping measure is aimed at protecting inefficient Malaysian steel industry.

This is not just an economic and ideological concern.

Long steel products are used for construction. An anti-dumping duty on long steel, for instance, will eliminate downward pressure on prices of raw material used for construction of houses and offices, even the MRT.

When prices of properties go up unreasonably, you know which policy to blame.

Categories
Economics Politics & government

[2563] Why I do not want to see a Eurozone break-up

I understand the case for the breaking up of the Eurozone. I do appreciate the virtue behind a flexible exchange rate, especially for cases like Greece. There is a need for rebalancing that a monetary union cannot provide. Yet, I am uneasy at the suggestion of a break-up, of Grexit, because deep inside of me, I am more or less an internationalist.

The internationalist sentiment is derived from my libertarian belief. It is about freedom of movement. Free flow of labor. Free flow of capital. All around the world.

I dream of a world where I would not have to present identification whenever I land in some foreign airports. I dream that I would be free to be anyway I choose without the need to ask permission from the state.

Unleash the ideal world and what I call the crazy me would come out as an anarchist. Specifically, an anarcho-capitalist. Freedom unbounded.

But I am not an anarchist because I understand anarchism is inherently unstable. I settle for the second best option available and that is free-market libertarianism.

Just as anarchism is the ideal but unattainable and thus the second-best solution is libertarianism, internationalism is the ideal but the second best approach is regionalism, for now.

This fuels my sympathy for the Eurozone. I want the Eurozone to be intact because of my bias. It has nothing to do about being western or Europe-centric.

I want it intact so that in the future, the Asean version can emerge. An Eurozone failure will likely inform decision on a more integrated Asean. Already the Indonesian President warned Asean of repeating the European mistake. The warning is appropriate but as I have argued, there are appropriate lessons to learn from the European crisis without jettisoning a closer Asean idea.

And I do think Europe will succeed, if recent history is of value.

The end of World War II saw closer cooperation between European countries: observe the Marshall Plan. Not all and definitely it was easy to cooperation when your opponent is dead, but the cooperation happened and that is the point.

The Cold War saw closer integration: observe the European Coal and Steel Community and the European Economic Community.

Post-Cold War saw even more: observe the European Union and its expansion.

The European Exchange Rate Mechanism crisis brought closer cooperation: observe the introduction of the Eurozone.

Now, the latest Eurozone crisis may bring in closer cooperation: observe the fiscal union proposal.

So, do not ring the bell yet. The regionalist game is not over yet and the outcome of death is not certain.

As a libertarian, the issue is the creation of a stronger state but I think, this can be a largely enlightened state, with a federal structure is can be a counterforce to the central government.

Categories
Economics

[2562] A time for fiscal expansion at no cost, a challenge to minarchism

This economic crisis is a challenge to advocates of small government, especially for those who establish their argument based on finance. Even those who ground their position on something more profound like libertarians are being challenged simply out of the practicality of the situation.

The situation is that the cost of borrowing for several governments with debt considered as flight-to-safety grade like the US Treasuries and the German Bunds are very low now. For some, it is more or less zero.

Risk-averse investors really have nowhere to go and the supply for such fixed-income assets is limited. Demand for such assets will continue to outstrip supply in this situation of widespread economic crisis and yields will likely continue to suffer from downward pressure as individuals, firms, central banks and foreign governments bid the prices of these bonds up.

Cases of negative yields in real terms are aplenty. More profoundly, there have been cases of negative yields even in nominal terms. The Danish and the Swiss bonds are two examples where purchasers pay the government to borrow money from the purchasers. This does not happen too often. The market is saying, just take my money and keep it safe; we will pay you to do that.

In such cases, it is probably optimal for governments to borrow so much money and it does not matter if they actually do not need the money. Just borrow and store it somewhere. And if the relevant government has plan that has been delayed due to funding requirement, then this is the time to do it. With zero yields, financing is free. With negative yields, governments get paid to finance the project.

So, the relevant countries, this trend can be used to massively boost government spending and indeed, this can be a Keynesian case for fiscal expansion. There is no cost to it, at least, in the near future. This suspends the crowding out effect that is embedded in mainstream macroeconomic theories.

With the current situation, advocates of small government have to rely on long-run structural argument. The unfortunate thing with long-run argument is that it is describing a situation so far into the future, that it is hard to capture the imagination of enough persons. To most people, what is real is what they see.

And yields on various governments are zero. And judging from the look of it, increased government spending is unlikely to push yields up by a significant margin.

Categories
Economics

[2561] What inflation?

Kapil Sethi has a really odd piece yesterday in The Malaysian Insider yesterday. It started pretty alright by discussing crime but the strangeness began when he tried touch the realm of economics:

At a deeper level though, this desperation points to a changing politico-economic environment that is forcing such radical shifts in behaviour. When there is a perception that well-connected people are getting obscenely rich and are spending their wealth conspicuously and extravagantly while everybody else is feeling the pressure of stagnating incomes, greater indebtedness and inflation, feelings of anger and desperation seem only natural [Crime and the economic divide. Kapil Sethi. The Malaysian Insider. June 19 2012]

In short, he tried to link crime rate with fiscal profligacy.

I do not intend to discuss the strangeness of his article because it messes up my mind. Suffice to say, I disagree with what he wrote about the link. All I want to highlight further is this paragraph of his:

Increasing inflation, higher interest rates and consequent high default on outstanding loans given stagnating incomes could be an outcome of profligate government spending rife with ”leakages” already seen in other economies, notably Greece.

Unfortunately for him, here is how Greek inflation looks like over the past 10 years or so.

I do not see anything special about the inflation rate, save those in 2008 and 2009 which were due to something else entirely (commodity prices boom and the subsequent recession and so-called recovery).

Increasing inflation? If you flip the chart upside down, then yes, maybe for the past two years.